Monday, April 14, 2014

The fragile middle class in developing countries

Much has been made of the emergence of the new middle class in developing countries, particularly in Asia and Latin America (in fact, we will have a conference at Oxford in late October on this precise subject).  The fragility of this new group has always been known, and now a great FT article emphasizes it:

"In that, the young Indonesian is emblematic of a group increasingly in focus as emerging economies slow. For all the talk of a new middle class, Muljoko is in fact part of what is better described as the world’s fragile middle: the almost 3bn people in the developing world surviving on between $2 and $10 per day, putting them above the poverty line but often still struggling for the financial security that is a middle class hallmark."

A few reflections:

1. As the article says, we tend to think about poverty reduction as a one way street.  When you move above the poverty line, you never come back down.  But this is cannot be further from the truth: various shocks lead to common reverse of fortunes.  This is the major point of Anirudh Krishna's excellent book One Ilness Away.

2. Replacing anti-poverty and means tested social policies with universal ones becomes even more urgent than before.  We need policies that incorporate the poor and the fragile middle class into the same systems, thus improving quality of services, benefiting from economies of scale and reducing risk and volatility.

2. Much of the fragile middle class works in relatively low productivity jobs in small and medium firms (the examples from Malaysia in the article are great).  Finding new, more creative ways to support these companies is a major challenge of a two-tiered industrial policy.

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