1. How middle-class is Latin America?
Latin American Economic Outlook 2011
Mario Pezzini
OECD Development Centre
Brasilia, 8th August 2011

2. Significant impact of the crisis on Latin America
GDP growth in previous three years 2009 GDP growth
10.0
8.0
6.0
Annual growth percentage
4.0
2.0
0.0
Argentina
Venezuela
Peru
Ecuador
Colombia
Uruguay
Chile
Brazil
Mexico
OECD
Costa Rica
-2.0
-4.0
-6.0
-8.0
Source: OECD (2010), based on data from ECLAC and OECD.

3. Outline
1 Latin America’s middle classes
2 Avoiding downward mobility: social protection
3 Fostering upward mobility: education
4 Middle classes and fiscal policy: a new social contract?

4. The “middle sectors” in Latin America
Middle sectors: Proportion of the population earning between 50% and 150% of median income
100 Disadvantaged Middle sectors Affluent
90
80
70
60
50
40
30
20
10
0
Peru
Bolivia
Uruguay
Brazil
Colombia
Argentina
Mexico
Italy
Costa Rica
Chile
Ecuador
Source: Castellani and Parent (2010) , based on national household surveys.

5. The middle sectors and the poor
Proportion of the population below the middle-sector cut-off, compared with
moderate and extreme poverty rates
50 Moderate poverty headcount
45
40
Percentage of total population
35
30
Disadvantaged
25
20
15
10 Extreme poverty
headcount
5
0
Argentina Brazil Chile Colombia Costa Rica Mexico Peru Dominican
Rep.
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.

6. Possibilities of moving up… and down
Indices of “mobility potential”
DMP Middle sectors size… RES Middle sectors size… MSMP
0.80 60 0.49
Middle sectors size (right axis) 60
0.51 60
0.70 0.50 0.48
50 50 50
0.60
0.49 0.47
40 40 40
0.50
0.48 0.46
0.40 30 30 30
0.47 0.45
0.30
20 20 20
0.46 0.44
0.20
10 0.45 10 10
0.10 0.43
0.00 0 0.44 0
Costa…
Costa…
0.42 0
Costa…
Brazil
Mexico
Peru
Colombia
Chile
Ecuador
Bolivia
Argentina
Uruguay
Chile
Mexico
Brazil
Peru
Bolivia
Ecuador
Colombia
Argentina
Uruguay
Mexico
Brazil
Peru
Bolivia
Chile
Ecuador
Colombia
Uruguay
Argentina
Potential to move up Middle Sectors Potential to move up out
into the middle sectors Resilience of the middle sectors
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).

7. •Outline
1 Some characteristics of Latin America’s middle classes
2 Avoiding downward mobility: social protection
3 Fostering upward mobility: education
4 Middle classes and fiscal policy: a new social contract?

8. Middle income workers: mostly informal
Middle-sector workers by employment category
Formal employees Self Employed (with tertiary education completed)
Non Agricultural Self-employed Non Agricultural Informal Employees
Agricultural Self-employed Agricultural informal employees
1.0
Percentage
0.8
0.6
0.4
0.2
0.0
2002 BOL 2006 BRA 2006 CHL 2006 MEX
Note: Percentage of total middle sectors’ workers (0.5 – 1.5 median household adjusted income)
Source: OECD (2010), based on household survey data.

9. Pension Coverage & income level
Formal Workers Informal Workers
BOL 2002 BRA 2006 CHL 2006 MEX 2006 BOL 2002 BRA 2006 CHL 2006 MEX 2006
35
100
90 30
80
25
70
60 20
50
15
40
30 10
20
5
10
0 0
Disadvantaged Middle Sectors Affluent Disadvantaged Middle Sectors Affluent
Percentage of workers covered

10. Informality reduces severely pension coverage
Middle sectors„ workers pension coverage rate
BOL 2002 BRA 2006 CHL 2006 MEX 2006
100
90
80
70
60
50
40
30
20
10
0
Formal Informal
Note: Percentage of affiliates (Bolivia and Mexico) or contributors (Brazil and Chile), over middle-sectors’ workers (14-64 years)

11. Informal workers are heterogeneous
Pension coverage rate of the informal middle sectors
BOL 2002 BRA 2006 CHL 2006 MEX 2006
45
40
35
30
25
20
15
10
5
0
Self Employed (with Non Agricultural Non Agricultural self- Agricultural self- Agricultural informal
tertiary education informal employees employed employed employees
completed)
Note: Percentage of affiliates (Bolivia and Mexico) or contributors (Brazil and Chile), over middle-sectors workers (14-64 years)

12. Policy recommendations: contents (ex post and ex ante)
Minimum pensions: old affiliates, agricultural informal
Universality vs. Looser eligibility
Affiliation: Independents with tertiary education
Compulsory for independent workers vs. Opt-out
Flexibility (contributions, withdrawals)
Public co-funding: Middle-sectors informal workers with savings
Matching defined contributions

13. Outline
1 Some characteristics of Latin America’s middle classes
2 Avoiding downward mobility: social protection
3 Fostering upward mobility: education
4 Middle classes and fiscal policy: a new social contract?

