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A long-term view of COVID-19’s impact on the rise of the global consumer class

A long-term view of COVID-19’s impact on the rise of the global consumer class | Speevr

Wolfgang Fengler

Lead Country Economist, Southern Africa – World Bank

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Homi Kharas

Senior Fellow – Global Economy and Development, Center for Sustainable Development

COVID-19 has triggered the greatest global economic crisis since the end of World War II. It is important, however, to keep its impact in perspective and measure it against the long-term trends of steady economic progress in the world. Despite last year’s global economic meltdown, COVID-19 will only look like a blip in the steady expansion of the global consumer class, which we define as anyone earning more than $11 per day in 2011 PPP (or approximately $12 per day in 2017 PPP). In the long-term, the forces of demographic change and productivity growth are too strong to be substantially interrupted by a short-term crisis. Since 2003, when the number of poor and vulnerable people in the world probably peaked, the middle class ($11-110) has been growing fast. It is the dominant group in the consumer class; the upper class ( >$110) only includes some 200 million relatively wealthy people, although they do account for one-quarter of the total spending by the global consumer class (see Figure 1).
Figure 1. The growth of the global middle class seems unstoppable

Source: World Data Lab’s MarketPro, 2021 update
In 2019, we predicted that half the world—for the first time ever—would be part of the global consumer class, which combines the middle class and upper class. This also happened to be the first time half the world was older than 30 years. COVID-19 stopped the rise of the global middle class (and the global old age group) temporarily. However, due to Asia’s economic dynamism, the expansion of the global middle class is set to continue in the next two decades. 2020 and 2021 will likely be remembered as two of the most extraordinary years in the history of the global consumer class:

2020 has been the only year of decline since estimates of the global consumer class have been recorded. Despite population growth of around 80 million people, the global consumer class shrank by 75 million people compared to 2019.
2021 will likely be remembered as the year with the highest ever increase—175 million—of the global consumer class, most of which entered the middle class.

By the middle of 2021, the world economy, in the aggregate, will be basically where it was before COVID-19 hit everyone. Half the world is again spending more than $11 per day, half the world is spending less than $11 per day. The global consumer class is experiencing a V-shaped recovery. If the recovery continues, the global consumer class will reach 4 billion in 2022.
By the middle of 2021, the world economy, in the aggregate, will be basically where it was before COVID-19 hit everyone.
This also means that the group of poor and vulnerable will keep declining. In 2004, this group reached a historic peak of 4.4 billion people which has been unnoticed by the world community. Despite a global population group of 75 million people per year, the poor and vulnerable class will keep declining by an average of 70 million people per year. This means that we will be experiencing a fundamental reversal of global fortunes within one century. In 1950, 90 percent of the world were poor and vulnerable. Today, this stands at 50 percent and by 2040, the extreme poor and vulnerable will only represent 25 percent of the world’s population (Figure 1).
Consumer spending in 2030
By 2030, households around the world will spend an estimated $91 trillion (in 2017 PPP, it would be around $100 billion). This is almost 50 percent higher than in 2020. The drivers of these $100 trillion of consumer spending are almost equally the lower-middle class, the upper-middle class, and the upper class (representing the wealthy people). The breakdown and shifts are as follows:

Each segment of the consumer class should grow by approximately $10 trillion.
The largest spenders will be the 3.8 billion people in the lower middle class who will collectively spend an estimated $35 trillion (2011 PPP).
The upper-middle class and the upper class, people spending more than $50 per day, will number 1.4 billion and collectively spend over $50 trillion.
The poor and vulnerable will remain large in absolute numbers but will only account for $5 trillion or about 6 percent of total spending, having an ever more marginal economic weight.

Table 1. All major income groups will grow strongly until 2030—but the lower middle class spends most

 

Total spending
($ trillion, 2011 PPP)

Number of people
(in billion)
Average spending per person ($ thousand/year)

Upper Class
23 (+9)
0.3 (+0.1)
 70 (+0.8)

Upper Middle Class
27 (+9)
1.0 (+0.4)
 26 (+0.1)

Lower Middle Class
35 (+9)
3.8 (+0.9)
 9.4 (+0.2)

Poor & Vulnerable
5 (-0.7)
3.3 (-0.7)
 1.5 (+0.1)

TOTAL
91 (+27)
8.4 (+0.7)
 11 (+2.5)

Source: World Data Lab’s MarketPro; Note: in brackets you see the difference between 2030 and 2020
This means that the expansion of the global consumer class seems unstoppable (as long as we successfully manage climate change). Fifty years ago, middle class consumers lived almost exclusively in Western countries. Today, middle class consumers are almost everywhere and by 2030, there will be middle class dominance with 4.8 billion people (plus 335 million wealthy people). The global consumer class is also expanding because people live longer, especially in Asia, which also means that global consumers are becoming increasingly older. One year after the start of COVID-19, global consumer spending is recovering strongly. Even the worst pandemic has not been able to interrupt long-term shifts.

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Why are Saudi women suddenly starting to take jobs?

