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Emerging Markets and the Global Middle Class

February 15, 2012


Most analysts agree that the greatest opportunities for companies looking to grow significantly will be found in emerging markets. The reason is simple: markets in developed countries are generally saturated and companies can only grow there at the expense of other companies — a zero sum game. Consumers in emerging markets are also more optimistic about their economies than consumers in developed countries. At least they were a couple of years ago. [“Developing nations’ confidence points to two-speed recovery,” by Daniel Pimlott, Financial Times, 11 August 2010] According to 2010 polls, 85 per cent Indian consumers saw “their country’s economic situation as good, while 77 per cent of people in China and 65 per cent in Brazil [were] also optimistic.” I suspect those number might have fallen over the past couple of years, but not precipitously.


The “confidence gap” between developed and emerging market countries was so large at that time that some analysts started talking about potential economic bubbles in emerging market countries. [“Emerging markets at risk from a gigantic bubble,” by Peter Tasker, Financial Times, 18 October 2010] Tasker wrote:

“The degree of euphoria surrounding some emerging economies is already troubling. … Bubble and bust in China, on which the world is now so dependent for growth and optimism, would likely tank the commodities markets, set off a second round of deflation, and end the emerging markets boom in the most spectacular way possible.”

Although concerns over economic bubbles remain (especially in the Chinese real estate sector), recent reduced growth rates in emerging market countries have tempered consumer enthusiasm. But back in early 2011, some analysts believed that the global economy was on the verge of a growth spurt. [“Get Ready for a Growth Supercycle,” by Ian Breemer, Wall Street Journal, 2 March 2011] Breemer reported that a Standard Chartered report argued “that about 10 years ago, the global economy entered a ‘new super-cycle’ of extended growth, one ‘driven by the industrialization and urbanization of emerging markets and global trade.’ The expansion is likely to last for ‘a generation or more.’ Forecasts in the report run through 2030.” The report may have underestimated the debt crisis in the developed world, which has kept the global economy in turmoil. The projections, however, were not primarily based on activity in the developed world, but in emerging markets. Breemer continued:

“According to the report’s authors, … the … super-cycle will be driven mainly by emerging-market countries, particularly in Asia, ‘the winners will be global.’ Caveats apply. Business cycles will ensure the ride won’t be a smooth one, and some countries and regions will fare better than others. The report’s assumptions depend on ‘a backdrop of relative peace, or certainly no global war, and stable monetary policies.’ The argument is compelling. Growth trajectories from China, India and Brazil to Indonesia, Turkey and sub-Saharan Africa speak for themselves.”

Although I believe that emerging market economies will trend upward for next couple of decades, I also agree that the trend line is likely to look like the elevation map for the upward portion of the mountainous sector of the Tour de France. There are going to be lots of ups and down. Monetary policies haven’t been stable and countries like Iran continue to rattle their sabers. The article continues:

“Americans and Europeans should be relieved to hear that other countries can do a bigger share of the world’s economic lifting. Yet, a global economy driven by emerging market states comes with big risks. First, the storm now cutting its way across the Arab world should remind us that emerging markets can be a lot more politically and socially volatile than established powers. Developing states with authoritarian governments can appear stable for decades, but they often come apart quickly. We’re also talking about a global economy that will depend for an ever larger percentage of its growth on countries where policy making is usually a lot less transparent and predictable, investment climates are more vulnerable to the whims of politicians and bureaucrats, and corruption is often endemic.”

As I stated above, the prediction about a growth supercycle may still prove to be correct (even for developed countries); but developed economies are still trying to muddle through one of the predicted rough spots along the way. Breemer concluded:

“The other big problem is that a global economic growth cycle driven by developing states will generate overnight industrialization on an unprecedented scale, as hundreds of millions of new consumers migrate toward an emerging middle class. Until new energy technologies gain a global foothold, we can only guess at what this surge of activity will mean for competition for oil, natural gas and other scarce commodities, for the quality of the world’s air and water, for the politics of climate change, and for the prices we all pay for food and other staples.”

Although Breemer raises some troubling points, my suspicion is that emerging market industrialization isn’t going to happen “overnight.” Developed countries are hoping that an emerging global middle class will spur manufacturing at home as well as overseas. Some companies are already bringing manufacturing back to developed countries; spurred by concerns over rising transoceanic transportation costs and supply chain disruptions (more on that topic in a future post). All of those facts indicate to me that industrialization will take place at a more measured pace. A lot of industrialization has already occurred in the so-called BRIC countries (Brazil, Russia, India, and China). The next tranche of industrialization will likely take place in so-called CIVETS countries (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa). As Breemer pointed out, this industrialization should move millions of people out of poverty and into the global middle class. That’s a good thing. The final stage of industrialization will likely include so-called frontier market countries in Africa and the Middle East. Although this sounds sequential, development is likely to take place simultaneously in spots across the globe.


In fact, Africa is already receiving a lot of attention. I have pointed out before that consumers in African countries have demonstrated a remarkable appetite for mobile phones. Businessman Mo Ibrahim made a fortune in Africa in the telecom sector and “is making aggressive investments in broadband, retail and other industries in Africa.” [“Mobile Pioneer Sees Rich Promise in Africa,” by Neanda Salvaterra, Wall Street Journal, 18 April 2011] Salvaterra reported:

“Mr. Ibrahim, who founded one of Africa’s first mobile networks, claims the continent offers one of the world’s best returns on investment: Africa was the top performing region over the past 10 years in terms of equity investments, with a 31% return compared with 25% globally, according to the International Finance Corporation, the corporate investment arm of the World Bank.”

