The New Vulnerable Class in Latin America

> Posted by Sergio Guzmán and Sonja E. Kelly, Smart Campaign Lead Specialist and Fellow, CFI

Some call them the lower middle class, some call them assets-poor, some refer to them as the 4-10s for their earning average of $4 to $10 per day. In a publication released this year, the World Bank called this group the “vulnerable class,” bridging the gap between a class they refer to as “poor” and the class traditionally known as the “middle class.” Two of the lead authors on the publication, Dr. Augusto de la Torre and Dr. Julián Messina, presented their findings at a recent event at the Inter-American Dialogue, a forum for research and conversation centered on Latin America.

The authors distinguish between two economic strata. The first is the vulnerable class, which is above the poverty line, but is still in danger of losing their discretionary income. The second is the middle class, which is firmly above the poverty line, and is unlikely to lose their discretionary income. The vulnerable class is defined by a narrow dollar range—only $4 to $10 per day. Despite this narrow income definition, in the last decade this class has grown to now contain the highest proportion of the Latin American population when compared to other economic classes. (The same phenomenon is appearing in other regions, as well, although that is a story for another day.) The graph below comes directly from the authors’ presentation (for more on the report’s methodology, see the publication here).

At the event (you can watch a webcast here) the authors mentioned that the shift of the population from poor into vulnerable correlates with several factors: economic growth in countries like Mexico and Brazil, increased educational opportunities for the poor, increased female participation in the labor force, improvements in public health, and the implementation of conditional cash transfer (CCT) systems, among others. The authors are careful to define these connections as correlations rather than attributing causes.

In Latin America, many people have been making the climb toward prosperity a one-way trip. More people move from poor to vulnerable to middle class, than in the other direction.

In the financial services realm, one of the relationships highlighted by the report was between class movement and conditional cash transfers. CCTs are the beginning of a social safety net. They assist people to transition from the poor to the vulnerable class but have little effect in moving people into the middle income class. Contrast this with the role microfinance often ascribes to itself. Many microfinance practitioners, especially in Latin America, have argued that the most effective role of microfinance is to assist the working poor (vulnerable), i.e., those just above the level of people at whom CCTs are aimed.

The authors suggest that when people have made the transition from vulnerable to middle class they tend to adopt more consumerist behaviors – engaging in what the authors described as “removing themselves from the social contract” by shifting from public to privately provided service alternatives (education, electrical utilities, security, etc.). Such a shift in spending patterns means that rather than saving more money as they move up the economic ladder, people in Latin America increase their spending.

The act of defining this vulnerable group is changing the way we think about financial inclusion. As we think about knowing our customers, we need to understand the motivations, choices, and challenges facing the growing number of not-quite poor, not-quite middle class populations in Latin America and beyond.

Image credit: The World Bank

Have you read?

Extending Oportunidades: A Look into Mexico’s Model Conditional Cash Transfer Program

The Financial Behavior of Rural Residents in Latin America

Productivity in Latin America: So Many Questions