KEEPING UP WITH THE FULANOS.

Latin America's middle class doesn't have a chance.

BLANCA AND JAIME GORENSTEIN CONSIDER THEMSELVES part of Latin America's middle class, "or at least we did," says Blanca. When they married, Jaime's three-employee business had been importing car parts for three years. But for the better part of this decade, business has gone from good to bad, a bit better and then terribly worse. Finally, he shut it down.

Now Jaime helps out a couple of friends in a sales job, but his salary is variable and the $400 Blanca brings in monthly from her part-time secretarial job is essential. Friends who were also doing reasonably well are now selling property for working capital to keep their businesses going.

"There's only enough for necessities," says Blanca. The Gorensteins closed their checking accounts and have no credit cards, save one for frugal shopping at a local department store. They have to think hard to recall their last major household purchase. "In the past six or seven years, nothing," says Blanca. "On the contrary, we were robbed three years ago and we couldn't replace the large television set. We just keep watching the little one."

The portrait of the Latin American middle class has not turned out as first sketched. Over the last decade, reformers behind economic liberalization from Argentina to Mexico claimed their programs would shrink poverty and create jobs--effectively shifting the subsistence working masses in the region upward into the ranks of consuming middle-class citizens. Ten years of accumulated evidence shows otherwise. The gap between the "haves" and the "have-nots" is growing faster than ever. Unemployment hovers at record levels in a number of countries.

Deceptive practices. The LATIN TRADE Consensus Forecast shows that the region's economies, after bottoming out this year should begin to recover. But the modest gains forecast--no more than around 4% GDP growth in Chile and Peru--do not rival the double-digit and high-single-digit growth rates posted at the beginning of the decade. Furthermore, population growth continues to outstrip economic performance, leaving more people to share less pie. Profiles of middle-class families (see sidebars) add fuel to the notion that individuals are feeling the squeeze.

Researchers at Strategy Research, a market research firm focused on the region, say many companies mistook the burst of consumer spending that took place in the early 1990s as a sign that Latin America's middle class was coming of age." 'Growing middle class,' that's what everyone wants to hear," says John A. Holcombe, vice president of Strategy Research. "We say you have to understand the market." The run on everything from cars to washing machines to big-screen televisions owed much to pent-up demand combined with a burst of stability, consumer confidence and easy credit.

In the United States, fully half of household income goes to either rent or mortgage payments plus transportation costs-usually car loans, insurance and maintenance. Latin Americans are free of many of those costs: Young families live with parents, use public buses more readily and do not bother with such things as health insurance. That leaves more money free in the flush times, like the early 1990s, to buy long-denied "luxuries," that middle-income U.S. families would take for granted--say, an electric dryer or stereo system.

The reality, says Holcombe, is that Latin purchasing power is still hovering around the same levels as in the mid-1970s. For consumers, Latin America's lost decade, in fact, threatens to blossom into the misplaced quarter-century. "In Latin America, the problem is that people don't have any money," said Jose Gonzalez of CLSA Global Emerging Markets at a recent conference on economic prospects.

Governments have responded to the situation as governments will: by jiggering the statistics. With few options other than the belt-tightening and privatization mandated by the financial markets, governments have sanitized the socioeconomic fallout by redefining poverty levels and the definition of unemployment, seeming to create dramatic drops in both categories across the region.

That has improved the overall macroeconomic outlook, but has done little to companies' bottom lines. Businesses that depend on a healthy middle class, such as retail chains, purveyors of pay TV, and automobile manufacturers, to name a few, in recent years are not hitting the numbers as fast as they had originally hoped. While auto sales have plummeted in Brazil and Argentina this year, for example, companies have tried to put a brave face on billions in investment, telling all comers that the costly endeavors are a must for establishing brand recognition for the sure-to-come boom. "It's definitely a viable market," says Ivette de Reubens, regional marketing manager for Microsoft. "Just not as developed as the United States."

Where the money is. The corporate success stories of this decade come from companies that sell products that everyone needs and can afford. Colgate-Palmolive and Procter & Gamble sell small, cheap packages of shampoo and detergent. Unilever sells many more ice cream bars than gallon containers of chocolate. The low-priced products are within consumers' reach and, conveniently, have healthy margins.

Mexican retailer Elektra went another route: financing expensive white goods in small monthly payments that allowed even the poorest consumers to buy a refrigerator or television. With interest rates often over 100% a year, such plans made financing appliances more lucrative than selling them.

