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Middle class now rivals poor in Latin America

Jim Yong Kim, World Bank president.

© Issei Kato/REUTERS

Rapid economic growth and more inclusive social policies in Latin America in the past decade have lifted 50 million people into the middle class, which for the first time rivals the poor in number, the World Bank said in a study on Tuesday.

"Most countries in the region are ontheir way to becoming middle-class societies; this represents a historic change," World Bank President Jim Yong Kim told reporters.

Rising income levels have also created a "vulnerable" class, which at 38 per cent makes up the largest income group. These people hover just above poverty, living on a daily income between $4 and $10 (U.S.) per person.

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"As poverty fell and the middle class rose … the most common Latin American family is in a state of vulnerability," the World Bank, the global development lender, said in a report looking at the middle class and economic mobility in Latin America and the Caribbean.

The World Bank measures the middle class as people who have economic security, facing less than a 10-per-cent chance of falling back into poverty. For the region, that translates into a daily income of $10 to $50 per person.

Roughly 30 per cent of the population now falls into that category, equal to the third of people still in poverty – a remarkable shift in a continent that has been known for its vast income inequalities, dominated by the poor and a narrow slice of the rich.

Latin America is now the only region in the world with narrowing income inequality, the World Bank said in a report last month, though the rich-poor divide remains higher than in most developed countries.

With global economic expansion, and redistributive policies in some countries, at least 40 per cent of the region's population has moved to a higher economic class between 1995 and 2010.

In Brazil, the region's largest nation and the world's sixth biggest economy, booming commodity-led growth and conditional cash transfers helped pull 30 million people out of poverty under left-leaning former president Luiz Inacio Lula da Silva.

Across the region, the rise of the middle class has had clear effects, helping countries like Brazil become less reliant on foreign assistance and less amenable to foreign pressure.

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It has nudged some countries toward greater democracy, and raised hopes for businesses eager to take advantage of the growing consumer tastes for everything from the Internet to financial services.

The question is whether this rapid rise can continue, especially with the global slowdown.

While families have improved their situation in the last decade, children are often still bound by the incomes and education of their parents, meaning mobility between generations remains low, the World Bank said.

"The poor from an inter-generational point of view suffer a double whammy. They are poor, and they are likely to stay there," said Augusto de la Torre, the World Bank's chief economist for Latin America and the Caribbean.

It is unclear whether the middle class's rising expectations can by themselves create a society of more equal opportunities.

Traditionally in Latin America the middle class has opted out of public services like education and health if they can afford to do so, creating a fragmented society where the poorest members are stuck with subpar social protection. Low taxation has also exacerbated the problem of poor-quality services, the World Bank said.

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"The middle classes may not automatically become the much-hoped-for catalytic agents for reforms," the Bank said.

Mr. de la Torre, the chief economist, suggested one solution may be to take advantage of rich profits from commodities in some countries to improve social services, which could entice the middle class to participate, and ultimately to pay higher taxes.

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