The unprecedented expansion of the global middle class: An update

Abstract

Seven years ago I published a set of projections suggesting that the emerging middle class in developing countries was about to surge (Kharas, 2010). I argued further that demand from this segment of the market could drive global economic growth and partly offset lower demand among middle-class consumers in developed countries who were struggling to deal with the shocks to their living standards caused by the Great Recession. Since then, four relevant developments have shaped middle-class calculations, and the first two of these turn out to have quantitatively important implications for overall estimates of trends and levels. First, a survey of purchasing power parity (PPP) prices, conducted in 2011, has replaced the previous 2005 PPP survey (World Bank, 2015) as the basis for comparing real income levels across countries. The 2011 survey differs not just in updating price levels, but also uses a new methodology for generating country-level data. The results have markedly changed and improved our understanding of countries’ and households’ relative economic strength. In brief, Asian and African countries were estimated to be far richer, compared to other countries, than previously imagined, by 18 to 26 percent in several cases (Deaton and Aten, 2015). The second development has been the continued weakness in global economic growth. Global recovery has fallen short of forecasts and remains weaker than the recovery from previous recessions (although perhaps in line with the rate of recovery from previous financial crises). Major institutions have sequentially and continuously downgraded their growth forecasts. The hoped-for “green shoots” have not materialized. A series of shocks, most recently the collapse of oil and other commodity prices, have reduced income levels in the short run, while deeper analysis of the data has led to a rethinking of long-run potential growth prospects (Summers, 2016; Rachel and Smith, 2015). The third development is the continued improvement of GDP data. In some countries, there has been a rebasing of national accounts leading to significant revisions of estimated output and national income; for example, Nigeria increased its estimate of the size of its economy by more than three-quarters in 2014 (Magnowski, 2014). Fourth, new household surveys have permitted a more up-to-date assessment of income distribution at a time of significant changes in within-country inequality, and, in some cases, allow for direct measurement of the middle class for the first time. The purpose of this paper is to assess the impact of these four improvements and the updates to the underlying data on the evolution of the global middle class.