Driving Middle Class Growth in Emerging Markets

Some of the most crucial foundations of middle class growth in emerging markets include economic growth, increased productivity, an attractive business environment, female labour participation, urbanisation, increasing educational attainment and the establishment of a social safety net. Looking at the world’s 10 largest emerging markets (measured in PPP terms) we see stark differences in these drivers of prosperity.

The World’s 10 Largest Emerging Market Economies: 2014

Source: Euromonitor International from national statistics/OECD /IMF

Economic growth: the good, the bad and the ugly

Strong and sustainable economic growth is a prerequisite for an expansion of the middle class. Looking ahead to 2020, we see stark differences. India, which we forecast to be the fastest-growing, is growing at a pace 10 times that of Russia, the slowest growing. Russia is mired in recession, and is expected to see its economy shrink this year and next as a result of the low oil price, sanctions, and structural challenges such as a dearth of investment and a lack of economic diversification. India on the other hand, as an oil importer, is benefitting from the low oil price, and is expected to achieve rates of growth above 7.0% annually up until and including 2018.

Real GDP Growth: 2015-2020

Source: Euromonitor International from national statistics/OECD /IMF

Note: Data are forecast

Productivity: Asia rules

Productivity is a crucial factor in driving income and economic growth. The four Asian emerging markets dominate in terms of the real growth in productivity. Despite India topping the ranking of overall economic growth, China is the top performer in productivity terms. Having said that China’s productivity levels are not high at US$13,421 per person employed in 2014, only the 6th highest amongst these 10 countries. This is unsurprising of a country which has hitherto relied on a cheap labour growth model. China should continue to see gains in productivity as a result of rising labour costs and an increase in services as the government continues in its attempt to steer a course towards a consumption-led growth model. Conversely, Saudi Arabia saw its productivity levels fall between 2009 and 2014. It suffers huge inefficiencies in its labour market, in part due to its Saudiisation policy.

Average Annual Growth in Productivity: 2009-2014

Source: Euromonitor International from International Labour Organisation (ILO)/Eurostat/national statistics

Note: CAGR of labour productivity measured in real US$ per person employed.

Business Environment: On friendly terms

A good business environment encourages investment – both foreign and domestic – creating employment and boosting economic growth. It also supports the development of the formal economy and middle class consumers tend to work in the formal economy. In terms of corruption, Saudi Arabia ranks best, coming in 55^th globally. Corruption in Saudi Arabia has been decreasing thanks to the government’s targeting of the issue. The National Authority for Combating Corruption was reconstituted in 2011, while Saudi Arabia ratified the United Nations Convention against Corruption (UNCAC) in 2013. The World Bank ranks Mexico an 38th globally, ahead of Belgium, Italy and Chile in terms of the ease of doing business. It takes just 6 days to start a business in Mexico, compared to 29 days in India. The Mexican government is legislating for a raft of reforms aimed at improving the business environment, encouraging investment and placing the economy on a sound footing for sustainable growth.

Business Environment Rankings: 2014/2015

Source: Corruption Perceptions 2014: Euromonitor International from Transparency International. Ease of Doing Business 2015: World Bank

Working women

An increase in female labour participation leads to more dual income households which are by their nature higher-earning. The number of women in the workforce varies massively between these 10 economies, with Iran and Saudi Arabia bringing up the rear, to China where 73% of working age women are in the labour force – still a rate 14.3 percentage points lower than that of men. Only four of the ten have female rates higher than 70% - the G7 country average. Getting the most out of human capital is a basic way to drive economic growth, harnessing female employment is a first step in this.

Female Labour Participation: 2014

Source: Euromonitor International from ILO/Eurostat/national statistic/UN

Asia must continue to urbanise

Middle class households tend to be urban. Urbanisation promotes the development of the middle class because cities tend to be the engines of economic growth, attracting higher-productivity businesses and creating a consumer class. All the largest emerging markets outside of Asia are predominantly urban – the Asian exceptions are Indonesia, India and Thailand; with Thailand bringing up the rear with an urban population of just 35.7% in 2014. Urbanisation has transformed the Chinese economy and between 2009 and 2014 the urban population increased at a rate seven times that of the population overall. It’s important that growth is happening across cities though. Mexico is the most urban, but here one-in-five of the urban population live in the Mexico City area and Mexico city is more than 4 times larger than the second city, Guadalajara. Whilst this kind of imbalance is not unusual, a strategy of promoting second tier cities can lessen inequality and boost economic growth.

Difference in Growth of Total Population and Urban population: 2009-2014

Source: Euromonitor International from national statistics/UN

Note: Data refer to the percentage point difference between the period growth

Educating the masses

Educational attainment is another crucial metric for boosting human capital and with it productivity and economic growth. An educated population is a draw for foreign investment and high-paying jobs. Looking at the population aged 15+ with at least a secondary education there is a large gulf between these 10 markets. Russia tops the ranking and India brings up the rear. In terms of higher education, Mexico has the largest percentage. In all but two countries, Turkey and India, there are more people with a secondary or higher education than there are people with a primary or no education. Mexico and Brazil have seen the strongest growth in the proportion of their populations with a secondary education since 2009. India meanwhile has seen no increase in its proportion with a secondary education. As well as boosting secondary enrollment attention must turn to boosting tertiary education if these economies are to boost their competitiveness.

Population with Secondary or Higher Education: 2014

Source: Euromonitor International from national statistics/UN

Social safety net

The development of a social safety net boosts middle class growth and specifically spending. A safety net allows for a more flexible workforce, reduces insecurity and prompts consumption. This is borne out in the Chinese situation whereby the average household saved a massive 40% of its disposable income in 2014 in part due to the lack of comprehensive healthcare and pensions – but also due to inequality and the ageing population. To finance a social safety net, governments must be able to collect sufficient revenues, and this is a challenge in many of the largest emerging markets. Government revenues are less than 25% of GDP in five of these economies: Mexico, Thailand, India, Indonesia and Iran. In Mexico and Thailand less than 20% of government spending is directed towards social security and welfare.

Government Revenues as % of GDP: 2014

Source: Euromonitor International from national statistics/IMF

These seven factors are central to the development of the middle classes as well as generating economic growth more broadly. A strong middle class is in turn a driver of economic growth, creating something of a virtuous circle. These are of course not the only factors that drive the development of the middle class, but they represent important underlying dynamics.