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Emerging middle class blues

1 July 2013
by Guest author
Exit, voice or loyalty?

Exit, voice or loyalty?

Today’s post is by Helmut Reisen, former Head of Research at the OECD Development Centre and author of the Shifting Wealth blog.

How is life? You might have expected the urban middle class in Brazil and Turkey to answer that well-known OECD slogan with “We can´t complain”, to paraphrase a recurring refrain in Hans Magnus Enzensberger’s 1964 poem Middle Class Blues. After all, the recalibration of the world economy toward the emerging countries, mostly as a result of superior prolonged growth in the Asian giants China and India, has since 1999 helped move roughly half a billion people above $2 a day, the median income poverty threshold in developing countries. Homi Kharas´ estimates for the OECD Development Centre projected almost 70% of the world´s middle class consumption – $56 trillion by 2030 – to be outside the OECD. No wonder then that the term “emerging country middle class” has been driving big dollar signs into many eyes.

Yet, the urban middle class youth is in revolt in Brazil, Turkey and other fast-growing countries. The controversy around Easterlin Paradox, a key concept of happiness economics, suggests that happiness grows more slowly than incomes. Leaders in many emerging countries are today confronted with a dilemma that reflects the dual rural-urban structure of their large societies. While the internet-savvy young urban middle-class has left poverty behind and demands voice, participation and efficient public services, there still coexist the poor in the rural hinterland striving to leave individual poverty behind.  

Exit, voice and loyalty, the late Albert O Hirschman´s intriguing basic categories that drive societal change, can be used to better understand the current conundrum. Loyalty, through adherence to a political party or to religion, can block change but is waning. Exit and voice have different potential in a rural-urban context: exit from the rural to the urban sector is a preferred option for the rural poor but is mostly a one-way street; whence voice as the preferred option for the urban middle class.

Much of the emerging-country middle class is fragile. Lousy education, poor health and urban congestion are the biggest risks to the lower strata of the middle class, by way of social and economic exclusion. A higher proportion of middle-class citizens translates into higher prices for private schools, hospitals and transports or, alternatively, overcrowding. The private provision of quality public services is a socially dividing, hence limited, costly option. In other words, exit to private education and health services – an option for the “happy few” – will raise prices to the point that it triggers voice while the size of the middle class rises.

“First-world soccer stadiums; third-world schools and hospitals”, was one of the slogans advanced by Brazil´s protesters. Brazil has already spent more than $3bn, three times South Africa’s total four years earlier, and only half the World Cup stadiums are finished. Public health spending occupies a mere 4 per cent of GDP in Brazil (despite a constitutional declaration for universal health care rights), compared to 6 in Turkey and 7 in the OECD on average. The latest PISA test scores rank Brazil 57th out of 65 survey countries for mathematics, Turkey is ranked 43rd. These numbers suggest that there is a political and social premium on best practices in the governance and allocation of public spending of tax receipts. Apparently, that premium has not been reached.

Emerging-country leaders might ignore the insights of the OECD Latin American Outlook 2011 at their peril. The policy recommendations put forth there rightly emphasize the need for “fiscal legitimacy”. To avoid the emerging middle class blues, public finances need to strengthen the social contract, provide better opportunities for the vulnerable people and better quality public services. Middle-income citizens are more willing to pay taxes for services, such as transport, health care and education, if they perceive them to be of high quality and if “white elephants” – trophy public investments with little social value – are avoided.

It is quite likely that the current protests, while destabilizing and weakening the affected governments in the short term, will be the start to stronger democracies and strengthen, rather than weaken, the rise of the emerging countries. As Susanna Vogt reminds us, Aristotle reflected “that the best political community is formed by citizens of the middle class, and that those states are likely to be well-administered in which the middle class is large […]; for the addition of the middle class turns the scale, and prevents either of the extremes from being dominant.”

Useful links

What the BRICS need: Education, employment, equality, and soft infrastructure by Helmut Reisen on OECD Insights

Economic Policy and Social Affairs in the BRICS  by Helmut Reisen, SGI and the Bertelsmann Foundation

OECD Development Centre work on poverty reduction and social development

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