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Reflections on the Macro Foundations of the Middle Class in the Developing World

  • Birdsall, Nancy

In this working paper I define inclusive growth as growth conducive to increasing the size and economic command of the middle class. I suggest a definition of the middle class based on absolute and relative measures of country-based income distributions, and present evidence of change in the size of the “middle class†for selected developing countries. I then review how macroeconomic policies shape the environment and incentives for inclusive growth, focusing on three areas: fiscal discipline, the more rule-based the better; a fair tax and redistribution system; and a business friendly exchange rate. The adoption of macro policies that favor the middle class lays the foundation for more economically and politically sustainable development. While on the whole sound macro policy that is good for the middle class is also likely to be pro-poor, tradeoffs may exist with respect to tax, expenditure and transfer programs and responses to economic shocks. Governments should consider the weighted welfare outcomes of alternative approaches to macro policy, rather than un-weighted growth or overly weighted poverty outcomes.

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Paper provided by Center for Global, International and Regional Studies, UC Santa Cruz in its series Center for Global, International and Regional Studies, Working Paper Series with number qt4nt1n232.

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Date of creation: 28 Nov 2007
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Handle: RePEc:cdl:glinre:qt4nt1n232
Contact details of provider: Web page: http://www.escholarship.org/repec/cgirs/

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  1. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  2. Hausmann, Ricardo & Pritchett, Lant & Rodrik, Dani, 2004. "Growth Accelerations," Working Paper Series rwp04-030, Harvard University, John F. Kennedy School of Government.
  3. Tanzi, Vito & Zee, Howell H., 2000. "Tax Policy for Emerging Markets: Developing Countries," National Tax Journal, National Tax Association, vol. 53(n. 2), pages 299-322, June.
  4. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
  5. Olivier Blanchard & Justin Wolfers, 1999. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," NBER Working Papers 7282, National Bureau of Economic Research, Inc.
  6. Anne O. Krueger, 2004. "Virtuous in old age : how the IFIs can help prepare for demographic change," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 243-255.
  7. Kraay, Aart, 2006. "When is growth pro-poor? Evidence from a panel of countries," Journal of Development Economics, Elsevier, vol. 80(1), pages 198-227, June.
  8. Nancy Birdsall, 2007. "Do No Harm: Aid, Weak Institutions and the Missing Middle in Africa," Development Policy Review, Overseas Development Institute, vol. 25(5), pages 575-598, 09.
  9. Nancy Birdsall, 2007. "Income Distribution: Effects on Growth and Development," Working Papers 118, Center for Global Development.
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