COHA: Latin America's New Middle Class

Analysis prepared by COHA Research Associate Katie Dickson

Empty Calories of Economic Growth and the Battle for Participatory Democracy--Latin America's New Middle Class

The past two decades have witnessed a series of political and economic rollercoaster rides all over Latin America. However, with economic "stability" being used as a tagline for positive growth and suitable political fervor, a novel way of life has been emerging that is affecting millions of citizens who now consider themselves members of a new middle class. This "Great Global Middle Class" has been illuminated perhaps more brightly in Latin America than anywhere else, due to its longstanding and hard-fought struggle with income inequality and socially repressive regimes.

Brazil, pointed to as a showcase for both its economic boom and the vast inequality that still persists in parts of the country, has become the new face of this emerging middle class. For the first time, many of the region's poorer citizens have made the inter-class transition and are now able to buy high-ticket consumer goods such as televisions, DVD players, motor vehicles, and personal computers. Never in their wildest dreams did these disfavored Brazilians, wedged in the hapless trenches of urban favelas, believe that they could imagine themselves as part of the middle class. As Rogerio Schmitt, a political consultant at Tendencias Consultoria in São Paulo, noted in an interview with the BBC, "Brazilian society has always been a frozen society. People who were born poor, die poor. People who were born middle-class, will die middle-class. That's beginning to change and this is probably one of the biggest social transformations that we have had in Brazil since the end of slavery in the 19th Century."

Many economists agree that Latin America is indeed heading in a positive financial direction, but this trend is not the only development catching the eye of the international community. The rise of "new leftist" leaders, such as the strong-willed, if not somewhat eccentric, Hugo Chávez of Venezuela and the embattled indigenous spokesman Evo Morales of Bolivia, not only can be found preaching their ideas of social democracy, but also putting it into action in the form of constitutional amendments incorporating key social programs. However, when analyzing these changes to the hemispheric landscape, one key question that arises is: What started this trend? Was it the economic boom that led to the expansion of the pre-existing middle class, or did leftist leaders successfully spread the Bolivarian ideology and commit themselves to energizing the poorer regions of Latin America through the medium of a new, more socially minded middle class? Conceivably, if the answer is known, a more rapid pace of growth and development in the region could be made possible, and through a combined opening of society, the future of Latin America would no longer be left completely up to chance.

Economic Indicators: The forecast looks bright (at least for some)

Throughout the 20th century, volatile commodity markets and bouts of high inflation have plagued Latin American economies. As a result, external debt owed to developed nations--much of it to the U.S.--began to mount, averaging almost 50 percent of the region's GDP in 1980. At this point, the need for a debt management initiative came to be seen as imperative to the future stability of the region. Most of Latin America by now has abandoned Import Substitution Industrialization (ISI)-based economic policies and has become more open and export-oriented, relentlessly following the neo-liberal strategies recommended by the International Monetary Fund (IMF) and the World Bank, which in the end tended to leave the region more vulnerable to economic shock than ever.

Some would argue that Foreign Direct Investment (FDI) has also played a major role in helping the region create formidable export industries and solid financial institutions. For example, in the report Foreign Investment in Latin America and the Caribbean (2004) prepared by José Luis Machinea, Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), FDI in Latin America and the Caribbean rose 44 percent in 2004 to reach US$56.4 billion. This was the first year that FDI in the region had positively risen since 1999. Now, seven years after the turn of the century, the economic outlook for Latin America continues to impress investors around the world. "Foreign direct investment will go back to the highest levels seen in the 1970s," predicts Citibank Brazil President José Monforte, and it will gravitate toward telecommunications, energy, automotives and durable goods.

