Bernardo M. Villegas
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Middle Class

           The phrase "middle class" is almost synonymous with the new exciting phrase in development economics, i.e., "emerging markets."  Besides having large domestic markets, the attractive feature of emerging markets like China, India, or Indonesia (Chindonesia) is their rapidly growing middle class as their annual per capita income transitions from low levels below $3,000 to higher levels of $5,000 or more.  Following Engel's Law, as consumers' incomes rise from levels at which they can only afford the barest necessities, their consumption pattern shifts to more sophisticated consumer goods and services such as higher quality education, health services, processed food products and beverages, consumer durables, cars, and entertainment, among others.  

          In a report entitled Mr. and Mr. Asia:  Moving up the J-curves (Spring 2011) by Mr. Anirudha Dutta of CLSA Asia-Pacific Markets, some figures on the Asian middle class were presented:  "The Asian middle class will continue to be the biggest investment story out of the region over the next decade...We project that by 2015, a billion people in Asia ex-Japan will join the middle-income category by earning an average per-capita disposable income of US$3000 annually.  Asian Development Bank (ADB) has a more liberal definition of the middle class--those who spend US$ 2 - 20 daily--and estimates that the group comprised 1.2 billion people in Chindonesia in 2010.  If we take away the lower US2-4 segment, then the number comes to 450 million."  Because of the rising middle class in these populous countries (including the Philippines), consumption will increasingly drive the growth of the economy.

          Even more than in the other Asian countries, the vast majority of the middle class in the Philippines falls in the $ 2 to 4 daily-spending range.  For example, the households who have one or more members working abroad as OFWs belong to the lower range of the middle class.  These households can number close to 10 million and are no longer below the poverty line of $1.5 per person per day.  They, however, are still quite vulnerable and can easily fall into poverty.  If they maintain their incomes at the level of $ 2 to 4 per day, they can be lucrative targets of numerous

non-durable consumer goods like food and beverage, fast food, personal care, cell phones, pharmaceutical products, etc. as well as small-ticket durable goods like television sets, cell phones, motor cycles, etc.  Only those who are at the $4 to 20 range (estimated by Mr. Duta to be about 15 per cent of the total population) can afford cars, low to middle-cost housing, personal computers and other high-value electronic products, quality private education, and domestic and foreign travel.  Among these Filipino households are those who are the 600,000 employees of BPO and KPO enterprises.  A good number of these individuals are single women and men in their early twenties, still living with their parents but earning P15,000 to P25,000 or more, making them large spenders on a host of consumer goods and services.  Note, for example, the boom in restaurants and retailing outlets in the Metro Manila area, Cebu, and other regional sites of the BPO and KPO sector.

          As the Philippine Government shifts its attention from capital-intensive industrialization to countryside and agricultural development, we can expect the middle class also to expand in the rural areas, or at least in what are called "rurban" areas such as Davao, Central Luzon, Southern Luzon, Central Visayas and Western Visayas. There will be more households who will graduate from the $2 to 4 lower middle class category to higher levels of income ($10 to 20 per day), making them catch up with the middle class in the Metro Manila area.  The two regions that are almost there are Central Luzon and CALABARZON.  I am especially bullish about the prospects of Central Luzon.  Once the international airport moves to Clark, a metropolitan complex will evolve around the Angeles-San Fernando cluster that will rival Metro Manila as a highly urbanized and industrialized zone.  I expect that 60 percent or more of the 5 to 6 million people who live in Central Luzon will belong to the upper middle class households.  A great advantage of Central Luzon is that it has its own food basket right in its midst, i.e. Nueva Ecija and Aurora provinces.

          What can we expect of the rising middle class in the next ten to twenty years?  We can learn from what has happened in China and India in the last twenty years when hundreds of millions of their citizens joined the middle class.  CSLA report cited above provides some useful insights.  The middle class has significantly more progressive views, such as on gender equality, competition, political activism and technology.  They demand greater accountability and transparency from the public sector.  They are likely to have smaller family, as marriages happen at much later ages and as both husband wife take on full-time jobs.  This trend, however, can be mitigated by private initiatives to promote large family sizes through appropriate values education and work-life balance management.  Education and healthcare will become big growth areas.  More households will invest in the stock market.  Innovations will tend to increase as can be inferred from the experience of the West in which innovation coincided with the rise of the middle class and economic growth.

          As emerging markets see their middle class expand in the next twenty years, there must be serious efforts of the Government, business and civil society to make sure that their populations avoid the excesses of consumerism of the West that have led to unsustainable development.  The CLSA study cites the UK journalist and author Jonathan Watts who stresses that the biggest of the emerging markets, China, cannot and will not survive if it adopts the levels of consumption in the West.  He warns that environmental degradation is already reaching a level that is hurting the welfare of the citizens.  He opines that water will be the single-largest growth challenge. And may I add food, because you need water to produce food. It is incumbent upon our leaders to develop among the citizens the necessary human virtues of temperance and self-sacrifice to prevent them from falling into the deadly disease of consumerism that has already wreaked havoc on many Western societies.  For comments, my email address is bernardo.villegas@uap.asia