ANALYSING MIDDLE INCOME GROUPS IN A MIDDLE INCOME COUNTRY: A CASE OF MONGOLIA TERMS OF REFERENCE FOR A POLICY STUDY

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1 ANALYSING MIDDLE INCOME GROUPS IN A MIDDLE INCOME COUNTRY: A CASE OF MONGOLIA TERMS OF REFERENCE FOR A POLICY STUDY 1. INTRODUCTION Ministry of Economic Development (MED) and UNDP through the project Strengthening the Government Capacity of National Development Policy & Planning MON/13/201 are inviting proposals from eligible research teams for conducting policy based research on the topic Analysing middle income groups in a middle income country: A case of Mongolia. The outcome of the policy study will contribute to meeting the overall objective of UNDP s NDPP programme of strengthening government capacity to undertake, and use the outputs of, applied policy research on human development issues especially relevant to achieving Mongolia s development objectives, particularly the MDGs. The policy study is expected to lead to evidence based policy making that strengthens utilization of information, research and analysis for future policy and strategy formulation and planning, and thus, maximize UNDP s overall development impact in the country. The subsequent sections describe the design of the study in detail. 2. BACKGROUND With rising mean per capita incomes, many countries are now categorized as middle income countries (MICs). 1 These MICs are home to a rapidly increasing emerging middle income group, whose members are neither poor, nor rich. Rather loosely, this middle income group has been labeled as the middle class and many economists have tended to identify the middle class using income or expenditure criterion. But there is no consensus on whether absolute or relative income matters, or within what ranges of absolute or relative income the middle class lies. One approach simply categorizes anyone who is not poor as middle class. Many recent studies are based on absolute definitions of expenditure per capita/day (PPP), ranging from USD 2 13/day; 2 stipulating two ends of the middle class such as USD 2 4/day and USD 6 10/day; 3 USD 2 $10/day and USD 20/day; 4 or defining a global middle class as the group living on between USD 10 and USD 100/day. 5 Others have taken the literal middle of the income/expenditure distribution in terms of the middle three expenditure quintiles, 6 or the non literal middle as those between the poor (taken as the bottom 40%) and the rich (taken as the top 10%). 7 By the latter approach the 3 rd and 4 th quintiles 1

2 are regarded as the middle class with the top and bottom quintiles as the rich and the poor respectively. The 2 nd quintile is the vulnerable group which is sometimes just above the poverty line and often experiences transient poverty. Both the absolute and relative approaches have their pros and cons. Sociologically, a class is supposed to possess shared interests or characteristics, aspirations and values. So a natural question arises whether the rising middle income group in MICs constitutes a middle class, for it is not clear whether the middle income group collectively reflects a class identity. If so, should the middle class be assessed and analysed in terms of daily expenditures alone? In depth research to identify the characteristic features could help address this issue. 3. RELEVANCE FOR MONGOLIA Mongolia s economy has grown at a fast pace in recent years. GDP growth averaged nearly 9 percent annually in largely on the back of high commodity prices. Recovering quickly from the global financial crisis in , the economy recorded double digit growth of 17.5% in 2011 and 12.4% in Growth is being led by the services sector which accounted for nearly 52 percent of the GDP in The per capita GDP (at current prices) witnessed an almost 10 fold increase in the period , 8 and Mongolia is now classified as a lower middle income country by the World Bank. However, other indicators present a far less rosy picture. In spite of declining recently, poverty head count was 27.4 percent in The unemployment rate, by the national definition, 9 was 7.7 per cent in In contrast to adults, youth between the ages of 15 to 24 face rising unemployment. They comprised nearly 30 per cent of all unemployed in 2011, and their unemployment rate (15.6 per cent) was more than double the adult unemployment rate. Inequality as measured by the Gini coefficient has gradually increased to 0.34,with some variation between Ulaanbaatar and the aimags. The richest quintile (i.e. top 20% of the population) consumes 5.4 times the amount consumed by the bottom quintile (i.e. poorest 20% of the population). The share of the bottom quintile in national consumption increased only marginally from 7.5 percent to 7.7 percent in the decade Thus, it is fairly evident that the benefits of economic growth are not accruing to the bottom quintile. The issue to examine is whether and to what extent the middle income group, i.e. the 2 nd to 4 th quintiles, participates in and have benefited from Mongolia s economic growth. Whether the middle income group constitutes a middle class, is another question that deserves exploration. Research on these issues to draw policy conclusions forms the basis of this study. Why is it important for Mongolia to look at the middle income group? With Mongolia on track to achieve the MDG target of halving poverty by 2015, 11 attention is shifting to income groups that are neither extreme poor, nor extreme rich. These middle income groups require closer examination because their expansion is associated with aspirations related to for example, increased asset ownership of consumer goods, purchase of health insurance, employment 2

3 in the formal sector, demand for better governance, all of which may potentially have wider societal implications for taxation, governance and ultimately, domestic politics. 4. STUDY OBJECTIVES The policy research study has four key objectives. It aims to: (i) (ii) (iii) (iv) analyse the impact of Mongolia s recent economic growth on the middle income group; assess whether the middle income group constitutes a middle class in Mongolia; identify a suitable methodology for determining the middle class for Mongolia; and propose recommendations for strengthening the role and contribution of the middle income group/middle class to national development. 5. SCOPE OF THE RESEARCH The research study, to be undertaken by a research team, will consist of the following components: Component 1: Review international research to assess global trends and propose suitable middle income category classifications for Mongolia (both absolute and relative); Component 2: Using the absolute middle income category classification, analyse whether the size of the middle income group has increased (what proportion of people is in this income group, has it increased over time, etc.?), and suggest what was the factors contributed to increasing the size of the middle income group between ; Component 3: Using the relative middle income category classification, analyse the impact of the recent economic growth on the share of the middle income group in national consumption (has it increased, remained constant, or decreased?), and suggest what factors can contribute to increasing the share of the middle income group in national consumption. Component 4: Assess whether households in the middle income group, by either definition, share certain attributes so to be classified collectively as middle class?; and Component 5: On the basis of the above analyses, suggest suitable policy choices and priorities for the Government to address issues of concern for the middle income group/middle class so as to increase the contribution of this group/class to the country s development. 3

