Latin America’s Emerging Middle Classes

What does it mean to be middle class in Latin America? How is the Latin American middle class changing? What are the implications of these changes for Latin American development? The contributions to this volume, taken together, attempt to answer these questions and to make sense of the emerging middle classes in Latin America. This initial chapter motivates recent interest in the Latin American middle class by situating the topic in three narratives about the region’s development experience in recent years, having to do with development success (in comparison to past decades, including the so-called ‘Lost Decade’ that stretched to almost twenty years in some countries), self-sustaining economic growth and a reduction of dependence on the US and European markets and the social critique formulated by the Brazilian demonstrations of 2013–14; each of these stories has an important middle-class dimension. The chapter then provides an overview for understanding the numerous ways the middle class has been defined and measured in recent years, arguing that the various definitions serve an array of explanatory purposes. The final section surveys the answers provided by the contributors to this volume to the research questions raised here.

What is the link between middle class and income inequality? This chapter will assess the relationship between changes in income distribution and the growth of the middle class. Interest in the latter has peaked worldwide, as the rise of the global middle class is increasingly recognized as a key megatrend (Global Trends 2030, 2013). Zooming in on the concrete case of Latin America and the Caribbean, we know that, as economic activity has grown and poverty levels have fallen alongside economic growth, the middle class is on the rise. We also know that income inequality has fallen in the region. Within this context, following a discussion on the middle class and inequality and presenting some recent trends, this chapter asks how much of the expansion of the middle class in Latin America is explained by economic growth, and how much by the decline in income inequality.¹

The middle class plays an important role in explaining comparative development as a source of consumption demand, innovation and political support for the public provision of infrastructure, health and education. The middle class has sufficient discretionary income to satisfy an increasing desire for consumption that drives the demand for higher-quality goods (Schor, 1999). This means that the demand for consumer durables increases rapidly as household income passes a critical threshold, normally associated with middle-class status. From a production standpoint, meanwhile, the middle class is sometimes identified with entrepreneurship and the corresponding side effects on job creation, innovation and the strengthening of a country’s productivity: this sequence of quality-improving innovations is argued to be the engine of economic growth (Aghion and Howitt, 1992). The middle class also plays an active role in domestic politics, in promoting democratic attitudes, favoring progressive political platforms and providing a strong constituency for public investment in human and infrastructure capital that is vital for long-term economic growth (OECD, 2010). But on occasion the middle class can be a regressive force, using their political clout to protect their own position by encouraging populist policies like subsidies for pensions, housing and universities that can generate macroeconomic instability and undermine democracy and economic growth alike.

This chapter discusses the new Brazilian middle class, its definition, evolution, profile, attitudes and durability.² It describes the methodology used to determine economic classes and reveals that 42 million Brazilians joined the middle class since 2003 due to a combination of economic growth and increased equity. It forecasts different economic classes’ paths and calculates individual income risks from longitudinal data.

Economic progress in Latin America over the last decade has been undeniable: solid growth rates, macroeconomic stability and fiscal discipline were detained only temporarily by the international financial crisis that began in 2008.¹ The region has made significant progress in its poverty reduction strategy, with poverty rates decreasing from 48 per cent to 29 per cent between 1990 and 2011, and extreme poverty dropping from 23 per cent to 11 per cent (ECLAC, 2013). However, income inequality, despite falling, remains high; the regional Gini coefficient is 0.48. The target groups of social programs remain vulnerable. To address these challenges successfully, a new generation of social programs needs to focus on the quality and relevance of education, protect households against risks, effectively redistribute income and at the same time promote productivity so as to ensure sustainable poverty reduction. Moreover, progress in reducing poverty must also contribute to the prosperity of a solid middle class.

Innovative social policy instruments, notably conditional cash transfers, have been effective in reducing poverty in many Latin American countries.¹ As a result, many households have recently succeeded in moving out of poverty and joining the ranks of the so-called emerging middle classes. This chapter will demonstrate, however, that many of these middle-class workers are still vulnerable to significant downward mobility if they are hit by negative shocks, such as illness, disability, job loss or a significant decline in income after retirement.

The Emergence of a New Middle Class in Latin America It has been (and still is) a prosperous time in Latin America during which, by some estimates, the middle classes have grown by 50 per cent in the past decade or so. Of the 73 million who ceased to be considered poor in recent years, 50 million worked their way up the social ladder and joined the middle class. From 100 million at the turn of the century, this new middle class (see definition below) accounts for more than 150 million Latin Americans and represents one in three of the region’s citizens. The economic growth created new jobs and allowed the transformation of many informal jobs into formal ones. The highest growth of the middle class was in Brazil, followed by Colombia, Costa Rica, Chile and Peru. This social mobility stems from a process set in motion at the dawn of the millennium, one which raised living standards in a widespread manner throughout the subcontinent and better positioned Latin American countries in the global economy.

Economic definitions of middle class often rely on arbitrary boundaries defined by measures of central tendency, quantiles of the distribution or absolute thresholds based on a measurable characteristic, such as income or consumption.¹ In practice, there is little agreement on what and how big the middle class is (the variety of approaches undertaken by the contributors to this volume bears out this assertion). Likewise, most economists often ignore that membership in a given class is also driven by social status, the relative individual situation in a social hierarchy affected by life opportunities, lifestyles and a diversity of attitudes.

Fiscal policy — the way taxes and expenditures are allocated across society — reflects the political equilibrium within a given society.¹ This equilibrium is determined by multiple factors, such as the preferences of citizens for redistribution (that is, taxes and public spending that disproportionately benefit the least well off) and other socioeconomic and political dimensions, the distribution of power within society, the degree of influence of interest groups on the policymaking process and the political institutions that condition this process, just to mention some of the most commonly analyzed political variables.²