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The emergence of a Sri Lankan middle class and its impact within the realm of socio-economic policy making is one of the main areas covered in the recently launched ‘Sri Lanka: State of the Economy 2013’ report.
This report is the annual flagship publication of The Institute of Policy Studies of Sri Lanka (IPS), the country’s apex think tank on socio-economic policy issues. This year, the report looks at ‘Sri Lanka’s Transition to a Middle Income Economy’, in which a comprehensive chapter on the notion of a growing middle class and its influence on sustainable growth in Sri Lanka has been discussed.
What is the ‘Middle Class’?
In recent years, there has been considerable interest in the emergence of the ‘middle class’ consumers, specifically in the Asian nations such as India and China, as it is believed that a strong and large middle class is essential for sustained economic growth and development in a country. It has been indicated that globally, middle class is estimated to grow from around two billion to nearly five billion individuals in the next two decades. Most importantly, this growth is estimated to be mostly driven by the growth of the ‘global middle class’ consumers in India and China rather than due to the continual growth of the ‘global middle class’ in the G-7 countries.
Following Kharas and Gertz (2010), the report defines those individuals living in households spending between purchasing power parity (PPP) adjusted US$ 10-100 per person per day as the ‘global middle class’. Further, those individuals living in households spending between PPP adjusted US$ 2-10 are mentioned as the ‘local middle class’ and those spending more than PPP adjusted US$ 100 per person per day as the ‘rich’.
Determinants of the ‘global middle class’
The global middle class influences growth and development in several ways. Primarily, they drive economic growth through shifting aggregate demand. Unlike the poor, individuals belonging to the global middle class, have more disposable incomes and are more likely to influence the demand for global goods and services. In addition, the global middle class source its income from labour. Being in a stable well-paying job gives the middle class the space and the resources to improve their living standards, be more engaged politically and demand for better services.
Global middle class consumers also invest in education and skill development. They are also credited for supporting meritocratic systems of governance, which gives them the opportunity for promotion and self-improvement through hard work, all of which eventually leads to greater productivity. Since global middle class consumers are more selective in consumption patterns, they also influence investment in innovation; a significant factor for sustainable economic growth in a country. Furthermore, large middle classes can contribute to political stability in a country, as in those countries there is more consensus.
However, despite the above mentioned benefits, a growing global middle class also has its drawbacks. A growing global middle class and its demands for better living standards brings with it a higher demand for water, electricity, energy, land and other resources. Higher per capita consumption of energy and consumer goods generate more pollution, adversely affecting the natural resources. Unless countries are well prepared to address these challenges, the positive effects of global middle class expansion on the development and growth of the economy will be diminished.
The Sri Lankan middle class
In Sri Lanka too, there is evidence of a growing middle class. Over the past decade, the poverty rates have declined sharply and there is a growing demand for advanced goods and services in the country.
The middle class in Sri Lanka account for 77% of the population, out of which, a majority belong to the ‘local middle class’ and 4% to the ‘global middle class’. According to the report, most in the ‘local middle class’ spend just above PPP-adjusted US$ 2 a day per capita. Further, the ‘global middle class’ in Sri Lanka spends just above PPP-adjusted US$ 16 per head per day on average, indicating that most in the ‘global middle class’ in Sri Lanka are spending closer to US$ 10 than US$ 100.
Global middle class in Sri Lanka
As discussed in this year’s report, consumption patterns of the global middle class in Sri Lanka are different from those belonging to the poor and the local middle class. For instance, the global middle class spent on a variety of items including entertainment, real estate, housing, transport, health, education in comparison the other two categories. Furthermore, the report shows that those belonging to the global middle class are more educated and well employed when compared to the local middle class and the poor. However, albeit having a global middle class in the country, it is still less than 5% of the total population. Thus, the report suggests secure well-paying employment opportunities and quality education to be significant factors in the process of increasing the global middle class in Sri Lanka.
Conclusion
‘Sri Lanka has a small but growing global middle class. Balancing its growth with related demands on the economy can lead the way for sustained demand driven economic growth’. Even though, the size of the global middle class in Sri Lanka is too small to influence the global market, the report suggests that it can influence the local market in several ways.
The global middle class has the potential to open up new businesses such as in entertainment, travel and transport. Nevertheless, it is imperative to keep in mind that any plans to expand the global middle class should accordingly go along the plans for improving physical and social infrastructure in the country in order to achieve the full potential of sustainable growth and development in Sri Lanka.
(Dr. Nisha Arunatilake, Research Fellow of IPS, is the contributing author for the chapter on ‘Driving Growth from the Middle: A First Look at the Middle Class in Sri Lanka,’ with research assistance from Mufaris Omar. The complete ‘State of the Economy 2013’ report can be purchased from the publications section of the IPS, located at 100/20, Independence Avenue, Colombo 7. For more information, contact the Publications Unit on 0112143100.)
