The Growing Middle Class in Emerging Markets in Asia - Research Paper Example

The Growing Middle Class in Emerging Markets in Asia Introduction Post 2008 financial crisis across the US and around the world, there has been considerable interest in emergence of the Asian middle class because they can play a significant role in reviving the world economy. As more and more people in the Asian region fall in the middle income category, they are likely to be a future growth engine. So far economies of China, South Korea, or Taiwan have been driven more by their export bases; however, with the emergence of middle class in these countries, there reliance on exports will diminish in the coming years as their domestic consumption will fuel the future growth. It is a fact that the wider the base of middle income group across the world, the more cushioning will it provide to the world economy. In other words, the world economy is likely to be more resilient to the future economic shocks unlike the one witnessed during financial crisis of 2008-09. While there is no specific definition of the middle class, different people/agencies use different criteria. According to the definition of the Asian Development Bank, the people earning between USD2 and USD20, in purchasing power parity terms, fall in category of the middle class. According to Homi Kharas – the deputy director and the economist at the Brookings Institution, middle class is defined as those households whose income fall between USD10 and USD100 per day based on purchasing power parity (PPP) perspective (Boulter, 2013). Historical Developments in the Region & the Role of Foreign Organizations Pezzini (2011), the director of OECD development, argues that emerging middle class in Asian countries is likely to be a main engine of growth, especially in China and India due to their large population base. According to him, this middle class has been a front runner in accumulating useful capital necessary for further growth in the region. Larger middle class in the region helps fuel growth through domestic consumption rather than depending upon export-based growth. South Korea's large proportion of population now falls in the middle income category or above and has already become a major engine of economic growth in the region. Asia Foundation has been a major organization in supporting economic growth across Asia through private and public institutions. Its economic development program consists of three core areas that include policy reform and develop business environments, supporting entrepreneurship, and creating economic cooperation across the region. The Asia Foundation helps micro, small and medium enterprises (MSMEs) through their research tools such as Business Climate Barometers, Economic Governance Indices that takes into account the costs associated with poor policies while measuring the quality of local business environments. Thus, the Foundation helps identify specific areas of improvement by providing support to local business owners (The Asia Foundation, 2013). Thomsen (1999) asserts that foreign direct investment (FDI) in the region has played a major role in enhancing economic development of the Asian countries such as Malaysia, Indonesia, Thailand, Philippines. Strong FDI flows have helped these countries to transform them from traditionally agrarian economies to the vibrant industrial economies by exploitation of available local raw materials to produce finished goods for exports. In 1990s, Malaysia, Indonesia and Thailand attracted over $35billion, $23billion and $17billioin of FDIs making them one of the top Asian countries to receive foreign direct investments; however, during the same time, China due to its sheer size was way ahead attracting over$200 billion of FDIs. These huge FDI inflows made these countries one of the fastest growing economic region of the world. FDI has employment effects that can be seen from the fact that in 1987, entities that brought investment in China employed 221,000 people but that went up substantially to 6 millions in 1997 due to increased FDI. This employment generation is direct and exclusive of indirect impact that FDI generated in the country. It is imperative that increased employment opportunities available through FDI flows have transformed hundreds of thousands of low-income households into middle-class households. That is why the proportion of middle class population in China has increased dramatically in last two decades – from 56% of the population in 1995 to 89% in 2007. The increase in middle class has been noticed in rural and urban areas equally (Kingombe, 2002). Regional Characteristics & Main Countries of the Region Consumer spending in Asian region has reached $4.3 trillion in 2008 that accounts for one-third of what collectively spent by the OECD countries. It is estimated that if the Asian region continues to grow at the same rate, it is likely to reach $32 trillion by 2030. This will amount to 43% of worldwide consumption (Key Indicators for Asia and the pacific, 2010). This means that Asian middle class is likely to form a formidable spending power in the years ahead. Some of the important characteristic of the