Why is middle-class growth in Latin America slowing?

The growth of the middle class has been one of the first casualties of the economic slowdown in the Latin America and the Caribbean region. In 2014, the share of Latin Americans that were middle class was almost the same as in 2013 (35 percent of the population, up from 34.8 percent; see the World Bank’s LAC Equity Lab). This almost negligible increase of the middle class contrasts with the trend that had marked the decade up to 2012. During that golden decade, the middle class grew at a brisk pace and every year over 1 percent of the population moved up to the middle class. It may not sound like much but put it this way: during the ten years before 2012 over ten million Latin Americans joined the ranks of the middle class every year. In 2014, barely a third of that figure –three and a half million– achieved that feat.

Until recently, Latin America was well on its way to becoming a middle class region. Had the trend of the golden decade continued, the middle class would have become the largest group of Latin Americans by next year. Unfortunately, as shown in the chart below, based on current trends it is unclear when such a milestone could be reached. In addition, other social gains have also slowed down. For example, the economic downturn has been accompanied by a lower income growth for the bottom 40 percent of the population—we examine this in the latest Poverty and Inequality brief

If there is a silver lining, it is that poverty continued to decrease, from 24.1 percent in 2013 to 23.3 percent in 2014. Then the question becomes where did people go if poverty decreased but the middle class remained virtually stagnant? The answer is that we have seen a substantial increase in the group that is not in poverty but not yet in the middle class, known as the vulnerable. This group, characterized by exhibiting a certain likelihood of falling into poverty in any given year, not only continues to be the largest group in the region but actually increased from 38.3 percent in 2013 to 38.9 percent in 2014. In other words, the vulnerable grew three times more than the middle class. If, by definition, the vulnerable are more at risk of falling into poverty than the middle class, helping minimize such risks will be an important agenda across the region as it adjusts to the new economic environment.