Rich Man, Poor Man: The middle classes – now you see them, now you don’t

"The happy medium means respectability..."
The happy medium means respectability…

In the second of three postings on wealth distribution, we look at the mixed fortunes of the world’s middle classes.

“I just had a cup of tea with soymilk,” tweets Dave Ellis. “It was one of the worst decisions I’ve ever made in my life.”

Dave’s tweet, and many, many more, can be found on Middle Class Problems, which makes fun of the daily challenges facing folks in the middle of our societies. In truth, their supposed pretensions and status anxieties have long made the middle classes objects of fun and even scorn. Even John Lennon, raised in fairly comfortable surroundings, turned his back on them and proclaimed himself a Working Class Hero.

Lennon was able to play with his identity, perhaps, because from a social perspective the term that might have described him best – “middle class” – is so vague. By definition, middle class is relative – somewhere between not well-off and very well-off, or rich, but where?

The economic definition is unclear, too (see Box 1): For example, some experts use a relative approach and define a household as middle class if it’s earning, say, between 75% and 125% of median income. (Median income is the point in the income range,  after taxes are paid and state transfers received, that separates the top 50% of earners from the bottom 50%.) Other approaches are more global: Goldman Sachs has defined middle class households as having an income of between $6,000 and $30,000 a year. By contrast, experts working in development tend to use a much lower figure – between $10 and $100 a day. Another way to see it is that, after covering the essentials, middle-class households have some money to spare – in other words, they’ve risen above subsistence living and can start thinking about the future.

In any case, defining “middle class” in purely economic terms misses a lot. That’s because to be middle class is as much a question of values as of income or wealth.  “Middle class values,” says development expert Homi Kharas, “emphasize education, hard work and thrift.” The goal of all this, adds columnist David Brooks, is improvement – of the individual, family and society: “They teach their children to lead different lives from their own, and as Karl Marx was among the first to observe, unleash a relentless spirit of improvement and openness that alters every ancient institution.”

It’s these values that make the middle classes so important – a reality underlined by recent protest in Brazil and elsewhere. As the OECD’s Horacio Levy wrote, the rallies showed that a “part of the population now feels empowered to demand access to quality services”.

Those calls are only likely to grow: According to Homi Kharas, there were 1.8 billion middle class people in the world (based on the $10 to $100-a-day definition) at the start of this decade. Europe and North America accounted for more than half the total, and the next biggest share was in the Asia-Pacific region, with 28% of the total. By 2030, Kharas estimates that the middle class will total 4.8 billion, and around two-thirds will live in the Asia-Pacific. These, he argues, they will increasingly take over from U.S. consumers as the main drivers of the world economy.

Naturally, any projections like this come with health warnings. It remains to be seen, for example, how the current slowdown in emerging economies will affect the emerging middle classes. Their position is often fragile – $10 a day doesn’t buy a lot of stability – and they are vulnerable to setbacks both in the economy and in their own households in the form of unemployment or illness. But, economic shocks aside, their long-term prospects probably look good.

By contrast, many fear the same can’t be said for developed economies. As Alan Krueger, then-chairman of President Obama’s Council of Economic Advisers, said in June, “economic forces have been chipping away at the middle class for decades”. As we’ve noted before on the blog, income inequality has tended to rise in OECD countries, fuelled by factors that include technological change, globalization and the emergence of winner-take-all economies. In many OECD countries, middle-class incomes have grown less quickly – or even stagnated – compared to those of high earners. Middle-class jobs, too, are under pressure, increasingly vulnerable to technological advances, even in areas like law and tax accounting that might once have seemed immune.

The result, argue some, is a “squeezed middle” – a middle class that grabs a shrinking share of national income and is losing confidence that its children will do better than it’s doing. In the world of middle-class problems, that’s a very big one indeed.

Useful links

OECD work on  income inequality

Divided We Stand: Why Inequality Keeps Rising (OECD, 2011)

An emerging middle class – Mario Pezzini in the OECD Observer

The hurting middle class – Arianna Huffington in the OECD Observer

A hollowing middle class – Peggy Hollinger in the OECD Observer

Emerging middle class blues

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

Social cohesion: making it happen

Click to get the report from the OECD Online Bookshop

Today’s post is written by Anne-Lise Prigent, the editor in charge of development publications at OECD Publishing.

