South Asia and Asia’s middle-class future

As they struggle to escape the global financial crisis, the prospect of China’s continued, powerful growth both excites and challenges the established economic powers in Europe and North America

US President Obama’s trip to Australia and the East Asia Summit last week was dominated by American strategies to deal with the challenge of China. India, it often appears, plays in to these strategies as little more than a chip in the game with China.

Think again. In a decade or two, India — 80 per cent of the South Asian economy — with its current rates of growth and demographic, nudging forward as East Asia’s China-driven growth eases off, will be nested into its own large economic and political relationship with China. Such is likely to be the power of India’s and China’s scale and their proximity in drawing their economies together and creating a new alignment of Asian interests.

Asia is predicted to add 2.5 billion people to the world’s middle classes in the next 20 years. The middle class in both China and India is growing at an extraordinary rate. As Kharas has argued: ‘if China is successful in its policy ambition to foster wage growth at least as fast as GDP growth, and if it continues to grow at its potential, its middle class could swell to 50 per cent of its population in just 12 years. India’s middle class could rise even more rapidly because Indian households benefit more from Indian growth than do Chinese households, given the prevailing distribution of income’.

The emerging middle class is already a key driver of Asia’s economic growth because of its demand for goods and services and because it is the primary source of savings and entrepreneurship that drives innovation and growth. Growth in today’s advanced economies comes mainly from new products, and most growth happens when these new products are targeted toward and adopted by the middle class.

Consumption by the global middle class (defined to include those living in households spending between $10 and $100 a day in real or purchasing power parity terms) accounts for almost one-third of total global demand, roughly divided evenly between North America, Europe and Asia, but heavily concentrated in advanced countries, currently accounting for two-thirds of total middle class consumption. These are the consumers at risk of retrenching their demand as those in China, India, Indonesia and much of the rest of Asia ramp up their spending.

The ADB’s Asia 2050 Report sees middle-class consumption in advanced countries rising by only 0.6 per cent a year for the next 20 years and thereafter beginning to decline. In Asia, the middle class is expected to lift its spending by 9 per cent a year through to 2030 (although Japanese middle-class spending — one-third that of all Asia today — is forecast to rise by only 1 per cent a year). This will be driven by the very strong growth in middle-class spending in the large Asian countries — China, India and Indonesia. This process is already under way in China, although only 12 per cent of the Chinese population yet enjoys middle-class living standards. Today, India has a tiny middle class by global standards. ‘But if it continues its growth’, the ADB Report argues, ’70 per cent of the Indian population could be middle class within 15 years’.

World Bank economist Ejaz Ghani, in this week’s lead essay, asks what will South Asia look like in 2025?

The most likely scenario is an optimistic one. ‘Growth will be propelled higher by young demographics, improved governance, rising middle class and the next wave of globalisation. There is democracy, for the first time since independence, in all countries in the [South Asian] region. Young demographics will result in nearly 20 million more people joining the labour force, every year, for the next two decades.

Almost a billion people will join the ranks of the middle class (1.2 billion by 2030 if you believe the ADB and 1.4 billion by 2050). India’s middle class is well-educated, enterprising, innovative, more demanding of better services, products and governance. The region will benefit from a new wave of globalisation in services, and increased international migration and human mobility. The drivers of growth seem to have already moved from the rich world to the poor world. The room for catch-up is huge, given the big gap in average income between South Asia and the rich countries’.

South Asia is reaching the tipping point, Ghani argues. But if the short window of opportunity is seized and policy makers redouble their efforts to promote rapid, inclusive and stable growth, South Asia is likely to join China in re-shaping tomorrow.
Author: Peter Drysdale, Editor, East Asia Forum