Unpacking the dynamics between Davos elites and the emerging global middle class. Are there opportunities for a win-win future?
This week on the WhoWhatWhy podcast, amid the World Economic Forum in Davos, we focus on a major transformation in global economics: the rise from poverty to empowerment of a worldwide middle class.
We are joined by Homi Kharas, a senior fellow at the Brookings Institution, chief economist at the World Data Lab, and author of The Rise of the Global Middle Class. Kharas unpacks the significance of an anticipated demographic milestone: the 5 billionth person joining the middle class by 2030.
Our conversation with Kharas navigates the complex interplay of population changes, technology, and geopolitics as globalization reshapes the role of the middle class in economic and social development around the world. We examine the unique characteristics of this group, and the growing impact of their lifestyle choices on political movements and consumption patterns.
Kharas gives us an insightful look at the expanding middle class, especially in countries like China and India, and its implications for political stability and environmental sustainability.
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Jeff Schechtman: Welcome to the WhoWhatWhy podcast. I’m your host, Jeff Schechtman. While much of the talk and reporting from the World Economic Forum in Davos this week concentrates on the wealthy because they’re much more fun to write about, the fact is that much of the work that comes out of there and much of globalization has allowed the middle class to stand as the most successful demographic in world history. By the time we reach 2030, it’s projected that the fifth billionth person will have joined its ranks. This journey, which began by people in pursuit of a better life, has sparked an unparalleled global transformation.
In today’s landscape where half of the global population find themselves at or above the middle-class threshold, the work of my guest, Homi Kharas, shines a light on their journey from poverty to empowerment. His research delves into the ways that technology, politics, and globalization have contributed to this monumental shift. However, this growth carries with it a weighty responsibility, as the consumption patterns of the middle class pose significant implications for the health of the planet.
A senior fellow at the Brookings Institution and a co-founder of the World Data Lab, Homi Kharas’ latest book, The Rise of the Global Middle Class, encapsulates the history of this expanding middle class and the complex interplay of global governance. Kharas reminds us that this extraordinary expansion compels us to reconsider the middle class’ role in fostering economic empowerment, shaping policy, and tackling the existential threat of climate change, all among the intricacies of a multipolar world, moving toward a vision of the future where prosperity doesn’t have to compromise our environmental integrity.
It is my pleasure to welcome Homi Kharas to discuss his latest work, The Rise of the Global Middle Class: How the Search for the Good Life Can Change the World. Homi, thanks so much for joining us here on the WhoWhatWhy podcast.
Homi Kharas: Thanks for having me, Jeff.
Jeff: Well, it is a delight to have you here. First of all, define what we mean in a global sense by the middle class, because I think people in the US think of it a certain way. When we think of it in global terms, the definition is perhaps different. Talk about that first.
Homi: So I’d like to distinguish between defining the middle class and measuring the middle class. To define the middle class, I think many people think in terms of aspirations. The middle class has certain values. They value hard work, essentially, their own responsibilities to take care of themselves and their families, and they really set themselves up as contributing to society. They have occupations and jobs that pay them good wages that permit them to be able to really make choices for themselves and their family.
So the middle class, in terms of a concept, are really people who are making choices, economic choices about their everyday lives, unlike the poor who basically are just scrambling to get by, don’t have the luxury of being able to make choices because they have to just subsist on bare necessities. And unlike the rich who don’t really make choices, they have the ability to spend whatever they want, so the concept of a choice isn’t really there. The middle class is constantly making choices. That just takes me to quickly say that if you want to then measure it, you have to measure it in terms of some metrics of spending.
And I’ve tried to use a metric of where people actually make these choices, adjust that by family size and by cost of living differences across the world, and that gives us a common definition that can be applied in all countries.
Jeff: When did we first start defining, measuring, and understanding a global middle class? I mean, you talk in the book about a long history of this that goes back almost to Victorian England. Talk a little bit about how it evolved, and then more specifically, how it evolved in a more contemporary world that we’re in today.
Homi: So I think early on, now I’m talking about the beginning of the 19th century, class was a very simple thing. You had a number of people who essentially claimed usually that they ruled by divine right, that God had ordained them to be the rulers, and they were called the aristocracy. They had vast tracts of land that they earned money on, and then you had everybody else. And the everybody else were largely peasants who lived off the land. The groups were so different that it was easy to tell them apart. They differed in incomes, they differed in our dress, in the language that they spoke, in the things they did.
