Keeping Up With The Fulanos

Latin Trade, Nov, 1999 by Sally Bowen, Douglass Stinson, Beth Rubenstein, James (Supreme Court justice) Wilson

Latin America's middle class doesn't have a chance.

BLANCA AND JAIME GORENSTEIN CONSIDER THEMSELVES part of Latin America's middle class, "or at least we did," says Blanca. When they married, Jaime's three-employee business had been importing car parts for three years. But for the better part of this decade, business has gone from good to bad, a bit better and then terribly worse. Finally, he shut it down.

Now Jaime helps out a couple of friends in a sales job, but his salary is variable and the $400 Blanca brings in monthly from her part-time secretarial job is essential. Friends who were also doing reasonably well are now selling property for working capital to keep their businesses going.

"There's only enough for necessities," says Blanca. The Gorensteins closed their checking accounts and have no credit cards, save one for frugal shopping at a local department store. They have to think hard to recall their last major household purchase. "In the past six or seven years, nothing," says Blanca. "On the contrary, we were robbed three years ago and we couldn't replace the large television set. We just keep watching the little one."

The portrait of the Latin American middle class has not turned out as first sketched. Over the last decade, reformers behind economic liberalization from Argentina to Mexico claimed their programs would shrink poverty and create jobs--effectively shifting the subsistence working masses in the region upward into the ranks of consuming middle-class citizens. Ten years of accumulated evidence shows otherwise. The gap between the "haves" and the "have-nots" is growing faster than ever. Unemployment hovers at record levels in a number of countries.

Deceptive practices. The LATIN TRADE Consensus Forecast shows that the region's economies, after bottoming out this year should begin to recover. But the modest gains forecast--no more than around 4% GDP growth in Chile and Peru--do not rival the double-digit and high-single-digit growth rates posted at the beginning of the decade. Furthermore, population growth continues to outstrip economic performance, leaving more people to share less pie. Profiles of middle-class families (see sidebars) add fuel to the notion that individuals are feeling the squeeze.

Researchers at Strategy Research, a market research firm focused on the region, say many companies mistook the burst of consumer spending that took place in the early 1990s as a sign that Latin America's middle class was coming of age." 'Growing middle class,' that's what everyone wants to hear," says John A. Holcombe, vice president of Strategy Research. "We say you have to understand the market." The run on everything from cars to washing machines to big-screen televisions owed much to pent-up demand combined with a burst of stability, consumer confidence and easy credit.

In the United States, fully half of household income goes to either rent or mortgage payments plus transportation costs-usually car loans, insurance and maintenance. Latin Americans are free of many of those costs: Young families live with parents, use public buses more readily and do not bother with such things as health insurance. That leaves more money free in the flush times, like the early 1990s, to buy long-denied "luxuries," that middle-income U.S. families would take for granted--say, an electric dryer or stereo system.

The reality, says Holcombe, is that Latin purchasing power is still hovering around the same levels as in the mid-1970s. For consumers, Latin America's lost decade, in fact, threatens to blossom into the misplaced quarter-century. "In Latin America, the problem is that people don't have any money," said Jose Gonzalez of CLSA Global Emerging Markets at a recent conference on economic prospects.

Governments have responded to the situation as governments will: by jiggering the statistics. With few options other than the belt-tightening and privatization mandated by the financial markets, governments have sanitized the socioeconomic fallout by redefining poverty levels and the definition of unemployment, seeming to create dramatic drops in both categories across the region.

That has improved the overall macroeconomic outlook, but has done little to companies' bottom lines. Businesses that depend on a healthy middle class, such as retail chains, purveyors of pay TV, and automobile manufacturers, to name a few, in recent years are not hitting the numbers as fast as they had originally hoped. While auto sales have plummeted in Brazil and Argentina this year, for example, companies have tried to put a brave face on billions in investment, telling all comers that the costly endeavors are a must for establishing brand recognition for the sure-to-come boom. "It's definitely a viable market," says Ivette de Reubens, regional marketing manager for Microsoft. "Just not as developed as the United States."

Where the money is. The corporate success stories of this decade come from companies that sell products that everyone needs and can afford. Colgate-Palmolive and Procter & Gamble sell small, cheap packages of shampoo and detergent. Unilever sells many more ice cream bars than gallon containers of chocolate. The low-priced products are within consumers' reach and, conveniently, have healthy margins.