CIAO DATE: 06/02

A Financial Architecture for Middle-Class-Oriented Development

Summary

International financial architecture works best when it serves social goals that command widespread support and legitimacy. Without neglecting the more conventional goal of allowing the greatest possible global flow of capital with the least risk of financial crisis, the primary goal of international financial reform, for both economic and political reasons, ought to be to promote middle-class-oriented development around the world.

1. Middle-class-oriented development is the key to global prosperity and stability. Extending the system of mass affluence found in the advanced industrial economies into the developing world as rapidly as possible is the key to global political stability and sustainable economic growth. It is also the key to building the kind of support that is needed in both developed and developing countries for sustaining the necessary reforms for stabilizing and strengthening the international financial system.

2. Much of the world is now ready for middle-class-oriented development. Thanks to the economic growth of the last generation, a substantial number of economies are ready for the transition to middle-class-oriented development. When considered on the basis of purchasing-power parity, fifty-two countries with a total population of 1.5 billion have reached levels of per capita GDP similar to those at which the United States inaugurated middle-class-oriented development policies. Other large economies, such as India and China, have already created substantial middle classes.

3. Middle-class-oriented development enhances poverty alleviation. Middle-class-oriented development does not mean taking resources from the poorest to concentrate on assisting those who already enjoy better living conditions. Rather, middle-class-oriented development seeks to expand the middle class by facilitating the rise of the working poor, thus increasing employment opportunities for both high- and low-skill workers. The reforms envisioned by the report would increase the ability of the World Bank and other agencies to concentrate on poverty alleviation and would enhance the efficacy of their activities.

4. Access to reasonably priced, long-term credit is the single most important element in the formation of a mass middle class. Small business,municipal and other public investment in infrastructure, home ownership (either in single-family homes or apartments), post-secondary education, and other necessities of middle-class life depend upon access to credit. The thirtyyear, self-amortizing mortgage is the "canary in the coal mine": if these mortgages are widely available, then credit markets are working for ordinary citizens who aspire to become middle class.

5. Middle-class-oriented development requires increased long-term capital flows to developing countries. To facilitate middleclass-oriented development, international financial architecture should promote more long-term capital flows from the capital-rich G-3 advanced industrialized countries to capital-hungry emerging economies. In addition, it should expand democratic access to capital within developing countries for such purposes as home ownership, education, and the start-up and expansion of small and medium-sized business.

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