World on the Move

Consumption Patterns in a More Equal Global Economy

Paolo Mauro, Tomas Hellebrandt, Jan Zilinsky

• Publisher: Peterson Institute for International Economics
• Year: 2016
• ISBN:
  9780881327175
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

The world is poised on the threshold of economic changes that will reduce the income gap between the rich and poor on a global scale while reshaping patterns of consumption. Rapid economic growth in emerging-market economies is projected to enable consumers worldwide to spend proportionately less on food and more on transportation, goods, and services, which will in turn strain the global infrastructure and accelerate climate change. The largest gains will be made in poorer parts of the world, chiefly sub-Saharan Africa and India, followed by China and the advanced economies. In this new study, Tomas Hellebrandt and Paolo Mauro detail how this important moment in world history will unfold and serve as a warning to policymakers to prepare for the profound effects on the world economy and the planet.

1

The Changing Landscape of Global Consumption

“Do you need one burner or two in your stove?” asks the salesman. Grace Makutsi, a graduate of the Botswana College of Business and Secretarial School, hesitates for a moment. She and her husband are choosing appliances for the modest house they just purchased. Never in her wildest dreams had she imagined she would be in a position to have a stove with two burners. She delights in the prospect and feels proud of her achievements.

Balram Halwai is the son of a rickshaw puller in rural India and has worked his way up to become the main driver of a local landlord. Through wit and ruthlessness, he has mustered the resources to acquire his own taxi company in Bangalore. When boasting about his material success, he points to his ownership of a chandelier and a laptop.

Makutsi and Halwai—fictional characters from bestseller¹—live continents apart and have very different lives. But they share a sense of enthusiasm about modern consumer goods that are taken for granted in the rich world, as well as a feeling of accomplishment in having acquired them.

Nearly a billion people in emerging-market economies in Asia and Sub-Saharan Africa will join the modern consumer classes over the next two decades.² Rising incomes will enable them to buy adequate food and simple goods such as toothpaste, bicycles, and television sets for the first time. Meanwhile, hundreds of millions of people who now live modestly will be able to purchase cars, air tickets, and improved medical care. The unprecedented demographic boom in Sub-Saharan Africa and continued rapid population growth in India—as population stagnates in China and most advanced economies—will shift the world’s economic center of gravity toward consumers in emerging-market Asia and, to some extent, Sub-Saharan Africa, offering fresh opportunities to companies and investors. Firms in these markets will become more productive by adopting modern technology and business practices and adapting them to local conditions. Output will increase, further raising the incomes and spending of the residents of emerging-market economies.

Focus of the Book

To better understand these trends and their policy implications, this book focuses on people rather than countries. Instead of relying solely on macroeconomic statistics, such as per capita GDP, it uses household surveys, in which thousands of people representative of a country’s population provide information on their incomes and spending by category. Each country’s household survey reveals the number of people who earn a given income level and what they spend their money on. Combining this information with forecasts of output and population for each country, the book projects the global distribution of individual incomes and consumption 20 years from now. It then uses the projected global income distribution to forecast what categories of goods and services will be in greatest demand and in which regions in the next two decades.

How future global gains in income are distributed among the world’s citizens is important not only in its own right but also because it affects the types of goods and services people will buy. If all income gains were to accrue to the richest people on the planet, spending on sports cars and luxury handbags would rise, but demand for wheat and soap would remain unchanged. In contrast, if the gains were to accrue to the poorest people, spending on food and other basic necessities would rise significantly.

The analysis in this book reveals not only that global income inequality will decline but also that hundreds of millions of people worldwide will be able to afford the goods and services that until recently have been widely consumed only in advanced economies. In that broad sense, the world’s citizens are projected to become more equal in terms of what they consume as well.³ As the income gap between the global rich (mostly residents of advanced economies) and the rest narrows, spending on transportation will rise dramatically. The increase will require massive investments in infrastructure (railways, bridges, roads, and ports), putting strains on government budgets, scarce natural resources, and the environment. Rising consumption of meat and fish could also have ominous implications for land, water, and ocean resources as well as for the climate.⁴

