Reflections on the Macro Foundations of the Middle Class in the Developing World - Working Paper 130

October 24, 2007

Shared growth -- growth that helps to build a middle class -- is now widely embraced as the central economic goal for developing countries. In this working paper CGD president Nancy Birdsall reviews how macroeconomic policies shape incentives for inclusive growth, focusing on three areas: fiscal discipline (the more rule-based the better); fair revenue and expenditure practices; and a business-friendly exchange rate. Birdsall relies heavily on the experience of the mostly middle-income countries in Latin America, while also referring briefly to the implications for heavily aid-dependent low-income countries, most of which are in sub-Saharan Africa.

The middle class depends on a stable macroeconomic environment. Economic volatility due to high fiscal deficits, poor monetary policy, unsustainable public borrowing, and undervalued exchange rates that temporarily make imports cheap -- all these along with inflation are bad for the incipient middle class. The experience of Western economies suggests that poor people benefit when an economically-strong middle class insists on accountable government and supports, through their willingness to pay taxes, universal and adequate public services. That experience suggests that inclusive growth benefits poor people indirectly as well as directly, by helping them escape poverty.

See also the CGD brief Poverty and Inequality in Latin America: How the US Can Really Help

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