Middle-income population: Slowly running out of puff

Muhammad Mahmood | Published: November 03, 2018 21:56:09 | Updated: November 10, 2018 21:13:13

The Household Income and Expenditure Survey (HIES) 2016 of Bangladesh Bureau of Statistics (BBS), unveiled on October 16, 2018, shows that the gini coefficient, which measures income inequality within a country's population, has increased from 0.458 in 2010 to 0.483 in 2016.

Bangladesh has averaged an annual growth rate of around 6.0 per cent over the last two decades. Such a steady growth path normally presupposes an increase in per capita income, a higher share of which, ceteris paribus, accruing to the middle income earners. Indeed,  a study carried out by Boston Consulting Group (BCG), an American multinational consulting firm, about three years ago (2015) declared Bangladesh as a "surging consumer market nobody saw coming''.

I remember similar sorts of  forecasts were made by many international business consulting and marketing firms for India in the wake of the great Indian economic liberalisation in the early 1990s under the stewardship of Mr. Manmohan Singh. I was quite a regular visitor to New Delhi during the whole of 1990s. I remember in one of the conferences I attended in New Delhi in the early 1990s, Mr. Singh outlined his vision of a "golabalised India''. Next day, at another conference I attended, a  member of the Indian Planning  Commission  (he came accompanied by a  retinue of civil servants including a "Chaprasee" or messenger carrying a that very famous Indian bureaucracy's "file"), outlined, as if to counterbalance Mr. Singh, a vision of a "planned India''. Despite those contradictory signals, I felt an air of optimism had at that time gripped India's capital city.

But I did not see any spectacular changes taking place in the Indian capital city in those years except one McDonald's (no Big Mac, of course, only Vegie burger and Lamb burger) and one Pizza Hut (where you needed a reservation to get in and an usher would guide you to your table) which popped up in and around Connaught Place - a sure sign of Indian globalisation. This could also be interpreted as a sign of an emerging middle-income consumerism. I presume there are a lot more of those now in New Delhi than in the 1990s.

Those forecasts for India were made on the basis of the emergence of a consumption-friendly middle income population with rising income levels. Definitely  a middle-income population has emerged in India, much bigger in size, and likely to get even bigger in coming days. But a vast majority of them earn an average income of Rs.8000-10,000 (US$125-150) a month working on an average for 25 days a month and also working overtime without getting paid for it (to be fair to India, this phenomenon is also a rule rather than an exception in most of developed countries now). With that amount of money they are not in a position to be as consumption friendly as the consulting firms would like to see. It is estimated that 300 million are considered as middle-income earners but many of them earn US$3.00 a day.

Bangladesh has already transited from a least developed country (LDC) to a developing country (an official recognition by the UN is due in 2021). On the strength of such a transition and with continuing growth projected at around 7.0 per cent per year for the near future, expansion of a middle-income population can be considered as a certainty.  The estimated size of the middle-income population differs quite considerably from 7.0  per cent of population (BCG) to 20 per cent (ADB or Asian Development Bank) of the population. The BIDS (Bangladesh Institute of Development Studies) estimate also puts the figure at 20 per cent of the population and the size of the "middle class" which is likely to rise to 25 per cent in 2025 and further rising to 33 per cent in 2030. [The term middle class in Bangladesh is problematic in the historical and also in the social context and  is not necessarily synonymous with middle-income population which is an income-based definition. I presume the BIDS used the term "middle class'' as the middle-income population).

The BCG further pointed out that the middle and affluent consumers (MAC) have an annual average income of US$5000.00 and 80 per cent of them live in two cities, Dhaka and Chittagong. The message is, firms trying to tap into the Bangladesh market need to build the profile of these consumers' needs and preferences. The growth of the emerging middle-income population in Bangladesh is, therefore, a critical issue for investment decisions making by firms which wish to enter the market. But a recent study  by ILO (International Labour Organisation) found that while the size of the middle-income population has doubled over the last decade in developing countries, the number of people classified as near poor has also  been on the rise.