4 6. RESEARCH METHODOLOGY The research study will use a combination of methodological approaches to collect both quantitative and qualitative data. Component 1 will be undertaken through a thorough desk research which will review international research on this topic as well as any studies in Mongolia. Components 2 and 3 will be based on secondary data sources such as the NSO s Household Socio Economic Surveys (HSES) for the period 2007/08 to 2012, and Labour Force Participation Surveys, Multiple Indicator Cluster Surveys, Enterprise Surveys, etc. for various years. Component 4 will be based on primary data collected through specially designed surveys, focus group discussions, case studies, etc. to assess whether the middle income group constitutes a middle class. The research team will design and implement a special survey to explore some of the following issues which are only indicative and not exhaustive: What are general characteristics and preferences of the middle income group in Mongolia? What are the major challenges for the middle income group for further improving their livelihoods? How are the challenges faced by this group are different from those of others? What is the role of the middle income group in the society and economy and what role does it play in elections? And policymaking? Are there signs of political consolidation and empowerment of the middle income group? Does this group have adequate representation in the political system? Component 5 will be based on the results of the analyses of the previous Components. 7. SPECIFIC TASKS The research team will be responsible for the following tasks: Undertake background research; Meet with NSO and MED to access relevant data and undertake secondary research; Design primary data collection using a combination of techniques such as a survey, focus group discussions, etc.; Share the preliminary results (draft report) with stakeholders; and Prepare the final report after receiving comments. 8. DELIVERABLES The research team will deliver the following: Draft report; Share the draft report at a national consultation; and Prepare the final report. 4

5 The research team should furnish the work implementation report to the NPD (MED) on specified schedule in the contract. 9. DURATION Expected starting date of the research study: End of March; Expected duration of assignment: 3 months (March June 2014). 10. MANAGEMENT The Research team will be contracted by the National Project Director (NPD) of the MED UNDP project and will report to the NPD (MED) & Team Leader of Human Development and MDG Unit, UNDP Mongolia. On administrative matters the consultant will liaise with the National Project Manager (NPM). The research team will work closely with the Development Policy and Strategy Planning Department of MED which will support the team with the necessary documentation, assist with the organization of the meetings, accessing data, and arranging meetings with NSO. The UNDP Project team will support the research team with translations as necessary, organizing the national consultation, and any additional support the team might require. 11. REQUIRED SKILLS AND QUALIFICATIONS The Research team must be a legally registered entity with at least 3 years of experience directly related to quantitative and qualitative research, policy study or a related field. The team will have expertise on analysis and policy/strategy formulation. 12. APPLICATION PROCEDURE Qualified and interested legal entities are requested to apply by sending the following documents in the application package: Recent copy of the state registration certificate of Legal bodies; Experience/list of performed tasks relevant to this assignment; Detailed CVs of key professionals who will be part of the research team, indicating educational backgrounds, relevant qualifications and experience; Details of at least two recently completed assignments/projects similar in scale to the proposed study together with contact information of the respective clients; Technical proposal providing an approach and methodology for undertaking the policy study and implementation work plan, and indicating which member of the team will undertake which task; Financial proposal. 5

6 13. PAYMENT MODALITY We will apply standard method of payment is the output based lump sum scheme and the payment will be made in installments upon completion of the tasks as agreed at the time of signing of contract. Payments will be made in Mongolian tugrugs. The amount paid shall be inclusive of all associated taxes. ENDNOTES 1 The income categories use the ATLAS method and follow the World Bank s classification of countries by GNI per capita: low income (less than USD 1,005); lower middle income (USD 1,006 USD 3,875); upper middle income (USD 3,976 USD 12, 275); high income (above USD 12,276). 2 Ravallion, M., 2009, The Developing World's Bulging (but Vulnerable) middle class, World Bank Policy Research Working Paper Washington DC: World Bank 3 Banerjee, A.V. and E. Duflo, What is Middle Class about the Middle Classes around the World? Boston: MIT. 4 ADB, 2010, The Rise of Asia s Middle Class. Manila: Asian Development Bank; AfDB, 2011, The Middle of the Pyramid: Dynamics of the Middle Class in Africa. Tunis Belvedère: African Development Bank. 5 Kharas, H., 2010,The Emerging Middle Class in Developing Countries,OECD Development Center Working Paper 285, Washington DC: Brookings Institution. 6 Easterly, W., 2001, The Middle Class Consensus and Economic Development,Journal of Economic Growth 6, Palma, J. G., 2011, Homogeneous Middles vs. Heterogeneous Tails, and the End of the Inverted U : It's All About the Share of the Rich, Development and Change, 42(1), Government of Mongolia, 2013, Achieving the Millennium Development Goals: Fifth MDG Progress Report 2013, Ulaanbaatar. 9 The NSO defines unemployed workers as those who are currently not working but are available for work. When compared to international standards, this definition removes the criteria of actively seeking work. Internationally unemployment relates to all persons not in employment who would have accepted a suitable job or started an enterprise during the reference period if the opportunity arose, and who had actively looked for ways to obtain a job or start an enterprise in the near past. 10 Since 2010 the share declined marginally from 7.9 to 7.7 percent. 11 Government of Mongolia, 2013, Achieving the Millennium Development Goals: Fifth MDG Progress Report 2013, Ulaanbaatar. 6