A Boost in Consumerism

The former president of Brazil, Fernando Henrique Cardoso, has pointed out that this new middle class is very different from the one Latin America experienced in the 1940s and 1970s, in that it is more dependent on the market than on the state. His assumption seems to be that this is a good thing, but why? The tide is rising for nearly all economic sectors in the region, particularly those which are resource-based, and as a result, these seemingly meager increases in personal income are resonating, but with Latin Americans dwelling at the bottom of the economic ladder. The Brazilian government, for example, plans to raise the minimum wage again in April 2008, this time by 7 percent. This will allow monthly earnings to increase from US$193 to US$207. This extra income will help the population to begin planning for the future, rather than just living exhaustive day-to-day lives; it will also enhance their ability to purchase small luxury items that before they could never even dream of owning.

A 2005 study conducted by the Fernand Braudel Institute surveyed four favelas in the city of São Paulo and found that all of the households contained color televisions, one-half owned cell phones, and almost 30 percent had a functioning automobile. More Brazilians have started to take out mortgages thanks to the relatively low interest rates that resulted from a new generation of public financial institutions, which strive to maintain low levels of inflation through fiscal mechanisms. Increasing air-travel--growing at approximately 6.6 percent annually (second only to China)--is another indicator of the economic growth being witnessed throughout the region. Boeing reports that Latin America is now being seen as an attractive growth area for the aviation industry because of the long distances between major cities in the region, poor existing ground transportation links and a sizeable boost in the number of prospective people able to afford air fares.

The conclusion that Latin America, as a whole, is heading in a optimistic economic direction has little cause to be disputed. But, has overall economic growth done enough to, in turn, shrink the large existing income gap, and show the vast number of people living in poverty that a price must be paid to forge their own path toward prosperity?

Income Inequality: Is the gap closing?

Unfortunately, the direct answer to the above queries, for the most part, is no.

As IMF Managing Director Rodrigo de Rato notes, despite recent successes in macroeconomic management, such as the transformation of the financial credit sectors (in terms of their ability to sustain external economic shocks), as well as the impressive gains from rising commodity prices, the income inequality gap in a number of Latin American countries has either failed to improve, or done so almost imperceptibly. The IMF 2007 October World Economic Outlook, entitled "Globalization and Inequality," offers some newly available data on income and consumption, showing that inequality--as measured, for example, by the widely used Gini coefficient--has risen over the past two decades in most regions, such as in developing Asia, developed Europe, and certainly in Latin America. However, despite this observed rise in relative inequality, per capita incomes have grown across virtually all regions and for all segments of the population, including the poorest. The Economist recently reported that between 2000 and 2005, the number of households with an annual income of $5,900 - $22,000 grew from 14.5 million to 22.3 million just in Mexico and Brazil alone. In addition, Spain's Banco Santander estimates that 15 million people throughout Latin America have moved into the blossoming middle class between 2002 and 2006. As a result, the poor are now better off in absolute terms, although in most cases incomes have risen at a relatively faster pace for those who are already wealthy.

Recently the international community has discovered an evolving trend that may have helped spur the formation of a new middle class, which is occurring throughout Latin America: the rise of several leftist political movements which have now taken office and are beginning to promulgate an avowed system of democratic socialism.

Consolidation of a Murky Past

Along with a wide variety of economic difficulties which took place at the tail end of the 20th century, corrupt elections, military coups and U.S.-sponsored or tolerated dictators time and again seemed to overpower any solid prospect for democratic stability. Unless recalcitrant regimes wanted to run the risk of economic blockades and CIA assassination attempts, it was either "Washington's way or the highway." However, much of the deepening of democracy being witnessed today was made possible due to the fact that for the first time since the end of the Cold War, Washington no longer has been able to prevent left-leaning leaders from coming to power, mostly in part because its attention has been occupied elsewhere, primarily in Iraq and Afghanistan.

In the meantime, the governments of Venezuela, Costa Rica, Argentina, Uruguay and Bolivia have all declared that they will no longer send students to the School of the Americas (now named the Western Hemisphere Institute for Security Cooperation)–the infamous police and military training center in Fort Benning, Georgia, where many of the region's most notorious killers learned the latest in "counterterrorism" techniques, and soon directed them, at least in the past, against campesinos in El Salvador and auto workers in Argentina.

