Latin America, Where Income Inequality Meets Middle Class Growth
Economic growth has brought more people into Latin America's middle class, a first but insufficient sign of progress in one of the world's most unequal regions.
The question of the Latin American middle class has been a frequent topic of news in recent years. It has become a matter of intense debate, perhaps because the region has long been home to some of the world’s highest levels of inequality.
Why should we care about the size of the region’s middle class? First, because growth represents more consumers demanding goods and services above subsistence levels, which increases the size of local markets. Second, a larger middle class can have beneficial social consequences. Academic research shows that restricting unequal incomes improves social cohesion and that a growing middle class favors the democratization process.
Several studies indicate that Latin America’s middle class has grown in size in the last decade. Research gives a wide range of estimates for its real size, from 170 to 350 million people. While a 2010 OECD study estimated that between 40% and 50% of Latin Americans were middle class, World Bank economists last year estimated its relative size to be 29%. Figures vary because these studies use different methods and economists have yet to establish a common standard for measurement.
Most of these studies cite household per capita income as a pertinent measure of relative wealth. Various methodologies traditionally used to gauge the middle class consider these incomes and their possible growth.
Who is middle class?
The OECD study fixes a central point as a median income, and considers middle class all those earning within a range around that. It defines the middle class as those households with a per capita income of between 50% and 150% of the national middle income. Using this measure, the middle class constitutes 56% of Uruguay’s population, 45% of Brazil’s and 40% of Bolivia and Colombia. The study indicates that reducing income inequalities over the past decade has prompted a relative growth in the middle class.
The World Bank’s study on Latin America, which is gradually becoming a standard reference, defines as middle class households with a daily per capita income of between $10 and $50. For a four-member household, that means an annual income of between $14,600 and $73,000. It is a more restrictive definition of the middle class than many used before for regional countries, among them Brazil.
An interesting aspect of the World Bank study is how the $10 daily income threshhold was devised specifically for the Latin American context. The $10 value implies there is a maximum probability of 10% that household incomes could be below the threshold used to measure poverty in the region, set at $4. In this definition of the middle class, the World Bank found it increased from 20% of the population in 1995 to 29% in 2009. Again, the country with the largest middle class in this study is Uruguay, where more than half the population qualify. In Brazil’s case, the middle class as defined by the World Bank is smaller, a little below a third of the population despite its considerable growth since 1995.
The main reason for middle class growth is a better economy. According to the World Bank, when household revenues begin to exceed $4 per head, they are no longer poor but enter a vulnerable category until their incomes exceed $10 per head. At that point they start moving toward the middle class, which is precisely what Latin American households have been doing. The percentage of households in the vulnerable, transitional group has not increased much, so reduction in poverty is reflected in a growing middle class.
And in the future? The World Bank predicts that the Latin American middle class could increase 10%, to reach 40% of the total population in 2030. Only time can confirm that. In any case, it will depend on the policies of governments and how they deal with financial turmoils that affect all emerging markets.
*Rolf Campos is a professor of economics at IESE Business School.