January 4th, 2013
04:57 AM ET

Everything you’ve heard about the middle class is wrong

By Christopher Sabatini, Special to CNN

Editor’s note: Christopher Sabatini is senior director of policy at Americas Society/Council of the Americas, editor-in-chief of Americas Quarterly and adjunct professor at Columbia University. The views expressed are his own.

Whether its growth is being hailed as a major advance for Latin America or its alleged decline in the developed world is taken as a sign of the global North’s impending fall, the middle class has assumed almost totemic status in popular discussions.  The reality, though, is more complex.

The confusion stems in large part from how we define the middle class.

In the seemingly interminable 2012 U.S. presidential election campaign, the U.S middle class loomed like an endangered species, so much time was spent by the candidates positioning themselves as the savior of the supposedly beleaguered middle class. Lost within the debate was the matter of whether the U.S. middle class was actually shrinking and why – or why not.

According to Brookings Institution scholars Scott Winship and Ron Haskins, the U.S. middle class has not contracted. That’s largely because most measures have failed to include the tax and social benefits that U.S. policy provides and are currently on the chopping block in the negotiations over the fiscal cliff.

More from GPS: What U.S. can learn from Mexico

Maintaining or expanding state support, though, is not enough. As Winship and Haskins argue, to rise above this state-supported floor, what is required is a more competitive educational system (the U.S. ranks among the lowest scorers in international student achievement tests) and job growth. In short, the answers to the U.S.’, until now, non-shrinking middle class is a mixture of state and market.

Then there’s the issue of the middle class in the emerging economies. Here there’s a lot of variety that belies the optimism of businesses and economists.  World Bank economist Luis Felipe Lopez-Calva provides one of the objective and realistic analysis of Latin America’s middle class, arguing that the threshold is $10 income per day.

Even here though, two questions emerge. The first is the vulnerability of the middle class. When many discuss the middle class, they carry a load of assumptions about the middle class’ security and political orientations – much of this based on the role and imputed role of the middle class in economic and political development in more developed economies.

Few of those apply to Latin America.

Let’s start with economic security. The rise of Latin America’s middle class owes much to stable macroeconomic policies and innovative social programs. Low inflation has increased incomes and allowed for the expansion of credit. At the same time, floating exchange rates and liberal trade policies have allowed countries like Chile, Peru, Colombia, Mexico and Brazil to insert themselves into the global economy, further spurring growth rates.

The same is not true for all countries in the region. Venezuela faces an inflation rate approaching 30 percent and an exchange rate that teeters on the verge of devaluation.  Argentina too is pretending not to flirt with high inflation. In both countries, ironically, the once-strong middle classes are shrinking.

But sound macroeconomic policies and economic growth alone didn’t spawn the new middle class. Look at the Dominican Republic compared to Ecuador. The former has slavishly followed the liberal model. While the policy has produced economic growth (averaging 5 percent for the last 5 years) the country’s middle class has contracted by about -3 percent. In contrast, Ecuador – hardly a poster child for neo-liberal policies – has seen its middle class grow by more than 10 percentage points from 2000 to 2010.

Modern social policies in Latin America have played a crucial role in raising families out of poverty – but they may not be sufficient to keep them in the middle class. The major innovation in social policy in the last two decades has been conditional cash transfers (CCTs) that provide direct income transfers to families of the poorest of the poor. When the measure of poverty – or middle classness – is income-based, though, such programs obscure the real stability of the middle class.

There is little difference between those receiving a direct state subsidy and those who have achieved a stable, formal job. In both cases, daily income has increased, but only in the case of the latter economic security has.

Social policy – whether through stable macro policy or CCTs – may have helped families pass the threshold to the middle class, but these policies don’t guarantee that they will stay there.

One of the key challenges is access to formal employment. Labor law reform will open opportunities for formal jobs. Until it recently liberalized labor laws, under 60 percent of Mexican citizens worked in a “formal” job, meaning that nearly half of Mexico’s labor force is in the informal sector, without access real benefits, like pensions and health care.

The other challenge is re-adjusting social policy to accommodate this region’s new demographic reality.  There exists a huge breach between CCTs and Latin America’s traditional – though often regressive – social policies. Today, social policies need to be re-jigged to provide a floor of social insurance to the socially mobile.

Frankly, it’s not unlike the challenge in the United States. In this case, the middle class may be keeping their heads above water thanks to old-time policies. Making sure they stay there requires opening up formal job opportunities and refining social policies.  Maybe we can learn from Latin America.

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Topics: Latin America

soundoff (5 Responses)
  1. Hahahahahahaha

    Not Everything!!! Such as I've heard the Middle Class is being f__cked in the a$$ by the rich people. THAT seems to be true!!! Hahahahahahahaha

    January 4, 2013 at 3:54 pm | Reply
  2. Obsever

    I wonder how much of the growth that is seen in a couple of these central Amercian countries is associated with drug peddling. We have a billionaire who has made almost all of his fortune in drugs, and how many people were killled to see the growth of this illegal middle class. In respect to true growth of the midddle class, there hasn't been any growth, unless your incorporating small bussiness people in those numbers, who employ people with wages that their employees could never live on. As for the increase in the middle class what is the base number your using and what is the top end number you use in these studies? Just wondering.

    January 4, 2013 at 4:49 pm | Reply
  3. JJ

    Hi-
    It seems a s though the real issue is not that middle class is being ignored or that there was someone living outside of society for 30 years living on friut- The issue is who is squabling in and out of the middle class. Jobs were the issue and that means keeping people out of the cracks where a car is not an option to get to work, that the workers have safe working environments and that their lives are not taken in part by their boss. People dont have to be fired because of a relationship in the workplace like theres a necessity; because people who loose their job and end up cycling in and out of middle class are the ones who do have little compensation not because of meaneal things. But its seems as though there are obstructions that tend to be bi partisan in nature. Like the fact that people end up in a cycle of out of work that tends to mixed up with some of the people who are havent gone to work in 20 years. Its a mix of obstructions of people that want to break through that berrier of being wealthy for reasons other than the work that they are supposed to be doing (as far as that issue in Greece with their prime minister or government official) and the people that are stuck in cycles because of obstructions. Its not sugar coated but pollitical correctness is oversold sometimes.THanks

    January 5, 2013 at 3:23 am | Reply
  4. empresstrudy

    $10/day is precisely what Obama wants to do to our middle class. Enjoy your paradise.

    January 5, 2013 at 10:23 am | Reply
  5. j. von hettlingen

    In many Latin American countries, people have, for a long time relied on remittances from their fellow citizens working abroad. People in Ecuador, Venezuela, Argentina etc have been able to benefit from the billions of dollars spent on social projects. With economic growth thanks to natural resources, countries like Mexico, Brazil etc have seen their citizens lifted out of poverty. But then the status of the middle class is fluid.

    January 6, 2013 at 6:46 pm | Reply

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