Pragma Synesi – interesting bits

Compendium of interesting bits I come across, with an occasional IMHO

Middle class

The following two articles are about the ‘global middle class’, which seems to be quite different to what we North Americans consider middle class — makes me appreciate even more how lucky I am living in a comparative paradise of Canada. And makes me wonder if we are going to be able to keep this standard of living in the long term.

http://www.theglobeandmail.com/servlet/story/RTGAM.20070724.wmiddleclassside0724/BNStory/International/

http://www.theglobeandmail.com/servlet/story/RTGAM.20070720.wmiddleclass0920/BNStory/International/?query=

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Defining the middle class

From Saturday’s Globe and Mail

Who is middle-class?

The North American images and conceptions of “middle class” are misleading: If you earn $75,000 a year in Canada, you aren’t middle-class; rather, you fall in the top 10 per cent of income earners. Internationally, such judgments are even less useful: A family income of $30,000 to $65,000, squarely in the middle in Canada, would place you in most countries’ upper ultra-elite.

Subjectively, middle-class status means freedom from absolute poverty, the ability to borrow money, home ownership, the ability to put your children through school (and likely some postsecondary education) and some sources of savings and equity that could be used to start a small business. These values are common badges of middle-class status around the world and are increasingly what the world’s poor aspire to.

But finding this middle ground is harder than it sounds. There are several possible methods.

Locate the middle group of earners You divide the population into equal-sized 10ths or fifths, each holding the same number of people, and see what they earn. In Canada, the middle one-third are those families earning about $35,000 to $70,000 per year. But the relative size of that middle third, in this scheme, will always remain exactly the same, making it impossible to judge if the middle class is growing or shrinking.

Define the ‘middle strata’ The ‘middle strata’ are those earning 75 to 150 per cent of the country’s average income. Though the measure can be misleading because of some tricky math, a group of scholars led by the World Bank’s Branko Milanovic recently tried to do something similar for the entire world. They divided the planet into a “lower class” – those with annual incomes less than the median income of Brazil (about $4,000 (U.S.) in purchasing power) – and an “upper class,” consisting of those making more than the median income of Italy ($17,000 (U.S.)). The lower class made up 78 per cent of all the world’s people, the upper class, 11 per cent and the middle – those living between those limits – made up another 11 per cent.

Classifying the countries themselves, rather than the individuals in them, yields similar results: About 11 per cent of countries were classified as “middle-income.”

Go by social function or consumer power You can skip money altogether and look at social roles. From its beginnings in the French Revolution, the popular concept of “middle class” has had more to do with what this class does than how much it earns. Initially, it referred to the bourgeoisie (business owners), but in the 20th century, it came to refer more to stable incomes and reliable pensions; the propensity to save or invest at least small amounts of money; access to education; and the ability to start small and medium-sized businesses.

Some agencies have come to define middle-class status by the simplest of all functions – consumerism. The ability to buy things other than the basic necessities of life (food, fuel, clothing) represents a step above poverty, if not a solid middle. Marketing companies have set this threshold at a family income of $1,500 (U.S.) per year for countries like India and China; there are probably more than a billion people in the world who meet it.

We will measure middle classness by a higher function – home ownership. Although there are places in Africa, the Middle East and South America without the same conventions of property ownership, in most places owning a house, outright or through a mortgage, means your escape from poverty is likely to last a long time, if not for several generations.

Most measures of middle-class status describe the same groups of people in most of the world’s poor countries: Those who manage to buy their first house generally earn $6,000 to $10,000 (U.S.), which fits neatly into the middle group of world income earners, according to Mr. Milanovic’s definition.

And it happens to be the amount of family income that people in India, China and most of South America describe as “middle-class.” So in that neighbourhood, it is safe to say, lies the world’s real middle.

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The fragile state of the global middle class

Economic optimists hail the advent of a ‘new middle class’ in countries such as India and China, but critics say that for every group that rises, others sink as income gaps widen

From Saturday’s Globe and Mail

MUMBAI — Six weeks ago, the Parab family stepped into a world many of us will recognize. After waking one last time to the murk of a hot morning in the dense slums of northern Mumbai, the four of them picked themselves off the floor of their poorly lit one-room dwelling, loaded their beddings into a van and made the long, bumpy ride into the middle class.

They walked nervously up the stairs of the Om Shanti apartment building, a greying 22-year-old concrete structure in the city’s well-treed northeast. For most of their 18-year marriage, Manohar and Shubhashi had been saving to reach this most important plateau – the ownership of a full-sized, respectable home.

