How a Growing Global Middle Class Could Save the World's Economy

  • by Homi Kharas
  • July 05, 2016
  • Essay

Video: The Global Middle Class is Growing Fast

In 1851, Britain hosted the Great Exhibition of the Works of Industry of All Nations showcasing the art, industry, and science resulting from the fastest expansion of wealth and the largest increase in economic opportunity that the world had ever seen. This was the Industrial Revolution, a time when new technologies increased productivity in ways previously unknown.

Just as revolutionary was another change—in the functioning of British society. The old world of aristocrats, craftsmen, and laborers was not suited to 19th-century business. Contracts and invoices were needed, bank loans had to be written, and lawsuits adjudicated. Government services, such as railways and post offices to serve industry, were expanded. A new occupation arose—the clerks who could pen the needed papers, their numbers skyrocketing in England from 44,000 in 1851 to over 119,000 20 years later. And since the new breed of worker needed to read, write, and understand arithmetic, as well as stay healthy enough to work regularly, teachers and nurses were needed—thereby fueling further professional growth.

These new occupations changed economic and social structures. Neither elite nor working class, clerks and others were referred to as “the middling sort.” They saved and invested for the future, educated their children, and took responsibility for improving their lives and those of their families. As their numbers grew, they used their discretionary income to indulge in entertainment, vacations, and travel, and consumed goods of higher quality and greater variety. The Harrods store opened in 1849 selling tea and groceries to this new middle class.

And so the middle class became a consumer class, driving the economies of countries that embraced the Industrial Revolution. It ushered in an age of mass development that swept the Western world in the 20th century and is now spreading to emerging economies, especially in Asia and Latin America.

Today, this spread of the middle class across the world is one of the primary forces sustaining the global economy. In 2015, the global middle class numbered about 3 billion people who spent $33 trillion, amounting to two-thirds of the world’s consumer spending.

In the United States, European countries, and other developed nations, the debate about the middle class has recently centered on issues of equality, mobility, and which policies can promote further growth and stem stagnation. Yet for the rest of the world, the debate is different. Despite disparities, other countries remain focused on growing out of poverty or moving beyond the category of “emerging.” A robust middle class is central to this effort.

Yet what is the future of the global middle class if some countries seek expansion and others experience contraction? What benefit does such a middle class bring to the world economy? What environmental, social, and political considerations exist? How is this growth balanced with the need to combat climate change? And how are the social and political changes that would result from a more educated, richer population to be managed? How these questions are answered will very likely determine the health of the planet and the financial security of billions of people.

Data Points

  • 3 billion people make up the global middle class

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  • $33 trillion was spent by the global middle class in 2015

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  • 2021 is the year most people could be middle class

    The middle class could surpass 4 billion this year, making it a majority of the world’s population.

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The state of the global middle class

Over the past decade, the growth of middle-class expenditure in developed countries has averaged only 0.4 percent while in developing economies it has averaged 8 percent per year. The middle class has truly taken off, and for about 2 billion people in developing countries, middle-class living standards are now the norm.

One-quarter of the global middle class today lives in an advanced economy. Around two-fifths lives in Brazil, Russia, India, and China (the BRIC countries), while the rest live in other developing nations. This is a recent phenomenon that reflects economic growth in developing countries during a period of economic slowdown in advanced economies, such as in the United States, Japan, and Europe.

In contrast, the middle class in the BRICs was half as large in 2000 as that in the Group of Seven large industrial nations; today it is more than twice as populous and growing much more vigorously.

If International Monetary Fund (IMF) economic growth forecasts are correct, there could be 1.5 billion middle-class people in China and India by 2020. But the story is not just about these giants. By 2020, Brazil, Mexico, Pakistan, Indonesia, and, a few years later, Egypt, Nigeria, and Vietnam could have middle classes larger than 100 million people. The Philippines and Thailand could have middle classes as large as in the United Kingdom, France, or Italy. These countries will still be far poorer than today’s nations with advanced economies, but the rate at which their middle-class markets are growing is impressive.

In fast-growing emerging and developing countries, middle-class spending rose by over 10 percent per year in the 1990s and 12.5 percent annually between 2005 and 2015. Even though there are much-discussed problems in some emerging economies such as the slowdown in China, current growth and demographic projections suggest that middle-class spending gains in fast-growing economies could exceed double digits for at least another decade. This in turn will drive much of projected global economic expansion: Between 2005 and 2015, the increase in expenditures of the middle class in fast-growing economies accounted for one-fifth of total global economic expansion—more when the indirect effects of government spending to meet middle-class needs and private investment to provide for future demand are added in. Between 2015 and 2025, the contribution of middle-class spending in fast-growing emerging economies to global demand is expected to increase even further.

