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Augusto de la Torre
Jamele Rigolini
MIC Forum:
The Rise of the Middle Class
We would like to thank Shubham Chaudhuri, Stefano Curto, Maria Davalos, Carolina Sanchez-Paramo and Joao Pedro Wagner de Azevedo for helpful comments, discussions and data.
Motivation
• The rise of the global middle class is recognized as a key megatrend sweeping the planet (Global Trends 2030, NIC)
• There is no doubt that the world is becoming middle income…
– 72% of the world population lived in MICs in 2011, vs. 22% in 1990
– 45% of the world GDP originated in MICs in 2011, vs. 21% in 1990
• …but is it also becoming middle class?
– There is a need to understand the nature and implications of the rapid pace of poverty reduction and rise of the middle class
– The rise of the middle class represents a tectonic shift in social structure that requires a shift in policies
Global Trends 2030: Alternative Worlds. National Intelligence Council. www.gt2030.com. 2
Concepts and definitions
• Middle class: households who face a low probability to falling into poverty
– In LAC, households earning approximately between 10 and 50 dollars per person per day, on a PPP-adjusted basis
– The concept automatically defines another - people who are not poor yet not middle class: “the vulnerable”
• Intra-generational mobility: directional income movement
– i.e., upward or downward “class transitions”
• Inter-generational mobility: equality of opportunity
– i.e., how much children’s outcomes in life are independent from parents’ social economic (particularly educational) background
3
The middle class rose significantly over most of the emerging world
Change in social structure in the emerging world, circa 2000 –2010
Despite positive trends, most people remain poor or vulnerable to poverty
-
20
40
60
80
100
2000s 2010s 2000s 2010s 2000s 2010s 2002s 2010s 2000s 2010s 2000s 2010s
South Asia Middle East &North Africa
Sub-SaharanAfrica
East Asia &Pacific
Latin America &Caribbean
Eastern Europe& Central Asia
Pe
rcen
tage
of
po
pu
lation
Extreme Poor Poor Vulnerable Middle Class
Note: estimates for LAC are based on income, for the other regions on expenditures. Estimates are population weighted and only include low and middle income countries. Source: PovCal and household surveys.
4
Under present trends, a massive population wave will join the middle classes by 2030
Middle-class growth forecasts, 2005 – 2030:
If trends continue, the middle class in low and middle income countries will grow from 5% in 2005, to 25% in 2030. China alone will add one billion people to the middle class
0
400
800
1200
1600
2000
2005 2030
Num
be
r o
f p
eo
ple
(m
illio
ns)
Eastern Europe and CentralAsia
China
East Asia (excl. China)
Latin America and theCaribbean
Middle East and North Africa
South Asia
Sub Saharan Africa
Source: Bussolo and Murard (2011). 5
But relatively few middle income countries are middle class societies
Size of the middle class and GDP per capita, circa 2010
Note: estimates for LAC are based on income, for the other regions on expenditures. Source: PovCal and household surveys.
0
2
4
6
8
10
12
14
16
18
20
0
20
40
60
GD
P p
er
ca
pita
(P
PP, T
ho
usa
nd
s o
f U
S $
)
Pe
rcen
tage
of
po
pu
lation
Small Moderate Large GDP per capita (PPP)
6
In LAC, intra-generational mobility has been mostly upwards
Class transitions in Latin America over the last 15 years (circa 1995 –2010)
Most of the former poor are now vulnerable, not yet middle class
Source: Ferreira, Messina, Rigolini, Lopez-Calva, Lugo and Vakis (2013). 7
Policies and economic dynamics that move people out of poverty are not necessarily the same as those that help
people join the middle class
Contribution of income growth vs. changes in inequality in:
Note: Based on Datt-Ravallion decompositions. Reference years are circa 1995-2010 for LAC, and circa 2000-2010 for ECA. Averages are population weighted. Source: Azevedo (2012 and 2013).
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0LAC (0 to 4 USD) ECA (2.5 to 5 USD)
Ch
ange
(%
po
ints
)
Growth Change in inequality
Reducing poverty
-5
0
5
10
15
20
25
30LAC (10 to 50 USD) ECA (10 to 50 USD)
Ch
ange
(%
po
ints
)
Growth Change in inequality
Increasing the middle class
Inequality has played contrasting roles across regions – but starting points were different
8
High intra-generational mobility does not imply high inter-generational mobility, especially in LAC
Relationship of average PISA test scores and parents’ socioeconomic background, 2009
Education is the great equalizer of opportunities across generations
Intergenerational immobility has worse implications when educational systems perform poorly
More inter-generational mobility
Bet
ter
per
form
ance
Sou
rce: Ferreira, M
essina, R
igolini, L
opez-C
alva, Lu
go and
Vak
is (2013).
