Rising with the Tide: Chile, Brazil, and Mexico

Stephen DeAngelis

August 24, 2007

It takes a lot to impress the folks at The Economist, but in the 18-27 August 2007 issue, one of the leaders contains the following the sentence: “Something rather exciting is happening in Latin America.” [“Up from the bottom of the pile“] Although the article makes passing mention of Hugo Chavez and his socialist revolution and anti-American rhetoric, it notes that “many countries in the region, and especially in Brazil and Mexico, Latin America’s two giants, things are in fact going better today than they have done since the mid-1970s.” Even more exciting than the economic boom is the accompanying social transformation.

“Financial stability and faster growth are starting to transform social conditions with astonishing speed. The number of people living in poverty is falling, not only because of growth but also thanks to the social policies of reforming democratic governments. The incomes of the poor are rising faster than those of the rich in Brazil (where income inequality is at its least extreme for a generation) and in Mexico. In both these countries a new lower-middle class is emerging from poverty. Low inflation, achieved through more disciplined public finances and trade liberalisation, has brought falling interest rates. Credit has at last returned. So these new consumers are buying cars and DVD players or taking out mortgages. No wonder Latin Americans are in an optimistic mood: earlier this year a poll by the Pew Global Attitudes Project found a greater increase in personal satisfaction in Brazil and Mexico over the past five years than in any of the other 45 countries it surveyed.”

The article notes that even though Latinos enjoy watching Chavez poke repeatedly at the Colossus to the north, they haven’t jumped on his economic strategy bandwagon.

“Out of a dozen presidential elections in the region in the 13 months to last December, the [radical populists and leftists] won only four. Moderate governments, of centre-left or centre-right, are in charge in most countries.”

The poorer the country, the more likely it is to lean toward the socialist policies that Chavez espouses. The article notes that such policies may be helpful to get people started toward a better life, but at some point more conservative policies are required to keep the dream alive. Fifty years of socialism in Cuba certainly hasn’t achieved a state worthy of emulation. The article concludes that most of Latin America still has a long row to hoe, but now is the time to do the tough work.

“Latin America remains a long way from enjoying widespread affluence. In the region as a whole, some 38.5% of people remain poor according to national definitions. The gains are still fragile. But the lessons for governments are clear. To bolster the new middle class, it is crucial to keep inflation low. So is improving the shoddy education imparted in the region’s schools and universities. And businesses in the region are still held back by lack of transport infrastructure and an excess of red tape.”

In a companion article [“Adiós to poverty, hola to consumption“], the magazine discusses the emergence of a new middle class in Brazil and Mexico. The story begins in the Brazilian town of Montanhão. The article notes that nagging problems there persist but …

“… signs of progress are all around. New tower-blocks, of the kind ubiquitous in the smarter parts of São Paulo, now jut up from among the houses of what still resembles a favela, or shantytown. Public services are improving fast: nearly everyone has electricity, piped water and sewerage. Smart new school buses run by the municipal government ply up and down the hillsides. And the mood of optimism is palpable. ‘Each year has been better than the last,’ says Mrs Jozina de Arruda. Between the profit from the kiosk and her husband’s wages as a security guard at a bank, they earn $900-1,200 a month. They are members of a new middle class that is emerging almost overnight across Brazil and much of Latin America. Tens of millions of such people are the main beneficiaries of the region’s hard-won economic stability and recent economic growth. Having left poverty behind, their incipient prosperity is driving the rapid growth of a mass consumer market in a region long notorious for the searing contrast between a small privileged elite and a poor majority. Their advent also promises to transform the region’s politics.”

The main focus of the article is on why and how this middle class emerged. It isn’t Latin America’s first middle class, but it is different than the one that rose and nearly disappeared late last century. In addition, it wasn’t government programs but private investment and market forces.

