# **I. Introduction**

In 2018, for the first time in nearly two decades, Latin America and the Caribbean’s middle class became the largest socioeconomic group. It increased from more than a fifth of the LAC population in 2000 (21.6 percent) to more than a third in 2019 (37.6 percent), based on 2011 PPPs. However, during the pandemic, there was a rapid decline in the size of this group in most countries. As a result, LAC is no longer a middleclass region. This group shrunk by four percentage points in 2020, excluding Brazil, representing 13 million people falling into poverty. Moreover, this decrease reached similar levels as those in 2013. Peru, Colombia, and Argentina drove this significant reduction in 2020.<sup>3</sup> Governments must continue targeting policies to support the most vulnerable populations, particularly after the COVID-19 pandemic, followed by the Russian Federation–Ukraine war, which significantly impacted the region. Thus, it is important to accurately measure the size of the vulnerable population, monitor its evolution, and know where they live and their characteristics.

The major challenge regarding estimating the LAC region’s vulnerable and middle class is the identification of the lower and upper thresholds defined initially by Lopez-Calva & Ortiz-Juarez (2014) and Ferreira et al. (2013). To do so, the principal data that allow for the comparability of different countries’ living standards are purchasing power parities (PPPs). In May 2020, the International Comparison Program (ICP) published new 2017 PPPs. The 2017 PPPs reflect the most recent relative price differences across a wide range of countries around the world. Jolliffe et al. (2022) assessed the impact of the 2017 PPPs on global poverty by updating the three international thresholds: the $1.9 2011 PPP line to $2.15 2017 PPP per person per day, $3.2 2011 PPP to $3.65 2017 PPP per person per day, and $5.5 2011 PPP to $6.85 2017 PPP per person per day.

These changes pose a challenge for how to update the upper and lower boundaries for identifying the vulnerable and middle-class populations in LAC countries. This paper makes three contributions to the literature on global vulnerability and middle-class measurement. First, it proposes a two-step methodology to update these thresholds when new and better rounds of PPPs are estimated. In the past, when 2011 PPPs were published, a simple approach was implemented to update the thresholds. The recent implementation of new PPPs presents an opportunity to revisit and improve previous methodologies used to define middle-class thresholds. However, replicating past approaches would not address the issues with those methodologies. Therefore, this study proposes a new methodology that addresses and resolves some of these problems in some cases and mitigates them in others. Thus, the new lines proposed in this document are determined by i) the use of the revised PPPs, ii) the methodological innovations introduced, and iii) the larger number of countries for which data is available. This novel approach yields a vulnerability or lower-bound line of $14 in 2017 PPP per person per day, compared to $13 in 2011 PPP. The study shows that this rounded value is robust to alternative approaches.

Second, this paper proposes a clear definition of the upper bound. Lopez-Calva & Ortiz-Juarez (2014) and Ferreira et al. (2013) do not provide an equally in-depth discussion of the upper bound as they do for the

> 3  Including Brazil, the middle class declined to 36 percent of the population in 2020, resulting in the loss of 7 million people from this socioeconomic class regionally.

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