April 13, 2014 6:43 pm

A slippery ladder: 2.8bn people on the brink

The precarious rise from poverty of millions in the emerging world
The Fragile Middle

Muljoko, a 27-year-old cleaner who works in one of Jakarta’s gleaming office towers, has all the trappings of a newly minted member of the middle class. He owns a motorcycle, slings a Sony smartphone and has a futuristic-looking phone-watch strapped to his wrist that he uses to text friends during working hours.

He is infinitely better off than when he was growing up in an impoverished farming village in southern Sumatra. Like millions around the world over the past three decades, Muljoko has risen out of poverty and is now a proud member of Asia’s emerging urban middle class.

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And yet, a closer look at his finances – and his aspirations – reveals that his place in the middle class is much more fragile than it seems.

Muljoko earns Jakarta’s minimum wage of Rp2.4m a month, meaning he lives off the equivalent of $7 a day. Roughly half of that goes to pay for food and the small boarding-house room he shares with his younger brother. After covering fuel and maintenance costs for the motorbike, he is left with as little as Rp500,000 ($44) – or less than $1.50 a day – to cover any discretionary spending, send money home to his family in Sumatra, or save for an all-important wedding.

It is no wonder Muljoko frets about the future. He worries about what he would do if he were confronted with a family medical emergency and how his earnings would stretch if he were to marry and have a family. By the Asian Development Bank’s standard definition of middle class – earning between $2 and $20 a day – Muljoko is a member in good standing. Yet he feels anything but.

“I don’t feel secure,” he says.

In that, the young Indonesian is emblematic of a group increasingly in focus as emerging economies slow. For all the talk of a new middle class, Muljoko is in fact part of what is better described as the world’s fragile middle: the almost 3bn people in the developing world surviving on between $2 and $10 per day, putting them above the poverty line but often still struggling for the financial security that is a middle class hallmark.

There is no doubt the world is less poor than it once was or that decades of rapid growth have created millions of consumers around the developing world. In 1990 an estimated 1.9bn people, or more than a third of the world’s population, survived on less than $1.25 a day, according to the World Bank. By 2010 that figure had fallen to 1.2bn, less than a fifth of the people on earth.

Developing-country growth could be 2-2.5 percentage points weaker than it was during the pre-crisis boom period

- World Bank

In the 25 years since the fall of the Berlin Wall those earning between $2 and $10 a day have been the biggest beneficiaries of globalisation. The rich world may be engaged in a debate about rising inequality, but the rapid economic growth in China and other developing countries has made the world more equal, as Branko Milanovic, one of the world’s leading authorities on inequality, has written.

In China, India and sub-Saharan Africa, robust economic growth has helped create a vast class of consumers, attracting multinational companies intent on selling them products that would have been out of reach not many years ago: mobile phones, beer, snacks and a host of household goods.

But put in a global context, the number of solidly middle-class people remains small, while the fragile middle has grown exponentially.

A Financial Times analysis of more than 30 years of World Bank data from 122 countries in the developing world illustrates this change in fortunes. As poverty has fallen, the number of people clustered in a narrow band above the poverty line has grown. But only a relatively small number of people tend to make it beyond that. The result is that four in 10 of the word’s people now live in its fragile middle.

FT Series: The Fragile Middle

Data graphic

Fragile middle

Data show 2.8 billion people in the developing world sit just above the poverty line, at risk of slipping back as emerging market economies slow

“More of humanity lives in that grouping than any other grouping,” says Homi Kharas, an economist at the Brookings Institution think-tank, who is one of the world’s leading experts on the rise of an emerging-markets middle class, a status that he says really begins at $10 a day. “It is larger than the middle class. It is larger than the rich. It is larger than the poor. The whole objective ought to be moving those people into the middle class.”

In 2010, the figures for which are the latest available, 40 per cent of the world’s population – 2.8bn people – lived on $2-$10 a day (measured in 2005 purchasing power parity terms). In the developing countries, there were 2.4bn people surviving on less than $2 a day and just 662m earning more than $10 a day, according to the FT analysis.

