Latin America’s Middle Class in Global Perspective

BRICS, LATIN AMERICA AND THE CARIBBEAN, 19 Nov 2012

Jamele Rigolini – Americas Quarterly

Different patterns of economic growth in BRIC countries have brought different social changes.

Latin America and the Caribbean is experiencing a dramatic surge of its middle class.  In just a decade, the proportion of people in Latin America and the Caribbean with a daily per capita income (in purchasing power parity) between $10 and $50 a day went from around one-fifth to one-third.  For the first time in history, there are as many people in the middle class as there are in moderate poverty (i.e., per capita earnings below $4 per day).

This  socioeconomic shift stems largely from the  sustained rates of economic growth in the 2000s that in most—though not all— countries trickled down and generated higher incomes.

But growth in the 2000s was not exclusive to Latin America and the Caribbean. While the industrialized world was facing a challenging decade, many emerging economies surfed past the global turbulences and continued to grow, lifting people out of poverty and feeding the ranks of their middle classes.

These changes are here to stay. Thanks to more sophisticated consumption habits, the middle classes in emerging countries will influence global trade patterns. Domestically, the middle classes will have a growing voice by means of higher purchasing power—moving up the consumption chain to high-end, more technical goods—and by demanding better education. And with a growing critical mass, they will push for institutional reforms and improved service delivery in areas that are beneficial to them.

The magnitude of these changes will depend, however, on the continued growth of the middle class and on the nature of its demands on the public sector. They will likely be more dramatic in regions where the middle class will grow the fastest, such as East Asia. While it is difficult—if not impossible—to forecast these changes with precision, it is possible with some margin of error to assess in which countries the middle classes have been growing and will grow the most.

Measuring the emerging world’s middle class

It is essential to choose a measure of the middle class that captures the ongoing structural changes and that allows a comparison of trends across both countries and time. The need for comparable indicators of the size and nature of the middle class narrows significantly the set of measures that can be adopted.

Further, an attempt to develop a metric for broad cross-country comparison runs the risk of also missing important differences in the nature of the middle class. To give an example, while the sociological literature adopts a rich definition of the middle class based on occupational categories, it is close to impossible to use such a definition in international comparisons, since occupational categories are not harmonized across household surveys.

For these reasons, most international comparisons tend to measure the middle class in terms of income or consumption, which is quantitatively easier to compare across countries.

Even within the narrow set of income measures, however, another important choice awaits any comparison: should relative or absolute income (or consumption) indicators be used? Both capture important, but very different, aspects of the middle class.

A relative indicator summarizes how many people sit “in the middle” of the income distribution, with a typical indicator for international comparison being the proportion of the population with per capita income between 0.75 and 1.25 of the median per capita income. While such a measure can be very useful in assessing the extent to which a society is unequal or polarized, it fails in capturing anything related to the “absolute” welfare of the middle class.

Consider the cases of Ethiopia and Brazil. Using the relative measurement described above, 43 percent of Ethiopians earned per capita incomes between 0.75 and 1.25 of the median in 2009.  That was twice as high as the proportion of Brazilians who could be defined as middle class under this definition (21 percent), despite the fact that Ethiopia’s GDP per capita (in purchasing power parity terms) is 11 times smaller!

To avoid such inconsistencies, any comparison that aims at capturing the absolute well-being of the middle class must put strong weight on absolute income and consumption levels. But even in this class of measures, there exist many possibilities.  For the purposes of this article, I define the middle class as those with daily per-capita income (in purchasing power parity terms) between $10 and $50.  For a family of four, this corresponds to an annual income between $14,600 and $73,000. These income thresholds—in particular the lower one—have been chosen based on the vulnerability of households to fall back into poverty, and are discussed to great extent in the new World Bank report “Economic Mobility and the Rise of the Latin American Middle Class.”

BRICS compared

A comparison of the growth of the Latin American and Caribbean middle class with its counterparts in BRIC (Brazil, Russia, India, China) countries shows that, even in comparative terms, the early 2000s have been very good for the region. Between 2000 and 2009, 50 million individuals were added to the middle class in Latin America and the Caribbean—bringing the total from around 115 million people to over 165 million.  The growth of the middle class goes beyond the stellar performance of Brazil: more than 30 million non-Brazilian citizens of Latin America and the Caribbean entered the middle class during that decade.

The growth of the middle class in Latin America and the Caribbean reflects dramatic trends that can be observed in all the BRICs, with the exception of India. In Brazil, Russia and China, the middle class has achieved impressive salience in a relatively short time. Around 2009, the middle class consisted of 61 million people in Brazil (up from 39 million a decade earlier), 75 million in Russia (up from 31 million), and 83 million individuals in China (a jump from just 10 million).

Still, these numbers mask strong differences across the BRICs when the middle class is measured as a proportion of the population.

In Brazil, the emergence of a middle class is not an entirely new phenomenon. In the early 1980s, the middle class made up more than 15 percent of the population; nowadays it makes up almost one-third. The most spectacular transformation toward “middle-class society” occurred in Russia, where the middle class grew from being one-fifth to more than one-half of the population.  In contrast, in China, the 83 million people defined as middle class only represent less than 10 percent of the population.

Today,  Russia seems to be a true middle-class society with a (small) majority of the population being middle class, while in Brazil and in many Latin American countries, almost two-thirds of the population has yet to reach middle-class status.

