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Wednesday, January 26, 2011

The Other Middle Class

Foreign aid is a tricky thing. While it can often be a shining example of humanitarianism and compassion, it can also smack of real politik; who gives to whom, how much, and when is often more a reflection of geopolitical strategy than of objective need. Further, various development types (notably William Easterly) will tell you that aid doesn’t do a whole lot of good for its recipients. Nonetheless, most of us would broadly agree on the importance of development assistance and humanitarian aid. But who should pay for it?

For the first time in history, more poor people live in middle-income countries than in poor countries. This was not the case when the World Bank was founded nor when the Gates Foundation was founded.  Think more around the time MethodLogical was founded. While there is no perfect definition for poor or rich countries (or those in between), the World Bank takes a stab at it. What it and others have been finding is that countries are rapidly industrializing and ascending from the “poor” category to the "middle-income" one, resulting in this demographic shift.

It should be noted that this trend may be somewhat exaggerated. Given that China and India account for about a third of the world’s population, any demographic shift that includes both of them is likely to have a significant global impact. And indeed, both China and India have recently graduated to middle-income status, bringing loads of poor citizens along with them (as well as a hefty amount of incoming aid dollars). Disproportionately large though they may be, China and India are not alone.  27 countries have made the shift since 2000. And by and large, this is a good thing.

The problem is—as anyone who has traveled to India or China or Brazil could tell you—a surging economy doesn’t erase all poverty. National growth may be good for most people (including the poor), but it’s no silver bullet. But as these countries add to their coffers, is it still the responsibility of wealthy nations to give them aid? Or is it time for these blue-collar countries to take care of their own?

Is she doing her part to aid her countrymen?

Firstly, we must ask if they are fully able to address their own needs. China has the money to spend a ton on its military, but if redirected, would it be enough to radically help the hundreds of millions of poor people inside its borders? If so, is it still the responsibility of developed nations to step in if a middle-income country is using its wealth irresponsibly? But what about Botswana, which spends quite a bit less on its military, but is still groaning under the weight of its HIV epidemic and widespread unemployment?

We also have to look at inequality. Though maligned, the Gini index is the best estimate of income inequality in a country. China and India fall in the middle third of nations, though the top third features quite a few middle-income countries. Addressing inequality has been a vexing question for all countries, rich and poor alike; some advocate redistribution while others prefer to let the free market do the heavy lifting. Regardless of method, it doesn’t hurt to have good governance, human capital, and an efficient bureaucracy in place. Capacity to address inequality does not materialize just because a country is manufacturing and/or exporting a lot. Perhaps this is an area where some newly minted middle-income countries suffer, as economic gains may outpace a nation’s ability to train the personnel necessary. It is reasonable to expect this capacity to lag behind economic growth (especially if the growth is a result of private sector success and takes time to translate into revenue for the state), and international assistance may be a reasonable bridge in this period.

I remain pretty agnostic on most of this, mostly for lack of definitive data. Perhaps more critical is the issue of how accurate the World Bank’s categorizations are. MethodLogical contributor Jason Kerwin has argued that these economic measures are far from perfect, while MethodLogical contributor Jason Hopper has mused on the usefulness of other measures, such as the Human Development Index or the Multidimensional Poverty Index. But as countries (if not individuals) acquire wealth, the dynamic of developed-developing countries will continue to evolve. The question of how best to aid the poor remains the same, but perhaps our methods must evolve as well.


  1. I am reminded of the prevention paradox in public health. If you target those at the highest risk (the poorest countries) you are obviously targeting the places richest in poor people. But unfortunately the majority of the world's poorest live in the middle of the country distribution simply because there are more countries here (I'm not thinking in terms of WB definitions). The general wisdom in public health is that you try more environmental and structural approaches for the vast population (I think of global trade policies and treaties on human rights) and do target approaches (intensive aid to government ministries, NGOs, private sector?). Ok, those are a few rough thoughts when I'm still groggy.

  2. We're actually covering inequality in my development econ class right now. There are a number of alternatives to the Gini coefficient, and in general they differ in terms of how they weight different parts of the distribution. The Gini cares most about the middle percentiles whereas there are other indices that put more emphasis on the high or low ends. We looked at a plot that shows how countries rank under different indices, and India completely changes position depending on how you weight the highest part of the distribution.

    It makes some sense that we should favor indices that weight the lower part but the reason India fares so well under such measures is that they have a flat income distribution with a spike at the very high end. That doesn't satisfy my intuition about a fair distribution of income. This is one reason why I think it's silly to care about inequality *per se*; what matters is the incomes of the poorest and how they evolve rather than their share of the national pie.

  3. @Jason - inequality DOES actually matter per se, the presence of inequality without being particularly impoverished can have a wide range of effects on health. this is a big area of work in social determinant of public health. i don't always have a problem with inequality per se, but i would also argue that it just ain't right in some circumstances (no estate tax, little economic mobility).

  4. I've never seen any study that I found convincing that shows that inequality in and of itself leads to negative health effects. There's a famous paper on oscar winners that was deeply flawed (and probably isn't capturing pure inequality anyway). Maybe we'll cover something in my next class that does a better job. What mechanism do people propose for inequality damaging health? How strong are the assumptions about people's knowledge of inequities? Statistics on rising inequality are frequently described as shocking or surprising, which isn't consistent with people realizing it's going on.

    All else equal I'd rather tax the rich for a number of simple and compelling reasons. I'm convinced the marginal utility of wealth declines very quickly. But if I see a country with across-the-board growth and rising inequality that's an unqualified good thing, albeit one that would be better if the growth were more concentrated at the low end.

  5. The mechanism proposed is that it is stressful to be poor and cortisol, the stress hormone, can be shown to have some harmful effects (metabolic, cardiovascular). The stress comes from the keeping up with the Joneses effect of inequality. I would say that by most standards of education, health, shelter, etc.

    It's hard/impossible to make this comparison, but I would love to compare life expectancy of someone in relative poverty today in the US with access to the same or better "inputs" as an aristocrat centuries ago. Where's the natural experiment for that? :)


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