Latin American Economic Outlook

OECD Development Centre

Frequency :
Annual
ISSN :
2072-5140 (online)
ISSN :
2072-5159 (print)
DOI :
10.1787/20725140
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The Latin American Economic Outlook is the OECD Development Centre’s annual analysis of economic developments in Latin America in partnership with UN ECLAC and CAF. Each edition includes a detailed macroeconomic overview as well as analysis on the dynamics shaping the region in the context of shifting wealth, particularly towards emerging economies. Each issue also includes an in-depth look at a special theme related to development in Latin America, taking into account the strategic challenges and opportunities the region will have in the future. Further information can be found on the website.

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Latin American Economic Outlook 2011

Latin American Economic Outlook 2011

How Middle-Class Is Latin America? You do not have access to this content

OECD Development Centre

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Author(s):
OECD
Publication Date :
03 Dec 2010
Pages :
176
ISBN :
9789264094659 (PDF) ; 9789264094642 (print)
DOI :
10.1787/leo-2011-en

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This year’s Latin American Economic Outlook focuses on those in the middle of the income distribution in Latin America. If these middle sectors have stable employment and reasonably robust incomes, then, arguably, they provide a solid foundation for economic progress. Moreover, following the political role often attributed to the middle classes by historians and sociologists, they might also support moderate but progressive political platforms in Latin America’s democracies. In fact, this report shows that, contrary to expectations, in Latin America this group is still economically vulnerable, few have university degrees and many work in informal employment. This is a "middle class" quite different from the group that became the engine of development in many OECD countries. In Latin America, what are the economic characteristics of these vulnerable middle sectors? How do they perceive inequality, public policies and democracy? How can public policies protect the livelihoods of these middle-sector households? These questions guide the Outlook to discuss why and how upward mobility should and can be promoted, and how safety nets can be put in place to protect the most vulnerable segments of people within those middle-income groups, as well as the poorest and most disadvantaged households in the economy at large. The report tackles policies such as social protection and education that promote upward mobility, and underscores the importance of fiscal policy as a tool to finance the required reforms and programmes that can engage the Latin American middle sectors in a renewed social contract.

"Latin America is undergoing a rapid transformation and the middle classes are one of the most powerful motors of this change. This edition of the Latin American Economic Outlook analyses the process of expansion of the region’s middle sectors through innovative statistical methods and from a refreshing perspective. The middle classes are dynamic but also vulnerable; they are not poor but they are nevertheless far from enjoying a comfortable and secure economic situation. Their future depends on their own actions, and on the economic and social policies that the region’s governments will adopt over the next decade."
Eduardo Lora, Chief Economist, Inter-American Development Bank.

"This new report from the OECD Development Centre touches upon a theme that is not often studied but which is of vital importance for the development of our countries: middle-income groups in Latin American societies. The report’s recommendations should be used as a basis for economic policy in the region, with the objective of promoting policy actions in favour of a sector that in advanced economies has been a pillar of development and democratic harmony – in contrast to what has happened in Latin America and the Caribbean."
Juan Temístocles Montás, Minister of Economy and Planning, Dominican Republic.

"This excellent report leads us to conclude that only with a stronger focus on rights, democracy and redistributive policies can we break the transmission of inequality and poverty from generation to generation, and advance towards the consolidation of a real middle class, a driver of development."
Soraya Rodriguez Ramos, Secretary of State for International Cooperation, Spain.

