In The News

Asia’s Rising Middle Class

January 26, 2011

Asia is undergoing a profound economic transformation – as the region’s resistance to the global financial downturn in 2008-09 demonstrated. Amid continued sluggish global performance in 2011, regional growth is set to remain robust – albeit less so than in 2010 – with China (9.1%) and India (8.7%) expected to lead the pack. Such growth will certainly be reflected in the number of participants from emerging nations like India and China at the Davos World Economic Forum that convenes today.

The ADB predicts that by 2030 developing Asia’s annual consumption will reach $32 trillion – nearly 43 percent of total global consumption. Photo by Karl Grobl.

Because of such strong growth, experts are pointing to the rise of a formative Asian middle class, which in 2010 spurred private consumption in Asian economies long inclined toward high savings and dependent on export-driven growth. The notion of an emerging Asian middle class and the domestic consumption it fuels has generated a great deal of discussion. For example, the Asian Development Bank (ADB) dedicated an entire chapter to the topic in its publication Key Indicators for Asia and the Pacific 2010; a recent Financial Times article highlighted the effects of the transition in China; and the OECD’s recently released working paper looks at the emerging middle class in developing countries, specifically in Asia.

Is this real?

In 2010, domestic demand helped shield countries like Indonesia and Bangladesh from the negative impact of plummeting exports. Consumer demand was likewise a main driver of growth in both India and Malaysia. In the Philippines, private consumption accounted for 50 percent of total growth in the first half of 2010; in Thailand, it contributed to nearly all GDP growth in the same time period. The IMF predicts domestic consumption to continue fueling China’s growth throughout 2011 – even increasing as a share of the country’s GDP.

In 1990, Asia’s middle class accounted for a mere 21 percent of its total population; by 2008, this figure had risen to 56 percent. According to the ADB, Indonesia’s middle class jumped from around 25 percent of its population in 1999 to 43 percent in 2009. In the Philippines, the figure edged up from 44 percent to 54 percent from 1988 to 2006. In 2008, annual consumption expenditures in the region totaled $4.3 trillion –almost a third of total OECD private consumption. While East Asia’s population is growing more slowly than that of other regions, its annual per capita income growth is much higher. In fact, says Deutsche Bank, Asia’s middle class is currently one of the fastest growing population groups in the world. While today Asia contains less than 25 percent of the world’s middle class population, the OECD sees this figure doubling in the next 15 years.

Assuming consumption expenditure continues to grow at rates similar to the past 20 years, the ADB predicts that by 2030 developing Asia’s annual consumption will reach $32 trillion – nearly 43 percent of total global consumption. It is looking increasingly likely that Asia’s emerging consumers may eventually become a pillar of global consumption, just as the middle class in the U.S. and Europe have been for so long.

Why is this important?

The emergence of Asia’s middle class and its subsequent impact on global consumption levels has obvious implications for both the future of the region’s growth and the trajectory of its development. But it is also worth considering the impact such a phenomenon will have on local economic governance in particular. Sustaining a strong middle class will require Asia’s local governments to improve service delivery and increase transparency within the realm of economic policy making.

On one hand, there exists the possibility that the middle class will exert growing pressure on local governments to improve service delivery. The emergence of a sizeable Asian middle class, says the ADB, is likely to “encourage business innovation, greater accountability, and transparency in government service.” Vocal demands for enhanced service delivery from a well funded, organized, and educated middle class can pressure governments through a number of channels – including non-governmental organizations, newly emerging political coalitions, or via the ballot box. Indeed, fiscal discipline, inclusive development planning and budgeting, and a healthy regulatory regime all work to the advantage of the middle class, who run small and medium-scale enterprises (SMEs), send an increasing number of children to school, and rely heavily on infrastructure to run their daily lives.

At the same time, to sustain a growing middle class, local governments will need to pursue economic policies in tune to the needs of citizens, the business community, and civil society. Increasing dialogue with relevant stakeholders is an important step in this direction. Doing so can ensure better targeted spending on education, health services, and infrastructure – all of which provide the social safety net needed to prevent the middle class from slipping back into poverty. Additionally, by producing regulations that promote the growth of SMEs, and making the process for obtaining business permits and licensing faster and more transparent, local governments can contribute to the growth of SMEs and encourage entrepreneurship. This will fuel local level growth and enable middle class expansion.

The centrality of local government

As the Financial Times piece I mentioned above points out, a great deal of middle class growth is set to occur outside of large international hubs like Beijing or Mumbai, as smaller towns and villages will likewise experience rising income and diminishing poverty. The demand for economic governance that attends to the needs of the middle class will be widespread throughout countries in Asia, down to the village level.

With external demand from industrial economies unlikely to return to pre-crisis levels, future growth in Asia will depend on the domestic demand fueled by its middle class. If Asia’s middle class is to become a reality, its expansion widespread, and the economic growth it generates sustainable, local governments will need to put in the work needed to keep up with a changing environment. These governments have to remain committed to protecting the middle class and preventing them from falling back into poverty. To not do so will be to the detriment of the Asian consumer and the global growth it spurs; but it will also be to the serious disadvantage of local governments themselves, which have just as much to gain from this phenomenon as they have to lose.

Johan Kharabi is a former junior associate with The Asia Foundation’s Economic Reform and Development and Communications units.

View all posts by Johan Kharabi

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