By Nisha Arunatillake
In Sri Lanka, there is evidence of a growing middle class. The incidence of poverty in the country has sharply come down over the past decade. There are indications of growing demand for advanced services and luxury products. Car sales have risen markedly over the past decade. A growing number of newspapers are available online and they interact with their readers through social media, indicating a large and growing customer base with access to mobile phones and computers.
These are luxuries that the poor or the near poor cannot afford and the level of this demand is too large to be driven only by the rich. These clearly indicate that the middle class is growing in Sri Lanka. The influence of a growing middle class on an economy and its people depend on particular country contexts. It also depends on the size, the growth and the purchasing power of the middle class and the preparedness of the country to deal with the demands of a growing middle class.
The middle class consumers have received greater attention in recent times due to the belief that a strong and large middle class is a prerequisite for sustained economic growth and development. Demand-led growth, as opposed to export-led growth, has also been seen as a means of steering an economy out of the middle income trap, the phenomenon of an economy stagnating in the middle income level. The size and the wealth of the middle class determine its power over the economy and governance structures.
As such, the size of the middle class has become an important indicator signalling growth and development of an economy. The growing middle class wealth and its size are key factors that are steering the changing global economic landscape to be Asia-centric. In 2012, China surpassed the US as the world’s leading market for personal computers (PCs); 69 million units of PCs were shipped to China, three million more than the number sold in the US. China and India are also the world’s first and second markets for mobile phones. These are only some examples of the growing middle class market power in China and India in particular and Asia in general.
The middle class is credited for stimulating growth in several ways. Primarily the middle class drives economic growth through shifting aggregate demand. But that is not its only channel for promoting growth. The middle class, primarily depending on labour for their incomes, promotes values such as savings and human capital accumulation which are beneficial for growth. The middle class consumers are also credited for supporting meritocratic systems of governance which allows them the opportunity for promotion and self-improvement through hard work. Those in the middle class being more selective consumers have fostered innovation in affordable but efficient products.
These products range from service goods such as insurances and banking to manufacture goods such as hygiene products. What is different about this new wave of innovations trends is that it caters to a more fastidious set of consumers who are harder to please. Examples of innovations spurred by this growing lower middle income classes abound. Some examples include the US $ 2,200 and fuel efficient ‘Nano car’ and the US $ 70 battery-operated refrigerator. These attributes of the middle class are considered to be valuable for sustainable market-oriented economic growth and poverty reduction.
What is middle class?
The literature defines the middle class in a variety of ways. Historically, the middle class was a social class characterized by intellectuals that were neither capitalists nor workers. They were the well-educated service providers and small scale entrepreneurs, who were hard working and had relatively secure and substantial incomes that allowed them to own houses, demand better quality services and enjoy comfortable lifestyles. Despite its initial classification on social terms, in recent times, economists have chosen to define the middle class using economic terms such as income or consumption, in order to better quantify its size. These definitions mainly take two approaches: The relative approach and the absolute approach.
Those using the relative approach use two main means of defining the middle class. In one relative measure, the middle percentiles of the income distribution are used to measure the middle class. For example, using this approach, Easterly (2000) defines the middle class to be those between the 20th and the 80th percentile in the consumption distribution. One major shortcoming in this approach of measuring the middle class is that the size of the middle class is fixed by definition. In the second relative approach, the middle class is defined relative to the median per capita income.
For example, Birdsall, et. al. (2000) defined the middle class to be those earning 0.75 to 1.25 times the median income of an economy. In both these relative approaches, the yard stick for defining the middle class changes from country to country. These relative measures of defining the middle class are sometimes referred to as the ‘developing middle class’ as these are consumers who are ‘middle class’ according to the standards of the developing world, but not necessarily according to that of the developed world.
The literature defining the middle class using an absolute approach defines the middle class as those earning some benchmark income range. For example, Bhalla (2007) defines middle class to be those earning more than US $ 3,658 (in 2006 prices) a year or US $ 10 a day, in purchasing power parity terms. Kharas and Gertz (2010), taking an absolute approach, defines the middle class as those households with daily expenditure between US $ 10 and US $ 100 per person per day in purchasing parity terms. Since this definition of middle class is common to all individuals across countries, the middle class defined this way is also referred to as the ‘global middle class’. There is much interest in the size and growth of this global middle class, as they are the consumers who influence global demand through their taste for branded goods such as designer clothes, latest technical appliances and education and health services.
