Do middle classes bring about institutional reforms?

We reexamine the association between poverty, the middle class, and institutional outcomes using a newly developed cross-country panel dataset containing detailed information on the distribution of income and expenditure. When the size of the middle class increases (measured as the proportion of people with income above 10 US dollars a day in purchasing power parity (PPP) terms), social policy on health and education becomes more active and the quality of governance regarding democratic participation and official corruption improves. This does not occur at the expense of economic freedom, as an expansion of the middle class also implies more market-oriented economic policy on trade and finance. In these respects, the impact of a larger middle class appears to be more robust than those of lower poverty, lower inequality, or higher gross domestic product (GDP) per capita.

► We study the effect of an expansion in size of the middle class on policy and institutional outcomes. ► To gauge the causal effect of the middle class, we use a dynamic panel generalized method of moments methodology. ► When the size of the middle class grows, health and education expenditure rise and governance improves. ► An expansion in size of the middle class also implies more market-oriented policy on trade and finance. ► The impact of a larger middle class is more robust than those of poverty and inequality.