One really didn’t need to think about class, and there was really no middle class at that time. As the Industrial Revolution took off, you started to get a group of people, clerks, bankers, accountants, lawyers, doctors, who fell in between those two credos. These were people who certainly were not peasants in the traditional sense, nor were they aristocrats, but they had a certain amount of spending power. And you started to see this category of people taking off sometime around 1830 when the Industrial Revolution starts, and then gradually accelerating over time, and becoming a class, meaning that they started to feel and use political power.
In the UK, they were able to vote, something that before had really been reserved for the aristocracy. And in many other countries, the emergence of the middle class and the expansion of the number of voters, including, incidentally, permitting women to vote, really went hand in hand. And that’s where we are today. We now have in almost all countries of the world, the middle class being the dominant segment of society. The number of really rich people is quite small. And now in most countries, the number of poor people is relatively small and the middle class has become the majority of the world for the first time ever.
Jeff: As we have seen this middle class evolve globally, we’ve seen it evolve in both democratic societies and autocratic societies. How has that been different and is that difference significant?
Homi: I think it is significantly different. There was hope at one point, and many people wrote about how an expansion of the middle class would also drive countries towards democracy, that the middle class would assert their rights to vote. I think that the evidence suggests that that is not actually true. The middle class simply requires governments to pay attention to the kinds of things they want. And one of the things they want, above all, is stability, and autocracies sometimes deliver stability even better than democracies.
And that’s why you see the middle class actually emerging and thriving in countries as different as China, which is certainly an autocracy, but also countries like, for example, Singapore, which may be a democracy but a democracy which has always had the same political party in power since its independence.
Jeff: And talk a little bit about the role of China, because it’s such an interesting country in that it itself has moved a huge portion of its population from poverty to the middle class, but it has also been so instrumental in moving populations in so many other parts of the world, so many other countries in this movement from poverty to the middle class. Talk about that.
Homi: Well, one of the great questions, I believe, of our time is whether the expanding middle class in China is good for the middle class in the West or bad for the middle class in the West. It’s really not obvious which way this would go. Certainly, when China was admitted into the World Trade Organization and became a full-fledged member of the global community, people thought that the emergence of China would be very good for the middle class in the West, because it permitted an expansion of trade and an expansion of cheap goods that the middle class wanted and wanted to consume.
So it helped to keep inflation low. Low inflation is another thing that the middle class thrives on. They hate inflation because it tends to eat into their financial savings, which is part of what they’re trying to accumulate for their own old age. So China played a very important role, but then it also played a role of potentially displacing jobs in the West, and that has proven to be a source of considerable friction. So there are pluses and minuses, and this is true not just of the middle class in the West, but in other countries as well. And the net balance, I think, remains to be seen about whether the emergence of the Chinese middle class is positive or negative for the West.
There’s one point which I’d like to emphasize on this which I think has been underestimated, and that is that it’s the Chinese middle class that has really pushed the Communist party to clean up its act with regard to carbon emissions. And they’ve done that not because they believe in saving the planet but because they believe in having the ability to breathe fresh air. So a while ago, China had some of the most polluted cities in the world. You couldn’t go outside and breathe in Beijing and other big cities. Today, all of that has been cleaned up and that’s really been a major factor in helping to contain the level of greenhouse gas emissions that now are being emitted globally.
Jeff: What role has globalization and free trade played in all of this? And what are we potentially going to see as we see a retrenching from so much free trade and globalization?
Homi: I think globalization has been hugely important because it’s permitted so many countries to grow rapidly economically. We saw that first with China, now we’re seeing it with India, another giant country with 1.4 billion people. When you have rapid economic growth in countries like China and India, you start to add tens of millions of people per year into the middle class. So I think globalization has been a reason why the middle-class growth has accelerated so much recently.
After all, by my calculations, it probably took something like 150 years for the first billion people to join the middle class. Today, we’re probably seeing a billion people joining the middle class every seven or eight years. So you can imagine that the speed has really accelerated enormously.
Jeff: And would that be in danger? Will that be in danger as there’s a retrenchment of globalization and trade?
Homi: There’s no evidences yet that globalization is actually retrenching. It may not be expanding as rapidly as it did before. But you still have very high levels of trade in all countries. And so you still see countries, I mentioned India, which is now the most rapidly-expanding large economy in the world, and it’s doing so very much thanks to globalization and its ability to export, in the case of India, mostly services, including IT services to the rest of the world. But of course, it is the digital economy which today is the real driver of economic growth everywhere, and that’s what India is specializing in.
