Asia's Consumers Come Alive

A decade after its emergence was forecast by investment bankers and economists, Asia's middle class is finally starting to make itself felt, according to a new report by the Asian Development Bank, and appears increasingly likely to assume the traditional role of the United States and Europe as primary global consumers who will help to rebalance the global economy.

The report, built on data from 22 countries across the region, was published as a special chapter in Key Indicators for Asia and the Pacific 2010, the ADB's annual statistical publication. Asia's consumers, according to the 55-page special section, can be expected to spend US$32 trillion annually by 2030, some 54 percent of worldwide consumer spending. China now is famously the world's largest car market and India's the fastest growing.

It is a class that is growing at astonishing speed. While the emerging middle class made up only 23 percent of developing Asia's population in 1990, it more than doubled to 56 percent in the 18 years to 2008, rising from 565 million in 1990 to 1.9 billion over the period. China added more than 800 million people to the middle class during the period, increasing aggregate annual middle-class spending by more than $1.8 trillion. India followed, with 205 million joining the middle class and US$256 billion in additional middle-class annual expenditure. Aggregate annual expenditure/income increased more than four-fold, from US$721 billion to US$3.3 trillion.

At that, according to the report, they remain cautious spenders. For more than a decade, as companies catering to the consumer have watched the growth of Asia's middle class, they have vainly tried to figure out how to separate them from their money. Saving rates remain very high all the way across Asia. Per-capita middle-class spending varies greatly across countries, with North America's legendary consumers accounting for 26 percent of global middle-class spending but only 18 percent of the world's middle class. By contrast, Asia's middle class account for 28 percent of the global middle class but they only do 23 percent of middle class spending.

In large measure that is because across the region, social safety nets, including social security and universal health care, remain substandard, particularly in relation to the Eurozone. In China's case, according to the report, the government could use the large profits of state-owned enterprises to reduce labor taxes and employment fees, and to accelerate banking reforms to ease access to credit for small and medium enterprises (SMEs).

Interestingly, the report notes that since Asia's middle class consumers are poorer and spend much less than their western counterparts, companies have had to develop affordable new products and services. "This has spawned a great deal of innovation in such varied areas as consumer goods, personal care products, banking, insurance, health care products and services, and information technology among Asian firms. This innovation in turn boosted economic growth, setting off a virtuous cycle of growth, consumption, innovation, and more growth."

The report also notes that the yuan is "alleged to be undervalued relative to the US dollar," so that Chinese goods are cheap to foreigners and foreign goods are artificially expensive to the Chinese, which ought to be music to western policymakers' ears. The Americans in particular have for years been jawboning the Chinese into changing their exchange rate policy, largely without result.

Nonetheless, the report says, "as developing Asia's people secure their middle-class status, its emerging consumers are very much expected to become the next global consumers and assume the traditional role of the US and European middle classes. Moreover, given the call for "rebalancing" Asian economies from export-led to domestic-led consumption growth—to reduce exposure to negative shocks from regional economies outside of Asia—it is expected that this process will depend highly on the emergence and expansion of the Asian middle class. This can create more stable and efficient poverty reduction and economic development."

The report uses an absolute definition of middle-class per capita consumption of US$2 to US$20 per day. And, the ADB's economists note, nearly 1.5 billion Asians continue to live on less than US$2 per day. Moreover, two thirds of those defined as middle class, in fact, are clustered around the lower end of the scale, spending between US$2 to US$4 per day, "leaving them highly vulnerable to slipping back into poverty due to economic shocks."

Despite that, the growth of the middle class and policies for promoting it is important for the stabilization of society itself, according to economic historians quoted by the ADB, pointing out that societies with small middle classes are generally polarized and find it difficult to reach consensus on economic issues. Societies with larger middle classes are much less polarized and can more easily reach on a broad range of issues and decisions relative to economic growth.

It is thus vital for governments across the region to facilitate economic growth by allowing society to agree on the provision of public goods critical to economic development. These include goods such as public education, public health services and physical infrastructure.

In societies without a middle-class consensus, the elites tend to underinvest in such goods and services for fear they will empower opposing factions. There is probably no better example on the planet than North Korea and Burma, although the ADB judiciously doesn't point that out.

In India, the emergence of a middle class numbering from 100 million to 250 million has drastically changed the country's class structure from one with a small elite and an enormous impoverished class to one dominated by a large intermediate class, the report notes. With the emergence of so-called "have-somes" over the have-nots, the middle class can provide the entrepreneurs who create employment and productivity growth as well as foster a culture in which the values of accumulation of human capital through education and savings are critical to economic growth.

Third, "with its willingness and ability to pay extra for higher-quality products, the middle class drives demand for high-quality consumer goods, the production of which typically presents increasing returns to scale. This encourages firms to invest in production and marketing, raising income levels for everyone."

The five countries with the largest middle class by percentage of population share are Azerbaijan, Malaysia, Thailand, Kazakhstan, and Georgia. The five smallest are Bangladesh, Nepal, Laos, Uzbekistan and India although in absolute size India's middle class dwarfs the other countries in the region. Armenia, China and Vietnam have made the greatest progress in increasing the population share of the middle class.

That isn't to say these rising incomes are an unalloyed blessing. Environmental and ecological damage, rising obesity, increasing chronic, non-communicable, middle-class diseases such as diabetes, cardiovascular disease, and cancer, are all growing problems.

Currently, the average Indian uses only 40 percent of the water an average American uses. Given the severe scarcity of water in many parts of the region, the report notes, "there are potentially large consequences if the average Chinese or Indian increases his or her water consumption to the level of the American consumer, unless policies effectively balance water pricing with inclusive and sustainable growth concerns."

Although carbon dioxide emissions per capita – considered to be the principal factor in climate change – are dwarfed by those in the Eurozone and North America, they are increasing at a much faster rate.

"In large part, the rising stress on the environment reflects a policy failure," the report notes. "For instance, water subsidies to urban consumers and to cultivators often result in overconsumption of water, while fuel (diesel) subsidies in many countries exacerbate the problem of greenhouse emissions; clearly, there is a strong role for policy to help mitigate such environmental stresses, while facilitating adaptation to climate changes."

The urban middle class has become more sedentary as it comes to rely on motor transport, raising levels obesity, which is also being brought about by dramatic changes in diet toward foods rich in fat and low on fiber and micronutrients, driven partly by the availability and pricing of processed foods. The rise in obesity is closely connected to the rise in diabetes, with many Asian countries facing epidemic levels. India and China now have the largest absolute number of diabetics in the world, 51million and 43 million respectively. The incidence of diabetes in Malaysia, Sri Lanka and South Korea is now as large as in developed countries such as the US, Germany, Canada and Spain. Cardiovascular deaths are only expected to increase as incomes rise.