10/17/2011 6:45 PM ET
It will happen around the world -- but not here -- as the middle class grows globally. Two big questions for investors trying to catch this trend: How big it will be and how long it will last.
It's big and it's growing fast.
But that's about all the experts agree on about the global middle class.
I don't expect investors to achieve enlightenment where a generation of political and social scientists, development experts, investment strategists and economists have tied themselves into statistical knots.
But because I think the growth of the global middle class will be the single most important investing trend for the next 20 years, I think investors ought to make a start at sorting through the myths.
I'd start by trying to distinguish myth from our imperfect grasp on reality in four areas.
Myth versus Reality No. 1: We don't have a good head count on the rising global middle class.
What's the middle class?
The global middle class numbers 1.8 billon, or 28% of the world's population, according to the Organisation for Economic Co-operation and Development. According to The Economist magazine, however, in February 2009, more than half of the world's population was already middle class. The World Bank projects that between 16% and 19% of the world's population will be middle class by 2030.
When you're talking about a world population of 7 billion, a difference of 10 or 20 percentage points, or a decade or two, amounts to a lot of people.
Jim Jubak
The projections don't necessarily get a whole lot closer when you go from a global perspective to an individual country.
The McKinsey Global Institute projects that India's middle class of 50 million, less than 5% of the country's population, will explode to 583 million by 2030. But economist Nancy Birdsall, the president of the Center for Global Development, calculates that India has no middle class at all. McKinsey Global puts China's middle class at 43% of its population today, on its way to 76% in 2025. Birdsall calculates that China's middle class was just 3% of the population in 2005.
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The extraordinary difference in these estimates comes from the difficulty in defining the middle class. By Birdsall's definition, the middle class consists of people who earn more than $10 a day but who aren't in the top 5% of the population by income. In 2005, India's extremes of income inequality put just about everyone making more than $10 a day in the top 5% of the population. The World Bank uses a range between the mean income levels in Brazil and Italy to define middle class.
Other estimates say the middle class begins at either $2 a day (twice the World Bank's $1 a day definition of extreme poverty), or at $6 a day.
No single middle classMyth versus Reality No. 2: Forget about the search for a single definition of a global middle class. There isn't one global middle class -- there are at least two. When I look at all these struggles to define "middle class," the thing that jumps out is how much of the difficulty comes from trying to mash together the income levels of the existing middle class of the developed world with the income levels of the developing world.
If we take a behavioral approach to our definition of "middle class," economists see middle-class activities such as discretionary buying for status, or the use of credit to turn future wealth into current consumption, emerging, to a degree, at income levels of $2 or $6 a day.
But while it may make an interesting intellectual challenge to try to somehow unify all these people at such disparate income levels under a single heading of middle class, from a business perspective -- and thus an investing perspective -- it makes no sense at all and may in fact be dangerous to a company's top line and your portfolio.
This division into two -- or more -- middle classes shows up, for example, in the way Coca-Cola (KO, news) markets its products in China. In urban areas, where incomes and aspirations are higher, Coke sells its products at prices that are just slightly lower than in Western markets. The relatively high price is part of a strategy to brand Coke as a product that consumers aspire to as incomes rise. In rural areas, Coke sets its prices lower, sells in slightly smaller bottles and requires customers to drink their Cokes on-site and return the bottles to vendors. Coke is still an aspirational product for rural Chinese consumers with rising incomes, but the income bar is set lower.
Coke's pricing strategy is being duplicated by other consumer companies, such as Procter & Gamble (PG, news), that sell their products in developing economies in smaller sizes and at lower prices, but the strategy suggests that there's a sizable opening for companies to develop new products and create new brands that fit different price points for the developing-economy middle class. If this massive developing-economy middle class doesn't have the income of its developed-economy peers -- at least not yet -- it still has the aspirations to signal its new wealth and status.
Investors shouldn't assume that the fruits of the growth of the developing-economy middle class will automatically flow to developed-economy consumer companies. We're seeing a process in the cellphone sector, for example, where Taiwan's HTC and Korea's Samsung have created brands that are displacing phones from Nokia (NOK, news) and successfully waging mind-share battles with Apple (AAPL, news).
