Index of /enm/images/dokumen
Revised Version, 28 September 2009
Note on Expanding and Deepening the Middle Class
and Engendering fnclusive Growth in the ASEANi
Ponciano S. fntal, Jr., ph.D.il
Senior Researcher.
Economic Research Institute for ASEAN and East Asia
@RIA)
have the strategies and projects to drive the ten markets into one single entity with
-We
575 million consumers and the growing and rising middle-class, which is not muiit
less than the
middle- class of china and not less than the middte class of India...lhe
of
fruits economic
development must be shared especially so that the middle clasi of ASEAN cin grow\nd
expand
and become the foundation of the market. rhe rise of the middle- class
gri. in each other,s
"o,
market and benefit from the natural resources in theie markets.
Speech of the Secretary- General of ASEAN, Dr. Surin pitsuwan at the
200g
ASEAN Business and Investment gumrnif, Bangkolq 26 February 2009
I.
Who belong to the middle class?
There is no clear cut definition of what constitutes the ..middle class". The
following are examples of empirical definitions of ..middle class":
McKinsey @arrell, et.al., 2006): households
incomes of (in 2000 prices)
with
annual
Poor
less than 25,000 renminbi
Lowermiddleclass:
25,001
40,001
Upper middle
class:
Mass affluent:
Global affluent
-
-
(disposable)
40,000 renminbi
100,000 renminbi
100,001 - 200,000 renminbi
more than 200,000 renminbi
considering that the exchange rate in 2005 was g.rg renminbi (yuan) per uS
dollar, the inflation rate over the 2000-2005 period was around g.i percent and
assuming that the average income tax rate is 20 percent, then the McKinsey
delineation can be converted into gross household income in US dollar terms at
2005 prices as follows:
Less than US $ 4,000
Poor
Lower middle
Upper middle
class
class
Mass affluent
Global affluent
US $ 4,000
US $ 6,500
- US $ 6,500
- US $ 16,000
us$16.000 - us$31,500
more than US $ 31.500
Note that the average family size in urban China (the focus of the McKinsey
article) is about 3. This means that in 2005 the threshold per capita gross income to
move up from being poor into the lower middle class is about US $ l, 300 per year
while the threshold per capita into the upper middle income class is about
US $ 2, 200 per year.
Abhjit Banerjee and Esther Duflo: Households whose
daily per
capita
expenditures valued at 2005 purchasing power parity (PPP) is between
US $ 2 andUS $ 4 andbetween US $ 6 and US $ 10' Ineffect:
Lower middle class: US $ 2
Upper middle class: US $ 6
-
US $ 4
US $ 10
Note that assuming an average household size of 5, the lower middle
class boundaries on an annual basis in 2005 PPP terms will be about
US $ 3,650 - US $ 7,300 in 2005 prices. The corresponding upper
middle class boundaries, in 2005 PPP terms' on an annual basis are
about US $ 11,000 and US $ 18,300 in 2005 prices'
Easterly:
those that are within the 20ft and 80ft percentile
in the consumption
distribution
Birdsall.GrahamandPettinato: those between 75 % and 125 %o of the
median per caPita income.
It may also be noted that the world Bank classifies countries in terms of per capita
incomes such that
low income: per capita annual income of US $975 or less,
lower middle: per capita annual income between US $ 976 and US $ 3,g55
upper middle: per capita annual income bet. US $3,856 and US $l1,905
It may be noted from the above that the Banerjee and Duflo cut-offpoints are more
generous (lower) than the McKinsey cut-off points. Also, the McKinsey cut-off
points are lower than the world Bank cut-offpoints, except for the threshold point
from the poor into the ranks of the middle class.
Drawing from the discussion in the previous section, two alternative estimates of
the size of the middle in the ASEAN are presented in the note. The alternative
estimates are defined as follows:
Alternative A.
This follows closely the Banerjee and Duflo definition. Specifically, a househord
belongs to the
lower middle class
2 - US $ 4 per capita per day in 2005 PPP
terms. This is roughly equivalent to US $ 750 US 11500 per
per year
US $
$
capita
at 2005 prices.
For a household of4, this is equivalent to about US
$ 3,000 US $ 6,000 household income per
annum in 2005 PPP dollars. For a household of5.
this is equivalent to about US $ 3,500 - US $ 7,500
household income per annum in 2005 PPP dollars.
-
upper middle class
4-
US $ 10 per capita per day in 2005 PPP
terms. This is roughly equivalent to US $ 1,500 US $ 31700 per capita per year at 2005 prices.
US $
For a household of 4, this is about US $ 6,000 US $ 15, 000 household income per annum in 2005
PPP dollars. For a household of 5, this is
equivalent to about US $7,500
US $18,000
household income per annum in 2005 PPP dollars.
-
Alternative B.
This is a somewhat more stringent empirical definition of the middle class,
with higher threshold per capita incomes for lower middle income and upper
middle income. This follows more closely the McKinsey and World Bank
threshold per capita income requirement for a lower middle class and the
McKinsey threshold per capita income requirement for the upper middle
class. Alternative B, nonetheless, follows the Banerjee and Duflo ceiling for
the upper middle income class, which is lower than the ceiling in McKinsey
and the World Bank.
lower middle class
-
US $ 3 US $ 6 per capita per day in 2005 PPP
terms. This is roughly equivalent to US$ 1'100 US $ 2,200 per capita per year at 2005 prices.
For a household of 4, this is equivalent to about US
$ 4,500 - US $ 9,000 household income per year in
2005 PPP dollars. For a household of 5, this is
equivalent to about US $ 5,500
US $ 11,000 household income per year in 2005
PPP dollars.
-
upper middle class
US $ 6 - US $ 10 per capita per day in 2005 PPP
terms. This is roughly equivalent to US$ 2'200
US $ 3,700 per capita per year at 2005 prices'
-
For a household of 4, this is equivalent to about US
$ 9.000 - US $ 15,000 household income per yeir
in 2005 PPP dollars. For a household of 5, this is
equivalent to about US $ 11,000 US $ 18,000
household income per year in 2005 PPP dollars.
