SUBJECT: Household consumption in South America.
SIGNIFICANCE: A study of ten South American countries, released recently as part of the World Bank's International Comparison Programme, provides an insight into consumer spending patterns, income inequalities and comparative price levels.
ANALYSIS: The World Bank study is the first to be completed under a global initiative launched in 2003 by the International Comparison Programme (ICP) to compare real GDP across more than 100 countries. By using purchasing power parities (PPP), based on the price of an identical basket of goods and services in different countries, the initiative aims to circumvent the distorting effect of exchange-rate variations.
The ten countries -- Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay and Venezuela -- in the South American study show wide variations in household consumption which, in these countries, accounts for an average two-thirds of GDP:
In PPP terms, per capita household consumption is highest in Argentina where, in 2005, it reached 161.3 points on an index where 100 represents the average for the ten countries. It was followed by Chile (148.0) and Uruguay (143.5) while the lowest levels were found in Paraguay and Bolivia with 69.8 and 52.7 points, respectively.
However, the differences between countries were smaller than had been indicated by
estimates based on a study carried out by the ICP in 1996. These had suggested that the difference between Argentina and Bolivia (also in first and last place in 1996) was close to 5:1, rather than just over 3:1. The report does not analyse the reasons for this change, but highlights the need to update PPP studies regularly in order to avoid policy decisions based on obsolete information.
Basic necessities. On the basis of the study, it is possible to determine the percentage of spending that households devote to satisfying basic necessities:
Food and non-alcoholic beverages. Argentines are the largest spenders on these items, with expenditure reaching 175.9 (where 100 represents the ten-country average) as compared to 79.3 in Brazil and 66.2 in Bolivia. However, food and non-alcoholic beverages account for only 21% of total real household consumption in Argentina as compared to almost 25% in Bolivia and over 30% in Paraguay (despite the fact that, in these latter two countries, they are the cheapest in the region).
Transport. This accounts for almost 21% of household consumption in Bolivia as compared to less than 10% in Argentina.
Housing and utilities. The percentage of household expenditure devoted to housing and utilities varies relatively little around a regional average of 17% except in Ecuador and Peru where it drops to 11% (for reasons that are not clear).
Education and healthcare. Argentina has the region's highest per capita spending on education and healthcare (including both household and public expenditure, which the study has yet to separate). In most countries, expenditure on these items represents close to the regional average of 18% of total household spending, with the exception of Colombia where it reaches 24% and Paraguay where it drops to just under 14%.
Non-essentials. Predictably, households in better-off countries devote a larger portion of total spending to non-essentials:
Alcohol and tobacco. Argentina, Uruguay and Chile all spend well above the regional average on alcohol and tobacco and, in Argentina, this is not only more than twice the regional average, but over four times the level recorded in Paraguay and ten times that in Bolivia. Contraband, a phenomenon that is widespread in these two countries, may be a factor in these apparent differences.
Clothing. The study found that Chile has by far the highest per capita expenditure on clothing and footwear. This surprising result, given the austerity of most Chileans, appears to reflect partly the fact that these items are more expensive than in the other countries, except Venezuela and Brazil.
Entertainment. Spending on recreation and culture is highest in Argentina, followed by Chile, but Venezuela and Peru are the biggest spenders on restaurants and hotels.
Price levels. Based on the basket of goods and services used to calculate PPP (some 580 items), the study also compared the cost of living in different countries. As of 2005, this was highest in Chile, with 117.7 points (as compared to an average of 100), followed by Brazil (114.2) and Uruguay (108.0). The cheapest were Argentina (77.5), Paraguay (57.4) and Bolivia (53.8).
This largely reflects exchange rate variations. Until its devaluation in early 2002, Argentina was one of the region's most expensive countries whereas, in recent years, Chile and Brazil have become more expensive, reflecting the strengthening of the peso and the real against most major world currencies.
A report published in late June by Mercer Human Resource Consulting, a US-based business consultancy firm, found that, although South American cities are still cheap places for expatriate employees, they are becoming more expensive. It noted a particularly sharp increase in Sao Paulo, Rio de Janeiro and Santiago and found, for example, that a cup of coffee is now more expensive in dollar terms in Santiago than in Tokyo (although flat rentals are obviously much cheaper). Similarly, the ICP report identified Chile as having the region's most expensive restaurants and hotels, alcohol and tobacco, and communications services, while Brazil is the most expensive for housing and utilities, transport, and recreation and culture.
Differences in the prices of specific items tend to mirror a country's production structure. Beef is, for example, relatively cheap in Argentina and Paraguay, as is coffee in Brazil. However, the fact that video equipment and electronics are cheapest in Chile is probably a result of its free trade agreements with many producer countries. Tax policies also affect the relative prices of some items such as books, which are particularly expensive in Chile, the only country in Latin America where they are subject to VAT (19%).
Outlook for regional consumption. According to forecasts released by the UN Economic Commission for Latin America and the Caribbean (ECLAC) on July 25, regional GDP will grow by 5.0% this year and by around 4.5% in 2007 (up from earlier forecasts of 4.6% and 4.1%, respectively), completing a five-year period of sustained expansion (see LATIN AMERICA: Economic optimism faces limitations - June 30, 2006). Although, according to ECLAC, consumption is growing at a slightly slower rate than output, reflecting an increase in domestic saving, a number of factors suggest that it will maintain strong growth:
With some exceptions as, for example, countries where mining is important, economic growth has generally meant a sharp drop in unemployment, which reached a regional average of 9.1% last year (in urban areas), down from 11.0% in 2002 and 2003, and decreased to 8.8% in the first half of this year.
The growth of access to bank credit has accelerated this year, reaching over 15% in nominal terms in the first quarter, according to ECLAC. In many countries, this expansion is led by consumer finance, which expanded by 69% in Argentina in the twelve months to April, by 44% in Colombia and 30% in Peru.
CONCLUSION: Although economic growth has brought new prosperity to some countries, and many more households around the region now have access to consumer goods, there remains a large gap between countries in which most families still have to focus on covering their basic needs and those where life-style or leisure expenditures represent a much larger part of household budgets.