Middle-class lifestyles start with $ 10 per person and day
For the first time in history, more than half the world’s population belongs to the middle class, freed from the spectre of poverty. Although Covid-19 has temporarily slowed the expansion of the middle class, Homi Kharas of the Washington-based Brookings Institution expects it to continue growing once the world economy recovers. He assessed matters in a D+C/E+Z interview.
What defines the middle class? Is this mainly an economic grouping, or is the definition broader than that?We need to differentiate between a definition and a measurement. The middle class is defined as a group of people which, while diverse, shares common features. Middle-class people share values of hard work, thrift meritocracy and individual responsibility. They are far enough away from the poverty line to be able to make choices to maximise their satisfaction and prospects. Unlike poor people who face day-to-day subsistence and have few options and unlike rich people who can generally buy whatever they want, middle-class people make economically based choices. They aim not just for material consumption, but also for enjoying life, appreciating leisure and art and beauty. While this definition is fairly loose, if we want to talk about the evolution of this group we need some kind of measurement. The most common measurement metric is an expenditure range. We use expenditure rather than income because expenditure is a more accurate measure of standard of living. Think of college students: they earn little or no money, yet they are independent, certainly not poor, and can borrow money and spend it. Expenditure is a much better measure of their material wellbeing than income. We originally chose an expenditure range of $ 10 to $ 100 per person per day, using 2005 purchasing power parity (PPP) dollars, to measure the middle class. The metric later shifted to $ 11 to $ 110 per person per day using 2011 PPP dollars, but it is the same in terms of purchasing power. You want a metric that is constant, so that you can compare expenditures across countries and across time.
Where does this specific range come from?The basic idea of this range is to set the lower end at the level where people have money left over for discretionary spending and are not in danger of falling into poverty. The upper end is set where people no longer have to give much thought to trade-offs in their spending. This particular range has historical origins. But interestingly, the same range – or its equivalent in local currencies – appears at different points in history and at different places in the world. The earliest middle-class group consisted of clerks in Victorian England who were hired by banks to facilitate factory owners’ purchases of machinery during the industrial revolution. They earned the equivalent of about $ 10 per person per day in 2005 PPP dollars. Similarly, when the UK first introduced an income tax, the authorities wanted to tax only people with middle-class living standards and above. They set the minimum income level at which the tax was levied at the equivalent of $ 10 per person per day in 2005 PPP dollars. Again, in Latin America policymakers looked into the income or expenditure level at which a person would have a reasonable chance of not falling into poverty over a three year period. That turned out to be the equivalent of $ 10 per person per day in 2005 PPP dollars. The poverty line in the US was also set at around that range. In India, too, a national commission established a benchmark for the middle class. It turned out to be the equivalent of $ 10 per person per day. The lower end is the number that says, “you are not considered poor if you have at least this amount.” Having a range also permits us to make comparisons across geography and across time. We are able to trace the development of the middle class from the 19th century to today.
The composition of what people buy was totally different in the 19th century compared to today. And price levels differ widely among countries today. How do statisticians account for these differences when making comparisons?The amount of money needed for material wellbeing has stayed the same, once one takes currency differences into account. Of course the basket of consumption items differs from country to country. But essentially, all people buy food, clothes, housing and transport. Once they reach middle class, they also consider buying vacations and entertainment. The basics of what people need have remained the same. As for price differences across countries, there are global studies that compare the prices of goods and services. The International Comparison Programme collects prices for a selection of essential goods and services, and these data are used to create an index that enables comparisons.
