Choosing between a good democracy and affluence

LAHORE: When shopkeepers complain that their sales have gone down substantially in volume terms, they in fact, are pointing towards fast diminishing real middle class.

The notion that those living above poverty level are the real middle class is not true because they are not the actual consuming class that drives the economy. They have no voice in the society.

Middle class in relative terms can be defined, as the middle-income range of each country. The problem with this approach is that each country has a different median income, so the definition of what is middle class shifts from place to place.

A more prudent method is to use a fixed income band for all countries. This is a more representative method because this constitutes empowered segment of society in every country. The real consuming families in developing economies earn between $10,000 and $50,000 per year. Thirty months back it meant that any Pakistani earning Rs110,000 a month was in middle class.

That comes to Rs1.32 million a year or $12,000 ($@Rs110) per year. Today, the income of a person earning Rs1.32 million a year comes to $8,148 ($@Rs162). Even a person earning Rs100,000 per month two and a half years back earned $10,909 per year. That income has now dwindled to $7,407 per year.

Those earning between $10,000 and $50,000 per annum are the real middle class that has voice in society. The effective middle-class comprising industry professionals, scientists, doctors, engineers play a pivotal role in the growth of a country. Based on lower cost of living in developing economies those earning over $10,000 a year enjoy the same living standards as enjoyed by a person earning $25,000 in a developed country.

Income disparities in India are more pronounced than Pakistan, but it has developed a consuming base of 300 million strong upper middle class earning between S10,000 to $50,000 a year that Pakistan lacks proportionate to its population.

The presence of such a strong upper middle class comprising around 22 percent of Indian population is the main reason for its robust economy. In contrast, such high earning middle class is limited to hardly four million in Pakistan, which accounts for less than 2.0 percent of its population.

Resource distribution in recent years has been fairer in India for the skilled and professional workers. Over 6 million of its IT workforce earns much above the minimum threshold of $10,000.

Pakistan unfortunately lacks the high skilled workforce and high-tech industries, which was evident from its dismal growth. Moreover, at least 100,000 to 200,000 real middle class has been relegated to lower level due to devaluation of rupee.

The higher dollar value has also increased the cost of living for the consuming class that buys products that are either imported or have substantial imported input.

In India, the local and international banks are making consumer credit increasingly available to middle-class borrowers. This is spurring a new wave of consumer spending unprecedented in India's history. Whereas in Pakistan the commercial banks are pulling out of consumer finance as it carries high risk due to limited incomes of the middle class.

The middle class in Bangladesh has also expanded at a great pace in the last decade. It is because of this increase in its consuming class that Bangladesh is expected to grow at higher pace than India, which up till now was the global growth leader.

Indian middle class has also tripled in last one decade as in 2009 only 11 percent were earning above $10,000. The momentum has been set for both India and Bangladesh and their middle-class would grow for years to come.

Pakistan needs to increase its effective middle class by increasing its spending on education and skill training. Only after that we could dream of sustained growth even on local consumption.

It is the middle-class that is the backbone of every society. They are not filthy rich but there are intellectuals, engineers, doctors, scientists, and industry professionals.

They influence policies. They fight corruption, bad governance, and incompetence. They spur growth; they are consumers of goods and services. The middle class is also different when it comes to the role of freedom in their own lives. They support struggle for freedom of speech, freedom of religion, freedom from hunger and poverty, or freedom from crime and violence. The middle-class is more inclined than the less wealthy to consider equal judicial treatment very important.

When confronted with a choice between a good democracy and a strong economy, members of the middle classes in many developing countries prefer good democracy over affluence.