Growing the global middle class

November 13, 2002

Free Market Foundation

Researchers who have looked at the growing disparity in incomes around the world conclude that the absence of efficient capital markets in many emerging economies, the diminishing ability to drive growth through exports, and the defensive efforts of long-standing economic interests, have led to growing income polarisation both within and between countries in recent decades. These developments have thus undermined the rise of a middle class that could be a source of growth-enhancing cultural values and sustainable demand-driven expansion.

Comparisons between regions yield striking disparities.

A recent World Bank study disclosed a striking level of income polarisation among the global middle class defining this group as people with per capita annual incomes, adjusted to represent purchasing power, of between $3,470 and $8,000.

The researchers estimated its size at 11 percent of the world’s population but some 78 percent of the world was described as poor, with incomes below the $3,470 threshold.

An individual with the median income in Africa would have an income in the bottom 5 percent in Western Europe, North America or Australia while a person with the median Western European, North American or Australian income would be in the 95th percentile of incomes in Africa.

To reverse these trends, researchers recommend:

Developing a middle-class and an efficient financial sector by facilitating wider home and business ownership and strengthening the financial system.

Creating deep and liquid capital markets to aid debt restructuring.

Supporting capital market depth by the securitisation of home and small business loans, credit-enhanced corporate debt issuance and the expansion of lending and equity investment to small- and medium-sized businesses.

Entrepreneurs need access to the capital they require to open businesses or expand existing ones. Countries with high levels of inequality tend to be characterised by substantial barriers to capital access and thus, other things being equal, they tend to under-perform economically.

Source: James Barth, Don McCarthy, Triphon Phumiwasan, Susanne Trimbath and Glenn Yago, Institute View, Milken Institute Review, Third Quarter 2002.

For text http://www.milkeninstitute.org/review/2002qtr3/pdf/87-93.pdf

For more on Economic Freedom & Growth http://www.ncpa.org/iss/int

FMF Policy Bulletin \7 November 2002