China's middle class overtakes US as largest in the world

 

World's second largest economy has seen its middle class grow to 109 million Luxury homes in Shanghai By Agency 7:37AM BST 14 Oct 2015 Comments China's middle class has overtaken the United States to become the largest in the world according to a comprehensive new report on the distribution of global wealth. Despite fears of a global growth slowdown in the emerging world, Asia is set to be the scene for the greatest expansion of the world's middle class, said Credit Suisse, in its annual wealth report. • How the world's up and coming rich spend their money The Swiss bank said with 109 million adults "this year, the Chinese middle class for the first time outnumbered" that in the United States at 92 million. While the number of middle class worldwide grew last year at a slower pace than the wealthy, it "will continue to expand in emerging economies overall, with a lion's share of that growth to occur in Asia," said Credit Suisse chief executive Tidjane Thiam. Number of middle-class adults (million), 2015, by region and country "As a result, we will see changing consumption patterns as well as societal changes as, historically, the middle class has acted as an agent of stability and prosperity," he added. The report said size and wealth of the middle class was a key factor in economic development, and the middle class was often at the heart of political movements and new consumption trends. China now accounts for a fifth of the world population, while holding nearly 10pc of the global wealth. The report used a floor for the middle class as having wealth double the annual medium income for their country. While wealth may still be mostly concentrated in Europe and the United States, Mr Thiam said "the growth of wealth in emerging markets has been most impressive, including a fivefold rise in China since the beginning of the century." Overall, the report found that global wealth fell by nearly 5pc in the year to mid-2015 to $250 trillion due a strengthening of the US dollar in which income is compared. However if currency effects are stripped out, wealth continued to expand at the trend rate since the beginning of the century. The report also found the number of millionaires is forecast to increase 46pc to 49.3 million over the next five years, with Malaysia more than doubling the number of affluent individuals with $1 million.   http://www.telegraph.co.uk/finance/china-business/11929794/Chinas-middle-class-overtakes-US-as-largest-in-the-world.html?utm_source=dlvr.it&utm_medium=twitter

India has a rare opportunity to become the world’s most dynamic big economy

Feb 21st 2015 Emerging markets used to be a beacon of hope in the world economy, but now they are more often a source of gloom. China’s economy is slowing. Brazil is mired in stagflation. Russia is in recession, battered by Western sanctions and the slump in the oil price; South Africa is plagued by inefficiency and corruption. Amid the disappointment one big emerging market stands out: India. If India could only take wing it would become the global economy’s high-flyer—but to do so it must shed the legacy of counter-productive policy. That task falls to Arun Jaitley, the finance minister, who on February 28th will present the first full budget of a government elected with a mandate to slash red tape and boost growth. In July 1991 a landmark budget opened the economy to trade, foreign capital and competition. India today needs something equally momentous. Strap on the engines India possesses untold promise. Its people are entrepreneurial and roughly half of the 1.25 billion population is under 25 years old. It is poor, so has lots of scope for catch-up growth: GDP per person (at purchasing-power parity) was $5,500 in 2013, compared with $11,900 in China and $15,000 in Brazil. The economy has been balkanised by local taxes levied at state borders, but cross-party support for a national goods-and-services tax could create a true common market. The potential is there; the question has always been whether it can be unleashed. Optimists point out that GDP grew by 7.5% year on year in the fourth quarter of 2014, outpacing even China. But a single number that plenty think fishy is the least of the reasons to get excited. Far more important is that the economy seems to be on an increasingly stable footing (see article). Inflation has fallen by half after floating above 10% for years. The current-account deficit has shrunk; the rupee is firm; the stockmarket has boomed; and the slump in commodity prices is a blessing for a country that imports four-fifths of its oil. When the IMF cut its forecasts for the world economy, it largely spared India. The real reason for hope is the prospect of more reforms. Last May Narendra Modi’s Bharatiya Janata Party won a huge election victory on a promise of a better-run economy. His government spent its early months putting a rocket up a sluggish civil service and on other useful groundwork. But the true test of its reformist credentials will be Mr Jaitley’s budget. The easy part will be to lock in India’s good fortune, with fiscal and monetary discipline. In addition India’s public-sector banks need capital and, since the state cannot put up the money, the minister must persuade potential shareholders that they will be run at arm’s length from politicians. If India is to thrive, it needs bold reforms and political courage to match. The tried-and-tested development strategy is to move people from penurious farm jobs to more productive work with better pay. China’s rise was built on export-led manufacturing. The scope to follow that model is limited. Supply-chain trade growth has slowed, and manufacturing is becoming less labour-intensive as a result of technology. Yet India could manage better than it does now. It has a world-class IT-services industry, which remains too skill-intensive and too small to absorb the 90m-115m often ill-educated youngsters entering the job market in the next decade. The country’s best hope is a mixed approach, expanding its participation in global markets in both industry and services. To achieve this Mr Jaitley must focus on three inputs: land, power and labour. Jumbo on the runway All are politically sensitive and none more so than land purchases. In China the state would just requisition the land, and let farmers go hang. But India has veered too far the other way. A long-standing plan to build a second international airport in Mumbai is on ice. An act passed in the dying months of the previous government made things worse by calling for rich compensation to landowners, a social-impact study for biggish projects and the approval of at least 70% of landholders before a purchase can go ahead. Mr Modi has used his executive powers to do away with the consent clause for vital investments. It is a temporary fix; Mr Modi needs to make it permanent and to win that political battle he needs to show that prime locations do not go to cronies, but to projects that create jobs. Power, or rather the shortage of it, also stops India soaring. According to one survey half of all manufacturers suffered power cuts lasting five hours each week. Inefficiency is rampant throughout the power network, stretching from Coal India, a state monopoly, to electricity distributors. The first auctions of coal-mining licences to power, steel and cement companies, which began this week, are a step forward. More effort will be needed to open distribution to competition. Regulators are cowed by politicians into capping electricity prices below the cost of supply—though people will pay up and leave the politicians alone if they know that the supply is reliable. The third big area ripe for reform is India’s baffling array of state and national labour laws. Compliance is a nightmare. Many of the laws date to the 1940s: one provides for the type and number of spittoons in a factory. Another says an enterprise with more than 100 workers needs government permission to scale back or close. Many Indian businesses stay small in order to remain beyond the reach of the laws. Big firms use temporary workers to avoid them. Less than 15% of Indian workers have legal job security. Mr Jaitley can sidestep the difficult politics of curbing privileges by establishing a new, simpler labour contract that gives basic protection to workers but makes lay-offs less costly to firms. It would apply only to new hires; the small proportion of existing workers with gold-star protections would keep them. Adversity has in the past been the spur to radical change in India. The 1991 budget was in response to a balance-of-payments crisis. The danger is that, with inflation falling and India enjoying a boost from cheaper energy, the country’s leaders duck the tough reforms needed for lasting success. That would be a huge mistake. Mr Modi and Mr Jaitley have a rare chance to turbocharge an Indian take-off. They must not waste it. source. www.economist.com

