CC BY
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The education system must ensure continuing education opportunities by eliminating the existing obstacles in the legal and regulatory framework, e.g. by providing better transitions between secondary education and vocational education, and then higher education.
Private business must employ advanced human resource management methods oriented toward improving managerial skills and enhancing the training and development opportunities at work, e.g. skills-charting and competence-mapping methods.
Itai SENED
Ph.D., Professor of Political Science and Director of the Center for New Institutional Social Sciences
at Washington University (St. Louis, U.S.).
Marshal THOMPSON
Ph.D., Assistant Professor of Political Science at Northeastern Illinois University (Chicago, U.S.).
Robert WALKER
Ph.D., Assistant Professor of Political Science at Washington University (St. Louis, U.S.).
Ron WATSON
Ph.D., student at the Department of Political Science
at Washington University (St. Louis, U.S.).
THE MIDDLE CLASS: A NEW CONCEPTUAL FRAMEWORK AND A BRIEF APPLICATION TO THE CAUCASUS
Abstract
T
he role of the middle class in the evolution of societies, their economies and their politics is one of the oldest
topics in political economy. In this paper we suggest a new conceptual framework for the study of the middle class in an ef-
fort to lay the foundations for a rigorous research program that would allow the assessment and study of what the middle class is, how we may want to measure its strength or lack thereof and how we may assess its impact on its social-political and economic environments. First, we need to define, in much clearer and more precise terms, what the middle class may be. What does it mean to be a member in this exclusive club? Then, we have to establish what are the variables that explain the size and strength of the middle class. Only then
can we go on to explore the effect that the size and strength of the middle class may have on the economic, social and political strength for developed, developing, and transition societies. In this exploratory paper we give some preliminary intuition of what an adequate definition may include, some initial results that highlight what such a research program may achieve and a short discussion of how this work is directly relevant to the political economy of transition societies like Azerbaijan, Armenia and Georgia in the Caucasus.
1. Introduction
In his Politics, Aristotle states that the wealth of a state depends on the wealth, size and constitutional protections of its middle class. Aristotle offered this empirical observation without any theoretical foundation. In this paper we provide a theoretical argument as to why the middle class may be so central to economic development. If this is the case, we expect utility maximizing governments to protect the property rights of the middle class, and when we study determinants of the wealth of nations we may want to pay closer attention to institutions and conditions that protect the property rights of the middle class.
The neglect of the role of the middle class in sustainable economic growth is due to the prevalence of the neo-classical school of economics emanating from Adam Smith’s Wealth of Nations.1 It is due to the omission, in this approach, of the distinction between the structure and the performance of the economy2 and the offhand treatment of structures of property rights, their distributional effects and the importance of the quality of their enforcement.3 Without an understanding of institutional structures, it is hard to account for variance in economic performance. Douglass C. North brought to the forefront of economic research the observation that this is a giant omitted variable that accounts for most of what we care to know about societies and their economies.4
The neo-classical economic school acknowledges the critical role of property rights to the function of markets, but for too long tried to incorporate this external determinant of social order into the “friction free” competitive market framework denying any role for central government enforcement. Considerable effort was made to explain “spontaneous” emergence of property rights using variations of repeated game logic5 by which, in equilibrium, unconstrained agents without any external (government) enforcement mechanism, would settle on some self-enforcing governance of property rights to avoid a failure in cooperation that would lead to disastrous consequences to all. Research of the late 1990s challenged this argument. First, it was established that self-enforcement is unlikely in most realistic environments. Even relatively small group(s) of agents with moderate levels of future discount factors can hardly hope for sustainable self-enforcement of
1 See: A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Strahan & Cadell, London, 1776.
2 See: D.C. North, Structure and Change in Economic History, Norton, New York, 1981.
3 See: I. Sened, The Political Institution of Private Property, Cambridge University Press, Cambridge, 1997.
4 See: D.C. North, op. cit.; idem, Institutions, Institutional Change and Economic Performance, Cambridge University Press, New York, 1990.
5 See: R. Sugden, The Economics of Rights, Co-operation and Welfare, Basil Blackwell, Oxford, 1986; M. Taylor, The Possibility of Cooperation, Cambridge University Press, New York, 1987.
