Saturday, June 2, 2012

Driven from the poor house

Carnegie Endowment economists Shimelse Ali and Uri Dadush turn Will Rogers' Depression era joke on its head.  The middle class of the world are best measured, they say, by how many of them can afford to buy an automobile.

  • The most widely used measure of the middle class was proposed in 2002 by Branko Milanovic and Shlomo Yitzhaki, who counted people with daily incomes between roughly $10 and $50, after adjusted for purchasing-power parity (Milanovic and Yitzhaki 2002).
If one uses this definition, there are an estimated 369 million people in the developing G20 economies who qualify as "middle class."
There's a better way to measure the middle class. Cars are big-ticket items that indicate the ability and willingness to purchase many other nonessential goods. Indeed, while the vast majority of households own a car in advanced countries and many own more than one, in developing countries owning a car symbolises relative affluence. Critics may contend that measuring car ownership excludes households that can afford, say, a computer, TV set, or air-conditioner, but not a car. However, because cars in circulation in the developing world are often of very old vintage and correspondingly cheaper -- for example, the average passenger car in India is 20 years old, compared with 11 years in the US – this supposed omission is not nearly as large as it seems.
Cars in circulation can therefore provide a measure of the number of middle-class households. After correcting for household size2,  measuring car ownership suggests that the middle class in developing G20 countries is in the range of 550 million to 600 million people – about 50% larger than the number arrived at using the Milanovic-Yitzhaki definition.3 

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