Decline Of The Middle Class

That was the heading of a piece in today's South China Morning Post. The article draws on a recent survey done by a local think-tank in Hong Kong and Kenichi Ohmae's book "The Impact of Rising Lower Middle Class Population in Japan: What Can We Do About It?".

Some key facts for Hong Kong:

1. median household income is still 15.8% lower than the peak in 1997;

2. between 1996 and 2005 the number of households with a monthly income below HK$8,000 rose by 76.5% to more than 500,000 (representing an increase from 13% to 22% of total households).

The data clearly shows that the benefits of the economic recovery that Hong Kong has experienced in the last three years have been unevenly distributed.

My view (and I am not sure if it is right or not) is that globalisation has been one of the major factors behind the decline of the middle class and the widening gap between rich and poor. Producers and suppliers of goods and services have the ability to source their goods and services from (almost) anywhere on the planet and a very strong economic incentive to use the cheapest source available. Hong Kong is not the cheapest place on the planet to do business. In fact it is, in the overall scheme of things, relatively expensive. Globalisation also means increased competition. Competition has the effect of pushing prices down, including the cost of labour.

The second reason for the growing divide between rich and poor (or at least between high income and lower income earners) is the transition from a manufacturing based economy to a services or knowledge based economy. A services based economy requires different skill sets from manufacturing. What we are seeing is a workers who have certain skills are able to command premium incomes while those who lack the skills most in demand are left to compete for a pool of jobs that require (or at least are perceived as requiring) lesser skills. In effect a large part of the gap between higher incomes and lower incomes is explained by differences in skills.

Absent a return to protectionism or the days of strong unions (neither of which I advocate or expect to see happen), I see little that can be done to address the issue of globalisation and would not, in any event, want globalisation to be reversed. It has brought more benefits than burdens. The skills issue is also unlikely to go away either. Even as workers upgrade their skills (or retiring workers are replaced by younger entrants with new skills), the pool of people around the world with the skills that employers demand is likely to keep growing. In effect keeping skills up to date is unlikely to increase your income as dramatically as it once may have. However, up to date skills may prevent you from sliding towards the lower income levels.

Kenichi Ohmae suggests that rather than aspire to join the middle class people learn to adjust their lifestyles and their expectations. In effect many people may have to forget about owning a car, owing their own home or sending their children to private schools and top universities.

This is not an encouraging perspective.