A famous Deng Xiaoping quote goes : “Let some people get rich first”. Yet, in Spring 2011, the Beijing city authorities banned all outdoor advertisement of luxury goods on the grounds that they might contribute to a “politically unhealthy environment”.

The trouble with growth is that inequalities tend to rise with it. Growth does not necessarily translate into better life satisfaction – far from it, as the experience of Thailand or Tunisia shows. What happens when the fruits of growth are not shared, when people feel that income inequalities are rising and food prices soaring? Well, that’s when the so-called “politically unhealthy environment” sets in.

Millions voiced their frustration during the Arab Spring. From Tahrir square to the streets of Tunis, a huge emerging middle class showed that it has a tremendous capacity to mobilize people. It demands governments that are open and transparent, as well as more and better services. How can governments answer these demands? How can they go about redistributing the fruits of growth?

A new policy agenda is needed: one that focuses not only on growth but also on openness, fairness and inclusion. Social cohesion needs to be at the centre of policy making. Failing this, we may (re)enter a vicious circle where inequalities create a sense of injustice, which in turn can lead to (mass) protest and sometimes violence. As a result, social peace and stability, as well as long-term growth, may be jeopardized.

How can governments foster social cohesion? Perspectives on Global Development: Social Cohesion in a Shifting World from the OECD Development Centre published today, answers this. With this latest report, the Development Centre again proves that it is engaged with the world we live in, whether discussing tax revenues or the merits of football as a factor of social cohesion: having a sense of community can make a difference. That, along with equality of opportunities is what social cohesion is all about.

The report first shows how the world has undergone a shift of historical significance over the past decade, with the centre of economic gravity moving towards the East and South. The figures speak for themselves: in 2000, OECD countries represented around 60% of global GDP but by 2010 this was down to 51%, and it will be only 43% by 2030. In fast-growing economies, per capita growth rate was more than double that of high-income OECD countries over the last decade.

It is precisely this shifting wealth that opens a window of opportunity for development and social cohesion. In fast-growing economies, fiscal revenues rose from 20% of GDP on average in 2000 to 27% in 2008. These countries now have the (fiscal) resources to finance social policies that can make the difference – or, can they?

This report argues that public policies can make a difference. OECD countries with initially high income inequalities manage to redistribute income through taxes and transfers. The challenge is to leave no one behind. A cohesive society reduces inequality between groups and ensures that all citizens – the poor, the middle-earners, and the rich – are socially included.

Over the last decade, hundreds of millions of people were lifted out of poverty. This report argues that the emerging middle class should not be ignored either. Today, nearly 1 billion out of the 2 billion people living on 10 to 100 dollars a day in the world – the global middle class – live in fast-growing countries. This number is projected to exceed 3 billion in 2030.

The emerging middle class is a critical economic and social actor because of its potential as an engine of growth, particularly in the largest developing countries such as China and India. Its contribution to social cohesion can be high, and its expectations are sharply rising. What is needed is a social contract between citizens and the state, which entails more and better services in exchange for paying taxes. This would foster a virtuous circle that boosts social cohesion as well as growth. Citizens are more willing to pay taxes in societies where they feel a sense of belonging. Fiscal policy is thus a good place to start.

As the report highlights, fiscal, social and employment policies should go hand in hand. With recent innovations in social protection, the poorest are covered by social assistance and the wealthy by either contribution-based or private alternatives. Yet, a considerable number of (informal) middle-class workers are stuck in the uncomfortable “missing middle” of coverage. More comprehensive social protection systems should protect all sections of the population.

Stronger labour market institutions are also needed. They should aim to create more “good” jobs and reduce the duality in labour markets – between standard and non-standard contracts or between formal and informal workers. This will be critical in reducing inequalities and fostering social cohesion.

A series of cross-cutting issues have to be addressed coherently as well, including education, gender equality, food policy, the integration of immigrants, and institutions.

As Albert Einstein once said, “Reality is merely an illusion, although a very persistent one”. Ignoring people’s desires and the reality in which they live is perilous. Technocratically good policies that do that just won’t work and giving space to dissenting voices is essential to the creation of a sustainable, socially cohesive society.