This is why there is such excitement in the business community about the middle class and why the consulting firm McKinsey & Co. predicts that the dollar increase in consumer spending growth in Shanghai or Beijing will exceed that in New York, Tokyo, or London.

To put today’s speed of growth of the global middle class into perspective, consider its trajectory. In 1820, after the Napoleonic War in Europe, there were probably no more than 2.5 million people out of a worldwide population of 1 billion who were in the middle class. By the beginning of the 20th century, the global middle class was around 90 million strong. By 1975, 150 years after starting its growth phase, the middle class had reached 1 billion people. By 2006, another 1 billion had joined the middle class, and now less than a decade later, we are at 3 billion. The middle class could surpass 4 billion by 2021, making it a majority of the world’s population.

Seen in the context of the last 150 years of economic expansion, today’s growth mirrors the patterns we have seen—albeit at an accelerating tempo—of national middle classes fostering domestic growth. This process could provide the growth engine the global economy desperately needs. But this will not be automatic. It depends on managing diverse challenges, including climate change and political governance, while instituting global policies that can maintain a liberal, open, and dynamic international order.

Mitigating climate change

One of the first challenges we must consider as the global middle class expands is climate change. Although the income and economic numbers of a rising middle class may be a marketer’s dream, we must also acknowledge that middle-class families consume more proteins and manufactured goods, have lifestyles requiring more energy, and are more wasteful of resources than those living in poverty. But while the common perception and concern may be that these changes will exacerbate climate change challenges over the coming decades, a rising global middle class could instead be one of the solutions.

In fact, the emerging middle class should be viewed as a positive force for reduced carbon emissions, not as a contributor to faster climate change. Why? A larger middle class is likely to mean higher per capita carbon discharges, but it also means a far smaller global population.

Based on extensive modeling of the world’s population conducted by the International Institute for Applied Systems Analysis, we know that higher family incomes and higher rates of girls’ secondary education—two variables associated with a larger middle class—could have a dramatic impact in slowing global population. That is because middle-class households tend to be urbanized and better educated. And with greater education rates, we see a shift in female employment as more women from middle-class households begin to work outside the home and, over time, have fewer children. As this dynamic deepens, population growth will slow and some of the drivers of climate change—emissions and resource consumption—will abate.

Taking this projection forward, we can look to the countries that will be the source of most of the growth in the world’s population over the next few decades (and where there is still a chance to slow this growth): India, Pakistan, Nigeria, and Indonesia. If the middle class in these countries, and other large developing nations, grows according to the optimistic scenario in the model—meaning more urbanized, educated, employed, and smaller families—the result will be approximately 600 million fewer people in 2050 and 2 billion fewer people in 2100.

Yet these changes may not occur without policymaker support. Education must be provided, especially secondary education for girls. For example, in Brazil, population growth is now less than 1 percent, and the middle class is about 60 percent of the population. In 1980, when the middle class was far smaller, at about 35 percent, population growth was just under 3 percent. Brazil exemplifies how the combination of higher family incomes, more education, and more urbanization can continue to slow population growth.

Social and political changes

Beyond global economics and the environment, what effect will the emerging middle class have on social and political considerations? If there were to be a norm, what would the global middle class seek in terms of societal changes? And will a global middle class spur a more open and liberal international system?

Traditionally, since the time of the Industrial Revolution, countries have considered middle-class priorities to be focused on jobs; urban transportation and infrastructure; education, especially for girls and increasingly at postsecondary levels; and affordable housing and other necessities such as health care and pensions.

History bears these values out. The Great Reform Act of 1832 in England gave rise to middle-class politics by redistributing membership in the House of Commons and adding members from cities. Bills that advanced middle-class interests included the Municipal Corporations Act (1835) to improve urban conditions, the Railway Regulation Act (1844) to ensure cheap passenger transport, and the Elementary Education Act (1870) to bring about state-funded, mass education. In the United States, New Deal programs such as the Works Progress Administration and the Social Security Act of 1935 helped bring about an unprecedented rebound in the American middle class, adding 20 million people between 1932 and 1937.