THE CAUCASUS & GLOBALIZATION
property rights structures.6 Then it was shown that governments are reliable enforcers of property rights under a wide range of realistic conditions. Furthermore, it is easy to show that societies fare better with governments that protect the property rights of their citizens than without them.7 This established a straightforward clear role for governments to play: protect the property rights of their constituents.8
Governments are expected to be inefficient. As a monopoly that grants and protects property rights, it is bound to apply monopolistic pricing so that property rights would be undersupplied and overpriced. Taxes levied by governments are likely to be too high for efficient markets.9 Also, governments are motivated by distributive and redistributive rather than efficiency incentives.10 And yet, government grant and protection of property rights seems a necessary condition for markets to emerge and prosper, with all the generic inefficiency associated with their monopolistic and redistributive motivations.11
If governments protect property rights to maximize their expected utility, what kind of property rights should they protect? In this paper we argue that if property rights structures are erected by utility maximizing governments, they should protect first and foremost the economic viability and strength of the middle class.
■ First, a strong middle class is critical for the economic prosperity of any government whose welfare rests on tax revenues.
■ Second, only a strong middle class has the incentive to help governments protect those property rights against the abuse of external and internal threats.
Helping the poor without protecting them with a generic structure of property rights is bound to lead to the well-documented inefficiency of philanthropy.12 Overprotecting the rich, is bound to lead to underutilization of human capital. Keeping a large proportion of society out of the wealth and comfort of health care, education and attractive job prospects, is bound to reduce the potential of productivity in any society.
Structure of the paper: In the next section we articulate our theoretical argument. In the third section we present some cross sectional data, consistent with our theoretical argument. In section four we trace a research program that will further this original line of investigation and conclude with some remarks on the application of our findings to the Caucasus and caveats on what we have done and the whole lot that remains to be done.
2. The Wealth of Nations Depend Primarily on the Wellbeing of the Middle Class
The importance of the middle class to the economy is a rather conventional wisdom. But, there is little theoretical basis for this wisdom. In this section we provide a neo-classical foundation
6 See: R.L. Calvert, “Rational Actors, Equilibrium and Social Institutions,” in: Explaining Social Institutions, ed. by J. Knight, I. Sened, Michigan University Press, Ann Arbor, 1995.
7 See: I. Sened, op. cit.
8 This role of government is still commonly ignored due to prejudice against the role of government shared by many neoclassical economists. An unfortunate reality that awaits it correction by a new, more realistic generation of scholars that would be better tuned to science and less obstinate with ideological prejudice.
9 See: I. Sened, op. cit.
10 See: J. Knight, Institutions and Social Conflict, Cambridge University Press, New York, 1992.
11 See: I. Sened, op. cit.; M. Levi, Of Rule and Revenue, The University of California Press, Berkeley, 1988.
12 Which is the main theme of C.C. Gibson, K. Anderson, E. Ostrom, D. Shivakumar, The Samaritan’s Dilemma, Oxford University Press, Oxford, 2005.
for this argument in three steps. We begin with a short review of the literature. Next, we explain that no economy can thrive solely or mainly on the wealth of a small group of the very rich. We then argue that helping the very poor may be normatively appealing but not sustainable for economic and societal long-term success. We conclude with a simple argument as to why the middle class is most likely to generate sustainable economic growth and social wellbeing. We complete the argument with a note on the role of political institutions in the protection of the wellbeing of a middle class.
2.1. A Short Literature Review
Traditionally, much attention was paid to the negative effect that reducing income inequality may have on economic growth. This argument follows two lines of reasoning.
■ Firstly, greater equality may have a negative impact on aggregate savings. If income is redistributed by transfers from individuals capable of saving to individuals with little propensity to save, then in the aggregate, the level of savings will be lower, thereby decreasing the level of investment and economic growth.13
■ Secondly, governments promote redistributive policies to favor poor people to alleviate political pressures through progressive taxes. These taxes, imposed at the margin, should affect the incentives for investment and translate to a negative effect on the rate of growth.14
Empirical studies, however, aimed at testing the effects of income inequalities on growth yields non-conclusive results at best. Rigorous recent studies show, consistently, an inverted U-shaped relationship between income inequality and economic growth.15
Probably more troubling than the failure to fit the data is the state of the art of these theoretical foundations themselves. Banerjee and Duflo recently summarized the theoretical state of the terms of three traditional arguments: “In one, new entrepreneurs, armed with a capacity and a tolerance for delayed gratification emerge from the middle class and create employment and productivity growth for the rest of society... In a second, perhaps more conventional view, the middle class is primarily a source of vital inputs for the entrepreneurial class: it is their “middle class values,” their emphasis on the accumulation of human capital and savings, that makes them central to the process of capitalist accumulation [of wealth]... The third view, a staple of the business press, emphasizes the middle-class consumer, .who is willing to pay a little extra for quality. It is the demand for quality consumer goods that feeds investment in production and marketing, which, in turn, raises income levels for everyone...”16
All of these arguments assume some generically distinctive feature of the middle class as such that seems ad-hoc at best. Not surprisingly, Banerjee and Duflo find no significant empirical support for any of them in their in-depth 13 countries study. What they do find is a tendency of the middle class to have less children and invest more in their education, health care and other individual foundations that translate into higher paying jobs and longer life expectancy amongst others.17
13 E.g. N. Kaldor, “Alternative Theories of Distributions,” Review of Economic Studies, Vol. 23, 1956.
14 E.g. A. Alesina, D. Rodrik, “Distributive Politics and Economic Growth”, The Quarterly Journal of Economics, Vol. 109, No. 2, 1994, pp. 465-490.
