A new direction in economic policy that could jump-start emerging-market economies and raise their standards of living is proposed in a new book from the Milken Institute and Council on Foreign Relations that has a simple but powerful prescription: grow a global middle class.
The Bridge to a Global Middle Class, a series of essays edited by Walter Russell Mead and Sherle R. Schwenniger, describes how international financial reform efforts must include changes that increase economic participation in widespread home and business ownership and an end to economic, corporate and financial concentration in the hands of a few.
"Not only will a program of middle-class-oriented development create a constituency that will support reform, but it will be the best guarantor of global stability," say the editors. "Fortunately, much of the world, including most emerging market economies, is ready for middle-class-oriented policies."
For years, the advice from the International Monetary Fund and World Bank to developing countries — the so-called "Washington Consensus" — was simple, but inadequate: open trade, unrestrained capital movements, and fiscal and monetary discipline.
As financial problems ricocheted around the world, policy leaders and economists offered their ideas on how to avoid future crises. Some focused on financial markets. Others examined the international financial system.
But most of these reforms, say the contributors to The Bridge to a Global Middle Class, fail to recognize the importance of encouraging emerging-market countries to promote the growth of a middle class that acts as a moderating influence on governments′ bad policies and a supporting influence on their good ones.
Economic development in these countries has long been based on export-led strategies, which are dependent upon continuously expanding demand in Europe and the U.S. As the population in the developed world has gotten older, however, and as their consumer markets have saturated, those strategies have become obsolete. Growth will increasingly require the growth of domestic demand in emerging countries.
To accomplish this, developing countries must insure that all of their citizens can participate and benefit from financial markets. Reforms must be designed to allow ordinary people to participate — to buy houses, for example, by making long-term financing affordable — and to open markets to the goods and services of small entrepreneurs.
In addition to focusing on middle-class-oriented reforms, the contributors to this new work point to the need for strong, stable regional financial institutions — in particular, to the value of regional central banks that create regional currencies. And, they argue, reforms must include corporate and financial restructuring, competition and broad-scale economic participation by investors, entrepreneurs and citizens.
The Bridge to a Global Middle Class consists of 13 papers from 18 authors, who present ideas and policy recommendations that would enhance the effectiveness, security and flexibility of the international financial system and greatly strengthen its ability to meet long-term credit needs in emerging countries. The writers are leading economists, business and financial practitioners, and policy analysts from Wall Street, international financial institutions, organized labor and public-interest organizations.
The papers were commissioned by the Council on Foreign Relations as part of an 18-month study — The Project on Development, Trade and International Finance — that investigated problems in the world economy in the wake of the 1997-98 financial crisis.
The book is the fourth in the Milken Institute Series on Financial Innovation and Economic Growth, directed by Glenn Yago and James Barth. It is available from Kluwer Academic Publishers.