Rest assured. Even though I would like to grab the attention of as many readers as possible, it is not my intent to enter the realm of cheap sensationalism with topics on humans as an endangered species on account of accidents or disasters. But “never say never”… It is something else that I would like to suggest for you to ponder over the weekend, based on the assumption that both I and the majority of you are part of the middle class “species”. I am referring here to experts and managers, businessmen, the self-employed, to name but a few categories that I would rank as the Romanian middle class.
True, the topic may seem a bit far-fetched given that in a developing country such as Romania, the middle class is in the process of shaping up, helped along by an entrepreneurship boost in various shapes and sizes. However, Romania is not China where even with the financial crisis in full swing, the middle class experienced consistent growth, as demonstrated by the constantly higher demand for European luxury items, as I pointed out on another occasion. The convergence process will inevitably cause the Romanian middle class to walk on the same trodden path as their Western counterparts at some point. What will happen once we get there is not meant to comfort us.
The middle class in both the US and Europe are under attack from three major disruptions: globalization, the economic and financial crisis and more recently, the digital revolution. Let us begin with globalization. As mentioned in other posts, as globalization has increased over the last ten years, the middle class in developed countries was the main loser while the net winners were the global elites and the emerging countries. Statistics leave no doubt. The world`s richest became richer with an increasing percentage of the total wealth in their hands. Deregulating capital and commodities flows granted the savvy access to a sizable pool of affordable labor and at the same time increased the solvency of those markets. Thus a second class of winners emerged: a part of the emerging countries.
A country like China started to catch up with the richer countries in terms of development which supported a better standard of living for its own citizens and a reduction in poverty. But we do not need to travel to Asia to see that. Even Central and Eastern Europe benefited at the end of the day from the opening of capital flows and the movement of labor by joining the EU and replicating at a smaller scale the dynamics triggered by globalization worldwide. Not all emerging countries, however, were able to take advantage in equal measure because some of them, such as Russia and Brazil, kept their economies dependent on commodity exports. Capital flows and export income were not channeled towards development, but consumption or other money losing investment projects. For that reason their economies remain as volatile as the prices of the commodities they trade in, which makes them extremely vulnerable and hence, weak. To put it differently, it is a failed development model which goes to show that resources are to no avail if you cannot manage them.
Relocating production capabilities from the developed countries to areas with affordable labor and large markets increased the pressure on the workforce in wealthy states, limited their bargaining power and as a result lead to a wage growth cap. Besides seeing their personal wealth reaching a plateau, a significant portion of the population in the developed world was hit by the economic and financial crisis. It impacted the developed countries to various degrees, the middle class was affected to a greater or lesser extent, but the effects were the same: the middle class shrank.
The middle class in the US was probably the worst hit for several reasons: high debt ratio, significant exposure to capital markets, weak welfare safety net. Bankrupt businesses, large or small, the substantial turnaround of the financial industry left many of the American middle class without a job or even bankrupt. Neither was the European middle class unscathed even though the aforementioned factors valid for the US were only partially present in the EU. There were, however, new variables to make up for that, such as a delay in recovery programs and the Greek debt crisis. Only now have we seen a slow rebound of this social class reflected in the tiny increase in consumption, sluggish employment recovery and, finally, unconvincing growth.
But the recovery is threatened in the short and medium term by the prospect of a new crisis. China may be boasting a nearly 6% growth rate, but quite many analysts consider that, given the negative dynamics of exports, energy consumption, transports or steel output, China`s economy is growing far too slowly or it is actually stagnating. Meanwhile the monetary policy of the US divergent from that of the rest of the world`s causes the dollar to strengthen leading to inflationary pressures within the US, but also putting a brake on US exports, all the more so as foreign demand is on the decrease. They will both increase the likelihood of the US going into recession, putting pressure on the FED to delay an interest rate hike.
In the long term, however, the main threat facing the middle class could be the digital revolution which is set to thrive. A study of the World Economic Forum (WEF), a foundation mostly known for organizing the Davos World Economic Forum, looking at countries such as Australia, Brazil, China, France, Germany, India, Italy, Japan, Mexico, South Africa, Turkey, the UK and the US, states that over 5 million jobs will be lost by 2020. It is estimated that the advancements in genetics, artificial intelligence, robotics and other hi-tech areas will cause 7 million jobs to disappear and 2 million new jobs to be created. Administrative and office tasks will account for two thirds of total losses, whereas IT, mathematics, architecture and engineering will be the big winners. According to the report, the lower involvement of women in these areas makes them more vulnerable to the tech advancements.
The extent of the shift is hard to estimate, but some of us will have to reinvent ourselves because the changes will not affect only the low-skilled workers. Human intelligence and know-how will be partially or totally replaced by artificial intelligence. Many experts` know-how in medicine, legal assistance or engineering will be taken over by expert-systems which will render their services redundant. Klaus Schwab, Executive Chairman of the WEF, claims in the Foreign Affairs magazine that social inequalities could be deepened as the main beneficiaries of the digital revolution will be those who hold tangible or intellectual capital: innovators, shareholders, investors. Given the ever-increasing value assigned to excellence, he purports that there is a major risk of labor segregation into a poorly qualified/poorly paid and highly qualified/highly paid workers which could result in higher social tensions.
The authors of the WEF study believe that in order to prevent the worst case scenario from happening – technological changes accompanied by a shortage of experts, mass unemployment and higher inequalities – re-training staff will be paramount. “…it is simply not possible to weather the current technological revolution by waiting for the next generation’s workforce to become better prepared.”. Indeed, the WEF assessment points out the extent and speed of the changes that we will be witnessing and that we are currently underestimating according to which 65% of the children enrolling in elementary school today will be working in jobs that do not even exist today.
Where does Romania stand in the overall picture? In the short term, I believe that the middle class is not threatened. We are still a developing economy which offers many opportunities to entrepreneurial people and foreign businesses looking for experts at a more affordable price than in their native countries. Convergence with the EU also implies a gradual increase in productivity and wages pushing more and more people whose current income does not classify as middle class into that class. Moreover, we also have a knack for IT, and a demand increase for IT specialists will work in our favor and could prove to be the card up the sleeve of a country short on tangible capital, but boasting a significant intellectual capital.
On the other hand, the window of opportunity may not last forever, especially for the least qualified. The country will need to switch fast from abundant and affordable workforce to specialized and well paid workforce or we may be caught off guard. Automation will make multinationals more likely to return to their developed countries of origin.
Indeed, a Boston Consulting Group study quoted by Forbes shows that over one third of US businesses intend to bring at least some of their operations back to the US over the next years, as automation will boost local production efficiency. For countries such as Romania, whose development heavily relies on foreign capital, such a disinvestment could have serious consequences. Things risk moving too fast for our capacity to adjust as a state and individuals, accustomed as we are with looking only at the immediate future. Moreover, even though I mainly dealt with the impact on the labor market, the effect on business models will be at least as dramatic. I encourage you to look up assessments in this area and study them.
As far as I am concerned, I will try to make my Thoughts for the Weekend as personal as possible to stay clear of any competition from artificial intelligence that could provide you with more exciting and abundant food for thought.
Have a nice weekend!
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