Is a Growing Middle Class Good for the Poor? Social Policy in a Time of Globalization

We examine the effect of the rise and evolution of the middle class on extreme poverty, using the World Bank's international poverty line of $1.90 per person per day in 2011 purchasing power parity (PPP)- adjusted terms. Like the definition of poverty, the definition of the middle class used here is also set in absolute terms, comprising households where per capita income or consumption lies between$11 and $110 per person per day in 2011 PPP terms—referred to as a "global," as opposed to national, definition of the middle class (Kharas, 2017). We argue that middle-class expansion initially is pro-poor given the incentives of the emerging middle class and the working poor to cooperate on matters of social policy. As citizens join the ranks of the middle class, they lobby for programs that provide them income stability and protections against shocks (social insurance). By allying with the working poor who seek social assistance (income transfers), middle-class constituents increase their bargaining power relative to elites who seek labor flexibility and lower taxes in a competitive global economy. Over time, however, as the middle class prospers and acquires greater political influence, the balance of programs shifts increasingly toward social insurance and away from social assistance. In this way, the middle class begins to capture an increasing proportion of the benefits of social spending, leaving less for welfare services targeted exclusively at the poorest. One implication of this is that the emerging middle class has never been truly progressive, because progressivity ultimately comes at its own expense

Political Constraints and Public Support for Market Reform

As concerns of "reform fatigue" in lower- and middle-income countries have become more widespread, so has the search for ways of boosting support for market-oriented reforms. Although the effects of political institutions on reform results have been extensively analyzed, there has been relatively little investigation of their effects on public opinion. We argue that constitutional and extra-constitutional reforms that place limits on the discretionary authority of public officials and enable voters to monitor, reward, and sanction politicians can enhance the legitimacy of market reforms. We present a voting model with asymmetric information to illustrate that these formal-legal reforms provide a credible signal of reformers' commitments. Using panel data based on public opinion barometers from Eastern Europe and Latin America, we examine the effects of political authority on public support for markets. We find that constraints on the power of the executive branch boost support for markets but that this effect declines as the reform process matures. Copyright 2006, International Monetary Fund

Fiscal federalism and regional growth : evidence from the Russian Federation in the 1990s

Subnational fiscal autonomy-the basis for fiscal federalism in modern federations-is meant to serve two roles. First, local control over revenue collection is meantto provide a check on the capacity of central authorities to tax arbitrarily local capital. Second, retention of taxes raised locally is meant to establish incentives for subnational governmental authorities to foster endemic economic growth as a way of promoting local tax bases. But in the Russian Federation, fiscally autonomous regions have often resisted market-oriented reforms, the enactment of rules protecting private property, and the dismantling of price controls and barriers to trade. The authors find statistical evidence in support of the hypothesis that fiscal incentives of the Russian regions represent an important determinant of regional economic performance. The authors also seek to understand the conditions under which fiscal autonomy prompts regional growth and recovery, and the conditions under which it has adverse economic effects. They argue that the presence of"unearned"income streams-particularly in the form of revenues from natural resource production or from budgetary transfers from the central government-has turned regions dependent on these income sources into"rentier"regions. As such, governments in these regions have used local control over revenues and expenditures to shelter certain firms (natural resource producers or loss-making enterprises) from market forces. Using new fiscal data from 80 Russian regions from 1996-99, the authors test this central hypothesis in both single- and simultaneous-equation specifications. Their results indicate that tax retention (as a proxy for fiscal autonomy) has a positive effect on the cumulative output recovery of regions since the breakup of the Soviet Union. But they also find that this effect decreases as rentable income streams to regions increase.National Governance,Public Sector Economics&Finance,Environmental Economics&Policies,Banks&Banking Reform,Municipal Financial Management,National Governance,Public Sector Economics&Finance,Banks&Banking Reform,Municipal Financial Management,Environmental Economics&Policies

Abstracts : policy research working paper series - numbers 3135-3170

This paper contains abstracts of Policy Research Working Paper series Numbers 3135-3170.Environmental Economics&Policies,Economic Theory&Research,Health Monitoring&Evaluation,Achieving Shared Growth,Poverty Assessment

The political economy of financial repression in transition economies

Financial systems in developing countries tend to be"restricted"or"repressed"through burdensome reserve requirements, interest-rate ceilings, foreign-exchange regulations, rules about the composition of bank balance sheets, or heavy taxation of the financial sector. Why are governments drawn to regulate financial markets to the point of financial repression? To address this question, the authors explore preliminary evidence from the post-Communist economies of Eastern Europe and the former Soviet Union, where financial regulations have rarely been examined systematically. They find that public-finance framework has limited ability to explain financial repression in the transition economies, given the peculiar financial lineage of the socialist state. The weak distinction between"public"and"private"spheres of finance in transition economies means that the deficit often conveys little information about the governments'real fiscal activities. It is more fruitful to examine how political institutions, by shaping the incentives politicians face, affect financial policy. Their findings suggest that post-Communist governments may adopt repressive financial controls - not to finance deficits more cheaply than would be the caseunder financial liberalization, but to maintain the authority and ensure the survival of those in power. In countries where pre-reform elites are plentiful in legislative bodies, where interparty competition is low, and where government parties are well-represented in parliaments, elites have been able to perpetuate a system of implicit subsidies by"softening up"the financial sector - especially commercial banks - to ensure the continued flow of cheap credit to specific borrowers. The main beneficiaries of these policies - large formerly state-owned industries with tight financial links to the largest commercial banks - are thus able to convert their well-established claims on public resources into preferential access to credit lines. In other words, financial repression in transition economies may simply serve to solidify main-bank, main-firm relations. These results would lend support to the claim of smaller, cash-starved Eastern European entrepreneurs that the commercial banks have"taken over the role of the old planning ministries."Banks&Banking Reform,Financial Intermediation,Payment Systems&Infrastructure,Environmental Economics&Policies,Economic Theory&Research,Environmental Economics&Policies,National Governance,Financial Intermediation,Banks&Banking Reform,Economic Theory&Research