One of the reasons that companies such as Nestlé (NSRGY, news) are investing so much money to set up research, development and marketing centers in developing economies is a belief, well-founded I think, that the rise of a developing-economy middle class requires more than simply transporting middle-class products from the developed economies to the developing world with, perhaps, some tinkering at price points.
Following this perspective just a bit down the road raises the possibility that there are more than two middle classes -- developed and developing-economy models. There's sufficient difference in income levels between the BRICS economies (Brazil, Russia, India, China and South Africa) and the next wave of developing economies that look ready for global takeoff (countries such as Vietnam and Indonesia) to create openings for another group of companies catering to the aspirations and price points of these new middle-class consumers.
Continued: Falling from the middle class? 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I consider CEO's of failed companies keeping millions in compensation as one of your false "fittest" that take advantage of our "civilized" society/ 0 0ReportSpamIce Cold Sangria8 minutes ago
Bon Ami moistened with white vinegar can easily handle that corporate scum.
0 0ReportSpamAverage Joe American - Tampa FL20 minutes agoVetteguru, I applaud your hard work ethic which has brought you prosperity. But I'm a little taken aback by your comment that poor people (or anyone for that matter) can just choose to be in the military if they weren't so lazy. While I agree that poor people need to step up or get stepped on, joining the military is not a simple matter of deciding that's something you want to do because you want 3 hots and a cot.
Do you have any idea how many people get turned down by recruiters? There are myriad prerequisites and minimal intelligence and vocational standards that many potential recruits must meet in order to even be considered for possible indoctrination into the military. We didn't get to be the world's greatest military by letting the so called weak persons in our society operate multi-million $ submarines and jets.
1 1ReportSpamRE J29 minutes agoMSN is so corrupt...what a in your face bunch of crap..ELIMINATE THE MONETARY SYSTEM...See no classes of people..just Human Beings being the best at what they love..not tied to crappy jobs..health insurance..wtf is that??...and universities that breed corruption..Its time..5000 years of human error...ELIMINATE THE MONETARY SYSTEMsimple solution..but MSN..the rich and the dumb are afraid...They should be...The Venus ProjectComing soon to an earth near you!!GO OCCUPIERS!!Lets eliminate these corrupt governments..big businesses and organizationsWake up people..the solution is at hand...stop buying into this sick corrupt system that benifits no one at all..not even the rich..ELIMINATE THE MONETARY SYSTEMAs far as this crappy MSN..they are just the worst..I have never seen such in your face lies and garbage reporting about..money..your looks and how people get "in trouble" for doing normal things in life...scaring you...They are controlled by business and protected by corrupt US Gov....BOYCOTT ANY ADVETISERS ON THERE..well most are just junk american car makers or the retard join the army gang..or crap food that makes you sick.. 9 3ReportSpamhuman nature prevails again35 minutes agocoke at it again FU coke 1 3ReportSpamA. Merican Manufacturer37 minutes agoJJZZ111Add Obama to your list of evil. He sent a S. Korea, Panama and Columbia Free Trade agreement to the Republicans, who signed it. The result will be even fewer jobs in US manufacturing. It is why the President of S. Korea was here, because it benefits them. Not the other way around.Business is in business to make profits. Not to hire people. If there is a demand for their products, they will hire. If not, they won't. Washington is in business to stay in power. And they will do anything to stay there. Even if it means selling out the American public.Perhaps you should consider redirecting your anger towards the people killing jobs, not those employing them. 5 3ReportSpamjjzz11145 minutes agoThe corporate, scum, globalist will abandon the new 3rd world so called middle class when profits are maxed and wages rise to more than is acceptable to their bottom line. Then they will move on to the next 3rd world country to pillage and corrupt. Their countryside's will be left poisoned and their beautiful new cities will crumble .Perhaps that 3rd world country will be America by then. A vicious, immoral, and evil circle. Anyone who supports these corporations in anyway are culpable and will rot in hell with the rest of them. 12 6ReportSpamVetteguru47 minutes agoNext999, that is all well and good. I mean, I applaud anyone who wants everyone to have a chance. Heck, I am a conservative, and I want everyone to succeed, but the problem is, it goes against nature. The weak always fail, while the fittest always survives. I have no problem with helping the lower class. I was there myself until recently. I worked for what I have. I grew up in poverty. My father raised me by himself and didn't demand the government to give me health care, wic, food stamps, or any other government support. He did it