The Emerging Global Middle Class

Stephen DeAngelis

March 10, 2011

In January, the World Bank forecast that the global economy would “grow at a modest 3.3% in 2011.” More interestingly, the bank predicted that it will be developing countries that prove to be the “stabilizing force” as the world continues to recover from recession [“World Bank Sees Developing Nations Driving Growth,” by Ian Talley, Wall Street Journal, 12 January 2011]. The term “developing countries” is pretty broad and not all “developing countries” will have a stabilizing influence on the global economy. Nevertheless, Talley reports, “China’s growth will temper to a still-steaming 8.7% in 2011 from 10% in 2010. India is set to grow by 8.4%; in many sub-Saharan African countries, growth is expected to exceed 6%.” Jim O’Neill, the analyst who coined the term “BRIC,” believes that “growth market” countries need to be distinguished from “emerging market” or developing countries because their impact on the global economy is greater and the risks of investing in companies there is lower.

This post, however, is not about GDP or economic growth rates; it is about consumers who continue to fill the ranks of the global middle class. Currently, many growth and emerging market countries are worried about inflation. One cause of this concern is skyrocketing food prices (to learn more about that topic read my posts entitled Fears Grow Concerning Possible Food Price Increases, Rising Food Prices, and Past-Post Updates). Although severe weather (that has negatively affected food production) is the single greatest cause of rising food prices, another significant factor has been the “upgrading” of diets that has accompanied increases in quality of life as millions have joined the global middle class. Nigeria provides a good case study of how consumer aspirations change once they join the middle class [“Cheap Chinese imports satisfy rising middle-class aspirations,” by Tom Burgis, Financial Times, 4 June 2010]. Burgis reports:

“When 13 traders from eastern Nigeria arrived at the allotted spot for their new market outside Lagos in 1977, the vista was not promising. ‘When they got here this was thick forest and swamp, populated by reptiles,’ says Chief Emeka Dike. Today, Mr Dike presides over what is reputed to be Africa’s biggest electronics market, a heaving bazaar long since swallowed by a megacity of 18m people. On offer at Alaba market are the trappings of a comfortable existence: fridges, televisions, air conditioning units, cookers. Hundreds of shops cater to the Nigerian segment of a middle class whose ranks have been swelled across the continent by rising livelihoods. From the explosion of mobile telephony to bulging profits of beer companies, evidence of expanding consumer markets in Africa abounds.”

Burgis notes that a rising middle class generally tests the waters of consumerism by buying cheaper goods. Over time, however, consumer tastes change and the quality of the products they buy gets better. Nigeria’s middle class is still testing the water.

“Traders estimate that about 90 per cent of the appliances in Alaba are made in China. Quality has improved markedly with time, most say. Some of the audio equipment packaged in western-branded boxes is Chinese underneath, some admit. According to a 2006 report for the African Union, ‘Chinese imports can be 75 per cent cheaper than “equivalent” imports from traditional sources and up to 50 per cent cheaper than the locally produced substitutes’. The precipitous fall in the cost of imports has brought a middle-class lifestyle within reach of many more Africans. … A Nigerian official study calculates that 30 per cent of the 150m population have ‘middle class’ salaries. … Mr Dike, Alaba’s elected president, says globalisation has provided the means and the incentive for Nigerians to fork out – at least for televisions. ‘It’s supposed to be a luxury,’ he says, ‘but today it’s a necessity.'”

The fact that yesterday’s luxuries are today’s necessities is why most analysts are betting that growth and emerging market countries are going to drive the global economy in the decades ahead. Nigeria is not the only country on the African continent where the middle class is on the rise [“A Continent of New Consumers Beckons,” by Peter Wonacott, Wall Street Journal, 13 January 2011]. Wonacott reports:

“There’s a new gold rush under way for the African consumer, a campaign that spans the continent and aims to reach an emerging middle class. These are the people who have begun to embrace cellphone messages, restaurant meals and trips down supermarket aisles. … Some analysts believe a billion-person continental market already has arrived. Consultancy McKinsey & Co. says the number of middle-income consumers—those who can spend for more than just the necessities—in Africa has exceeded the figure for India. The firm predicts consumer spending will reach $1.4 trillion in 2020, from about $860 billion in 2008.”

