India doing well to promote inclusive growth

India doing well to promote inclusive growth

New Delhi: The Asian Development Bank (ADB) advocates middle-class centric policies as a policy option to reduce poverty and sustain economic growth in its report The Rise of Asia’s Middle Class. Jong-Wha Lee, ADB’s chief economist, spoke in an interview about growing Asian consumerism and why India will have a larger middle-class population than China by 2030. Edited excerpts:

Why this sudden shift in focus from the poor to the middle class?

We are not really saying that the middle class is more important than the poor. What we are saying is that just focusing on the poor may not be enough to sustain economic development. We need to continue to have to get poor people out of poverty, but we also need to protect this middle class to stay in the middle class (income group). For example, during the Asian financial crisis, 10% of the middle-class people in Indonesia went back to poverty. The recent natural disaster in Pakistan may lead many people back to poverty.

So, this is very important, specially in the Indian context. Around 75% of the middle-class population belongs to the lower range ($2-4 a day in terms of purchasing power parity) of the middle class in India. These people are very vulnerable to adverse external shocks. Securing better-paying jobs for them will make sure they have this upward mobility continuously. Also, providing advanced educational opportunities is very important because they are actually spending a high portion of their expenditure on the education of their children.

But as your report says, the middle class is not a homogeneous group. So how can policies be uniform?

From the policy perspective, there are common policies, which can be applied to all middle-class people—lower middle class (income of $2-4 a day), middle middle class ($4-10) or the upper middle class ($10-20). All of them are still vulnerable to external shocks although the lower middle class will be more vulnerable to external shocks. So, providing advanced education opportunities, good job opportunities for all of them would be important.

This is true not just across the consumption practice, it is also the same across rural and urban (populations), though there are some differences. But we still need to provide common policies to help them to continuously grow in the pyramid.

The report says that the Asian middle class will play the traditional role of the US and the European middle classes. Will there be any particularly Asian characteristics though?

The middle class consumes more consumer durables. That provides the business opportunity. Especially in the US, the boom in automobile consumption actually created job opportunities for the people. This is common among the Asian economies and the industrialized countries. The expansion of the middle class provides better business opportunities to producers, companies and businesses in Asia. Also, it will lead to an increase in the demand for energy and will have some impact on the environment. This will be the same if you look at the consumption pattern in both types of countries.

However, when we discuss the Asian middle class at present, it is still at a very low income class (by) global standards. If you go to the US, this ($2-20) is basically the poor income class. The rising consumption power is true and common. But in terms of the absolute amount of consumption and how we locate consumption, (Asia is) very different. The important thing is with the big population size in Asia, basically in India and China, even if each person spends a small amount, if you combine all together, it is big. That is why we say Asia will play the traditional role of the US and Europe of being the primary global consumer. Our focus is, in 2030, about 43% of the world wide consumption will be done by the Asian consumers.

But consumerism in the US and Europe was mostly driven by plastic money and less savings, at least till the recent financial crisis. So, are we also going to see in Asia more focus on consumption and less on savings?

The Asian financial service industry will be expanding over time. So people will get access to better financial services that will include credit cards. The empirical evidence shows that the development of financial services encourages consumers to spend more. Asian consumers, especially in China, had higher savings where household consumption is only 37% of GDP, which is very low even compared with India or other Asian countries. Eventually, their savings rate will decline and consumption rate will increase, but only gradually. Also, that will be supported by government provision for a social safety net, which will encourage consumers to spend more.

So what will be the impact if Asians start to spend more and save less?

I don’t think it will have a big impact on global rebalancing because what we have seen in previous decades is that the industrial countries, especially the US consumers, spent a lot and their household debt increased significantly, while Asian countries saved more. Asian economies continue to accumulate current account surplus and the US continues to accumulate current account deficit. So it is good for the Asian consumers to spend more. But I am not saying they should accumulate household debt. What we are saying is that the optimal level of consumption is very important for the economy.

With the rise of the middle class will also come the issue of inequality in income distribution. What will be the repercussions of that on society and the economy?

In reality, in most societies, the rise of the middle class actually helped in reducing income inequality. Many countries start with a small group of rich people with huge poor masses. This is (typically) a very polarized society. The important thing is that the huge majority of poor people should move to the middle class. What we have seen in the last two decades, for example in India, (is) more than 200 million poor people moved from poverty to middle class. In China, 800 million people moved from absolute poverty to middle class. So, in terms of income distribution, the rise of the middle class will solve the polarization. And (with) these people with more stable income, there is scope for income equality. If you focus on rich people, then rich people become richer. Basically, the concern is how to achieve income equality while continuing to help poor people get out of poverty.

Most Asian countries such as India have focused on pro-poor policies, not pro-rich policies. That has still led to income inequality. How would you explain that?

Pro-poor policies are not ruling out pro-middle class policies. Pro-poor policies means helping them get out of the poverty to go to the middle class. See what happened to India in the past two decades. The growth-oriented policy through policy reforms not only helped in accelerating economic growth but also promoting inclusive growth. So the poor people increasingly became the middle class. But there are challenges. One is (that) the population growth is very high. So you have to make sure the increasing generation belongs to the middle class by providing them job opportunities. The second thing is to make sure through middle class centric policies that the people who already have gone into the middle class do not fall back into poverty .

What is the reason behind ADB’s forecast of a larger middle class population (income of more than $2 a day) compared with China by 2030?

It is obviously possible because India has been doing quite well in promoting inclusive growth. In China’s case, the majority are already above the $2 a day line. In a way, India’s progress will be faster than China as long as India maintains its strong economic growth in the next two decades. India will achieve, among other things, reduction of poverty and increasing the middle class. That is good for India and good for the global economy.