The performance of Russia is, however, eclipsed by the stunning growth of the middle class in China, where sustained economic growth led to an eightfold increase of the middle class in a decade. And although China, as noted above, with less than 10 percent of its population being middle class in 2009, may not yet be as much of a “middle-class society” as Brazil or Russia, it has an enormous potential for growth if current trends continue.

Among the BRICs, India’s comparatively poorer performance may come as a surprise. Both in relative and absolute terms, the Indian middle class grew significantly less than in the other BRIC countries. In 2010, only 9 million Indians had reached middle-class status, which is less than 1 percent of the population. These low estimates reflect that, despite a good growth performance in the 2000s, India’s GDP per capita remains below the levels of the other BRIC countries.

Of all the BRICs, China is forecast to experience the greatest growth of the middle class, overshadowing the good—but not as impressive—performance of Latin America (or of any other country and region). China’s middle class is expected  to grow from 54 million in 2005 to more than 1 billion in 2030, or 72 percent of the population, adjusted for population growth. In contrast, while growing in absolute terms, the Latin American and Caribbean middle classes will gradually lose ground internationally. While in 2005 the region’s middle classes represented more than 40 percent of all the middle classes in low- and middle-income countries, the forecasted dramatic rise of the middle class in China will reduce Latin America and the Caribbean’s share to less than 20 percent in 2030.

Even without China’s contribution, the next two decades will be characterized by a massive increase of the middle class all over the emerging world, from around 300 million households in 2005 to almost 1.9 billion—approximately six times the current population of the United States.

According to the forecasts, however, the increase is likely to remain modest in South Asia, where the middle class is predicted to reach 100 million people in 2030—still a relatively small number given that region’s large population.

Of course, as with any projections about an uncertain future, these numbers should be taken with a grain of salt. Forecasting is as much an art as a science, and in two decades many factors could affect, in one way or another, the parameters underlying the forecasts. In particular, an average annual growth rate of the Chinese economy of 7 percent between 2005 and 2030 is a key driving assumption behind these results.

Implications for politics, economics and globalization

What will be the geopolitical and socioeconomic implications of the remarkable growth of the middle class across emerging economies? And what are the implications for Latin Americans of a Chinese middle class that will surpass by far the whole population of the region?

Any attempt to answer such difficult questions would entail a great deal of speculation, and falls beyond the scope of this article. But the growth of a strong and vocal middle class throughout the emerging world will bring change. It is difficult to predict, however, the direction of these changes.

To be sure, the middle classes differ in important characteristics from lower and upper classes and, at least in Latin America, they are surprisingly similar in characteristics across countries.

In all of Latin America and the Caribbean, the heads of middle-class households have substantially more years of schooling than those in the poor or vulnerable classes, but fewer than the rich. Middle-class households are also more urbanized than poorer households.

And significantly, formal employment seems to be a distinctive sign of the middle class in Latin America: the middle-class worker is typically a formal employee, rather than being self-employed, unemployed or an employer. In contrast, the poorer classes rely on self- or informal employment (or suffer from unemployment), while the rich are more frequently employers and, in some countries, self-employed.

Middle-class workers are often found in the services sector, including health, education and public services. There is no evidence that the middle class is disproportionally employed by the public sector. In most Latin American countries for which data exist, public-sector employment is actually more frequent among the rich than among the middle class.

Family dynamics and demographics further sharpen the portrait of the region’s middle classes. Between 1992 and 2009, the average size of a middle-class household in Latin America and the Caribbean fell from 3.3 to 2.9 individuals. This compares to regional averages that show household size decreased on average from 4.1 people in 1992 to 3.4 people in 2009.

Middle-class women are also typically joining the labor force in greater numbers.  Seventy-three percent of middle-class women ages 25 to 65 across the region are either employed or looking for work, as compared to a regionwide population average of 62 percent. And their children are typically in school: virtually all middle-class children ages 6 to 12 attend school, as do roughly three-quarters of those ages 13 to 18.

But are these class characteristics sufficient to induce change? A recent analysis by Loayza, Rigolini and Llorente¹ supports the notion that the size of the middle class can determine the pace of reform: using a cross-country approach, their analysis compares how the middle class relates to socioeconomic outcomes in low-, middle- and high-income countries around the world. They find that, everything else being equal, when the proportion of the middle class in a society increases, social policy on health and education becomes more active and the quality of governance regarding democratic participation and official corruption improves.

Whether the change brought by the middle classes is always good for the poor remains, however, an open question.

It has often been claimed that the middle classes carry specific beliefs and values that lead to political, economic and social reforms, but empirical evidence remains scant at best. Recent analysis, discussed in the World Bank report, suggests that the middle classes do not possess particular values and beliefs that make them more prone to push for reforms based on ideology. Middle classes, however, do not need to carry values based on a broad notion of the public good to push for reforms; they can also act upon self-interest.

Under this more pragmatic scenario, while some reforms pushed by the middle classes may benefit the poor, others may not. It could be imagined, for instance, that growing middle classes may want to slow social spending targeted to the poor to limit the fiscal burden associated with it, and to push for more public expenditures in services from which they benefit. Only time, and careful analytical efforts, will tell.

Watch an AQ Q&A on India’s middle class.

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