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Home > Blogs > Anthony Harrington > Rise of Asian Middle Classes becomes the New Growth Engine

Rise of Asian Middle Classes becomes the New Growth Engine

Rise of Asian Middle Classes is a New Growth Engine Anthony Harrington

A working paper, “The Emerging Middle Class in Developing Countries”, by the OECD Development Centre, produced back in January 2010, set out to test one of the main hopes economists have for a more balanced global economy. This hope rests on the extent to which the emerging middle classes in developed economies can become a major driver for a more balanced global economy.

The paper’s author, Homi Kharas, a research analyst with the Brookings Institution in Washington, begins from the premise that so far, global consumer demand has been concentrated in the rich economies of the OECD. One of the main drivers of global imbalance, and certainly one of the prime underlying causes of the global financial crash of 2008, was the disproportionate reliance on exports by emerging market economies, particularly China.

The argument by now is a very familiar one. The massive trade surpluses built up through strong exports and weak domestic consumer demand created vast capital flows back into US dollar assets. These drove down yield and created a “hunt for yield”, pushing investors generally away from the near zero yields of risk free bonds and into risk assets like property and equities.

Credit soared while the cost of credit fell, boosting levels of personal and government indebtedness. Lightly regulated markets in the US and the UK particularly, responded with innovative financial engineering which disguised both risk and the extent to which risk was being leveraged, and ultimately spread contagion throughout the financial system.

On this argument, none of this would have happened if emerging markets had had strong domestic consumer growth so that wealth fed back into local economies through increased consumer demand. There are any number of other “interventions” that could have and should have been made, but the absence of a well developed consumer base in emerging market economies was key to the shape of the trade and capital flows in the pre crash period, giving form to the boom that led to the bust.

Kharas set out to provide some solid projections to the likely growth of the middle classes across 145 countries. His study defines a global middle class as comprising all those households with a daily per capita income of between US$10 and US$100 in PPP (purchasing power parity) terms. He combined household survey data with growth projections for the 145 countries studied and concluded that at present, Asia as a whole accounts for less than one quarter of today’s middle classes, but that Asia’s share of the global middle classes was set to rocket upwards.

In a forthcoming QFinance Viewpoint, Peter Elston, a strategist with Aberdeen Asset Management, based in Singapore, points out that the really key result from Kharas’s study is the fact that Asia is likely to double its share of the global middle class within the next eight years (by 2020), while the middle class in Europe is actually predicted to decline. Growth in the US will be at best marginal. Latin America and Africa will also not add significantly to middle class numbers. The inescapable conclusion then, is that Asian domestic demand, fuelled by ever rising numbers of middle class households, is going to be an absolutely enormous engine for growth, and it is all going to happen in Asia.

Advanced markets will benefit from this in two ways. First, more balanced trade will help rebalance sovereign debt levels, which are teetering  close to out of control across Europe and the US. Second, major multinationals quoted on advanced market stock exchanges already derive between 30% and 40% of their turnover from emerging markets. With the rise of the Asian middle classes, that share is likely to increase, helping to spread the “Asia wealth effect” globally.

Kharas’s paper is perhaps the one really bright spot in a sea of gloom and doom as far as economic news is concerned, and it deserves to be read and cited a great deal more than it is at present!

Further reading on demographics and economics

Tags: Asia , asian , Asian economies , Asian middle classes , China , demographics , developed markets , developing economies , global growth , global imbalances , growth , hunt for yield , OECD , risk free assets , south-east asian economy , sovereign debt , trade balance , trade surpluses , yield curve
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