A Global Middle Class Is More Promise than Reality

From 2001 to 2011, Nearly 700 Million Step Out of Poverty, but Most Only Barely

Updated August 13, 2015: This new edition includes corrected estimates for Iceland, Luxembourg, the Netherlands and Taiwan, and some related aggregated data.

The first decade of this century witnessed an historic reduction in global poverty and a near doubling of the number of people who could be considered middle income. But the emergence of a truly global middle class is still more promise than reality.

In 2011, a majority of the world’s population (56%) continued to live a low-income existence, compared with just 13% that could be considered middle income by a global standard, according to a new Pew Research Center analysis of the most recently available data.

And though there was growth in the middle-income population from 2001 to 2011, the rise in prosperity was concentrated in certain regions of the globe, namely China, South America and Eastern Europe. The middle class barely expanded in India and Southeast Asia, Africa, and Central America.

Even those newly minted as middle class enjoy a standard of living that is modest by Western norms. As defined in this study, people who are middle income live on $10-20 a day, which translates to an annual income of $14,600 to $29,200 for a family of four. That range merely straddles the official poverty line in the United States—$23,021 for a family of four in 2011. 1

Purchasing Power Parities

Dollar figures estimated for this study are expressed in 2011 prices and are converted to 2011 purchasing power parity dollars. Purchasing power parities (PPPs) are exchange rates adjusted for differences in the prices of goods and services across countries. In principle, one PPP dollar represents the same standard of living across countries. The U.S. serves as the base country for price comparisons and for currency conversions. Thus, for the U.S. one US$ equals one PPP$. But for India, for example, the rupee to US$ conversion rate —46.67 in 2011—is different from the rupee to PPP$ rate—14.975 for individual consumption expenditures by households. Thanks to the lower cost of living in India, this means that only Rs. 14.975, not Rs. 46.67, is needed to obtain what $1 buys in the U.S.

The 2011 PPP estimates used in this study are the latest available benchmark estimates and are based on a round of international price comparisons conducted that year (World Bank, 2014a). Estimates from other sources that are mentioned in this report are typically based on PPPs from 2005, that is, they are derived from a round of international price comparisons conducted in 2005 (World Bank, 2008).

In 2011, only 16% of the world’s population was living on $20 or more daily, a little above the U.S. poverty line. By global standards, that constitutes an upper-middle or high-income existence. And most of these people still lived in the economically advanced countries in North America, Europe and the Asia-Pacific region.

This is not to suggest that developed nations do not struggle with their own issues of income inequality and poverty. But, in a global context, a much greater share of Americans and Europeans are middle or higher income than are people in emerging and developing nations.

Perhaps more importantly from an international perspective, the gap in living standards between the world’s economically advanced countries and emerging and developing nations barely narrowed in the first decade of this century. In 2001, 91% of the world’s high-income people lived in North America and Europe; in 2011, the share was 87%.

These are among the key findings of a study that is one of only a few to analyze change in the world’s middle-income population at the start of the 21st century. The 111 countries covered in the study accounted for 88% of the global population and 85% of world output in 2011. The study is also among the first to make use of

the 2011 purchasing power parities (PPPs) that are based on the latest available benchmark estimates of price levels around the world. 2  Purchasing power parities are exchange rates corrected for differences in the prices of goods and services across countries and are essential for rendering income data comparable across countries.

Explore an interactive map of income distribution by country

Who is Middle Income?

This study divides the population in each country into five groups based on a family’s daily per capita consumption or income. 3 The five groups are labeled poor, low income, middle income, upper-middle income, and high income. Of the four thresholds that separate these different income groups, two are especially important to keep in mind. The first is $2, the minimum daily per capita income that must be exceeded to exit poverty. 4 The second is $10, the threshold that must be crossed to attain middle-income status. The thresholds are expressed in 2011 prices and 2011 purchasing power parities.

A middle-income threshold of $10 follows a practice that is gaining acceptance among economists. The same, or virtually the same, threshold has been applied by the World Bank (2007. 2015 ), researchers at the Organization for Economic Cooperation and Development (Kharas, 2010 ), the development community (Birdsall, 2010; Birdsall, Lustig and Meyer, 2013. and Dadush and Shaw, 2011) and the private sector (Court and Narasimhan, 2010 ). There is growing consensus that the $10 threshold, which is five times the poverty line used in this study, is associated with economic security and “insulates” people from falling back into poverty.

Middle Income or Middle Class

The terms “middle income” and “middle class” are often used interchangeably. This is especially true among economists who typically define the middle class in terms of income or consumption. But being middle class can connote more than income, be it a college education, white-collar work, economic security, owning a home, or having certain social and political values. Class could also be a state of mind, that is, it could be a matter of self-identification. The interplay among these many factors is examined in studies by Hout (2007 ) and Savage et al. (2013 ), among others.

This report uses income or consumption (depending on how data have been collected for a country) to group people. For that reason, the term “middle income” is used more often than not. However, “middle class” is also used, either to describe the overarching issue or to refer to work by other researchers.

The $10 threshold for middle-income status has secured favor in part due to evidence from Latin America. It is estimated that households in Chile, Mexico and Peru have less than a 10% probability of falling into poverty if their per capita income is at least $10 per day. 5 Middle-income thresholds were also derived from surveys in five Latin American countries in which people were asked to self-identify their economic class. The threshold fell at about $10 in Colombia, Mexico and Peru, at $16 in Brazil, and at $20 in Chile. 6

Coincidentally, the $10 threshold also is close to the median daily per capita income of U.S. households living in poverty ($11.45 in 2011). 7 This means that a large share of poor people in the U.S. would also fail to meet the global middle-income standard.

The income thresholds are fixed over time and across countries as they are converted to 2011 prices and expressed in 2011 PPP dollars. Thus, given the fixed $10 middle-income threshold, we can see whether the percentage of the population that is middle income has shrunk, grown or remained the same in different countries over the course of the century’s opening decade. We can also examine shifts in the proportion of the population that is middle income at the regional and global levels.

Are you in the global middle class? Find out with our income calculator

Source: www.pewglobal.org

Category: Forex

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