The rising demands of emerging middle classes
In the five years since the onset of the financial crisis, the world's established powers have struggled to regain their confidence. Yet, worsening political polarization in Washington cannot obscure signs that the US economy is strengthening. Europe's leaders have used the Eurozone crisis to begin to address monetary union's many design laws, and the continent will emerge stronger in years to come. Japan has made significant progress in its recovery from the 2011 triple disaster, and Abenomics, Prime Minister Shinzo Abe's plans to jumpstart Japan's economy, is off to a promising start.
Today, the greatest risks for the global economy are to be found among the emerging market (EM) powers that have injected much-needed dynamism and hope into global markets in recent years -- China, India, Brazil, Turkey and others. All of them have seen slowing growth in recent months. And large-scale protests earlier this year in Brazil and Turkey remind us that even the most promising of emerging markets remain much less predictable than their developed world counterparts.
In some ways, governments of EM countries are victims of their own success. Since the turn of the century, commodity and credit booms fueled rapid expansion across the most successful emerging markets, lifting tens of millions of people from poverty into the middle class and boosting the popularity of ruling parties and their leaders. But this expansion eased pressure on policymakers to enact more ambitious reforms and allowed them to spend more money than they should to boost near-term growth and their own popularity, and to make extravagant promises to spend more in the future.
In addition, steady revenue streams enabled state officials in some countries to ramp up support for state-owned enterprises and favored domestic champions, and to claw back concessions made to foreign companies in earlier periods of economic weakness. This trend is apparent in China and Russia but is also playing out in democracies such as Brazil, Indonesia, and India.
Yet, growth has now slowed for most EM countries, and policymakers now face the higher middle class expectations that success has created, more modest economic prospects, and tougher economic tradeoffs than they have faced in many years. The protests in Turkey and Brazil were triggered by local events -- an aggressive police response to demonstrations against a plan to cut down a grove of sycamore trees in central Istanbul and a relatively small fare increase for public bus service in Sao Paulo -- but they ignited a broader response from citizens who now feel entitled to more accountable government and higher-quality public services. A noteworthy number of the protesters who spilled into city streets in both countries were members of their countries' newly expanded middle classes.
These are not people with the purchasing power associated with wealthier countries. Using OECD criteria, an EM middle class is defined as those who earn a household income of between US$10 and $100 a day, using 2005 dollars. But while the poor focus on basic subsistence, shelter, and employment, middle classes now demand better services, better health care, educational opportunities for their children, and relief from ever-present crime and corruption.
Some may also be suffering from impatience with the party in power. China's President Xi Jinping and Prime Minister Li Keqiang are relatively fresh faces for a party that has held power for 64 years. But Manmohan Singh has served as India's prime minister since 2004, President Dilma Rousseff's Workers Party has governed Brazil since 2003, Recep Tayyip Erdogan has served as Turkey's prime minister since 2003, and Vladimir Putin has dominated Russian politics since 2000. Singh, Rousseff, Erdogan, and Putin are all significantly less popular than they once were.
In addition, the availability of modern tools of communications -- the Internet, smart phones, and social media -- will make life even more difficult for political officials in these countries as it becomes easier for frustrated citizens to share their anger and organize protests. In some countries, governments will respond with attempts to divert public fury toward other targets. We've seen this in China, for example, where political officials have allowed anti-Japanese protests and boycotts of Japanese companies to burn hotter and longer than usual to channel resentments away from Beijing toward foreign targets. Russian President Vladimir Putin has made anti-American and anti-European rhetoric a predictable political tool. Even Turkey's Erdogan has lately begun to blame foreigners for his country's unrest.
For all these reasons, we can expect more emerging market unrest over the next several years and fewer available tools with which governments can contain them.
We can never accurately forecast exactly where and when protests will erupt, but there are warning signs that make them less likely in some countries than in others. First, countries where middle classes have grown most quickly are especially vulnerable to the pressures that come with rapid social change. The countries that have experienced the most significant middle class protests in recent years -- Argentina, Russia, Chile, Turkey, and Brazil -- fit this model.
Other countries face their share of internal pressures, but the chance for widespread unrest is likely muted for various reasons. In India, political power is fragmented along regional lines, though India's social and linguistic diversity makes nationwide protests much more difficult to sustain. In Russia, Putin is increasingly unpopular in the country's cities, but his support base remains strong among poorer, rural voters. Increased union activism and chronic unemployment have eroded public confidence in South Africa's ruling African National Congress, and the eventual passing of Nelson Mandela will separate the party further from its revolutionary past and the governing mandate it provides.
China faces the greatest risk of a destabilizing confrontation between rising middle class expectations and the political elite's monopoly hold on power -- but it's likely not an issue in the near term. The country's middle class now numbers more than 200 million people, the largest of any EM country, but it is still a small enough percentage of the broader population that the balance of influence within the country has not yet shifted decisively. And in meetings I've had with senior Chinese officials, they display acute awareness and sensitivity to this issue. It's not as if we're the only ones concerned about the role of the middle class--and its potential political instability--in China. If anything, Beijing is more keenly aware of it than we are, but they also understand the tradeoffs internally to truly addressing it.
China stands on the edge of the most ambitious reform process in history as the state tries to enrich and empower consumers to buy more of the goods and services that China produces without surrendering the ruling party's stranglehold on political power. That is why in years to come, China's leaders will have to contend with unprecedented social pressures and demands for change.
This is the emerging market story that will matter most for the rest of us. (By Ian Bremmer, President, Eurasia Group)
August 26, 2013(Mainichi Japan)