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The Global Middle Class

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The Global Middle Class

This module was designed to give you a deeper understanding of how monetary trends and the distribution of monetary wealth affect the globe. Through close examination of global poverty and income inequality, you’ll learn critical concepts such as the Gini Coefficient and the Kuznets Curve, and how to use them as tools in analyzing the global distribution of wealth. You’ll also explore the rise of the global middle class, and how businesses are responding to the growth of middle class consumption. Finally, you’ll investigate the relationship between changing gender dynamics and wealth in the world. By the end of this module, you’ll be able to use effective analytical tools to form a clearer understanding of the effect of wealth within society and how it affects your organization.

Global Trends for Business and Society

University of Pennsylvania

Course 1 of 4 in the Business Strategies for A Better World Specialization

In this course, you’ll learn to analyze rapidly changing global trends, their effects on consumer and labor markets, financial systems, and geopolitical relationships among countries all over the world. Professor Mauro Guillen of the Wharton School has designed this course to help you understand the magnitude of influence these trends have on the business world and society. Through real-world case studies, both historical and contemporary, you’ll examine how changes within one society affect others. By the end of this course, you’ll have gained the tools to be able to identify, analyze, and adapt to global changes as they affect your business and society.

Skills You'll Learn

Global Financial Crisis, Trend Analysis, Economy, Trading, Strategic Management

Taught By

Mauro Guillen
Professor of International Management

Transcript

Many of the debates about income and wealth and

equality in the world these days, revolve around the concepts of the middle class.

The middle class is historically defined as the segment of the population

between the peasantry and the working class, on the one hand, and

the upper class, on the other.

It was assumed to have different values and to exhibit different political

behavior, than the working class or the peasantry or of course the upper class.

The rise of the middle class historically, beginning in Europe and

United States, had to do with the growth of cities, and with the new

occupations especially in the trades, that where created in those cities.

At the global level, the middle class is defined today as the segment

that lies between the poor and the rich.

Whats distinctive about middle class is that, it has discretionary spending power.

And the middle class as we know it today, didn't really exist until the early 20th

century, starting in Europe and the United States.

This is Venice.

Perhaps the first modern instance of a city-state, that thrives on

the development on a vibrant middle class of artisans, merchants, and shopkeepers.

Now, think about how important the middle class is in the following ways.

The middle class is a foundation of modern democracy.

It's a key nexus in the chain of social mobility.

Very few people make the transition from being poor to being rich directly.

First, they become middle class.

The middle class is also a pillar of social stability.

Countries that have a broad middle class tend to be more politically and

socially stable.

The middle class is also the largest consumer demographic, so most

of the market for consumption is accounted for by the middle class consumer.

And of course the middle class is the largest beneficiary of the welfare state:

education, health care, pensions, unemployment benefits.

And let's not forget, in many countries,

the tax system subsidizes the middle class because although they do pay taxes,

they tend to benefit disproportionately from services offered by

the states such as education, healthcare, pensions, or unemployment benefits.

Now recently,

we've seen another term being used very frequently in the press, in the media.

That's the concept of the global middle class.

Now this term is an ambiguous one.

The reason is that the middle class can only be defined within each country,

because who exactly is in the middle of the income of the world distribution

is relative to how rich or how poor the entire country is.

Nevertheless, the Organization for Economic Cooperation and

Development, defines the middle class as,

people with at least $10 to spend per day, but no more than $100.

Adjusting, of course, for

the cost of living in different countries around the world.

Note that these per day levels of spending translate into

incomes throughout the year, of between $14,600 and

$146,000 in annual income for a family of four.

That is to say, a family that has two parents and two children.

So in other words, what we're doing here is drawing two thresholds.

The first separates the middle class from the poor.

And the second one separates the middle class from the rich.

Once again, for an individual, you're assumed to be middle class

if you have income of at least $10 per day but no more than a 100.

Now, using this definition of the middle class.

What we see in terms of it's evolution over time is a very clear trend

which is that, every year that passes, there's more and

more people in the world qualify as middle class.

This chart over here starts at the beginning of the 21st Century,

goes to the year 2015 with actual recorded data, and then shows projections,

median projections, always median projections into the future.

The orange area in the middle is the numbers of people who are middle class.

Above it, we have the numbers of people who are poor.

And then at the bottom of the chart, we have the numbers of people in the world

who are rich, according to the definition that I just gave you.

It's very clear that the numbers of people in the middle class are growing.

But also, that the numbers of people in the rich segment are also growing, and

we will analyze that phenomenon a little bit later in this class.

But notice, that as we speak today.

The year 2016, 2017, 2018.

We still have in the world more people who are below the poverty line than people

who part of the middle class.

