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

  • Nancy Birdsall

    ()

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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File URL: http://www.cgdev.org/content/publications/detail/14696
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Paper provided by Center for Global Development in its series Working Papers with number 130.

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Length: 22 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:cgd:wpaper:130
Contact details of provider: Web page: http://www.cgdev.org

References listed on IDEAS
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  1. Nancy Birdsall, 2007. "Do No Harm: Aid, Weak Institutions, and the Missing Middle in Africa," Working Papers 113, Center for Global Development.
  2. 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.
  3. 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.
  4. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
  5. Howell H. Zee & Vito Tanzi, 2000. "Tax Policy for Emerging Markets; Developing Countries," IMF Working Papers 00/35, International Monetary Fund.
  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. Ricardo Hausmann & Lant Pritchett & Dani Rodrik, 2004. "Growth Accelerations," NBER Working Papers 10566, National Bureau of Economic Research, Inc.
  8. Nancy Birdsall, 2007. "Income Distribution: Effects on Growth and Development," Working Papers 118, Center for Global Development.
  9. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
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