IDN
THA
ALB
AZE
BGR
KAZ
KGZ
LTU
LVA
ROU
RUS
SRB
TUR
ARG
BRA
CHL
COL MEX
PAN PER
URU
AUS
AUT
BEL
CAN
CHE
CZE
DEU DNK
ESP
EST
FIN
GBR GRC
HUN IRL ISL
ISR ITA
JPN
KOR
LUX
NLD NOR
NZL
POL PRT
SVK SVN
SWE USA
300
350
400
450
500
550
20 30 40 50
East Asia & Pacific Eastern Europe and Central Asia
Latin America & Caribbean High income OECD
Ave
rage
te
st
sco
re
Effect of parents’ socioeconomic background on reading test scores
9
A large share of the middle class in a country’s population is associated with positive economic and social changes
Normalized impact of a rise in the middle class
Note: The normalized impact represents the impact (measured in standard deviations of each outcome variable) of a standard deviation increase in the middle class. Results draw from a multivariate regression for 107 countries. Source: Loayza, Rigolini and Llorente (2012).
-0.4
-0.2
0
0.2
0.4
0.6
Public HealthExpenditures
(% GDP)
Public EducationExpenditures
(% GDP)
TradeLiberalization
Credit MarketLiberalization
Democracy Score Corruption Score
10
But a larger middle class does not automatically lead to shared prosperity and inclusive societies
• The middle class may “opt out” of the social contract – there is a risk of a “bad equilibrium”
• Whereby the middle class opts out of public services, does not pressure for institutional improvements, and is unwilling to contribute to public goods
• Good government policy and democratic institutions are essential to
close the wedge between class interests and broader social interests
– There is a need to incorporate explicitly equality of opportunity into public policy (in particular for education)
– The quality of public services plays a key role in encouraging “opting into” the social contracts and achieving equality of opportunities
– A “good equilibrium” hinges on the policies of a responsive government
11
Policy areas of possible focus: Commonalities across regions
• Improve the quality of public services to achieve greater equality of opportunity and more inclusive social contracts, i.e., shared prosperity
• Depending on the context, act on the revenue side, but also on spending effectiveness and priorities
• As the middle class expands, complement targeted social assistance with improved social insurance policies
• Calibrate social policies to the vulnerable
• Manage demographics
• Balance the needs of aging populations with the productivity challenges faced by the next generations of workers
12
Policy areas of possible focus: Latin America & the Caribbean
• Incorporate equality of opportunities more explicitly into public policy
• Sound economic management and social inclusion can go hand in hand
• Improve access and quality of education, including tertiary
• Embark on a second generation of reforms to the social protection system
• Calibrated to the vulnerable and with a better integration of social assistance and social insurance
• Break the bad equilibrium of low taxation and low quality of public services
• Use the commodity revenue bonanza to significantly raise quality of public
services, including education
13
Policy areas of possible focus: Eastern Europe & Central Asia
• Capitalize on the legacy of high equality and strengthen pathways into the middle class
• Improve quality of services and rationalize provision without compromising high access
• Manage better risk by improving integration and complementarity between social assistance and social insurance
• Strengthen employment creation in the private sector
• Regain momentum in the implementation of the modernization agenda, with a focus on business climate and public sector reform
• Invest in new skills and promote labor mobility; improve the design of tax and social benefit systems to promote formal work
• Manage demographics
• Avoid risk of growing gap between middle class and vulnerable by aligning incentives of aging middle class with the needs of other groups (e.g. youth)
14
Policy areas of possible focus: East Asia & Pacific
• Ensure equality of opportunity to the skills of East Asia & Pacific’s growing labor force
• Equality of opportunity is especially important for those in lagging regions and in traditionally poorer segments of the population
• Manage the roll-out of social protection systems that a growing middle class will demand, in a way that mitigates the fiscal burden and impact on growth
• Strong focus should be put on the rapidly urbanizing and increasingly aging population
• Redefine the social contract through more open government, channels for citizen engagement, and better service delivery, to ensure that the growing middle class stays engaged
15