Several theories have attempted to respond to the question of why democracy--as championed by the U.S. and other developed states-- has failed, in any number of instances, to become an ingrained part of Latin American society. Some see it as a matter of chronic inherited economic disadvantages burdening a given regional nation, while others claim that the lack of political and social stability in the region originates purely from an unfair distribution of wealth and resources, leading to a disengaged civil society. However, as Guillermo O'Donnell and Eric Selbin have hypothesized, it may actually be a combination of both. They assert that a deficiency in economic and social development as well as a belief in democratic practices seems to be keeping Latin America from fully institutionalizing or consolidating such desiderata.

The lack of an abiding confidence in democracy itself is a common problem among many citizens in the region, who have witnessed a cyclical pattern of failed regimes and resurrected successors throughout the past century. The 2006 AmericasBarometer, conducted by the Latin American Public Opinion Project (LAPOP), surveyed the health of democratic processes throughout the Western Hemisphere. The following are some of the most salient results pertaining to democratic consolidation:

A strong indicator of the prospects for democratic stability in a given country is citizens' belief in the legitimacy of their governments and their willingness to respect the right to political opposition. By that standard, the highest scoring countries (on a 0-100 scale) are Canada (68), the United States (64), Costa Rica (50), Uruguay (46) and Mexico (41). At the low end are Nicaragua (25), Haiti (24), Paraguay (20), Bolivia (20) and Ecuador (12).
Economic conditions play a strong role in determining how much Latin Americans trust their political systems. Respondents who believe that their personal economic situation is poor or that the national economy is performing poorly express far less trust in their political system than those who see their personal and/or national economy as performing well.

A Shift to the Left

The push for a more authentic democracy in Latin America has not gone unnoticed; rather, it has spurred a new form of political governance which, although it may not follow a North American or European ideal, has gained some popularity among a number of nations. Since the 1998 election of Hugo Chávez as president, there has been a dramatic rise in the discussion of the suitability of democratic socialism as one of the region's political systems of choice. In launching the Bolivarian Revolution, with its goal of redistributing wealth and improving living standards for his nation as well as the region, Hugo Chávez has become an irrepressible presence in the region and the world, for better or worse.

In 2005, Bolivians, in electing Evo Morales as their nation's first indigenous president, chose a leader who also professed that he too was a "democratic socialist" and a close ally of Venezuela. Morales ran for office on an agenda focused on the nationalization of oil and natural gas industries. Shortly after taking office, he issued a decree nationalizing Bolivia's hydrocarbon resources. In Nicaragua, the Sandinistas made an electoral comeback in 2006, when for a second time their leader, Daniel Ortega, was elected president of Nicaragua. In the same general period, Ecuador, Brazil, Uruguay and Argentina have also seen the election of center-left governments that, while not exactly filling the same pair of shoes, nor being inherently socialist in nature, are relatively supportive of Hugo Chávez and are willing to distance themselves from Washington to one degree or another.

Reasons for the Increased Popularity of Democratic Socialism

An encouraging product coming from the limited spread of democratic socialist theory and practice in the region is the targeted social programs that deal directly with the problem of poverty. These began to be seen during the 1990s with Mexico's Progresa, a program that gave small stipends straight to the poor on the condition that parents agree to send their children to school. Under the name Oportunidades, the program was vastly expanded under President Vicente Fox after 2000, to cover the whole of Mexico. This approach was copied and amplified by Brazil in its Bolsa Família program, which now reaches one in four Brazilian families.

The kind of democratic socialist elements expressed above usually go hand in hand with an established participatory system, which aims to bring more direct representation to its citizens. Unlike in the U.S., where legislators are elected as representatives of the populace, participatory democracy, or "direct democracy," is supposed to give ordinary citizens a larger, more personal voice in the decision-making process. If successful, this may leave the door open for a more energized civil society--something that, as mentioned before, is normally necessary for democratic consolidation. It is easy to see why this form of government is so readily accepted among many Latin Americans, even though "socialism" as an ideology, more often than not, possesses an attached negative connotation. In addition, democratic socialism's positive qualities closely resemble those of populism, which also aims to bring improved living standards and some sense of common connection to the citizen base.