-
il.
Size of the middle class in ASEAN Countries
The computation of the size of the middle class is based on the PovcalNet data of
the World Bank, which allows for the estimation of "headcount poverty incidence"
depending on altemative levels of poverty line. For the purpose of the presentation,
the altemative "poverty lines" used are US $ 2 per day, US $ 3 per day, US $ 4 per
day, US $ 6 per day and US $ 10 per day. Note that I minus the "poverty
incidence" will give the incidence of the "non-poor", which given the total
population will allow for an estimate of the "non-poor", either the middle class or
the rich. We assume the same absolute level of "poverty lines" across all the
ASEAN countries, for comparability. Note that the "poverty lines" and "non-poor"
are in quotation marks because raising the poverty line sigrificantly beyond the US
$ 1.25 or US $ 2 per day is no longer realistic for poverfy analysis.
The computation of the size of the middle class was done for Cambodia, Indonesi4
Laos, Malaysia, Philippines, Thailand, and Viebram; here termed ASEAN 7. With
gross national income per capita in 2008 of $ 50,000 dollars and $ 47 ,940 dollars in
PPP terms for Brunei Darussalam and Singapore (the fifth and sixth highest in
the world), it is best to consider both countries as high income. There is no data for
Myanmar; nonetheless, it is preponderantly a low income country with a per capita
income in 2008 at $1, 290 dollars in PPP terms, lower than Cambodia's $ 1,820
dollars in PPP terms and Laos' $ 2,060 dollars in PPP terms in 2008. Thus, it is
likely that Myanmar has a tiny middle class only.
The results of the computations for Alternative A are shown in Table 1. The
results show the remarkable transformation of the ASEAN region, with about 150
million more people that moved out of poverty and into the ranks of the middle
class from the early 1990s to the mid 2000s. By the mid-2000s, the majority (51%)
of the population in the ASEAN 7 developing countries is middle class, a sharp rise
from the share of the middle class population of about 27 %o in the early 1990s.
Being the most populous country in the region, Indonesia has the largest number
and percentage share (38 %) of the middle class in the region, albeit
preponderantly lower middle class. Vietnam and Indonesia present the most
remarkable stories of dramatic increases in the size of the middle class dwing the
1990s and the early 2000s, a reflection of the comparatively fast growth of their
economies (especially Vietnam) during the period. Nonetheless, even Cambodia
and Laos experienced substantial increases in the number of middle class
population. The sizeable middle class deepened further in Malaysia and Thailand,
with the latter showins the sharpest decline in the absolute number of low income
population as well as the largest number of the affluent in the region by the mid2000s. The Philippines has the most modest performance, with the country
showing some increase in the level of the abject poor together with Cambodia in
sharp contrast to the dramatic decreases in abject poverty in Indonesia, Thailand
and Vietnam.
(It is likely that the data overstates the comparatively poor
performance of the
Philippines because ofthe unique characteristic ofthe country having a substantial
percentage of Filipinos working abroad. The basic sources of data for the
computations of the middle class are the family expenditures data of each country.
Since the overseas Filipino workers stay abroad, their consumption expenditures
are not captured in the family income and expenditures surveys. Hence, compared
to the ASEAN countries with far less number of their peoples working abroad, the
underestimation of family expenditures for the Philippines is particularly
substantial. As such. the number of the middle class is underestimated and the
number of the poor overestimated for the Philippines.)
Table 2 presents the results of the computations for Alternative B which has
higher threshold per capita incomes for both lower middle income class and the
upper middle income class than under Alternative A. Not surprisingly, the size of
the middle class is lower under Altemative B than under Alternative A. Indeed. the
levels are much lower because a significant share of the lower middle class in
Altemative A is in the range of US $2.00 - US 3.00 dollars per capita in PPP terms.
Nonetheless, the changes in the levels and shares during the 1990s and the early
2000s are as remarkable as in Alternative A, with Vietram and Indonesia still
showing the fastest increase. Thailand is also worth mentioning because of the
large decline in the number of the low income group while most of the countries
still registered higher levels of low income people.
Based on the results in Tables I and2, and given the altemative definitions of what
constitutes the middle class, we can classiff the ASEAN countries at present as
follows:
Largely affluent:
Largely middle class:
Transitioning into middle
Largely low income:
class:
Brunei Darussalam, Singapore
Malaysia, Thailand
Indonesi4 Philippines, Vietnam
Cambodia, Laos, Myanmar
presents the results for India and China under Alternative A and
Alternative B. The table shows the incredible performance of China, perhaps the
Table
3
largest number of people that entered the middle class (and the affluent) in so short
a time in the world ever. A more detailed look at the urban and rural components of
China would indicate two Chinas: urban China is largely middle class, similar to
Malaysia and Thailand while rwal China is transitioning to middle class similar to
Indonesia or the Philippines.
It is useful to compare the size of the middle class in the ASEAN with those of
India and China. In the mid-2000s.
Aflluent population:
China
ASEAN
India
Middle class
China
ASEAN
India
around 52.0 million
around 25.7 million
around
5.7
Alternative
/ / / mllrlon
257 million
256 million
A
million
Alternative B
505
149
94
million
million
million
of which upper middle class:
China
328 million
ASEAN
India
112
million
43 million
136 million
37 million
13 million
Table 3 and the figures above show clearly that ASEAITI compares very favorably
with India up until the mid 2000s. The size of the middle class in the ASEAN is
the same as that of India under Alternative A (the more generous threshold per
capita incomes) but about 50 percent higher than India under Altemative B (with
higher threshold per capita incomes). The size of the affluent class in the ASEAN
is four and half times that of India. (Note that in the computation, the whole
populations of Singapore and Brunei Darussalam are assumed to be "affluent".)
Appendix A shows the distribution of population by income class in the ASEAN
countries. China and India from mid-1980s to mid-2000s.
m.
