Latin America’s Rising Middle Class

LatinAmericaRisingClass

New studies reveal that in the 2000s, the middle classes of Latin America and the Caribbean (LAC) grew by a striking 50 percent. As of 2009, the LAC middle class had expanded to at least 152 million consumers, comprising almost a third (29%) of the region’s population. Moreover, this trend has proven resilient to the global economic downturn. The result is that for the first time in history, LAC has nearly as many middle-class people as poor ones.

And the World Bank projects the positive news will continue, with 42 percent of the region — i.e., 291 million people — becoming middle-class by 2030 and less than a fifth classified as poor.

Economists call the achievement “historic” in a region that the United Nations has identified as the world’s most unequal.

Major challenges need to be faced before the gains can be considered permanent. In particular, deep-rooted class discrimination continues to severely restrict opportunities for most young Latin Americans; social contracts between governments and citizens remain weak; and the global downturn will restrain exports.

But robust drivers are also in play, such as urbanization, smaller families, and women’s entry into the workforce — promising that the LAC middle class will continue to grow. “These changes are here to stay,” asserts Jamele Rigolini, a senior economist in the World Bank’s LAC division.

3 KEY FINDINGS

  • Middle classes in Latin America and the Caribbean grew by 50 percent in the 2000s, reaching around 150 million.
  • The middle class should continue to grow through 2030 despite the global downturn.
  • Social inequality and weak social contracts continue to restrict young people’s opportunities and will curb middle-class growth.

3 TRENDS IN THE MIDDLE-CLASS’S GROWTH

Using the UN’s definition, the LAC region includes 33 countries and 580 million inhabitants. The middle-class boom has touched the entire region:

  • Brazil in the lead. Brazil contributed 40% of the increase in middle-class consumers. But, importantly, most countries in the region experienced a large surge in their middle classes.
  • GDP an important enabler. From 2000 to 2010, annual per capita GDP growth averaged 2.2 percent . While far short of Asian growth rates, this is very high for LAC (which in the 1980s and 1990s averaged from negative 0.2 percent to 1.2 percent  GDP growth). According to the World Bank, this strong growth was responsible for nearly 75 percent  of the middle-class boom.
  • Recession resilience. In spite of the Great Recession and economic turmoil in key export markets (the United States, EU, and China), LAC’s GDP growth has been even faster since 2010. In 2011 and 2012, GDP grew 4.3 percent and 3.1 percent respectively, and the UN projects nearly 4 percent growth through 2014 thanks to buoyant internal demand in several countries.

3 DRIVERS BEHIND THE BOOM

  • Robust economic growth. Per capita GDP across the LAC region grew by an annual average of 2.2 percent in the 2000s and by 3.5–4 percent in 2011–2012.
  • Demographic boon. Working-age Latin Americans temporarily outnumber dependents, giving families more income.
  • More women working. Some 70 million women have entered the workforce since the 1980s, feeding a rise in dual-earner households.

4 CLASSES

From the mid-1990s to 2009, 43 percent of Latin Americans moved into a new economic class. All but 2 percent of these moved upward. As a result, the World Bank now divides Latin America into four distinct classes.

  • The wealthy. At 2.2 percent of the population, LAC’s elite earn $50/day or more per capita.
  • The middle class. Defined as those who make $10–50/day per capita or $14,600–$73,000/year per household, this group reached 152 million in 2009, or 29 percent of the region’s population. By 2030, it could reach 42 percent.
  • The vulnerable. A new class, defined as those who make $4–10/day, people at this level are at risk of slipping into poverty (and as many as 12 million may have done so post-recession). With 38 percent of the population in 2009, they are likely to remain at this share until at least 2030.
  • The poor. LAC’s poor totaled 31 percent of the region in 2009 — down from 44 percent in 2000—and could fall to 18 percent by 2030.

3 BUSINESS IMPLICATIONS

  • The emergence of a strong middle class is a relatively new phenomenon for most LAC countries. We have identified middle-class growth as one of the world’s Top 20 trends, and written extensively about how this growth affects both societies and the businesses that serve them.
  • Companies serving LAC shouldn’t assume that rising income will automatically translate into a rise in modern values across the region. Values change will follow income growth relatively slowly in much of the area — although the speed of change will vary significantly by country. Seminal research by Ronald Inglehart’s World Values Survey has shown that while rising income normally pushes a shift from traditional to modern to postmodern values in developing countries, if people also face continuing financial insecurity, it tends to significantly slow this shift.
  • Global companies that operate in LAC may benefit in both the short and long term by working directly with LAC consumers to solidify the middle-class gains and help build the formal sector. For example, Goldman Sachs and others have been instrumental in working with World 2 women to foster women’s economic engagement and leadership.