An expanding middle class in Colombia drives demand and consumption

Rapid economic growth in the decade leading up to 2012 saw Latin America’s middle class double in size, as more households moved out of poverty. Colombia was one of the continent’s fastest-growing economies during this period. The emergence of the region’s middle class has signalled important social progress and new investment opportunities.

Consumption patterns have changed to accommodate the demands and preferences of those with more disposable income. Demand has surged for consumer and durable goods, such as cars. There have also been political implications as the new middle class has fostered higher-quality public services and more transparent governance.

BY THE NUMBERS: According to the World Bank, the share of the population in Latin America classified as middle class – those living on $10-50 per day, adjusted for purchasing power parity at constant 2005 prices – rose from 21% in 2003 to 35% in 2013. This equated to an average increase in the continent’s middle class population of approximately 10m people every year. As the regional economy slowed, however, growth in the middle class tapered to 35% in 2014, with some 3.5m Latin Americans entering the middle class. The share of the population living in poverty – on less than $4 per day – has continued to decline steadily from 41% in 2003 to 23% by 2014.

Nevertheless, the total population classified as vulnerable, or living on $4-10 per day, has remained just under 40% for most of the last decade, reaching 39% in 2014. Therefore, while much of the continent’s population has escaped poverty, many people have yet to break into the middle class.

COLOMBIA’S EXPERIENCE: In certain respects, the growth in Colombia’s middle class has been even more dramatic than the regional average. World Bank figures show that between 2001 and 2014 the share of the population living in poverty more than halved, from 60% to 29%. At the same time, the middle class more than doubled, increasing as a share of the population from 11.3% to 29.6%.

Indeed, 2014 was the first year when the middle class population was greater than those in poverty, whereas those in poverty had outnumbered the middle class by a factor of more than five at the turn of the century. Still, 38.7% or the population, the largest segment, was classified as vulnerable in 2014. Colombia has a stark urban-rural divide. The middle class accounted for 35% of the urban population in 2014, but only 11% of their rural counterparts. Meanwhile, the poverty rate had fallen to 22% in urban areas, but still stood at 53%in rural areas.

Unlike some of its Latin American neighbours, Colombia has a high rate of income inequality, despite the progress made in terms of reducing poverty. Between 2003 and 2014 income inequality in Colombia as measured by the Gini coefficient fell slightly from 54.4 to 53.5, and remained among the highest on a continent which is already the most unequal in the world. Over the same period, the Gini coefficient in Brazil, for example, fell from 58 to 51.5.

PUBLIC INITIATIVES: While the commodity super-cycle induced an economic boom and helped raise living standards, public policy initiatives aimed at poverty reduction and meeting the needs of the new middle class have been successful.

“The social progress made over the past 15 years, in terms of Colombia’s emerging middle class, has been striking,” Leonardo Villar, president of the local think tank Fedesarollo, told OBG. “This phenomenon was due to a combination of factors: macroeconomic growth, on the one hand, and carefully targeted government policies in health, education and poverty reduction, on the other hand,” he said.

For example, Familias en Acción, introduced in 2000, is a conditional cash-transfer programme whereby small grants are given to families in poor households on a monthly basis. These funds enable children under age seven to get medical check-ups and children aged 7-18 to attend 80% of classes at school. More recently, the Colombia Mayor initiative was introduced in 2010 to provide a solidarity pension to those in extreme poverty. This scheme has been of particular benefit to those with informal or irregular work, who would otherwise enter retirement with little savings or alternative income source.

ECONOMIC IMPLICATIONS: One of the most profound economic impacts of the emerging middle class is the shift in consumption patterns away from basic, subsistence goods to more discretionary items and, increasingly, non-tradeable services. In Colombia this trend has been accompanied by increased formalisation in the labour market and a deepening banking system as more people get access to credit, albeit both from a low base. “Colombia’s emerging middle class has been a key driver of private consumption in recent years, helping the economy hold up relatively well considering the external shocks it has been exposed to,” Munir Jalil, chief economist for the Andean region at Citibank, told OBG.

KEY CHALLENGES: The biggest impediment to sustaining growth in Colombia’s middle class, as seen across the continent, is the marked economic slowdown of recent years as well as labour informality. While the country avoided a recession, and the labour market has also remained relatively robust, unemployment is expected to continue ticking upwards throughout 2017.

Speaking to OBG, Juana Téllez, chief economist at BBVA, suggested there might be a “glass floor”, meaning many people are hovering just above the poverty threshold, and therefore precariously just inside the middle class. In order to keep growing the middle class, and to continue improving living standards for those who have exited poverty, Téllez highlighted areas where action is needed, while noting the changed priorities of Colombia’s middle class. “The new middle class is demanding more and better public services. Access to third-level education, for example, is still very unequal and there is a housing shortage of about 3m homes. Something the government could look at, for example, is extending mortgage subsidies so that more families can fulfil their dream of owning a home,” said Téllez.

THE STATE’S ROLE: Thus, the implications of Colombia’s burgeoning middle class of recent years are not just social and economic, but also political. As seen in other countries in the region, newly prosperous segments of the population are likely over time to make new political demands, including for more and better public services. Complicating the government’s capacity to meet these demands are the limited public finances and the fact that the state plays a relatively small role in the economy compared to neighbouring countries. This increases the pressure to prioritise scarce public resources.

Villar flagged pension reform as an important avenue for future reform to achieve further social progress. “Government spending, in general, and social spending in particular, are still relatively low,” he told OBG. “At the same time, much of what is classified as social spending is taken up by pension spending, which accounts for a quarter of all federal government expenditure, but benefits less than a quarter of the population. Because the beneficiaries are generally those who retired from the formal private sector or the public sector, and thus better off than the bulk if the population, this significant element of social spending is actually quite regressive in terms of income distribution.” Making further progress in tackling poverty, while meeting the demands of the new middle class and implementing the peace agreement will be a challenge Colombia’s leaders are determined to meet. Increased investment and partnership with the private sector could help fill gaps in financing and ensure that progress is made.