In 2017 you forecasted that by 2022, 170 million people would join the middle class every year. Is that still your expectation, despite the pandemic?Well, what has changed temporarily is the rate of growth of the middle class. After a brief slowdown due toCovid-19, I think the growth trend will pick up again and will hold over time. Covid-19 has probably set back the growth of the middle class by two to three years. Nonetheless, we still have more than half of the people on earth in the middle class or richer. According to the World Bank, about 50 % of the world population have a purchasing power of $ 5,50 or more, not $ 10. Yes, but its numbers do not reflect full per capita spending in each country. For example, in India, the Bank relies on household surveys that only capture one-third of total spending in the national accounts. My methodology is, I believe, better because it makes an adjustment for such gaps. The important point is that, in 1820 the middle class was only about one percent of the world’s population, and now, 200 years later, it represents the majority of the world’s population. That is an extraordinary development, which at its root has been caused by technology, and technological development continues apace. So today you still have hundreds of millions of people joining the middle class every year, mostly in Asia. You see big advances in education and life expectancy for these people. They work hard and have the ability to make a better life for themselves and their families. Covid-19 will probably actually shrink the middle class in 2020. We expect about 120 million people to fall out of the middle class in 2020 compared to 2019. Also, we expect that about 170 million fewer people will have joined the middle class in 2020 compared to what might have been the case without Corona. So in all, Covid-19 might be responsible for something close to 300 million people not being in the middle class in 2020 compared to what might have been without Covid-19. However, that effect will disappear fairly quickly. Hopefully by 2021 or 2022 the middle class will be back on the same growth trajectory as before. This group has been squeezed, but it will bounce back.
What are the political implications of the global growth of the middle class?Generally, middle-class people try to ensure that their government delivers for them. They tend to strive for independence, so they favour private property, saving for the future and maximising personal choices. The middle class also favours government provision of health and education. It aims for economic safety and therefore pushes for social protections such as pensions and labour rights. The middle class champions women’s rights; the earliest suffragettes were from the middle class. The middle class also usually favours free trade, which broadens consumers’ choices. The first political victory for the middle class was the repeal of the Corn Laws in 19th century England. Those laws imposed tariffs on imported grain which kept prices high, thereby favouring landowners at the expense of consumers. The middle class fought hard to get those laws repealed.
What differences are emerging within the middle class?Today we are seeing a bit of a fracturing of the middle class. The Covid-19 pandemic highlighted the division between the part of the middle class which is college educated and able to work remotely, and the part that is blue collar and cannot work from home. The interests of these two segments are starting to diverge. Certainly they are having different lived experiences. For example in the United States, the blue-collar segment has seen a higher incidence of alcohol and drug poisoning and suicides, the so-called deaths of despair. Among this small group we also see increases in illness, reported physical pain, mental ill health and reduced life expectancy.
Is this divergence within the middle class starting to cast doubt on using the term “middle class” to describe everyone falling within in a broad range of expenditure?It could be that the interests of those with college educations and those without are quite different. So some now argue that education level should become a metric for measuring the middle class. I would prefer to keep the broader definition but come up with a different way to describe the lifestyles of different segments of the middle class. The divergence in lived experience may turn out to be temporary. It could be that right now some people have opportunities in the digital economy that others don’t have, but that in 10 or 15 years everyone will have these opportunities. This is a technology phenomenon. A new technology tends to benefit certain people first, before the benefits are spread throughout society. Consider the introduction of electricity: at first it was only for the wealthy, and now it is part of the middle-class lifestyle.
The middle classes are growing faster in poor countries than in rich ones. Is that disparity fuelling resentment among some parts of the middle class in advanced countries?There is a level of saturation of the middle classes in developed countries, which helps to explain why the growth of the middle classes there is slower than the growth in low-income countries. The growth of the middle class in one place has been associated historically with more opportunities for the middle class in other places. The Marshall Plan in Europe helped the middle class in Europe, but also in the United States. As markets grow, everyone benefits. This is one of the great features of economics as opposed to politics. In economics, when your neighbour is better off, then you are better off. In politics, when your neighbour is better off, you might not be better off. Politics is more a zero-sum game than economics. The great hope is that this will be recognised. So for example, if you are in a developed country and your pension fund holds stock in Apple, you have to understand that when Apple profits from its sales in China and India that this also benefits you as an indirect shareholder. All the big brands are big brands because they can sell to billions of people in the global middle class. I could easily argue that a great part of the expansion of housing, higher education, health care, finance, insurance and many other services in the developed world is linked to the ability to build on the prosperity that has taken place because of trade with developing countries. Certainly with trade and with technological development there are transition costs. It is hard to say how long a transition will take and how politics will evolve. This points to the central fact that paying more attention to transition costs, including adapting to new technologies, is vital in a rapidly changing world.
Homi Kharas is a senior fellow and deputy director in the Global Economy and Development Programme at the Brookings Institution in Washington, DC.[email protected]
Putdate 20 June 11:40 am Frankfurt time: We only asked the question about why the World Bank’s estimate of global per-capita incomes diverges from the one of the Brookings institution yesterday, when the interview had already been posted. Homi Kharas responded fast.
