November 27th, 2012
10:32 AM ET

Latin America's challenge

By Global Public Square

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With President Obama’s visit to Asia and war in Gaza, Washington's foreign policy energies have been focused this past week on the Far East and the Middle East. But let’s not forget the surprising developments in a region we share a 2,000 mile border with: Latin America.

I just read a new World Bank report, and it has some important findings. Between the years of 2003 and 2009, nearly 50 million people joined Latin America's middle class – that’s twice the entire population of the state of Texas, and a sixth of America's population as a whole. In those six years, the size of the region’s middle class expanded by 50 percent. The proportion of people in poverty fell sharply, from 44 percent, to 30 percent. And as the rest of the world became more unequal, Latin America was the only region to decrease the gap between rich and poor.

The findings have important consequences locally, but also for the world. When China lifted hundreds of millions of people out of poverty in the 1980s, it set out on a path towards increased consumption and growing global clout. Is Latin America heading the same way?

Let’s take a look.

The World Bank cites a number of reasons behind the region's rise. 70 million women joined the labor market in recent years, contributing to a reduction in extreme poverty. Education also boosted opportunities: children now spend three extra years in school compared with a decade ago, thanks to targeted government initiatives. And of course, there's been a rise in exports: Brazil enjoyed the region's fastest growth fueled largely by a boom in commodities.

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The question is whether the rise is sustainable. The World Bank cautions that class remains a major obstacle to opportunity in Latin America. You are likely to spend the same number of years at school as your parents. And simply getting children into school isn't enough – The Economist points out that the difference in the quality of schools attended by those at the top and bottom income groups is bigger than anywhere else in the world.

The growth of a Latin American middle class is obviously good news, but there's reason to worry about its economic future. We recently reported how Brazil's growth rate closely tracks global commodity prices. If those prices drop as a result of a slowdown in China and Europe – as many economists expect – Brazil and Latin America's growth will stall.

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That could mean new entrants to the middle class may slip back into poverty. These economies need to be diversified. Schools and health services need more investment; the many closed sectors and markets across the region need to open up further and foster competition.

But how will these governments raise money? This is where Latin America is different from China in the 1980s. Too many entitlements and subsidies have been doled out. Argentina, for example, has put in place a non-contributory pension scheme – essentially free support for the elderly. What happens when it’s time to pay up? Apart from Brazil and Argentina, taxes are low across the region. How do you increase them? As we know all here in the United States, entitlements once given are difficult to take back.
It’s heartening to read about the millions of people who have climbed out of poverty. But Latin America’s leaders face a major challenge to sustain these gains. Otherwise we could look back on this period as a peak from which it fell.

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