Asset accumulation by the middle class and the poor in Latin America: political economy and governance dimensions

Abstract

As Latin America is currently living a period (2004-2006) of accelerated economic growth led by booming commodity prices, it is a good time to address some important long term features of the Latin American economy and society that have been traditionally inimical to stable and sustained development. Recent literature on the relationship between growth, inequality, democracy and development highlights, based both on analytical models and historical data, that at the root of the problems of economic instability and the fragility of democracy lies a combination of often slow growth and distributive conflict in unequal societies. The problem is compounded by the traditional difficulties to ensure adequate governance mechanisms that mediate in the distribute conflict in ways that are favorable to both growth and stability. This paper highlights missing components of current social policies in Latin America that affect the political-economy equilibrium: in particular, the neglect of the middle class as valid subject of social policy, the persistence of income and wealth inequality in a context of moderate growth and the need to put more emphasis on asset accumulation by the poor and the middle class. The paper provides economic and political economy rationales for devising new policies that could correct this neglect.