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From issue: Latin America's Real Middle Class (Fall 2012)

AQ Feature

Not Poor, But Not Middle Class Yet

Defining the middle class reveals a new vulnerable segment, and a new policy challenge.

During the first decade of the twenty-first century, Latin America’s increasing prosperity and social progress have led analysts to conclude that historic change is taking place. Indeed, poverty in Latin America fell from 41.4 percent in 2000 to 28 percent in 2010, even at a time of global distress1—a result, in part, of both sustained economic growth and reductions in inequality.

As a result, the focus in policy circles has switched to the role an emerging middle class can play in the region, both as an engine of growth and as the foundation for social cohesion and better governance. The key to understanding this shift is accurately defining the middle class in economic terms.

The Importance of Definition and Measurement

The notion of class, and what it means to be in the middle, is a multi-faceted concept that has been treated differently by different disciplines. Sociology, the most common approach, defines social mobility in terms of changes in occupational categories. In general, that approach seems to adapt Max Weber’s classic characterization of social stratification. His definition included elements of class (based on economic opportunity), status (based on identity and cultural orientation) and power (the capacity to exert influence individually or collectively over public policy).

But for the purposes of economic comparisons we need a simpler definition. To be of practical relevance, it must satisfy three important conditions. First, it must define clearly the direction of changes (whether mobility goes up or down in terms of a welfare-related index). Second, it must anchor the concept in a specific characteristic—a particular feature that differentiates this situation from others—just as poverty is linked to nutritional status. And third, it must be a notion from which we can derive relevant implications for policy.

Key to this definition of the middle class is that there should be some notion of the structural, permanent nature of the middle class in which temporary shocks, such as a macroeconomic slowdown, have only a limited impact. An absolute definition based on vulnerability, and an appropriate upper threshold, should satisfy this principle. However, the definition should not be one in which the middle class grows in times of economic crisis, because people become more vulnerable and get closer to being poor.2

The optimism over Latin America’s economically mobile population has missed the large segment that remains vulnerable—not in poverty but still at risk of falling back into it. Photo: Monique Naoum.
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Relative definitions of middle class in the economic literature have used a basic income-based metric that looks at the position of people in the income distribution. Thus, middle class is equivalent to a middle stratum in the distribution.3 An alternative is to use an absolute income-based definition, which identifies middle class households according to a specific and comparable range of income or consumption (at purchasing power parity in international dollars).

But using the poverty line as a lower threshold to define middle class lacks conceptual foundation.4 Ideally, one would look for an income level that allows an individual to achieve a condition or characteristic of being or doing that distinguishes her situation from others.5

Following the requirements just described, I have proposed—with my former colleague at the United Nations Development Programme Eduardo Ortiz-Juarez—an absolute income-based threshold to define the middle class, analogous to the discussion about “absolute poverty.” Our proposed concept defines economic security as the condition that defines a person as middle class. People who are less vulnerable to fall into poverty may be different in terms of risk-taking capabilities, investment decisions, consumption patterns, and the like—perhaps closer to what we have historically considered to be middle class.

The practical challenge is to identify an income threshold associated with this concept so that it becomes operational. Although the quantification of the income level can be relative (a certain amount of income or consumption per day marks the threshold in a given context), the concept behind the threshold is absolute: the condition of being less vulnerable to fall into poverty.

By looking at actual transitions in and out of poverty, we were able to statistically estimate the amount of comparable income per person that depicts the lower threshold for being middle class in Chile, Mexico and Peru, associated with a low (0.10) probability of falling into poverty: $10 a day. This threshold correlated to individual self-definitions of the middle class used in the 2007 Ecosocial surveys in several countries—indicating a reasonable common standard for the region. The upper line we determined to be at $50 a day, leaving around 2 percent of the income distribution at the top as upper class. Thus, being middle class in Latin America, from this perspective, consists of living with a per capita income of $10 to $50 a day at 2005 purchasing power parity.

Following this approach, we found that in 2009, for the first time in history, one out of three individuals in Latin America and the Caribbean was in the middle class. This achievement notwithstanding, being middle class in Latin America is still, in relative terms, a privileged status. FIGURE 1 shows the distribution of income in 2009 for 15 out of 41 countries (including overseas territories) in Latin America and the Caribbean, representing 86 percent of the region’s population.