Social cohesion is a means for development as well as an end in itself. What if social cohesion were the 21st century’s holy grail? A holy grail that can only be attained with some long-term vision and commitment – and a smile. Failing that, there might be rough times ahead.

Useful links

Social cohesion on Wikiprogress

OECD Development Centre

2012 年全球发展前景:转变中世界的社会凝聚力

China’s spoilt brats and America’s disappearing middle class

She's got her own BMW too

Regular Insights blogger Brian Keeley is in Beijing, from where he sends this dispatch.

A recent afternoon brought one of those classes that all lecturers dread: Glazed eyes from one side of the room to the other, and mouths opening and closing in syncopated yawning. Time to tear up the lesson plan and throw out a question: “Hey, did you see the story about the rich kid who beat up that nice couple?” Dull eyes sharpen, slack jaws tighten. Yes, the students have heard about it and, what’s more, they have something to say.

In case you missed the story, here’s what happened: On a recent evening, a middle-class couple was driving home in Beijing. Quite reasonably, they slowed to take a corner, forcing a couple of cars behind them to stop. Incensed, the drivers of the two following cars got out and beat them up.

Road rage, but that was only the half of it: It turned out that one of the drivers was just 15 years old, which meant he was driving his car – a BMW – illegally. Not only that, he warned onlookers against intervening: “Who dares to call the police?” he supposedly shouted. His cockiness can probably be explained by his family connections: The boy is the son of a celebrity army general, Li Shuangjiang, who shows up regularly on TV to sing patriotic ditties.

In the wake of the incident, Major-General Li was put through the media wringer. He visited his son’s victims in hospital, apologized abjectly, and said of the boy, “I didn’t him give a good upbringing.” As for Li junior, Chinese media reports that he’ll go to a correctional facility for a year, but will escape criminal charges because of his age.

The affair was startlingly reminiscent of another incident last year, when the well-connected son of a senior security officer knocked down and killed a university student. That young man, too, shouted a warning to onlookers: “My father is Li Gang.” His words became a national catchphrase, epitomizing what many Chinese seem to feel is the attitude of an arrogant elite that feels itself above the law. 

Certainly, that was the feeling of most of my students. But there was a second strand of opinion: They felt that media reporting of these incidents, and subsequent online commentary, was sensationalist and served no bigger purpose than stirring up bitterness and resentment. “The media should ask itself, ‘why are we reporting this?’,” said one student. “It should think about the bigger social question, and try to make China better.” That, of course, was one of the traditional role assigned to the media by the Chinese Communist Party. But in today’s China, it’s sensationalism – not worthiness – that sells papers.

As for the “bigger social question,” the student isn’t alone in seeing the incident as symptomatic of more than just Beijing’s awful road manners. Many in China worry about the impact of widening inequality on social stability, even if these concerns are expressed in careful language. But whenever you hear China’s leaders referring to the need for a “harmonious society,” it’s usually inequality that’s being talked about.

China was not the only country that got a reminder last week of the risks of “unharmoniousness”. In the United States, there was fresh evidence of how society there has been reshaped over the past decade or so. The middle class, once the solid core of American life, is being hollowed out, leaving a class structure that’s now shaped more like an hourglass. Indeed, some retailers have reportedly rejigged their product lines to focus on either the top, or the bottom, of the economic pile.

The impact of this social shift goes beyond determining what’s on Walmart’s shelves. As the historian John Gray notes, there’s a real danger in undermining the middle class (a risk first identified by Karl Marx): “In the process of [capitalism’s] creative destruction,” says Gray, “the ladder has been kicked away, and for increasing numbers of people a middle-class existence is no longer even an aspiration.” The result, he argues, is the destruction of “the way of life on which capitalism in the past depended”.

That’s not true of China, or at least not yet. The middle class may be under pressure in many developed countries, but in China it’s growing by leaps and bounds. But as Gray suggests – and as the financial crisis of the past few years has shown – the economic impact of capitalism’s forces are less easy to tame than we might wish. And as recent news from both China and the United States suggests, their effect on our societies can be just as tricky to manage.

Find out more

OECD work on income distribution and poverty

Growing Unequal

Perspectives on Global Development