Jeff: And in the rest of the world, talk about the role that the digital economy, that big tech is playing in helping this continual movement towards the middle class.
Homi: I think it’s huge because ultimately it connects people to markets, and it’s markets and harnessing the power of markets that’s really driving economic growth. So one of the big problems that the middle class has always faced is how do they get credit? Many middle-class entrepreneurs start small companies, but to grow those small companies need credit. In the old days, you had to go to a bank, you had to sell them on your idea, you probably had to demonstrate that you were putting your own money at risk. It was really quite difficult to get credit and quite time consuming and quite expensive.
Today in the digital economy, with so-called FinTech platforms, credit is extended to small and medium enterprises in a very different way. They look at your history of paying bills, they look at whether people are buying your products or not, and you basically get trade credit or working capital, and that allows you to expand much more rapidly. And that’s something we’re seeing over and over again in all countries which have really started to develop digital platforms for payments.
Jeff: Talk about sustainability of all of this development, particularly as it relates to environmental issues, the threat of climate change, and the concern among those that have already been successful, that if the rest of the world follows the same pattern, that it proves potentially dangerous to the planet.
Homi: That is, of course, one of the big existential questions, is whether the planet can actually sustain a middle-class lifestyle for so many people. You mentioned that we could get to five billion people in the middle class by 2030 or so. That’s a big number and certainly if we continue to structure our economies in the way they’re currently structured, we would breach many planetary boundaries. But the good news, I think, is that there is a tremendous amount of innovation right now, and a lot of that innovation is starting to demonstrate that we can have the same living standards but with far lower stresses on the planet and on natural resources.
And those innovations, of course, they start with clean energy and the reduction of greenhouse gas emissions, but it also goes into new materials and new technologies. And there are examples in my book about how now one can have leather and clothing made essentially from mushrooms. You don’t have to have leather from animals, which is a really very polluting industry by the time you use all the chemicals to cure the leather and dye it and things like that. Much easier to do it with some of these other fabrics.
Jeff: Talk a little bit about what we’ve seen, particularly in terms of those nations that have led the way in moving large portions of their population out of poverty and into the middle class, and the degree to which it potentially creates rising demand, and that those demands carry with it a whole different set of problems.
Homi: So one of the big drivers of the middle class has been urbanization. So countries which have developed large middle classes are also countries which bring people together in cities. And today, when you look at some of the largest cities of the world, we’re used to thinking about New York, London, Tokyo, maybe Paris. But now if you were to name the top 20 cities by population in the world, you’d have a number of Chinese cities that many people may not even have heard of. You have a number of Indian cities; you even have some cities in Africa that are expanding really rapidly.
How those cities are built is extremely important for the kind of lifestyle that the middle class can enjoy, the kinds of transport that is available to people, the nature of green spaces in those cities. Cities provide the foundation for the kind of environmental footprint that the middle class will have. And that’s why now there’s so much talk of so-called smart cities. The second big driver, I would say, is education and human capital. So just think about America, the most reliable ticket to the middle class has long been college education. And along with a college education, you get a good job, but it also changes your views of the world and the values that you have.
And one reason why I’m quite optimistic about the world is that I see the new generation that’s coming up as being much more concerned about sustainability, because they really understand that to be able to preserve their lifestyle, they have to build sustainability into their own lives as well.
Jeff: Is that becoming a universal understanding?
Homi: I think it is. It varies from place to place. It’s perhaps most advanced right now in Europe, but you see it also in Asia, certainly in countries like Japan, a little bit less so in the middle classes in what we call developing countries, in the countries like China and India. But I think that as the middle class starts to solidify and gain confidence, there will be similar moves towards sustainability there as well.
Jeff: In many ways, it’s also an early warning system in that as you talk about technology is going to play a huge role, technology and innovation in these countries moving towards sustainability, in terms of the middle class moving towards sustainability, but along with all of that innovation comes a lot of disruption. Jobs will change, the nature of work will change, and in many cases, we’re going to see that happen, it seems, in these developing countries before we’re even going to see it in the West.