Expanding and deepening the ASEAN middle class
A comparison of the Philippine experience with those of Vietram and lndonesia
will readily show that the best way to expand and deepen the middle class in the
ASEAN countries is by ensuring that there is robust, better yet high rate of
economic growth in the region together with a comparatively equal distribution of
income. This is not surprising because the expansion and deepening of the middle
class necessitates the rise in the average incomes of households, the faster the
better. Expanding the middle class means more of the hitherto poor households
have joined the middle class. Deepening the middle class means that the average
income of the middle class increases over time, thereby allowing for the movement
from the lower middle income class to the upper middle class.
The importance of high and sustained growth in substantially reducing poverty and
in effect lifting more people into the ranks of the middle class can be illustrated by
comparing the performance of Indonesia, Vietnam and the Philippines during the
1990s and the 2000s:
Sharp falls in poverty incidence tend to be in countries with high growth rate.
Drop in Poverty rate $ 1.25 PPP:
(1990t2-200s/6)
Vietnam:
43.2%
Indonesia
32.9
Phil
8.1
Ave GDP per cap g.r
(reeo -2006)
s9%
4.8
1.4
The World Bank Growth Report summarizes the key factors that help explain the
high growth phase of a few developing countries during the past several decades.
They are:
.
Key ingredients (Growth Report,pp.2l-26\z
Full exploitation of global economy: Openness
. Import knowledge ("ideas, know how, technology"): FDI;
measures to extract technology from FDI; foreign education
. Exploit global demand ("deep elastic market')
Macroeconomic stability
. Modest inflation
. Sustainable public finances ("public didn't go out ofhand")
High rates of investment and saving :Future Orientation
. public infrastructure critical
Let markets allocate resources (6'govts did not deff their
comparative advantage")
.
.
Prices guide resources
Resources follow prices ("labor moves rapidly from sector to
sector; tumultous process of creative destruction in fast growing
economies)
Conmitted, credible and capable governments: leadership and
governance ("patiencel long planning horizonl implicit or explicit
social contract re benefits")
. Credible commitment to growth
. Credible commitment to inclusion
' Capableadministration
In addition to, and most likely also in support of, robust growth is the prevention of
large distortions in the labor market to prevent dualistic labor market and in the
process would likely lead to the growth of steady, well paying jobs that as
Banerjee and Duflo suggest is a key defining characteristic of the middle class in
developing countries.
The experiences of Indonesia (in the early 2000s) and the Philippines seem to
suggest that large price distortions in the labor market can lead to less than
satisfactory employment growth as well as to more difficult industrial adjustment
processes. h contrast, Vie0ram's successful adjustment to its emerging
comparative advantage may have been underpinned by a less distorted labor
market in addition to high investment rate (Intal and Borromeo,2009):
Indonesia: Labor intensive manufactures struggled in 2000s with more rigid labor
laws and sharp rise in minimum wage, leading to minimal
employment growth and rise in unemployment rate
Philippines: Reduction in ratio of manufacturing wages to per capita GDP, given
stagnant labor productivity in the 1990s. Poor employment creation
with significant inter-industry shifts to more skilled labor industries
(including tradable services)
Vietnam:
IV.
Successful adjustrnent to greater export market access, with sharp rise
in labor intensive manufactures in tandem with robust asdcultural
exports
The middle class and ASEAN growth, competitiveness and
integration
From Banerjee and Duflo, the following are what differentiates the middle class
from the poor:
l.
"Compared to the poor, the middle class work longer hours, on more
stable and higher paying jobs, which they often had to go to some trouble
to find. That, ratler than their propensity to take risk and run businesses,
seems to be at the core of their (relative) economic success" (p. 17)
2. "T"he middle class lives in smaller families, and has fewer children,
compared with the poor" (p.17)
3. 'The middle class is more likely to send their children to school than the
poor:. (p. l8)
4. "The middle class spends more, often much more, per child educated than
the poor." (p.19)
5. 'Nothing seems more middle class than the fact of having a steady wellpaying job.... If the middle class matters for growth, it is probably not
because of its enffepreurial spirit." (p.21).
From the above characterization, the middle class has corollary characteristics that
contribute to the strengthening of the foundations for robust growth and
competitiveness of ASEAN countries.
1. The bias of the middle
class for education increases private investment in
education which provides intemal dynamic to human capital investment.
Investment in human capital is a critical factor for the region's technological
upgrading, which is needed in order for the ASEAN countries to remain
intemationally competitive (as a production base and as an investment
destination) in the face of relentless improvements in China and improving
capacities and investment climate in India.
2. T\e middle class tends to be a pressure group for transparency and good
governance. Thus, the rise ofthe middle class leads to rising call for greater
transparency and less comrption in local and national govemance at least in
countries with greater democratic space. Despite resulting societal conflicts
as a result, e.g., Thailand in recent years, the Philippines for nearly a decade,
greater transparency, less comrption and improved govemance can be
expected to contribute to improved investment climate in the region. The
best example of this of course is Singapore that still gets the bulk of
investments into the region despite its extremely high wages vis-d-vis the
rest of the ASEAN countries.
Perhaps most importantly, the widening and deepening of the middle class in the
ASEAN is the foundation for the deepening of the domestic markets in the
region, which in tum facilitates the growth and upgrading of domestic firms in the
ASEAN. The middle class consumption pattern (e.g., more processed food or
better prepared food, food outside the home, better quality garments, sturdier
homes with the attendant demand for better home fumishings and home
equipment, etc.) provide the demand impulse domestically for industrial
diversification as domestic firms establish, expand or reengineer to meet the
varying demands of the increasingly more demanding consumer market. This is
where and how local brands are developed and established. The growing and
dynamic domestic market can likely become the springboard of successful
domestic firms for expansion into the regional and global markets. Note that the
expansion into other countries need not be in the context of subcontractors as part
of a regional production chain. Rather the regional expansion can be in terms of
branches or franchises for unique products or processes; e.g., Singapore's Bread
Talk and Gardenia becoming established players in Indonesia and the Philippines.
