Decline of Brazil’s Middle Class

Although he was a left-wing, socialist president for two consecutive terms, Luiz Inácio Lula da Silva demonstrated that a left-wing administration was capable of navigating a sound macroeconomic course for Brazil. Also, he opened the country’s economy to unprecedented global trade and investment. During his presidency, Brazil became more integrated into the global economy than it had in forty years and trade accounted for 25-30% of Brazil’s national economy.  Under his leadership, he successfully lifted millions of Brazilians out of poverty making it possible for them to enter the middle class. However, Brazil’s economic crisis and corruption have tarnished his legacy and millions of people from Brazil’s middle class are now at risk of falling back into poverty.

Last year, we ran an article on Brazilian-born, Dr. Roberto Mangabeira Unger, Roscoe Pound Professor of Law at Harvard University Law School at the David Rockefeller Center for Latin American studies (US – Brazil Relations: the dynamics of consciousness and empowerment). In his lecture, he stated Lula’s tenure in office was considered a period of real progress that alleviated poverty and diminished inequality. He went on to state that, in his opinion, this period was essentially a cycle of consumption orientated, credit-based growth that created a new “second” middle class unlike the traditional middle class base of Brazil (i.e., purely of European descent, white, and focused on traditional professions such as doctors, lawyers and government employees). This new, second middle class made up of mixed race Brazilians, people who worked during the day and studied at night to earn college degrees, and those that built successful small businesses, faced an uncertain future. He pointed out that their existence was precarious because it depended solely on earned wages from jobs and cyclic consumer credit without which it could not sustain itself.

For several years, researchers both foreign and Brazilian have been studying and compiling data on the Brazilian middle class. Researchers such as Lester Thurnow (1986), Nancy Birdsall (1996, 2000), and William Easterly (2001) have developed different approaches that focus on developing an assessment of income distribution patterns and differences between first and third world countries and worsening trends. More important, the largest number of researchers have chosen to establish a threshold by including earnings above the daily poverty limit of U$2 – U$12 a day.  And, another group of researchers started at U$12 – U$50 since this range reflected the average of respective incomes in both Brazil and Italy. Further, in the Milanovic and Yitzaki study (2001), the middle class of emerging economies was estimated to have reached 250 million in the year 2000 and 1.2 billion by 2030. This population is closely watched by multinational corporations, banks, and their consultants and focus on target populations for products and services. However, it is the “lower” middle class which covers the majority of these populations in these countries that are under scrutiny as demonstrated by studies such as those provided by McKinsey and Goldman Sachs.

Further, Brazilian researchers separated income groups into five classifications – A, B, C, D, and E with the middle class “C” household receiving between R$1064 – R$4591 *(U$618 – U$2669) per month and per capita earnings ranging between R$282 – R$1218 *(U$163 – U$708) per month. However, poverty in Brazil decreased gradually from the 1990s and more dramatically in the last decade from 35% of the population in 1992 to just 18% in 2007. As a result, the poor saw their incomes advance by 9% and the next 30% of the population by an average of 5%.  According to Brazilian household studies, the “C” class increased from over 30% to close to 50% of the population between 1991-1992 and 2007-2008. This means that from 46 to 95 million Brazilians entered the market place for durable consumer goods ranging from mobile phones, radios, TVS and DVD consoles to refrigerators, freezers, motor bikes and cars in the last 10 to 15 years. Although a large portion of these consumers still live in favelas, houses are now made of brick and most have running water and electricity in order to use electric and electronic goods. This translates into an increase of the “C” class in the last 15 years, averaging 2.5% from the presidency of Cardoso to 4% under the Lula administration. Further, the Wall Street Journal reported that in 2003, the Brazilian lower class constituted 54% of the population; the middle class 37%; and the upper class 7%. However, by 2013, the lower class was 30%; the middle class had grown to 56%; and the upper class was 13%.

Unfortunately, the economic downturn believed to have been started by the slowdown in commodity exports to China, the historic Petrobras scandal, and the resulting political deadlock has caused unemployment to rise to 10.9%, gross domestic product shrunk by 3.8% in 2015 and is predicted to be –0.20% for 2016. Inflation has reached 8.7% and the pace of consumer spending has hit a twelve year low. In addition, an effort on the part of the government to stem a widening budget deficit has resulted in more taxes further crippling family budgets. More important, economists are saying that with wages rising less than inflation, about 35 million Brazilians from the lower middle class are in danger of falling back into poverty. Many experts are stating that the current situation threatens to undo transformation of the country’s economy and society.

Now, there is also a consensus among economists that the current economic crisis is due to several factors. The most startling factor is something economists call the “resource curse.” This is a theory that describes how countries with abundant resources sometimes do worse than countries without them. For example, the influx of currency from exports strengthened the country’s currency. It was Goldman Sacks that declared Brazil’s currency the most overvalued in the world at the height of its boom. Also, Brazilian politicians initiated a foreign policy to reduce the role of the United States in Latin America by blocking a U.S. Free Trade agreement. It also aligned itself more with anti-American countries such as Venezuela, Argentina, and Iran. Further, the country began spending it’s proceeds from iron ore and oil resources before they were produced. With the anticipation of commodity sales, the government simply overspent. Government banks, for example, handed out easy credit, subsidized energy bills, and issued cheap loans to big companies with political ties. In addition, other big loans failed to pay long-term gains. Also, oil production was far less than what was anticipated. For instance, Petrobras struggled to develop oil fields in extremely deep waters. And finally (probably one of the most important factors), Brazilian leaders avoided addressing political problems such as a political system that bred corruption and blocked business innovation.

Certainly, Brazil’s middle class is not equivalent to its U.S. counterpart or many other countries but it seems that the same policies that lifted millions from poverty over the last decade or so is now undermining the new middle class and threatening to bring down the very class that it previously built.

Footnote: At the time the WSJ article was written the US Dollar to Brazilian Real exchange rate was as follows: 1 USD = 1.7258 BRL (11 September 2010 ). The rate at the writing of this article is 1 USD = 3.2060 therefore R$1064 – R$4591 (U$332 – U$1434) per month and per capita earnings ranging between R$282 – R$1218 (U$88 – U$380) per month.

Sources: Birdsall, N. and R.H. Sabot (1996) Opportunity Foregone: Education in Brazil. Washington D.C.: Inter-American Development Bank; Birdsall N., Graham, C. and Pettinato, S. (2000a) “Stuck in the tunnel: Is globalization mudding the middle class?” The Brookings Institution Center on Social and Economic Dynamics Working Paper No. 14’’; Thurow, L.C. (1986) “A general tendency towards inequality”, American Economic Review, May; Easterly, W. (2001) “The middle class consensus and economic development”, Journal of Economic Growth, 6 (4): 317-335; Milanovic, B.and S. Yitzhaki (2002): “Decomposing world income distribution: does the world have a middle class?”, Review of Income and Wealth. Blackwell Publishing, 48 (2): 155-178; Beinhocker E.D. et al. (2007) “Tracking the growth of India’s middle class”, The McKinsey Quarterly, 3: 51-61; Lyons, J. and P. Kiernan. (2015) How Brazil’s China-Driven Commodities Went Bust. New York: Wall Street Journal; Wogart, J. P. (2010). Rev. Econ. Polit. vol.30 no.3 São Paulo; Unger, R. M. (Producer). (2012). Brazil and the United States: Their National Futures; Rapoza, K. (2016). Pace Of Brazil Consumer Spending Hits 12 Year Low. Forbes.