It’s not just that more people are receiving middle class salaries, they are also getting greater access to credit [“Number of the Week: Consumers in China, Brazil Discover Debt,” by Mark Whitehouse, Wall Street Journal, 9 October 2010]. Whitehouse reports:

“While consumers throughout the developed world struggle to shed debt, their counterparts in China and Brazil are piling it on. In 2009, the year the global recession hit bottom, the aggregate credit-card balances of Chinese consumers rose 17.1% even as those of U.S. consumers fell 8.7%, according to a study by financial consultancy Lafferty Group. Brazilians increased their balances by 28.9%, part of a 9.2% rise throughout Latin America. More people going into debt might not sound like a desirable development, but in some ways this could be. One of the global economy’s biggest problems has been its dependence on an overstretched U.S. consumer. If folks in places such as China and Brazil are now stepping up and taking on some of the burden, that could provide some much-needed rebalancing. … As of 2009, China, Brazil, India and Russia had a total combined credit-card balance of $143 billion, still a far cry from the U.S.’s $849 billion but getting into the same league. Two Chinese banks were among the global top ten by number of cards issued. The danger, of course, is that consumers in the developing world get themselves into the kind of credit bubble that triggered the most recent global crisis. By international debt standards, it looks like they have a way to go. China’s total credit-card balances amounted to only 2.4% of the country’s annual economic output, compared to 6.0% in the U.S. Brazil’s stood at less than 1%, and India’s was even smaller. In other words, a little well-placed profligacy might yet do the world some good.”

India, the country that is home to more of the world’s poor than any other, still suffers from crushing bureaucracy, widespread corruption, and lingering social inequalities. Yet, even there, globalization and economic growth is helping bring millions out of poverty. The Economist reports, “Some economists think India will grow faster than any other large country over the next 25 years. Rapid growth in a country of 1.2 billion people is exciting, to put it mildly.” [“India’s surprising economic miracle,” 30 September 2010]. The article continues:

“The country now boasts legions of thriving small businesses and a fair number of world-class ones whose English-speaking bosses network confidently with the global elite. They are less dependent on state patronage than Chinese firms, and often more innovative: they have pioneered the $2,000 car, the ultra-cheap heart operation and some novel ways to make management more responsive to customers. Ideas flow easily around India, since it lacks China’s culture of secrecy and censorship. That, plus China’s rampant piracy, is why knowledge-based industries such as software love India but shun the Middle Kingdom.”

All those businesses are putting people to work and those workers are rapidly joining the global middle class. Is there still unimaginable poverty in India? Yes. But overlooking the progress that has been made would be a mistake. It has been estimated that India’s growth has “pulled as many as 200m out of poverty.” [“India’s reform and growth have lifted all boats,” by Jagdish Bhagwati, Financial Times, 30 November 2010] Bhagwati admits that India’s elite have probably benefited most from India’s growth, but he asserts that “these improvements are also shared by nearly all underprivileged groups, a fact now documented in a series of studies.” He continues:

“The political scientist Devesh Kapur, for instance, examined the fortune of the Dalits (or ‘untouchables’) in India’s most populous state, Uttar Pradesh, between 1990 and 2008. His research found that 61 per cent of those surveyed in the east of the state, and 38 per cent in the west, said that their food and clothing situation was now ‘much better’ than in the past. Al Stepan and Yogendra Yadav, also political scientists, found an even more striking result: less than a quarter of those in disadvantaged groups had seen their financial situations worsen between 1996 and 2004. What of inequality? Economist Amartya Lahiri recently studied India’s ‘scheduled’ castes and tribes – two very disadvantaged groups – and concluded that the past 20 years ‘have seen a sharp improvement’ in their relative economic fortunes. Two more economists, Pravin Krishna and Guru Sethupathy, found that … being poor is now seen by India’s underprivileged as a removable condition.”

Another country often listed as one the world’s growth countries — Indonesia — provides another example of the effect that an emerging middle class can have on the global economy [“Indonesia’s middle class comes of age,” by Anthony Deutsch, Financial Times, 18 November 2010] Deutsch reports:

“Dini Shanti, a web marketer, struggled for years to pay the rent and put food on the table for her two children. Yet in the past 24 months she has moved into a new home, bought her retired father a car and begun paying into investment funds and a life assurance policy. Her rapid climb to financial security was, until recently, a rare story in Indonesia, a young democracy of nearly 240m people and one of Asia’s fastest-growing economies. But in the coming decade, more than 60m low-income workers are poised to join her in what will be the coming of age of Indonesia’s middle class. That projected boom will also make Indonesia – already a member of the Group of 20 nations and the largest south-east Asian economy – the fastest-growing consumer market after India and China.”