But within about five years, or seven, or eight years at most,

certainly by the year 2025 or so, we will have for

the first time in human history, more people that are members

of the middle class than people who are below the poverty line in the world.

Now, what I find fascinating about this statistics is to see how the purchasing

power of the middle class, is distributed geographically around the world.

Let's take a look at one first chart here, which again starts in the year 2000.

It goes to the year 2015, with actual recorded data.

And then makes medium projections to the year 2030.

The vertical dimension on this chart is a percentage.

What percentage of middle class consumption or

purchasing power in the world, is accounted for by different regions?

As you can see, as we speak today, the two largest regions of the world

in terms of middle class consumption, are the European Union and the United States.

Put together, they account for about 40% of the world's total.

But by the year 2030, notice that the European Union and

the United States combined, will be less than 25% of the total.

And India and China combined, will be about 40%.

And if you add the rest of Asia even excluding Japan, you will

get more than half of all the middle class consumption in the world locating in Asia.

In other words, it's not going to take longer than 10 or 15 years for

the center of gravity of global middle class consumption,

to shift away from Europe and the United States towards Asia.

I'm in Bangkok the capital of Thailand.

Thailand is another economy that has seen

very rapid economic growth over the last 25 years, so that with some ups and

downs especially the crisis in 1997.

I am in downtown Rio de Janeiro in the Copacabana section.

Since the year 2000, Brazil has seen a big economic boom.

And as a result of that,

about 50 million people have been lifted out of poverty and into the middle class.

Whereas 15 years ago, very few Brazilians could go to a bank branch and

obtain a loan in order to buy a washing machine, an automobile, or a home.

Nowadays, it is much more commonplace.

This change, of course, is going to have enormous consequences for companies, but

also for the global economy and, I also believe, for global geopolitics.

Now, let me show you another chart that contains the exact same information.

Vertically, we have what percentage of total middle class consumption in

the world is accounted for by different countries or different parts of the world.

And horizontally, we have the time dimension, starts in the year 2000.

But unlike the previous chart, we don't stop in the year 2030.

We keep going until the year 2050.

And if you do that, then something very,

very unanticipated happens, which is that, you can see that India

becomes the largest market in the world for middle class consumption.

Becoming bigger than China.

Now, some people might react to this chart in disbelief saying, that's not possible.

China will be the largest economy in the world.

And my answer to that is absolutely.

China may be, most likely, the largest economy in the world for

a long time to come.

But, here we're not measuring total GDP,

total gross domestic product, we're only measuring consumption by the middle class.

In other words, we're excluding investment, and we are excluding

consumption by people outside of each of these countries, meaning exports.

We know that China invests and exports huge amounts of money every year.

India invests and exports much less than China,

in other words, whatever size the Indian economy has, a greater proportion of it

is going to be domestic consumption and most of that by the middle class.

Now also keep in mind, that beginning in roughly the year 2025, India,

we have for the first time in a long time, a greater population than China.

And finally and most importantly from my point of view, India will continue

to have for the foreseer for the future a much younger population than China.

Now, that's important to remember, because young people in their 30's,

in their 40's are more likely to purchase automobiles, homes,

and other consumer goods that are durable, and that,

those items contribute big time to the size of the domestic consumer market.

Let me share with you two maps, so that you can see the dynamic

evolution of middle class consumption in the world moving forward.

So the first map refers to the year 2015, and each circle here represents a country.

The bigger the circle the more middle class consumption there is in that market

as of the year 2015.

And I'm going to show you the medium projection to the year 2030.

And if you compare the two maps, you can see the enormous growth in

middle class consumption, that is going to be taking place in emerging markets,

especially China and India, over the next 15 years.

Let me give you the specific figures comparing the situation today,

to the situation in the year 2030.

And all of these figures are in trillion US dollars.

For the entire world, we're going to see a massive increase in middle class

consumption from 21.3 to $55.7 trillion.

In North America which includes United States and

Canada, this going to be stag nation.

The reason for this is remember, the poverty is in the increase in

the United States and there's more income in wealth accumulation at the top.

So in other words, the middle class is shrinking.

In Europe, there's going to be a slight increase, from 8.1 to 11.3.

Now, I can assure you that increase is not going to be taking place in countries such

as Italy or Greece or Spain or Portugal.

And perhaps not even in Germany,

because Germany has a rapidly aging population, most likely.

That increase in Europe is going to come from Eastern Europe from places like

Poland, or the Czech Republic, or Romania.

Central and South America is also going to experience an increase and so

will Sub-Saharan Africa, but

by far, the bulk, most of the increase in middle class consumption in the world,

iss going to come from the Asia Pacific region, mostly from India and China.

And as you can see over here, with the specific numbers,

it will grow from $4.9 trillion to $32.6 trillion by the year 2030.

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