Emerging Trends in The Global Middle Class: A Private Conversation with Dr. Homi Kharas
Towards the end of 2018, humanity experienced an important tipping point: half the population now lives at income levels that are either in or above the middle class. As part of World Data Lab’s (WDL) thought leadership initiative exploring implications of the world’s rapidly changing consumer landscape, Dr. Homi Kharas, Interim Vice President and Director of the Brookings Institution and WDL’s Senior Economic Advisor, provided exclusive insights into WDL’s methodology and its groundbreaking econometric modeling techniques for a group of industry leaders on April 5, 2019.
Dr. Kharas focused on the global middle class, which is the world’s fastest growing consumer group. People in this group earn between $11-$110 (2011 PPP) every day, amounting to a total annual consumption of approximately $40 trillion and contributing more to global growth than any other element of demand. The peer-reviewed definition1 of the so-called “consumer class” is mainly derived from its economic behavior (income elasticity for consumer durables/services like insurance rises well above one), and the fact that the group excludes everyone considered to be “poor” (even those residing in advanced countries) as well as everyone considered to be outside of the middle class in a rich country.
“The essence of our real-time modelling is to put everyone in the world on the same scale.” – Dr. Homi Kharas
Taking advantage of the power of World Data Lab’s real-time data, Dr. Kharas further elaborated on the current distribution of income as well as the dynamics between consumer groups. While there are two types of fluctuation to be observed, people are moving much faster from being “vulnerable” to being in the middle class (5 people/sec) than moving from the middle class to being classified as “rich” (0.5 people/sec) as of early 2019. This trend is leading to a fast-growing global consumer class.
Knowing the amount of people making a certain amount of money in a specific region is critical for every supplier or service provider as there are certain thresholds after which people tend to start buying certain goods. A study by the McKinsey Global Institute2 states that one of the first gadgets purchased in middle class households is a refrigerator (when households have a spending power of $7-$16/day), followed by buying transport and communication (spending power of $16-$17/day), and much later by washing machines (daily spending power of $27-$55/household) or leisure travel (approximately $50 daily spending power/household).
Successful strategies build on insight that are data-driven and forward-looking. Markets which seem strong today might not be as important in ten years. Dr. Kharas aptly depicted this hypothesis utilizing the market sizes of India, the European Union, China, and the United States. While they are currently still fairly unequal in early 2019, these four markets are projected to be very similar in size by 2030 (keeping in mind that this projection includes UK in its EU numbers), with the US only slightly larger than China in total spending power. Whereas the United States clearly dominates upper class spending now and is expected to continue to do so in 2030, the global middle class is an Eastern story: 85% of people who are moving into the middle class through 2030 are expected to be from Asia.
However, country-level analysis sometimes isn’t enough to make data-driven decisions. In an effort to provide data that is much more granular, Dr. Kharas discussed his and World Data Lab’s efforts in the space of Geospatial Income and Demographic (age, gender) Mapping with the power of Artificial Intelligence, projects which are supported by institutions such as the European Space Agency and the Asian Development Bank, and will be incorporated in Safaricom’s and Vodafone’s future strategies.
The rise of these cutting-edge methods will change data-based decision-making as we know it. Thanks to powerful industry supporters and the assistance from world-class academics such as Dr. Homi Kharas, World Data Lab will continue to shape international debate via fundamental data outputs, analytics, modeling, webtools, reports, and more—and via thought leadership forums similar to this webinar.
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1Kharas, Homi. 2010. “The Emerging Middle Class in Developing Countries.” OECD Development Centre Working Paper No. 285. Paris: OECD.
Kharas, Homi. 2017. “The unprecedented expansion of the global middle class. An update.” Global Economy & Development Working Paper 100. Washington, DC: The Brookings Institution.
2McKinsey Global Institute, 2012. „Urban World: Cities and the rise of the consuming class.“, p.28ff