The rise of the middle class

Growth of the middle class in developing countries is considered by political scientists to be the backbone of democracy and economists consider this growth an important factor that drives economic development, since the enlargement of the middle class allows for both an increase and diversification in consumption.

Recent research by Joao Pedro Azevedo from the World Bank that has not yet been published but was presented last week by the author at the Bahçeşehir Center for Economic and Social Research (BETAM) offers new insight regarding issues of poverty and the middle class in Turkey.

Azevedo's paper ("Pathways to the Middle Class: How have reducing poverty and boosting shared prosperity helped?" a joint work with Aziz Atamanov) studies the evolution of income growth and income distribution from 2002 to 2011 based on government Household Budget Surveys (HBS) statistics. In line with Word Bank standards, the authors define three groups across income distribution: The poor have an income of less than $5 per day, those with an income between $5-10 per day are considered vulnerable, and, finally, the middle class earns more than $10 per day. Incomes in Turkish lira were converted to US dollars using the World Bank's scale of purchasing power parity (PPP) for 2008. The study contends that not only the evoluton the groups’ shares but also transitions in both directions.

The proportion of the poor in the total population in Turkey was 43 percent in 2002. This figure declined to 22 percent in 2011, while the proportion of the middle class rose from 20 percent to 40 percent. The vulnerable segment remained at around 37-38 percent. This is certainly a remarkable achievement in terms of poverty reduction and middle class growth, but it is not as bright a picture as our rulers try to convince us it is. Indeed, a comparison with Central and Eastern European countries shows that Turkey performed better than some countries like Croatia, Serbia, Georgia, Armenia, the Czech Republic and Hungary, but worse than countries like Romania, Bulgaria and Poland in the period 2006-2011.

As for the transition dynamics, they provide interesting insight regarding movements from one group to another. The data indicate that 41 percent of the poor moved out of poverty during the period and became members of the vulnerable category. None were able to jump straight to the middle class. Middle class category growth was the result of transfers from the vulnerable group to the middle class; 40 percent of the vulnerable category entered the middle class. Only 1 percent of the vulnerable group fell into poverty and no middle class individuals experienced the high income losses that would have pushed them down to poverty. It is also worth noting that only 2 percent of middle class individuals fell into the vulnerable group. These findings indicate that the decrease in poverty as well as the growth of the middle class was the result of a smooth process of increasing per capita incomes from the bottom to the top. Turkey did not experience strong volatility during the period of sustained high economic growth -- close to 6 percent on average -- during the period 2002-2011.

The striking feature of Turkey's poverty reduction achievement is that it was mostly due to an increase in per capita income rather than a redistribution of income. According to the paper's authors, 89 percent of poverty reduction in Turkey came from economic growth; in Latin American countries, the contribution of growth to poverty reduction has been limited to 47 percent, with the remaining 53 percent being the result of income redistribution. This comparison demystifies the "successful" redistributive policies claimed by the ruling Justice and Development Party (AKP).

Another interesting finding of the study appears when poverty reduction is analyzed according to various types of income. There are three major contributors to poverty reduction: an increase in real wages -- particularly the minimum wage increase in 2004, the increase in employment and pensions. The contribution of social assistance lags well behind these three majors contributors.

What can be drawn from the findings of this recent study in respect to the political economy? At first glance, I might assert that during its first decade of rule the AKP was able to enlarge its electoral base -- which reached 50 percent in the general elections of June 2011 -- mostly due to pro-poor and pro-middle class economic growth. However, given the fact that this growth was based on domestic demand fueled by foreign loans which led to a very high and unsustainable current account deficit, the limits of pro-poor growth might have been reached. Relevant income data for the last two years is not available yet, but we already know that the growth rate declined abruptly to 3 percent because of strict control of private consumption. We can predict that it will likely be quite difficult to reduce poverty and to continue the growth of the middle class in the context of a low growth regime without strong redistributive policies.

