Emerging middle class

One analysis published by the OECD12 has shown that while Asia Pacific countries account for less than 30% of the global middle class today, by as early as 2020 they could represent 50% of its population and 40% of its spending. This is because in many developing countries there is a large group of people just below the middle class – defined as those earning between $10 and $100 per day – whose incomes will be lifted over the threshold by expected economic growth. The analysis suggests that Asian Pacific middle class could grow six-fold from 525 million people today to 3.2 billion in 2030, two thirds of the global total, and its spending power could rise from $5 trillion to $33 trillion (Tables 1 and 2).

A daily income of $10-$100 may not sound particularly middle class by western standards, but calculated at purchasing power parity, which takes account of the fact that goods are much cheaper in poorer countries, it represents considerable spending power. In this income bracket, people have money to spend not only on the bare necessities but also discretionary goods and services: fridges, TVs and satellite dishes, more meat and dairy, education, eating out, and perhaps a scooter or car.

The Chinese car market is a case in point. Even a decade ago the market was tiny, with sales of less than a million vehicles per year, but as average incomes reached $6,000 in 2008, sales took off.15 In 2009 Chinese car and truck sales reached almost 14 million, overtaking the US with just over 10 million. Chinese vehicle sales then grew to 22 million in 2013, although they appear to have flattened in 2014 (Figure 1). In 2004 GM sold 10 cars in the US for every 1 in China; by 2009 the ratio was 1:1.

This dramatic change took place at a time when the emerging Chinese middle class was still relatively small. As Figure 2 shows, in 2009 just 12% of China's population, or 157 million people, earned more than $10 per day, but the OECD paper argues that provided the government pursues sensible policies to support income equality, this could swell to 75% by 2030, or around 1 billion people.

Table 1: Numbers (millions) and share (percent) of the global middle class by region. Source: OECD13

Table 2: Spending by the global middle class, 2009 to 2030 by region (billions of 2005 purchasing power parity dollars). Source: OECD14

Figure 1: Vehicle sales in China 2008-2014. NB 2014 figures up to November only. Source: Statista16

The emergence of a middle class in developing countries is important because it can create a 'sweet spot' or virtuous growth cycle: rising incomes lead to increased discretionary spending, which in turn stimulates economic growth and raises incomes even further. The Indian economist and asset manager Surjit Bhalla estimates that for every 10% expansion in a country's middle class, its growth rate rises 0.5%.18

Many other large developing countries are on the brink of this transition, notably Indonesia and India (Table 3). A recent analysis by the Centre for Economic and Business Research forecast that India's economy would overtake Britain's in 2018 to become the largest in the Commonwealth, and concluded the country's rise "looks unstoppable".19

Figure 2: China's middle class is small, but quickly rises. Source: OECD 17

Some Asian societies will not only be richer but younger, which brings its own demographic dividend. In India, for example, half the population is under 24, and therefore about to enter their most economically productive years.21 Over the next three decades, the Indian labour force is expected to grow 0.5% faster each year than the population as a whole, reducing the dependency ratio and raising household incomes.22

Urbanisation is another powerful trend supporting growth. An estimated 16 million Indians migrate from the countryside to cities each year – equal to another New Delhi every twelve months – and this tends to raise labour force participation and productivity. India's labour force participation rate of around 60% lags China's by about 20%, suggesting substantial headroom for further growth. Goldman Sachs expects India's cities to swell by 500 million people over the next 25 years, and the UN forecasts the global urban population will rise from 3.9 billion in 2014 to 6.4 billion by 2050.23

Table 3: When will emerging economies hit their projected 'sweet spots'? Source: EY 20

The OECD analysis suggests these factors mean Asian middle class spending will reach about 60% of the world total within as little as fifteen years. China's middle class is expected to reach one billion by 2030, but youthful India should overtake ageing China as the engine of growth during the 2020s (Figure 3). India's middle class is expected to be well over one billion by 2040, when it will include 90% of the country's population – up from just 10% today.

Figure 3: Regional shares of global middle class consumption, 2000-2050. Source: OECD 25

India's Smart Cities

India's government has responded to mass urban migration with a plan to develop 100 'Smart Cities', either by upgrading existing cities or building entirely new satellite towns. Smart Cities are loosely defined as those where investment in infrastructure, transport, services and digital technologies combine to make them more sustainable and liveable. A government scoping document identifies the need for new logistics hubs, warehousing and freight terminals to support Smart Cities, and while cold chains and other forms of cooling are not mentioned specifically, they would clearly be essential for safe and efficient distribution of food and medicine.24 The document also stresses the importance of clean air – India's cities are among the world's most polluted – implying a need for a zero-emission alternative to highly polluting diesel powered Transport Refrigeration Units (section 4). And since the government assumes an average population of 1 million per smart city, this alone implies a market for sustainable cold chains of some 100 million people.

12 The emerging middle class in developing countries, Homi Kharas, OECD Development Centre, January 2010, http://www.oecd.org/dev/44457738.pdf

15 Hitting the sweet spot, the growth of the middle class in emerging markets, Ernst & Young, http://www.ey.com/ GL/en/Issues/Driving-growth/Middle-class-growth-in-emerging-markets---The-middle-class-effect-and-the-growth-sweet-spot

18 Hitting the sweet spot, the growth of the middle class in emerging markets, Ernst & Young, http://www.ey.com/ GL/en/Issues/Driving-growth/Middle-class-growth-in-emerging-markets---The-middle-class-effect-and-the-growth-sweet-spot

19 World Economic League Table 2015, Centre for Economic and Business Research, 26 December 2014, http://www.cebr.com/reports/world-economic-league-table-2015/

21 India election: country awaits a demographic dividend or disaster, the guardian, April 2014, http://www.theguardian.com/world/2014/apr/07/india-election-demographic-dividend-disaster

22 The emerging middle class in developing countries, Homi Kharas, OECD Development Centre, January 2010, http://www.oecd.org/dev/44457738.pdf

23 World Urbanization Prospects, United Nations, 2014, http://esa.un.org/unpd/wup/Highlights/WUP2014-Highlights.pdf

24 Draft Concept Note on Smart City Scheme, Smart Cities, Ministry of Urban Development, Government of India, http://indiansmartcities.in/downloads/CONCEPT_NOTE_-3.12.2014__REVISED_AND_LATEST_.pdf