Monday, 1 July 2013

Exit, Voice and Loyalty in Dual Economies

* 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.
[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.