Deflation can be a good thing. But today’s version is pernicious

Feb 21st 2015 | From the print edition FALLING prices sound like something to cheer. In 1950 talk was not cheap. It cost $3.70 to place a five-minute call between New York and San Francisco—or $36.35 in today’s money. Now that same call costs you nothing. The emergence of the sharing economy is driving down the price of a taxi ride and a bed for the night. More recently tumbling prices for natural resources, especially oil, have boosted the spending power of consumers from Detroit to Delhi. Mark Carney, the governor of the Bank of England, reckons that falling energy prices are “unambiguously good” for the British economy. Mr Carney is not wrong. Nonetheless, the world is grievously underestimating the danger of deflation. The problem is that aggregate prices are dipping in so many places at once. Deflationary pressures are visible far beyond food and energy, and in countries that cannot claim to be leading the charge towards the new economy. In the euro zone, where deflation grips tightest, consumer prices fell by 0.6% in the year to January; Germany, Italy and Spain all saw falls. Prices in Greece have been declining for 23 months. Ultra-low inflation is also widespread. America, Britain and China each have inflation rates of less than 1%. This looks less like a welcome jolt to prices than a sign of entrenched weak demand. Deflation poses several risks, some well-understood, one not (see article). One familiar danger is that consumers will put off spending in the expectation that things will get even cheaper, further muting demand. Likewise, if prices fall across an economy but wages do not, then firms’ margins will be squeezed and employment will stagnate or decline. (Neither of these dangers is yet visible; indeed, America and Britain are seeing strong employment growth.) A third, well-known risk is debt deflation: debts become more onerous because the amount that is owed does not fall, even as earnings do. This is a big worry in the euro zone, where many banks are already stuffed with dud loans. The least-understood danger is also the most serious, because it is already here. Deflation makes it harder to loosen monetary policy. When inflation is at 4%, the central bank can take real (ie, inflation-adjusted) rates well below zero, to -4%, by keeping headline rates at zero. But as inflation falls and turns negative, low real rates get harder and harder to achieve—just when you need them most. Most rich-world central banks have already cut their main policy rates near to zero in order to pep up demand. A growing number of European economies are using negative interest rates to encourage spending, although charging people to put money in the bank will eventually prompt them to use the mattress instead (see article). All of which means that policymakers risk having precious little room for manoeuvre when the next recession hits. And sooner or later it will—because of a sharp slowdown in China, say, or the effect of a rising greenback on dollar-denominated corporate debt, or from some shock that comes out of the blue. The Federal Reserve has cut its policy rate by an average of 3.9 percentage points in the six recessions since 1971. That would not be possible today. The break-glass-in-case-of-emergency option of depreciating the currency massively against a fast-growing trading partner is of limited use when so few big economies are growing rapidly and prices are falling, or close to it, in so many places. Change the target Policymakers should be more worried than they appear to be, and their actions to avert deflation should be bolder. Governments need to boost demand by spending more on infrastructure; central banks should err on the side of looseness. (Next month the ECB will start quantitative easing—and about time too.) Now is also the moment to consider revising the monetary rule book—in particular, to switch the central bankers’ target from the inflation rate that most now favour to a goal for the level of nominal GDP, the total value of spending in an economy before adjusting for inflation. With such a target there is no need to distinguish between good and bad price shocks. And the change in rules would itself send a signal that policymakers are serious about banishing the threat of deflation. Central bankers change course slowly, and their allegiance to inflation targets runs deep. Conservatism often serves them well. But in this case it could cost the world economy dearly. From the print edition: Leaders source – www.economist.com