Equally important, the widening and deepening of the middle class in the ASEAN
becomes an investment magnet by itself, in the same way that the foreign direct
investment into China in recent years has been more and more for the booming
domestic market rather than as a production base for exports that characterized
much of Hong Kong and Taiwanese investments into China in the early 1990s, for
example. [n short, as the domestic ASEAN market expands and becomes more
variegated, domestic demands of a growing number of products and services would
likely be better served through the establishment of ASEAN production plants
rather than through imports; hence, greater foreign direct investment into the
ASEAN ensues.
11
The challenge remains however of making the ASEAN one huge home market for
the ASEAN firms and not just a collection of highly disparate and segrnented
national or even local markets. Reduction in the barriers to and costs of intraASEAN trade in goods and services, improving logistics, as well as harmonizing
standards and procedures within the region would go a long way toward the
creation of robust, dynamic and huge ASEAN home market that makes the region
a highly competitive destination of foreign direct investment similar to the "big
countries" like China and India, as well as a dynamic breeding ground for
intemationally competitive ASEAN firms.
V.
Engendering inclusive growth
growth of the middle class
in the ASEAII in
tandem with the
At the same timq" inclasive growth needs to be given emphasis as much as the
growth of the middle class in the region. The size of the poor is still large in
Indonesia, the Philippines, Vietnam as well as in Cambodia, Laos and Myanmar.
Moreover, the pursuit of inclusive growth eases the process of expanding the
region's middle class. The purzuit of inclusive growth also makes high economic
growth more sustainable.
The number of poor populafion in the ASEAN is still very substantial. Based on a
US $ 1.25 per capita per day in 2005 PPP dollars, the numbers are as follows for
selected ASEAN countries:
Indonesia (2005):
47.3 million
Philippines (2006): 20.2 million
Vietnam (2006)
l8.l million
Cambodia (2004)
5.5 million
Laos (2002)
2.4 million
(Note: There is no data for Myanmar in the PovcalNet. Myanmar's population is at
present about 55.4 million; it is probably safe to say that a preponderant portion of
Myanmar's population is poor based on the US $ 1.25 per day per capita in 2005
PPP dollars. )
The poor's main assets are labor and access to land. Hence, substantial drop in
poverty requires:
.
.
.
.
Substantial rise in gainful employment
Substantial rise in real wages, given no labor slack
Substantial rise in labor productivity in non-agriculture, esp.
manufacturing
Moderate rise in labor productivity in agriculture
The best ways to reduce poverty are sustained high growth, expansion of
employment in manufacturing and other high payng jobs relative to agdculture,
increase in agricultural productivity to allow for the release of labor into
manufacturing and other better paying non-agricultural sectors, and significant rise
in labor productivity in manufacturing (Intal and Borromeo, 2009).
Similarly, on the supply side of the labor market, the poor and disadvantaged labor
tends to be low skilled with low education. It is clear therefore that special
attention needs to be given to the provision of education and training to the poor in
order to make them more employable in better paying and more stable jobs. Health
services (and possibly health insurance) would also be useful to help alleviate the
poor from poverty because health crises are a significant source of impoverishment
(as families sell offassets) drawing from the Philippine data.
Given limited budgetary resowces, it is important that the anti-poverfy or poverty
alleviation mea$ues such as health insurance or food support or educational
support be well targeted. Leakages are known to bedevil many anti-poverty
programs in developing countries. In this regard, the experience of Community
Based Monitoring System (CBMS) is worth considering as a complemenl to the
growth enhancing measures discussed above. The experiences in a large number
of CBMS sites in many provinces and municipalities in the Philippines show that
cBMS can help improve the targeting of poor beneficiaries and in the allocation of
scarce local govemment funds. CBMS also helps toward greater public
participation in budget and planning process. The result is greater credibility of
government progrurms. CBMS is now being implemented on a wider scale in the
Philippines and is being firmly established in Cambodia, Indonesia, Laos and
Vietram.
Summary
In short, ASEAN may well go for the following key
strategies in widening and
deepening the middle class and at the same time engendering inclusive growth in
the region :
13
i.
ii.
iii.
iv.
v.
sustainably robust and high economic growth in member
countries, with the attendant key factors discussed in the World Bank's
Growth Report and summarized earlier in the paper
Pursuit of regional integration for bigger market and robust competition
Prevention of major distortions in the factor markets (especially the labor
market) in the region
Pwsuit of inclusive growth, in part through targeted anti-poverty
Pursuit
of
measures
Use of community based monitoring systems and similar approaches for
improved targeting, greater transparency, and better govemance both
local and national
The end result can be expected to be a virtuous cycle of an expanding and
deepening middle class (and the elimination of abject poverty) that provides the
foundation for further growth through human capital investrnent, growing
domestic market, greater investment attraction and capability for technological
adaptation and innovation. Facilitating such virtuous cycle are improving
govemance, sfiengttrening institutions, open and integrating economies, business
community "...looking at opportunities and taking more risks" (Pitsuwan,2009),
and general peace and security in the region.
References
Banerjee, A. and E. Duflo (2007), Wat is middle class about the middle classes
around the world? Massachussetts Institute of Technology, Department of
Economics. Accessed. http://econ-www.mit.edu/fileV3 I 07.
Farrell, D., U. Gersch and E. Stephenson (2006), The value of China's emerging
middle
class.
The
McKinsey Quarterly.
Accessed.
http://www,mckinseyquarterly.com/Economic_Studies/Productivity_Performance/
The_value_of_China' s_emerging_middle_class_ 1 79 8 ? gp: l
Intal, P. and M.R. Borromeo (2009), Globalization, Adjustment and the Challenge
of Furthering Sustained, Robust and Inclusive Growth and Industrial Upgrading:
Insights, Lessons and Policy Recommendations. Power point presentation in
Manila, 14 August 2009.
' Prepared
for the Camelot Brainstorming Meeting with the Secretary-Genoral of ASEAN, Dr. Surin Pitsuwan, at the
ERIA Aanex Office, Jakarta, on 20 August 2009
" The author thanls Ms. Yunita Dora Nababan for research assistance.
