Latin America's middle class grows, but with a tenuous grasp on status

With a regular salary as a beauty salon manager, Edgar Ladino supports his two children, leases a compact car, and is able to make rent payments on time.

“It’s not my dream job, but it’s OK,” he says with a shrug, sipping a latte at a Bogotá shopping mall.

Mr. Ladino may not love his job, but it has landed him a spot in the burgeoning Latin American middle class. Millions across the region are finally setting up new companies, buying cars and homes, and helping to further stabilize democracies. In the world’s most unequal region, their rise has dominated policy documents, academic papers, and press reports.

Fifty-six million households have joined the Latin American middle class in the past decade and a half, according to new analysis by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), which studied 10 countries in the region representing 80 percent of the population. The growth mirrors trends in the rest of the world, the group says, with 1.3 billion people today calling themselves middle class.

But behind good news lies a troubling reality. While new members of Latin America's middle class might be better off than their parents, the benefits often taken for granted by their Western counterparts remain far from their grasp. Many are barely holding on to their new status, with insecure jobs and poor access to quality education for their children. In most cases, they are more likely to fall into poverty again than rise into affluence.

Ladino’s situation, for example, is far from stable. Like millions of Colombians, he only has a one-year contract. It expires at the end of May. It’s entirely up to his employer whether to renew the contract or not. “What kills me is the uncertainty,” he says. If his boss decides to not sign him on again, Ladino isn’t sure where the next car payment will come from.

“This is not a European or US middle class,” says Christopher Sabatini, editor-in-chief of the policy journal Americas Quarterly in New York, which is published by the Council of the Americas. “I think we are at risk of over-blowing the stability and type of middle class that has grown. … It is very, very fragile.”

Several factors are driving up economic status, including greater access to education and credit and macroeconomic policies that have kept inflation in check.

Across the region, GDP grew by an average of 2.6 percent between 2000 and 2008, according to the World Bank. Many countries have reduced poverty by paying families who keep their children in school. Demographics have also been a boon, as the population of those of working age is greater than those not – giving families extra income.

Growing informal economy

But no longer categorized as poor, many in the region find they are surviving on the fringes, without a base in place to secure them. One reason is the growing informal economy.

According to the OECD’s Latin America Economic Outlook 2011, which looked at the heterogeneity of the middle class, more than half of 72 million “middle sector” workers in Bolivia, Brazil, Chile, and Mexico – those with household income per capital between 50 percent and 150 percent of the national median – work informally, which means they have no safety net in the case of illnesses, retirement, or job loss. Coverage of social-protection schemes in Latin America remains at well below 50 percent of workers, the group says.

In Colombia, according to official government figures, only half of the economically active population works in the formal sector, enjoying access to benefits, consumer credit, and eventually, a pension. Economist Alejandro Gaviria says rigid labor laws contribute to the situation. The high cost for employers of mandatory nonsalary benefits, such as severance pay, health insurance, and pension payments, has led many companies to find ways to circumvent the costs.

“They paralyze job creation and lead to a trap of informality,” says Mr. Gaviria, dean of economics at Los Andes University in Bogotá.

So despite a healthy economic growth rate of 4.3 percent last year – it is expected to expand by 5 percent in 2011 – the size of Colombia’s middle class has remained stagnant, according to the ECLAC study. In fact it remains one of the most unequal countries in the world, behind Haiti, according to the 2010 UN Human Development Report.

New status minus the benefits

While states have successfully reduced poverty, they have failed to create meaningful, broad-based social programs like unemployment benefits or social security to protect those at the bottom of the middle class, says Mr. Sabatini. Mexico has seen more robust growth of its middle sector, with households in the middle class more than doubling to 14 million over the past decade and a half, according to ECLAC.

But the numbers often paint a rosier picture than reality, says Juan Carlos Moreno-Brid, the associate director for the Mexican office of ECLAC and author of “Development and Growth in the Mexican Economy: A Historical Perspective."

“The middle class in this country, in contrast to US, does not have unemployment benefits, and our pension system is extremely poor,” he says. “Many are in a very vulnerable situation.”

Javier Malagón reckons he’s on the low end of what’s considered middle class is Colombia, but he’s proud to distinguish himself from the poor.

“I don’t go hungry,” he says. He and his brother jointly own a food cart where they sell hot dogs, hamburgers, chorizo, and arepas, a Colombian cornmeal patty. They borrowed the $1,000 it cost from informal lenders three years ago, and are still making payments. “Banks would never even look at us,” he says. When he’s not manning the stand, Mr. Malagón tries to find shift work at restaurants and grills.

But with his current set-up, Malagón can barely think ahead. “At any point the police can come and haul away the cart and then where will we be?” he asks. “It’s all very unstable.”