BRAZIL'S WORKING/MIDDLE CLASS GAINS PURCHASING POWER,

UNCLAS SECTION 01 OF 03 SAO PAULO 000643

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E.O. 12958: N/A
TAGS: ECON PINR SOCI BR
SUBJECT: BRAZIL'S WORKING/MIDDLE CLASS GAINS PURCHASING POWER,
POLITICAL CLOUT

REF: 04 BRASILIA 2751

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SUMMARY
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1. Brazil's working/lower-middle class has been making slow but
steady progress in regaining purchasing power over the last two
years after seeing its economic position erode for a decade
(1994-2003) (reftel). These families are becoming more
sophisticated in their purchases, with the most notable gains in
electronic and technology goods once reserved only for the wealthy.
Stable and low inflation, a higher minimum wage, and increased
access to credit are just a few economic reasons for the change in
purchasing behavior. Business may be targeting persons of modest
means as customers more than in the past; however, one expert
believes that despite its recent increase in purchasing power, the
working/middle class have experienced a deterioration of its quality
of life since the 1970s. With most lower class voters expected to
support President Lula's re-election, and richer voters preferring
challenger Geraldo Alckmin, Class C is expected to be a major
political battleground in this year's presidential election. END
SUMMARY.

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THE PHENOMENON
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2. Brazil's working/middle class, referred to by economists,
demographers, and sociologists as "Class C," has grown over the last
two years in size and consumer participation. This group, which
represented 31 percent of households and 26 percent of consumers in
2001, now comprises 38 percent of families and 27 percent of buyers.
In 2005, Class C increased spending by 55 percent over 2001 levels
to total 290.5 billion Reals (approximately USD 137 billion). Car,
education, and travel expenses more than doubled, while spending for
leisure activities, personal hygiene, and school supplies rose by as
much as 95 percent. This economic/demographic group had seen its
purchasing power eroded in the decade from 1994-2003.


3. Nailing down a common definition of Brazil's Class C is
difficult. Class C is often referred to generally as a "tier"
within the middle class. Some experts have labeled the group as the
emerging middle class, lower middle class, and even the working
poor. With an average monthly income of 1,800 reals (about USD
850),Class C is sandwiched between the wealthy A and B tiers that
hold 62 percent of purchasing power and the bottom rung of classes D
and E who represent only 11 percent of consumers.


4. Though Classes A and B vastly outspend Class C, these two groups
combined represent only 28 percent of households, a disparity deeply
rooted in Brazil's history. Not surprisingly, the poor Classes D
and E, represent 34 percent of families and a small percent of
consumers.


5. The most striking change in Class C's buying behavior is their
taste for sophisticated goods. Saving up for a dream home has
fallen in priority behind acquiring tech goods such as televisions,
cellular phones, computers, DVD players, internet access, and video
games. According to the research group LatinPanel, Class C now has
the same access to items that traditionally only Classes A and B
had, albeit access to different brands at lower prices.

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WHAT HAS CHANGED?
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6. A combination of microeconomic factors is partly responsible for
change in Class C's spending patterns - lower and stable inflation,
readjusted salaries, higher minimum wage and increased access to

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credit. The increased availability of credit cards and other
financing is a particularly notable difference. Credit companies
are increasingly targeting this portion of the middle class,
enabling blue collar workers to travel for the first time by plane
and own large domestic appliances thanks to long-term, no-interest
payment plans. A 2004 Lula Administration reform increased credit
to this group at more affordable interest rates through the
introduction of automatic payroll-deduction loan repayment programs,
which offered banks greater repayment security.


7. The independent consultant and editorialist for Epoca magazine
Ricardo Neves offers a non-economic explanation for Class C's
increase in discretionary spending. Neves believes the change in
the group's purchasing power is a reflection of the class's
socioeconomic aspirations. According to Neves, everyone wants to
play an active role in consumerism because it lifts one's
self-esteem and confirms their participation in, and contribution
to, society. Neves thinks producers can now better distinguish
between impoverished and low-income families in their marketing.
Some of Neves's clients, such as Unilever and Procter and Gamble,
can now deliver their products at affordable prices thanks to
economies of scales, improved distribution channels, changes in
packaging, and reduced transportation costs.


8. Author and economist Marcio Pochmann of the University of
Campinas is less optimistic about the rise of Brazil's middle class.
Pochmann sees a shrinking and more impoverished middle class since
the 1970s - the decade referred to by Brazilians as the Miracle
Decade of growth. Pochmann argues that at least 70 percent of those
who were in the middle class between 1980 and 2000 have since
suffered from a lower quality of life as result of the "neoliberal
wave of open markets, financial and technological promotion, and
[low] productivity of the country." Furthermore, Pochmann sees a
polarization of classes in Brazil, with the rich and poor growing
and the middle class contracting. (Comment: Official data suggest
that Pochman is not entirely correct. In the Real Plan's first
decade, i.e. from 1994 to 2003, the richest increased their share of
national income at the expense of the middle classes, although the
poor held their ground. Since 2003, however, both the poor and
Class C have increased their share of national income, while the
rich have seen their relative share slip.)

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COMMENT
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9. Class C's recent growth in consumerism could be the start of a
long-term trend in increased economic power and participation in the
country. If the recent favorable economic trends continue,
multinational companies may find Brazil's working/middle class an
increasingly attractive segment for more aggressive marketing and
product development. Class C's increased access to credit, however,
may prove to be a mixed blessing. Though credit and financing are
significant contributors to the change in the middle class's
purchasing behavior, Brazil should be cautious of the downsides of
potential spiraling consumer debt and overspending. Fortunately,
higher wages and increasing employment over the last two years have
enabled Brazilian consumers to keep default rates low, further
boosting the current strong growth in consumer spending.


10. Meanwhile, as the 2006 election shapes up, members of Class C
could play an important role in determining the outcome. Most
observers expect President Lula to win the support of Brazil's
poorest citizens who benefit from the government's social programs,
such as "Bolsa Familia." The business community and large swathes
of Classes A and B are expected to support Sao Paulo former Governor
Geraldo Alckmin of the Brazilian Social Democracy Party (PSDB). But
there is a solid portion of Class C that does not visibly tilt
either way, and these are the voters both candidates will have to
woo. The critical question is whether, given the change in spending

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habits, such voters consider themselves better off under Lula and
expect their condition to improve, or whether Alckmin can convince
them that his economic policies are more likely than Lula's to
generate more stability and prosperity for Class C. END COMMENT.


11. This cable was coordinated with Embassy Brasilia.

MCMULLEN