Why are Saudi women suddenly starting to take jobs? | Speevr

A previous blog showed the remarkable rise of Saudi female labor force participation over the last three years. In this blog, we want to look at what might explain this strong increase. Our analysis shows that the many reforms of the past years are likely to have played a substantial role, but that some of the increase—especially during the crisis—might have been circumstantial.

Jumana Alaref

Economist, Social Protection and Jobs Global Practice – World Bank

Johannes Koettl

Senior Economist, Social Protection and Labor Global Practice – World Bank

Research from other countries has indicated that policy—alongside better education for women and structural changes in the economy—plays a major role in explaining increases in female labor force participation. In the Organization for Economic Cooperation and Development (OECD) countries, the strongest expansion in the labor force participation of prime-aged women happened between 1980 and 2000 with an average increase of 12 percentage points. Most of this expansion can indeed be explained by the aforementioned factors.
Over the past few years, the Saudi Arabian government has made significant reforms to incentivize women to find employment and to protect them better on the job. These reforms also increased Saudi Arabia’s score in the World Bank Women, Business, and Law (WBL) database by almost 50 points (Figure 1) between 2016 and 2020. In parallel, female labor force participation rates improved at unprecedented rates, rising by 14 percentage points during the same time.

Areas of reforms include: allowing greater freedom of movement (travel abroad, having a passport, driving, and moving residences); forbidding gender-based discrimination in employment; abolishing requirement for segregation in the workplace; eliminating restrictions on women’s employment in industrial jobs, jobs that were deemed dangerous, and in jobs that require a night shift; making it easier for women to have their own businesses; forbidding the dismissal of women from jobs for maternity- or pregnancy-related reasons; equalizing retirement age between men and women; prohibiting gender-based discrimination in accessing financial services; and criminalizing sexual harassment in public and private sector workplaces.
Other reforms that are bearing fruit include expanding access to education for all Saudi women. In fact, Saudi women do better than Saudi men in the formal education system and have 7 percent higher enrollment in universities. Also, Saudi women strongly benefited from the expansion of the service sector in recent years. An explicit “Saudization” policy that incentivizes hiring of Saudi over expatriate workers has surely contributed to this development. As a result, in 2020, 26 percent of Saudi women worked in the wholesale and retail sector.
These reforms were indeed substantial and have made a major contribution to improving labor market outcomes for Saudi women, however, it is unlikely that they explain the full extent of the increase in women’s labor force participation rates in 2020—a year that was marked by the unfortunate departure of many women from the labor market in most countries of the world.

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While it is still early to provide definite answers, there is indication from recent data that Saudi women may have taken some of the jobs held by expatriate workers who left the country in the wake of the pandemic. Driven by major outflows of expatriate workers during the second and third quarters of 2020, it looks like female employment experienced some boost in sectors where expatriate employment was hardest hit (Figure 2). It seems that employers turned toward Saudi women to replace some of the missing expatriate workers when the economy reopened during the third quarter of 2020, particularly in sectors such as wholesale and retail, construction, manufacturing, and administrative and support service activities. However, this compensation is only partial and the Saudi economy is yet to recover from the unprecedented decline in the number of expatriate workers in the country.

Some Saudi women seem to be closer substitutes to expatriate workers than Saudi men. While both Saudi men and Saudi women are still paid, on average, more than twice the amount that expatriate workers receive, Saudi women are more willing to work at lower wages compared to men. Saudi men are paid 2.7 times the amount that expatriate workers receive. As for Saudi women, they are paid 2.2 times that amount.
Hence, the recent gains in Saudi women’s employment and labor force participation seem to be the result of a combination of past policy reforms and the circumstances of the pandemic, with the latter perhaps being a catalyst. An open question is how sustainable this will be in the future. In the past, the evidence was clear that there was not much substitution between Saudi and non-Saudi workers: Just like in other countries, there is little substitution in the labor market between natives and migrants. If this latest surge was driven by a temporary shortage of expatriate workers, it might evaporate in the future. Sustaining these large gains may require going further and addressing long-standing distortions that have kept the demand for Saudi labor low in the private sector, chief among them the large differences in wages and employment conditions between Saudis and non-Saudis, as well as gaps in the country’s training and skills development policies. Many further reforms to address these challenges are currently underway, like the abolishment of the kafala system and the introduction of free mobility for expatriate workers. Only time will tell if these and other reforms can sustain the gains made so far, or even expand on them.

Why the extent of intra-African trade is much higher than commonly believed—and what this means for the AfCFTA

Why the extent of intra-African trade is much higher than commonly believed—and what this means for the AfCFTA | Speevr

Intra-African trade is widely perceived as low compared to other regions of the world, an argument made ad nauseum in both academic and policymaking circles. Some observers are especially disparaging about its potential. One recent textbook on African economic development (Cramer et al., 2020:65) claims that:
“Despite decades of negotiations and agreements within subregions and RECs in Africa, intra-African trade remains a tiny proportion of the continent’s overall trade. … [While] greater intra-African trade may be rhetorically appealing on grounds of economic nationalism or South–South solidarity, as a blueprint for accelerated development it is a fantasy.”
We beg to differ and argue that intra-African trade has much greater economic significance than is commonly believed. The orthodox narrative is driven by three errors: 1) The comparisons made with other regional blocks are frequently misleading and do not compare like with like; 2) the picture of intra-African trade is distorted by large-scale commodity exports to destinations outside the continent; and 3) there is a systematic failure to recognize the scale of informal cross-border trade.
Comparisons made with other regional blocks are frequently misleading and do not compare like with like