How can developing countries afford to invest in infrastructure?

 

To maintain current growth rates and meet demands for infrastructure, developing countries will require an additional investment of at least an estimated US$1 trillion a year through 2020. In the Mashreq countries, the required infrastructure investment for electricity alone is estimated at US$ 130 billion by 2020, and an additional US$108 billion by 2030.

These gigantic financing needs will continue to place a huge burden on government budgets. Simply put, they cannot be addressed without private sector participation. Public-private partnerships (PPPs) can help to close this growing funding deficit and to meet the immense demands for new or improved infrastructure and service delivery in sectors like water, transport, and energy (among others). In countries with diverse and numerous needs, PPPs can fill gaps in implementation capacity as well as the scarcity of public funds.

However, for PPPs to meet their stated purpose, governance is key. In particular, governments need to think carefully about their basic legal and institutional arrangements. It needs to be clear which ministries or local government entities are able and authorized to enter into PPP agreements, approve PPP transactions, and to monitor and regulate the project.

In addition, to ensure the best value for money, governments must have proper procedures to make sure that the PPP bidding process is competitive, objective, and transparent. Project outcomes and public-private relationships tend to be more successful when the rules of the game are fair. A 2010 IFC Survey of PPP investors in Africa found that the “appropriate legal framework for investment” was the primary factor affecting decisions to pursue investment opportunities in a particular country, ranking above even the political and economic stability.

Unfortunately, many public officials in the developing world, including those in the MENA region, often do not have the technical know-how to implement these complex, long-term arrangements. Systemic governance challenges are prevalent, and lack of transparency can open doors to corruption, delays, and inefficiencies.

Our teams are working together as One World Bank Group to address these challenges and increase knowledge of Procurement under PPP. An October 2014 World Bank workshop in Beirut, Lebanon financed by the Iraq Technical Assistance and Capacity Building Fund (TACBF) brought together contributors from across the world to share knowledge about how to manage and execute procurement for PPP projects. Led and facilitated by the Governance Global Practice, the event combined many different angles of the World Bank’s global knowledge. The event began as a request from the Kurdistan Regional Government (KRG) of Iraq, but eventually grew to include participants from other parts of Iraq, Lebanon, Washington, Sri Lanka, India, Pakistan, and Yemen.

Recognizing that procurement under PPPs is extremely complex, participants aimed to better understand what a public-private-partnership is, and what kind of policy, legal and institutional frameworks could be put in place to ensure that PPPs are executed well. Presenters shared multiple case studies on private participation in Water and Energy projects in other low- and middle-income countries, including key success factors, and described the process for developing, appraising, and implementing a PPP procurement.

PPPs have not historically played a major role in the Middle East And North Africa Region despite clear need for private investments.

These issues are particularly relevant in the MENA region. Despite its vast needs, MENA has consistently ranked below other regions in the value of private investments in infrastructure. In recent years, the situation has started to shift. The Arab Spring exposed new opportunities to revamp traditional state-business relationships in the region and to break away from old systems of cronyism. Countries like Jordan, Oman, Saudi Arabia, and Morocco have successfully implemented PPP projects, and others like Egypt, Iran, Iraq and Lebanon are actively pursuing more private participation. Unfortunately, though, the current environment has not been fully conducive to attracting private investors to the region. Uncertainty and insecurity have made it more difficult to establish adequate risk management frameworks and secure the long-term commitments that PPPs need.

However, this is an area where the World Bank can continue to play a critical role. And it’s not just through its financing. By facilitating public-private cooperation and sharing global knowledge, the Bank can help to close the infrastructure gap in the KRG and beyond, while promoting the good governance that will be needed to address it.

This post first appeared on The World Bank Blog

Authors: Rachel Lipson works in the Public Integrity and Openness Department of the Governance Global Practice. Nazaneen Ismail Ali is a Senior Procurement Specialist working in the Governance Global Practice and currently based in the World Bank Office in Beirut, Lebanon.

