Sunday, 26 April 2009

Article: Notions of shopkeepers

Notions of shopkeepers

Feb 12th 2009 From The Economist print edition

Why the new middle classes are so good for their countries’ economies

MOST Western businessmen think the middle class in emerging markets matters because of its spending potential. One day those billions of Chinese, Indians and Brazilians will be buying awesome quantities of toothpaste or computers. A global consumer society will be born.
Yet between them the village shopkeepers and the yuppie shoppers are changing the economies of both their home countries and the globe. Surjit Bhalla reckons that the larger a country’s middle class, the faster its economic growth: according to his calculations, a nation’s growth rate rises by half a point every time the size of the middle class increases by ten percentage points (so if a country’s middle class accounts for 50% of the population, it will, other things being equal, have a growth rate one percentage point higher than a country whose middle class makes up 30%).
Yet there is a handful of reasons for thinking that something special about the middle class itself—some intrinsic quality of middle-classness—contributes to growth, efficiency and the enrichment of a society. The most common argument is that the middle class matters because it does a lot of consuming.
The new bourgeoisie has created an enormous market, even if you ignore wild extrapolations about the future. In 2008 the number of cars sold in the big emerging markets exceeded that sold in America for the first time. In 2007 India had slightly more mobile-phone users than America and China had more than twice as many. Since 1994 business services in a range of emerging markets including India and Brazil have grown by 250-700%; in Europe and America they have roughly doubled.
The newly affluent in emerging markets echo the tastes of the English middle class 150 years ago. They want travel, improved health services, private schools and better public infrastructure. Like the Victorians, they are also keen on self-improvement. On one (conservative) estimate, 30m Chinese children are learning to play the piano. “The discipline will be good,” says one proud mother. On a more frivolous note, Brazil is number one in the world for liposuctions, number two for plastic surgeries (after America) and number four for the number of gyms.
But as Diana Farrell points out, the really transformative thing about middle-class consumption is the signal it sends to producers. The demands of middle-class consumers in the developing world feed investment in new sorts of production, which raises income levels and changes the way business is conducted.
The best-known example is the Nano, the $2,500 car designed by India’s Tata Motors. Until it made its appearance, nobody in the automobile business believed that you could design a proper car that sold for less than about $5,000. By radically simplifying production and by stripping down the design, Tata’s engineers managed to cut that supposed floor price in half.

There is no guarantee that the Nano will succeed. It has been plagued by well-publicised production problems. It may not satisfy its target market, being too cheap for the rich who can afford traditional small cars and too dear for the middle classes who currently ride motorbikes. But if it does take off, it could change car-buying habits around the world. At one-fifth of the price of a cheap family saloon in the West, some American or European families might decide to buy two or even three Nanos instead.
Seen as a market, the new middle class in emerging countries is still relatively poor but very large, so it provides incentives to offer things that are cheap and can be sold in their millions. In terms of its total spending power, though, it still lags well behind its peers in the rich world; nor is that likely to change soon. According to a World Bank study in 2007, the rich (in this instance meaning everyone with an income per person above the average for Italy, wherever they live) accounted for 57.5% of total world income in 2000, a figure that is likely to rise to 69% by 2030 (because the ranks of the rich are swelling, too). The share of world income taken by the global middle class (on $13-50 a day), at 14%, will remain more or less flat between 2000 and 2030. So its role in consumption can be only part of the story.
The middle class is committed to education. Current theories about economic growth stress the importance of what economists call “human-capital accumulation”.

Human capital means more children at school and university, higher educational qualifications, more adult education and healthier lives. The more advanced the economy, the more educated people are needed to control the processes of wealth creation (more computer designers, more logistics technicians and more white-collar workers in general). The richer the country, the higher its human capital, and vice versa.
The middle class’s third distinctive contribution to growth is its gift for entrepreneurship. “Armed with a capacity and a tolerance for delayed gratification,” says Mr Banerjee, new entrepreneurs “emerge from the middle class and create employment and productivity growth for the rest of society.”
The middle class is better at entrepreneurship than the elite partly for the reasons cited by Mr Acemoglu: it is more likely to invest in new businesses and more willing to learn new ways of doing things.
Most importantly, argues Mr Banerjee, the cream of the middle class is a better source of entrepreneurship than the poor because it can set up companies big enough to create lots of jobs. Profitable investments often incur substantial fixed costs. The dream of a couple of college kids with a few savings creating an Apple computer in a garage could come true only in a rich country, with a big financial sector and a low-cost distribution system. Emerging markets do not have those.

Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
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