Saturday, December 11, 2010

Latin America: Latin American Governments Asked to Protect Middle Class

An urban middle class neighbourhood in Latin America | Credit:

By Richard Johnson

Courtesy IDN-InDepth NewsAnalysis

PARIS (IDN) - The burgeoning middle class is an engine of economic growth in Latin America, but its high vulnerability poses a serious threat to sustainable progress. Latin American governments will therefore do well to ensure that those who are contributing to the region's growth do not fall down the economic ladder.

This is the upshot of a new report titled 'Latin American Outlook 2011', published by the Development Centre of the 33-nation Organisation for Economic Cooperation and Development (OECD) based in Paris. The OECD members include Chile and Mexico, and its Secretary-General Angel Gurria is a Mexican.

The study points out that in Chile, 39 percent of the population within the middle income group does not contribute to any pension scheme. This goes up to 52 percent and 67 percent in Brazil and Mexico, respectively, and to an astonishing 95 percent in Bolivia.

This is because sizeable sections of the middle income groups work in the informal sector. Since informal labour goes hand-in-hand with low social-protection coverage, fewer than half of these workers will benefit from a social safety net when they get old or lose their jobs, explains the report.

There is normally a direct correlation between a sizeable and relatively prosperous middle class and long-term growth, greater equality and less poverty. "However, high levels of labour informality, low coverage of social-protection programmes and limited fiscal resources to improve public services could cancel-out the possible benefits in Latin America," notes the study.

Consequently, reducing the economic vulnerability of Latin Americans who have reached a middle income level and ensuring that more people in the region can move up into this level are "worthy objectives of public policy".

Education is the surest way to lift children to higher social and economic levels, but the ability of education systems in Latin America to boost social mobility remains very limited in comparison to other countries, finds the report.

As the quality of the education received is closely linked to the socio-economic background, the study points out that a Latin American with illiterate parents is ten times more likely to be illiterate than he is to finish university.

To hedge the risks arising from the present situation, the OECD Development Centre asks governments to consolidate the position of the middle sectors by extending social-protection, foster upward social mobility through education, and strengthen the "social contract" by improving the quality of public services such as health and education.

The report pleads with policy makers in the region to protect the most vulnerable people within these middle sectors by: extending social pensions; compulsory (or semi-compulsory) affiliation for the more educated self-employed; greater flexibility regarding contributions and withdrawals; and matching defined contributions (transfers made by the state to an individual's pension plan).

Greater opportunities can also be created for upward mobility through more and better education by investing more in early childhood development; increasing the quality of public education, through measures such as better administration of schools, a modern system of evaluation, better recruitment and training of teachers as well as better incentive systems; and financing tertiary education through grants and loans.


While drawing attention to the vulnerable situation, the OECD Development Centre study also praises the resilience of the Latin American economies.

"The 2009 global crisis affected Latin American economies strongly. Their deeper integration into the international markets for both trade and finance had the negative consequence of spreading the crisis to the region. But while they undoubtedly suffered, the performance of the region's economies was surprisingly strong particularly when compared to past crises, and this time their medium-term prospects have emerged largely unscathed."

The report adds: "China's sustained demand for the commodity exports of the region and the timely monetary action of the international community, including IMF (International Monetary Fund) liquidity provisions, are two external factors that are undoubtedly part of the explanation."

However, positive internal factors played a major role too including greater macro policy resilience, stabilised aggregate balance sheets and, for some countries at least, the ability to adopt counter-cyclical fiscal policies. Stronger financial institutions too were a factor, the result of financial sector reforms in most countries over the last decade.

Nevertheless, important challenges for the future remain: Sustained macroeconomic stability now needs to be institutionalised. Policies pursued based on the knowledge that good times are inevitably followed by bad have been demonstrably rewarded by a rapid recovery and strong performance.

"But once economies start growing this experience can start to fade. Sustainability of both external and fiscal balances needs to be secured against political pressures for short-term gains," cautions the report.

In the near term, warns the study, interest-rate and currency risks remain important obstacles for domestic financial development. These risks will need to be addressed through public action such as regulation and education.

The report adds: "The conclusion is that there is no room for complacency. Global economic prospects remain highly uncertain. Although initial response to the crisis has depleted resources and reduced the scope for future action, there is still room for policy action on both the fiscal and monetary fronts."

Combining this with citizens who now appreciate and acknowledge the fruits of sustainable macroeconomic policy brings the chance for the region to improve and further institutionalise structural macroeconomic policy, predicts the OECD Development Centre.