MIDDLE CLASSES, MOBILITY, ECONOMIC GROWTH AND DEMOCRACY IN LATIN AMERICA Guillermo Perry Universidad de Los Andes, CGD Second CAF-OXFORD UNIVERSITY Conference Oxford, October 2014
THIS PRESENTATION Why we care about the size and growth of the middle class? Economic growth Public goods Social and political stability Democracy and human rights But (discriminating among competing hypothesis): Is it the size or share of the Middle Class? Or is it the poverty rate? Ot the Concentration of Income and wealth at the top? Or inequality in general? Or inequality of opportunity and social mobility? How to define and measure the Middle Class? The Middle Class in LAC: Size and growth Characteristics: human capital, occupation, location Attitudes and values Issues and Future Research
WHY DO WE CARE ABOUT THE MC?
Why do we care about the middle class? The Aristotelian Dream: quoted in Easterly, 2001): the best political community is formed by citizens of the middle class those states are likely to be well-administered, in which the middle class is large where middle class is large, there are least likely to be factions and dissension The American Dream: The American Middle Class, Inequality, and the Strength of our Economy; Boushey, H. and A. Hersh, Center for American Progress, 2012 ; Alan Krueger, Land of Hope and Dreams: Rock and Roll, Economics, and Rebuilding the Middle Class, Alan B. Krueger, Chairman, Council of Economic Advisers,2014) Human capital: accumulates human capital and support quantity and quality improvements in public education. Domestic market: economies of scale, technologically sophisticated goods and services Entrepreneurship Support of inclusive political and economic institutions: democracy, property rights, levelled field regulation. The OECD Dream: How Middle class is Latin America, Latin American Economic Outlook 2011 Correlated with long term growth. Evidence of the success in reduction of both poverty and inequality Have historically favoured economic growth through physical and human capital accumulation, Support progressive social policies in education and labour rights that promote inclusive growth.
Why do we care: evidence? Source: The Middle Class and Economic Consensus (Easterly 2001)
But, competing theories? Variable/ Channel Size and share of MC Poverty Share of top 1% or 0.1% Inequality Equality of opportunity Investment rate and productivity xx (xxxxx) (xxxxx) xx?? (xxx) (xxx) (xx) xxxxx Human Capital xxx (xxxxx) (xx) (xx) xxxxx Domestic Market Crime and Violence xxxxx (size) xx (xx)? (xxxxx) xxxxx Property Rights xxxxx xxx (xxxxx) xxxxx Political Rights xxx (xxx) (xxx) xxxxx Human Rights?? (xxx) (xxx) xxxxx Pro macro stability xx (xx) xx (xxx) xxx Pro-market xx (xx) xxxxx (xxx) xxx
DEFINING AND MEASURING THE MIDDLE CLASS
From Marx to the World Bank Marx: class defined by common economic interests under the prevalent mode of production: a minor role for the small burgoisie (independent entrepreneurs, bureaucrats and intellectuals) vis a vis two defining classes (capitalists and workers). Poulantzas: new small burgeoisie: white collar workers Dahrendorf and Wright: managers and technical experts that exert control, though they are not owners Weber: class defined by common life copportunities (skills, education) Modern sociologists and political scientists: Class based on education (Giddens: tertiary) and/or occupation (Goldthorpe and Mc Knight: professional, managers). Class positions and their type of contracts affect risk (economic security and stability) and opportunities. Modern economists: class based on income (absolute, relative, polarization); income and occupation (Hoppenhayn) and economic security (Lopez-Calva et al; World Bank: Economic Mobility and the Rise of the Latin American Middle Class
Modern economists definitions and measurement of Middle Class Four economic classes, according to income distribution, in selected Latin American Countries. Source: Down and Up or Up and In? Polarization-Based Measures of the Middle Class for Latin America (World Bank 2013) Source: Economic Mobility and the Rise of the Latin American Middle Class (World Bank 2013)
60 Share of Self-Defined Middle Class vs the WB vulnerability-based definition 50 40 30 WB 2009 LB 2013 20 10 0 0 5000 10000 15000 20000 25000 Source: The Emerging Middle Class, Lagos CAF (2013)
The importance of economic security for the Middle Class American Dream (Center for American Progress) When we say middle class, we mean more than just families who are, broadly, in the middle of the income distribution we mean families with enough financial security to provide investments in the next generation s success A middle class family has some economic security..a good job with health insurance and a retirement plan,..some savings in the bank to tide them over in an emergency, send a child to college,..or float a loan to a member that wants to start up a new business Economic security permit long term planning and risky investments: Human capital: Time with children and use of early childhood programs. Keeping children in school and tertiary education until investments in education pay handsomely; Changing careers to look for a better match. Domestic market development: Investments in housing and durables Consumption of technologically more sophisticated goods and services Promoting entrepreneurship: Taking the time and risks for creating new businesses and financing them. Higher education provide the training and skills necessary to start a business.
