Monday, April 2, 2012

2/4/2012: Impact of the middle class on economic, social and political institutions

A fascinatingly interesting study of the effects the middle class has on economic, social and political institutions.

The World Bank Policy Research Working Paper 6015: "Do Middle Classes Bring Institutional Reforms?" by Norman Loayza Jamele Rigolini Gonzalo Llorente (link here - emphasis mine) "examines the link between poverty, the middle class and institutional outcomes using a new cross-country panel dataset on the distribution of income and expenditure." The data "spans 672 yearly observations across 128 countries" allowing the authors " gauge whether a larger middle class has a causal effect on policy and institutional outcomes in three areas:

  • social policy in health and education 
  • market- oriented economic structure and 
  • quality of governance." 
The study finds that "when the middle class becomes larger (measured as the proportion of people earning more than US$10 a day),

  • social policy on health and education becomes more progressive [expansion of share of these expenditures to GDP], and 
  • the quality of governance (democratic participation and official corruption) also improves. 
  • This trend does not occur at the expense of economic freedom, as a larger middle class also leads to more market-oriented economic policy on trade and finance." 
From data (econometrics) perspective: "These beneficial effects of a larger middle class appear to be more robust than the impact of lower poverty, lower inequality or higher gross domestic product per capita."

The causality of the latter effect is itself an interesting point: "That may be linked to the evolution of the middle class: they are more enlightened, more likely to take political actions and have a stronger voice. They also share preferences and values for policy and institutional reforms, as well as higher stakes in property rights and wealth accumulation."

The authors note that their results show that "the indicators of poverty and inequality are also relevant determinants for social policies, economic structure, and governance quality, but not always in the expected way or with the consistency shown by the middle class measure. For instance, a decrease in income inequality seems to produce a decline in official corruption (as possibly expected) but also a reduction in democratic participation (which may be harder to explain). Similarly, a decrease in the poverty headcount appears to induce a liberalization of international trade but also, surprisingly, a constriction of credit markets."

Fascinating stuff, in my view.

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