What do the people in the middle – neither the richest nor the poorest in society – contribute to economic development? Many economists have recently begun to talk about the importance of the developing world’s "middle class".1 Others point to the size of the middle-class market and its potential role as a motor of growth, particularly in the largest developing countries such as China and India.2 The long-run econometric analysis across many countries by New York University economist William Easterly, meanwhile, demonstrated that the existence of a sizeable and relatively prosperous middle class was significantly correlated with long-term growth.3 Certainly, the growth of a segment of the population with higher living standards than those of their poorest compatriots signals success in the ongoing struggle to alleviate poverty, as well as offering new opportunities for entrepreneurs.

This year’s Latin American Economic Outlook focuses on the fortunes of those in the middle of the income distribution in Latin American economies. If these middle sectors have stable employment and reasonably robust incomes, then, arguably, they provide a solid foundation for economic progress. Moreover, they might also support moderate but progressive political platforms in Latin America’s democracies – the political role often attributed to middle classes by historians and sociologists. Indeed, as early as 1958, political scientist John Johnson formulated the influential thesis that middle sectors had emerged in many Latin American countries, and that they championed state-sponsored development, public education, social-welfare programmes and democracy itself.4 Conversely, if those in the middle have precarious incomes and unstable employment, their consumption cannot be counted upon to drive national development, their growth cannot be taken as a sign of social progress, and their political preferences may veer toward populist platforms not necessarily conducive to good economic management.

This Outlook analyses the economic characteristics of Latin America’s middle sectors, including their income levels, the kind of jobs they perform, but also their attitudes and values regarding inequality, economic policy and democratic politics more generally. We find that the middle sectors in Latin America are often quite economically vulnerable, subject to the risk of falling down the economic ladder. The precarious position of Latin America’s middle sectors has to do with high levels of economic inequality, as well as a structure of economic institutions and incentives that have too often rewarded rent-seeking over formal-sector entrepreneurship, for example. Accordingly, we look carefully at the public policies that can protect the livelihoods of middle-sector households, and policies such as social protection and public education, that promote upward mobility more generally.