SIZE, GROWTH AND CHARACTERISTICS OF THE LATIN AMERICAN MIDDLE CLASSES
Relative Size (WB vulnerability based definition)
Growth (WB) Source: Economic Mobility and the Rise of the Latin American Middle Class (World Bank 2013)
Relative Size in selected Emerging Markets (WB) 60 Middle Class Share 50 40 30 20 10 0 India (Urban only) Indonesia (Urban only) China (Urban only) Honduras Thailand South Africa Turkey Mexico Brazil Russia Chile 2005-06 2008-09 Source: A Note on the Middle Class in Latin America (Birdsall 2012)
Relative Size and Income Share Trends in selected LAC countries (WB) Source: A Note on the Middle Class in Latin America (Birdsall 2012)
Growth and the Growth of the Middle Class (WB) Source: Economic Mobility and the Rise of the Latin American Middle Class (World Bank 2013)
Social mobility across Classes (WB) Source: Economic Mobility and the Rise of the Latin American Middle Class (World Bank 2013)
Characterizing the Middle Class in Latin America
Middle Class: differences in Education, Urbanization and Migration Source: Economic Mobility and the Rise of the Latin American Middle Class (World Bank 2013)
Middle Class diffferences: preference for private Education Source: Economic Mobility and the Rise of the Latin American Middle Class (World Bank 2013)
Class and occupation: few employers in the Middle Class Percentage of Employers, Aged 25-65 Poor Vulnerable Middle Rich Honduras 11,4 10,5 5,8 29,5 Dominican Republic 2,1 3,4 7,8 19,6 Peru 3,3 4,7 7,9 21,4 Mexico 4,2 3,2 13,0 20,6 Colombia 3,0 3,2 5,7 12,0 Costa Rica 5,2 4,5 7,6 18,4 Brazil 0,9 1,7 6,3 20,5 Chile 1,4 0,7 2,8 15,3 Source: A Note on the Middle Class in Latin America (Birdsall 2012)
% Higher Women labor force participation (c.2009) 90 80 70 60 50 40 30 20 10 0 Honduras Dominican Republic Peru Mexico Colombia Costa Rica Brazil Chile Poor Vulnerable Middle Rich Source: A Note on the Middle Class in Latin America (Birdsall 2012)
Are Middle Class Values different in LA?
5 Middle Class Impact in Education, Health and Infrastructure (Easterly) 4 2 1 3 0-1 Life Expectancy (Years) Infant Mortality (deaths per 1000) 2-2 1-3 -4 0-1 Secondary Enrollment (%) Tertiary Enrollment (%) Infants with low weight (%) Immunization Immunization DPT (%) Polio (%) Paved roads (%) Acces to sanitation (%) -5-6 Source: The Middle Class and Economic Consensus (Easterly 2001)
5 Middle Class Impact on economic policies, rights and political stability (Easterly) 4 3 2 1 0 Revolutions and Coups per Year Constitutional _Changes per Year 0-1 -2-3 Log Overvaluation Index Log CPI Inflation Financial Depth -0.002-0.004-0.006-4 -0.008-0.01-0.13-0.135-0.14-0.145 Political Rights (1-7 1 most rights) Civil Liberties (1-7 1 most Free) -0.012-0.014-0.016-0.15-0.018-0.155-0.16-0.165 Source: The Middle Class and Economic Consensus (Easterly 2001)
Are Middle Class Values really different in LAC? (WB) 0.3 0.2 0.1 0 Trust in Institutions Political Alienation Perception of Opportunity Support Individual Rights Legitimization of Political Violence Voted Social Tolerance Nationalism Left Right Political ideology Interpersonal Trust Interpersonal Alienation -0.1-0.2-0.3 Vulnerable Lower Middle Upper Middle Source: Economic Mobility and the Rise of the Latin American Middle Class (World Bank 2013)
Or, are country differences more important? Source: Economic Mobility and the Rise of the Latin American Middle Class (World Bank 2013)
ISSUES AND FUTURE RESEARCH
Issues for further research 1. Measures: need for more objective criteria to set the cutoff point between Middle Class and the rich. 2. Use of (panel ) household surveys to deepen our knowledge about class values and attitudes: The MC in LAC appear to educate more their children, but in private schools: eg, they would be an unlikely source of support for better bassic public education! What about public health? Pension systems? Unemployment insurance? Massive urban transport vs roads for cars? The MC in LAC seem to care more about political rights and stability, but not so much about civil liberties and social tolerance. Eg, a source of support for democracy, but not necessarily for human rights? Does the MC in LAC support macro stability? pro-market policies? trade and financial integration? Do we observe changes over time? Over the economic cycle? Panel: Do we observe changes across the life cycle? With increasing or decreasing income and when crossing class boundaries? 3. Many of the arguments/channels through which the share of MC may have a causal effect on growth (and democracy and social tolerance, etc) have been advanced in relation to inequality, equality of opportunity and social mobility, the share of the poor or the share of the super-rich Most of the available empirical studies do not test these hypothesis against each other. An urgent task
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