The Bright Side of the Global Economy: The Middle Class Is Growing

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There is a middle class revolution happening in the largest economies in Central and South America, a counterbalance to the terrible news coming out of Europe

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Shoppers carry an electronic item outside a store in Caracas / Reuters

As journalists, policymakers, and activists of various stripes and interests focus on the rise of the global middle class, scholars struggle with how exactly to define this category of people worldwide. The method matters, as differences can make one exceedingly optimistic or pessimistic as to today's reality, tomorrow's promise, and of what people, governments, companies, and markets should and should not be doing to encourage this growth.

One way of measuring the middle class is in relative terms, by looking at who is within the middle range of incomes in any given country. Scholars such as Lester Thurow, Nancy Birdsall and William Easterly have done this in various formats. But it is often unclear exactly what their results mean for emerging economies, where the middle of the country is not necessarily one and the same as the middle class. It is also hard to use this approach comparatively, as the "central" income range differs widely from country to country.

Another approach is to use absolute thresholds, which has the advantage of getting at attributes that are more universally acknowledged as middle class. The question here becomes how to define this "fixed band." The most expansive calculation - used by Martin Ravallion at the World Bank -- classifies a middle class person as anyone who makes between $2 and $13 a day in PPP terms. Intended to measure the expansion of the middle in emerging markets,  this definition includes those who have just made it across the World Bank $2 poverty line. By this measure, China and India have made incredible strides over the past fifteen years, developing a true middle class. But to those in advanced Western economies many of these people would almost certainly be considered abjectly poor, questioning the comparative value, and universality of this scale.

On the more restrictive end, a study by Branko Milanovic and Shlomo Yitzaki  sets the the upper and lower bounds of the global middle at the average incomes of Brazil ($4,000 in 2000 PPP terms) and Italy ($17,000) as, and counts anyone earning between $12 and $50 a day as middle class. These may not be the right threshold incomes either, however, particularly because this bottom line leaves out the millions in India and China who earn less than $12 a day and yet still, as households, lead quite comfortable middle class lifestyles. This definition puts Mexico's middle at less than half the population, in contrast to those that count Mexico as now majority middle class.

Finally, a Brookings report by Cárdenas, Kharas and Henao takes a slightly different approach to the issue. Based on an earlier study by Kharas, they use the poverty line in Portugal and Italy - the lowest among advanced European countries - as the lower limit and twice the average income in Luxembourg, the richest European nation, as the upper limit of the global middle. As the authors note, their calculation "excludes those who are considered poor in the poorest advanced countries and those who are considered rich in the richest advanced country."

Source: Cárdenas et al., "Latin America's Global Middle Class," Brookings (2011).

By this definition, the Latin American countries with the largest middle classes are Mexico (60%), Uruguay (56%), and Argentina (53%), while Bolivia (13%), Honduras  (16%) and Paraguay (19%) fall on the lower end of the spectrum. As a whole, the region cannot be called middle class, but it is moving in the right direction, and may qualify in the near future. The model predicts that by 2030 over half of Latin American countries will have a majority middle class. It contrasts with China and India in this regard, where, despite great progress, a true middle class as a substantial percentage of the overall population is still decades away.

Recognizing the enormous expansion of the middle class in Latin America and worldwide does not deny the destitute poverty in which hundreds of millions, even billions, still live. But ignoring the progress of recent years also has its perils for the poor. Better measuring and understanding the rise of the global middle is vital precisely because it suggests paths for those still less fortunate to follow.

This article originally appeared at CFR.org, an Atlantic partner site.

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Shannon K. O'Neil

Shannon K. O'Neil is the Senior Fellow for Latin America Studies at the Council on Foreign Relations. She blogs at "Latin America's Moment."

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