Reports from the Economic Front

a blog by Marty Hart-Landsberg

Searching for the Global Middle Class

The latest hype, designed no doubt to take attention away from declining living and working conditions in core economies, is that a new global middle class is emerging.  The implication is that capitalist globalization continues to work its “magic,” although now it is happening in the so-called third world.  Reality doesn’t match the hype.  Search all you want—it is hard to find real evidence of the emerging new global middle class.

Steve Knauss highlights the talk:

Over half the world will be middle class by 2030, predicts the United Nations Development Program (UNDP) in its report on “the Rise of the South.” The Economist, not known to be shy, claims we’re already there, thanks to “today’s new bourgeoisie of some 2.5 billion people” across the global South that have become middle class since 1990. The OECD, perhaps the boldest of all, postulates that India – currently one of the poorest countries on earth – could find more than 90 percent of its population joining this “global middle class” within 30 years, from around 5 or 10 percent today.

It all sounds pretty impressive until you learn how membership in the new global middle class is determined.  It includes those whose real income (in purchasing power parity dollars) is at least $10 per day.  That means at least $3650 in annual earnings gets you membership in the new global middle class.

To appreciate how low that figure is one has to know what purchasing power parity means and how it is used to calculate income.  There are two main ways to make comparisons in earnings across countries, something needed for global claims.  One is to convert national earnings into dollars using the exchange rate.  However, this is not considered very reliable.  Exchange rates move all the time, making comparisons unreliable.  Even more problematic, many of the goods and services people consume are not internationally traded so changes in exchange rates do not affect their well-being.

The other method, the one most commonly used, relies on purchasing power parity calculations.  In brief, the World Bank constructs a basket of consumer goods and services and determines its dollar cost in the United States in a particular year; the most recent year was 2011.  Then, it determines the national cost of a similar basket in other countries.  Finally, it calculates a purchasing power parity exchange rate for the dollar and the currencies of these other countries using these relative costs.

An example: suppose that the constructed basket of goods costs $200 in the US.  And suppose that the “equivalent” basket of goods costs 800 Rupees in India.  We can then can construct a purchasing power exchange rate between the two currencies.  In my example, 1 Rupee equals $0.25.  Or said differently an Indian with 4 Rupees is said to be able to command the same value of goods and services as someone in the US who has $1.  Thus, an Indian earning 8000 Rupees would be said to earn the equivalent of $2000.

Of course this method has its own difficulties.  For example, imagine how hard it is to develop national indices that are equivalent.  How do we calculate the average price of a good or service in a country?  And are the goods and services in one country, say the US, really equivalent to the goods and services in another country, say India?

Regardless, putting doubts about the methodology aside, we can now return to our standard for reaching the global middle class.  Our international agencies seek to count individuals who earn the annual equivalent of $3650 in the US as middle class.  That certainly seems like a stretch!

The following chart highlights the distribution of global income in purchasing power dollars using development agency categories.

earnings

As Knauss explains:

Even taking the data at face value, 71 percent of humanity is poorer in real terms than the $10 PPP threshold. . . . This is compared to 79 percent in 2001, owing to a modest increase in families crossing the $10 PPP line but remaining concentrated very close to it . . . . There was consequently an expansion of those living on between $10 and $20 per day from 7 percent of humanity in 2001 to 13 percent today.

That’s it. That’s the whole basis for the “global middle class” hype. If one were to select even a slightly more reasonable standard – for example, $20 PPP, or the real living standard equivalent of a family of four in the United States with a total income above $29,200 – there is no global middle class to speak of whatsoever. Only 16 percent of humanity – 13 percent in 2001 – enjoys this standard of living, composed of the majority of the population across the West, where real substantial middle classes exist, and the elites in the South, very rarely more than 15 or 20 percent of the population, and much more often substantially less.

Still, a look at the chart does show a significant fall in the share of world population that made less than $3 a day.  This however appears largely due to “the historic wave of ‘depeasantization’ throughout the neoliberal era.”  In other words, as people are forced off the land and into urban areas they become part of the cash economy.  Whether their higher money wage compensates for their loss of access to land is another issue, one that should make us pause before declaring them better off.

More generally, the gains over the 2001 to 2011 period were driven by international processes that are now moving in reverse.  The global economy is clearly slowing.  Already declines in exports of manufactures and commodity prices are undoing past gains in poverty reduction in Asia, Africa, and Latin America.

Capitalist globalization does indeed appear to be working magic.  But, as Oxfam’s recent report shows, only for the benefit of those at the top of the income scale.

  • In 2015, just 62 individuals had the same wealth as 3.6 billion people – the bottom half of humanity. This figure is down from 388 individuals as recently as 2010.
  • The wealth of the richest 62 people has risen by 44% in the five years since 2010 – that’s an increase of more than half a trillion dollars ($542bn), to $1.76 trillion. Meanwhile, the wealth of the bottom half fell by just over a trillion dollars in the same period – a drop of 41%.
  • Since the turn of the century, the poorest half of the world’s population has received just 1% of the total increase in global wealth, while half of that increase has gone to the top 1%.
  • The average annual income of the poorest 10% of people in the world has risen by less than $3 each year in almost a quarter of a century. Their daily income has risen by less than a single cent every year.

inequality

 

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