Many of the drivers of the middle class are the same today, and developing countries have embraced the same priorities. Education is one example. China has about 24 million students enrolled in 3,000 higher education institutions. (By comparison, the United States has 21 million students in 4,700 institutions.) Urbanization is another. About 100 million people in developing countries are moving to cities every year, 25 million of them in China alone. There, migrants can double or triple their annual earnings thanks to higher productivity. Still another driver is women’s empowerment and the entry of women into salaried work, creating two-income households with fewer, but better educated and healthier, children. Developing countries with the largest proportion of the population in the middle class are those, like South Korea and Malaysia, where women are in salaried positions in government and business.

The Philippines and Thailand could have middle classes as large as in the United Kingdom, France, or Italy.

There is also some evidence, reported in sequential rounds of the World Values Survey, of a rising trend in the proportion of people in selected developing countries who believe that thrift, hard work, determination, and perseverance are the bases for improving their lot in life. In these countries there is a growing feeling of personal responsibility within middle-class families. But at the same time, the middle class looks to government to provide subsidies for housing, education, pensions, transport, and the like. They also want stability and predictability for themselves and their children. The survey results further suggest that the middle class may not support a rise in taxes to pay for all they ask.

This tension within the middle class between the demand for public services and the willingness to pay for them plays out in a variety of political forms. There is no contemporary evidence to support the view that more middle-class societies will evolve into more democratic societies that will then support middle-class priorities, as happened in developed countries in the 19th and 20th centuries. Democratic governance today, measured by a number of indices, is not correlated with the size of the middle class, after adjusting for other factors. The middle class in Egypt and Thailand, for example, appears to support the stability associated with current governments, each headed by former military leaders. On the other hand, the middle class in Brazil, Indonesia, and the Philippines was instrumental in the turn away from autocracy.

The problem in the 21st century is that the beneficiaries of globalization—the middle class in emerging economies and the elites in advanced countries—are no longer strong enough to alone shape the political reform of domestic and global institutions. Indeed, the middle class in advanced economies is now even in retreat, causing many to become skeptical about whether further globalization is serving their best interests.

An added complication is that emerging and developing countries are looking for ways to shape the global rules of the game to better serve their interests. They do not offer full support to the multilateral institutions that have steered globalization through periods of crisis and restructuring. The rounds of trade liberalization under the auspices of the World Trade Organization appear over. Reforms in the IMF and the World Bank have inched forward at a glacial pace, encouraging emerging economies to set up parallel institutions such as the Asian Infrastructure Investment Bank and the New Development Bank, which is a multilateral development bank operated by the BRICs.

What can be done to reframe globalization into a win-win for the middle class in each country and to avoid it pitting the interests of the middle class in developing countries against those in advanced countries? In developed countries, more attention must be given to issues affecting middle-class families, what is often referred to as “inclusive growth.” There is a package of measures that share a basic idea: that continued widening of income and opportunity gaps, and the barriers these create to social mobility, must be forcefully tackled. In developing countries, politics could better reflect the economic interests of the growing domestic middle class. These emerging nations should also take on more responsibilities for strengthening multilateral institutions and achieving a better globalization.

One global body that could do more to steer global institutions is the Group of 20 (G-20), a grouping of representatives of industrial and emerging-market nations. The G-20 was successful in warding off tariff and exchange rate wars between major economies during the Great Recession, but it has not succeeded in mobilizing strong domestic support for globalization in each member country. As recent polls have shown, faith in the global institutions that have helped the world establish sound rules of the game for commerce and development has ebbed, and these organizations are no longer seen as the key players that will ward off the risks associated with globalization. These institutions need more support (and resources) to do a better job, but both are in short supply in a world in which poll findings show that trust in government itself, irrespective of nationality, is at historic lows. All nations should recognize and adapt to the reality that progress depends on continued globalization but that this will be uneven and needs to be better managed.

Leaders must also recognize that the expectations of a burgeoning middle class transcend national borders. Collectively, the future of the world’s economy and the financial security of billions of people depend on whether global leaders—policymakers, lawmakers, and heads of state, along with business, civil society, and academia—become more accountable and responsive to the middle class in their respective countries. These leaders will be changing the world for the better—or for the worse—by charting policies that will create sustainable development; educate more people, especially women; create new social norms much as when “the middling sort” upended British society; and, perhaps most importantly, establish new political freedoms. Under these conditions, the global economy and the global middle class will thrive. It is the world’s best chance for shared future prosperity.