Three years ago, they finally attained a sufficient household income – about $7,500 a year – and the down-payment savings that could put an Indian family into the tangible ranks of the middle class. Even then, as hundreds of millions of people are discovering, it was a long struggle.

Ever since quiet, cheerful Manohar, 52, got his job as a driver of executive cars for a major electronics company, earning him a decent $550 a month, Shubhashi, a gregarious, energetic woman of 36 – the master strategist behind the family’s upward mobility – had been doing the math, visiting the banks, trying to find a way to join the slowly growing ranks of families around the world whose lives are not governed by mere survival.

The up-and-comers: From left, sons Prateek and Rohan Parab and parents Shubhashi and Manohar Parab in the newly renovated kitchen of their three-room flat in Mumbai.

Enlarge ImageThe up-and-comers: From left, sons Prateek and Rohan Parab and parents Shubhashi and Manohar Parab in the newly renovated kitchen of their three-room flat in Mumbai. (Subhash Kumar Sharma for The Globe and Mail)

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She was discovering what economists are just beginning to notice about the new middle class: It is extremely difficult to enter, even for those who seem to have enough money. And, she was well aware, it is all too easy to fall back into poverty.

A mortgage was impossible, given her husband’s lack of job security (even well-paid jobs in poor countries now tend to be casual, short-term or temporary), so she had arranged a consumer loan to buy the $42,500 flat in June. His salary of $6,600 a year wasn’t providing enough savings, so she found small sources of income – renting out their previous slum dwellings – that raised their household income to a healthy $7,950. This was enough to buy what was listed in the language of Indian real-estate listings as a “1bhk” – “one-bedroom-hall-kitchen,” a three-room flat, or what we would call a starter home.

There were still hurdles: Besides the loan, she had to pay several thousand in “black money” – an off-the-books cash payment, almost mandatory in India – to the seller.

The two boys, aged 18 and 11, were the first to walk through the front door of the cheery apartment. Their mother had made them wait a full month before moving in, because she had decided to do something that Canadians will recognize as a classic middle-class rite of passage: She cashed in the small pieces of gold she had been saving for years, valued at almost $10,000, and used the money to pay for furniture and renovations: new kitchen counters, marble floors, ceiling mouldings and lights installed by her workman cousin, and a bigger bathroom.

“As soon as we got this house, it was clear to both of us that we had now entered the middle class,” she says as her family stretches out in front of the TV, still marvelling at the expanses of unpopulated floor space. After the intimate confines of Asian poverty, however, the middle class can seem to families such as the Parabs like a comparatively lonely place.

“Atmosphere-wise, I liked the old place better,” Mrs. Parab says of their former slum dwelling, a rudimentary cinder-block structure known as a chawl. “People were coming in and out all the time, there were always two or three neighbours inside, you could here everything going on around you. Now, it’s just too quiet.”

The middle class may be a lonely and disconcerting place to its millions of new entrants, but the Parab family are clinging tightly to their perch. They recently paid their first visit to a shopping mall, one of India’s latest innovations, and found themselves stumbling over a previously unknown device known as an escalator. But they didn’t buy anything – their savings are precious.

The family, like almost every new middle-class family here, is betting everything on the next generation. Prateek, their patient, quiet 18-year-old son, is their main weapon, and they are spending a formidable $90 a month to put him through a computer-science program at the Northern India Institute of Technology.

“It’s difficult to get by – we have had to borrow so much, and our income barely meets our expenses,” Manohar Parab says. “We are really counting on the sons. They will do better than us, and pay for this.”

The sons, glancing away from their TV to their father as he speaks, suddenly look old beyond their years.

A key to peace

Do the Parab family, and others like them across the social petri dish that is Mumbai, represent the future? It may be the most important question in the world today.

Their move from poverty into reasonably secure middle-class status follows a path that was crossed by millions of Europeans and North Americans in the 19th and 20th centuries. Only when a significant number of Westerners (perhaps 40 per cent) became members of the middle class did our economies become broadly prosperous and self-sustaining. Only then did political violence and extremism cease to be a feature of Western societies. It is widely believed by most scholars that a large and stable middle class is the key to a nation’s lasting peace and prosperity.

