The world's emerging economies will need more than just cheap labor to keep growing.
People pass by a billboard of a Chinese family in the financial district of Shanghai / Reuters
The BRICS comprise four distinct trillion-dollar plus economies (Brazil, Russia, India & China) plus the recent addition of South Africa which has nearly a half trillion dollar GDP. Whether it was a marketing ploy or brilliantly prescient, Goldman Sachs economist Jim O'Neill -- who coined the BRICs moniker -- created a new portal into debating and thinking about the future global distribution of power that has more dynamism than the conventional binary framing of America vs. Asia or more flamboyantly, the West vs. the Rest.
Many have tinkered with the question of whether the BRICS nations are the right ones to celebrate as tomorrow's national wunderkinds or not. I'm guilty of this as well -- suggesting at the recent Halifax International Security Forum that Turkey, itself closing in on membership in the trillion dollar GDP club, be considered the "silent T" in TBRICS.
In contrast, George Mason University's Jack Goldstone tosses out the decade old skeletal structure of BRICS and says that new significant trends have changed which nations will be up and which down. He suggests that TIMBIs be the new acronym -- Turkey, India, Mexico, Brazil and Indonesia.
Goldstone tosses out Russia and China on demographic grounds, arguing that labor force growth will determine which economies are most fast-growing and vibrant. Russia's population is shrinking while China's workforce will age fairly rapidly.
The argument I find more compelling, however, is that the density and breadth of a country's middle class -- more than the size of labor force -- may determine whether a rising nation jumps up to the level of a stable, enduring, high-wage job generating economy.
Two must read treatments of this subject are first, The Bridge to a Global Middle Class by Sherle Schwenninger and Walter Russell Mead published in 2003 by the Council on Foreign Relations; and second, an OECD Development Centre Working Paper titled "The Emerging Middle Class in Developing Countries," by Homi Kharas published in January 2010.
Here is the pdf of the 54-page Kharas paper. Regrettably, the Schwenninger/Mead book is priced by the Council on Foreign Relations at $150.00 -- not very middle class friendly -- but they have a number of shorter articles that can be googled and this survey of their thinking by Glenn Yago and James Barth captures the key principles of their smart book.
What Schwenninger and Mead argue is that the development of stable financial instruments and social support structures that hold and direct capital to productive investment in a country -- like a stable (not corrupt) home mortgage framework. Other middle class-oriented structures include the creation of retirement savings systems and broadly deployed health care networks. These institutions can create legitimacy for the state in contrast to the hot money flows from outside that can undermine governments. These structures also help create a class of vital middle class stakeholders whose self interest can moderate the potential bad decisions and extremes of politicians.
As Barth and Yago summarize:
[Schwenninger and Mead] convincingly argue that for market-oriented reforms to succeed and produce lasting stability, they must hold out the prospect that all citizens will directly benefit from them. Reforms, for example, must be designed to allow ordinary people access to home ownership through the availability of affordable long-term financing or for private entrepreneurs to enter long protected, government directed business markets. Expanding economic participation in home and business ownership is key to the expansion of consumption and production in these economies. Not only will a program of middle-class oriented development create a constituency that will support reform, but it will be the best guarantor of global stability.
But what are the prospects for middle class oriented development among the BRICS countries and other parts of the world?
Homi Kharas' interesting report doesn't do a line item review of nations -- but he does of regions. And he delves into China's and India's growth vectors in great detail in his paper -- as well as comparing many other high growth economies, including Brazil's.
What he argues is that while there are serious structural constraints facing the super sizing of China's and India's middle class -- both are poised to grow this segment of their economy faster than nearly any other part of the world in the decades to come. Kharas writes that China's 157 million person middle class is now only second to the United States in absolute size. China is now the world's largest user of energy, the largest vehicle market, the number one cell phone market. Kharas also argues that "China's new middle class is eager to become the world's leading consumers" nothing that Chinese consumers shop 9.8 hours per week compared to 3.6 hours a week for the average American.
Kharas cautiously notes that China's middle class is still small -- only 12% -- but that the growth rate of the middle class may help it overcome Brazil's middle class distribution "trap."
About Brazil, Kharas writes:
In this regard, China would do well to look to the contrasting experiences of Brazil and South Korea. Between 1965 and 1980, Brazil grew at an average of 5.6 per cent per capita per year, becoming a middle-income country with a per capita income level of USD7600 (PPP). Yet due to its high income inequality, Brazil's middle class made up only 29 per cent of the country's population in 1980.
This made it impossible for the country to rely on middle-class consumption to drive the transformation into an innovation-based economy. Since 1980 the country has remained primarily a commodity exporter, and has struggled to sustain growth. Per capita incomes today are only slightly higher than they were thirty years ago (0.7 per cent annual growth), and the middle class never took off, currently accounting for just 38 per cent of total population. Brazil's recent growth performance is more hopeful and it may yet join the club of convergers, especially if it can leverage recent oil finds into sustained growth.
In the chart at the top of this article, one sees what happens to the distribution of global middle class consumption if Kharas' assumptions are correct.
Essentially, North America's share of middle class consumption plummets from 26% in 2009 to 10% by 2030; Europe from 38% in 2009 to 20% by 2030; the Asia Pacific from 23% in 2009 to 59% in 2030. Central and South America falls from 7% in 2009 to 6% over this period; Sub-Saran Africa remains at 1% during the time span while the Middle East and North Africa remain flat at 4% over those two decades.
One sees why President Obama and his National Security Advisor Tom Donilon have committed to strategically rebalancing America's assets toward Asia and are reducing the footprint of attention and resources directed at South Asia and the Middle East. The Asia Pacific is where a juggernaut of world economic growth will be.
Another great chart to understand trends in the world is this one:
The dark blue regions comprise the affluent nations; the dark green the "converging" regions, i.e. regions where the breadth and density of the middle class is growing rapidly; the lighter green areas are areas where structural income disparities have helped stall middle class development -- and the light blue areas are "struggling".
In this map, Brazil is the real suprise and is considered -- at least in this treatment -- as 'stalled.' China, India, Turkey, even Russia are part of the converging class of nations. One of Goldstone's TIMBIs, Mexico, is hanging with Brazil.
Whether or not these particular categorizations and future estimates hold or not, the notion that big nations need sophisticated structures to manage resource and capital allocation makes a lot of sense -- and is the real contribution to development studies that Sherle Schwenninger and Walter Russell Mead back in 2003.
So rather than shooting from the hip or offering gut prognostications on which nations will rise and which will fall, it may be useful to consider points of analysis like Goldstone's labor force factors or Kharas, Mead and Schwenninger on middle class-oriented development as the driver of tomorrow's global growth champions.
For the record and despite this data, I'm still captivated by Brazil whose economic growth, commitment to self-sustained national energy consumption, and bigger footprint in global affairs may be key drivers of future global power in their own right, and may give Brazilian leadership more tools to eventually generate more balanced distribution of wealth and a kick-start to the further growth of its middle class.
This sort of speculation about what factors will drive growth and power are what makes these BRICS and TIMBIs debates so interesting.
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