The middle class

The ancient Egyptians were capable of remarkable feats of engineering, but only used that knowledge to build tombs for their pharaohs. The Romans knew of the steam engine, but satisfied themselves with putting it to use in opening a temple’s doors. Societies that have a very uneven distribution of income accumulate human and physical capital for the privileged elite. In the Ming Dynasty, around the 14th Century, the Chinese invented gunpowder, the printing press, paper and the compass. But industrialization, which would transform the country in the 20th Century, only took place once the gap between the rich and poor was bridged. Economic progress is dependent on a middle class. Aristotle said that the best political community is one formed by middle class citizens and the best administered States, which are less subject to polarization and violence, have a large middle class.

So what is the middle class?

Not even in the US, known as the prime example of a middle class country, are economists and sociologists able to precisely define the middle class. Even the Census Bureau has stated that it lacks a definition and so must use families that fall in the middle of the average income distribution (i.e. the 20% of the population that lie in the third quintile).

In the table below, we use the estimates of share of income for each quintile (calculated in the study by Ricardo Paes de Barros at al, “A queda recente da desigualdade de renda no Brasil” [“The recent fall in inequality of income in Brazil”], Ipea, 2007). As the research on which these calculations are based underestimate income in relation to GDP, we have combined the information on income distribution in Brazil with GDP figures.  

Income Estimates

Brazil, 2006

Quintile

Income share

(%)

Average annual income per capita

(R$)

Poorest 20%

2.9

1,800

Second Quintile

6.5

4,000

Middle Quintile

11.1

7,000

Fourth Quintile

18.5

11,600

Richest 20%

61.0

38,300

Memo: GDP per capita: R$12.560,00 e Total GDP: R$ 2,32 trilhões

Source: Back of the envelope calculation applying income distribution estimates in Paes de Barros (opus cit.) to GDP numbers.  

The average income for the third quintile is much smaller than the population’s average income. The population’s average income, or GDP per capita, is to be found in the fourth quintile. So which quintile is more representative of the middle class – the third, or the fourth?

The choice between them would have left Aristotle unsatisfied. So what happens if we choose the third quintile (the one that is actually in the middle), or the fourth (which includes the individuals whose income more closely match the GNP per capita)? Well, the middle class would always retain its relative size. It would grow in absolute terms when the population as a whole grows, but it would always represent 20% of the population, thus prohibiting references to a large or small middle class in relation to the country’s population.

One alternative would be to define a band around the average income, counting the individuals found within its borders and calculating the resulting size in relation to the other classes. In 2006, the per capita income in Brazil was R$ 12,400.00. If we define the middle class as individuals with incomes between R$ 10,000.00 and R$ 15,000.00, the sum of individuals that fall within these boundaries would be less than 20% of the population.

By increasing the band to include individuals with annual incomes of between R$ 5,000.00 and R$ 20,000.00, we would see the total figure amount to more than 20% of the population, as this would also include individuals from both sides of the fourth quintile. Choosing which of these two bands would be most appropriate involves difficult judgments.

Another way to solve the same problem would be to calculate the size of the group that accounts for 50% of the total income. In Brazil, the poorest 30% earn 5.7% of the total income, the next 50% earn 33% of the total, whilst the top 20% earn 61%. With such a poor lower class and with the upper class accounting for such a large share of the GNP, it is highly unlikely that Brazil would satisfy Aristotle’s criterion for a well administered State.

A large middle class characterizes a developed society, where more than 50% of the population have access to good education, medical assistance, little instability and widespread democracy. Politics can only go badly when inequality is so great, even though disparity of income and polarization are not one and the same. This is why it should come as no great surprise that the Brazilian Senate has become such a source of national shame.

3 Responses to "The middle class"

  1. Vitoria Saddi   October 11, 2007 at 4:32 pm

    Eliana, Are you implying causation when you say:” Politics can only go badly when inequality is so great”, that is great inequality implies bad politicians? Interesting.
    What are the macro incentives to decrease inequality for a Lula type of government, given that he’ll not reap the benefits of such an act?

  2. Marco Mayrink   October 11, 2007 at 4:35 pm

    While you don’t discuss this point do you agree with Tom Trebat’s in the aspect that Brazil has portraited a significant decrease in inequality lately?

  3. Eliana   October 11, 2007 at 7:18 pm

    Vitoria, yes, I suspect this is the case: too much inequality and bad politics go hand in hand.
    Inequality has decreased during the last 4 years. Not bad for Lula.

    Marco, Tom is right. Paes de Barros (in the work cited in my post) documents the decline in inequality. But it was too small. And until now it has not lasted long enough to improve politics. The disease is common to other Latin American contries. See politics in Venezuela (or Argentina) for instance.