Across Lima from the Gorensteins' house, stockbroker Charles Fyfe has what would seem the quintessential job for a developing middle-class society. But selling Peru's blue chip equities to investors is just his day job. Fyfe holds stakes in a number of small ventures oriented toward the plastic-razor-buying market, like a company that distributes one-use sleeves of shampoo to Lima's shantytowns. "If you want to get rich in these countries, you've got to sell things to poor people," he says. He waxes poetic over an old school buddy who has made his fortune selling building materials--cement and roofing--in small lots by drinking trucks into the shantytowns and selling each brick on a cash basis.

Shifting fortunes. In October 1994, American Demographics published an article headlining Mexico's "bulging" middle class. A few short months later, in December 1994, the peso crisis suddenly gobbled up all the gains. Everyday Mexicans watched their savings devalue and their credit card debts soar. Suddenly they were back to a beans and tortillas diet and struggling to find a second job to help cover costs.

Nearly five years later, Mexico seems back on track and families are once again starting to buy their version of the American Dream. Meanwhile, South America suffers mightily under the constraints of the Asian contagion, depressed commodities prices and the bust of the Brazilian real.

Argentine entrepreneur Ruben Gonzalez has seen earnings drop by half at his two laundromats. The vagaries brought about by uncertain economics have kept him a conservative man. A bachelor, he lives in a small house and keeps things simple. His car is 15 years old and he says he doesn't waste money on luxury goods. His clients, however, seem to be deciding that paying to clean their clothes is also a luxury. "A few years ago, the laundry business was better. Now, people like to borrow their family's washing machines because the extra money spent on laundry is a burden," he says.

Recessions have halted the growth needed to increase the middle class across the continent. Gains are on hold in Argentina, Peru, even scrappy Chile, while Brazil and smaller economies like Ecuador have lost ground. Analysts say Brazil is rebounding faster than expected from its devaluation, but in many ways, consumers are blighted with the same process that took Mexicans five years to slog through.

Brazilians are entering what economists call the "informal economy" in droves. A more accurate term might be urban subsistence, similar to the way rural peasants grow their own crops and survive outside the money economy. In cities, however, desperate job seekers sell whatever they can to their neighbors and friends. Impromptu, in-home beauty salons and lunch counters, and door-to-door salespeople are cropping up to replace lost jobs or supplement incomes after hours. No overhead means such goods and services are cheaper than traditional companies can offer, but they chip away at the tax base.

The boom-bust cycle over the last few years has at once raised hopes and caused people to resign themselves to a life of greater effort for diminishing gains. No one complains about the end of the era of hyperinflation. At least that has allowed Latin Americans to take a breather from ever-escalating prices.

The missing ingredient, of course, is growing purchasing power for the masses. For that to happen, the region will have to put together a string of years of strong growth, not just flash-in-the-pan results. "They need stability and balanced budgets for 10 or 15 years before a broad base of consumers emerges. Think what happens when you create a middle class in Latin America that can buy goods," Merrill Lynch analyst Eduardo Cabrera says.

"The potential is tremendous:'

Meanwhile, a class of consumers that cannot buy good is "middle" only as in "middle of nowhere."

                         MEDIAN ANNUAL WAGES (US$)

                OFFICE  DRIVERS MID- LEVEL MID- LEVEL  SENIOR
               CLEANERS         SECRETARY   MANAGER   MANAGER
JAPAN           20,101   33,920   30,151     60,302    90,050
UNITED STATES   15,300   24,000   30,000     70,176   132,000
UNITED KINGDOM  13,458   23,070   26,356     57,676    97,502
SPAIN            9,553   13,401   15,922     34,072    52,728
ARGENTINA        6,003    9,604   18,009     54,027    99,050
BRAZIL           1,770    4,130    8,817     29,499    58,165
CHILE            3,609    5,654    8,421     36,091    72,182
COLOMBIA         1,984    2,862    4,579     21,872    40,324
PERU             1,570    2,791    5,233     20,930    40,226
MEXICO           2,416    4,257    6,945     33,214    84,544
VENEZUELA        3,120    4,471    6,863     20,797    41,595


NOTE: Data as of February 1999. It does not include bonuses, in-kind
benefits, stock options or other incentives.
SOURCE: World Economic Forum.