Figure 1 shows that the region’s income distribution is grouped around both the poverty and middle class lines ($4 and $10 a day). This is, in part, the reason why we are observing dramatic decreases of poverty and increases of the middle class. Any small shift in the mean of the income distribution that brings people out of poverty and into the middle class affects a large segment of Latin America’s population. Such a large aggregate effect would not be seen for a shift from the middle class to, say, the upper threshold of $50 a day.

In fact, about two-thirds of the region’s population remains concentrated in the poor and vulnerable classes. This suggests that, despite positive trends, the region is not yet a “middle class society,” where most people earn a sufficiently high income to enjoy the sort of security that we often associate with middle-class citizens.

The distribution of income in the region means that while the impressive movement of people out of poverty represents a positive trend, vulnerability to poverty remains a serious concern for the majority. For those in poverty and for those not yet securely in the middle class, social policies will continue to play an important role for the foreseeable future.

The fact that such a large proportion of people who escaped poverty did not join the ranks of the middle class points to a central policy question: how well protected are the vulnerable? Many of those in this segment are still exposed to economic downturns or worse—without well-developed social safety nets or insurance and credit markets—at risk of slipping back into poverty because of health- or employment-related shocks. Policymakers in the region must focus on bringing these people into a more secure economic position so that they can eventually join the ranks of the middle class.

It’s (Not Just) the Economy, Stupid

While important, economic growth is not the only driver of the growth of the middle class. FIGURE 2 shows that for similar growth rates, countries experienced differences in the patterns of change in their middle class. Between 2000 and 2010, for example, the Dominican Republic experienced a higher growth rate than Ecuador, but its middle class shrunk—while in Ecuador, the middle class grew by more than 10 percentage points. This suggests that factors beyond growth itself, such as redistribution, influences the growth of the middle class. As shown in the literature that analyzes changes in inequality in Latin America during the past decade, factors associated with redistribution are related to educational upgrading, expanding access and improving the incidence of social programs so that they actually reach the poor. Consistently, being more educated and in wage employment seems to be associated with being middle class.

There is also a purely mechanical factor that is often overlooked: the existing distribution of income. How much the middle class increases for each percentage point of growth depends on where the threshold of $10 a day is in each country’s income distribution.

As mentioned above, in addition to initial conditions, changes in the size of the middle class are also influenced by redistributive policies. Nora Lustig, Ortiz-Juarez and I, for instance, have done an in-depth analysis of the causes underlying the decline in inequality for Argentina, Brazil and Mexico—looking at a representative sample of countries in the region—in terms of diversity of initial inequality and economic growth.6 We found that policy innovations and social programs were key.

In Brazil, we estimate that the Benefício de Prestação Continuada and Bolsa Família (both conditional cash transfer—CCT—programs) explain more than 20 percent of the decline in income inequality in households. In Mexico, the national CCT program Oportunidades accounts for 18 percent of the change in the pre- and post-transfers difference in the Gini coefficient. In these cases, targeting went beyond cash transfers: spending on health, education, nutrition, and basic infrastructure also became more pro-poor.

A question, though, is whether these CCT programs—originally designed to eradicate structural poverty by targeting extreme poverty—are the most appropriate social tool for these not poor but still vulnerable sectors of the population. In several countries, expanded CCT programs now reach some of those vulnerable households. But some analysts see the inclusion of the non-poor in CCT programs as a targeting error.

A new, more relevant question is how social policy can develop a long-term solution to addressing the security of these vulnerable sectors. To this end, CCTs could potentially be tailored to play the role of buffers during crisis. But addressing the development and social needs of this growing non-poor but economically insecure population over the long term requires the design of new policies that focus on social insurance and the formal inclusion of households in the productive economy.

Consistently, two of the clearest associations with those in the stable middle class (our definition of middle class) are greater levels of education and wage employment. While over a decade of economic growth and innovations in social policy are making Latin America a middle-class society, the transformation is not yet complete; it will require effective public action that helps citizens gain access to higher levels of education and to wage employment. Failure to shore up those who have left poverty but remain in between the poor and the middle class may mean that the region’s considerable success in recent years could come to a halt, and the opportunities for poverty reduction lost.

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