Mass Privatization, State Capacity, and Economic Growth in Post-Communist Countries

Why did the transition from socialism to capitalism result in improved growth in some countries and significant economic decline in others? Scholars have advanced three main arguments: (1) successful countries rapidly implemented neoliberal policies; (2) failures were not due to policies but to poor institutional environments; and (3) policies were counterproductive because they damaged the state. We present a state-centered theory and empirically demonstrate for the first time one of several possible mechanisms linking neoliberal policies to poor economic performance: mass privatization programs, where implemented, created a massive fiscal shock for post-communist governments, thereby undermining the development of private-sector governance institutions and severely exacerbating the transformational recession. We performed cross-national panel regressions for a sample of 25 post-communist countries between 1990 and 2000 and found that mass privatization programs negatively affected economic growth, state capacity, and property rights protection. We further tested these findings with firm-level data from a representative survey of managers in 3,550 companies operating in 24 post-communist countries. Within countries that implemented mass-privatized programs, newly privatized firms were substantially less likely to engage in industrial restructuring but considerably more likely to use barter and accumulate tax arrears than their state-owned counterparts.Sociolog

Abstracts : policy research working paper series - numbers 2262-2299

This paper contains abstracts of Policy Research Working Paper series Numbers2262-2299.Health Monitoring&Evaluation,Health Economics&Finance,Environmental Economics&Policies,Governance Indicators,Achieving Shared Growth

The vicious circles of control - regional governments and insiders in privatized Russian enterprises

How can one account for the puzzling behavior of insider-managers who, in stripping assets from the veryfirms they own, appear to be stealing from one pocket to fill the other? The authors suggest that such asset-stripping and failure to restructure are the consequences of interactions between insiders (manager-owners) and regional governments in a particular property rights regime. In this regime, the ability to realize value is limited by uncertainty and illiquidity, so managers have little incentive to increase value. As the central institutions that rule Russia have ceded their powers to the regions, regional governments have imposed various distortions on enterprises to protect local employment. Prospective outsider-investors doubt they can acquire the control rights they need for restructuring firms and doubt they can avoid the distortions regional governments impose on the firms in which they might invest. The result: little restructuring and little new investment. And regional governments, knowing the firms'taxable cash flows will have been reduced through cash flow diversion, have responded by collecting revenues in kind. To disentangle these vicious circles of control, the authors propose a pilot for transforming ownership in insider-dominated firms through a system of simultaneous tax-debt-for-equity conversion and resale through competitive auctions. The objective: to show regional governments, for example, that a more sustainable way to protect employment is to give managers incentives to increase enterprises'value by transferring effective control to investors. The proposed mechanism would provide cash benefits to insiders who agree to sell control to outside investors. The increased cash revenue (rather than in-kind or money surrogates) would enable regional governments to finance safety nets for the unemployed and to promote other regional initiatives.International Terrorism&Counterterrorism,Municipal Financial Management,Banks&Banking Reform,Economic Theory&Research,Payment Systems&Infrastructure,Municipal Financial Management,Economic Theory&Research,National Governance,Environmental Economics&Policies,Banks&Banking Reform

Decentralization and corruption - evidence across countries

The relationship between decentralization of government activities and the extent of rent extraction by private parties is an important element in the recent debate on institutional design. The theoretical literature makes ambiguous predictions about this relationship, and it has remained virtually unexamined by empiricists. The authors make a first attempt at examining the issue empirically, by looking at the cross-country relationship between fiscal decentralization and corruption as measured by a number of different indices. Their estimates suggest that fiscal decentralization in government spending is significantly associated with lower corruption. Moreover, they find that the origin of a country's legal system - for example, civil versus common legal code - performs extremely well as an instrument for decentralization. The estimated relationship between decentralization, when so instrumented, and corruption is even stronger. The evidence suggests a number of interesting areas for future work, including investigating whether there are specific services for which decentralized provision has a particularly strong impact on political rent extraction, and understanding the channels through which decentralization succeeds in keeping corruption in check.National Governance,Decentralization,Pharmaceuticals&Pharmacoeconomics,Economic Theory&Research,Legal Products,National Governance,Governance Indicators,Pharmaceuticals&Pharmacoeconomics,Economic Theory&Research,Legal Products

Household savings in transition economies

During the transition from central planning to market economies now under way in Eastern Europe, output levels first collapsed by 40 to 50 percent in most countries, then staged a modest recovery in the last two years. Longer-term revival of growth requires a resumption of investment and thus, realistically, of domestic savings. To explore the determinants of household savings rates in transition economies, the authors studies matching household surveys for three Central European economies: Bulgaria, Hungary, and Poland. They find that savings rates strongly increase with relative income, suggesting that increasing income inequality may play a role in determining savings rates. Savings rates are significantly higher for households that do not own their homes or that own few of the standard consumer durables-possibly because, with no retail credit or mortgage markets, households must save to purchase houses and durables. The influence of demographic factors broadly matches earlier findings for developing countries. Perhaps surprisingly, variables associated with the household's position in the transition process-including either sector of employment (public or private) or form of employment-do not play a significant role in determining savings rates.Environmental Economics&Policies,Services&Transfers to Poor,Economic Theory&Research,Banks&Banking Reform,Payment Systems&Infrastructure,Safety Nets and Transfers,Rural Poverty Reduction,Environmental Economics&Policies,Banks&Banking Reform,Economic Theory&Research