This paper identifies a group of people in Latin America and other developing countries that are not poor but not middle class either. The authors define them as the vulnerable “strugglers”, people living in households with daily income per capita between $4 and $10 (at constant 2005 PPP dollar). These people are well above the international poverty line, but still vulnerable to falling back into poverty and hence not part of the secure middle class. Long-term growth projections show that in Latin America about 250 million people are likely to be in the struggler group in 2030, accounting for about a third of the total population.
This paper argues that in many upper-middle income countries of the region, the strugglers are likely to become the new poor. Harmonised household survey data and fiscal incidence analysis suggest that the cash transfers that the strugglers receive are largely offset by the indirect taxes they pay, and the true benefit of in-kind transfers in education and health is questionable after adjusting for quality.
The paper’s key findings are as follows:
- “Strugglers” will continue to be a large group in most Latin American countries, constituting between 30 and 40% of the population for several decades at least. They are also at risk of being marginalised, as the middle class grows and median income in each country rises.
- This is true elsewhere in the developing world as well – but in Latin America, particularly in the upper-middle income countries, the challenge is one of politics not just economics. That is because of the risk that the growing middle class will opt out politically of the support for higher taxes and increased public investments in infrastructure and education most likely to benefit the poor and the strugglers (and in the long run will be both equity and growth enhancing for societies as a whole).
- The evolution of policy and politics is extremely path-dependent and country specific. Some governments will try to “appease” both the vulnerable group and the middle class in ways that are not sustainable in macroeconomic terms and hinder long-term growth. Others might be able to manage the politics of the social contract better, particularly if they are benefitting from a growth-friendly external environment.
- Policy steps that minimise the risk of marginalisation of the strugglers ought to be a high priority. Those policy steps would focus on a combination of gradually increasing revenue to GDP ratios, and using increased revenue to ensure that public investments provide new and greater relative benefits for households in the $4-$10 group as well as the poor. For the $4 to $10 group, in addition, a high priority would be reform and strengthening of labour market and social insurance policies.
- The political process is obviously a dynamic one, in which the struggler group could be politically marginalised and hence risk being left behind, exploited, or neglected as the middle class grows and thrives. Or, given adequate opportunities, the vulnerable strugglers could become powerful supporters of progressive policies: fairness, anti-corruption, sustainable growth and an effective state. Will they in themselves form a political constituency more powerful than the poor have been? Will the income-secure middle class see its own needs and interests as aligned with shared growth and thus the needs and interests of the strugglers?
