February 14th, the Economist published a series of articles on the global middle class; among the topics were how important the middle class is for emerging market economies to successfully develop. This is because the middle class takes on certain characteristics depending on its overall size. High commodity prices and a large volume of exports fueled the economic boom that allowed so many individuals in emerging markets to move up into the middle class. But the financial crisis could have serious consequences for the new middle class as the recession hits harder and businessmen are forced to cut production and reduced the size of their workforce.
Currently, the middle class makes up over half the world’s population with 80 million more added each year. But the term “global middle class” is relatively broad; it can mean income levels of anywhere from the equivalent of $10-100 a day. For this reason many economists consider there to be two different middle classes, those that would be considered middle class in any country and those that would be considered middle class only in developing countries. The second definition is basically a measure of how many people live just above the poverty line and are able to purchase items other than basic necessities. This group makes up a largest portion of the “new middle class” and is the most vulnerable to shifts in the global economy. Their margin from middle class to poverty is relatively small therefore once a fraction of their income is taken away or if they lose their job, a significant portion of the new middle class could once again fall back below the poverty line.
Although their level of affluence is much lower, the new middle class has become the consumers driving emerging market economies. An increasing consumer base has allowed a variety of businesses to proliferate including those producing things like cell phones, cars, cloths, prepared meals and private education. When the consumer base increases, the industrial sector expands to provide more jobs for more people. The result is a larger portion of the population climbing up the income latter and into the new global middle class.
After WWII the American middle class expanded rapidly leading the way for unprecedented levels of wealth and innovation. Middle class populations tend to boom rather than incrementally expand with growth, for instance the Chinese middle class made up just 15% of the population in 1990 but reached 62% in 2005. The size of the group is important; middle class behavior takes on different attributes depending on its relative size within the economy. A relatively small middle class will tend to emulate the rich - who typically are more risk averse. This is because the rich are comfortable with their current income level and want to protect their lifestyle rather than see new people enter their ranks to possibly compete with them. This is compared to a larger middle class, who take on their own set of characteristics. When the size of the middle class reaches a certain point – there’s not a definite number - they start feed off each others’ success. The result is the middle class becomes more innovative, entrepreneurial and driven by competition.
The entrepreneurial spirit associate with the middle class is a key component to development success. Entrepreneurs generally start up small and medium size corporations that in the aggregate employ a large portion of the population. These smaller businesses also tend to be more competitive than large inefficient firms that dominate the business landscape when the middle class does not represent a good portion of the economy. In a capitalist system healthy competition often leads to innovation and the desire to move up the value added latter, from small storefronts or simple textile manufacturing - characteristic of sweat shops - to more technical consumer electronics and industrial goods. Taiwan and South Korea are prefect examples of countries that moved up that value added latter and into well functioning economies.
Also important, is the middle classes’ desire for self improvement, when families move into the middle class category, they generally become healthier and better educated; increasing the country’s human capital, and making for a more productive workforce. The middle class generally take the philosophy that a rising tide raises all boats and are more willing to support universal education. The rich on the other hand oppose educating the masses and instead advocate for private education for their children – this is also probably related to competition.
There is no doubt the middle class is important to development but the economic crisis is threatening their ability to grow and possibly maintain their current numbers. The economic crisis started in the US but has reached to almost every economy in the world. Some emerging market economies like Brazil thought they would escape the problems, believing that they had decoupled from the global economy; a few months ago when asked about how the crisis will affect Brazil, President Lula responded “go ask Bush… it is his crisis, not mine.” However this has not been the case for Brazil and several other emerging markets, globalization has connected just about all economies – except for maybe North Korea.
The economic crisis has affected emerging markets - with susceptible middle classes - in a variety of ways. The most obvious is decrease output, many emerging market economies depend on exports for continued economic growth - with the US being the primary destination for finished goods. As the recession becomes deeper, demand for their goods decreases therefore business are forced to cut production and eventually cut middle class jobs. The situation is becoming so bad that the World Bank is forecasting that global trade will decrease for the first time since 1982.
The banking system is a very important component to economic growth and because the current crisis started in the banking system, the credit markets are virtually frozen. Companies and individuals are finding it difficult to get access to credit because emerging markets are seen as a risky investment. But businesses need access to credit so they can stock shelves or buy inputs for production; consumers need credit to purchase big ticket items like cars or refrigerators and with a lack capital in the system emerging market economies will not be able to continue at their current pace. Banks in some counties like Brazil isolated themselves from sub-prime investments but their bank spread – number of points between federal funds rate and hat is actually charged to the customer – are extremely high, making it difficult to get loans out to the people who need them.