Protecting forests: Are early warning systems effective?
Forests play an indispensable role in bolstering biodiversity, supporting a stable climate, and providing sustainable livelihoods. Yet, the earth is rapidly losing its forests. In the last 30 years, the world has lost 180 million hectares of forest—greater than the total area of Libya. Forests, especially tropical rainforests, are often cleared by illegal operators to acquire open land for large-scale farming and mining operations, which poses a serious threat to global efforts to reduce deforestation.
Early detection is a critical element of deforestation control efforts. Artificial satellites have played a crucial role here. Using regularly updated optical satellite data, such as LANDSAT, which captures the reflection of sunlight from the ground surface, several early warning systems (EWS) for deforestation have been launched since the 2000s to provide timely information on forest changes for regulators and civil society groups. EWS are now widely used in tropical countries to monitor forest protection. The Global Land Analysis and Discovery (GLAD) laboratory in the Department of Geographical Sciences at the University of Maryland maintains one EWS with publicly available deforestation data. Unfortunately, there is a severe drawback to optical satellite data. As we discuss in our chapter in the forthcoming book “Breakthrough: The Promise of Frontier Technologies for Sustainable Development,” detecting deforestation by optical satellites is substantially harder during the rainy season when cloud coverage is high. This is a serious problem because most of the illegal destruction takes place during the rainy season in the Brazilian Amazon to avoid detection, according to the Brazilian regulatory agency for illegal deforestation.
One solution is to use “radar eyes” in place of “optical eyes.” Radar satellites capture the image of the earth’s surface by catching the reflection of radar waves that the satellite itself generates. These waves can penetrate thick clouds, allowing researchers to identify whether trees exist on land regardless of cloud coverage. Japan’s ALOS-2 radar satellite, for example, can detect 1.5 to 10 times more deforestation than optical satellites during the rainy season in the Amazon area (November to March). Building on these technological advances, a new EWS called JJ-FAST (JICA-JAXA Forest Early Warning System in the Tropics), utilizing the ALOS-2 radar data, was launched in 2016 to provide data on deforestation in tropical countries.
While radar-based EWS can capture deforestation more timely and accurately during the rainy season, has it reduced tropical deforestation? To answer this question, we look at data from the Brazilian Amazon, the only county to date which has used radar-based EWS for deforestation monitoring. We hope that the quantitative evidence provided here will motivate other countries to employ this method to help combat deforestation.
Figure 1 conceptualizes how radar satellite EWS can help prevent deforestation. Suppose there are two forest areas of similar size in the Amazon. In the last three months, say February to April, Area 1 and Area 2 had the same amount of deforestation, measured by area, according to optical data (GLAD). However, images provided by radar data (JJ-FAST) indicate that Area 1 had more extensive deforestation than Area 2. When forest agencies analyze the data, Area 1 is likely to attract more attention, which means that the illegal operators in Area 1 face a higher probability of arrest, incentivizing illegal operators to stop logging and escape. As a result, the deforestation of Area 1 should be smaller in May. Therefore, if radar-based EWS reduces deforestation, there should be a negative correlation between the amount of deforestation detected by radar (JJ-FAST) and deforestation in the subsequent months.
Figure 1. Early warning systems and legal enforcement
Source: Authors
Our data comes from three raster images covering the Brazilian Amazon in 2019—monthly radar data (JJ-FAST), monthly optical data (GLAD), and average monthly cloud cover.
Figure 2.1. GLAD Alerts raster image
Figure 2.2. JJ-FAST raster image
Note: Two images above show the raster data of deforestation by GLAD and JJ-FAST for the same part of the Amazon in February 2019 (rainy season). Cells with darker colors contain larger detected deforestations.Source: Authors
To investigate whether we can observe a statistically significant negative correlation between the deforestation detected by radar satellite and the deforestation in the following month(s), we estimate the following equation using OLS (ordinary least squares):
Where Yjt is the deforestation area in cell j in month t, reported by GLAD. JJjs is the deforestation detected by the JJ-FAST in the month of s in cell j. GLADjs is the deforestation recorded by GLAD. CLOUDjt is the cloud coverage. Our coefficient of interest is β, which is the correlation between JJ-FAST’s deforestation during three preceding months of t and Yjt. If β is negative and statistically significant, this means that the cells with higher deforestation recorded by JJ-FAST in the past three months have systematically lowered the deforestation record in the current month.