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Note on Expanding and Deepening the Middle Class
and Engendering fnclusive Growth in the ASEANi
Ponciano S. fntal, Jr., ph.D.il
Senior Researcher.
Economic Research Institute for ASEAN and East Asia
@RIA)
have the strategies and projects to drive the ten markets into one single entity with
-We
575 million consumers and the growing and rising middle-class, which is not muiit
less than the
middle- class of china and not less than the middte class of India...lhe
of
fruits economic
development must be shared especially so that the middle clasi of ASEAN cin grow\nd
expand
and become the foundation of the market. rhe rise of the middle- class
gri. in each other,s
"o,
market and benefit from the natural resources in theie markets.
Speech of the Secretary- General of ASEAN, Dr. Surin pitsuwan at the
200g
ASEAN Business and Investment gumrnif, Bangkolq 26 February 2009
I.
Who belong to the middle class?
There is no clear cut definition of what constitutes the ..middle class". The
following are examples of empirical definitions of ..middle class":
McKinsey @arrell, et.al., 2006): households
incomes of (in 2000 prices)
with
annual
Poor
less than 25,000 renminbi
Lowermiddleclass:
25,001
40,001
Upper middle
class:
Mass affluent:
Global affluent
-
-
(disposable)
40,000 renminbi
100,000 renminbi
100,001 - 200,000 renminbi
more than 200,000 renminbi
considering that the exchange rate in 2005 was g.rg renminbi (yuan) per uS
dollar, the inflation rate over the 2000-2005 period was around g.i percent and
assuming that the average income tax rate is 20 percent, then the McKinsey
delineation can be converted into gross household income in US dollar terms at
2005 prices as follows:
Less than US $ 4,000
Poor
Lower middle
Upper middle
class
class
Mass affluent
Global affluent
US $ 4,000
US $ 6,500
- US $ 6,500
- US $ 16,000
us$16.000 - us$31,500
more than US $ 31.500
Note that the average family size in urban China (the focus of the McKinsey
article) is about 3. This means that in 2005 the threshold per capita gross income to
move up from being poor into the lower middle class is about US $ l, 300 per year
while the threshold per capita into the upper middle income class is about
US $ 2, 200 per year.
Abhjit Banerjee and Esther Duflo: Households whose
daily per
capita
expenditures valued at 2005 purchasing power parity (PPP) is between
US $ 2 andUS $ 4 andbetween US $ 6 and US $ 10' Ineffect:
Lower middle class: US $ 2
Upper middle class: US $ 6
-
US $ 4
US $ 10
Note that assuming an average household size of 5, the lower middle
class boundaries on an annual basis in 2005 PPP terms will be about
US $ 3,650 - US $ 7,300 in 2005 prices. The corresponding upper
middle class boundaries, in 2005 PPP terms' on an annual basis are
about US $ 11,000 and US $ 18,300 in 2005 prices'
Easterly:
those that are within the 20ft and 80ft percentile
in the consumption
distribution
Birdsall.GrahamandPettinato: those between 75 % and 125 %o of the
median per caPita income.
It may also be noted that the world Bank classifies countries in terms of per capita
incomes such that
low income: per capita annual income of US $975 or less,
lower middle: per capita annual income between US $ 976 and US $ 3,g55
upper middle: per capita annual income bet. US $3,856 and US $l1,905
It may be noted from the above that the Banerjee and Duflo cut-offpoints are more
generous (lower) than the McKinsey cut-off points. Also, the McKinsey cut-off
points are lower than the world Bank cut-offpoints, except for the threshold point
from the poor into the ranks of the middle class.
Drawing from the discussion in the previous section, two alternative estimates of
the size of the middle in the ASEAN are presented in the note. The alternative
estimates are defined as follows:
Alternative A.
This follows closely the Banerjee and Duflo definition. Specifically, a househord
belongs to the
lower middle class
2 - US $ 4 per capita per day in 2005 PPP
terms. This is roughly equivalent to US $ 750 US 11500 per
per year
US $
$
capita
at 2005 prices.
For a household of4, this is equivalent to about US
$ 3,000 US $ 6,000 household income per
annum in 2005 PPP dollars. For a household of5.
this is equivalent to about US $ 3,500 - US $ 7,500
household income per annum in 2005 PPP dollars.
-
upper middle class
4-
US $ 10 per capita per day in 2005 PPP
terms. This is roughly equivalent to US $ 1,500 US $ 31700 per capita per year at 2005 prices.
US $
For a household of 4, this is about US $ 6,000 US $ 15, 000 household income per annum in 2005
PPP dollars. For a household of 5, this is
equivalent to about US $7,500
US $18,000
household income per annum in 2005 PPP dollars.
-
Alternative B.
This is a somewhat more stringent empirical definition of the middle class,
with higher threshold per capita incomes for lower middle income and upper
middle income. This follows more closely the McKinsey and World Bank
threshold per capita income requirement for a lower middle class and the
McKinsey threshold per capita income requirement for the upper middle
class. Alternative B, nonetheless, follows the Banerjee and Duflo ceiling for
the upper middle income class, which is lower than the ceiling in McKinsey
and the World Bank.
lower middle class
-
US $ 3 US $ 6 per capita per day in 2005 PPP
terms. This is roughly equivalent to US$ 1'100 US $ 2,200 per capita per year at 2005 prices.
For a household of 4, this is equivalent to about US
$ 4,500 - US $ 9,000 household income per year in
2005 PPP dollars. For a household of 5, this is
equivalent to about US $ 5,500
US $ 11,000 household income per year in 2005
PPP dollars.
-
upper middle class
US $ 6 - US $ 10 per capita per day in 2005 PPP
terms. This is roughly equivalent to US$ 2'200
US $ 3,700 per capita per year at 2005 prices'
-
For a household of 4, this is equivalent to about US
$ 9.000 - US $ 15,000 household income per yeir
in 2005 PPP dollars. For a household of 5, this is
equivalent to about US $ 11,000 US $ 18,000
household income per year in 2005 PPP dollars.
