Latin American Economic Outlook 2011 Washington DC, December 2010 How middle-class is Latin America? Jeff Dayton-Johnson Head, Americas Desk OECD Development Centre

2 Latin American Economic Outlook Macroeconomic Overview 2Latin America’s “middle classes”

3 Impact of the crisis on Latin America: SIGNIFICANT Source : OECD (2010), based on data from ECLAC and OECD.

4 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

5 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 Mexico for reasons of data availability. The points are plotted for the worst quarter in 12-month periods comprising the second and first halves of consecutive years. Source: OECD (2010), based on data from IMF and ECLAC.

6 The export channel determined the size of the shock Shock to exports and GDP slowdown Source: OECD (2010), based on datatfrom ECLAC.

7 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.

8 … 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.

9 On the monetary side, policy achievements proved effective Interest rates Inflationary expectations Source: OECD (2009, 2010), based on data from central banks.

10 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.

11 … although increased policy space yields its benefits Source: OECD (2009, 2010), from various sources.

12 Latin American Economic Outlook Macroeconomic Overview 2Latin America’s “middle classes”

13 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

14 The middle sectors and the poor Source: OECD (2010), based on data from the SEDLAC database, accessed in August 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 definition. Proportion of the population below the middle-sector cut-off, compared with moderate and extreme poverty rates

15 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”

16 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

17 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

18 Coverage improves with income – in the informal sector sector Source: OECD (2010), based on national household surveys. Workers with formal jobsWorkers with informal jobs Pension coverage rate of workers by income category, formal and informal employment

19 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 Probability

20 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 PISA Science Score

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

22 Taxation and satisfaction with public services Source: OECD ( 2010), based on survey data from Latinobarómetro (2007-8).

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

24 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.

25 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