Warning from Europe for Asia’s middle-classes – Asia Times


A Friday evening on one of downtown Kuala Lumpur’s busy commercial streets (Simon Roughneen)

JAKARTA — As hundreds of millions of Asians enjoy higher living standards in the move from lower to middle class, a warning of the trend’s sustainability came this month from Europe, where middle class expansion has stalled.

The Organization for Economic Co-operation and Development (OECD), a Paris-based club that includes most of the world’s wealthiest nations, reported that many of its member states have “seen their standard of living stagnate or decline, while higher income groups have continued to accumulate income and wealth.”

The middle class crisis in the West means disappointment for those who hoped that standards of living would continue to improve, as was the case for their forbears during the four or five decades after World II.

But more recent times have seen the top 10% of earners’ share of total wealth rocket to nearly half the national average — findings contained in a new OECD report, Under Pressure: The Squeezed Middle Class, that in turn paints a grim picture for the third of member state populations described as “economically vulnerable.”

Emerging Asia has been the world’s economic growth dynamo in recent decades, with average incomes rising across the region – unlike in the West. “Asia’s the one part of the world economy that has been doing best in raising living standards,” said Gareth Leather, senior Asia economist at Capital Economics.

But just as Western economies are struggling to improve living standards for their smaller wealthier populations, Asia’s developing economies must cater for vast populations, with 47% of workers across the Asia-Pacific region working informally, according to World Bank estimates.

Hopes that India will lead the next big wave into Asia’s middle class after China are constrained by the lack of salaried employment, World Bank statistics show.

“Over the past 30 years, middle income households have experienced dismal income growth or even stagnation in some [OECD] countries. This has fueled perceptions that the current socio-economic system is unfair and that the middle class has not benefited from economic growth in proportion to its contribution,” the OECD reported.

They are vulnerabilities and resentments that are likely to worsen given estimates that one in five middle-income jobs could soon be jeopardized by automation, according to the same research.

Social and political unrest has ensued in some Western countries as the increasingly wealthy elites are blamed for a succession of economic crises, for outsourcing jobs to lower cost Asia, for what many in Europe and North America believe to be insufficient curbs on migration, and for overseeing the angst-inducing combination of rising living costs and stagnating wages.

Low wages in emerging Asian economies helped drive inward foreign investment in manufacturing and services from companies headquartered in OECD member states. But that middle class-creating investment is also in jeopardy as Western leaders such as US President Donald Trump demand businesses repatriate assets.

The Gilets Jaunes protests across France are but the latest manifestation of a globalization backlash that underpinned Trump’s 2016 election win on a nationalistic “America First” platform, and the shock vote by a majority of British citizens that same year to leave the European Union.

Asia’s OECD member-states Japan and South Korea have so far escaped the turmoil and polarization affecting Western countries. But Japan’s economy has been stagnant for almost two decades and its middle class is smaller than the OECD average, with only 54% of Japanese fitting the OECD’s classification of households that earn between 75% and 200% of the median national income.

“It is difficult to make a generalization for Asia,” said Michael Forster, an economist at the OECD secretariat and co-author of the report who spoke to Asia Times. “The picture [for the middle class] is more gloomy than you would think, however.”

Countries such as China and India, which feature briefly in the OECD report, have smaller middle classes as a proportion of their populations compared to the wealthier OECD members.

Led by China, most of Asia has enjoyed heady economic growth over the past two decades, particularly since the dark days of the late 1990’s Asian financial crisis.

Indeed, driven by Asia, the world reached a “tipping point” last year, according to the Brookings Institution, a US think tank, which estimated that just over 50% of the world’s population now live in households with enough disposable income to be considered either “middle class” or “rich.”

In 2009, the world’s middle classes numbered 1.8 billion people, according to the OECD’s calculations — 664 million Europeans, 525 million Asians and 338 North Americans.

If current economic trends hold, a big if, by 2030 the world’s middle classes will number 4.9 billion, 66% of them Asia, more than double 2009’s 28%, according to the OECD.

And for consumer-oriented businesses that thrive when the middle classes grow, the bet is on Asia’s rise continuing and more of its people having more money to spend.

“As for South East [Asian] countries, generally speaking, they have been showing rapid economic growth and will keep their pace in future, too,” said a spokesperson for Japanese retail giant AEON, in a recent email.

The United Nations Conference on Trade and Development last year described Asia, and Southeast Asia in particular, as the world’s foreign investment growth point, pointing to some major investment deals made in sectors geared towards consumers — people with disposable income, or the middle-classes, in other words.

In November 2018, the Association of Southeast Asian Nations secretariat and UNCTAD reported an “all-time [foreign investment] high of $137 billion in 2017.”

But Asia’s relatively low incomes per capita and huge populations mean that sustained high growth will be required to expand and ensconce the region’s middle classes, with even relatively wealthy countries such as Malaysia struggling to escape the so-called “middle income” trap.

“You need economic growth first if you are to have sustainable and inclusive growth of middle income classes,” said Michael Forster, who warned against “benefits [of growth] tricking down in an unequal way,” as seen in the OECD member states in recent years.

Although most emerging economies in Asia are expected to continue to grow over the next 20 years or so, that growth could be slower than over the previous two decades and thus stunt middle class expansion.

UK-based consultancy Capital Economics predicted earlier this year that economic growth in China could to slow to 2% a year “within a decade” and suggested that though poorer countries such as India are likely to enjoy sustained high growth of up to 7%, “growth in the rest of Emerging Asia is likely to slow.”

“We expect growth to slow, as many countries have already undergone the relatively easy, catch-up phase of economic development,” said Leather, the Capital Economics economist.

And just as economic stresses are increasingly prompting political fallout in the West, Asia — where countries such as the Philippines, Indonesia and Thailand feature extremes of income inequality — will feel social and political pressures of its own unequal growth.

If Asia does undergo a continent-wide transition to European or Japanese living standards, it at least can take on board how the problems faced by those advanced, albeit stagnant, economies came to be — not to mention avoid any social unrest due to vast numbers of people dissatisfied at not making the leaps from subsistence to relative poverty to the consumer class.

But even then, increased wealth could bring about other challenges. Though the new middle classes have functioned as ancien régime guardians in some parts of Asia — where there has been several reversals for democratization in recent years — more often the expansion of middle classes leads to “pressures to govern in a more open manner, to be more democratic, to abolish corruption,” according to the OECD’s Forster.

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