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Latin American Economic Outlook 2011
How middle-class is Latin America?
Jeff Dayton-Johnson
Head, Americas Desk
OECD Development Centre
Washington DC, December 2010
Latin American Economic Outlook 2011
2
1
Macroeconomic Overview
2
Latin America’s “middle classes”
Impact of the crisis on Latin America: SIGNIFICANT
GDP growth in previous three years
2009 GDP growth
10
6
4
2
-6
-8
Source: OECD (2010), based on data from ECLAC and OECD.
3
Mexico
OECD
Venezuela
Chile
Costa Rica
Brazil
Colombia
Ecuador
-4
Peru
-2
Argentina
0
Uruguay
Annual growth percentage
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Impact of the crisis on Latin America: BUT TRANSITORY
Growth Forecast
10
8
Real GDP %
6
4
2
0
LAC
ARG
BRA
CHL
COL
CRI
2009
2010
DOM
MEX
PER
-2
-4
-6
-8
Source:
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2011
OECD Economic Outlook, Dec 2010 (Chile, Brazil Mexico and OECD)
Latin American Consensus Forecasts, Nov 2010 for other countries
VEN
OCDE
Global recessionary shocks hit the region
External commercial and financial shocks
Net purchase of domestic assets by
foreigners
20000
15000
10000
5000
0
-15
-10
-5
0
5
10
15
20
-5000
-10000
2009
-15000
Exports purchasing power (% annual change)
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.
5
The export channel determined the size of the shock
Shock to exports and GDP slowdown
4
Dominican Rep.
Uruguay
GDP growth percentage 2009
2
Ecuador
Colombia
0
-4
-2
Costa Rica
0
2
Brazil
4
6
8
Chile
-2
Venezuela
-4
Mexico
-6
-8
Export impact on GDP growth
Source: OECD (2010), based on datatfrom ECLAC.
6
Argentina
Peru
But the crisis was also propagated via the financial channel
Foreign investors’ purchases and “unexplained” GDP growth
0
2009 GDP growth unexplained by exports
-100
-50
0
50
100
150
200
250
300
350
400
Chile
-2
Brazil
-4
Argentina
450
Peru
Colombia
Mexico
-6
-8
-10
Venezuela
-12
net purchase of domestic liabilities by foreigners 2009 qIV-2010 qIII*
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.
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… which is correlated with hard-earned resilience
Foreign investors’ purchases and fiscal policy resilience
5
Policy resilience index 2008*
4.5
Chile
4
Peru
3.5
Mexico
Brazil
3
Colombia
2.5
Argentina
Venezuela
2
1.5
1
-100
-50
0
50
100
150
200
250
300
350
400
450
net purchase of domestic liabilities by foreigners 2009 qIV-2010 qIII
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.
8
On the monetary side, policy achievements proved effective
Interest rates
Argentina
Colombia
Brazil
Mexico
Chile
Peru
16
12
10
Inflationary expectations
8
6
4
Annualized percentage
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
6.0
Jul-07
0
Apr-07
2
7.0
Jan-07
Brazil
Chile
Mexico
Peru
Colombia
5.0
4.0
3.0
2.0
1.0
9
May/10
Jan/10
Sep/09
May/09
Jan/09
Sep/08
May/08
Jan/08
Sep/07
Source: OECD (2009, 2010), based on data from central banks.
May/07
0.0
Jan/07
Annualized percentage
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On the fiscal side, an important gap remains …
Output elasticity of total taxes
Indirect taxes
Social Security Contributions
0.5
Corporate Income Tax
Personal Income Tax
Percentage of GDP
0.4
0.3
0.2
0.1
0.0
CRI
ARG
BRA
URU
PER
CHL
COL
MEX
LA-8
KOR
US
SPA
OECD
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.
10
… although increased policy space yields its benefits
3
2.5
Budget Balance/GDP
Debt/Exports
EMBIG Spreads
2
1.5
1
0.5
0
1982 2008 2009 1982 2008 2009 1982 2008 2009 1982 2008 2009 1982 2008 2009 1982 2008 2009 1982 2008 2009 1982 2008 2009
Argentina
Brazil
Chile
Source: OECD (2009, 2010), from various sources.
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Colombia
Dominican
Republic
Mexico
Peru
Venezuela
Latin American Economic Outlook 2011
12
1
Macroeconomic Overview
2
Latin America’s “middle classes”
The “middle sectors” in Latin America
Middle sectors: Proportion of the population earning between 50% and 150% of
median income
Source: Castellani and Parent (2010) , based on national household surveys.
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Bolivia
Colombia
Argentina
Affluent
Ecuador
Costa Rica
Middle sectors
Brazil
Chile
Mexico
Uruguay
Italy
Disadvantaged
Peru
100
90
80
70
60
50
40
30
20
10
0
The middle sectors and the poor
Proportion of the population below the middle-sector cut-off, compared with
moderate and extreme poverty rates
50
Moderate poverty headcount
Percentage of total population
45
40
35
30
Disadvantaged
25
20
15
10
Extreme poverty
headcount
5
0
Argentina
Brazil
Chile
Colombia
Costa Rica
Mexico
Peru
Dominican
Rep.
Source: OECD (2010), based on data from the SEDLAC database, accessed in August 2010.
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 50-150 definition.