Homi: I think that’s right, although the ability of technology to diffuse very rapidly in developing countries is much slower than in the West. So I think the technologies and many of the innovations start in the West. And let me say, these are innovations both in technology, as is commonly thought of, producing a new product in some way, but also innovations in business practices. And that’s an area where I think you’re going to see much more innovation in developing economies, because many of them are used to resources being scarce, and so there’s a whole branch of so-called frugal innovation that’s starting to emerge. And you see companies taking advantage of that in developing countries.
Jeff: One of the things we haven’t talked about, whether it’s in a democratic system or a more autocratic system, is the role that governance is going to play in how successful or unsuccessful this movement towards the middle class is. Talk about it from a governance point of view and the role of governance in this process.
Homi: So I think the middle class needs avenues to be able to express its demands and wants to whoever is in power. In democratic societies, it does that through the ballot box. And what it tries to do is to shape economic policy to be able to provide more effectively some things that it needs. That’s why in so many Western countries, you have governments providing education, because education is something that is so much more efficiently provided as a collective than each individual trying to, for example, hire a tutor to teach their families. That’s a very expensive proposition and probably one that would lead to a very unequal society.
So simple things, education, health, justice, these are all things that the middle class pushes for as they try to ensure that the society that evolves is a meritocratic, rules-based society. That ultimately is what the middle class is after. In less democratic systems, they need to find other ways of expressing those demands. Sometimes they do it through associations. So you might have environmental associations, you might have trade unions, but there has to be some way that the middle class finds to say, “This is what we really want.” I think, very interestingly, we’re now seeing changes in what the middle class says it wants.
And one of the things I talk about in the book is that the middle class has become concerned about overwork and mental health issues. And we see an explosion of mental health problems in the United States but also elsewhere, where the middle class is simply saying the whole idea of being in the middle class is to start to enjoy the good life. And if you’re working, flat out, longer and longer hours, you’re just too stressed and tired to really enjoy yourself and do the things that matter to you. So there’s a real movement now to reduce the work week, to pay more attention to mental health issues.
And you have some advanced economies, I think New Zealand is perhaps the first advanced economy where mental health actually became a major priority in their national government budgets. So that’s just an example of how the middle class is always thinking about and pushing governments to try to introduce policies to address their priority concerns.
Jeff: And how they feel about that seems to be a function of where they are in the developmental cycle, That a country like New Zealand that has had a thriving middle class for so long can afford that luxury almost, as opposed to what we see in India, for example, where there are so many that are dedicated to working so hard, so much to be able to succeed and have a place in that middle class.
Homi: That’s absolutely right, but countries can get trapped into customs. And so you still have in, let’s say, places like Japan, which has also had a middle class for a very long time, people continuing to, corporations continuing to ask their employees to put in very long hours, and that’s creating real problems. So there is a part which is a natural evolution of wants and desires, but there’s also a part which every so often needs to be nudged more aggressively, because otherwise, inertia just kicks in.
Jeff: Coming back to where we started in talking about measuring, how important is the role of data for people like you, for economists, et cetera, to continue to monitor this as a way to understand how it’s evolving?
Homi: I think that data is so important because it gives us a sense of speed, a sense of direction, and a sense of the magnitude of the trend. And that’s important because it suggests and indicates that in some areas we cannot go on as we currently are. And so, of the several threats to the middle class that I outline, one is greenhouse gas emissions. And one should be quite clear that many of the greenhouse gas emissions are there precisely because companies are trying to satisfy the demands of the middle class for cheap goods. Cheap goods, cheap houses, and cheap mobility. The middle class likes to travel. Well, airlines tend to be extremely greenhouse gas intensive, so something will need to change.
Pollution, we throw away so much stuff, and for a while, when landfills in the US filled up, it was reasonably straightforward, we exported our trash to developing countries. Now developing countries have their own middle class and now have to deal with their own trash, there’s nowhere to send it. So we have to deal with those kinds of things. And then the last big threat, of course, is AI and what AI is going to do to our jobs. So there are these big trends that you can only get a sense of if you have an understanding of the data and the dimensions and speed with which the trends will evolve.
Jeff: Homi Kharas, his book is The Rise of the Global Middle Class: How the Search for The Good Life Can Change the World. Homi, I thank you so much for spending time with us here on the WhoWhatWhy podcast.
Homi: It’s been a pleasure to talk to you, Jeff.
Jeff: Thank you. And thank you for listening and joining us here on the WhoWhatWhy podcast. I hope you join us next week for another radio WhoWhatWhy podcast. I’m Jeff Schechtman. If you liked this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to whowhatwhy.org/donate.