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    Foreword
    Countries in Latin America have managed to resist the global economic and financial crisis more successfully than in many other regions of the world. Similarly, they are showing relatively faster signs of recovery. Economic growth in the region is expected to be stronger than in most OECD countries in 2010, confirming the trend signalled in last year’s OECD Latin American Economic Outlook.
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    Acknowledgements
    The OECD Latin American Economic Outlook 2011 was prepared by the OECD Development Centre’s Americas Desk, headed by Jeff Dayton-Johnson and under the supervision of Mario Pezzini, Director of the Development Centre. Responsibility for the various chapters was distributed as follows: Macroeconomic Overview, Alejandro Neut, Sebastián Nieto Parra and Caroline Paunov; Chapter 1, Francesca Castellani, Jeff Dayton-Johnson and Gwenn Parent; Chapter 2, Rita Da Costa, Juan R. de Laiglesia, Emmanuelle Martínez and Ángel Melguizo; Chapter 3, Christian Daude; Chapter 4, Bárbara Castelletti, Christian Daude, Hamlet Gutiérrez and Ángel Melguizo; and the Country Notes (available on our website), Rita Da Costa, Alba N. Martínez and Emmanuelle Martínez, with contributions from Natalia Villagómez Gonzalez. Box 1.1 was written by Caroline Paunov, Box 1.3 by Eduardo Lora, and Box 3.1 by Alba N. Martínez. Box 4.1 was written by Bárbara Castelletti and Hamlet Gutiérrez, and Box 4.2 by Christian Daude and Ángel Melguizo.
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    Preface
    The 2009 global economic crisis affected Latin American and Caribbean economies severely, as demand for the region’s goods and services plummeted. However, thanks to improved domestic macroeconomic management and regulation, Latin America was better equipped to tackle this crisis than ever before. Domestic demand, fuelled by the expanding purchasing power of those Latin American households in the middle of the income distribution, explains at least part of the Latin American resilience. Because of their capacity to change the region’s economic and political landscape, these middle-income households are the thematic focus of this Outlook. Here referred to as "middle sectors," they are defined as households with income per capita between 50% and 150% of the national median. This definition is often used as a basis for the analysis of the middle class in OECD countries; in the case of the Latin American region, does this definition identify the same type of people?
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    Acronyms and Abbreviations
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    Executive Summary
    What do the people in the middle – neither the richest nor the poorest in society – contribute to economic development? How well are these middle sectors doing, economically and socially, in Latin America? Certainly, the growth of a segment of the population with higher living standards than those of their poorest compatriots signals success in the ongoing struggle to alleviate poverty, as well as offering new markets and opportunities for entrepreneurs.
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    Macroeconomic Overview
    The 2009 global economic crisis affected Latin American and Caribbean economies severely. However, despite Latin America’s high level of integration with international markets and its poor growth showing in 2009, several economies in the region displayed noteworthy resilience, reversing the downturn fairly quickly while performing well relative to economies elsewhere in the world. Major external factors contributing to this comparatively good performance were Chinese demand for commodities and timely monetary action of the international community. Nonetheless, this superior economic outcome was also the fruit of internal factors, such as improved domestic monetary and fiscal macroeconomic management on the one hand and prudential microeconomic regulation on the other. Now that Latin America’s long-term growth prospects are positive, the policy measures that led to macroeconomic stability need to be further institutionalised, especially on the fiscal front, and financial system risks need to be addressed through further public regulatory action and financial education.
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    Middle Sectors and Latin American Development
    The middle sector is defined as households with income between 50% and 150% of the national median. The relative size of Latin American middle sectors ranges from a high of 56% of the population (Uruguay) to below 40% (Bolivia, Colombia). Household survey data reveal that most middle-sector households are headed by a pair of adults, though the proportion is even higher among the affluent. In most countries, middle-sector working people are not as likely as the affluent to be public-sector employees such as teachers or civil servants. Nor is the middle sector the cradle of entrepreneurship: the share of entrepreneurs is highest among the affluent. Indices of mobility potential are computed to measure how "close" disadvantaged households are, on average, to the middle-sector threshold, and similarly, how close middle-sector households are to falling into the ranks of the disadvantaged.
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    Social Protection and Labour Informality in the Middle Sectors
    Coverage of social-protection schemes in Latin America remains low, at well below 50% of workers. This can be explained by the dual structure of labour markets in the region: labour informality remains high, and the majority of informal workers contribute irregularly, if at all. The number of informal workers among Latin America’s middle sectors is high. Social-protection systems fail to reach even half of middle-sector workers, leaving many of them without adequate employment protection and access to social safety nets. This situation represents a pressing challenge for public policy, since low levels of affiliation and irregular contribution histories put people at a high risk of significant downward social mobility when they get sick, lose their job, or retire. Three key features of Latin America’s economic situation must guide a pragmatic social-protection reform: high levels of labour informality, a still relatively young population, and limited fiscal resources. To aid decision makers in the design of appropriate policies, this chapter assesses alternative pension reforms including ex post policies (i.e. after retirement, such as social pensions), and ex ante policies (i.e. during working life, especially matching defined contributions).
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    Education, Social Mobility and the Middle Sectors