The numbers reflect a remarkable shift. In 1981, 58 per cent of the world’s population lived on less than $2 a day. Just 20 per cent of the world – 930m people – earned $2-$10 a day.

But extending the gains is becoming harder now that the great emerging-market growth spurt of the past 30 years appears to many to be coming to an end. As growth slows, the rise of an emerging-market middle class may look less inevitable. In a paper presented last week, World Bank economists warned that “developing-country growth could be 2-2.5 percentage points weaker than it was during the pre-crisis boom period”.

. . .

According to Kaushik Basu, chief economist of the World Bank, even if the developing world delivered the above-average growth that it did in the past 20 years it is unlikely that the bank would meet its goal of effectively eliminating extreme poverty by 2030.

More worrying is the possibility that a prolonged period of slow growth would erode the gains of recent decades. How vulnerable would those who have risen out of poverty be to sliding back into it?

“That’s a very good question,” Mr Basu says. “And I think they are still very vulnerable.”

Decades of success have led to a tendency to think of the fight against poverty as a one-way path: people move up the economic ladder and rarely slip back. Yet in many developing countries there remains a huge churn between those above and just below the poverty line each year. Incomes in rural India remain vulnerable to a bad harvest, so the march in and out of poverty is linked intimately with the monsoons. In Indonesia 55 per cent of the poor in any year are likely to have been living above the poverty line the year before, according to the World Bank.

Some development economists argue that improved social safety nets in countries such as Brazil ensure that those who rise out of poverty are less likely to return than they were even a decade ago. But those safety nets have large holes.

The double-digit contraction the Indonesian economy saw in 1998 amid the Asian financial crisis and the end of the 34-year rule of strongman Suharto sent millions sliding back into poverty. Strong growth in recent years has put Indonesia on a firmer footing. But a vast portion of the population remains vulnerable. In 2010 111m of Indonesia’s 240m people still lived on less than $2 a day. A further 125m people existed on $2-$10 a day.

While a few hundred tycoons control much of its wealth, 99 per cent of businesses in Indonesia are small and micro enterprises. And even if many of the people behind them have technically risen into the middle class, they remain vulnerable to shocks.

FT Series

The Fragile Middle

Fragile Middle

Millions in emerging markets have in the past 30 years moved from poverty into the consuming middle classes. But with growth slowing, their fates are now one of the biggest challenges confronting governments

Rasyad Parinduri, an economist at Nottingham Business School’s campus in Malaysia, calls the noodle hawkers and family store owners who make up much of the Indonesian economy “subsistence entrepreneurs”. In a recent study he found that the death of a family member in the preceding five years reduced their assets by an average of 30 per cent.

Because the ranks of the fragile middle are now too big to ignore, its members are driving change across the developing world. In big democracies such as India or Indonesia – both of which are in the middle of landmark elections – polls show voters gravitating towards candidates promising good governance, reform and a brighter economic future. In Brazil, where the economy is facing a period of slow growth and rising inflation, the fragile middle has become increasingly restless, as shown by riots last summer that began with a communal paroxysm over poor public transport.

China’s leaders are facing the existential challenge of keeping their own fragile middle happy as they try to rebalance the economy. Recent announcements out of Beijing have focused on providing affordable housing, residence permits and better transport infrastructure catering for the migrant workers who, though they have benefited from China’s boom, have also been squeezed by rising prices and lack of access to public education or healthcare.

Mr Basu remains optimistic that something close to the recent patterns of growth will eventually return to the developing world. But he is also wary of risks that could set back years of progress: the slowing Chinese economy, new technologies such as robots and 3D printers, and a world where wages represent a falling share of gross domestic product.

The world is at an inflection point, he says, one that it may not quite have registered. “I think it is a very important moment in global economic history,” Mr Basu says. “But it is a very strange moment because the biggest underlying challenges are not the most visible challenges.”

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Letter in response to this article:

A new ecosystem is now required / From Mr Rajiv Girotra

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