This analysis focuses on income and consumption rather than wealth for several reasons. First, data on income and consumption are more generally available and allow for more sophisticated analysis.⁵ Second, as the bottom half of the world’s population has long had essentially no wealth, trends in indicators such as the number of billionaires (who have as much wealth as the bottom half of the world’s population) or the wealth held by the top 1 or 50 percent would not be as informative as trends in the incomes of the corresponding shares. Third, income is more relevant than wealth in forecasting what people—especially people in the bottom half of the distribution—will buy.⁶

Key Findings

Ignoring national borders, the distribution of individual incomes of all people worldwide will become more equal in the next 20 years. Rising incomes in emerging-market economies will increase spending on transportation, which will require enormous infrastructure investment in these countries. Government processes will have to become more transparent to ensure that the money is not wasted on unnecessary or poorly implemented projects.

Global Income Distribution

For the first time since the Industrial Revolution allowed today’s advanced economies to pull away from the rest of the world and deliver unprecedented levels of affluence to their citizens, the gap between the global rich and the global poor started declining significantly at the turn of the 21st century. This trend of falling global inequality is expected to continue for the next two decades, under the economics profession’s consensus projections for output and population growth in individual countries.

In the baseline scenario, the Gini index for worldwide income distribution is projected to decline from 69.1 in 2015 to 66.6 in 2035.⁷ (It was 73.8 in 2003 and at similar values in the late 1980s.) In 2015 the global income of individuals in the 90th percentile of the income distribution was 29 times that of people in the 10th percentile.⁸ This ratio is projected to fall to 25 in 2035, primarily as a result of faster economic growth in emerging-market economies than in advanced economies. Rising incomes in emerging-market economies are expected to lift almost half a billion people out of extreme poverty, defined as living on less than $1.90 a day.

If income inequality within countries evolves with economic growth based on the relationship between inequality and affluence observed across countries, global inequality could fall even faster. In this scenario the global Gini index would reach 63.0 in 2035. Under an alternative, more pessimistic scenario—in which countries’ economic growth rates gradually revert to the worldwide average growth rate observed over the past 50 years, reducing the pace of convergence between emerging-market and advanced economies—inequality declines more slowly, with the Gini index reaching 68.2 in 2035.

Under the baseline scenario, the global pool of consumers will increase, with the largest net gains in emerging-market economies. The number of people with annual household incomes below $2,000 (in international US dollars at 2011 prices) is projected to decline by more than 1.1 billion.⁹ The $2,000-$6,000 income bracket will swell by about 700 million people, with the largest gains in Sub-Saharan Africa and India. The number of people with incomes of $6,000-$20,000 will increase by a little over a billion, with the largest gains in India and China. The number of people with incomes over $20,000 will increase by almost 800 million, with the largest gains in the advanced economies and China.

Global Consumption Patterns

As incomes rise, people across cultures increase their spending on transportation more than proportionately. Growth of transportation spending will be especially strong in emerging-market Asia—including China and India—and Sub-Saharan Africa, where large segments of the population are on the cusp of being able to afford cars and air travel for the first time. Spending on transportation will increase well in excess of total consumption in most emerging-market economies. It is projected to increase by a factor of four in India, followed closely by China and Sub-Saharan Africa; three or more in East Asia and the Pacific; and at least two in all remaining emerging-market regions. Global spending on transportation is projected to increase by 127 percent between 2015 and 2035, compared with 107 percent for total consumption. The global difference is more modest than regional differences, because much of today’s transportation spending occurs in advanced economies, where spending is projected to grow relatively slowly in the next two decades.

Food consumption will rise more slowly than household incomes, as people divert some of their resources to nonessential items. The highest growth rate is projected in Sub-Saharan Africa (145 percent), in part because of the rapid growth of total consumption there (the gap between the growth rates of food consumption and total consumption is relatively small because of the sizable initial share of food in total consumption in Sub-Saharan Africa). India will also see food consumption at least double (110 percent growth); Southeast Asia, East Asia and the Pacific, and China will see growth of 80–90 percent. The lowest growth rates for food spending (about 30 percent) are projected in the countries of the European Union and the Organization for Economic Cooperation and Development, Eastern Europe, and Central Asia.

