One big group of countries is the India, Indonesia and Brazil of the world. The ones who haven’t done the structural reforms they should have when times were good, and the liquidity might just have masked the lack of real economic progress. Even if it’s often said that countries don’t do the needed reforms until the crisis hits, these countries will face a hard time doing so. There will likely not be huge increases in their middle classes soon.
In the current storm surrounding emerging markets, it’s interesting to analyse what this means for the new emerging global middle class that has been one of the key global demographics stories over the last decade.
At the same time as the middle classes in the developed countries has been squeezed both from the top and the bottom, millions of people from developing countries have joined their ranks. In countries as diverse as China, Indonesia and Brazil, a wide swath of people have seen increased incomes and have started to be referred to as middle class. Over the last years, there has been plenty of excitement regarding how this new middle class will deliver the next wave of growth. BBC has been running a major investigation into the topic lately.
Now however, we are seeing a host of negative news regarding emerging markets, and their growth is coming into question. Does the latest developments mean that the promise of the new middle class will falter? Has the stellar growth we’ve seen in emerging markets over the last years just been an effect of liquidity from developed countries flooding the world with nowhere to go? Will the end of the commodities super cycle spell an end to the boom for emerging markets economies? Or is there a solid underlying growth story?
It is of course not really helpful to talk of emerging markets as one homogeneous category, but that is the way the markets seem to think about them, given the last week’s outflow of money from any country that seems remotely emerging, so let’s look at the story overall.
In a country such as China, we have seen millions already join the “new middle class”. At least if we define a person who saves up a month’s salary to buy a Coach handbag as middle class. China might now be running out of its unlimited supply of labor, and the debt overhang in its cities and companies suggests that it’s in for a significant slow down in growth. But at least they have seen true productivity growth. We will not see the millions of new middle class denizens quietly return to the countryside. Rather, they might start fulfilling that other classic tenet of being middle class – to start demanding political freedoms corresponding to their economic ones.
In Africa, we’re seeing huge steps forward, which has led to some spectacular growth rates, and a more savvy population. The FT argues here that this has the positive benefit of making elections harder to steal over time. Although the ease of the recent Zimbabwe election tells a different story.
So what’s going on with the middle class in developed countries? Robots are taking its jobs, and the new jobs that are created by technology seem out of reach for the average middle class person, and pay less in any case, as we can see in the app economy. All industrial technology revolutions before the Internet seemed to create more jobs than they destroyed, but so far, the Internet has created no new middle class jobs. The developed world’s middle class seems to be in for a continued decline, with unemployment becoming structural over time, as more and more industries turn more and more digital.
This will lead to more outrage and radicalization, as we’ve seen in the support for more extreme parties all over Europe. In Greece with 50% youth unemployment it could be understandable that voters turn to more extreme alternatives, but in Germany where growth is still strong? It shows that the content middle class is shrinking even there.
What we should see that would address both these issues is a much larger amount of migration, within countries, and between countries. We’re seeing a little bit of this with the reverse colonization between Portugal and Angola, but we’d need to see a whole lot more. Paradoxically, both in the US and in Europe, we’re seeing much less migration than historically, and, of course, much more resistance to it.
A renewed push to simplify migration globally, maybe as part of TTIP and TPPA, could solve both these issues in one go, as the continued growth of the middle class in emerging markets, and thereby the global economy, would be pushed forward by a medium-tech workforce from developed countries who escape unemployment and early retirement. Even if unrealistic in large scale at the current time, I think we’ll see more of this as these trends all carry on, and are joined by climate change redrawing countries’ boundaries.