Latin America’s Missing Middle: Rebooting inclusive growth The Dialogue May 22, 2019

GDP per capita (constant PPP), indexed to OECD average Latin America’s GDP per capita gap to developed economies has not narrowed, while other emerging economies have caught up GDP per capita (constant PPP), indexed to OECD average 100 OECD Import substitution industrialization Commodity supercycle Lost Decade Liberalization 50 45 40 Middle Income Benchmarks 35 Latin America 30 25 20 15 10 5 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: The Conference Board Total Economy Database™ (Original version), November 2018, McKinsey Global Institute analysis

The region needs to fill in two missing middles to restart the virtuous cycle of growth Productive and well-paying jobs Demand Supply Government enablers A. Missing middle of firms B. Missing middle of consumers Latin America needs to expand the pool of modern, globally competitive firms to raise productivity and increase the number of high-wage jobs. More productive jobs with higher wages and rising middle-class prosperity increase demand and spur new investment. New investment to meet demand

A. Latin American economies have fewer large and mid-sized firms than faster growing peers Over $500 Mn $100 Mn to $500 Mn $50 Mn to $100 M Firms per $1 Tn GDP in Latin America and other EM indexed to Benchmarks Index, Total is share of firms compared to Benchmark average, average 2015-2017 2015-17 Firms Number (‘000) 2015-17 Avg Revenue $ Million Latin America average Benchmarks average Indonesia 27 1.1 370 Chile 45 0.5 561 Brazil 48 3.8 309 Argentina 50 1.3 200 Turkey 56 2.0 207 Philippines 56 0.7 257 Mexico 62 3.0 344 China 70 34.4 364 India 74 7.3 237 South Africa 82 1.1 590 Peru 86 0.7 178 Colombia 97 1.2 202 Thailand 121 2.2 280 Poland 153 3.2 182 Malaysia 174 2.2 213 Russia 187 11.2 188 65 100 Source: McKinsey Corporate Performance Analytics database; WB WDI; McKinsey Global Institute analysis

B. Modest productivity gains have not fed through to higher wages in Mexico, whereas in Brazil average wages rose strongly but not sustainably Components of growth, income view 2000-2016 contribution to GDP growth, % Employed labor share4 All other income ∆ Average Wage ∆ Employees at constant wages Profits, mixed income, VA taxes Peru 5.2 Latin America 2.8 Colombia 4.2 Chile 3.9 Advanced 1.6 Argentina 2.5 Other EM 4.8 Brazil 2.4 Mexico 2.1 China 0.3 4.7 9.5 Source: GGM; World Bank WDI; INEGI; IBGE; DANE; The Conference Board Total Economy Database™ (Original version), November 2017; McKinsey Global Institute analysis

% of total consumption by region and income percentiles, 2017 B. As a result, Latin America’s consumption share from the bottom 50 percent and bottom 90 percent of the population remains the lowest in the world. % of total consumption by region and income percentiles, 2017 1-50th percentile 51st-90th percentile 91st-100th percentile Latin America and Caribbean 100% Sub-Saharan Africa 100% North America 100% South Asia 100% East Asia and Pacific 100% Middle East and North Africa 100% Europe and Central Asia 100% Source: World Data Lab, McKinsey global institute analysis

What is needed to expand the missing middle and accelerate the virtuous growth cycle? Productive and well-paying jobs Build competitive capabilities and expand number of modern firms: Create conditions to attract investment and technology with a priority on policy stability and building out the value chain with local spillover Create competitive markets through more competition, innovation, access to land and finance, and ease of doing business Leapfrog economic development through a sound digital industrial policy Raise income and purchasing power for the bottom 90 Design flexible labor policies to keep wage growth in line with productivity and reduce non-wage labor costs Proactively skill the future labor force through better coordination among public, private, and university systems and on-the-job training Empower economic participation of marginalized populations by improving public service delivery in health, education, childcare, energy, transportation Demand Supply Government enablers Make inclusive growth a national priority Unite public and private efforts for inclusive growth with a clear objective and a communication plan to galvanize public support Prepare for delivery by establishing new collaborative and adaptive governing mechanisms with a mandate for inclusive growth New investment to meet demand

Digital spring provides an opportunity to reboot reforms Billion dollar startups (unicorns) and firms that went public or were acquired by global firms Source: CBInsights “The Global Unicorn Club”, LAVCA, online search

Thank you Link to our report from the McKinsey Global Institute website: www.mckinsey.com/mgi