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June 07, 2012

Global Middle Class Definition based on a household with a Car

Foreign Policy - The world has never agreed on a universally accepted definition of what constitutes "middle class." The broadest classification is too low; it suggests the middle class is anyone who is not poor, which according to the World Bank means those who earn an income in excess of $2 a day after adjusting for purchasing power. That level has now been achieved by more than 4 billion of the world's 7 billion people, but while many people earning $2 a day are able to afford a cell phone, their income is far too low to afford amenities such as a regular power supply or clean water.

The narrowest classification defines middle class as individuals with an income close to or above the median income in advanced countries -- roughly $85 a day at U.S. prices. Only about 12 percent of the world's population lives in countries whose average per capita income is higher than that threshold, and only a very tiny minority in developing countries would qualify. This level of income, moreover, exceeds by a factor of seven the income needed to buy a car (around $4,000), not to mention most other big-ticket consumer items, indicating that the definition is far too narrow and too high.

Many other measures have been proposed in between these extremes. The most widely used measure was proposed in 2002 by World Bank economist Branko Milanovic and Hebrew University professor Shlomo Yitzhaki, who counted people with daily incomes between roughly $10 and $50 a day, after adjusted for purchasing-power parity, as middle class. If one uses this definition, there are an estimated 369 million people in the developing G-20 economies -- Argentina, Brazil, China, India, Indonesia, Mexico, Russia, South Africa, and Turkey -- who qualify as "middle class."



We need a better way of measuring the middle class. Here's where the passenger cars come in. Cars are big-ticket items that indicate the ability and willingness to purchase many other nonessential goods. Indeed, while the vast majority of households own a car in advanced countries, in developing countries owning a car symbolizes relative affluence. While one can define the middle class in many ways, car ownership is an unambiguous indication of the ability to purchase other luxury goods.

Critics may contend that measuring car ownership excludes households that can afford, say, a computer, TV set, or air-conditioner, but not a car. However, because cars in circulation in the developing world are often of very old vintage -- for example, the average passenger car in India is 20 years old, compared with 11 years in the United States -- this supposed omission is not nearly as large as it seems. In the United States, for example, one can buy a 20-year-old Ford Taurus for about $500, about the price of a new computer or TV set. The older cars in circulation in developing countries can be bought for even less. So even for the purpose of assessing potential demand for many less expensive consumer products, the ability to buy a 20-year-old or a 30-year-old car provides a pretty good benchmark.

Moreover, measuring car ownership suggests that the middle class has grown much more rapidly than we had previously understood. For example, employing the Milanovic-Yitzhaki definition, the middle class in China, India, and Russia is projected to grow annually by 9.4 percent, 5.8 percent, and 2.4 percent, respectively, over the coming two decades. But this is much slower than the average annual rate of growth of cars in circulation from 2007 to 2010: 35.8 percent in China, 15.7 percent in India, and 7.1 percent in Russia.

What's more, the ranks of the global middle class appear poised to swell considerably in the coming years. About 70 developing countries, home to a combined 4 billion people, lie in the per capita annual income range of $3,400 to $10,000 -- an income range where car ownership grows much faster than income -- meaning that a large share of that population is just on the threshold of affluence. In 2010 alone, the BRIC countries -- Brazil, Russia, India, and China -- added about 14 million cars to their circulation. That figure implies that about 46 million people were added to the middle class, or roughly the population of Spain. The BRICs also accounted for more than half the global increase in cars in circulation in 2010.

The number of passenger vehicles per 1,000 people in India and China is just 10 and 27, respectively, compared with 502 in Germany and 451 in the United States. Even if the number of cars in circulation in China and India continues to grow rapidly -- near the 10 percent average annual growth rate recently projected by the International Energy Agency for these two countries -- it would take about 25 years for China and more than 40 years for India to reach the current penetration rates in advanced countries.

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