A new species? The elusive nature of the global middle class

Demand for air conditioning has increased in India and China. Here, customer look at AC units at a store in Mumbai.
Kuni Takahashi | Getty Images
Demand for air conditioning has increased in India and China. Here, customer look at AC units at a store in Mumbai.

At the height of the Cold War, the State Department put the nation's best-known intellectuals to work as good-will ambassadors, sending artists and writers on propaganda missions to persuade people around the world to embrace American middle-class striving.

At one memorable meeting, Nobel Prize-winning authors Saul Bellow and William Faulkner locked horns over the method of promotion. Faulkner, impatient with the high-concept talk of those around the table enjoying the sound of their own voices, said all we had to do was give people a used car and a TV and they'd understand the benefits of the American way. Bellow stormed out of the room in a fury.

As consumerism surges in the emerging world, from Latin America to Asia, determining how to define middle class isn't quite as simple as Faulkner made it out to be. Though the link with more discretionary spending and the group is clear, the new middle class is proving elusive.

A new field has arisen for economists and think tank analysts in the effort to define the new middle class, but results are inconclusive. The definers are broken up into camps, defending their positions, though with slightly more conciliation than existed between Bellow and Faulkner.

"There's no consensus," said Christian Meyer, research associate at the Center for Global Development. "In all of this mess of confused definitions, we like to think of not defining it, but identification. We think it matters more to think of concept of middle class—is it a Western idea of income security, not being vulnerable to economic shocks, general economic stability and comfort to engage in society and politics?"

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We can look at occupation—the extent to which there's a professional class of workers or the number of workers receiving a pay stub (a sign of regular income and economic stability); technology usage—access to the Internet and smartphones and use of services such as texting and social media; or ownership of durable goods and other higher-priced items, including refrigerators, air conditioners, televisions and cars.

But when defining the middle class, experts primarily look at an income benchmark. And some of the early studies of an income threshold for the developing world's middle class show how far apart the experts can be.

Several of the prevailing definitions of the new middle class don't even overlap at any point on a quantified spectrum.

One of the early definitions came from two MIT poverty researchers, Esther Duflo and Abhijit Banerjee, who zeroed in on a range of $2 to $10 in per capita daily spending. Meanwhile, Homi Kharas, a senior fellow at the Brookings Institute and a former World Bank economist, set the threshold starting at $10 per capita daily spending—the point marked by the MIT economists as the global middle class's upper limit.

But the first crack at nailing down the new middle class was taken by World Bank economists Branko Milanovic and Shlomo Yitzhaki in 2001. They defined it as people with an income threshold of between $4,000 and $17,000, which in fact, hews closely to the $10 per day benchmark at the low end of the income range. (All the benchmarks are adjusted for U.S. prices using an economic leveler known as purchasing power parity , or PPP.

"Ten dollars is the line to define the global middle class," Meyer said. "We think it's useful because at $10 you have economic security and lack of exposure to global economic shocks. You're not vulnerable of falling back into poverty."

Uri Dadush, a senior associate and director of the international economics program at the Carnegie Endowment for Peace, doesn't agree.

"In this case, definitional variations are so huge," he said.

More than a decade after his original study, Milanovic, who was traveling and unavailable for an interview, said via email, "There is no generally accepted definition of what the [global] middle class is."

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A definition is not just an academic exercise tying up research dollars and bleeding a lot of ink on journals read only by specialists but critical to understanding the future of the global economy.

Kharas projects that the global middle class will rise from 2 billion today to 5 billion by 2030, and the key trend is the growth of the developing world's middle class. When the number stood at 1 billion, it was primarily divided among the U.S., Europe and Japan. By 2030, however, the developed middle class will no longer be in the majority, or even splitting the pie fifty-fifty.

"That's a big shift," he said.

Dadush said, "In the U.S., if you added 10 percent GDP over the next 10 years, it would do nothing to the middle-class size because so much of the population is already middle class, and many poor people are well below what would be considered middle class in the U.S. If you add 10 percent to the GDP of India, you will get a much bigger impact on the middle class."

In addition, the developed world's middle class is growing at an accelerated rate compared with previous income surges.

China has accomplished in 30 years what took advanced countries a century or two to do, Dadush said. After the Industrial Revolution and up until 1950, income in developed nations was rising 1 percent a year, which was considered exceptional. Today, China's per capita income is increasing 7 percent to eight percent annually.

Put in the simplest terms, people with more money buy more stuff.

"There is a demand argument, and if I were at VW, Nestle, Dunkin' Donuts or Ikea, that's what I would be interested in," Meyer said.

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Add the fact that the legacy economic engines, American and European consumers, have been squeezed by the Great Recession, and the need know about the middle class elsewhere becomes more acute.

"Is it large enough to substitute?" Kharas asked. "We think about the global economy being driven by demand from the middle class, and that demand is shifting. It involves not just Chinese and Indians and Brazilians, but Indonesians and Vietnamese," he said.

The geographic shift in middle-class power will have economic consequences.

"Because the middle class tends to like real things—cars and phones—raw material prices start to go up, like the price of steel, and that is reflected in prices everywhere, higher prices for all kinds of things," Kharas said.

Dadush, who cites the lack of clarity in studies focused on income and spending thresholds, decided to concentrate on passenger car ownership in countries around the globe.

"Having grown up in Libya myself, the well-off would have cars. From my youth, to have a car would signify you had some spare cash. It seemed to be a natural crossing point into middle class, and ownership of a car is a pretty concrete thing," he said.

At $3,500 to $4,000 of income—which comes close to the lower end of some early income threshold studies of the new middle class, even if viewed through an "asset" prism—people across many markets begin buying cars.

Dadush contrasts a car with other asset purchases that have become common in developing countries.

"While many people earning $2 a day are able to afford a cellphone, that level of income is far too low to afford amenities associated with the middle class in advanced countries," he said. "There are nearly 6 billion cellphone subscriptions in the world today, of which about 4 billion are in developing countries. Still, many of those cellphone owners in the developing world do not have access to a regular power supply," he wrote in his study.

So maybe Faulkner was right?

It's generally accepted among economists that as people accrue money they buy TVs first, then refrigerators, cars and air conditioners.

But in the former Soviet Republic, for example, having a refrigerator might have nothing to do with income. In many parts of the developing world, people can have the surplus income of a middle-class consumer but not own an air conditioner because they don't have access to reliable electricity.

Some things we consider vital to a middle-class lifestyle, such as electricity and clean water, are not necessarily obtained with more household income.

"We find asset data is very hit or miss," Meyer said. "It goes back to defining as opposed to identifying."

As the definers of the new middle class continue to battle it out, argue positions and, ultimately, seek consensus somewhere between definition and identification, maybe Dadush summed it up best with an admission.

"The middle class is a nebulous concept itself," he said.

—By Eric Rosenbaum, CNBC.com