Asian region can be described as per the following. Asia comprises of the two largest countries, in terms of population, namely China and India. The region constitutes almost 60 percent of the world population when countries such as Bangladesh, Pakistan, Indonesia, Malaysia, South Korea and Philippines are included in this population base. A large middle-class will drive the growth of these two economies and there will be a definite shift from an export-led growth to domestic consumption economy. India will have more favorable demographic because a large proportion of its population (65%) is below age 30. Kerschner & Huq (2010) argue that by 2022, Asian middle-class spending, excluding Japan, is likely to surpass that of the EU, US and Japan combined. Most of the growth -- to be precise 85%, will come from Asia. Global spending by Asian middle class will be over $44 billion by 2030. And bulk of this will come from two countries: India and China. Barton et al. (2013) have estimated that by 2022 over 75 percent of Chinese urban households will earn minimum of $9000 and maximum of $34000 per year. This proportion was only 4 percent in 2000 that rose to 68 percent in 2012. This middle class of China is likely to create huge impact on the world economy. The urban middle-class will buy laptops, mobiles, cameras, watches, jewelry, readymade garments, shoes, and hosts of other items of capital nature or daily consumption. South Korea with its rapid economic growth has not only become a major international economic power but a pool of strong middle income population in the region. When seen from the purchasing power view point, it is the 11th largest economy in the world and 4th in Asia after Japan, China, and India. A way back, it was one of the poorest countries in Asia. The country suffered heavily during the Korean War between 1950 and 1953; however, during 1960s and 1970s, the South Korean economy developed at an average annual rate of 8.6%. By 1990s, South Korea became a major producer of electronics, steel, automobiles, shipbuilding, mobile phones, semiconductors, and hosts of electronic items. Some of the South Korean Companies such as LG, Hundai, Samsung and many more carved a suitable niche for themselves in the international arena during 1990s (South Korea Economy, 2012). Most Significant Developments – Strategies, Events, Policies Banerjee and Duflo (2008) emphasize on three mechanisms by which middle class may become instrumental in promoting development. Firstly, the middle-class values are crucial that aim at generating savings and accumulation of human capital. Both are critical for economic growth. Second, the middle-class people are entrepreneurial by nature that in turn, helps create employment and enhance productivity in a society. Third, middle class people generate demand for quality products due to their readiness to pay extra for premium products. Thus, they tend to encourage the production of quality products that forces firms to invest in research and development and customer education through their marketing activities. Due to changing lifestyles among Asian middle-class, they have been prone to certain health issues such as obesity, diabetes, heart disorders. Obesity issues in middle class have increased several folds in last two decades resulting into increased incidences of diabetes type II. High-fat diets and fast food consumption is causing these issues. In 2010, China and India had estimated population of diabetic patients to the tune of 43 million and 51 million respectively. Some other Asian countries such as South Korea, Malaysia, Sri Lanka also have substantial population of diabetic patients that may affect a large section of the middle class in their capacity to enhancing their earnings. In China, the proportion of middle-income class of people consuming a high-fat diet has increased from 19.1% to 51% and India is in no way different from this. Diets lacking in fiber and nutrients will develop many disorders including cancers of intestine. Indulgence in smoking has increased the incidence of heart ailments that were previously confined to the Western countries. It has been projected that middle class in Asian countries will face challenges from such chronic diseases in a large scale increasing their health spending significantly (Banerjee and Duflo, 2008). This also means that greater policy changes to face these emerging challenges are needed. Sound health policies are needed to be in place so that growth of the Asian middle class is not strangulated. Sustainable growth of middle class is a key to eliminate poverty from the Asian region. Moreover, a considerable proportion of the middle class is vulnerable to fall below poverty line if sound policies such as fiscal discipline, low inflation, sound monetary policies, and continuing with economic reforms, especially on labor laws are not formulated and implemented. Income inequality is another issue that needs to be addressed. Policymakers need to focus on the ever-increasing economic opportunities that are available due to technological changes and new scientific advances. Education is going to be the key to solving many of such issues. Not only