Section 4 Sophistication of consumption 1. Income per capita

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1 Section 4 Sophistication of consumption Against the backdrop of rapid economic growth, the sophistication of consumption is advancing in emerging economies. Below, we will first look at changes in consumption expenditure per capita in emerging economies and then describe the sophistication of consumption there. 1. Income per capita As for changes in income per capita (real GDP per capita on a purchasing parity basis), income per capita surpassed 5,000 dollars, a level above which more than half of disposable income may be used for discretionary expenditure, in upper-middle-income economies in the 1980s and is expected to reach 15,000 dollars there in 2015 (Figure I ). In lower-middle-income economies, income per capita surpassed 5,000 dollars in Meanwhile, in low-income economies, as the growth in income per capita has been slow, the income level is expected to be less than 2,000 dollars in It is generally presumed that when annual disposable income is higher than 5,000 dollars, half of the income can be used for expenditure on items other than foodstuff (discretionary expenditure). According to the Ministry of Economy, Trade and Industry (2012), when households disposable income has surpassed 5,000 dollars, the ownership rate of various household appliances, such as washing machines and refrigerators, rises rapidly. When households disposable income has reached the range of 7,000 to 10,000 dollars, consumption expenditure on various services, including dining-out, education and leisure activities, rises rapidly, and when it has surpassed 12,000 dollars, expenditure in the healthcare sector increases (Figure I ). It is generally presumed that for Japanese companies that excel in high-quality, high-function products, regions where higher-income groups of people are increasing are more attractive as markets. 77

2 Figure I Changes in real GDP per capita (Dollars) Real GDP per capita Half of the income can be used for discretionary expenditure 5,000 dollars Figure I Consumption expenditure by income group Note: On a purchasing parity basis. Simple average of the countries and regions that constitute each ecomic group. Figures after 2014 for some of the countries include estimated values. Source: World Economic Outlook (IMF). [Household income: $70, 000 or more] Average household income in Japan in ,000 dollars [Household income: $12,000 or more] - Expenditure in the healthcare sector increases. Upper-middle-income groups 10,000 dollars [Household income: $7,000 to $10,000] - Consumption expenditure on various services, including dining-out, education and leisure activities, rises rapidly. - Consumption expenditure on luxury items, such as interior accessories, rises rapidly. - Ownership rate of new cars rises rapidly. [Household income: $5, 000 or more] - Ownership rate of various household appliances, such as washing machines and refrigerators, rises rapidly. * Income level in Japan in the first half of the 1960s Lower-middle-income groups 5,000 dollars Source: Shin chukansou kakutoku senryaku - Asia wo chushin to shita shinkokoku to tomoni seichosuru Nippon (METI). 78

3 2. Consumption expenditure In upper-middle-income economies, consumption expenditure has increased steeply since the latter half of the 2000s, when income per capita started to rise (Figure I ). Consequently, expenditure in 2013 nearly quadrupled from 2000 to approximately 9 trillion dollars. In lower-middle-income economies, consumption expenditure in 2013 quadrupled from 2000 to 3.4 trillion dollars. On the other hand, in low-income economies, the growth in consumption expenditure has been slow. (Trillion dollars) Figure I Changes in consumption expenditures Source: WDI (World Bank). 3. Diversification and sophistication of consumption In line with the rise in the income level, consumption in emerging economies is expected to become more diversified and sophisticated than before. Discretionary expenditure, or expenditure on non-necessity items, including transport and communication, recreation and education and medical and health care, is expected to grow. Consequently, demand for various goods and services is expected to grow in emerging economies. For example, if we look at changes in the number of subscribers for mobile phones, a service that is most emblematic of the economic globalization, we can see that the subscriber numbers in upper-middle income economies and lower-middle-income economies have continued to rise steeply in the 2000s and have surpassed the subscriber number in high-income economies in 2008 and 2010, respectively (Figure I ). 79

4 (100 million people) Figure I Changes in the number of mobile phone subscribers High-income economies Source: WDI (World Bank). The number of Internet users has also continued to rise. In emerging economies, the number of Internet users started to rise around 2000, and in 2013, one in two persons were using the Internet in upper-middle-income economies and one in five persons were using it in lower-middle-income economies (Figure I ). 80

5 Figure I Changes in the number of Internet users per 100 people (Number of users per 100 people) Source: WDI (World Bank). In the meantime, imports of consumer goods by emerging economies have also been increasing steeply (Figure I ). The value of consumer goods imports by upper-middle-income economies reached billion dollars in Including imports by lower-middle-income economies, the value of consumer goods imports by middle-income economies totaled nearly 600 billion dollars, equivalent to around 20% of the value of imports by high-income countries in 2012, which was 2,800 billion dollars. 81

6 (Billion dollars) Figure I Changes in the value of consumer goods imports Source: UN Comtrade (United Nations). If we look at the value of imports of information and communication equipment 13 by emerging economies as an indicator of the degree of the penetration of IT there, we can see that the value has risen steeply in upper-middle-income economies since 2000 to a level far above the levels in lower-middle-income economies and low-income economies (Figure I ). 13 It should be noted that the import value of information and communication equipment here represents the total of the import values of such equipment classified as consumer goods and of equipment classified as capital goods. 82

7 Figure I Changes in the value of imports of information and communication (Billion dollars) equipment Notes: Data shows the results of calculation by multiplying the share of information communication equipment in goods imports of countries by their goods imports values, only targeting the countries providing data on all given years. Source: WDI (World Bank). As shown above, the consumption trend concerning consumer goods and services in emerging economies appears to be rapidly becoming closer to the trend in high-income economies. However, a comparison between emerging economies and high-income economies in terms of the breakdown of actual consumption expenditure shows that there are still significant differences between the two groups. Figure I shows a comparison between the Chinese city of Shanghai, which is the largest city in the world, and Tokyo in terms of the breakdown of consumption expenditure. This indicates that compared with Tokyo, Shanghai lags in the diversification of the consumption structure. There is a particularly large difference between Shanghai and Tokyo with regard to other goods and services, an item which mainly comprises discretionary expenditure products such as beauty products and personal goods. The figure shows that in Tokyo, other goods and services is the second largest expenditure item after foods, while in Shanghai, this item s share in overall expenditures is very small. An increase in expenditure on other goods and services, as well as an increase in expenditure on cultural activities, would mean diversification of consumption. It may be said that there is still ample room for further sophistication of consumption even in Shanghai, where consumption is supposed to have become as sophisticated as in high-income economies. 83

8 Figure I Comparison of breakdown of consumption expenditures between Shanghai, China, and Tokyo, Japan, in 2013 Clothing Food Household equipment, services Transportation, communication Medical and health care Education, leisure and cultural activities Other goods and services Shanghai, China Tokyo, Japan Notes: 1. As for Tokyo, figures show the consumption expenditures in the Tokyo Metropolitan Area. 2. Other goods and services include beauty products, personal goods, tobacco, entertainment expenses and remittances. Source: Kakei Chosa (MIC), JETRO website. 84