Global Policy Forum

Income Distribution to the Middle Sectors in Latin America


Poverty, Employment and Income Distribution in the First Half of the 1990s,
Social Panorama of Latin America, Edition 1995, ECLAC

The economies of most Latin American countries during the 1990s have been characterized by an unequal distribution of the costs of adjustment and by a notable rigidity of income distribution during expansionary phases. If the distributive inequity of current development models continues, any progress towards social stability which may result from economic growth will depend chiefly on the reduction of poverty and indigence, and it is uncertain how far lower-middle-income groups will go in pressing their income demands.

Previous editions of the Social Panorama have analysed the changes in income distribution that took place during the 1980s and the early 1990s.5/ These studies have concluded that, in most of the countries, households in the highest decile did not suffer income losses during the crisis and that, in some cases, their incomes even increased in real terms. Thus, in general, their share of income distribution rose. On the other hand, the available evidence indicates that households in the seven lowest-income deciles bore the brunt of the crisis and the costs of adjustment policies. In addition, the most recent trends show that the periods of resumed growth in the region have been characterized by a highly inflexible pattern of income distribution, which has prevented the benefits of such growth from outweighing the relative disadvantages faced by population groups whose income share had fallen during the 1980s.
Under these circumstances, the percentage increases in household incomes among the various deciles have been similar, so that while the relative share of the lowest-income households has not improved, their real income has increased in direct proportion to economic growth. This has allowed a significant percentage of households in this category to escape from indigence and poverty, particularly in cases where economic growth has been strong and sustained. Given the effects of scarce resources on households in the poorest deciles, it must be assumed that during periods of rapid growth, such groups would be likely to support a development mode that enables them to escape from the worst kinds of poverty. At the other end of the scale, the two or three highest deciles are receiving a major share of the income increases, and can naturally be expected to be more supportive of current development processes.
Between these two extremes are the population groups which, while not poor, are not fully integrated into the more dynamic sectors of the economy. These are the households whose incomes, while sufficient to meet their basic needs, are still below the average. In the urban areas of the countries which have attained what may be considered a middle or high per capita income level for Latin America, such households make up the next three deciles after the poorest 40% in terms of family income distribution.6/ In 1980 the lowest household incomes in this group were between 30% and 40% above the per capita value of the poverty line, and the highest incomes were between 2.2 and 3.3 times higher than the poverty line, depending on the country (except in Argentina and Uruguay, where they were around four times higher)7/ (see table 1). The 30% of households in this group earn incomes ranging between US$ 300 and US$ 800 per month for a family of four, and they typically constitute the lower level of the broad middle-income urban groups in the region's countries.8/

The following discussion will examine the trends in the income share of middle-income urban households in the fifth, sixth and seventh deciles and their absolute levels of well-being, which are relevant to an analysis of how the fruits of economic growth have been distributed in recent years. This group is generally considered to play an important role in strengthening democracy, since it consists mainly of wage-earners employed in enterprises in the formal sector of the economy and a portion of the public sector. Moreover, because of its position in the income pyramid, the urban group is the one that best represents the paramount level of well-being in the countries, and it is therefore the reference group for the population living in poverty. A further factor which may be important to social stability is the perception that the members of the lower-middle group have of their own incomes as compared with those of other groups and with their growing consumer expectations, as well as their opportunities for social mobility. This perception derives from their access to the mass media, and their higher educational attainments.
Be that as it may, households at the lower-middle level receive a significantly smaller share of total urban income distribution than the 30% which they would hypothetically receive if income was equitably distributed. In the Latin American countries with a relatively less concentrated pattern of income distribution (Argentina, Costa Rica, Uruguay and Venezuela), this group's share hovers around 26%, but it dwindles to 20% in countries with a more concentrated urban income distribution (Brazil and Chile, among the countries considered). In the other countries these households' share falls between those percentages (see table 2). There is a significant contrast between this situation and that of the industrialized countries with higher per capita incomes, in which the share received by the 30% of households in the lower-middle group approaches 32% of national income.9/
An analysis of trends in the lower-middle group's share of urban income distribution after 1980 shows that, in seven of the eight countries for which information is available, this share decreased or held steady, between the early 1980s and the early 1990s. The exception is Uruguay, where income distribution did not worsen significantly during the 1980s and even showed a less concentrated pattern at the beginning of the 1990s than a decade earlier. In the other countries, the percentage of total income received by this group declined sharply, particularly by the mid-1980s; thereafter, it stagnated or recovered slightly up to 1992. Nevertheless, this recovery was not sufficient to restore income shares to the levels achieved at the end of the 1970s (see table 3).