cent-percent literacy rate is a must to bring every one above poverty line but also higher proportion of middle-class must enroll in institutions of higher learning to develop new skills and knowledge to avail new opportunities in the knowledge economy (Asian Development Bank, 2013). Future of the Asian Middle Class While it is a fact that the middle-class in Asian countries is rising at phenomenal rates, the issue has certain future implications too. The future implications vary across Asian nations. Demand of white goods such as television sets, mobile phones, refrigerators, automobiles and many electronic items have surged in countries such as China, India, Korea, Indonesia, Philippines. Asian middle class is more frugal than the one found in the developed countries and perhaps that is the reason, why some of the low-cost innovations have been done in these countries. Some of the examples are: ‘Nano’ Car at the cost of $2200 by Tata Motors, India; a portable electrocardiogram machine that can provide cardiogram at the cost of just $1 by GE at Bangalore, India; a $24 husk-based water filter by Tata Chemicals, India; a $12 lithium battery by BYD Lithium Battery co. in China (The Economist, 2010). The growing Asian middle class and its consumption levels could lead to strain on natural resources accelerating climate change. With the rise in income levels across middle class, per capita water consumption will increase putting more strain on existing water resources and may lead to dire consequences if domestic water consumption reaches to the level used by an average person of the developed countries. There is hardly any water policy in existence currently in most Asian countries and water consumption needs to be balanced through proper pricing mechanism. Environmental pollution could be more severe with the rise in Asian middle-class. By 2025, Carbon dioxide emission level in China is likely to be twice that of the US. If the Asian middle class continues to flourish as predicted and per capita emission level reaches equivalent to that found in the US, then it will have most severe ramifications on global climate change. It becomes necessary that renewable sources of energy must be harnessed to prevent pollution hazards and climate change complications in the years ahead (Asian Development Bank (2013). Conclusion Middle-class in Asian countries such as China, India, South Korea, Indonesia, Malaysia and many more is not only going to stay here but thrive in the years ahead. Population demographics are also in their favor as over 60% of their population is below age 30; their productive working life is significantly larger when compared with their counter parts in the Western countries including the US. Over time, their collective spending power will continue to fuel the world economy because this Asian middle class will expand substantially in numbers to cross one billion marks in the decade or so. There is no doubt that the Asian middle class will take a center-stage of the world economy in a couple of years from now. References Asian Development Bank (2013). Key Indicators for Asia and the Pacific. Retrieved June 23, 2014 from http://www.adb.org/publications/key-indicators-asia-and-pacific- 2013 The Asia Foundation (2013). Economic Development. Retrieved June 23, 2014 from http://asiafoundation.org/program/overview/economic-development Bannerjee, A. and Duflo, E. (2008). What is Middle Class about the Middle Classes around the World? Journal of Economic Perspectives. 22(2). 3-28. Barton, D., Chen, Y., Jin, A. (2013). Mapping Chinas' Middle Class. Retrieved June 23, 2014 from http://www.mckinsey.com/insights/consumer_and_retail/mapping_chinas_middle_class Boulter, J. (2013). China's Emerging Middle Class: Challenges and Opportunities. Retrieved June 23, 2014 from http://www.futuredirections.org.au/publications/food-and-water-crises/911-china-s-emerging-middle-class-challenges-and-opportunities.html The Economist (2010). A Special Report on Innovation in Emerging Markets. April. 17- 23. Kerschner, E. M., Huq, N. (2010). Asian Affluence: The Emerging 21st Century Middle Class. Retrieved June 23, 2014 from http://www.morganstanleyfa.com/public/projectfiles/35257b34-b160-45e4-980d-8bca327db92b.pdf Key Indicators for Asia and the pacific (2010). The Rise of Asia's Middle Class. Retrieved June 23, 2014 from http://www.iberglobal.com/Archivos/asia_middle_class_adb.pdf Kingombe, C. (2002). Employment Effects of Foreign Direct Investment in Host Developing Countries: Survey and Trends. International Labour Office. Geneva. Retrieved June 23, 2014 from http://www.academia.edu/1342679/Employment_Effects_of_Foreign_Direct_Investment_in_Host_Developing_Countries_Survey_and_Trends Pezzini, M. (2011). An Emerging Middle Class. Retrieved June 23, 2014 from http://www.oecdobserver.org/news/fullstory.php/aid/3681/ South Korea Economy (2012). South Korea Government. Retrieved June 23, 2014 from http://www.southkoreagovernment.com/economy.htm Thomsen, S. (1999). Southeast Asia: The Role of Foreign Direct Investment Policies in Development. Retrieved June 23, 2014 from http://www1.oecd.org/investment/investmentfordevelopment/1897793.pdf Read More