Latin American Economic Outlook 2011

Washington DC, December 2010

How middle-class is Latin America?

Jeff Dayton-JohnsonHead, Americas DeskOECD Development Centre

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Latin American Economic Outlook 2011

1 Macroeconomic Overview

2 Latin America’s “middle classes”

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Impact of the crisis on Latin America: SIGNIFICANT

Source: OECD (2010), based on data from ECLAC and OECD.

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Impact of the crisis on Latin America: BUT TRANSITORY

Source: OECD Economic Outlook, Dec 2010 (Chile, Brazil Mexico and OECD) Latin American Consensus Forecasts, Nov 2010 for other countries

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Global recessionary shocks hit the region

External commercial and financial shocks

Note: Quarterly purchases of domestic assets cover only the three largest regional economies - Argentina, Brazil and Mexicofor reasons of data availability. The points are plotted for the worst quarter in 12-month periods comprising the second and first halvesof consecutive years.

Source: OECD (2010), based on data from IMF and ECLAC.

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The export channel determined the size of the shock

Shock to exports and GDP slowdown

Source: OECD (2010), based on datatfrom ECLAC.

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But the crisis was also propagated via the financial channel

Foreign investors’ purchases and “unexplained” GDP growth

Note: *Financial purchases are adjusted for the size of a “country’s economic possibilities” in the eye of foreign investors, a concept proxied by the volume of export growth in dollar terms in previous years.

Source: OECD(2010), based on IFS-IMF data.

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… which is correlated with hard-earned resilience

Foreign investors’ purchases and fiscal policy resilience

Note: *The Policy-Resilience Index is described in OECD (2009a). Policy Resilience Index calculated using 2008 data.

Source: OECD (2009, 2010), and IMF-IFS data.

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On the monetary side, policy achievements proved effective

Interest rates

Inflationary expectations

Source: OECD (2009, 2010), based on data from central banks.

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On the fiscal side, an important gap remains …

Output elasticity of total taxes

Note: OECD unweighted average, excluding Chile and Mexico.

Source: Daude, Melguizo and Neut (2010) for Argentina, Chile, Colombia, Costa Rica, Mexico, Peru and Uruguay, de Mello and Mocero (2006) for Brazil, and Girouard and André (2005) for the rest.

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… although increased policy space yields its benefits

Source: OECD (2009, 2010), from various sources.

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Latin American Economic Outlook 2011

1 Macroeconomic Overview

2 Latin America’s “middle classes”

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The “middle sectors” in Latin America

Source: Castellani and Parent (2010) , based on national household surveys .

Middle sectors: Proportion of the population earning between 50% and 150% of median income

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The middle sectors and the poor

Source: OECD (2010), based on data from the SEDLAC database, accessed in August 2010.Notes: Poverty headcount figures refer to the number of individuals below the respective national poverty line, according to official statistics. The square refers to the percentage of disadvantaged population as per the 50-150 definition.

Proportion of the population below the middle-sector cut-off, compared with moderate and extreme poverty rates

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Possibilities of moving up… and down

Notes: DMP,RES and MSMP are defined in Box 1.2.Source: OECD (2010), based on 2006 National Household Surveys analysed in Castellani and Parent (2010).

Potential to move up into the middle sectors

Potential to fall down out of the middle sectors

Potential to move up out of the middle sectors

Indices of “mobility potential”

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What kind of work do middle-sector people do?

Source: OECD (2010) based on analysis of national household surveys in Castellani and Parent (2010).

Proportion of middle-sector population in various occupations

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Middle-sector workers: mostly informal

Note: Percentage of total middle sectors’ workers (0.5 – 1.5 median household adjusted income)Source: OECD (2010), based on household survey data.

Middle-sector workers by employment category

0.0

0.2

0.4

0.6

0.8

1.0

2002 BOL 2006 BRA 2006 CHL 2006 MEX

Perc

enta

ge

Formal employees Self Employed (with tertiary education completed)

Non Agricultural Self-employed Non Agricultural Informal Employees

Agricultural Self-employed Agricultural informal employees

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Coverage improves with income – in the informal sector sector

Source: OECD (2010), based on national household surveys.

Workers with formal jobs Workers with informal jobs

Pension coverage rate of workers by income category, formal and informal employment

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Probability of achieving a higher level of education than one’s parents, given parental educational achievement

Education as a tool for upward mobility: more can be done

Source: OECD ( 2010), based on survey data from Latinobarómetro (2008).

Parents’ level of education

Prob

abili

ty

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Social inclusion & PISA science test performance

Note: Blue lines indicate OECD averages. Inclusion index measures proportion of variance of economic, social and cultural variance within schools.Source: OECD ( 2010), based on survey data from 2006 round of PISA

Equity and performance: No trade-off necessary PIS

A S

cience

Sco

re

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Effective net receipt of benefits by household income deciles: weighted average, percentage of mean disposable income (TOP); percentage of decile mean disposable income (BOTTOM)

Middle sectors: players in a renewed social contract?

CHILE MEXICO

Source: OECD (2010), based on national household surveys.

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Taxation and satisfaction with public services

Source: OECD ( 2010), based on survey data from Latinobarómetro (2007-8).

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Middle sectors: supporters of democracy, politically moderate

Attitudes towards democracy(% support and satisfaction)

Distribution of political preferences(0 extreme left, 1 extreme right)

Attitudes towards democracy

0%

10%

20%

30%

40%

50%

60%

70%

80%

1 2 3 4 5Perceived Income Quintile

Support for democracy Satisfaction with functioning of democracy

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

0 1 2 3 4 5 6 7 8 9 10

Freq

uenc

y

Left - Right self-reported preferences

Q1 Q2-Q4 Q5

Source: OECD ( 2010), based on survey data from Latinobarómetro (2007-8).

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The Outlook: Main Messages

THE MACRO SITUATION

• Latin America has withstood the global crisis better than other regions, thanks to a combination of external and internal factors

MIDDLE SECTORS

• The middle sectors in Latin America are economically vulnerable

• Labour informality – and low social protection coverage – are particularly prevalent among the middle sectors

• Education is a powerful motor of intergenerational social mobility: but one that isn’t working particularly well in Latin America

• The middle sectors are disposed to pay taxes – if they receive public goods of reasonable quality in exchange.

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The Outlook: Policy Recommendations

THE MACRO SITUATION

• Now is the time to further and better institutionalise good macro management practices

MIDDLE SECTORS

• Flexible social protection policies must be put in place to arrest downward social mobility and an increase in inequality

• Early childhood education, as well as better quantity and quality of secondary education would bolster the role of human capital as a means of climbing the social ladder

• Tax reform must be accompanied -- or preceded -- by improvements in the quality of public spending