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Latin America’s missing middle

March 3, 2020

The economy in Latin America has been more unstable and volatile than other emerging economies, and also poorly distributed. The region's GDP averaged 2.8 percent annual growth from 2000 to 2016. This is far below the average of 4.8 percent for other emerging economies (not including China, which grew twice as fast during that time). Among Latin American countries, Peru grew the most, with an annual average of 5.2 percent; while Mexico was the weakest in growth with an average of only 2.1 percent.


Since 2000, 56 million people, or more than 40% of the population of Latin America, are poor. Pro-poverty government programs have tried to fight this; in Brazil, the Bolsa Familia program has reached 14 million households, a quarter of its population. And it has helped just 10% of the population live in extreme poverty over the past decade. Although poverty has been reduced since 2000, these people are officially not poor but have not yet reached the middle class, meaning that they cannot yet afford basic services and are at risk of falling back into poverty during a recession or in a medical emergency. About 60% of the population in Mexico lives on $5 to $11 a day.


Consumption growth 


Household consumption represents the largest part of GDP in Latin America with 64%. Although it only represents an annual growth of 1.9 percent, compared to 2.7 percent if emerging-market benchmarks. The way to explain this proportion in Latin America is that instead of expanding per capita consumption, only the population, and therefore consumption, has increased. Since the beginning of this millennium, per capita consumption in Latin America has only increased by 1.8% way less than the 4.3% in benchmark countries. One of the main reasons can be attributed to the taxes in these countries since these can limit the purchasing power of those who are ready to spend. For example, in Brazil, the value-added tax represents a total of 40 percent of the cost; taxes in cars approach 50%. The population ends up paying approximately 32% of their income in taxes. 


The difficulty in obtaining consumer credit has also affected finances directly. Less than 50 percent of the population in Mexico and Colombia have bank accounts, restricting households' ability to save money. Not having bank accounts also affects online business. In Brazil only 6 percent of purchases were made via the Internet, a big difference compared to China (16 percent) and South Korea (13 percent). However, digital disruption is beginning to be noticed in Latin America. In Colombia, a clear example is Rappi, an on-demand delivery service such as groceries and medication. This is one of the first unicorns in Latin America with a value of at least $1 billion dollars. Also MercadoLibre, an Argentinean online marketplace has expanded throughout the continent.


Income flow


The flow of income in expanding economies can be slow for different reasons. Brazil and Mexico are two very clear examples. In Brazil, social policies, an increase in the minimum wage and the expansion of credit gave a boost to the local economy, but it was not sustainable. Prices rose along with wages, reaching the same level as in the beginning.  Inflation and macroeconomic instability brought this era of comfort to an end. Mexico, on the other hand, focused on supply reforms and accessibility to foreign markets, boosting productivity in various segments of the industry. Although local demand did not grow much. The automotive sector in Mexico shows the divergence between wages and productivity growth. Production has grown by 7 percent since 2006, being the top producer in the world. While their wages only rose 1.6 percent in this period, in comparison, South Korea grew 58 percent in wages corresponding to its productivity. 


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Bughin, J. Q. Jacques, Manyika, J. M. James, & Woetzel, J. W. Jonathan. (2019, July). Latin America’s missing middle of midsize firms and middle-class spending power. Retrieved January 22, 2020, from https://www.mckinsey.com/featured-insights/americas/latin-americas-missing-middle-of-midsize-firms-and-middle-class-spending-power


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