The African continent is often compared in a poor light vis-à-vis other continents in terms of the extent of intraregional trade. On a continental level, this argument, at first sight, seems true given the low percentage of intra-African trade of the region’s total trade (Figure 1). However, if we focus on subgroupings within these continental blocks, their intraregional trade figures are suddenly not so impressive. Compared to the Asian average, for instance, Central and Southern Asia are relatively less prosperous regions with less industrialized and diversified economies. Likewise, the ASEAN (Association of Southeast Asian Nations) grouping straddles countries with highly diverging levels of income and economic diversification—and with different types of economic integration into the global economy. For example, only 9 percent of Vietnam’s trade is currently with other ASEAN member states.

Conversely, in a similar breakdown of African trade figures, we find some subsets of African countries (particularly the landlocked ones) with significantly higher levels of dependence on intraregional trade than the continental average (Figure 2). In fact, what actually drags down the African average of intraregional trade are the continent’s larger economies—Egypt, Nigeria, and South Africa—distorting the picture of the importance of intra-African trade for the rest of the continent. For each of these countries, the reason for the low dependence on the African market varies: As a country with long-standing market access agreements with the European Union, Egypt has in the past prioritized the markets of its northern neighbors; for Nigeria, it reflects the country’s oil wealth; and for South Africa, there are historical reasons, related to its apartheid economy, that make its economy less dependent on its regional neighbors’ markets than would otherwise have been the case. The basic point is that many African countries have a higher dependence on the continental market than average figures denote.

The picture of intra-African trade is distorted by commodity exports to destinations outside the continent
The extreme dependence on commodity exports of a minority of African countries creates a misleading narrative around intra-African trade. This trend is a common characteristic of the patterns of trade in resource-rich regions: For example, after nearly three decades of existence, the share of MERCOSUR’s trade that is intraregional (see again Figure 1) is still lower than the African average. This outcome is largely because the bloc is dominated by one of the world’s largest commodity exporters—Brazil—and the principal demand for its commodities comes from outside the region. Africa finds itself in a similar situation: The region holds a significant proportion of global mineral reserves (e.g., 60 percent of manganese, 75 percent of phosphates, 85 percent of platinum, 80 percent of chrome, 60 percent of cobalt, and 75 percent of diamonds) and is responsible for nearly 10 percent of global oil and gas production. Notably, the bulk of these commodities are destined for markets outside Africa, dragging down the share of intraregional exports.
This structural feature very much distorts our vision of the potential of the continental market. Angola is a case in point: Oil comprises more than 90 percent of its exports—nearly all of which is destined to the United States. But strip out those extraregional commodity exports, and suddenly, according to our calculations (based again on UNCTADStat data), the importance of intra-African exports for Angola jumps to around three-quarters of the country’s total exports. It also needs remembering that while the continent is rightly considered as “resource-rich,” this is not true for the average African country, more than half of which are net commodity  importers, not exporters. As a corollary of this, most African countries tend to have a higher dependence on the continental market than the principal commodity exporters.
There is a systematic failure to recognize the scale of informal cross-border trade
A final reason why our perception of intra-African trade is so distorted is the prevalence of informal trade. A lot of African borders are extremely porous; indeed, simply the length of borders inhibits against tight controls. While informal cross-border trade is a global phenomenon, studies tend to concur that it is more widespread on the African continent vis-à-vis other developing regions (e.g., FAO, 2020, Afreximbank 2020). Almost by definition, all informal trade is intra-African, implying once again that the real extent of intraregional trade is much higher than can be gleaned from official trade statistics alone.
Table 1 provides some estimates of the scale of informal trade relative to formal sector exports. With the exception of Tunisia (which has low formal-sector, intra-African exports), the smaller landlocked countries are usually where informal sector trade is most intensive. Summarizing the available data, Harding (2019) concludes that intra-African trade is systematically underreported by anything between 11 percent and 40 percent.

Conclusions and policy implications
The stylized facts described above have a number of important implications for policy, especially at a time when trading under the African Continental Free Trade Area (AfCFTA) has begun:

Policies should be adopted to address the extensive barriers across the continent to informal cross-border trade (World Bank, 2020). Once fully implemented, the AfCFTA may see a sudden blooming of small-scale, cross-border trade, as the incentives for keeping informal sector trade off the record suddenly disappear.
The impression of sluggish intra-African trade is wrong: It represents a high share of total African trade and is usually the more dynamic—and certainly the more diversified—element of a typical African country’s exports. This disarms the excessively simplistic but widespread myth that African countries have nothing to trade with one another.
National trade strategies need to be consistent with these stylized facts—and prioritize intra-African trade rather than expend political capital in prolonged free trade agreement negotiations with extra-African trading partners.

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