    Education is a powerful tool to foster upward social mobility. The uneven distribution of opportunities in Latin America means that access to educational services in terms both of quantity and quality is low for the region’s middle sectors, and the level of education attained by middle-sector children also seems to peak around complete secondary education. This chapter discusses a series of policy recommendations aiming to promote inter-generational social mobility: investing in early childhood development; increasing the quality of public education, through measures such as better administration of schools, a modern system of evaluation, a more effective incentive structure for teachers; financing tertiary education through grants and loans; redistributive policies and income support; and policies to increase the social mix within schools.
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    The Middle Sectors, Fiscal Policy and the Social Contract
    This chapter analyses the links between the middle sectors and fiscal policy. Latin American middle sectors strongly support democracy, but they are critical of how it works, largely due to the perceived low quality of public services delivered by governments. Moreover, the net effect of taxes and transfers for middle-sector families is not large, and they benefit most from in-kind services such as education and health care. If these services are of low quality, the middle sector is more likely to consider itself a loser in the fiscal bargain and less willing to contribute to financing of the public sector. This chapter proposes that in order to strengthen the social contract — particularly with the middle sectors — governments need to improve the quality of public services and carry out tax reforms based on greater transparency and more effective administration.
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      Argentina
      Argentina is the second largest country in South America, after Brazil. In 2008, it had a gross domestic product (GDP) per capita of USD 7 160 and a population of 39.9 million. Although the country’s development has been affected in many ways by its turbulent political and economic history, in the past 25 years Argentina has made considerable progress towards building a successful market economy.
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      Brazil
      Brazil is the largest national economy in Latin America, the world's eighth largest economy at market exchange rates and the ninth largest in purchasing power parity (PPP), according to the International Monetary Fund and the World Bank. Brazil has a free market economy with abundant natural resources. The Brazilian economy has been predicted to become one of the five largest in the world in the decades to come, with growing gross domestic product (GDP) per capita. It has large and developed agricultural, mining, manufacturing and service sectors, as well as a large labour pool.
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      Chile
      Chile has a dynamic market-oriented economy which is characterised by a high level of foreign trade. During the early 1990s, Chile's reputation as a role model for economic reform was strengthened when the democratic government of Patricio Aylwin – who took over from the military in 1990 – deepened the economic reform initiated by the military government. Growth in real gross domestic product (GDP) averaged 8% from 1991–97, but fell to half that level in 1998 because of tight monetary policies (implemented to keep the current account deficit in check) and because of lower export earnings – the latter being a product of the Asian financial crisis. Chile's economy has since recovered and has seen growth rates of 5-7% over the past few years. In 2006, Chile became the country with the highest nominal GDP per capita in Latin America.
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      Colombia
      In spite of the difficulties presented by serious internal armed conflict, Colombia's market economy grew steadily in the latter part of the 20th century, with gross domestic product (GDP) increasing at an average rate of over 4% per year between 1970 and 1998. The country suffered a recession in 1999 (the first full year of negative growth since the Great Depression) and the recovery from that recession was long and painful. However, in recent years growth has been impressive, reaching 8.2% in 2007, one of the highest rates of growth in Latin America. Meanwhile the Colombian stock exchange climbed from 1 000 points at its creation in July 2001 to over 7 300 points by November 2008.
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      Costa Rica
      Located in Central America, Costa Rica had a gross domestic product (GDP) per capita of USD 6 060 in 2008 and a population of 4.5 million. Traditionally open to foreign investment, during the last decade Costa Rican economic policies have been oriented towards fostering an optimal penetration of the country into international markets, mainly by expanding and diversifying its export base.
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      Dominican Republic
      The Dominican Republic is an upper middle-income developing country. In the trimester of January–March 2007 it experienced an exceptional growth of 9.1% in its gross domestic product (GDP), which was actually below the previous year's 10.9% in the same period. Growth was led by imports, followed by exports, with finance and foreign investment the next largest factors.
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      Mexico
      The economy of Mexico is the eleventh largest in the world. After rapid economic, social and technological growth beginning in the 1990s, Mexico is now one of the world's fastest growing economies, with a stable growth rate of 7.6%. Since the 1994 crisis, administrations have improved the country's macroeconomic fundamentals. Mexico was not significantly influenced by the 2002 South American crisis and has maintained positive rates of growth after a brief period of stagnation in 2001. Moody's (in March 2000) and Fitch IBCA (in January 2002) issued investment-grade ratings for Mexico's sovereign debt. In spite of its unprecedented macroeconomic stability, which has reduced inflation and interest rates to record lows and has increased per capita income, enormous gaps remain between the urban and rural populations, central and peripheral states, and the rich and the poor. However the majority of the population has been part of the growing middle class since the late 1990s. Some of the government's challenges include the upgrade of infrastructure, the modernisation of the tax system and labour laws, and the reduction of income inequality.
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      Peru
      Peru is a developing country with a market-oriented economy; it has a high Human Development Index score of 0.723 based on 2010 data. Historically, the country's economic performance has been tied to exports, which provide hard currency to finance imports and external debt payments. Although exports have provided substantial revenue, self-sustained growth and a more egalitarian distribution of income have proven elusive. According to 2008 data, 36.2% of Peru's total population is poor, including 12.6% that is considered extremely poor.
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