Global Poverty Plummets. But Where Is the Middle Class?
July 20, 2015
Humanity climbing out of poverty is a historic—if often unheralded—achievement. According to a fascinating new report issued by the Pew Research Center in Washington, D.C., from 2001 to 2011 somewhere between 669 million and 867 million people around the world escaped extreme poverty. That’s about 10 percent of the world’s total population. These gains were driven largely by developing countries introducing and expanding market forces—especially connecting to the global economy—that drove faster growth in output and thus incomes. Today, living standards around the world are higher than at any time in human history.
That’s the glass-half-full story on global economic development. There is, alas, a glass-half-empty side to this story as well. Surprisingly few people have reached the middle class.
This new Pew report carefully analyzes data for 111 countries and for each divides the population into five categories, based on daily per capita income or, when income data are more limited, consumption. For the especially data-minded readers, note this study is one of the first to use the 2011 data from the World Bank’s International Comparison Program, which every several years calculates price levels around the world to enable cross-country real-income comparisons.
What do the data show? The remarkable progress on extreme poverty means that from 2001 to 2011, the share of the world’s people living on less than $2 per day (and thus defined as “poor”) fell from 29 percent to just 15 percent. Yet fully 56 percent of the global population is still “low income,” with daily earnings of just $2-$10 per day. Just 13 percent of the global population meets this study’s (and many others’ as well) definition of “middle income,” which is earnings of $10-$20 per day. The remaining 16 percent of the world’s population is classified as “upper middle income” (9 percent) or “high income” (7 percent) “The emergence of a truly global middle class,” write the report’s authors, “is still more promise than reality.”
The size of the world’s middle class is immensely important. For starters, higher living standards contribute to better health and longer life expectancy, above and beyond greater material comforts. As more people move into the middle class, governments have both the means and the mandate to invest in areas like education and housing that support living standards for the future as well. And as research such as that of Harvard professor Benjamin Friedman has shown, the economic growth that supports middle-class expansion tends to enhance democracy and tolerance throughout the world.
Thus far in the 21st century, the middle class has managed to grow in some places. The biggest gains from 2001 to 2011 were in China, South America, and Eastern Europe—with more than 200 million people in China alone moving from low income to middle income. Yet over that decade the middle class barely expanded in many other regions, including Southeast Asia, Africa, and Central America—despite what economic growth these areas did realize over that time. In India, for example, although the poverty rate fell from 35 percent to 20 percent, the share of the middle-class population only grew from 1 percent to 3 percent.
The growth of a global middle class has been much heralded. For example, one recent study by McKinsey forecasts that by 2025, annual household consumption in emerging markets will reach $30 trillion—what it terms “the biggest growth opportunity in the history of capitalism.” Based on the same Pew estimate that a household income of $10 per day is the key threshold at which families can afford large consumer purchases such as refrigerators and televisions, this study forecasts that the size of the world’s “consumer class” will rise from 2.4 billion people today to 4.2 billion people in 2025.
The Pew study and the McKinsey forecast are not inconsistent. For the world’s middle class to blossom, however, will require more economic growth in many countries—and, of course, commensurate growth in incomes for workers and their families. We find remarkable in how many countries today the focus of so many government and business leaders alike is on the well-being of the middle class. As we discussed in last week’s missive, for example, recent gyrations in China’s equity markets may impair President Xi’s aspiration for a flourishing “Chinese Dream.”
And in our home country of the United States, supporting the middle class is squarely front and center in the quickening presidential race. Last week Hillary Clinton, frontrunner for the Democratic Party’s nomination for president, delivered a major policy speech. On what topic? On her economic agenda for raising the incomes of America’s middle class. The specifics she proposed we leave for another time. But her focus was unambiguous. “The defining economic challenge of our time is clear: We must raise incomes for hard-working Americans so they can afford a middle-class life.” As the U.S. presidential campaign plays out over the next 15 months, be ready to hear a great deal about the middle class. As we have written before, this topic is fraught with anxiety—legitimately so. In 2013 (the most recent year of U.S. government data available), median household income in America was $51,939. This was $493 below its level in 1989.
The Pew report reveals that the number of people globally in the middle class is still considerably smaller than is often assumed. Policy and business leaders around the world cannot ignore this sobering fact.
Articles © 2015 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2015 Trustees of Dartmouth College. All rights reserved.