Sunday, 22 May 2011


From  2008 to the present, the US and a number of European countries, especially southern Europe, Balkans, and Baltic countries have experienced high unemployment and negative GDP growth. Consequently, they have suffered a speedier contraction of the middle class and lower living standards for mid to lower income group. By contrast, Latin America has experienced modest upward mobility that actually reflects the growing economic strength of the region, despite setbacks owing to the deep global recession. Naturally, there are immense differences between the poorest nations - Haiti, Guatemala, Bolivia, Nicaragua - and richest and larger republics Brazil, Mexico, Argentina.

Latin America's population is roughly twice that of the US, or 600 million. Latin America's combined GDP is one-third that of the US. Despite average annual GDP growth of 2.6% from 2000 to 2008, the global recession of 2008-present had a deep impact on Latin America, especially on Mexico whose economy depends heavily on the US. Of the 600 million people, approximately 70 million live in extreme poverty, while another 120 million around poverty levels, thus one-third of the population is near or below poverty, in comparison with US that has 14% poverty level, and EU around 17% (note: statistics vary somewhat according to source.)

In the last ten years, 56 million Latin American households joined the ranks of the 'middle class' based on how the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) defines that social group; a definition with different criteria for Norway than  for Chile. Latin America's middle class growth is part of a global trend where an estimated 1.3 billion people claim to be in that group; again with the caveat that there are qualitative and quantitative difference between middle classes from one country to the other.

For example, in comparison to the middle classes in the US, Canada and EU, the Latin American middle class has to make due with a poor educational system, weak benefits, and the likelihood of falling into poverty only to reemerge after a recessionary cycle is not uncommon in Latin America, as the Argentinian situation attests in the last three decades. The fragility of the Latin American middle class is a reflection of the nature of the export-based economies undergoing 'dependent capitalist development' with massive foreign capital investment.

Although Latin America experienced a rise in the middle class that is largely a reflection of the middle class rise in developing nations (especially Asia), it is important to consider that this modest upward social mobility took place under progressive regimes, at least regimes that claimed to cater not just to the traditional oligarchy, but to the middle class and labor as well. In the last ten years, a number of countries elected governments with a commitment to greater social justice.

Governments with some commitment to more democratic institutions and working toward greater social justice and less external dependence, at least in theory, include: Brazil under Lula da Silva and now under Dilma Rousseff; Venezuela under Hugo Chavez; Argentina under Nestor Kirchner and his wife Cristina Fernandez; Paraguay under Fernando Lugo; Bolivia under Evo Morales; Ecuador under Rafael Correa; Nicaragua under Daniel Ortega; Honduras under Manuel Zelaya; El Salvador Mauricio Funes; Chile under Ricardo Lagos and Michelle Bachelet; and Uruguay under Jose Mujica.

None of these regimes have worked economic or social miracles, considering that not a single Latin American nation is among the world's top 25 for highest average incomes, and considering that Bolivia, regardless of Morales' good intentions and struggles, remains one of the poorest nations in the Western Hemisphere. However, if there are 56 million more households in the middle class today, it is because there were regimes in place that at the very least had fiscal, economic and labor policies allowing for such wealth distribution instead of concentration as usually occurs under authoritarian governments.

To be sure, there are serious structural economic and social impediments to Latin American development, problems directly linked to the political class and business elites supported by a global neo-liberal climate that the IMF has been pursuing. Appearances notwithstanding. the informal economy that has always been very prominent has continued to grow at the expense of a weak state fiscal structure.

According to the OECD, about 35 million 'middle sector' workers  (income levels between 50 and 150% of the national median) in Bolivia, Brazil, Chile, and Mexico are employed in the informal economy. And more than half of Latin America's workers have no social safety net. Youth unemployment, a huge problem world-wide, is especially critical for Latin America, reaching 60% for the southern cone countries (Brazil, Argentina, Uruguay and Paraguay), or three times higher than what it is in the EU.

Overall, one must look at the positive aspects of the UN-ECLA report on the middle class that has been growing amid a contracting trend in the developed nations. The other positive aspect is that a growing middle class could potentially lead toward a more meritocracy-based, less corrupt and more democratic institutional structure. Again, this is in theory, although the culture of 'clientist' politics is always slow to change. Another positive aspect of the growing middle class is the growth of a stronger labor movement that has been on the decline from the 1950s onwards for most countries.

The strength of the middle class indicates a potential change in value system, although that too is very slow to change and it entails a considerable growth of the middle class before there is meaningful change. I do not share the view of 'modernization theory' advocates about the correlation between middle class growth and stronger commitment to 'bourgeois democracy'. Besides taking into account each country's history and traditions as factor on how the middle class may behave, I believe that the middle class tends to be more radical in many respects than workers and historically it advocates institutional changes. This is especially the case today with modern technology that allows the educated middle class youth to be instantly informed about progressive movements throughout the world.

Latin America has a very long way to go before its economic and social indicators show that it has joined the developed nations. However, for some of the republics at least, the prospects seem bright not only from an economic perspective but political as well. Whereas in Europe and Central Asia the richest 20% of the population controls 41% of the income and the bottom 20% of the people own 6.6% of income, in Latin America/Caribbean, the corresponding percentages are 57.1% of the income for the top 20% of the people and 2.9% of the income for the bottom 20%.

Mexico, followed by the US leads thirty OECD countries in rich-poor gap (25:1 and 16:1 ratios respectively). Denmark, Sweden and Finland have the smallest gap at just under 5:1 ratio. Unless that immense income gap closes at least to Spain's level (10:1 ratio) that is the average for OECD, Latin America cannot make progress. Advocates of modernization theory, including the IMF, contend that technology is the catalyst to the widening rich-poor gap, thus the solution in Latin America and elsewhere is education that would allow people to keep up with technological advances that globalization invariably carries.

Not that education is not important, on the contrary it is the key to progress, but three points about IMF and modernization theorists advocating education as the panacea to the problems of unemployment and low wages:
a) this is the same argument they make as the solution for all countries and all situations when there are pressures on labor wages and unemployment;
b) The argument is intended to deflect focus from the root causes of income inequality, which are related to fiscal and economic policy designed to benefit the financial elites;
c) neo-liberal policies that modernization theorists embrace entail less funding for education, thus excluding more people from securing the opportunity of more schooling.

If economic development necessarily led to democratization of a country, then a number of countries with highly developed economies, including Nazi Germany, would have taken that route. On the other hand, we have the best examples of social democracies in the Nordic countries. As encouraging as the growth of Latin America's middle class may be, even more encouraging will be signs that the rich-poor gap closes with more equitable income distribution that lowers poverty levels.

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