The new middle classes in emerging markets
Burgeoning bourgeoisie
Feb 12th 2009
From The Economist print edition
For the first time in history more than half the world is middle-class—thanks to rapid growth in emerging countries. John Parker (interviewed here) reports
THE crowd surges back and forth, hands above heads, mobile-phone cameras snapping one of Brazil’s best-known samba bands. It could be almost anywhere in Latin America’s largest city on a Saturday night. But this is Paraisopolis, one of São Paulo’s notorious crime-infested favelas (slums). Casas Bahia, the country’s largest retailer, is celebrating the opening there of its first ever store in a favela (pictured above). It is selling television sets and refrigerators in a place that, at first glance, has no running water or electricity.
Among the shacks, though, rise three-storey brick structures with satellite dishes on their tin roofs. In the new shop, Brazilians without bank accounts—plumbers, salesmen, maids—flock to buy on instalment credit. In a country with no credit histories, the system is cumbersome: the staff interview customers about their qualifications and get them to sign stacks of promissory notes, like post-dated cheques, before allowing them to take their purchases home. But it works, more or less. According to Maria, a cleaner, “Everything I have comes from Casas Bahia. Things are very expensive but the means of payment are better for people like us, without any money.” This is the emerging markets’ new middle class out shopping.
Eduardo Giannetti da Fonseca, one of Brazil’s most distinguished economists, describes members of the middle class as “people who are not resigned to a life of poverty, who are prepared to make sacrifices to create a better life for themselves but who have not started with life’s material problems solved because they have material assets to make their lives easy.” That covers a broad range of ambitions, as two other examples will show.
Back in 1992 Lu Jian was a dissatisfied mid-level bureaucrat at China’s department of transport and communications who became surplus to requirements. Taking advantage of government measures that encouraged such officials to go into business, he went off for a stint at China’s first commodity-futures trading company. Soon afterwards he found himself designing the country’s first ski resort, near the northern city of Harbin. Now, as chairman of the Nanshan Ski Village, in the desert hills near Beijing, he presides over the capital’s main winter-sports recreation ground.
This season 3m Chinese will take up a sport that was unavailable in the country only 15 years ago. China has around 300 ski runs, including some in the subtropical south where skiing is done indoors. Even in freezing Nanshan, snow is manufactured from wells deep underground. “When the Chinese first got rich,” says Mr Lu, “they wanted to go to Thailand and South Korea. Now they want to go skiing.” Every weekend the resort is packed with IT executives, bankers and media glitterati. This is the emerging markets’ new middle class at play.
In December 2008, a week after the terrorist attacks in Mumbai, thousands of young, English-speaking professionals gathered in Mumbai, New Delhi, Bangalore and Hyderabad. They were demanding a new security law and a ban on criminals holding parliamentary seats, as well as urging people to vote. India’s professional classes have long been considered indifferent to politics and less inclined to vote than the poor. Yet suddenly social-networking sites were full of memorials to the victims and proposals for further action: vote, don’t vote, withhold taxes, join a new party. “Those laid-back, lethargic, indolent middle classes—they’ve been galvanised,” says a former advertising executive.” This is the emerging markets’ middle class engaged in politics.
So much to do
“We expect a lot from the middle classes,” say Abhijit Banerjee and Esther Duflo, of the Poverty Action Laboratory at the Massachusetts Institute of Technology. Following the historical examples of Britain and America, they are expected to be the dominant force in establishing or consolidating democracy. As a group, they are meant to be the backbone of the market economy. And now the world looks to them to save it from depression. With the global economy facing the biggest slump since the 1930s, the World Bank says that “a new engine of private demand growth will be needed, and we see a likely candidate in the still largely untapped consumption potential of the rapidly expanding middle classes in the large emerging-market countries.”
This special report will assess these expectations. It will argue that many of them are broadly justified; that there is indeed something special about the contribution the middle classes make to economic development that goes beyond providing a market for Western consumer goods. The middle classes can, and sometimes do, play an important role in creating and sustaining democracy, though on their own they are not sufficient to create it, nor do they make it inevitable. On balance, the report is optimistic about the prospects of countries where the middle classes are growing. But they are not a homogeneous group, so their impact varies. A middle class that has grown largely to tend to the state will behave differently from one that is based on the private sector.
The one-third rule
But who, as a patrician British prime minister, Harold Macmillan, once loftily asked, are these middle classes? Their members are neither rich nor poor but somewhere in-between. In countries long divided between lord and peasant, that has large consequences. “Middle-class” describes an income category but also a set of attitudes. In the words of Shashi Tharoor, an Indian commentator, it is a category “more sociological than logical”.
An essential characteristic is the possession of a reasonable amount of discretionary income. Middle-class people do not live from hand to mouth, job to job, season to season, as the poor do. Diana Farrell, who is now a member of America’s National Economic Council but until recently worked for McKinsey, a consultancy that has spent a lot of time studying the middle classes, reckons they begin at roughly the point where people have a third of their income left for discretionary spending after providing for basic food and shelter. This allows them not just to buy things like fridges or cars but to improve their health care or plan for their children’s education.
Usually, an income of that size requires regular, formal employment, with a salary and some benefits, that is, a steady job—another key middle-class characteristic. The income needed to have a third of it left over after meeting basic needs also varies from place to place. In China, for example, $3,000 a year may be enough in Chongqing or Chengdu, big cities in the west, but not in Beijing or Shanghai. So defining the middle class in absolute terms is hard (see article).
In practice, emerging markets may be said to have two middle classes. One consists of those who are middle class by any standard—ie, with an income between the average Brazilian and Italian. This group has the makings of a global class whose members have as much in common with each other as with the poor in their own countries. It is growing fast, but still makes up only a tenth of the developing world. You could call it the global middle class.
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