Consequently, in five countries (Argentina, Brazil, Costa Rica, Panama and Venezuela), the average real incomes of lower-middle income households declined sharply between 1980 and 1992 -by between 7% and 27%. In Mexico, however, they increased by nearly 2%, although there was no improvement in these households' share of total income. In all the countries referred to, with the exception of Argentina, the gap between the average income for the group and total household income widened still further. In addition, a number of lower-middle-income households are currently approaching the poverty line. Accordingly, this group is now more vulnerable than in the past two recessions and declining economic growth rates, with the resulting increases in unemployment.
It is particularly interesting to examine the experience of lower-middle-income groups in Argentina, Chile, Mexico and Uruguay, countries which in recent years have mostly exhibited high growth rates and have made substantial progress in reforms. In Argentina, the economic growth achieved during 1990-1992 allowed households in this group to recover a major portion of the real income10/ which they had lost during the past decade. In Mexico, the improvement resulting from growth in the early 1990s was not sufficient to enable these households to regain their earlier share of urban income, although their purchasing power increased relative to 1984. In Uruguay, on the other hand, growth was of relatively greater benefit to middle-income groups, including those at the lower- middle-income level; these groups not only managed to regain their 1980 income share, but to exceed it, as their income improved significantly (26%) between 1986 and 1992.
It is also instructive to review what has happened to the well-being and urban income share of lower-middle-income households in Chile, which has exhibited very high growth rates since the mid-1980s. There, average incomes in this group grew by around the same proportion as overall household income (approximately 20%), so that between 1987 and 1992, the lower-middle-income share of urban income did not improve, but remained at around one fifth of total income (except in 1990, when it showed a slight, temporary increase). Nevertheless, these households made significant gains in well-being, as measured in terms of the poverty line. The most recent figures indicate that the income share of lower-middle-income urban households remained virtually static between 1992 and 1994, but that their incomes continued to improve in real terms, with an average increase of 15% over the period. Nevertheless, for the period 1990-1994, the income percentage received by this group appears to have decreased slightly (see table 1).
In short, in some of the region's countries, the lower-middle-income urban group had developed protective mechanisms enabling it to survive adverse economic conditions, and had partially begun to share in the benefits of growth. In most cases, however, this group suffered a notable setback in its share of income distribution from 1980 onward, so that, in six of the eight countries considered, it experienced significant real income losses. Thus, not only did the households in this group have to defer their expectations of increased consumption levels, but in some cases, their incomes have tended to approach the poverty line.
If the dominant type of employment among the lower-middle-income labour force is looked at, it can be seen that there are a number of policies that are closely linked to income trends at this level. Of the total lower-middle-income population employed in the urban areas of Chile, Costa Rica, Mexico, Uruguay and Venezuela, 70%-75% are wage-earners, and 55%-65%, including public-sector wage-earners, are employed in the formal sector of the economy, the traditional base of trade-union movements. Therefore, this group's opportunities for improving its income and income distribution share depend largely on the dissemination of technological progress among the sectors and enterprises in which it is employed, and on its capacity for turning productivity increases into income.
Currently, the most important policies, whether proposed or implemented, that are directed towards this group's income and productivity are aimed at promoting flexibility in labour-force participation, so that employment and household income can be increased, although it is recognized that such measures could lead initially to a drop in wages. Mention should also be made of new regulations which, in a different context, are designed to give trade-union organizations more power in wage agreements in order to restore wage-earners' negotiating position. As regards productivity, it is worthwhile to note the policies designed to bring small and medium-sized enterprises and micro-enterprises into the more dynamic sectors of the economy, and those that link public sector-wage increases to heightened efficiency and macroeconomic policies.

5/ See ECLAC, Social Panorama of Latin America, 1994 edition (LC/G.1844), Santiago, Chile, November 1994, chapter III, and table 18.

6/ This analysis does not include countries with annual per capita incomes under US$ 1,000 and poverty levels of nearly 50% or higher in urban areas. Of the countries for which information is available on income distribution trends during the period 1980-1992, Bolivia, Guatemala, Honduras and Paraguay were not included.

7/ The low poverty percentages and the high income and urbanization levels reached in Argentina and Uruguay in the early 1980s, as compared with the rest of the region, mean that this group was larger in both countries. The next 10% of households after the poorest 30% should be added to the three deciles mentioned; the lower-middle level would thus consist of the 40% of households in the fourth, fifth, sixth and seventh deciles in terms of urban income distribution. For purposes of comparison, however, the definition of the level was retained.

8/ The middle-income urban groups, defined in accordance with the income-classification method, are broader than the definition used for analytical purposes. Also included in these groups are the 20% (the eighth and ninth income distribution deciles), or even 25% of households with above-average incomes. These households constitute the middle and upper-middle urban groups.

9/ This figure is an average of the lower-middle group's percentage shares of national income distribution in the following eight countries around 1985: Australia, Canada, France, Italy, Japan, Sweden, the United Kingdom and the United States. The share received by the next 30% of households after the poorest 40% was estimated on the basis of income distribution data published by the World Bank in The Challenge of Development. World Development Report, 1991, New York, Oxford University Press, 1991.

10/ Deflated by the nominal per capita value of the poverty line.

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.