-
il.
Size of the middle class in ASEAN Countries
The computation of the size of the middle class is based on the PovcalNet data of
the World Bank, which allows for the estimation of "headcount poverty incidence"
depending on altemative levels of poverty line. For the purpose of the presentation,
the altemative "poverty lines" used are US $ 2 per day, US $ 3 per day, US $ 4 per
day, US $ 6 per day and US $ 10 per day. Note that I minus the "poverty
incidence" will give the incidence of the "non-poor", which given the total
population will allow for an estimate of the "non-poor", either the middle class or
the rich. We assume the same absolute level of "poverty lines" across all the
ASEAN countries, for comparability. Note that the "poverty lines" and "non-poor"
are in quotation marks because raising the poverty line sigrificantly beyond the US
$ 1.25 or US $ 2 per day is no longer realistic for poverfy analysis.
The computation of the size of the middle class was done for Cambodia, Indonesi4
Laos, Malaysia, Philippines, Thailand, and Viebram; here termed ASEAN 7. With
gross national income per capita in 2008 of $ 50,000 dollars and $ 47 ,940 dollars in
PPP terms for Brunei Darussalam and Singapore (the fifth and sixth highest in
the world), it is best to consider both countries as high income. There is no data for
Myanmar; nonetheless, it is preponderantly a low income country with a per capita
income in 2008 at $1, 290 dollars in PPP terms, lower than Cambodia's $ 1,820
dollars in PPP terms and Laos' $ 2,060 dollars in PPP terms in 2008. Thus, it is
likely that Myanmar has a tiny middle class only.
The results of the computations for Alternative A are shown in Table 1. The
results show the remarkable transformation of the ASEAN region, with about 150
million more people that moved out of poverty and into the ranks of the middle
class from the early 1990s to the mid 2000s. By the mid-2000s, the majority (51%)
of the population in the ASEAN 7 developing countries is middle class, a sharp rise
from the share of the middle class population of about 27 %o in the early 1990s.
Being the most populous country in the region, Indonesia has the largest number
and percentage share (38 %) of the middle class in the region, albeit
preponderantly lower middle class. Vietnam and Indonesia present the most
remarkable stories of dramatic increases in the size of the middle class dwing the
1990s and the early 2000s, a reflection of the comparatively fast growth of their
economies (especially Vietnam) during the period. Nonetheless, even Cambodia
and Laos experienced substantial increases in the number of middle class
population. The sizeable middle class deepened further in Malaysia and Thailand,
with the latter showins the sharpest decline in the absolute number of low income
population as well as the largest number of the affluent in the region by the mid2000s. The Philippines has the most modest performance, with the country
showing some increase in the level of the abject poor together with Cambodia in
sharp contrast to the dramatic decreases in abject poverty in Indonesia, Thailand
and Vietnam.
(It is likely that the data overstates the comparatively poor
performance of the
Philippines because ofthe unique characteristic ofthe country having a substantial
percentage of Filipinos working abroad. The basic sources of data for the
computations of the middle class are the family expenditures data of each country.
Since the overseas Filipino workers stay abroad, their consumption expenditures
are not captured in the family income and expenditures surveys. Hence, compared
to the ASEAN countries with far less number of their peoples working abroad, the
underestimation of family expenditures for the Philippines is particularly
substantial. As such. the number of the middle class is underestimated and the
number of the poor overestimated for the Philippines.)
Table 2 presents the results of the computations for Alternative B which has
higher threshold per capita incomes for both lower middle income class and the
upper middle income class than under Alternative A. Not surprisingly, the size of
the middle class is lower under Altemative B than under Alternative A. Indeed. the
levels are much lower because a significant share of the lower middle class in
Altemative A is in the range of US $2.00 - US 3.00 dollars per capita in PPP terms.
Nonetheless, the changes in the levels and shares during the 1990s and the early
2000s are as remarkable as in Alternative A, with Vietram and Indonesia still
showing the fastest increase. Thailand is also worth mentioning because of the
large decline in the number of the low income group while most of the countries
still registered higher levels of low income people.
Based on the results in Tables I and2, and given the altemative definitions of what
constitutes the middle class, we can classiff the ASEAN countries at present as
follows:
Largely affluent:
Largely middle class:
Transitioning into middle
Largely low income:
class:
Brunei Darussalam, Singapore
Malaysia, Thailand
Indonesi4 Philippines, Vietnam
Cambodia, Laos, Myanmar
presents the results for India and China under Alternative A and
Alternative B. The table shows the incredible performance of China, perhaps the
Table
3
largest number of people that entered the middle class (and the affluent) in so short
a time in the world ever. A more detailed look at the urban and rural components of
China would indicate two Chinas: urban China is largely middle class, similar to
Malaysia and Thailand while rwal China is transitioning to middle class similar to
Indonesia or the Philippines.
It is useful to compare the size of the middle class in the ASEAN with those of
India and China. In the mid-2000s.
Aflluent population:
China
ASEAN
India
Middle class
China
ASEAN
India
around 52.0 million
around 25.7 million
around
5.7
Alternative
/ / / mllrlon
257 million
256 million
A
million
Alternative B
505
149
94
million
million
million
of which upper middle class:
China
328 million
ASEAN
India
112
million
43 million
136 million
37 million
13 million
Table 3 and the figures above show clearly that ASEAITI compares very favorably
with India up until the mid 2000s. The size of the middle class in the ASEAN is
the same as that of India under Alternative A (the more generous threshold per
capita incomes) but about 50 percent higher than India under Altemative B (with
higher threshold per capita incomes). The size of the affluent class in the ASEAN
is four and half times that of India. (Note that in the computation, the whole
populations of Singapore and Brunei Darussalam are assumed to be "affluent".)
Appendix A shows the distribution of population by income class in the ASEAN
countries. China and India from mid-1980s to mid-2000s.
m.
