As Go the Fortunes of Asia's Emerging Middle Class, So Goes Fate of the Poor

The mantra across developing Asia since the 1960s has been poverty reduction. Huge strides were made during the Asian "miracle," yet two-thirds of the world's poor remain in Asia. More needs to be done, but what, and how?

The mantra across developing Asia since the 1960s has been poverty reduction. Huge strides were made during the Asian "miracle," yet two-thirds of the world's poor remain in Asia. More needs to be done, but what, and how?

Perhaps we need to flip the coin.

Instead of just "pushing" people out of poverty, we should also aim at bolstering the rapid expansion of the middle class as a magnet to "pull" people out of poverty, providing an anchor for sustained and more inclusive economic growth.

This is good global economics as well. As households in advanced economies get a handle on excessive debt and start to save, developing Asia's rising middle class holds the key to rebalancing the region's economies more toward consumption.

Asia's emerging consumers are likely to assume the traditional role that the US and European middle classes played as global consumers.

Asia's emerging middle class is far from what is considered "middle" in, say, the United States, where some fear that the middle class is slowly vanishing.

The poverty line in the developing world is generally considered an income of $2 a day. The "emerging" middle class in Asia can be defined as individuals consuming $2-$20 a day (at 2005 purchasing power parity).

From only 21 percent of Asia's population in 1990, the region's middle class rose to 56 percent in 2008, or nearly 1.9 billion people.

Their spending has increased nearly three-fold during the period - to $4.3 trillion, or about one-third of OECD middle-class expenditure.

As Asia continues on the path of rapid poverty reduction over the next 20 years, the middle class is expected to grow commensurately.

The Asian Development Bank estimates that the size of the Asian middle class will expand to 2.7 billion by 2030. China and India will see the largest rise.

But defining Asia's middle class is more than just numbers. With more income, people's attitudes move away from a survival instinct to the "luxury" of being able to plan ahead.

Permanent jobs provide stable incomes that can finance stable consumption patterns. It also creates a class that demands good governance and better social safety nets that ensure better education, health care and pensions.

The middle class is more likely to have values aligned with greater market competition, gender equality, perceptions of upward mobility, and more investment in science and technology.

The magnet of Asia's emerging middle class is also great for business. It has already raised the consumption of consumer durables made in Asia.

From the production side, this increased demand creates more and better jobs up and down the supply chains and across production networks.

But it has also led to what we call "frugal innovation" - as companies react to comparatively lower middle-income levels by spawning new products aimed at this rapidly expanding pool of consumers.

Examples abound, but new products like India's $2,200 "Nano car" (by Tata Motors), or the $12 lithium-ion battery (by China's BYD Lithium Battery) make the point clearly.

Affordable innovative products go beyond consumer goods to personal-care products, banking, insurance, health care and advances in information technology among Asian firms.

This sets off a virtuous cycle of growth, consumption, innovation and more growth.

The middle class also helps improve accountability in public services through more vocal demands for better services, particularly given better education and greater awareness of rights.

And while its demands are usually self-serving, the poor benefit just as much.

The middle class is the main source of leaders and activists who create and operate many of the nongovernmental organizations that work for greater government accountability.

However, Asia's rapidly expanding middle class remains vulnerable. More than half is considered "lower-middle" class, consuming $2-$4 a day (at 2005 purchasing power parity).

A major shock can easily send them back into poverty.

Last year's economic slowdown brought with it severe job losses that turned some of the marginal middle class poor again; during the 1997/98 Asian financial crisis, 4.8 million people in Indonesia slipped back into poverty.

So we need to protect the emerging middle class as well.

Governments have to adopt middle-class-friendly policies, focusing on better jobs and higher education.

But aside from jobs, education and social safety nets, nurturing the middle class requires stable and sustained economic growth to ensure upward mobility is secure.

Many of the same policies that are good for growth, such as fiscal discipline, sound monetary policies, improved infrastructure and reduced trade volatility also help foster the middle class.

And these policies that build the middle class have benefits not only for economic growth, but can be more cost-effective at long-term poverty reduction than policies that focus solely on the poor.

A rapidly expanding Asian middle class is not without its problems.

More vehicles and bigger factories can wreak havoc on the environment, and governments have become well aware of the consequences.

Higher fat diets and less active work lifestyles have led to a surge in chronic diseases such as obesity, diabetes, heart disease and cancer.

What is clear, however, is that the rise of the Asian middle class could become the development story over the next several decades.

It offers the potential for greater poverty reduction, more political stability, economic innovation and improved living standards. It also plays an increasingly important role in the shift in the balance of global demand.

It will necessitate sound policies to entice its growth.

But more important, they must ensure this middle-class expansion is sustainable and, as much as possible, equitable.

That way, its magnet can better draw the poor out of poverty with security and permanence.