To conclude, the middle class continues to play an important role in development and will hopefully remain resilient even through these tough economic times. The middle class is what makes a society great, the author of one of the Economist articles “Beyond Wisteria Lane” says it best: the middle class create a “society in which people hope their children will do better than they have done themselves; which believes in merit, not privilege; competition not inheritance; thrift not conspicuous consumption and which applauds personal effort rather than collective endeavor.”
Currently, the middle class makes up over half the world’s population with 80 million more added each year. But the term “global middle class” is relatively broad; it can mean income levels of anywhere from the equivalent of $10-100 a day. For this reason many economists consider there to be two different middle classes, those that would be considered middle class in any country and those that would be considered middle class only in developing countries. The second definition is basically a measure of how many people live just above the poverty line and are able to purchase items other than basic necessities. This group makes up a largest portion of the “new middle class” and is the most vulnerable to shifts in the global economy. Their margin from middle class to poverty is relatively small therefore once a fraction of their income is taken away or if they lose their job, a significant portion of the new middle class could once again fall back below the poverty line.
Although their level of affluence is much lower, the new middle class has become the consumers driving emerging market economies. An increasing consumer base has allowed a variety of businesses to proliferate including those producing things like cell phones, cars, cloths, prepared meals and private education. When the consumer base increases, the industrial sector expands to provide more jobs for more people. The result is a larger portion of the population climbing up the income latter and into the new global middle class.
After WWII the American middle class expanded rapidly leading the way for unprecedented levels of wealth and innovation. Middle class populations tend to boom rather than incrementally expand with growth, for instance the Chinese middle class made up just 15% of the population in 1990 but reached 62% in 2005. The size of the group is important; middle class behavior takes on different attributes depending on its relative size within the economy. A relatively small middle class will tend to emulate the rich - who typically are more risk averse. This is because the rich are comfortable with their current income level and want to protect their lifestyle rather than see new people enter their ranks to possibly compete with them. This is compared to a larger middle class, who take on their own set of characteristics. When the size of the middle class reaches a certain point – there’s not a definite number - they start feed off each others’ success. The result is the middle class becomes more innovative, entrepreneurial and driven by competition.
The entrepreneurial spirit associate with the middle class is a key component to development success. Entrepreneurs generally start up small and medium size corporations that in the aggregate employ a large portion of the population. These smaller businesses also tend to be more competitive than large inefficient firms that dominate the business landscape when the middle class does not represent a good portion of the economy. In a capitalist system healthy competition often leads to innovation and the desire to move up the value added latter, from small storefronts or simple textile manufacturing - characteristic of sweat shops - to more technical consumer electronics and industrial goods. Taiwan and South Korea are prefect examples of countries that moved up that value added latter and into well functioning economies.
Also important, is the middle classes’ desire for self improvement, when families move into the middle class category, they generally become healthier and better educated; increasing the country’s human capital, and making for a more productive workforce. The middle class generally take the philosophy that a rising tide raises all boats and are more willing to support universal education. The rich on the other hand oppose educating the masses and instead advocate for private education for their children – this is also probably related to competition.
There is no doubt the middle class is important to development but the economic crisis is threatening their ability to grow and possibly maintain their current numbers. The economic crisis started in the US but has reached to almost every economy in the world. Some emerging market economies like Brazil thought they would escape the problems, believing that they had decoupled from the global economy; a few months ago when asked about how the crisis will affect Brazil, President Lula responded “go ask Bush… it is his crisis, not mine.” However this has not been the case for Brazil and several other emerging markets, globalization has connected just about all economies – except for maybe North Korea.
The economic crisis has affected emerging markets - with susceptible middle classes - in a variety of ways. The most obvious is decrease output, many emerging market economies depend on exports for continued economic growth - with the US being the primary destination for finished goods. As the recession becomes deeper, demand for their goods decreases therefore business are forced to cut production and eventually cut middle class jobs. The situation is becoming so bad that the World Bank is forecasting that global trade will decrease for the first time since 1982.
The banking system is a very important component to economic growth and because the current crisis started in the banking system, the credit markets are virtually frozen. Companies and individuals are finding it difficult to get access to credit because emerging markets are seen as a risky investment. But businesses need access to credit so they can stock shelves or buy inputs for production; consumers need credit to purchase big ticket items like cars or refrigerators and with a lack capital in the system emerging market economies will not be able to continue at their current pace. Banks in some counties like Brazil isolated themselves from sub-prime investments but their bank spread – number of points between federal funds rate and hat is actually charged to the customer – are extremely high, making it difficult to get loans out to the people who need them.
To conclude, the middle class continues to play an important role in development and will hopefully remain resilient even through these tough economic times. The middle class is what makes a society great, the author of one of the Economist articles “Beyond Wisteria Lane” says it best: the middle class create a “society in which people hope their children will do better than they have done themselves; which believes in merit, not privilege; competition not inheritance; thrift not conspicuous consumption and which applauds personal effort rather than collective endeavor.”