Expanding and deepening the ASEAN middle class
A comparison of the Philippine experience with those of Vietram and lndonesia
will readily show that the best way to expand and deepen the middle class in the
ASEAN countries is by ensuring that there is robust, better yet high rate of
economic growth in the region together with a comparatively equal distribution of
income. This is not surprising because the expansion and deepening of the middle
class necessitates the rise in the average incomes of households, the faster the
better. Expanding the middle class means more of the hitherto poor households
have joined the middle class. Deepening the middle class means that the average
income of the middle class increases over time, thereby allowing for the movement
from the lower middle income class to the upper middle class.
The importance of high and sustained growth in substantially reducing poverty and
in effect lifting more people into the ranks of the middle class can be illustrated by
comparing the performance of Indonesia, Vietnam and the Philippines during the
1990s and the 2000s:
Sharp falls in poverty incidence tend to be in countries with high growth rate.
Drop in Poverty rate $ 1.25 PPP:
(1990t2-200s/6)
Vietnam:
43.2%
Indonesia
32.9
Phil
8.1
Ave GDP per cap g.r
(reeo -2006)
s9%
4.8
1.4
The World Bank Growth Report summarizes the key factors that help explain the
high growth phase of a few developing countries during the past several decades.
They are:
.
Key ingredients (Growth Report,pp.2l-26\z
Full exploitation of global economy: Openness
. Import knowledge ("ideas, know how, technology"): FDI;
measures to extract technology from FDI; foreign education
. Exploit global demand ("deep elastic market')
Macroeconomic stability
. Modest inflation
. Sustainable public finances ("public didn't go out ofhand")
High rates of investment and saving :Future Orientation
. public infrastructure critical
Let markets allocate resources (6'govts did not deff their
comparative advantage")
.
.
Prices guide resources
Resources follow prices ("labor moves rapidly from sector to
sector; tumultous process of creative destruction in fast growing
economies)
Conmitted, credible and capable governments: leadership and
governance ("patiencel long planning horizonl implicit or explicit
social contract re benefits")
. Credible commitment to growth
. Credible commitment to inclusion
' Capableadministration
In addition to, and most likely also in support of, robust growth is the prevention of
large distortions in the labor market to prevent dualistic labor market and in the
process would likely lead to the growth of steady, well paying jobs that as
Banerjee and Duflo suggest is a key defining characteristic of the middle class in
developing countries.
The experiences of Indonesia (in the early 2000s) and the Philippines seem to
suggest that large price distortions in the labor market can lead to less than
satisfactory employment growth as well as to more difficult industrial adjustment
processes. h contrast, Vie0ram's successful adjustment to its emerging
comparative advantage may have been underpinned by a less distorted labor
market in addition to high investment rate (Intal and Borromeo,2009):
Indonesia: Labor intensive manufactures struggled in 2000s with more rigid labor
laws and sharp rise in minimum wage, leading to minimal
employment growth and rise in unemployment rate
Philippines: Reduction in ratio of manufacturing wages to per capita GDP, given
stagnant labor productivity in the 1990s. Poor employment creation
with significant inter-industry shifts to more skilled labor industries
(including tradable services)
Vietnam:
IV.
Successful adjustrnent to greater export market access, with sharp rise
in labor intensive manufactures in tandem with robust asdcultural
exports
The middle class and ASEAN growth, competitiveness and
integration
From Banerjee and Duflo, the following are what differentiates the middle class
from the poor:
l.
"Compared to the poor, the middle class work longer hours, on more
stable and higher paying jobs, which they often had to go to some trouble
to find. That, ratler than their propensity to take risk and run businesses,
seems to be at the core of their (relative) economic success" (p. 17)
2. "T"he middle class lives in smaller families, and has fewer children,
compared with the poor" (p.17)
3. 'The middle class is more likely to send their children to school than the
poor:. (p. l8)
4. "The middle class spends more, often much more, per child educated than
the poor." (p.19)
5. 'Nothing seems more middle class than the fact of having a steady wellpaying job.... If the middle class matters for growth, it is probably not
because of its enffepreurial spirit." (p.21).
From the above characterization, the middle class has corollary characteristics that
contribute to the strengthening of the foundations for robust growth and
competitiveness of ASEAN countries.
1. The bias of the middle
class for education increases private investment in
education which provides intemal dynamic to human capital investment.
Investment in human capital is a critical factor for the region's technological
upgrading, which is needed in order for the ASEAN countries to remain
intemationally competitive (as a production base and as an investment
destination) in the face of relentless improvements in China and improving
capacities and investment climate in India.
2. T\e middle class tends to be a pressure group for transparency and good
governance. Thus, the rise ofthe middle class leads to rising call for greater
transparency and less comrption in local and national govemance at least in
countries with greater democratic space. Despite resulting societal conflicts
as a result, e.g., Thailand in recent years, the Philippines for nearly a decade,
greater transparency, less comrption and improved govemance can be
expected to contribute to improved investment climate in the region. The
best example of this of course is Singapore that still gets the bulk of
investments into the region despite its extremely high wages vis-d-vis the
rest of the ASEAN countries.
Perhaps most importantly, the widening and deepening of the middle class in the
ASEAN is the foundation for the deepening of the domestic markets in the
region, which in tum facilitates the growth and upgrading of domestic firms in the
ASEAN. The middle class consumption pattern (e.g., more processed food or
better prepared food, food outside the home, better quality garments, sturdier
homes with the attendant demand for better home fumishings and home
equipment, etc.) provide the demand impulse domestically for industrial
diversification as domestic firms establish, expand or reengineer to meet the
varying demands of the increasingly more demanding consumer market. This is
where and how local brands are developed and established. The growing and
dynamic domestic market can likely become the springboard of successful
domestic firms for expansion into the regional and global markets. Note that the
expansion into other countries need not be in the context of subcontractors as part
of a regional production chain. Rather the regional expansion can be in terms of
branches or franchises for unique products or processes; e.g., Singapore's Bread
Talk and Gardenia becoming established players in Indonesia and the Philippines.