(Published in Todays' Zaman, June 10, 2014)

Poverty in Turkey

The state of poverty is one of the critical issues in all democratic societies. The social cohesion, electoral   outcomes and even the stability of democracy depend on the level of poverty and its evolution.
If it is decreasing, even from a high level, it can effectively contribute to the functioning of the democratic system, allowing the incumbent party (or parties) to solve political and economic problems that often requires difficult structural reforms. However, when poverty is increasing, all kinds of extremist movements can easily find large support, which can jeopardize the stability of the democratic regime. Everyone would easily agree on this assertion, but when it is questioned whether poverty is increasing or decreasing, a consensus is not so easily found. Indeed, the measure of poverty is not an easy task. I am not talking of course about personal observations expressed so frequently in my county in cheap talk, even sometimes in television debates during which we can hear serious opposition members and even academics express that “since it is obvious (sic) that poverty is increasing, one cannot understand how the Justice and Development Party [AK Party] could increase its voter support.” For readers who are not experts on the matter, I can briefly speak about the difficulties to measure poverty and say that the critical issue is the definition of poverty. Unfortunately or obviously, there is more than one, each with their own flaws. Since each definition contains partly subjective judgments, it is tricky to define the poverty line and for this reason they are all open to criticism from the people as well as from competing political movements and academics. Till now, Turkish Statistics Institute (TurkStat) essentially produced two poverty estimations -- the first being “Complete poverty [food+non food],” based on Households Budget Surveys (HBS), and the second called “Relative poverty,” based either on HBS and Income Distribution and Living Conditions Surveys (IDLCS). TurkStat recently decided to abandon the “Complete poverty” measure because of its flawed methodology producing paradoxical results originating from the definition of the poverty line expressed in terms of consumption expenditures; the line was increasing along with the diminution of the share of food expenditure, which is, in fact, a sign of increasing welfare. TurkStat is now in search of a new definition of the poverty line. The definition of the poverty line for “Relative poverty” is not so difficult because the individual income as a certain percentage of the median income defines the line. But the problem is that a relative poverty concept measures income inequality rather than poverty. According to IDLC figures, the poverty rate (the share of individuals having an income below 60 percent of the median income) has been estimated by TurkStat as 16.7 percent in 2010. When, say, in 10 years, per capita income reaches $15,000 ($8,000 actually), the share of “relatively poor” would not be far from 16.7 percent; this will depend on the impact of income growth on income distribution. OK, I agree that the introduction was too long, so I am coming to my point: The IDLC surveys produced in accordance with EU standards since 2006 are not only more reliable than HBS but also contain questions on living conditions, allowing us to produce straightforward measures of poverty. I suggest taking three of these questions and defining as poor whoever responds negatively to all of them. The three questions are: 1) Are you able to eat at least every two days either meat, chicken or fish? 2) Are you able to replace your used clothes? 3) Are you able to adequately heat your house? These three abilities are all about basic needs and we can define those who are not capable of meeting them as poor. Using the micro data of IDLC statistics and according to the definition above, we calculated in Bahçeşehir University's Center for Economic and Social Research (BETAM),  the poverty rate or the share of poor households from 2006 to 2010 as following: 2006 (25.7 percent), 2007 (25.2 percent), 2008 (24.1 percent), 2009 (21.2 percent), 2010 (19.1 percent). So, one can assert without hesitation that, considering the ability to access basic needs, poverty is still quite high in Turkey, but it has decreased remarkably in recent years. The factors behind this improvement have to be determined through more detailed analysis, but we can already assert that the increase of per capita income during this period (approximately 10 percent) should be the main driver. The distribution of poverty among the regions is also interesting, albeit without surprise. In 2010, the lowest poverty rate belongs to western Anatolia (10 percent), followed by Central Anatolia (12.7 percent) while Southeast Anatolia by far is the poorest with 35.3 percent, followed by the East Black Sea with 25.7 percent. I think that decreasing poverty in Turkey is very consistent with the increasing electoral support for the AK Party, and the opposition -- rather than speculating on the “obvious increase in poverty” -- should focus on the alternative policies able to produce better results. Or, to wait till the low growth, in which Turkish economy seems to be trapped nowadays, produces adverse effects on poverty.