Megatrend echo chamber and the rise of global middle class

21 Dec 2012 by Jim Fickett.

Everyone knows a top megatrend is the rise of the global class. Everyone knows that because everyone knows that. But in fact there is precious little evidence.

Take, for example, the European Strategy and Policy Analysis System, who published in April their Global Trends 2030 - Citizens in an Interconnected and Polycentric World. Like everyone else analyzing megatrends, they list as one of top trends “The global rise of the middle class”, and state,

Over the coming 20 years, the world will likely evolve from being predominantly poor to mostly middle class … It is estimated that the size of the global middle class will increase from 1.8 billion people in 2009 to 3.2 billion by 2020, and to 4.9 billion by 2030

4.9 billion. Not 4.5 billion. Not 5.0 billion. 4.9. Such precision gives the illusion that this statement is based on serious analysis.

The ESPAS study cites “H. Kharas, ‘The Emerging Middle Class in Developing Countries’, OECD Development Centre Working Paper no. 285, January, 2010”. As a matter of fact, if you search for “rising global middle class” and, in the resulting articles and reports, drill down to the original source of the rumors, more often than not you arrive ultimately at this paper by Kharas. One of the original authorities on which the meme is founded.

Kharas says,

To understand trends in the global middle class, I develop a scenario for GDP growth for each country and assume that the income of each household in a country grows at this rate.

So first he makes a guess for the GDP growth rate of each country. These are educated guesses but, of course, they are guesses. For example, in the case of India, he says,

in their 2003 study, Goldman Sachs assumed an investment rate for India of 22 per cent of GDP and a growth rate of 6 per cent. In actuality, India’s investment rate today has risen to 36.7 per cent and even in the face of the current crisis, 6 per cent growth seems low

Then, given a guess for the growth rate in each country, he assumes that all incomes in each country also grow at that rate.

Naturally, if you take the optimistic assumptions about Asian growth that were prevalent in 2009, when this paper was being written, and assume that all poor families benefit from that growth, you get the conclusion that many will move from poverty to the middle class.

I am not saying the middle class won't grow. Perhaps it will and perhaps it won't. But guessing that high global growth will continue, and that each country's growth will apply equally to all incomes, hardly provides strong evidence that the rise of the global middle class will continue.

We all want to think we've got a handle on where the world is going. It is very satisfying to think we know the megatrends. But just because we want to know the future doesn't mean we really do. Don't invest on the assumption that 4.9 billion people are going to have discretionary income, unless you find much better evidence than I've managed to dig up.