on his own. He raised two boys for five years on his own before he remarried. My father had something this country is lacking...Pride! I agree that not all poor people are lazy. But, I know a lot who are. I have heard stories about families selling their government food stamps for cash. Is that the kind of help we want to give? I know people who have screwed their lives up so bad, they could never hope to have a decent paying job. I mean, really, the military is always looking for people. It is a good living, well paid, free medical for you and your family, and free housing and food,. The problem is, a lot of inner city folks get caught up in the violence and crime of inner city life. Before you know it, they have track records a mile long before they even graduate. Thus, negating thier chances for a decent living. Military, or college. College is an option for most people in this country. Student loans, grants, scholarships, there are plenty of oportunities to better yourself. 17 2ReportSpamIce Cold Sangria1 hour ago
I think it's okay if we sell smaller Cokes to the Chinese because they are smaller than everyone else.
"the use of credit to turn future wealth into current consumption"
There is a lot of food for thought in that phrase.
5 2ReportSpamJJ from CA1 hour ago
Did you know that we are now going to be getting out water from Mexico? With all the regulations forcing companies to leave the U.S. I guess we now can't even process water for consumption.
Americans will be the slaves of foreign countries who hate us. We are dependent on foreign oil from the middle east. China makes pretty much everything we buy and consume in this country including food. Now we are going to be getting our water from Mexico??
We are being enslaved and once we aren't able to sustain ourselves we will become a third world country. America is in deep trouble. Then we have these worthless morons protesting on Wall Street who don't have a clue. The ones protesting because of huge student loans they can't pay back: go protest at the schools. They are the ones charging the tuition. The banks are only lending them the money that they signed a contract for. Grow up and take responsibility already and stop whining like the children you are.
The middle class in America is vaporizing before our eyes. This article is drivel.
18 25ReportSpamnext99992 hours agoBCohio - they should, because if the middle class continues to dwindle down to the poverty level, then the rich a.k.a. 1%ers will have no one to support their profits by buying their goods and services. And what a typical thing for a republican to say - that all liberals think they are owed something. How wrong you are. All we want is for everyone, yes EVERYONE, to have equal amounts of the things we need to survive. If you think it is ok to allow people in our own country (let alone the rest of the world) to suffer without food, water, shelter, health insurance, etc., while the privileged few continue to amass wealth at astounding levels, you are a sad excuse for a human being. How is that acceptable? And don't feed us the typical right-wing gargage about how the poor are just lazy. Maybe some of them are, but certainly not all. I wonder how your view of things would drastically change if you were to suddenly find yourself out on the street with nothing, unable to find work, pay for food, go to the doctor, or pay rent. If you tried as hard as you could with what little you had to find work, and remain unsuccessful, would you still blame the poor for being lazy? Would you have a heart and actually feel compassion for your fellow man? Or would you stick to your stubborn conservative ideals and blame yourself for being in your situation? 39 15ReportSpamJohnSmith98752 hours agoCarrot on a string BS. We're just donkeys chasing that carrot, believing all these advisors that tell us a middle class boom is coming soon...so blow that cash now on unwise stock investments!The death of the middle class started when the republicans stopped becoming the progressive party and embraced the Reagan Revolution. Since then they have become more hardcore in their support for the super-wealthy....their politicians getting generous campaign donations in return.The democrats have always been easily corrupted too, but even they have a sliver of morality. Occasionally they do pass laws that help us. 36 10ReportSpamBCohio2 hours agoJohn Why should they!???.... All liberals think they are owed Something!... Make your Own MONEY!... 32 37ReportSpamjohn 1112 hours agoTalk about a lot of white noise. Here go the so-called experts again, spewing more of their B.S. The rich minority are never going to let go of their fortunes to help the middle class. 29 9ReportSpamEricTheRon133 hours agoActually this is the only macro-economic trend that could hold up the world economy in this decade. The demographics of most of the developed world have a similar trend, with a large boom generation after WWII peaking around 1960-62. This means the largest block of the world's middle class is moving from their high-spending 40s to their high-savings 50s and 60s. This demographic will lead to negative economic growth this decade, unless countered by large blocks of poor from developing countries moving into the middle class, increasing consumption.