Food consumption is projected to grow more slowly than total consumption, but the increase will still put considerable pressure on natural resources. As individual incomes rise from very low levels, consumers usually increase the share of meat and fish in their diets.¹⁰

Infrastructure Needs

The projected shift in spending patterns over the next 20 years—which will disproportionately benefit people in emerging-market economies—means that more infrastructure will be needed than would be projected on the basis of GDP growth alone. Just building new paved roads and railroads will cost an estimated $48 trillion through 2035, according to this book’s analysis.

The needs are so massive that governments will not be able to act alone; the private sector will need to participate on a grand scale. Transparency will be needed in dealings with private sector actors, to ensure that they—and government officials—do not profit unfairly, by overbilling, delivering substandard products, or building unnecessary projects. The potential for corruption is enormous, especially because needs will be greatest in many of the countries in which governance is weak.

To finance these expenses—as well as the costs of maintaining this infrastructure—governments will need to start making decisions about tax and expenditure policies soon. They will also need to choose options that are climate-friendly (building metros and railways rather than roads, for example, and investing in renewable energy rather than coal). Given the long lives of infrastructure, choices made today will affect the livability of emerging-market megacities and the global climate for generations.

1. Alexander McCall Smith’s The Limpopo Academy of Private Detection (2013) and Aravind Adiga’s The White Tiger (2008).

2. Throughout the book, the term “emerging-market economies” includes all nonadvanced economies.

3. This book does not examine the extent to which closing income and consumption gaps will result in lower disparities in perceived well-being, happiness, or health outcomes. On the relationship between income, consumption, and those outcomes, see Deaton (2013).

4. Compared with vegetarian sources of calories and protein, meat requires more water and energy to produce and leads to higher greenhouse emissions (Foley 2014, Kunzig 2014).

5. The best data on the global wealth distribution were assembled and analyzed by Davies et al. (2011) and partially updated and popularized by Credit Suisse (2014) and Oxfam (2016). According to Oxfam, the net wealth of the world’s wealthiest 60 individuals is as great as that of the bottom 50 percent of the world’s population.

6. Although income is more relevant for projecting expenditures, wealth (which is distributed more unequally than income) is also an important measure. The lack of wealth leaves people at the bottom of the distribution highly vulnerable: With no assets to tap during bad times, they are unable to smooth their consumption and are thus wholly exposed to the vagaries of their incomes

7. The Gini index (or coefficient) is the most common indicator of inequality. It ranges from 0 (a situation in which everyone in the economy has the same income) to 100 (a situation in which a single person in the economy earns all the income).

8. In a population of 100 people ranked by ascending order of income, the 90th percentile would represent the income of person number 90 (i.e., the person with the 10th-highest income). The ratio of the 90th to the 10th percentile is a common way of summarizing income inequality that reduces the influence of extreme poverty and extreme affluence.

9. Throughout this book, data are presented in constant 2011 prices in international US dollars. Data in local currency are converted to international US dollars using purchasing power parity exchange rates drawn from the World Bank’s World Development Indicators. Such exchange rates measure the relative cost of purchasing the same basket of consumer goods and services in different countries. They take into consideration the fact that, for example, the price of a haircut is cheaper in an emerging-market economy than in the United States.

10. For example, daily consumption of animal source foodstuffs (measured in grams per capita) in China is twice as large for high-income households as for low-income households (Du et al. 2004).

2

Projecting Growth in Populations and Incomes

Prediction is very difficult, ...

Table of contents

• Cover
• Title
• Copyrights
• Contents
• Preface
• Acknowledgments
• 1 The Changing Landscape of Global Consumption
• 2 Projecting Growth in Populations and Incomes
• 3 Measuring Income Distribution within Countries
• 4 Global Income Distribution from the Turn of the Century to 2035
• 5 How Will Changes in Population and Income Distribution Affect Global Consumption?
• 6 Projected Demand for Transportation Infrastructure through 2035
• 7 How Will Countries Build the Infrastructure They Need?
• 8 Challenges from Rising Consumption in the Next 20 Years
• References
• Index
• Back Cover