Overall, the picture projected is quite optimistic in terms of a rising consumption-friendly middle income population in Bangladesh. The projected rise in the size of the middle-income population is fundamentally premised upon not only on the country's transition to a middle-income country (at that also as a lower middle-income country which is defined as one with per capita income of US$1,026 to US$4,035 while the upper middle-income country as one with per capita income of US$4,036 to US$ 12,475), but also to be able to achieve a growth trajectory which will enable the country to transit through to the stage of an upper middle-income country to eventually becoming a developed country, which on the current reckoning by the Bangladesh government, can be achieved by 2041.

But historical experience tells us that many countries make the transition from low-income to the middle-income country, but very few are able to make the final transition to the final stage of becoming a high-income country. Most middle-income countries are now caught into what is being termed as "the middle-income trap''. This trap indicates economic growth at the middle-income stage slows down. Why that happens remains very conjectural, but the central issue remains to work out what factors contribute to growth at the middle-income level. So far economic growth in Bangladesh has been driven entirely by using available abundant inputs, not productivity and/or innovation. It is most unlikely that an entirely input-driven growth will do the trick to transit to the next stage of economic achievement.

The market conjured up by the BCG and similar organisations rarely exits in Bangladesh. If one takes a walk around the "posh'' shopping centres, not to speak of "Moholla'' shopping areas in Dhaka or Chattogram, can clearly see what types of wares are on display (barring Rangs display centres which are definitely targeted for very miniscule upper-income bracket consumers who possibly constitute 5.0 per cent of the population). Firms are mostly peddling  in very basic necessities of life like food, clothing and footwear, soap, phone credits etc. But there are also telltale signs of nascent middle-income consumerism such as Pizza Hut and Gloria Jean's coffee shops in Dhaka as I had seen in the 1990s in New Delhi, but no McDonald's yet in Dhaka. Mobile phone use has become very widespread but you do not see any Apple outlets anywhere; the latest brand of iPhone would almost cost half year's salary for an average middle-income earner. Also absent are any leading designer clothing brands.

The chance of Bangladesh developing a middle-income population to match countries such as Malaysia or Thailand, let alone China, is stymied by growing income inequality. The Household Income and Expenditure Survey (HIES), 2016 indicated rising income inequality over the last decade.  When average household monthly income is adjusted for inflation for the country as a whole between 2005 and 2016, it remained almost the same. Worse even, the average urban households experienced a decline in average monthly income by TK.950.00. This clearly indicates nominal wages in the urban areas where the overwhelming majority of middle-income people live, have failed to keep up with rising costs of living as reflected in the rising prices of household necessities. This figure clearly indicates the squeeze facing middle-income households is real. The top 5 per cent are squeezing out the rest in Bangladesh; they account for 28 per cent of the total income in the country while the bottom 5 per cent share only 0.23 per cent of the same. There are reasons to believe that the share of the top 5 per cent is an underestimate. No wonder, close to 60 per cent of middle and lower middle-income population cannot afford to own their own house or apartment in Dhaka where almost half of the country's urban population live. Also 40 per cent of the population in Dhaka live in slums.

Furthermore, the workforce is woefully unproductive and this is reflective of an education system producing thousands and thousands of graduates hardly equipped to face the challenges of a fast changing economic landscape. These graduates eventually end up, if they are lucky, to get a job (the graduate unemployment rate in Bangladesh is 48 per cent) in low-wage jobs in the services sector. Poor employment prospects can only lead to low-income jobs. The estimate of middle-income group in Bangladesh varies between 12 million and 33 million, many of whom earn only US$4.00 a day. Twenty per cent these middle-income population are self-employed who largely operate in the informal sector and barely eke out a living. If there are policies designed to create a viable middle-income population, they have mostly been not successful.

Muhammad Mahmood is an independent economic and political analyst.


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