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UNCLAS SECTION 01 OF 03 SAO PAULO 000643 
 
SIPDIS 
 
DEPT FOR WHA/BSC AND WHA/EPSC 
STATE PASS USTR FOR MSULLIVAN 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONESE, NRIVERA, CVERVENNE 
NSC FOR SUE CRONIN 
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TREASURY FOR OASIA, DAS LEE AND FPARODI 
SOUTHCOM ALSO FOR POLAD 
AID/W FOR LAC/AA 
 
SIPDIS 
 
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 
-------------- 
 
¶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? 
----------------- 
 
¶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 
 
SAO PAULO 00000643  002 OF 003 
 
 
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 
------- 
 
¶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 
 
SAO PAULO 00000643  003 OF 003 
 
 
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