Whilst we in India are dealing with a downturn in our own middle class’s fortunes (click here for our 23rd Nov ’24 blog on this subject), it turns out that we are not alone. In fact, as per this article in The Economist, India is in better shape than the rest of developing Asia. Says The Economist: “Asia’s middle class is not growing as it once did. Between, 1991 and 2014 the average annual growth rate in the number of middle class households was 6%…In the past decade, it has slowed to 2%. In a few countries, including China, it has shrunk….
Throughout the 1990s and 2000s, an average of 19m households in Asia joined the middle each year. That acceleration tailed off over the 2010s…
Since 2021 just 12m households been added to the middle class per year, and the vast majority of the growth is coming from a single source: India.”
It is important to note that The Economist’s definition of middle class includes households making $3K (Rs 2.5 lakhs) to $25K (Rs 21 lakhs) per annum i.e. a range that most of us in India would agree is middle class by Indian standards as well.
So, what’s gone wrong in developing Asia? Why is Asia’s middle class under the pump? The first culprit appears to the Covid and the damage that inflicted on the informal sector in Asia: “A study from 2021 found that Indonesian workers who fell into informality because of the Asian financial crisis of 1997 suffered a lasting 32% drop in subsequent earnings. Covid-19 caused informal employment to rise by 5% point in Indonesia after 2020, to 61% of workers.”
Secondly, FDI into developing Asia has tailed off in the past decade and that has impacted job creation: “In the past decade FDI and exports have kept Vietnam’s middle class growing at an average 3% annual rate, faster than the regional average. But that is half the pace it grew at between 1990 and 2014.”
Thirdly, as in India so in the rest of developing Asia, countries have not been able to upskill their workers fast enough. The outcome is shortages of skilled labour: “Vietnam has struggled to train its workforce. Labour productivity lags peer countries and firms face shortages of skilled workers.”
A fourth factor appears to high food prices (which eat into disposable income) and high household debt burdens (which also eat into disposable income): “Even as real income growth has slowed in some places, higher inflation has created a perception of eroding living standards….Especially important is the price of food. In developing Asia it makes up a third of consumption compared to 9% in America. Food prices were mostly stable in 1990s and 2000s, until droughts caused food-price crises in 2007-08 and again in 2010-12. The surge never entirely reverted. Food prices were on average 46% higher during the 2010s than in the 2000s, in nominal terms, according to the UN. The war in Ukraine, and its disruption of grain markets, has had a painful effect. Average food prices have risen another 15% this decade, compared to the last…
Meanwhile in Thailand high-household debt strangles middle class borrowers.”
The remarkable thing about this piece in The Economist is how familiar these issues feel to us in India. And yet, there we were, living in the delusion that against all odds, the Indian middle class will keep firing decade after decade.
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