A rising middle class and corporate innovation help lagging productivity

A rising middle class and corporate innovation help lagging productivity

Asset Management Economy & Policy Funds Features

Families lined the Paseo de la Reforma in Mexico City the Saturday after Thanksgiving to catch a glimpse of giant balloons of cartoon favorites like Peppa Pig, guided by six human handlers. Red and white poinsettias adorned the base of the Angel of Independence monument. Majorettes dressed like Minnie Mouse twirled batons. Cheerleaders catapulted into the air.

Liverpool, a department store that caters to Mexico’s burgeoning middle class, has hosted the parade every year in November since 2015. The parade is inspired by the annual Macy’s Thanksgiving Day Parade in Manhattan, with the goal of steering holiday shoppers toward Liverpool stores.

The experience at Liverpool is playing out across the region as retailers cater to the rising middle class. Though the degree of change varies widely from country to country, there’s no dispute that the middle class has been expanding in recent years both in absolute terms and as a share of total households.

The growth of the Latin American middle class can be traced to the commodity-fueled economic growth that preceded the 2008 global financial crisis, according to An Hodgson, head analyst for income and expenditure at Euromonitor.

Euromonitor International data shows that between 2008 and 2018, Latin America’s middle class – defined as households with between 75% and 125% of median income – expanded from 33 million households to 46 million. “There are fewer poor people in Latin America than ever in history,” said Manuel Molano, deputy director of Mexican think tank IMCO.

Molano feels that freer trade has helped expand the middle class in much of Latin America by driving down costs for goods and enabling countries to specialize in producing things that they are best at producing, while importing the rest. Consumers save money thanks to greater competition for their pocketbooks while relishing variety.

Productivity growth remains a challenge throughout the region, averaging just 0.5% to 1% over the past few years, according to economist Edward Glossop at Capital Economics in London. That’s much weaker that developing nations in Asia.

But the demographic shift is having a profound impact that’s being felt far beyond the retail industry. Increasingly, there are bright spots as companies rethink their ways of doing business. The emergence of the fintech industry is just one example of the way technology caters to a consumer base that barely existed a decade ago.

Governments are also rethinking ways to enhance productivity, now that the commodity boom has faded. “You need a different engine of growth. The engine of growth of the commodities is not there and will not be there, says Marcos Buscaglia, founding partner of New York-based Alberdi Partners, a Latin America economic and political consultancy. He notes that new administrations in Chile, Argentina and Brazil have displayed a willingness to pursue reforms to increase productivity and preserve the gains of the middle class.

Chile is a success story, according to Buscaglia. It has a solid middle class that owns property, has credit and buys on credit. What’s more, poverty is declining in Chile and middle-class workers are increasingly part of the formal economy. Colombia and Peru have made similar gains, he says.

The middle class is seen providing a consumerdriven boost to the regional economy over the next few years. Real gross domestic product growth across the region will improve to 2% in 2019 and further to 2.5% in 2020, from the 1.3% expected for 2018, according to Euromonitor. Yet economists estimate that the region needs to grow closer to 5% to lift more people poverty.

Just how long the benefits will last isn’t certain. Euromonitor’s Hodgson worries that much of the middle class is vulnerable to falling back into poverty. The savings rate remains low. In 2018, Euromonitor data shows the region’s savings ratio in Latin America was 6.4% of disposable income – the lowest globally. For comparison, Asia Pacific had a savings ratio of 24%.

Complicating the picture is the relatively tenuous bridgehead the middle class has established in the region. The World Bank argues that wealth, which captures the value of a country’s human capital, assets, natural capital and infrastructure, is a better way to measure the well-being of a population. By this measure, Latin America and the Caribbean fall short: wealth per capita expanded by a meager 1.1% between 1995-2014, versus a 5.8% expansion for East Asia and the Pacific.

What’s more, informal employment remains stubbornly high with nearly 130 million Latin Americans – about 48% of the working population – performing work with no pensions or social security protection, according to the International Labour Organization.