Populism, in its modern incarnation, has played an important role in the political history of Latin America, dating back to the 1930s, if not before. It is commonly identified with charismatic leaders such as Juan Domingo Perón, former president of Argentina, the late Prime Minister Maurice Bishop of Grenada, and today with Hugo Chávez. However, the more recent pattern that has emerged in Latin American populism has been socialist in context, and appeals to the bulk of the poor by promising redistributive social policies and state control of the nation's energy resources, as seen in the case of Venezuela and Bolivia.

Nevertheless, populism in Latin America has been criticized by the international financial establishments for the irresponsible fiscal policies of many of its leaders, but, on the other hand, has also been defended for having allowed historically weak states to maximize their cohesion and present a solid front against their would-be enemies and to use their assets to achieve social order through moderate policies of mobilization and modernization. During periods of relative hopelessness, strong-willed populists at least kept alive the vision of what the poor might one day attain, but many still wonder how long it will take for their resources to run dry before they are allowed to benefit from them.

Putting It All Together: Political implications for the future

Regardless of a persistent income inequality gap, the consensus among many Latin Americans is that life is getting better, and for those who may not have yet experienced such benefits, a change in attitude towards the future has made all the difference in terms of political legitimacy. Believing in their role (seen with the indigenous in Bolivia and Ecuador) as agents of change and makers of their own destiny is something not to be minimized. Although this newly enfranchised middle class may not look the same as it does in developed countries, those who belong to it will certainly be happy to experience reliable electricity and waste disposal, or to buy digital music players for their grandchildren, for example. This process is bringing an entirely different dynamic to the local and national political scene. A middle class that breaks away from its traditional definition of being self-absorbed, to be replaced by being partial to a just society that features material equality is important not only for economic productivity, but for establishing humane relations. Since many people in the middle class in fact consider themselves to be members of the "working class," many of them also make up a large percentage of the voting population. It is this element of the electorate which is providing the impact for the creation of left-leaning parties. Now, either through increased civil society participation--as fostered by democratic socialism--or by means of economic freedom, citizens have the ability to hold their government and its officials more accountable than in the past.

Likewise, the emergence of a middle class in Latin America has the potential to accelerate some aspects of state reform, while improving the rule of law, which is perhaps the most important factor now underway and is one area in which progress is measurable. Institutionalized political corruption has infected the region for decades. At the end of last year, for example, a fifth of the members in the Brazilian Congress were recently under investigation for malfeasance (which didn't stop them from voting to raise their salaries by 91% for the next Congress). However one must take note that democracy, which may seem to offer a quick fix, is in itself an ongoing process that is still at doubt and it may take years, if not decades, for it to be fully consolidated in Latin America.

Conclusion

Democratic socialism, although not an American archetype, must be seen as a contending form of democratic expression that is now taking the stage in Latin America, and will surely develop as the middle class grows and demands more of the same social programs and services which political leaders of the poor routinely call for. Now, it is up to these new leftist leaders to prove to their home constituencies as well as to the world that their policies are more than just a popular quick fix or a self-serving platform for re-election. Moreover, it is the responsibility of the Latin American electorate to hold government officials accountable for their actions, and to continue to build solid institutions so that the fragile, if not failed, democracies from the past do not come back to haunt them.

Economic progress in the past decade has helped give the region a sense of legitimacy as well as extra funds for the improvement of the social sector, which allows for some of the benefits generally associated with the middle class to become more widely available. As for the question of what came first, the emerging middle class or democratic socialism, the actual answer would appear to be less relevant than the assurances offered by all sides, that this cycle can be counted on to produce an improved society as well as a welcomed increase in exercisable democratic options and economic prospects.

ENDS

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