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Possibilities of moving up… and down
Indices of “mobility potential”
Middle sectors size…
60
0.51
60
50
0.50
50
0.49
40
0.48
30
0.47
Potential to move up
into the middle sectors
Notes: DMP,RES and MSMP are defined in Box 1.2.
Potential to fall down
out of the middle
sectors
10
0.42
0
Potential to move up out
of the middle sectors
Source: OECD (2010), based on 2006 National Household Surveys analysed in Castellani and Parent (2010).
15
Bolivia
0.43
Colombia
Bolivia
Colombia
Argentina
Ecuador
0
Costa…
0.44
Peru
0
Brazil
10
Chile
0.45
Mexico
10
20
0.44
Argentina
20
0.46
Uruguay
Bolivia
Colombia
Argentina
Ecuador
Peru
Brazil
Chile
Mexico
Uruguay
0.00
Costa…
0.10
30
0.45
Ecuador
20
0.20
40
0.46
30
0.30
0.47
Costa…
0.40
60
50
Peru
40
0.50
0.48
Brazil
0.60
0.49
Chile
0.70
MSMP
Middle sectors size (right axis)
Middle sectors size…
Mexico
0.80
RES
Uruguay
DMP
What kind of work do middle-sector people do?
Proportion of middle-sector population in various occupations
35
30
Agriculture, Forestry, Fishing
Manufacturing
Wholesale, Hotels, Restaurants
Construction, Transport, Communication
Public administration, Education, Health
25
20
15
10
5
0
Argentina (urb)Uruguay (urb)
Brazil
Chile
Costa Rica
Source: OECD (2010) based on analysis of national household surveys in Castellani and Parent (2010).
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Mexico
Peru
Middle-sector workers: mostly informal
Middle-sector workers by employment category
Formal employees
Self Employed (with tertiary education completed)
Non Agricultural Self-employed
Non Agricultural Informal Employees
Agricultural Self-employed
Agricultural informal employees
Percentage
1.0
0.8
0.6
0.4
0.2
0.0
2002 BOL
2006 BRA
2006 CHL
Note: Percentage of total middle sectors’ workers (0.5 – 1.5 median household adjusted income)
Source: OECD (2010), based on household survey data.
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2006 MEX
Coverage improves with income – in the informal sector
sector Pension coverage rate of workers by income category, formal and informal
employment
BOL 2002
BRA 2006
CHL 2006
MEX 2006
100
35
80
30
BOL 2002
BRA 2006
CHL 2006
MEX 2006
25
60
20
40
15
10
20
5
0
0
Disadvantaged Middle Sectors
Workers with formal jobs
Affluent
Disadvantaged
Workers with informal jobs
Source: OECD (2010), based on national household surveys.
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Middle Sectors
Affluent
Education as a tool for upward mobility: more can be done
Probability of achieving a higher level of education than one’s parents, given parental
educational achievement
Women
Men
0.9
0.8
Probability
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Illiterate
Incomplete
primary
Complete
primary
Incomplete
secondary
Complete
secondary
Incomplete
tertiary
Parents’ level of education
Source: OECD ( 2010), based on survey data from Latinobarómetro (2008).
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Complete
tertiary
Equity and performance: No trade-off necessary
PISA Science Score
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
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Middle sectors: players in a renewed social contract?
Effective net receipt of benefits by household income deciles: weighted average, percentage of
mean disposable income (TOP); percentage of decile mean disposable income (BOTTOM)
CHILE
MEXICO
Taxes
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
-50.0%
-60.0%
-70.0%
-80.0%
-90.0%
I
II
Social spending
III
IV
V
VI
Net transfers
VII
VIII
IX
X
120%
120%
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
-20%
-20%
-40%
Social spending
Net transfers
I
II
III
IV
V
VI
VII
VIII
IX
X
I
II
III
IV
V
VI
VII
VIII
IX
X
-40%
I
II
III
IV
V
VI
VII
VIII
IX
X
Source: OECD (2010), based on national household surveys.
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Taxes
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
-90%
Taxation and satisfaction with public services
"Good Citizens pay their taxes"
(percentage of respondents who agree)
"Taxes are too high"
(percentage of respondents who agree)
60
50
55
45
50
40
45
35
40
30
35
30
25
Q1
Q2
Q3
Q4
Q5
Q1
Q2
Q3
Q4
Satisfaction with health services
(percentage of respondents)
"Tax evasion is never justified"
(percentage of respondents who agree)
Q5
Satisfied
Not Satisfied
No Access
37
35
100
33
80
31
60
29
40
20
27
-
25
Q1
Q2
Q3
Q4
Q5
Q1
Q2
Q3
Source: OECD ( 2010), based on survey data from Latinobarómetro (2007-8).
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Q4
Q5
Middle sectors: supporters of democracy, politically moderate
Attitudes towards democracy
Attitudes towards democracy
(% support and satisfaction)
Support for democracy
Distribution of political preferences
(0 extreme left, 1 extreme right)
Q1
Satisfaction with functioning of democracy
Q2-Q4
Q5
40.0%
80%
70%
35.0%
60%
30.0%
50%
25.0%
Frequency
40%
30%
20.0%
15.0%
20%
10.0%
10%
0%
5.0%
1
2
3
Perceived Income Quintile
4
5
0.0%
0
1
2
3
4
5
6
Left - Right self-reported preferences
Source: OECD ( 2010), based on survey data from Latinobarómetro (2007-8).
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7
8
9
10
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.
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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
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