The coming reemergence of Latin America’s middle class
Remember all those articles ten years ago about the growth of Latin America's middle class. After the current economic crisis is over, it's likely to happen again.
Thanks to everyone who attended yesterday’s webinar. One comment I made about the middle class attracted some attention and questions and I decided to follow up in today’s newsletter.
One of the worst things that has occurred due to the pandemic and the associated recession is that many of Latin America’s middle class families have dropped back into poverty. While it would be better if that had never occurred, it does mean that one of the relatively positive trends I see in the coming two to three years is the reemergence of the middle class in Latin America.
As economies rebound and reopen, the millions of families that are on the wrong side of the poverty line are going to be able to improve their standard of living. Increased government spending (perhaps at the risk of both inflation and longer term debt/deficit issues) will also help boost economies and provide support for lower middle class families.
What does that reemergence mean? In many ways, it will look like the previous middle class boom in ways both good and bad.
During the 2000’s and early 2010’s, the region saw tens of millions of middle class citizens rise from poverty, largely thanks to the economic growth driven by the commodity boom. That middle class increased consumer spending, buying cars, refrigerators, cell phones and other goods. They sent their children to better schools and pushed them to attend universities.
There were problems with the first middle class boom and it’s worth considering them because history won’t repeat, but it will rhyme. Four challenges come to mind:
The growth of that middle class stagnated and even turned backward in some countries during the weak economic years of the late 2010’s.
The costs of living increased, often faster than wages in the years immediately before the current crisis.
Some families took on excessive debt to finance their new lifestyle.
Many economists warned that the new middle class in Latin America was living precariously on the edge of poverty. The crisis in 2020 proved those economists correct.
Fear and technology will drive the differences from the previous boom
This will be a more cautious middle class
The first time people emerged from poverty to the middle class, there was a bit of a binge on items that they couldn’t previously afford. I don’t say that in any way that suggests people are culpable. Eating three full meals per day and sending children to better schools are necessities they couldn’t afford previously, not luxuries they were splurging on. Who doesn’t want a refrigerator in their house? Cars can be essential to obtaining new and better paying jobs. The point isn’t to cast blame but to say that money was spent, not saved.
This time the emerging middle class may be more cautious in how they spend their new “wealth.” Having been bitten by economic crisis and forced to confront poverty again, there may be more caution in spending, particularly on large and expensive items that require debt payments.
Digital first
The previous emerging middle class bought DVDs, often pirated. This one will buy Netflix and Spotify subscriptions. Or, they’ll find cheaper local brands. Or ways to pirate those US-based services with their internet connections. Far more spending will be on digital items and services than during the previous middle class rise.
The growth of digital doesn’t imply the death of physical items, but many of those physical items are going to be purchased digitally. There is a reason Mercado Libre, Amazon and Rappi are all growing in the region.
The next wave of electronic payments is coming
Latin America’s traditional banks were not prepared for the middle class boom in the 2000’s. The situation left many of the lower middle class unbanked or with bank accounts that provided limited banking services. The end of the 2010s saw a rise of financial technology companies and a growth of traditional banks working to build internal services to compete with those fintech companies and avoid being disrupted.
The economic crisis of 2020 is likely to shake up that banking and payment ecosystem. When the middle class reemerges, they are likely to use new electronic payment options including NFC and QR codes that don’t require physical contact. This is a great moment for new entrants and companies that come to dominate a niche of the payment and payment processing landscape in the next 2-3 years will do very well. Businesses are going to demand better payment terms, with many of them tired of the high fees they currently pay on credit card payment processing. I think a rather divided system is likely to emerge amid the competition and it will take years for any unified standard to win out.
Thanks for reading
Brian Winter wrote an article a few months ago along a similar tangent, providing a more optimistic view of economic growth in the coming decade. If you were interested in the above, that article provides some additional data.
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