Catarina's World

Middle class spending is crucial for economic growth. So now, with Western middle classes in debt and distress, many economists look to the new emerging-market middle class as the foundation for a new era of global  prosperity. However, companies need new approaches to penetrate the developing world’s increasingly prosperous consumer markets.

The last couple of years 70 million people in developing countries joined the middle class, with incomes between $6,000 and$30,000. It is estimated that within 20 years they will surpass their Western pears when it comes to global spending power. The focus is mainly on Asia and it is estimated that in about a decade they will pick up the slack left by overspent America. Emergency market spending is in fact already bolstering the balance sheets of many Western firms.

World focusing on China and India

Needless to say the world is focusing on China and India due to its huge populations as well as rapidly rising economies and middle classes. Correct if you look at the amount of people. But by looking at the issue that way we overlook a very potent and prosperous group of people. Saudi Arabia's retail sector is actually predicted to grow by $50bn by 2014 as more international brands look to move into the kingdom that has overtaken better known retail destinations like Hong Kong, Russia and Japan when it comes to attracting brands. Only London and Dubai are attracting more retailers and shoppers.

Don't forget Saudi Arabia and the Gulf states

When it comes to per capita spending I'm certain that the middle classes in Saudi Arabia and the other Gulf countries not only earn more but also spend far more than their Asian counterparts. It's not for nothing many middle class Indians chose to work in the Gulf, despite the fact that they are paid less than the locals. Salaries are higher and you pay no income tax in the Gulf.

Shopping for entertainment

Shopping is a top leisure activity and when the weekend starts the malls are filled with people who literally shop until they drop. A woman who works in a Chanel shop in the area told me an average customer spends an absolute fortune every time they come to the shop. And the same goes for more expensive items like cars, jewellery and electronics. Considering the importance the Chinese put on saving money, I would be very surprised if middle class people in China, with the exception of some mega rich, spend that much.

Richard Branson and Martha Stewart eyes Middle East expansion

The world, certainly multinationals, are already managing the economic spending shift to Asia very well. But quite a few Western companies are forgetting about Saudi Arabia and the Gulf, which in my opinion could prove costly especially for companies selling expensive consumer goods.

So it comes as no surprise thatVirgin Mobile boss Sir Richard Branson and Qatar Telecom (Qtel) are expanding their partnership and eyeing a number of new markets in the Middle East. And US lifestyle guru Martha Stewart is extending her magazine publishing empire into the Middle East with the launch of several of her namesake titles in countries across the region

A large amount of Asian and Middle Eastern households have incomes today that position them just below the global middle class threshold and so increasingly large numbers of them are expected to become middle class in the next ten years.

Emerging middle classes have different tastes

Emerging-market leaders know that the Western system created the worldwide boom of the last quarter century that ended when Lehman Brothers collapsed. Now the boom has moved to emerging markets, and their leaders will increasingly choose to alter Western models to suit their countries. Consequently the fact that all eyes are on Asia and the Gulf is forgotten could turn out to be a fatal mistake. The new emerging middle classes are supporters of globalization but highly nationalistic. And there is a vast difference between nationalism in China and, say, Kuwait.

Back to emerging middle classes in general, we can conclude that the Chinese bought more cars than Americans last couple of years, and that India has as many Internet users as the U.S. Also it is estimated that by 2030, more than nine out of every 10 mobile phones will be owned by people in the developing world. Coca-Cola actually forecasts a doubling of worldwide revenues to $200 billion over the next decade, thanks to another 1 billion people expected to join the middle class by 2020. So Western companies who haven't yet focused on developing countries' middle classes should jump on the band waggon swiftly and not overlook the Gulf.

(photo: flickr – Lars Plougmann)

It’s not a coincidence that most successful Western corporations were founded last century. Then it was still possible to build up a highly profitable company in the West. Nowadays however, that’s easier said than done. Western tax authorities, led by Sweden followed by America, are tightening any loopholes there are.

Multinational corporations have already made arrangements to pay as little as possible to the taxman in the West. So they will not be much, if at all, affected by this. However the vast majority of companies are small and medium sized. And for them it isn't always possible to do what the big players do.

In the developing world however, companies can still do what used to be done here which gives them the upper hand. Cannot understand how tax authorities have been allowed, actually instructed, by politicians to hand out all the aces to competitors overseas? You have to play with the cards you have and with the odds stacked against them, Western companies have their hands tied.

Private sector companies generate the main part of taxes and fees that pay for government and the public sector. Hence cannot understand how Western governments can implement taxation laws that slowly but surely make Western corporations unable to compete on the global market? Where is the money going to come from to fund Western authorities? Obviously the problem is that politicians main priority is to be re-elected. They hence take opportunistic decisions to gain short term benefits. But how about keeping the West competitive in the long run? A lot of famous Western brands, such as Volvo, Rolls Royce and Range Rover, have already been sold to the developing world.

Where is the money going to come from to keep the West wealthy when companies are being taxed out of business? Tax authorities in the West are getting more and more militant and EU and US politicians are cooperating to make sure they squeeze as much taxes as possible out of companies. The justice system in Sweden is hence so twisted you are actually better of murdering someone than committing severe economic crimes since your jail sentence will be shorter.

The jobless recovery illustrates the tax problem very well. Many jobs lost will not be replaced, more likely outsourced or moved overseas. Most manufacturing has already moved to the developing world, not because companies wanted to move, but had to in order to be competitive. Fair enough since most Americans and Europeans are not keen on such jobs anyway. Catch is that all countries have a population of everything from brilliant to stupid people. What are Westerners with a low IQ going to do in the future? Non-skilled jobs are in the developing world but how many labourers in the West are prepared to start working in, say, a factory in China? Or Africa for that matter, because some experts believe manufacturing will start moving there since they provide cheaper labour than Asia.

Multinational corporations have already made arrangements to pay as little as possible to the taxman in the West. So they will not be much, if at all, affected by this. However the vast majority of companies are small and medium sized. And for them it isn’t always possible to do what the big players do. So weather they like it or not, they have to start thinking about moving their company head quarters to other parts of the world. Or, like IKEA, transfer ownership to a trust abroad.

Unfortunately politicians are not the do-gooders they ideally should be. Politics is a profession. And like the corporate world they are looking for short term gains. That companies do is one thing, but surely US and European politicians should have the long term welfare of their own countries at heart? Throughout history empires come and go. And the US and European empires are no exceptions. We all know that China, India and Saudi Arabia/the Gulf will take over. But what I cannot understand is why Western politicians are actually speeding up the end of their empires? Wouldn’t it be better to try to remain the leading powers for as long as possible by keeping the good cards? Apparently not since the West seems to be undermining its strenght from within without taking into account what this will do to future generations.

(photo: 427 – flickr)