Is a growing middle class good for the poor? Social policy in a time of globalization

Abstract

Despite much analysis of the rise of the middle class, little is known about the effects of an expanding middle class on the poorest in society. In the late 19th century, Europe’s middle class played a critical role in the creation of social protections aimed at reducing poverty and shielding vulnerable groups from shocks. This was achieved when a political alliance was formed between the working poor and white-collar professionals—a “red-white” alliance. We examine the role of the middle class and social spending on the extreme poor using data covering a range of earlyand late-industrializing countries between 1870 and the present. We find that poverty reduction occurs alongside a growing middle class, mediated in part through greater spending on health, education, and welfare, but that the effect of such social spending on poverty diminishes as the middle class expands. We then examine various components of the current social safety net in developing countries and find that, while targeted transfers to the poor are associated with a larger middle class, social insurance benefits that accrue to the upper quintiles increase three times as quickly. Given that antipoverty policies are not likely to be sustained without the tacit support of the middle class, a central implication of our findings is that developing countries aiming to eradicate extreme poverty will need to focus on raising the volume of social assistance in a package with universal programs designed so as to cover groups in nonstandard jobs.