Equally important, the widening and deepening of the middle class in the ASEAN
becomes an investment magnet by itself, in the same way that the foreign direct
investment into China in recent years has been more and more for the booming
domestic market rather than as a production base for exports that characterized
much of Hong Kong and Taiwanese investments into China in the early 1990s, for
example. [n short, as the domestic ASEAN market expands and becomes more
variegated, domestic demands of a growing number of products and services would
likely be better served through the establishment of ASEAN production plants
rather than through imports; hence, greater foreign direct investment into the
ASEAN ensues.
11
The challenge remains however of making the ASEAN one huge home market for
the ASEAN firms and not just a collection of highly disparate and segrnented
national or even local markets. Reduction in the barriers to and costs of intraASEAN trade in goods and services, improving logistics, as well as harmonizing
standards and procedures within the region would go a long way toward the
creation of robust, dynamic and huge ASEAN home market that makes the region
a highly competitive destination of foreign direct investment similar to the "big
countries" like China and India, as well as a dynamic breeding ground for
intemationally competitive ASEAN firms.
V.
Engendering inclusive growth
growth of the middle class
in the ASEAII in
tandem with the
At the same timq" inclasive growth needs to be given emphasis as much as the
growth of the middle class in the region. The size of the poor is still large in
Indonesia, the Philippines, Vietnam as well as in Cambodia, Laos and Myanmar.
Moreover, the pursuit of inclusive growth eases the process of expanding the
region's middle class. The purzuit of inclusive growth also makes high economic
growth more sustainable.
The number of poor populafion in the ASEAN is still very substantial. Based on a
US $ 1.25 per capita per day in 2005 PPP dollars, the numbers are as follows for
selected ASEAN countries:
Indonesia (2005):
47.3 million
Philippines (2006): 20.2 million
Vietnam (2006)
l8.l million
Cambodia (2004)
5.5 million
Laos (2002)
2.4 million
(Note: There is no data for Myanmar in the PovcalNet. Myanmar's population is at
present about 55.4 million; it is probably safe to say that a preponderant portion of
Myanmar's population is poor based on the US $ 1.25 per day per capita in 2005
PPP dollars. )
The poor's main assets are labor and access to land. Hence, substantial drop in
poverty requires:
.
.
.
.
Substantial rise in gainful employment
Substantial rise in real wages, given no labor slack
Substantial rise in labor productivity in non-agriculture, esp.
manufacturing
Moderate rise in labor productivity in agriculture
The best ways to reduce poverty are sustained high growth, expansion of
employment in manufacturing and other high payng jobs relative to agdculture,
increase in agricultural productivity to allow for the release of labor into
manufacturing and other better paying non-agricultural sectors, and significant rise
in labor productivity in manufacturing (Intal and Borromeo, 2009).
Similarly, on the supply side of the labor market, the poor and disadvantaged labor
tends to be low skilled with low education. It is clear therefore that special
attention needs to be given to the provision of education and training to the poor in
order to make them more employable in better paying and more stable jobs. Health
services (and possibly health insurance) would also be useful to help alleviate the
poor from poverty because health crises are a significant source of impoverishment
(as families sell offassets) drawing from the Philippine data.
Given limited budgetary resowces, it is important that the anti-poverfy or poverty
alleviation mea$ues such as health insurance or food support or educational
support be well targeted. Leakages are known to bedevil many anti-poverty
programs in developing countries. In this regard, the experience of Community
Based Monitoring System (CBMS) is worth considering as a complemenl to the
growth enhancing measures discussed above. The experiences in a large number
of CBMS sites in many provinces and municipalities in the Philippines show that
cBMS can help improve the targeting of poor beneficiaries and in the allocation of
scarce local govemment funds. CBMS also helps toward greater public
participation in budget and planning process. The result is greater credibility of
government progrurms. CBMS is now being implemented on a wider scale in the
Philippines and is being firmly established in Cambodia, Indonesia, Laos and
Vietram.
Summary
In short, ASEAN may well go for the following key
strategies in widening and
deepening the middle class and at the same time engendering inclusive growth in
the region :
13
i.
ii.
iii.
iv.
v.
sustainably robust and high economic growth in member
countries, with the attendant key factors discussed in the World Bank's
Growth Report and summarized earlier in the paper
Pursuit of regional integration for bigger market and robust competition
Prevention of major distortions in the factor markets (especially the labor
market) in the region
Pwsuit of inclusive growth, in part through targeted anti-poverty
Pursuit
of
measures
Use of community based monitoring systems and similar approaches for
improved targeting, greater transparency, and better govemance both
local and national
The end result can be expected to be a virtuous cycle of an expanding and
deepening middle class (and the elimination of abject poverty) that provides the
foundation for further growth through human capital investrnent, growing
domestic market, greater investment attraction and capability for technological
adaptation and innovation. Facilitating such virtuous cycle are improving
govemance, sfiengttrening institutions, open and integrating economies, business
community "...looking at opportunities and taking more risks" (Pitsuwan,2009),
and general peace and security in the region.
References
Banerjee, A. and E. Duflo (2007), Wat is middle class about the middle classes
around the world? Massachussetts Institute of Technology, Department of
Economics. Accessed. http://econ-www.mit.edu/fileV3 I 07.
Farrell, D., U. Gersch and E. Stephenson (2006), The value of China's emerging
middle
class.
The
McKinsey Quarterly.
Accessed.
http://www,mckinseyquarterly.com/Economic_Studies/Productivity_Performance/
The_value_of_China' s_emerging_middle_class_ 1 79 8 ? gp: l
Intal, P. and M.R. Borromeo (2009), Globalization, Adjustment and the Challenge
of Furthering Sustained, Robust and Inclusive Growth and Industrial Upgrading:
Insights, Lessons and Policy Recommendations. Power point presentation in
Manila, 14 August 2009.
' Prepared
for the Camelot Brainstorming Meeting with the Secretary-Genoral of ASEAN, Dr. Surin Pitsuwan, at the
ERIA Aanex Office, Jakarta, on 20 August 2009
" The author thanls Ms. Yunita Dora Nababan for research assistance.
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