Deutsch notes that “big retailers, banks, carmakers, insurers and consumer goods producers are tapping the growth, posting record profits this year.” Time and again we have seen that the best course for raising people out of poverty is to promote economic growth. Deutsch continues:

“Euromonitor, a market research group, expects the number of Indonesian households with $5,000- $15,000 in annual disposable income, a rough gauge for middle income, to grow from 36 per cent of the population this year to more than 58 per cent by 2020. … Indonesia’s economic growth is restoring people’s prospects 12 years after the devastating 1997-1998 Asian financial crisis.”

Angel Gurría, head of the Organization for Economic Cooperation and Development, who was interviewed for the article, stated, “In any developing country today, the most important sign of success in the economic policy is that you have a growing, strong and vibrant middle class. This really is the measure of the success.” Although it is a measure of success for the country involved, it is also a measure of success for the global economy as well. Deutsch concludes:

“Signs of increased buying power are abundant in the dozens of malls dotted across Jakarta, Indonesia’s capital of nearly 10m, where foreign retail chains and luxury fashion outlets are adding locations. Optimism about consumer spending has been a driver of investor sentiment. So, too, has economic growth of about 6 per cent, tame inflation, high foreign currency reserves and financial reform. … Growth is also shifting from urban centres on Java, the main island, to other parts of the archipelago, the Asian Development Bank wrote in an August study of Asia’s rising middle-income households. ‘Some poor people managed to move up the ladder to become new middle class, like in China,’ said Guntur Sugiarto, an economist at the ADB. ‘There is poverty reduction in rural areas – much bigger than in the urban areas.'”

Another sign that the global middle class is having a positive effect on the rest of the world is the fact that products once designed for them are now finding their way onto retailer shelves in the developed world [“New accent on customer tastes,” by Louise Lucas, Financial Times, 13 December 2010]. Lucas reports:

“Back when ancient civilisations flourished, the flow of inventions across hemispheres was pretty much two-way: gunpowder, printing and the compass came from Asia; missionaries and their bibles went in the opposite direction. Now, with Asia and other emerging markets gaining economic power, the south-to-north flow of ideas and products is firmly on the agenda. Lightweight and cheap nappies that were originally designed for China, where a market for disposable diapers did not exist until only recently, have been introduced to UK and US retailers targeting parents with environmental concerns. Small packs of Nescafé coffee designed for cash-conscious Thais and Russians are on sale in austerity-era Europe. For Harish Manwani, Unilever’s president for Asia, Africa, central and eastern Europe, these ‘reverse flows of innovation’ are entirely logical. Emerging markets are home to more than half of the world’s people and the source of virtually all population growth. ‘By 2020, three-quarters of incremental consumer spending will come from emerging markets,’ he says. ‘By then, consumer spending in Asia in purchasing power parity terms will overtake North America to become the largest consumer bloc.'”

Because new global middle class consumers, especially those in Asia, will have such a dramatic impact on markets in the future, many multinational corporations have shifted some or most of their R&D to focus on these new consumers. Lucas continues:

“This will inevitably mean more products shaped by Chinese tastes, according to Karl Gerth, a University of Oxford academic and author of As China Goes, So Goes the World: How Chinese consumers are transforming everything. ‘China is the market all these multinationals are scrambling to become best in and they are moving R&D as quickly as they can, not just because it is cheaper, but increasingly because they want to be where their most important consumers are. So why would we not see enormous amounts of this stuff?’ he says. The consequences are diverse. At one level, it points to more globalisation of products, but with places like China and India calling the shots rather than the US. That means any­thing from more attention to back seats in cars – the ‘honour’ seat in China – to the way consumers are persuaded to buy goods. If, to cite Mr Gerth’s example, the Chinese discover that ‘something other than cleavage sells beer’, western advertising could start to look a whole lot different. It also means quicker roll-out of products internationally at company level. Unilever has unified systems and supply chains across the world, thus removing barriers to multi-country launches.”

Lucas notes that “emerging market consumers’ first priority is often low price, so manufacturers often trim packaging to the minimum by removing the frills, or replacing bottles with pouches.” That is not so different from U.S. consumers who have demonstrated time and again that price trumps most other considerations (like where or how a product is manufactured). Sometimes, Lucas reports, the focus on cost also improves sustainability. “Environmentally conscious consumers in the west,” he explains, “also want less packaging.” Lucas concludes, “It is, after all, people who consume – and when it comes to people power, Asia wins hands down.” For the economy, a rising middle class is not just an Asian win, but a global one.