"A Rising Middle Class in Developing Nations"

Sydney M. Williams

Thought of the Day

“A Rising Middle Class in Developing Nations”

October 18, 2010

The story for our times has been the rising middle class in developing nations, especially those in Asia, but also in Brazil, Russia and parts of Eastern Europe. “China’s ascendancy”, writes Geoff Dyer in the weekend edition of the Financial Times “in recent years has been so dramatic that governments around the world, as well as Beijing itself, are still struggling to adjust.” The increasing importance of this rising middle class is reflected in their economies, which are credited with helping drive the West toward recovery. It is the principal explanation for higher food costs around the world, for one of the initial benefits of rising income is eating better. It is responsible, at least in part, to the currency conflagrations ominously consuming many in Washington. It is manifested in declining birthrates, and a concomitant aging population in parts of the world where such trends would have been inconceivable three decades ago.

Food shortages persist throughout the globe due to a combination of poor land, adverse weather conditions, outdated seed technology and corrupt governments. While much has been done – think Norman Borlaug, the recently deceased “father of the green revolution” – more needs to be done – consider the people in Somalia. Unfortunately, as long as politics and corruption are interchangeable, malnutrition will persist. However, an expanding middle class in much of the developing world where corruption is less prevalent and incomes are rising, the demand for more and better food products is driving up prices for corn, wheat and soybeans. In this globally interconnected world those of us in the developed world better hope that those in developing nations continue to improve their lot, for our well-being is tied to theirs.

A pull-out section in Fridays Financial Times, “Special Report on World Food” addressed the problem of the undernourished, but failed to consider the rising demand for more and better foods. (Interestingly, the common denominator of the most undernourished nations – Haiti, the Democratic Republic of Congo, Comoros, Burundi and Eritrea – is that, according to Transparency International, they constitute some of the most corrupt governments in the world.) But appetites in developing nations are becoming more sophisticated. To produce a pound of beef it takes more corn than to produce a pound of chicken or pork. And all meat products, in terms of protein, are more expensive to produce than the direct byproducts of the grains.

A weak currency, no matter the rouge and the lipstick being applied by many in Congress, the White House and at the Fed, is a vote of no confidence for the issuing country. Those like New York’s Senator Schumer, a China basher of the first caliber, must be careful less what they wish for transpires. Since March 2009, the Dollar on a trade weighted basis is down 14.3% and has been particularly weak against currencies of developing countries such as Brazil and Malaysia, and against such commodity driven economies like Canada and Australia. Even the much maligned Chinese Yuan has risen 2.8% in the last seven weeks. Also, since March 2009, the Bridge/Commodity Index has gained 58%, sowing the seeds for future inflation.

While no expert on currency markets, I found the interview with Robert Mundell in Saturday’s Wall Street Journal fascinating. The interview was conducted by Judy Shelton, the author of Money Meltdown: Restoring Order to the Global Monetary System. In response to a query as to his opinion of the $4 trillion now trading daily in the global currency markets, Professor Mundell argues that “currencies should be fixed, as they were under Breton Woods or the gold standard. All this unnecessary noise, unnecessary uncertainty; it just confuses the ability to evaluate market prices.” I am not qualified to offer an informed opinion, but as Mr. Mundell points out: “Fixed exchange rates operate between California and New York.” And they now operate between Germany and Portugal, in large part because of Robert Mundell, the father of the Euro. Fixed exchange rates would seem to serve as a de facto single currency.

It appears increasingly apparent that the Federal Reserve, with the Obama Administration’s complicity, is trying to devalue the Dollar – purportedly to provide a trade advantage, but at the risk of rising future inflation. (It should be noted that the Bush Administration pursued a similar policy when Mr. Greenspan was at the helm of the Fed.) Professor Mundell’s recommendation? Ms. Shelton writes: “He (Mundell) thinks the European Central Bank, along with the Federal Reserve, should intervene in currency markets to limit movement in the world’s single most important exchange rate, pointing out that the dollar and euro together represent 40% of the world’s economy.” Finally Judy Shelton asks Professor Mundell: “You mentioned gold? The price of gold is an index of inflation expectations, Mr. Mundell says without hesitation.”

What we do know is that this rising middle class in the developing world will serve to increase world trade, which should serve to help all economies. Not surprisingly, many American and European companies are far ahead of their respective governments in recognizing these macro changes taking place and the opportunities these present. It is true that all countries are not equally “fair” when it comes to trade, so conversations among nations must be continuous. China, it can be argued, is a mercantilist state, but I would also argue that they are increasingly being carried along by the inexorable current reflecting the more modern views of David Ricardo and Adam Smith. The real risk is protectionism, the erection of barriers, nationalism and the spread of xenophobia.

Malthusians and adherents of the Club of Rome once worried that the world was becoming over populated; today there are those that worry the opposite might become true – a planet graying indefinitely. Among developed nations (and even among some developing ones), the United States is unique, in that with a combination of births and immigration our population continues to expand. Exports, as I have argued in the past, should become more important to our growth.

In the November issue of Foreign Policy, Phillip Longman, author of The Empty Cradle, argues that a consequence of this rising affluence is already seen in a slowing in the world’s birth rates and an aging of the population. He points out that, according to the U.N. Population Division, “the world’s population will increase by roughly one-third over the next 40 years, from 6.9 to 9.1 billion.” But, he cautions: “Indeed, the global population of children under 5 is expected to fall by 49 million as of mid-century, while the number of people over 60 will grow by 1.2 billion.” In Sunday’s New York Times , Natasha Singer writes: “For the first time in human history, people aged 65 and over are about to outnumber children under 5. “Aging”, as Mr. Longman writes, “is a rich-country problem.” But it is also a problem in developing nations like China. It is another consequence of the rising tide that is lifting millions, if not billions, of people out of the depths of poverty and into the ranks of the middle class.

An increasing affluence in the developing world will provide more competition; it will serve to highlight educational differences. There will be losers and winners. The former will be those who cling to the past; the latter will include those who see the rise of the middle classes in the developing world, not as a threat, but as an opportunity. In this regard and in the U.S., business leads government.