However, I don't think this trend will continue, as he mentions in item 4, but not for those reasons. The biggest reason will be because if there is decllining consumption in the developed world, the export markets for the developing countries will dry up. The way some of them are managed (particularly China) will probably lead to major collapses of their banking systems, and things could get worse in the developing countries than in the developed world.
12 0ReportSpamBCohio3 hours agoThese Fools want one world Government and One world Money!... The only way they can do this is if all countries of the world are equal!.. How can they do this!, By Bring DOWN ALL the Profitable countries to the third world Level!... Now do you under stand What Obammy is trying to do to America!..This is just the Start of this Push!... 44 23ReportSpamDLH533 hours agoThey are exceptional ( ten times more skilled than Americans contractors) They work hard and they have a smile on their faces..To PTPTPTPTPP
We still can't understand what they are saying on the phone so we still think it is unacceptable customer service. Just a fact.
24 3ReportSpamBCohio3 hours agoThese are the same so called Experts!, That got us into this mess in the first place!.. What a LOAD OF B.S! and Why should we belive shese FOOLS NOW!... Vote for Newt Gingrich For President Thats the only way out for America!... 12 40ReportSpamLeroy Linux (SomeGuy99) 3 hours agoGiving away jobs to another country is not patriotic, and should not even be legal. It's ruining our middle class and our country. You should be focusing on your American workers and helping them grow and improve; they would gladly do this. You should be developing your country, not a foreign country. Where are the laws to protect the workers? 60 5ReportSpamCalDart813 hours agoThe only thing this "global economy" will accomplish is a worsening of our economy and improving of developing economies. Eventually we will all meet in the middle. Why would our American based corporations want to drag down our economy? I do believe it's the fact that an small percentage of our population are being allowed to hoard an obscene amount of wealth. Hoarding wealth does nothing good. And our government has been aiding and abetting them since NAFTA.
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Please post again tomorrow.","lc_post_prog":"Post in progress...","lc_post":"Post","lc_save":"Save","lc_not_auth":"You are not signed in.","lc_no_suggest_paren":"(No suggestions)","lc_ignore_paren":"(Ignore)","lc_insrt_emot":"Insert Emoticon","lc_cancel":"Cancel","lc_ok":"OK","lc_fmt_quote":"Format as Quote","lc_incr_indnt":"Increase Indent","lc_decr_indnt":"Decrease Indent","lc_bullets":"Bullets","lc_numbering":"Numbering","lc_italic":"Italic (CTRL+I)","lc_bold":"Bold (CTRL+B)","lc_post_dirty":"Edits you have made to your post will be lost.","lc_rte":"Rich Text Editor","lc_ip_banned":"The computer or device you are using is temporarily banned from posting on this site. People or automated programs have recently used this computer or device to create unwanted posts. 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Other estimates say the middle class begins at either $2 a day (twice the World Bank's $1 a day definition of extreme poverty), or at $6 a day.
Myth versus Reality No. 2: Forget about the search for a single definition of a global middle class. There isn't one global middle class -- there are at least two. When I look at all these struggles to define "middle class," the thing that jumps out is how much of the difficulty comes from trying to mash together the income levels of the existing middle class of the developed world with the income levels of the developing world.
If we take a behavioral approach to our definition of "middle class," economists see middle-class activities such as discretionary buying for status, or the use of credit to turn future wealth into current consumption, emerging, to a degree, at income levels of $2 or $6 a day.
But while it may make an interesting intellectual challenge to try to somehow unify all these people at such disparate income levels under a single heading of middle class, from a business perspective -- and thus an investing perspective -- it makes no sense at all and may in fact be dangerous to a company's top line and your portfolio.