Image: Labourers work at a flyover undergoing construction in the southern Indian city of Hyderabad July 2, 2009. REUTERS/Krishnendu Halder

Why the rich now have less leisure than the poor

 

Apr 19th 2014

FOR most of human history rich people had the most leisure. In “Downton Abbey”, a drama about the British upper classes of the early 20th century, one aloof aristocrat has never heard of the term “weekend”: for her, every day is filled with leisure. On the flip side, the poor have typically slogged. Hans-Joachim Voth, an economic historian at the University of Zurich, shows that in 1800 the average English worker laboured for 64 hours a week. “In the 19th century you could tell how poor somebody was by how long they worked,” says Mr Voth.

In today’s advanced economies things are different. Overall working hours have fallen over the past century. But the rich have begun to work longer hours than the poor. In 1965 men with a college degree, who tend to be richer, had a bit more leisure time than men who had only completed high school. But by 2005 the college-educated had eight hours less of it a week than the high-school grads. Figures from the American Time Use Survey, released last year, show that Americans with a bachelor’s degree or above work two hours more each day than those without a high-school diploma. Other research shows that the share of college-educated American men regularly working more than 50 hours a week rose from 24% in 1979 to 28% in 2006, but fell for high-school dropouts. The rich, it seems, are no longer the class of leisure.

There are a number of explanations. One has to do with what economists call the “substitution effect”. Higher wages make leisure more expensive: if people take time off they give up more money. Since the 1980s the salaries of those at the top have risen strongly, while those below the median have stagnated or fallen. Thus rising inequality encourages the rich to work more and the poor to work less.

The “winner-takes-all” nature of modern economies may amplify the substitution effect. The scale of the global market means businesses that innovate tend to reap huge gains (think of YouTube, Apple and Goldman Sachs). The returns for beating your competitors can be enormous. Research from Peter Kuhn of the University of California, Santa Barbara, and Fernando Lozano of Pomona College shows that the same is true for highly skilled workers. Although they do not immediately get overtime pay for “extra” hours, the most successful workers, often the ones putting in the most hours, may reap gains from winner-takes-all markets. Whereas in the early 1980s a man working 55 hours a week earned 11% more than a man putting in 40 hours in the same type of occupation, that gap had increased to 25% by the turn of the millennium.

Economists tend to assume that the substitution effect must at some stage be countered by an “income effect”: as higher wages allow people to satisfy more of their material needs, they forgo extra work and instead choose more leisure. A billionaire who can afford his own island has little incentive to work that extra hour. But new social mores may have flipped the income effect on its head.

The status of work and leisure in the rich world has changed since the days of “Downton Abbey”. Back in 1899 Thorstein Veblen, an American economist who dabbled in sociology, offered his take on things. He argued that leisure was a “badge of honour”. Rich people could get others to do the dirty, repetitive work—what Veblen called “industry”. Yet Veblen’s leisure class was not idle. Rather they engaged in “exploit”: challenging and creative activities such as writing, philanthropy and debating.

Veblen’s theory needs updating, according to a recent paper from researchers at Oxford University*. Work in advanced economies has become more knowledge-intensive and intellectual. There are fewer really dull jobs, like lift-operating, and more glamorous ones, like fashion design. That means more people than ever can enjoy “exploit” at the office. Work has come to offer the sort of pleasures that rich people used to seek in their time off. On the flip side, leisure is no longer a sign of social power. Instead it symbolises uselessness and unemployment.

The evidence backs up the sociological theory. The occupations in which people are least happy are manual and service jobs requiring little skill. Job satisfaction tends to increase with the prestige of the occupation. Research by Arlie Russell Hochschild of the University of California, Berkeley, suggests that as work becomes more intellectually stimulating, people start to enjoy it more than home life. “I come to work to relax,” one interviewee tells Ms Hochschild. And wealthy people often feel that lingering at home is a waste of time. A study in 2006 revealed that Americans with a household income of more than $100,000 indulged in 40% less “passive leisure” (such as watching TV) than those earning less than $20,000.

Condemned to relax

What about less educated workers? Increasing leisure time probably reflects a deterioration in their employment prospects as low-skill and manual jobs have withered. Since the 1980s, high-school dropouts have fared badly in the labour market. In 1965 the unemployment rate of American high-school graduates was 2.9 percentage points higher than for those with a bachelor’s degree or more. Today it is 8.4 points higher. “Less educated people are not necessarily buying their way into leisure,” explains Erik Hurst of the University of Chicago. “Some of that time off work may be involuntary.” There may also be change in the income effect for those on low wages. Information technology, by opening a vast world of high-quality and cheap home entertainment, means that low-earners do not need to work as long to enjoy a reasonably satisfying leisure.