Technology and a Shrinking Middle Class?

Technology and a Shrinking Middle Class?

No-one doubts that the rise of the middle class globally has fuelled the demand for consumer goods of all kinds; that is certainly true for electronics and all-things digital. Nothing illustrates this better over recent years than the explosion of handheld connected wireless devices, with headlines such as “Middle class driving iPhone sales in emerging markets, says Tim Cook” (Tech2 29 April 2015[1]) becoming increasingly commonplace.

However the relationship of ICTs to the global growth of the middle class is more profound than just consumption. Broadly speaking, the middle class can be defined either in terms of being in the middle of national income distribution – but if almost everyone is close to or below the poverty line this becomes pretty meaningless; or with a per capita income over USD3,000 – but the purchasing power of this will vary enormously between countries. The key issue is purchasing power, or in other words, real income because this determines economic welfare. And that is where ICTs have played an absolutely huge role. Technological advances in the manufacture of micro-processors, otherwise known as “Moore’s Law”, have reduced the costs and spread the availability of electronic products and processes everywhere,[2] creating an enormous rise in real incomes. According to a new study by Intel celebrating 50 years of “Moore’s Law”, the contribution of reduced costs and increased performance of micro-processors to the global economy over the past 20 years stands at around 3 trillion dollars.[3]

While “Moore’s Law” seems to continue to hold true, the inexorable rise of the middle class is now under a question mark. In developed countries the middle has been squeezed: “The decline of the middle class has come to the forefront of debate in the US and Europe in recent years. This decline has two important components in the labour market. First, the number of well-paid middle-skill jobs in manufacturing and clerical occupations has decreased substantially since the mid-1980s. Second, the relative earnings for workers around the median of the wage distribution dropped over the same period, leaving them with hardly any real wage gains in nearly 30 years.” (Michael Boehm ‘Job polarisation and the decline of middle-class workers’ wages’ 8 February 2014.[4]) In other words, technological unemployment – including ICT-enabled overseas outsourcing – and stagnant nominal earnings are outweighing ICT-enabled productivity gains.

In emerging economies the problem is sustainability of the middle class. Despite the World Bank claiming that the “rise of the middle class represents a tectonic shift in social structure that requires a shift in policies,”[5] there remains an underclass at the Bottom-of-the-Pyramid (BOP) and, according to the IFC/World Resources Institute, over 80% of people living in Greater Asia (including the Middle East) fall into that category, with over 40% below USD1,000 annual per capita income.[6] They are mostly hidden from view because much of their economic activity belongs to the ‘informal’ economy, which in Asia probably accounts for 30% of official GDP – hence household surveys are more reliable than national accounts of income and expenditure. If the BOP in emerging economies account for 80% of the people, that seems to imply 20% are middle or upper class. But that is not necessarily true. The World Bank paper (above) hedges its bets, noting that if middle class implies a category of people with a low probability of falling into poverty, that automatically defines another – people who are not poor yet not middle class, ‘the vulnerable’. For example, a paper from the African Development Bank (AfDB) estimates Africa’s middle class by 2010 to be 350 million people, but then adds, of those “approximately 180 million people remain barely out of the poor category.”[7]

In other words, measuring at any moment in time those with annual incomes above USD3,000 takes no account of their vulnerability to fall back down to the BOP. A recent World Bank blog reviews estimates of the size of the middle class in Asia,[8] citing one report that by excluding the top 5% of income recipients as ‘rich’, “finds virtually no middle class in South Asia and very few in East Asia!”

That might be too extreme, but a recent set of anecdotal press headlines certainly raises red flags. Noting that ”Shoppers Are Missing at India’s Malls” (Wall Street Journal, 17 June 2015) the story goes on “while some analysts estimated India’s middle class would swell to more than 400 million people, it turns out that only a sliver of them – less than 10 million by McKinsey & Co.’s estimates – have enough disposable income to make them steady mall goers.” In the Financial Times (17th June 2015) the headline reads “African realities prove hard to digest for Nestle” pointing out that “For more than a decade the quest for Africa’s nascent middle class has been the holy grail for frontier investors seeking a new and exciting market…. Excluding oil-exporting countries Angola, Nigeria and Sudan, the middle class has proved much smaller than previously estimated, according to a Standard Bank survey of 11 countries last year.”

“The shrinking middle class: so far, just a U.S. story” runs a headline in the Globe and Mail (6 February 2015),[9] but the comparison was with Canada, not with the world’s emerging economies which have been the focus of the ‘next 3 billion’ who remain unconnected to the Internet. The ICT sector will boom indeed if it can find ways to connect them and then sell them the devices needed to use it. But the answer to the dilemma of a shrinking middle class is finding ways to make networks and devices more accessible and affordable, not to rely upon unrealistic forecasts of the future growth in nominal incomes. And that is why Moore’s Law remains so relevant today.

[1] http://tech.firstpost.com/news-analysis/middle-class-driving-iphone-sales-in-emerging-markets-says-tim-cook-265269.html

[2] The exponential rate of performance improvement was at first predicted as a doubling of component capacity every 2 years, or Ct = 2.Ct-1 and a corresponding halving of cost, or Mt = (Mt−1))/2. See G.D.Hutcheson The Economic Implications of Moore’s Law.

[3] Celebrating the 50th Anniversary of Moore’s Law https://technology.ihs.com/api/binary/532884

[4] http://www.voxeu.org/article/job-polarisation-and-decline-middle-class-workers-wages

[5] http://www.worldbank.org/content/dam/Worldbank/document/MIC-Forum-Rise-of-the-Middle-Class-SM13.pdf

[6] Allen L. Hammond, William J. Kramer, Robert S. Katz, Julia T. Tran, and Courtland Walker, IFC/World Resources Institute The Next 4 Billion http://pdf.wri.org/n4b_chapter1.pdf

[7]http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/The%20Middle%20of%20the%20Pyramid_The%20Middle%20of%20the%20Pyramid.pdf

[8] http://blogs.worldbank.org/eastasiapacific/is-there-a-middle-class-in-asia-depends-on-how-you-define-it

[9] http://www.theglobeandmail.com/globe-debate/the-shrinking-middle-class-so-far-just-a-us-story/article22828747/

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