Table 1 reports the results. In sum, we observe that JJ-FAST monitoring significantly reduces deforestation in the Brazilian Amazon. The first column shows the results of the OLS estimation. As expected, the estimate on the effect of cloud coverage, δ, is negative and significant, indicating that higher cloud coverage is associated with a lower record of deforestation by GLAD. The estimate of β implies that a 1 km2 increase in deforestation, as detected by JJ-FAST, in the preceding three months reduces deforestation in the current month by 0.024 km2. To confirm the robustness of these results, we also report fixed effects results at the cell in the second column. With the fixed-effect estimation, the magnitude of the impact of JJ-FAST increases to 0.120.
Our quantitative investigation suggests that radar based EWS effectively reduces deforestation in the Brazilian Amazon. Although further analysis using data from other geographies is needed, our results highlight the important role new technologies can play in protecting global public goods.
Capturing Africa’s insurance potential for shared prosperity
Among the drivers of economic growth and development in emerging countries, insurance is often overlooked in favor of flashier sectors like technology or infrastructure. In fact, though, insurance is a behind-the-scenes factor driving growth at all levels of society, from family life to massive infrastructure projects to technology development. As discussed in my new report, expanding Africa’s lucrative insurance market may be key to creating inclusive prosperity in the region.
Notably, increased penetration rates for insurance throughout African markets are directly connected to Africa’s overall development: Indeed, as Das, Davies, and Podpiera (2003) show, insurance can have positive effects on growth through six mechanisms: improving financial stability for businesses and households; mobilizing savings for public and private investment; reducing pressure on the government to provide public goods such as pensions; encouraging trade and entrepreneurship; mitigating risks and enhanced diversification; and improving social living standards. Other scholars have identified insurance premium thresholds associated with positive economic growth in Africa. Studies of Rwanda’s Universal Health Coverage (UHC) found that increased enrollment was accompanied by higher utilization of health facilities as well a higher presence of skilled-birth attendants.
Expanding Africa’s lucrative insurance market may be key to creating inclusive prosperity in the region.
Despite these advantages, Africa’s aggregate insurance penetration rate in 2019 was only 2.78 percent, compared to the global average insurance penetration rate of 7.23 percent. With increased entry, participation, and expansion from traditional insurance companies and new microinsurance companies (as well as reinsurance companies), the potential for growth across the continent is immense. Recent disruptive events—including an increasing number of natural disasters, political upheavals, and economic disruptions from current and future pandemics—will continue to increase demand and foster rapid growth throughout this sector, particularly of digital insurance platforms.
What does Africa’s insurance market look like now?
The insurance sector is comprised of three subcategories: life insurance, nonlife insurance, and reinsurance. African countries have grown in each of these market segments at varying paces, following their own diverse growth patterns. For example, South Africa’s market is dominated by life insurance premiums, while other countries, like Kenya, Nigeria, and Tunisia, have a much higher volume of nonlife insurance premiums than life ones.
These patterns are suggestive of future trends and point to vast, untapped markets for companies seeking to deliver insurance products that are both affordable and well suited to the mass market. Indeed, just five countries house about 84 percent of the estimated $68.15 billion total value of the continent’s insurance market. South Africa is the leader with about 70 percent of the total market share, followed by Morocco, Kenya, Egypt, and Nigeria. In most other African markets, though, the penetration rate remains below 2 percent.
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More specifically, life insurance market penetration has been slow because of the demand for specialized risk-management capacities and heavy investment in security and information gathering, which has left the sector fragmented and dependent on foreign investment. Five countries (South Africa, Morocco, Namibia, Kenya, and Egypt) comprise 92 percent of the life insurance market on the continent. Although McKinsey expressed concern about South Africa’s life insurance market losing ground given the COVID-19 crisis, low market penetration combined with expected increased consumer and business spending by 2030 will continue to create plenty of opportunities in less developed markets across the continent.
Key to the sector’s growth and expansion is the region’s rapidly growing middle class, who can particularly find greater household stability with life insurance. As this segment of the population becomes increasingly aware of the value insurance provides to their households and businesses, they will be more inclined to spend more of their disposable incomes on insurance: In fact, according to an Ernst and Young 2016 survey of African insurance companies, increased earnings in households and businesses were the leading driver of increased insurance premiums.
