* A similar entry will be posted today on the OECD Insights blog. I wish all readers a nice summer break. HR
The recalibration of the world economy toward
the emerging countries, mostly a result of superior prolonged growth in the
Asian giants China and India, has since 1999 helped move roughly half a billion
people above 2$ a day, the median income poverty threshold in developing
countries. Homi Kharas´ estimates for the OECD Development Centre[1]
projected almost 70% of the world´s middle class consumption – 56$ trillion by
2030 - to be outside the OECD. No wonder then that the term ´emerging country
middle class´ has been driving big dollar signs into many eyes.
Yet, the urban middle class youth is revolting
in Brazil, Turkey and other fast growing countries. The controversy around the Easterlin Paradox, a key concept of
happiness economics, suggests that happiness grows more slowly than incomes. Leaders
in many emerging countries are today confronted with a dilemma that reflects
the dual rural-urban structure of their large societies. While the internet
savvy young urban middle class has left poverty behind and demands voice, participation
and efficient public services, there still coexist the poor in the rural
hinterland striving to leave individual poverty behind.
Exit, voice and
loyalty, the late
Albert O Hirschman´s intriguing basic categories that drive societal change,
can be used to better understand the current conundrum. Loyalty, through
adherence to a political unity party or to religion, can block change but is
waning. Exit and voice have different potential in a rural-urban context: exit
from the rural to the urban sector is a preferred option for the rural poor but
is mostly a one-way street; whence voice as the preferred option for the urban
middle class.
Much of the emerging-country middle class is
fragile. Lousy education, poor health and urban congestion are the biggest
risks to the lower strata of the middle class, by way of social and economic
exclusion. A higher size of middle-class citizens translates into higher prices
for private schools, hospitals and transports or, alternatively, overcrowding.
The private provision of quality public services is a socially dividing, hence
limited, costly option. In other words, exit to private education and health services
- an option for the ´happy few´ - will raise prices to the point that it triggers
voice while the size of the middle class rises.
“First-world soccer stadiums; third-world
schools and hospitals”, was one of the slogans advanced by Brazil´s protesters; Brazil has
already spent more than 3bn$, three times South Africa’s total four years
earlier, and only half the World Cup stadiums are finished. Public health
spending occupies a mere 4 per cent of GDP in Brazil (despite constitutional
declaration for universal health care rights), compared to 6 in Turkey and 7 in
OECD average. For Mathematics, the latest PISA test scores rank Brazil 57th
out of 65 survey countries, Turkey is ranked 43rd. These numbers
suggest that there is a political and social premium on best practices in the
governance and allocation of public spending of tax receipts. Apparently, that
premium has not been reached.
Emerging-country leaders might ignore the
insights of the OECD Latin American Outlook 2011 at their own peril[2].
The policy recommendations put forth there rightly emphasize the need for
´fiscal legitimacy´. To avoid the emerging middle class blues, public finances
need to strengthen the social contract, provide better opportunities for the vulnerable
people and better quality public services. Middle-income citizens are more
willing to pay taxes for services, such as transport, health care and
education, if they perceive them to be of high quality and if ´white elephants´
- trophy public investments with little social value – are avoided.
It is quite likely that the current protests,
while destabilizing and weakening the affected governments in the short term,
will be the start to stronger democracies and strengthen, rather than weaken,
the rise of the emerging countries. Already Aristotle[3]
reflected “that the best political community is formed by citizens of the
middle class, and that those states are likely to be well-administered in which
the middle class is large […]; for the addition of the middle class turns the
scale, and prevents either of the extremes from being dominant.”
[1] Kharas,
Homi (2010), „The Emerging Middle Class in Developing Countries“, OECD Development Centre Working Paper No.
285.
[2] OECD (2011), Latin American Economic Outlook 2011: How Middle-Class
Is Latin America?, OECD Publishing. http://dx.doi.org/leo-2011-en.
[3] Vogt, Susanna (2011), “Globalisation from the Bottom Up: The
Aspiring Middle Classes in Emerging Economies”, KAS International Reports
12|2011, Berlin: Konrad-Adenauer-Stiftung.