This division into two -- or more -- middle classes shows up, for example, in the way Coca-Cola (KO, news) markets its products in China. In urban areas, where incomes and aspirations are higher, Coke sells its products at prices that are just slightly lower than in Western markets. The relatively high price is part of a strategy to brand Coke as a product that consumers aspire to as incomes rise. In rural areas, Coke sets its prices lower, sells in slightly smaller bottles and requires customers to drink their Cokes on-site and return the bottles to vendors. Coke is still an aspirational product for rural Chinese consumers with rising incomes, but the income bar is set lower.
Coke's pricing strategy is being duplicated by other consumer companies, such as Procter & Gamble (PG, news), that sell their products in developing economies in smaller sizes and at lower prices, but the strategy suggests that there's a sizable opening for companies to develop new products and create new brands that fit different price points for the developing-economy middle class. If this massive developing-economy middle class doesn't have the income of its developed-economy peers -- at least not yet -- it still has the aspirations to signal its new wealth and status.
Investors shouldn't assume that the fruits of the growth of the developing-economy middle class will automatically flow to developed-economy consumer companies. We're seeing a process in the cellphone sector, for example, where Taiwan's HTC and Korea's Samsung have created brands that are displacing phones from Nokia (NOK, news) and successfully waging mind-share battles with Apple (AAPL, news).
One of the reasons that companies such as Nestlé (NSRGY, news) are investing so much money to set up research, development and marketing centers in developing economies is a belief, well-founded I think, that the rise of a developing-economy middle class requires more than simply transporting middle-class products from the developed economies to the developing world with, perhaps, some tinkering at price points.
Following this perspective just a bit down the road raises the possibility that there are more than two middle classes -- developed and developing-economy models. There's sufficient difference in income levels between the BRICS economies (Brazil, Russia, India, China and South Africa) and the next wave of developing economies that look ready for global takeoff (countries such as Vietnam and Indonesia) to create openings for another group of companies catering to the aspirations and price points of these new middle-class consumers.
Bon Ami moistened with white vinegar can easily handle that corporate scum.
Vetteguru, I applaud your hard work ethic which has brought you prosperity. But I'm a little taken aback by your comment that poor people (or anyone for that matter) can just choose to be in the military if they weren't so lazy. While I agree that poor people need to step up or get stepped on, joining the military is not a simple matter of deciding that's something you want to do because you want 3 hots and a cot.
Do you have any idea how many people get turned down by recruiters? There are myriad prerequisites and minimal intelligence and vocational standards that many potential recruits must meet in order to even be considered for possible indoctrination into the military. We didn't get to be the world's greatest military by letting the so called weak persons in our society operate multi-million $ submarines and jets.
I think it's okay if we sell smaller Cokes to the Chinese because they are smaller than everyone else.
"the use of credit to turn future wealth into current consumption"
There is a lot of food for thought in that phrase.
Did you know that we are now going to be getting out water from Mexico? With all the regulations forcing companies to leave the U.S. I guess we now can't even process water for consumption.
Americans will be the slaves of foreign countries who hate us. We are dependent on foreign oil from the middle east. China makes pretty much everything we buy and consume in this country including food. Now we are going to be getting our water from Mexico??
We are being enslaved and once we aren't able to sustain ourselves we will become a third world country. America is in deep trouble. Then we have these worthless morons protesting on Wall Street who don't have a clue. The ones protesting because of huge student loans they can't pay back: go protest at the schools. They are the ones charging the tuition. The banks are only lending them the money that they signed a contract for. Grow up and take responsibility already and stop whining like the children you are.
The middle class in America is vaporizing before our eyes. This article is drivel.
Actually this is the only macro-economic trend that could hold up the world economy in this decade. The demographics of most of the developed world have a similar trend, with a large boom generation after WWII peaking around 1960-62. This means the largest block of the world's middle class is moving from their high-spending 40s to their high-savings 50s and 60s. This demographic will lead to negative economic growth this decade, unless countered by large blocks of poor from developing countries moving into the middle class, increasing consumption.
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