14. 0.10
0.30
0.60
0.00
0.20
0.40
0.50
0.70
Peru
Ecuador
Panama
Chile
Brazil
Source: Hertz el at. (2007)
Colombia
Nicaragua
Indonesia
Italy
LAC
Slovenia
Egypt
Hungary
Sri Lanka
Pakistan
USA
Switzerland
Ireland
South Africa
Poland
Vietnam
Philippines
Belgium
OECD (excl. Mexico and Chile)
Estonia
Sweden
Ghana
Ukraine
East Timor
Bangladesh
Slovakia
Czech Republic
Netherlands
Norway
Nepal
New Zealand
Intergenerational mobility in Latin America is low
Developing countries
Finland
Northern Ireland
Great Britain
Malaysia
Denmark
Kyrgyzstan

15. Low mobility in the middle
Probability of achieving a higher level of education than one’s parents, given parental
educational achievement
Women Men
0.9
0.8
0.7
Probability
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Illiterate Incomplete Complete Incomplete Complete Incomplete Complete
primary primary secondary secondary tertiary tertiary
Parents’ level of education
Source: OECD ( 2010), based on survey data from Latinobarómetro (2008).

16. Equity and performance: No trade-off necessary
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

17. Policies to enhance upward mobility
• Expand early childhood development programs
• More and better secondary education: focus on schools and teachers
• Better social mix within schools
• Financing tertiary education: grants and scholarships
• Redistributive policies and income support

18. Outline
1 Some characteristics of Latin America’s middle classes
2 Avoiding downward mobility: social protection
3 Fostering upward mobility: education
4 Middle classes and fiscal policy: a new social contract?

19. Democracy: supportive but satisfied
Satisfaction with functioning of democracy Support of democratic systems
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Venezuela
Peru
Bolivia
Mexico
Costa Rica
Ecuador
Guatemala
Argentina
Brazil
Colombia
Nicaragua
Chile
Dominican Republic
Uruguay
Honduras
Panama
Paraguay
El Salvador
Source: Based on Latinobarómetro 2008.

20. Middle sectors: supporters of democracy, politically moderate
Attitudes towards democracy
Distribution of political preferences
Attitudes towards democracy (0 extreme left, 1 extreme right)
(% support and satisfaction)
Q1 Q2-Q4 Q5
Support for democracy Satisfaction with functioning of democracy 40.0%
80%
35.0%
70%
30.0%
60%
50% 25.0%
Frequency
40% 20.0%
30%
15.0%
20%
10.0%
10%
5.0%
0%
1 2 3 4 5
Perceived Income Quintile 0.0%
0 1 2 3 4 5 6 7 8 9 10
Left - Right self-reported preferences
Source: OECD ( 2010), based on survey data from Latinobarómetro (2007-8).

21. 0
2
4
6
8
10
12
14
16
18
0
2
4
6
8
10
12
14
16
Colombia Guatemala
Peru Dominican Rep.
El Salvador
El Salvador
Costa Rica
Dominican Rep.
Mexico
Costa Rica
Uruguay
Chile Venezuela, Bolivarian
Rep.
Uruguay
Colombia
Mexico Peru
Indirect Taxes
Direct Taxes
Brazil Argentina
Argentina Chile
Brazil
Selected LAC
Selected LAC
OECD (33)
OECD (33)
0
1
3
4
5
6
8
9
2
7
10
6
8
0
2
4
10
12
14
16
18
Chile
El Salvador
Peru
Direct Taxes
Tax revenue as percentage of GDP
Guatemala
Colombia
Mexico
Argentina
Indirect Taxes
Uruguay
Costa Rica
Social Security
Brazil
Social Security
Selected LAC
Brazil
OECD (33)
OECD (33)
Selected LAC
Source: Revenue Statistics in Latin America (OECD, ECLAC, CIAT, 2011, forthcoming)

22. Searching Better Taxation
Tax revenue, as percentage of total taxation
Source: Revenue Statistics in Latin America (OECD, ECLAC, CIAT, 2011, forthcoming)

23. Taxation – Brazil
Tax revenue, as percentage of total taxation
Source: Revenue Statistics in Latin America (OECD, ECLAC, CIAT, 2011, forthcoming)

24. Taxation and satisfaction with public services
"Good Citizens pay their taxes" "Taxes are too high"
(percentage of respondents who agree) (percentage of respondents who agree)
60 50
55
45
50
40
45
35
40
30
35
30 25
Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5
Satisfaction with health services Satisfied
"Tax evasion is never justified"
(percentage of respondents) Not Satisfied
(percentage of respondents who agree)
No Access
37
35 100
33 80
31 60
29 40
20
27
-
25 Q1 Q2 Q3 Q4 Q5
Q1 Q2 Q3 Q4 Q5
Source: OECD ( 2010), based on survey data from Latinobarómetro (2007-8).

25. Middle sectors: players in a renewed social contract?
Effective net receipt of benefits by household income deciles in percentage of decile mean
disposable income
CHILE MEXICO
120% 120%
Taxes Social spending Net transfers Taxes Social spending Net transfers
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
-20% -20%
-40% -40%
I II III IV V VI VII VIII IX X I II III IV V VI VII VIII IX X
Source: OECD (2010), based on national household surveys.

26. Main Messages
 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 might be disposed to pay taxes – if they receive public
goods of reasonable quality in exchange.

27. Policy Recommendations
 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

28. How middle-class is Latin America?
Latin American Economic Outlook 2011
Mario Pezzini, Director
OECD Development Centre
www.latameconomy.org
www.oecd.org/dev