By John Richardson
IF I had a dollar in my pocket for every time I had read or heard the phrase “the rise of the middle classes in the emerging markets” in the context that this was a tremendous opportunity for the global economy, I would be pretty rich by now.
And I would be in an even stronger financial position if each of those dollars was followed by a further dollar for every time such a phrase was followed by lack of sufficient context.
Too many speeches I have heard, and articles I have read, glossed over the fact that being middle class in the developing world is vastly different from being middle class in the West. For the overwhelming majority of people in emerging markets what defines them as middle class would actually be classified as poverty in the West.
This lack of depth of analysis can lead to false impressions about the nature of the goods and services that most people in the developing world are likely to need over the coming decades.
It will not be millions and millions more people reaching the income levels of being able to afford luxury automobiles, for example. The reality will instead be more like India, where autos market growth remains dominated by motorbikes. This has major implications for the nature of demand for the chemicals and polymers used to make all of these goods and services.
Why the euphoria then? Why did too many people essentially ignore the data in favour of easy, comforting slogans that were then used to build unrealistic expectations about the nature and extent of future demand growth in the developing world?
This was largely because of the euphoria generated by China’s economic stimulus programme in the years immediately after the Global Financial Crisis (GFC). Too many people talked about the emergence of a “billion plus” Western-style consumers in China, and how the knock-on benefits of China’s new-found wealth would result in a sustainable middle class spending boom across the rest of the developing world.
But as an important new World Bank study reveals:
- In the five years before the GFC, it would still have taken emerging markets an average of 42.3 years to catch up with US per capita GDP.
- Now, though, it will take an average of 67.7 years for the emerging world to catch up with the US. As the FT points out: For frontier markets, those more fragile economies further down the development scale, such as Nigeria, the catch-up period has more than doubled from 43.1 years to 109.7 years.
Why this much more pessimistic outlook? China’s economic stimulus programme is over, resulting in the end of the commodities supercycle. The growth prospects for emerging market commodity exporters, such as Nigeria, Russia and Brazil, have thus been very badly damaged.
The fantastic news is that nothing has really changed in the developing world. It has always been the case that huge future demand for chemicals can be created by meeting basic needs such as a food, potable water and sanitation. The smart companies will already have strategies firmly in place to take advantage of this opportunity.
What is different is that solutions to basic needs need to be even more affordable than in the past, as is once again underlined by the World Bank study.