The middle class has been one of the most closely analyzed and hotly debated concepts in economics (and politics) for most of the last century. It has become almost conventional wisdom that nations rise and fall on the strength of their middle class. And yet, there is disagreement not only on how to grow the middle class but how to even define the middle class and its true significance.
In the West, the perpetual anxiety about the state of the middle class has focused on the relative trends in Western vs Asian middle class populations. It seems that there has been an immense disparity in regional middle class growth. The conventional wisdom is that the middle class in Asia is growing fast, while the opposite is true in the West. Is this really the case? And if it is, what does this mean for the coming years of global economic and political developments? That’s exactly what we’re going to look at in this article.
Is the Middle Class Shrinking?
The question pundits always seem to be asking – and the question politicians always seem to be answering – is this: “Is the middle class shrinking?” Before we can answer that question, we need to start with an even more basic question: “What is the middle class?”
It’s hard to come up with a perfect definition of ‘middle class.’ The difficulty in defining it is due to changes in the value of money over time, the relative value of money from place to place, and even the preferred economic model. Some official sources use the middle class definition of someone who lives in a household with a combined daily income of between $10 and $100 (note: the figures in this middle class income range are not current dollar valuations but reflect a “Purchasing Power Parity” score based on 2005 values). Others, such as the Pew Research Center, define the middle class household income as $48,500 to $145,500 (in 2018 values). This might be a more intuitive definition to use.
By Pew’s definition, ~52% of Americans are in the middle class. So, is the middle class disappearing?
The American middle class is shrinking gradually but significantly. Decades of globalization (and outsourcing of jobs), as well as anti-labor domestic policy and fiscal austerity have dealt a blow to the middle class. This is despite the fact that the growth of the middle class was cited as America’s strength in the post-World War II international economy.
The Rise of Asian Economies
The notion that the middle class is shrinking is a Western-centric worldview. In other regions, the middle class is exploding. The rise of the China economy has long been anticipated in the West. Even still, the rapid rate of China’s economic growth has come as a shock to many Western observers. And just as surprising is the concurrent story of India’s economic growth. India’s economy is now the third-largest in the world.
The picture is clear: we are at the beginning of the new Asian century. Half the world’s middle class population now lives in Asia, and that is expected to rise significantly in coming years. Asian economies together outproduce the rest of the world combined. Further, while the middle class is expected to remain stagnant or decline in most Western countries, the middle class across Asia is expected to grow from 150 million to 250 million people in the coming years.
What Risks Exist for US Businesses?
There has been a great deal of alarm in the West about the rise of China, India, and other Asian and Pacific nations. Reactionary politics aside, it is true that the changes in the global economy could present some risks for US businesses.
One immediate impact of the economic rise of Asia is that US businesses will have more competition on the world stage – for market share and resources. The relative purchasing power of Western businesses may decrease. To succeed, U.S. businesses will need to be exposed to Asian middle class demand. In addition to its economic growth, the character of China’s economy (and other Asian nations) is expected to keep changing, with an explosion of material consumption. China’s increasingly middle-class economy will shift in emphasis from exports to imports. This could present more opportunities for American manufacturers/exporters, but they’ll need to stay on top of changing needs and preferences in consumers across the world.
The rise of the Asian middle class also means that American imports and supply chains will have to adapt. It may, in fact, be possible to ”insource” jobs back to the U.S. as labor rates rise in China and other Asian countries. In sum, the growth of the middle class in Asian countries is both an opportunity and a risk for U.S. businesses.
Could Consulting Firms Be Adversely Affected?
China’s increasing middle class means the rise of an investor class in China, a change also taking place in other Asian nations. This could mean a growing market for consulting services. There has been an explosion in the Chinese consulting industry, which now exceeds $6 billion per year. This means that American consulting firms will face increasing competition in the new business landscape.
Further, consulting firms must remain attentive to the economic changes sure to ensue alongside the growing Asian middle class. For example, if Chinese consulting firms move beyond their local markets to compete against U.S. based firms for contracts in Europe, India, and Africa, they will likely do so on the basis of price, increasing competition and decreasing margins for U.S. consultancies.
Many Western observers are paying attention to the explosion of the middle class in Asia. It is possible to be alert to the challenges presented by changing middle class populations while also celebrating the common humanitarian benefit of a growing global middle class. This trend presents both opportunities and risks that U.S. businesses should be aware of in the coming months and years.
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