Size, trends of Lankan global middle class
For ease of exposition, those individuals living in households spending US $ 2 to US $ 10 (not including US $ 10) will be referred to as the ‘local middle class’, those individuals living in household spending less than US $ 2 a day per person will be referred to as the ‘poor’ and those individuals spending US $ 100 or more per person per day will be referred to as the ‘rich’.
As seen in the Table, the global middle class in Sri Lanka amounted to 4 percent of the population in 2009/10. The majority of the Sri Lankan population belongs to the local middle class. Also, the proportion of population in the global middle class has changed slower in Sri Lanka compared to China and India. For example, the population in the global middle class has increased from 26.5 million to 122.8 million in China from 2002 to 2009 (a more than fourfold increase) but it has increased by only 0.2 million (a less than two-fold increase) in Sri Lanka over the same period.
Looking at it another way, on average, the number of global middle class individuals in China increases by 13.8 million a year; this increase is 0.7 million for India, 0.03 million (or about 30,000) for Sri Lanka and 0.02 million (or 20,000) for Bangladesh. However, given the different population sizes in the countries under consideration, it is more useful to look at these increases as a proportion of population. On average, the size of the global middle class increased by 1.02 percent of the population a year from 2002 to 2009 in China. In comparison in Sri Lanka the global middle class increased by 0.09 percent of the population a year from 2002 to 2009/10. In Bangladesh and India, the yearly increase of the global middle class as a proportion of the population was 0.01 percent and 0.05 percent a year, on average.
The global middle class in Sri Lanka has increased over time. But the rate of this increase is marginal compared to China, although it is better than that of India and Bangladesh in terms of increase of the middle class individuals as a proportion of the population. For determining market power, sometimes, what matters is the absolute size of the market, not its relative size. In this regard, Sri Lanka with only 0.8 million global middle class individuals commands only a fraction of the global market power compared to India (with 9.5 million global middle class consumers) as well as China (with 122.8 million global middle class consumers).
As shown in the earlier discussion, global middle class influences economic growth not only through its market power. The literature shows that a large middle class can influence governance structures and improve the provision of public services in the country. However, given the small size of the global middle class, it is unlikely that the global middle class in Sri Lanka will have a substantial influence on the governance and institutional structures of the country.
Literature shows that expanding global middle class will open avenues for new businesses. For example, unlike the local middle class, the global middle class is seen to spend money on travelling overseas (e.g. expenditure on airplanes and ships) and new technology (e.g. computers). The global middle class demand for private medical facilities and professionals, as well as private education facilities, is also higher. There are signs that this is happening in Sri Lanka already. However, along with these positive aspects, a growing global middle class can put pressure on existing social infrastructure as well. This will be partly due to rising taste for better quality and more convenient services.
Literature shows that the demand for electricity, water, roads and other infrastructure are higher amongst the global middle class consumers. Already, there are signs that improving living standards in Sri Lanka are putting pressure on the physical infrastructure and natural resources of the country. The demand for electricity and energy in the country has increased in recent decades. The demand for electricity has grown at a much higher rate than envisaged. To avoid constraints on economic development, the country will have to carefully study the increasing trends in demand for infrastructure and plan well ahead to meet this demand in the most effective manner.
Sri Lanka has a small but growing global middle class. Its size is too small to make a dent in the global consumer patterns. But, it can influence the local economy positively in several ways. The global middle class will open avenues for new markets, such as in entertainment, travel and transport. There are already indications that there is pressure to improve the quality and coverage of education and health services in the country. However, an expanding middle class will be a strain on the existing physical, social and environmental environment in the country. If these infrastructure constraints persist possible economic benefits of an expanding middle class can be dampened.
(Courtesy Talking Economics)
(This article is based on the comprehensive chapter on the Middle Class contained in the forthcoming edition of the ‘Sri Lanka: State of the Economy 2013’ report (due in October 2013)
(Nisha Arunatilake is a Research Fellow and Head of Labour, Employment and Human Resources Development research at the IPS. Since joining the IPS in 1995, her research and publications have covered various dimensions of development, especially in areas of education, health, labour, employment and social protection. Arunatilake holds a BSc in Computer Science and Mathematics with summa cum laude from the University of the South, USA and an MA and PhD in Economics from Duke University, USA)