The growth of the global middle class

By J. Carlitos G. Cruz

First Published in Business World (9/9/ 2013)

WHILE there are signs that the global economy may be moving (albeit slowly) towards stability, one thing is clear: the world has changed significantly from the one that we knew just a few years ago. As the centers for trade and economic power shift away from traditional western bastions, analysts are looking to rapid-growth markets (RGMs) to shore up the still-wobbly global economy.

A recent Ernst & Young (E&Y) publication, Rapid-Growth Markets Forecast, identifies RGMs as countries that emerged from the 2008 recession with minimum damage and are projected to grow up to 6% in 2014. These countries cut across the globe and include nations in Southeast Asia, Africa, Latin America and the Middle East, among others. [The report did not classify the Philippines as an RGM for now, but the country is viewed as a high-potential market.] The expectation is that an increasingly interconnected world can benefit from the trading opportunities that will arise from this anticipated phenomenal growth.

Under this scenario, one anticipates that as RGMs achieve prominence, their economies will become stronger, their governments will become more influential and — this is most important — their people will become more visible because of their buying power. This will drive a significant shift in worldwide demographics, with the expected growth of the global middle class. Logically, increased economic performance will eventually flow down to the largest socio-economic groups in most developing countries — the poor — who are also the ones who will benefit the most from increased prosperity.

Who do we expect will constitute this “new” middle class? The report uses the same definition used by the Organization for Economic Cooperation and Development (OECD): households with daily expenditures between $10 and $100 per person in purchasing power parity terms. This income group includes consumers of television sets, refrigerators, cars and mobile phones, and is therefore clearly seen to be the driver of the global economy.

No longer will the global demand for goods and services be driven primarily by consumption patterns in the United States. The middle class in RGMs is expected to create a burgeoning demand in the coming years as they rise out of poverty, with their spending increasing from $21 trillion to $56 trillion in 2030. And as the RGM middle class expands, they will draw more imports and increase demand for services. It is highly possible that RGMs will become a key destination for more service exports, including sophisticated banking, insurance and other financial services that were previously more prevalent in western markets.

The global middle class is expected to grow organically and to have a healthy appetite. It is projected that the size of this group will hit 3.2 billion by 2020 and 4.9 billion by 2030, according to the OECD Development Center. The bulk of this growth will come from Asia; by 2030, Asia will represent 66% of the global middle class population and generate 59% of middle-class consumption (compared with 28% and 23%, respectively, in 2009). China, India and Indonesia together are expected to account for 27% of global consumption by 2020 and 45% by 2030. ASEAN’s proposed economic community, expected to be in place by 2015, will likely further fuel consumption within, and beyond, ASEAN.

The Philippines, which demonstrated 7.6% GDP growth in the first semester of this year and is projected to grow by 7% in 2014, is a high-potential market. The positive views and upgrades given by the credit ratings agencies have brought an increase in investor interest in the country, supported by socio-economic progress of recent years. With our robust domestic demand, coupled with our talented working-age population and growing middle class, the Philippines can be seen as being in a similar position to other RGMs in long-term performance. Local businesses would be well-advised to prepare for the growth opportunities to come, as well as increasing competition from foreign players.

There are a few key factors that have contributed to RGMs leapfrogging from third-world status to the new engines of the global economy.

One is technology. Mobile communications, broadband connections, tablets and smartphones — all these have changed consumer purchasing habits and accessibility to goods. There are increasing numbers of online retailers in Russia, China and various RGMs that are capitalizing on having a huge global market — without needing an actual, physical retail environment.

Then there is the growing number of foreign-educated youth who are bringing in skills, capital and new ideas to their home countries, and contributing to the economic and social welfare of their nations. From these individuals will eventually rise a new generation of companies that will embody modern entrepreneurial ideas and insights. As the middle class becomes more educated, they begin demanding more from themselves and the government.
Consequently, their social and economic conditions will improve, leading to a better relationship with the government and a more advanced society — one that offers the best in terms of employment opportunities, medical facilities, infrastructure, law and order, ease of doing business, and cross-border trade. This will, in turn, lead to stronger fiscal and monetary policies, which will benefit businesses and consumers. Under these scenarios, there are tremendous possibilities for forward-thinking companies to begin preparing, whether by establishing footholds in RGMs or building strategic alliances that will allow them to market positively to the coming global middle class.

The question is, are businesses ready to meet this coming demand?
To borrow an often-used phrase, the global financial crisis has resulted in a brave new world for all of us. One where the bold — be they companies, individuals, or even a social class as a whole — may find great advantages in seizing the initiative.

J.G. Cruz is the vice-chairman and deputy managing partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.