15 E.g. A. Banerjee, E. Duflo, “Growth Theory through the Lens of Development Economics,” Handbook of Development Economics, Vol. 1a, 2005, pp. 473-552.
16 A. Banerjee, E. Duflo, “What is Middle Class about the Middle Classes Around the World?” Journal of Economic Perspectives, Vol. 22 (2), 2008, p. 5.
17 See: Ibid., p. 22.
THE CAUCASUS & GLOBALIZATION
2.2. A New Theoretical Foundation for the Role of the Middle Class
The theory of the middle class and its role in economic growth and social prosperity that we are submitting here, rests on two basic principles of the neo-classical economics. A diminishing returns argument and an acknowledgement of the role of property rights structures as determinants of economic performance. On the empirical side, it explains the inverted U-shaped relationship between income inequality and economic prosperity.
Excessive wealth in the hands of few is likely to result in two types of inefficiencies. First, the logic of diminishing returns suggests that those who accumulate immense sums of money use investment strategies with quickly diminishing returns. Second, the property rights of the very rich are difficult to protect and manage. In particular, the huge financial conglomerates that protect and manage the financial assets of multi-billionaires must suffer, generically, from major X-inefficiencies more commonly associated with the conduct of central governments. Enjoying near or perfect monopoly power in major areas of their activities and sustaining huge administrative apparatuses, they tend to invest their capital and manage it as inefficiently as central governments. Recent figures on corporate earnings clearly indicate how widespread this phenomenon is. Much attention has been directed to the excessive salaries of many of the corporate leaders who run these corporate conglomerations often with little or no success to show for it. The mismanagements and management failures of many of these major corporations has been widely discussed in the media in the context of the 2009 economic recession and need no further elaboration here.
At the other end of the spectrum, transfers to the poor are likely to confirm worries of the ineffectiveness of political transfers. Even if some savings and entrepreneurial gests occur, this segment of the population is the least likely to be able to benefit from basic protections of property rights, with little if anything to protect, with poor education, poor health and little property. Crime-infected neighborhoods and deprivation of health care and other modern protection against destitution are detrimental not only to the productivity of the poor, and therefore to any long-term investment, but also to whatever assets they may accumulate. Hence the limited prospects to philanthropically motivated redistribution toward the poor.
2.3. A Ticket to the Middle Class—
A Property Rights Approach
Economic fortune is often measured in terms of income and assets. This definitional myopia goes to the heart of our theoretical argument. Even if membership in the middle class is defined purely in terms of income and assets, the diminishing returns argument still gives us some leverage. It would still be the case that the middle class is more likely to make a better use of its assets than the very rich, but even here we may run into potent objections. Frank Knight18 seems to have argued that the rich enjoy an unexplainable quality of dealing with uncertainty that explains the origin of profits in a way that the general equilibrium model cannot. Knight “saved” the profits in the competitive market model that would, otherwise, predict the dissipation of all profits by the competitive forces that are assumed to make those markets work. He also left us with a belief that has never been proven or shown to be true, that the rich know better how to spend their money, generic to the “trickle down” economic school and flat taxation schemes. A critique of Knight’s theory is beyond our scope, but we draw attention to the tension between the diminishing returns principle and the “rich know better” argument.
18 See: F.H. Knight, Risk, Uncertainty and Profit, Hart, Schaffner & Marx; Houghton Mifflin Co. Boston, MA,
1921.
The former is backed by theoretical and empirical support, the latter remains implicit in most cases and has not gotten much theoretical or empirical corroboration.
On the diminishing returns argument alone, transfers to the very poor are easily justified. School subsidies and basic health care should all go to the poor where they are likely to have the most beneficial effect. Therefore, it is important to appreciate to dual basis of our theory. Diminishing returns is only half of the story. The ability to protect those returns against potential threats is a necessary complement. What makes the middle class the central building block of the society is its ability to protect and preserve the fruit of labor on a large scale. It is critical to appreciate how difficult it is to protect the rights of the very rich and the very poor. The challenge with the rich is the multi-layer principle agent problems associated with the indirect protection of assets and their use. The problem with the poor is the challenge of erecting a comprehensive enough bundle of rights to allow them to benefit from the little they have.
