Latin America’s Middle-Class Mirage

BUENOS AIRES – Rising incomes across the developing world will bring some 400 million people into the middle class by 2020, up from 1.8 billion today. Their increasing spending power, especially on non-essential consumer goods and services, is being hailed as the great hope for the global economy. But closer examination of their economic circumstances suggests that these new consumers are neither as wealthy nor as secure as we may think.

The vast majority of the middle-class expansion is taking place in emerging Asia. But a similar socioeconomic shift in Latin America holds important lessons for rapidly growing markets everywhere. Latin Amercia’s middle class grew by around 50%, to 152 million, from 2003 to 2009, accounting for around 30% of the continent’s population – a proportion that undoubtedly has grown since.

This remarkable economic transformation has been presented as proof of successful pro-growth policies pursued in previous decades. Higher employment, rising wages, cash transfers to the poor, and state pensions have all helped to fuel progress. But, while policies that reduced the atrocious poverty and narrowed the yawning income inequality that persisted throughout the 1990’s must surely be applauded, the welfare gains associated with this performance may prove to be weaker than hoped.

An obvious problem lies in the fact that we measure the size of the middle class according to household-income data, but with little knowledge about these households’ patterns of saving. If today’s higher incomes are consumed and tomorrow’s incomes decline (which is likely if the economy slows), middle-class households with no savings buffer could easily slip back into poverty.