“The middle class that is emerging now is … more accurately described as a lower-middle class. Fernando Henrique Cardoso, a former president of Brazil who is also a sociologist, points out that this class is related more to the market than the state. Many of its members have small businesses, like Mr Gonçalves. Others act as consultants to larger concerns. José Roberto Mendonça de Barros, an economist in São Paulo, points to a plethora of small service companies which advise large Brazilian farms on computing and biotechnology. … In Mexico, argues Jorge Castañeda, a political scientist, some of the new middle class come from the informal economy, others from new industries or service businesses. The class is less concentrated in Mexico City and is rougher-edged, culturally and socially, as well as darker-skinned, shorter and more Mexican-looking than its predecessor, he says. These trends are furthest advanced in Chile. But they are most dramatic in Brazil and Mexico, which between them account for more than half of Latin America’s 560m people. In Brazil between 2000 and 2005 the number of households with an annual income of $5,900 to $22,000 grew by half, from 14.5m to 22.3m, while those receiving less than $3,000 a year fell sharply to just 1.3m (see chart 2). In Mexico, according to Alejandro Hope of GEA, a consultancy in Mexico City, the number of families with a monthly income of between $600 and $1,600 has increased from 5.7m in 1996 to 10.7m in 2006.”

Similar trends are being seen in Colombia, Peru, and Argentina.

“In Latin America as a whole, according to calculations by Banco Santander, a Spanish bank, some 15m households ceased to be poor between 2002 and 2006. If the trend continues, by 2010 a small majority in the region will have joined the middle class, with annual incomes above $12,090 in purchasing-power-parity terms. In Mexico some 15m out of 27m households could have middle-class incomes by 2012.”

Even though progress has been achieved primarily through private sector investment, government programs have contributed.

“In both Mexico and Brazil, one family in five now receives a small monthly stipend from the government, provided they keep their children in school and take them for health checks. Lastly, in some countries remittances from Latin Americans who have migrated help their poorer families back home. The result is that in both Brazil and Mexico the incomes of the poorest half of the population are growing faster than the average. In both countries poverty is falling steadily, and income distribution is becoming less unequal.”

For more about the program in Mexico, see my post Oportunidades At Home and Abroad. The article ends on a mixed note of wariness and optimism.

“All these positive trends are recent and remain fragile. Mr Mendonça de Barros notes that in Brazil, until very recently, a university graduate could expect to earn less than 2,000 reais a month in his first job—roughly the same wage as a bus driver. Many of those who have clawed their way out of poverty could be knocked back down again if there were a repeat of the financial collapses the region suffered in the 1980s and 1990s. The new middle classes have more schooling than their parents; some have gone to mushrooming private universities. But they are less educated than the old middle class that benefited from elitist public universities—and that makes moving into the upper-middle class hard. Nevertheless, the direction of change is clear.”

In a final related article [“Destitute No More“], the magazine notes how well Chile has been doing.

“Poverty has fallen further, faster, in Chile than anywhere else in Latin America. Sustained economic growth and job creation since the mid-1980s are the main explanation, though it helps that poorer Chileans are having fewer children than in the past. In recent years public policies, such as Chile Solidario, have played a bigger role. In the 1990s poverty dropped by half a percentage point for each point of economic growth, but now it falls by one-and-a-half points, according to Clarisa Hardy, the planning minister. Chile Solidario aims to help the poorest support themselves, by ensuring they take up various social benefits and keep their children healthy and at school, and by offering training and a grant to set up a small business. It is too soon to tell whether it will be a long-term success: the first of 250,000 very poor families enrolled in the scheme are only just graduating from it. Even so, Chile has a chance of all but abolishing poverty in the next few years. … The fact that alternative ways of measuring poverty are now being discussed is a sign of how far Chile has come in the past two decades. It is also an indication of the tasks that still lie ahead in creating a middle-class society.”

For readers who have been reading about our Development-in-a-Box™ approach, they should recognize why we are so encouraged by it. Countries that have done well have adopted international standards and best practices, have emphasized educating their citizens, have created jobs, and encouraged the emergence of a middle class by fostering private development. The results, as you can see, are encouraging.