India, China middle class boom faces many challenges

Published on FirstPost.Economy, by Homi Kharas, June 13, 2011.

… Between 1960 and 2010, the number of people who had middle class or better living standards in OECD member-countries more than doubled from around 400 million to over 900 million. Poverty, by global standards, was essentially eradicated.

Asia today faces the same potential. Economies in South Asia and East Asia have grown fast for two decades now, and in some Asian countries, growth has been sustained for much longer periods. Most South Asian and East Asian economies have passed the World Bank’s threshold of per capita GDP of $1,000 to become classified as middle-income countries. But that still does not mean that they have a large middle class, at least not by global standards. 

A global middle class is best defined by the spending of households, not the income available to the economy. When households can afford small luxury items, when they can purchase consumer durables like cellphones, cars, motorcycles, refrigerators, maybe own their house, enjoy vacations and leisure and afford to educate their children and to provide them with good health care, then they can be classified as members of a global middle class.

One rough definition of when this happens is when households spend at least $10/person/day in purchasing power parity terms … //

… Small middle class in China, India:

In China, because of the low share of labour in GDP and very low rates of household expenditure, the middle class is small — perhaps accounting for only 12% of the population — compared to what one would expect from an economy at its level of development.

India too has a small middle class by global standards, only about 5% of its population, because it is still a rather poor country. But the middle class in both China and India is growing at extraordinary rates. If China is successful in its policy ambition to foster wage growth at least as fast as GDP growth, and if it continues to grow at its potential, its middle class could swell to 50% of its population in just 12 years.

India’s middle class could rise even more rapidly because Indian households benefit more from Indian growth than do Chinese households, given the prevailing distribution of income.

While the two Asian giants are obviously the most important drivers of the aggregate numbers of growth in the Asian middle class, the exciting possibility is that many large South and East Asian countries could enjoy the same kind of prosperity — Cambodia, Indonesia, Malaysia, Thailand and Vietnam are poised to become predominantly middle class countries within a decade to 15 years.

If changes like this occur, the face of Asia will change in every way. Asia is on a pace to add 2.5 billion people to the ranks of the world’s middle class in just 20 years, if it can sustain its growth.

That’s a big if: … (full long text).

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