Is it time for the world’s poor countries to repeat this transition? The past two decades have seen enormous increases in national wealth and average incomes in most of the poor countries of the world – especially India and China. The amounts of money earned by the world’s poorest two billion people have increased dramatically in the past 20 years and hundreds of millions have been lifted out of abject poverty into a standard of living that allows them to buy things other than food, shelter and clothing. There are now 52 countries in the world, representing 1.5 billion people, that have reached the same level of individual earnings that Canada and the United states did when they became middle-class-majority countries in the 20th century.

The question is whether this boom in wealth is translating into a middle-class revolution in the eastern and southern corners of the world. Are Asia, South America, Eastern Europe and the Middle East undergoing today what we did two centuries ago? Are the Parabs becoming the norm?

If you ask the marketing industry, the answer is enthusiastic: Yes, there is a great new middle class of consumers taking shape around the world, especially among the 2.5 billion people of India and China.

Last year, a group of economists working for MasterCard predicted that we will soon see a “deluge” of a billion middle-class families emerging from India and China. The number of people with family incomes above $5,000 will soon explode, the report predicted, to 650 million people in China and 350 million in India by 2020 (there are currently about 12 million in India and 79 million in China who meet this mark).

This is seen as a marketing bonanza. “As soon as income exceeds the $5,000 threshold, marginal expenditures shift quickly to discretionary appending such as dining out, personal travel, auto purchases etc., and these have a huge business and economic impact,” the report said.

But other reports are less glowing. Most notably, the World Bank’s chief economist, Branko Milanovic, has argued that the world has failed to develop a middle class of any importance and shows little indication of doing so.

His detailed economic studies of this problem indicate that the number of countries with substantial middle classes has fallen to 31 from 41 in 1960 and only four countries (South Korea, Singapore, Hong Kong and Taiwan) have risen to the “high-income” status generally considered necessary to produce a middle-class majority.

Right now, there are only six developing countries that are “middle-class nations” – that is, which have more than 40 per cent of their populations in the middle class or above. Only two of the poorest countries, Botswana and Egypt, have risen to a level of income that could produce basic consumerism, never mind a middle class.

“The absolute income levels of the poorest are creeping up,” says David Rothkopf, a scholar with the Carnegie Endowment for International Peace. “But with the notable exceptions of India and China and a few others, which show some heartening middle-class growth, we are doing a very bad job of building the middle classes, which are the foundation of stability and the antidote to the boom-bust cycles that bedevil much of the emerging world.”

Here in Mumbai, often considered a test bed for theories of the middle class, evidence of both the exciting promise and the frustrating impediments to middle-class growth are ample. All around the teeming streets of the city’s once-destitute north are shopping malls and new apartment complexes, cellphone boutiques and motorcycle dealers.

But it is becoming increasingly apparent that families like the Parabs are a slim minority. This is a city that is obsessed, from the plastic-roofed slums to the luxury high-rises, with the idea of upward mobility, as are people in Shanghai or Chongquing or Sao Paolo. But actually attaining that mobility isn’t as easy as it looks.

A detailed new study by U.S. scholar Jan Nijman found that during the 1990s in Mumbai, while the ranks of the upper middle classes grew, home ownership remained out of reach for the more numerous lower middle classes, earning $5,000 to $8,000 a year.

Prof. Nijman found out something else potentially alarming: In India, even the majority of people who do buy houses can’t really afford them; like the Parabs, they are borrowing money they can’t afford to repay, gambling on economic growth or the success of their children. A similar pattern is found in China.

“It appears that part of the current consumption by urban Indians constitutes some sort of anticipatory socialization, consumption based on the expectation of upward mobility,” Mr. Nijman says.

“These consumers are not middle-class or upper-middle-class yet, but they are acting like it.”

Behind all these troubling details, there are broad reasons to be optimistic: According to the World Bank’s 2007 annual report on global prospects – using formulas devised by Mr. Milanovic – the middle class is now 7.6 per cent of the world’s population, and the bank now sees them growing to 16.1 per cent, or 1.2 billion people, by 2030. It may take a century, but other middle-class countries may emerge, if world economies can avoid collapse.

But there is an alarming side to this: Unless countries manage to produce actual majorities of middle-class families, which so far has been done only in the West, there are strong signs that these emerging middle-class communities in the developing world could be washed away as fast as they have appeared.

Catastrophe waits

To understand this threat, you need to jump on the teeming Mumbai commuter train and ride a half-hour north from the Parabs’ new house. There, you’ll meet a family on the other side of the ledger.

Twenty years ago, the Naigaonkars were an early version of the Parabs. When Prabhakar, 54, married Daya, 52, in 1981, he had an upstart job as an accountant and they lived in a one-room house. He quickly climbed up the corporate ladder in one of the city’s largest cotton mills, becoming chief accountant with an impressive salary of $300 a month. They moved into a nicer two-room place and dreamed of bigger houses, cars, vacations.