The pandemic affords an opportunity in the form of consolidation: Unsustainable and inefficient players may be forced out of the market, facilitating innovation, healthy competition among thriving companies, and better coverage. Other experts suggest that commercial insurance for businesses will outpace the growth of individual insurance coverage over the next year, partly because of increasing reinsurance rates. The pandemic has also accelerated the digitalization of local insurance companies, opening the door for a more accessible and inclusive insurance industry in the long term, which could be fostered by a conducive policy environment.
Technology adoption and innovation are the keys to growth in the African insurance industry. Microinsurance could also change the name of the game, as it can reach Africa’s rising middle class through small-scale, low-cost, low-risk products. MicroEnsure, which partners with telecommunications firms, is an example of a successful microfinance venture that offers basic health and life insurance coverage through a free add-on to customers’ existing mobile phone services. Furthermore, micro-health insurance products like Jamii have also entered the market, bringing affordable coverage to low-income populations. Similarly, health financing has been radically changed by mobile and online platforms: M-Tiba facilitates digital management of both public and private health insurance policies through partnerships with governments and providers.
Policy recommendations for managing risks
Recognizing the role the insurance market can play in development, African governments are also working to improve the regulatory climate for insurance investors. Diversification, partnership, and cross-collaboration among insurers and banks is the foundation required to create economies of scale and increase revenues for both sectors. These partnerships, coupled with accelerated digitization to online and mobile platforms, have the potential to increase cost efficiencies and profit margins throughout Africa’s insurance sector—completely transforming the insurance industry.
Africa’s underdeveloped insurance market represents an opportunity both for players in the insurance sector and for African societies in general.
While opportunities abound, there are also risks and challenges for the industry to overcome, including COVID-19 and future pandemics; a decentralized cross-country market with regulatory barriers; gaps in regulatory enforcement; a shortage of technical human capital; low demand for insurance; and market volatility. Thankfully, investment mitigation strategies can help overcome these hurdles: For example, companies will need to invest in both human capital (training and developing qualified staff) and information technologies, adapt to trends in the market, and pursue innovative strategies. Partnerships between companies need to be focused on improving product differentiation, working with government to fill regulatory gaps and barriers, and increasing product awareness in the marketplace.
Africa’s underdeveloped insurance market represents an opportunity both for players in the insurance sector and for African societies in general. The first credible and convenient insurance providers will reap enormous rewards as this sector develops—becoming pioneers in the region. Moreover, African households and businesses can benefit from the reduced risks and increased stability that insurance products can provide.
PHILIPPINES: Duterte looks first to his succession plans, not legacy
At a press conference yesterday, President Rodrigo Duterte said he should be considered as a candidate for the vice-presidency in 2022. The statement is likely a bluff to create political noise that keeps him relevant through the next few months. For Duterte and many of… Become a member to read the rest of this […]
What role should the SEC play in ESG investing?
Environmental Social Governance (ESG) issues continue to climb in importance for many investors and policy makers. What role should public policy and financial regulation play in response to ESG concerns? These questions are of particular importance for the Securities and Exchange Commission (SEC) tasked with protecting America’s capital markets and American investors.
SEC Commissioner Hester Peirce will share her perspective on these issues during a Brookings event on July 20. The conversation will continue with a panel representing investors and the public interest who will react to Commissioner Peirce and share their own views.
Viewers can submit questions for speakers by emailing events@brookings.edu or via Twitter using #ESGInvesting.
Dirty money in offshore banks
Billions of dollars and other currencies are in tax havens outside the owner’s country of origin, allowing individuals and corporations to evade taxation by their home governments. Since many of these offshore accounts are secret, it’s difficult to trace what’s legal and what is not. In new research, Brookings expert Matthew Collin, a David M. Rubenstein Fellow in Global Economy and Development, examines a leaked dataset from a bank in the Isle of Man to find some interesting discoveries about who owns these accounts. In this conversation, Collin discusses his findings and some policy ideas to address the problem of dirty money. Also on this episode, Governance Studies Senior Fellow Sarah Binder talks about what’s happening in Congress, with a look at five things you need to know about the road ahead for President Biden’s infrastructure plans in Congress. You can also listen to this audio segment on SoundCloud.
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