Caught in the middle

Mahmoud Mohieldin
Wednesday 25 Jan 2023

The world’s middle-income countries and middle classes are being caught in a “middle trap” as a result of the present global changes


Perhaps you, like me, spent a good part of the end of 2022 and the beginning of 2023 following media reports about the crisis-plagued global economy and fretting over the dire prognoses from experts on its repercussions on people’s lives and standards of living.

Perhaps you were then also taken by surprise by the sudden optimism and upbeat reports in periodicals like the London Financial Times on the World Economic Forum held in the Swiss resort of Davos last week and the jubilation sparked by the four per cent upturn in the global financial markets since the beginning of the year.

The mood brightened further with the news that China, the second largest economy in the world, had ended its zero Covid-19 policy and was opening up again and working to get production and consumption back into full swing. Some also cheered the approximately 80 per cent drop in natural gas prices that will ease pressures on Europe, the world’s third largest economic bloc, which had been reeling from the crisis in energy supplies and global price hikes.

The Inflation Reduction Act (IRA) recently passed in the US also brought smiles of relief with its promise of generous government-funded investments in clean and renewable energy and infrastructure programmes. Such positive signs from the three largest economies in the world will encourage international financial agencies to update their forecasts to herald a reviving global economy that averts recession and brings inflation under control.

But perhaps we need not be so surprised by the sudden turnaround in economic expectations and outlooks. Previously in this space I wrote that “the general uncertainty that prevails today makes the chances of predictions coming true little better than a stab in the dark, and if they do come true it would be more accurate to attribute it to pure coincidence.”

“If you doubt this, just refer back to the forecasts that international agencies have made during the past three years since the outbreak of the Covid-19 pandemic about global economic growth, inflation rates, the exchange rates of major currencies, and the prices of oil, food, precious metals and other commodities, and see how closely they match up to reality.”

At all events, I have no doubt that the US Federal Reserve’s monetary policies will ultimately steer the US economy out of its current inflationary problems. The Fed may be forced to raise interest rates by 25 to 75 basis points, or less than one per cent, by the end of the year. But then it will pause to assess the situation.

It will take stock of the labour market, comparing job creation or stability trends with layoff rates among major companies, assess whether economic growth rates have fended off the spectre of recession, ascertain whether small and medium-size enterprises can hold their own, and ensure that the real estate and financial sectors are on a healthy footing and not overexposed to risk and forfeitures.

I see good news on China as well. Its quick return to normality after three years of pandemic lockdowns will have welcome effects on economic growth and employment rates. It might take a period of cautious readjustment during the first quarter or so of this year, but if things are allowed to proceed as expected, the rising Chinese growth rate will have a positive impact on average global economic growth.

China’s renewed growth will, of course, also be accompanied by an increase in demand for energy, basic commodities, and raw materials, and by a rise in transportation and shipping costs. It will therefore be necessary to calculate the net effect of its recovery on the production, supply, and distribution sectors, always presuming that supply chains will function normally free from disruptions due to natural causes or restrictive protectionist policies from some of China’s trading partners.

Rising energy prices due to China’s return to normal and anticipated economic growth may pour cold water on happiness at the prospect of lower inflation rates in Europe, especially given the ongoing war in Ukraine. The European Central Bank may therefore feel compelled to sustain its monetary tightening policies and even to discourage expansionary fiscal policies that could offset its efforts to fight inflation.

Ultimately, we might see a repeat of the European experience with a post crisis delayed recovery. If so, the causes would not just be higher energy costs and the war in Ukraine. It would also be due to older and deeper problems such as the decline in population growth and the aging population in Europe, together with lower productivity and decreased spending on innovation and research and development with few exceptions.


What will be the net effect of the above-mentioned changes and the race between the world’s major economies on the developing nations?

Of particular concern are the impacts on the middle-income nations. These are the ones that generally end up the losers in a scramble of this sort, and the middle classes in these countries tend to be the most vulnerable to risk in times of crisis.

The wealthy have a financial buffer to protect them, and some quarters of them may even benefit from crises, depending on their sources of wealth and income. Low income families generally have established social and economic safety nets that ensure government-funded material and financial support at times of stress that largely insulates them from the worst effects of a crisis if the systems are activated effectively and in a timely manner.

The middle income nations that fall into what I have called the “middle trap” account for a third of the global economy and are home to 75 per cent of the world’s population and more than 60 per cent of its poor, which includes most of the populations of the Arab region and Africa.

As I have pointed out many times before, middle income nations do not have access to cheap loans in their own currencies. The loans they obtain are therefore vulnerable to exchange rate fluctuations. Nor do countries in the “middle trap” get the advantages of the facilitated loans that international development organisations offer poor and low income nations.

The ostensible logic behind this is that middle income countries have the means to finance themselves from their own domestic resources, private sector investment and access to international markets. But this argument is based on a false premise.

Classification methods that peg countries and peoples into certain income brackets on the basis of naive indexes that reduce development to mathematical averages are misleading.

They fail to take into account sharp disparities in incomes and extreme vulnerability to shocks, for example.

The “middle trap” thus epitomises two problems: the trap in which middle income countries are caught and the trap in which the middle classes in these countries are caught. To these, I will add a third in the shape of medium sized enterprises. Large companies enjoy preferential treatment from banks and financial markets, and small and micro enterprises receive support packages from local or foreign donors.

Medium sized enterprises in many developing countries, on the other hand, have no such forms of support to turn to in times of crisis. They have neither the resources and facilities available to large companies nor the attention that donors shower on small enterprises. They too are among the “forgotten middle,” a term that has gained currency to refer to the entities – countries, companies, or people – that have been slotted into a nowhere zone on the basis of some ranking system or other.

Clearly, the means for facilitating financing in times of crisis need to be reconsidered. For developing nations, fresh thought needs to be given to what they can obtain from international financial organisations and how to ease stringent terms for loans.

I have proposed, for example, that climate action financing for the developing nations should come with a no more than one per cent interest rate, a grace period of ten years, and a repayment period of at least 20 years, and that this support should be funded from the $100 billion a year that the industrialised nations have pledged to the developing nations, though only a fraction of this has far been forthcoming.

With regard to medium sized enterprises, all possible support should be made available to the ones that show promise on the basis of pioneering technological components and their contributions to employment, innovation, and exports.

The middle classes should be seen as the bedrock of social stability and values in society and the vehicle for the social mobility that is necessary for progress. At the time of the rise of the Japanese economy after World War II, if you had asked a young person what social status they aspired to, they would immediately answer that they wanted to be like everyone else.

In societies where the middle classes make up the majority of the demographic and economic pyramids, an individual’s aspiration is very properly to be like other members of the general public.

*This article also appears in Arabic in Wednesday’s edition of Asharq Al-Awsat.

**A version of this article appears in print in the 26 January, 2023 edition of Al-Ahram Weekly.

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