Ibrahim isn’t the only business executive who sees promise in some African countries. Chinese companies have also made significant investments in Africa. By the end of this year, “Jain Irrigation Systems of India plans to set up its first factory in Africa.” [“India’s Jain plans first factory in Africa,” by Peter Marsh, Financial Times, 25 April 2011] American companies are also beginning to pay attention to Africa. [“U.S. Companies Race to Catch Up in Africa,” by James R. Hagerty and Will Connors, Wall Street Journal, 6 June 2011] Hagerty and Connors reported that a number of large U.S. corporations are “vying for a stronger foothold on the continent.” Those companies include: Cummins Inc., joins Caterpillar Inc., Harley-Davidson Inc., General Electric Co., Google Inc., Archer Daniels Midland Co. and Wal-Mart Stores Inc. Patrick McGroarty reports, “Africa’s middle class will triple to more than one billion people in the next half-century.” [“Africa’s Middle Class to Boom,” Wall Street Journal, 13 October 2011] He tempers his enthusiasm by writing:

“Not everyone believes Africa’s middle class market is so large. The Organization for Economic Cooperation and Development estimates that there were 32 million middle-class consumers in Africa last year, or just 2% of the population. It defined those consumers as people who spent between $10 and $100 a day. The World Bank makes yet another projection of 43 million middle class Africans by 2030. Regardless, foreign companies see a new generation of consumers worth pursuing.”

McGroarty makes a good point. The attraction of many emerging market countries is that they are home to an emerging middle class that contains potential consumers — and there are lots of them. Large populations that were once thought to be a hindrance to progress are now viewed in a better light. [“Massive Population Lifts Nation’s Growth,” by Bob Davis, Wall Street Journal, 14 February 2011] Davis wrote:

“Toward the end of the 19th century, Britain and Germany were the world’s largest economies. But by 1900, the U.S. had become No. 1, said H.W. Brands, a U.S. historian and professor at the University of Texas at Austin, as the country’s greater population, natural resources and industrial productivity propelled it ahead of individual European nations. ‘There was a vogue for thinking in terms of a westering trend in economic history and how the center of gravity of the world economy was moving across the Atlantic from Europe to America,’ he said. Now, the fast-growing Asian nations are pushing that center of gravity to the east. China’s rise to No. 2 matters a lot, even if many of its people remain poor. That is because it has become one of the world’s largest traders, creditors and markets for commodities. Its buying and lending decisions shape markets globally.”

Manufacturers and retailers have always drooled at the thought of selling things to the large Chinese population. As Davis asserted, “Population counts as much as productivity in determining economic power.” Adam Davidson reports that getting the Chinese to become consumers hasn’t been an easy task. [“Come On, China, Buy Our Stuff!New York Times, 25 January 2012] He writes:

“China is the fastest-growing consumer market in the world, and American companies have made billions there. At the same time, Chinese consumers aren’t spending nearly as much as American companies had hoped. China has simultaneously become the greatest boon and the biggest disappointment. … What went wrong? In part, American businesses assumed that a wealthier China would look like, well, America, says Paul French, a longtime Shanghai-based analyst with Access Asia-Mintel. He notes that Chinese consumers have spent far less than expected, and the money they do spend is less likely to be spent on American goods.”

Another factor affecting consumerism in China is its savings rate. As Davidson points out, “Many U.S. executives … assumed that as China got richer, its citizens would spend more of their income. But the opposite has happened: the country’s savings rate is now climbing faster than its spending. China’s households save more than a quarter of their money, while Americans save less than 4 percent.” Davidson, however, believes “the greatest barrier to Chinese consumption is the policy of China’s Central Bank.” He explains:

“Every month, the United States buys around $35 billion in goods and services from China and sells around $11 billion back. That, of course, leaves a $24 billion trade deficit. Currencies work like any other salable good in that they adjust based on supply and demand. Every month, the United States is demanding a lot of renminbi and China is demanding few U.S. dollars. The natural result should be for the dollar to get weaker as the renminbi gets stronger. But China’s government prevents that adjustment by artificially increasing the demand for dollars, spending much of that $24 billion surplus on U.S. Treasury bonds. This sounds boring, but it effectively makes all Chinese exports somewhere around 25 percent cheaper and all U.S. imports to China, effectively, about 25 percent more expensive.”

You’re likely to hear a lot more about China and the manipulation of its currency during the election campaign. Davidson concludes, “Every president since Clinton has been trying to persuade China to float its currency. A number of Republican presidential candidates, including Mitt Romney, support pressuring China. But candidates always talk tough. Presidents opt for a gentle, nudging approach. They know that China, alone, gets to decide.”


While some analysts are concerned about a decreasing middle class in developed countries, middle classes in emerging markets are likely to continue to increase. If the global economy is to continue to grow, these new consumers represent the future. As Davidson points out, however, getting these newly prosperous individuals to part with their cash is not as easy as once hoped. Over the coming years and decades, numerous business strategies are likely to emerge to persuade them to open their purses and wallets. Companies that hit on the right strategy should thrive.

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