Boom time for the global bourgeoisie

Monday, July 21, 2008

In the midst of the current widespread gloom and doom in the west, it is important not to lose sight of the true structural themes shaping our era.

Linked to the current mood, commentators often depict an embattled and shrinking middle class, with sharply rising financial inequality. However, globally, this is simply not true. One of the most startlingly positive phenomena for many generations continues to unfold around the world. We are in the middle of an explosion of the world’s middle class.

As two of my colleagues, Dominic Wilson and Raluca Dragusanu, showed in a paper Goldman Sachs published last week (The Expanding Middle: The Exploding World Middle Class and Falling Global Inequality), about 70m people a year globally are entering this wealth group, as defined by those on incomes of between $6,000 and $30,000 (?3,800-?19,000, ?3,900-?15,000), in purchasing power parity terms.

The phenomenon may continue for the next 20 years, with this global middle accelerating to 90m a year by 2030. If this happens, an astonishing 2bn people will have joined the ranks of the middle class. This demonstrates that, contrary to widespread opinion, global inequality is declining significantly, not increasing.

Behind this powerful development is, of course, the unfolding story of the Bric, as we dubbed Brazil, Russia, India and China back in 2001. In addition to the gloom surrounding cyclical challenges in the US and other developed economies, it is currently becoming fashionable to believe that the Bric story is about to be tipped over the edge by rising inflation, scarcity of resources and their own backlash against globalisation. Some slowing of rapid growth in these economies is bound to happen. Indeed, the sustainability of it might be helped by some softening.

But I believe this negative mood is overstated. In China, we are seeing evidence that inflation may have peaked three months ago. This week we are likely to hear consumer price inflation slowed to 7.1 per cent in June, the third consecutive monthly slowing, and we think annual inflation will be back below 4 per cent by early next year.

With this move, overall gross domestic product growth will slow below 10 per cent, but this decline will be led by exports and investment. The Chinese consumer is going to keep on spending. In fact, judging by the ongoing strength of retail sales, the Chinese shopper may already be spending more than his or her equivalent in the US.

In all our exciting 2050 projections, including those updated for the recent paper, we have assumed that Brazil, Russia, India and China all grow at notably slower rates than currently. The same is true for the other countries that make up the bulk of the exploding global middle.

The emergence of this group is led by China and India but, importantly, includes many other countries. Even without China and India, the expansion of the new middle classes would be about 20m a year. Middle-class citizens will appear in their millions in many other parts of Asia, central and eastern Europe, the Middle East and Latin America. This is a Bric-driven phenomenon, but the “next 11” are making their contribution and other nations will also participate.

Dramatic changes in economic, social and political trends will probably follow, some of which are already beginning to emerge. According to news stories last Friday, Russia has already become Europe’s biggest car market, outstripping Germany, following dramatic first-half sales. Automakers are fleeing from Detroit to Moscow and St Petersburg. Battles about the right way to run global businesses, countries and trading between us all will inevitably grow. Meetings of the Group of Eight leading economies will become redundant features of the annual calendar, with a new group driving the world’s economic agenda.

It is also evident that poverty is dropping dramatically around the world. According to our calculations, the number of people living on incomes of less than $1,000 dollars a year ($2.75 a day) has already dropped significantly from about 50 per cent of the world’s population in the 1970s to 17 per cent by 2000. According to our numbers, it could be as low as 6 per cent by 2015. On the more familiar World Bank defin?ition of one dollar a day, the same dramatic shift is evident. Probably no more than 5 per cent of the world’s population now suffers this indignity. Of course, this is too much, but as long as the forces of globalisation continue we expect it to drop further.

It is important for everyone in the so-called developed world to be constantly aware that these powerful shifts in global wealth are good not only for the developing world, but for them too. If you take a look at a chart of recent US export growth, you may well think you are looking at the wrong data series. But you are not. US exports are indeed growing at close to 20 per cent and it is this that is stopping the housing and credit crunch from driving the US into a deep recession. Aspects of the same phenomenon can be seen in Japan, Germany and even the UK.

The new middle-class explosion is going to remain the market opportunity for us all, or certainly for those of us who are prepared to respond to the new realities.

Source: Financial Times (link opens in a new window)