SLOWDOWN PUTS 1BN MIDDLE CLASS AT RISK / THE FINANCIAL TIMES

April 13, 2014 7:07 pm

Slowdown puts 1bn middle class at risk

By Shawn Donnan and John Burn-Murdoch in London

Almost a billion people in the developing world are at risk of slipping out of the ranks of a nascent middle class, according to FT analysis, raising questions about the durability of the past 30 years’ remarkable march out of poverty.

Rising inequality and slower global growth raise issues for businesses that have been investing heavily in emerging markets.

One of the biggest questions confronting governments is what slower growth will mean for the creation of a solid middle class in countries such as China and India, which many are counting on to drive the global economy in the 21st century.

The IMF last week warned that the world could face years of below-par growth, while economists from the World Bank also cautioned that growth of developing economies was likely to average 2-2.5 percentage points less than that seen before the 2008 global financial crisis.

The Asian Development Bank has defined the entry point to the new middle class as the $2 per day poverty line, adjusting for purchasing power, while other economists have argued that a more robust definition begins at $10 per day.

But analysis by the FT of World Bank income distribution data from 122 developing countries since the 1970s makes clear that most of the millions who have risen out of poverty in recent decades are sitting in what is best described as a “fragile middle” between those two lines.

There were 2.8bn people – 40 per cent of the world’s population – living on $2-$10 a day in the developing world in 2010, the most recent year for which data are available. That makes the fragile middle the world’s biggest income group.

Moreover, many of those lifted out of poverty remain in an even tighter band only just above the $2 per day line. There were 952m people earning $2-$3 a day in the developing world in 2010, according to the FT analysis, a vulnerable segment that has grown more quickly than any other across the income spectrum.

FT Series: The Fragile Middle

Data Graphic

Data show 2.8 billion people in the developing world sit just above the poverty line, at risk of slipping back as emerging market economies slow

The FT analysis also showed a strong correlation between poverty reduction and growth, with the relationship tending to be stronger among countries with higher GDP growth rates. Across the so-called Bric and Mint countries, India, China and Indonesia exhibited the strongest relationships between GDP growth and a reduction in the share of their population earning less than $2 per day since the late 1970s. These three countries also had the highest average annual real terms growth over the same period, each growing 5.5 per cent or more.

One of the things that concerns development economists is that, even before economies began to slow, the “churn” between those below and those immediately above the poverty line remained high. According to the World Bank, in countries such as Indonesia more than half of those below the poverty line were above it the year before.

The International Labor Organisation said it was already seeing the effect of slow growth in emerging economies, with the number of workers worldwide in extreme poverty declining only 2.7 per cent in 2013, one of the slowest rates seen over the past decade.

In an interview, Kaushik Basu, the World Bank’s chief economist, warned that many of those people who had emerged from poverty in recent years remained “very vulnerable” to slipping back. He also said the world economy faced risks, including the possibility that China’s growth could slow even more than it has already, something that would have big repercussions for the developing world.

Even if that risk did not materialise, Mr Basu said, current growth would not be enough to return to the sort of poverty reduction seen in recent decades.

To make up for that, he said, “governments need to do more, much more, in terms of structural reforms in developing countries”.

The risk if they did not, he said, was the stalling of decades of progress in the fight against poverty and in the creation of a middle class deemed so vital to the future of the global economy.

Copyright The Financial Times Limited 2014.