Then the bottom fell out of the Mumbai cotton industry. Mr. Naigaonkar’s mill closed in 2001 after years of ugly strikes made Chinese mills more appealing. He spent his final year, up to the end of 2002, closing the books and handing severance cheques to lifelong friends. Older and untrained in the new methods, he knew he would not earn a middle-class income again.

“I knew that this could happen to me eventually, so I did save money and avoid buying a very large house,” he says, offering coffee to his guests, wife and youngest daughter in their cozy, tiny house. “But I was not prepared for how bad it would be.”

Like almost all middle-class families in India, the Naigaonkars have been forced to adopt that Western innovation, the double-income family. “Even if you are doing much better than us, you cannot get by on only the man’s income – that tradition cannot exist here,” says Mrs. Naigaonkar, who works up to 18 hours a day in a department store to earn $75 a month. Her husband makes slightly more, doing accounting and sales (partly on commission) for a vegetable-oil company – a far less secure, prestigious job than before.

Until last year, their earnings barely covered their bills. Then came a catastrophe they had dreaded: Their eldest daughter, Swananda, got engaged.

Even among the modern middle class in India, the marriage of a daughter is a key event; it is what makes your family’s future possible. It is also extremely expensive – in their case, the most modest possible wedding cost $1,050 for the hall and $200 to feed the 372 guests – a sum they could not fathom.

They faced a terrible choice: They could pay for the wedding and be forced to move out of their home and into a slum, abandoning any pretext of middle-class status. Or they could beg.

“I am ashamed to say that I simply could not afford to marry my eldest daughter,” says Mr. Naigaonkar, the proud, firm facial expressions nurtured by his classical singer’s training collapsing into despair. “So I had to rely on my brothers and other relatives.”

The brothers picked up the bill. This is what keeps people from falling out of the middle class, in India and everywhere else in the world – the support of family. But that can only go so far, especially if there is an economic crisis that affects an entire family or community.

“If I had, say, a medical expense, it would be absolutely the worst thing for us,” Mr. Naigaonkar says. “We could not manage.”

What happens when you start slipping off your bottom rung in the middle class, and you look around and find all your friends and relatives doing the same? It’s a familiar situation in today’s world.

In some places, economic growth has created such intensive inequality, in booms that deliver their rewards only to the top, that it has driven millions of people out of the middle class and into poverty.

According to the United Nations, for example, 23 million Latin Americans have fallen from the middle class into poverty since 1999. In Eastern Europe and Russia, Mr. Milanovic says, the middle class actually shrunk by 7 per cent in the late 1990s, throwing millions into a poverty their families hadn’t known before. Such people – known as the nuevos pobres in South America – are embittered and often become the supporters (as in Russia and Venezuela) of tyrannical political movements: They no longer want a growing economy, just a slice of what’s left.

That is not happening in Mumbai today. There is an extreme precariousness to these bottom steps on the middle-class staircase – and a profound difficulty in reaching any higher steps – but so far, India and China have held together, along with some other once-poor economies: Brazil, Argentina, South Africa. But there is a grave worry that even a brief economic downturn could plunge tens of millions of people back into the lower class for a generation.

Here on the ground of the world’s poorer four-fifths, working people are well aware of these risks. There is a strong sense that the future may not deliver constant growth. But unlike previous generations, people in India and China aren’t all reacting by saving their gold. Many are borrowing money – causing borrowing rates finally to catch up with savings rates – and investing it on the enormous gamble known as their children.

With both the Parabs and the Naigaonkars, you see where the money is going: In the tiny Naigaonkar house, where the whole family gets by on a sub-middle-class $1,722 a year, an anomalous personal computer sits in the living room. Calm, confident Kankana, 18, is practising her Java programming.

Both families are staking their middle-class existences on financing their children’s university educations: If they fail, the families will probably be bankrupted back to the one-room chawl; if the kids succeed, then the families will enter a very different sort of middle class, the sort of middle class that most Canadians belong to.

“We are very satisfied, self-contained people, and that has helped us,” says Prabhakar Naigaonakar, getting ready to join some other men for an evening of singing. “We do not have anything except our daughters, and they are our only hope. Without the children, we are nowhere.”

Doug Saunders is a member of The Globe and Mail’s European bureau

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July 31, 2007 - Posted by | economics

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