While the diminishing returns argument is a useful complement, our argument is founded, first and foremost, on the idea that a structure of property rights that protects the middle class is bound to be conducive to economic and social prosperity. This leaves us with two interconnected challenges. First, we need to articulate the bundle of individual and property rights that are necessary for the wellbeing of a large and prosperous middle class. Second, we need to further articulate why the welfare of the middle class so critical to the wellbeing of society as a whole. Since the bundle of property rights is mostly a measurement issue we delay our discussion of it to the next section. Here we continue to articulate why our property right theory implies that a strong middle class, protected by a solid structure of property rights is key to economic prosperity.
The middle class must use a fair amount of its free income to reinvest in its own economic development as well as in the development of the society as a whole. Given the fact that middle class investors usually depend on their savings and investments for the education of their children and for retirement and health related expenses and given the somewhat limited resources that each family in this group in society has at its disposal, this class of citizens are likely to manage their finances carefully and invest wisely and efficiently. This class of individuals usually possesses the information and skills to succeed in their efforts to invest wisely and protect their investments against different threats and risks. Additionally, a strong middle class should be able to affect political institutions so as to better protect its wealth. Such institutions will in turn impact the security of more members of society that, with some help from government and financial institutions, can join the middle class and further strengthen it.
Our argument mirrors the classic argument of Douglass C. North19 of how economic firms affect the evolution of political institutions. North, however, overlooked the fact that strong segments in society can affect the evolution of political institutions not through the economic leverage they control, but as private individual citizens through the political process. An important means by which individuals may resist the predation of their governments is through the use of their political institutions. Monarchs, military juntas, presidents, and other executives tend to attempt to acquire and control as much of the resources from their societies as is feasible.20 In the absence of constraints on these actors, property rights become less secure and the incentive for investment diminishes.
The empowerment, that seems possible only through the persistent support of a strong middle class, of institutions outside of the executive branch, forms a bulwark against abusive governance. A primary responsibility of a legislative branch, for instance, is to oversee the operations of the government and to hold executives and subordinates accountable. Likewise, a critical function of an effective judicial branch is to permit individuals to receive an impartial adjudication of their complaints vis-a-vis their governments and others parties. In this way, these branches of government encourage
19 See: D.C. North, Institutions, Institutional Change and Economic Performance.
20 See: M. Levi, op. cit.; D.C. North, J.J. Wallis, B. Weingast, Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, Cambridge University Press, New York, 2009.
THE CAUCASUS & GLOBALIZATION
“good governance” and the “rule of law.” Legislative bodies also help strengthen the state by improving policy outputs and by further integrating society.
It is well known that the weakness of the poor as a segment in the political constituency of a state is its tendency not to participate in the political process. The middle class is always the politically active class and the larger and more diverse it is, the better the functional representation is and, ceteris paribus, the stronger we should expect the state to be. It remains to be seen what buys an individual a ticket to this exclusive club of this very potent middle class, which is the subject of the next section.
3. A Ticket to the Middle Class Club—
The Measurement Issue
The middle class remains a muddy concept.21 Like many social entities, the middle class does not appear in the world in the same way as plants or animals. It is also an aggregate concept: no single characteristic makes an agent a member of the middle class.
Three components must reside in any useful definition of the middle class.
■ First, it must propose an appropriate set of measures—such as income, social status, employment, education, or property ownership—for researchers to test for.
■ Second, a definition must provide cut points on the lower and upper tails of the distribution.
■ The third component must identify a theoretical explanation why those included in the middle class are to be expected to behave differently than those who are not included.
It is striking how often this component is left out or scantly dealt with in definitions of the middle class. Our theoretical approach allows us to be more careful in this respect.
Below, we canvass attempts to define the middle class, examining the relative strengths and weaknesses of each approach. All four approaches scrutinized are found wanting. The following section outlines our approach to measuring the middle class and explains how it combines strengths of previous attempts while avoiding their weaknesses.
3.1. Three Measures of the Middle Class
One quite common way of defining the middle class is by identifying middle class with middle income. Birdsall, Graham, and Pettinato,22 suggest that “households with per capita income in the range of 75 and 125 percent of the median household per capita income” should be defined as “middle class.”23 This approach has three advantages.
■ First, it allows the number of middle class individuals to vary over time. Measures that count middle quintiles or middle deciles24 fix the size of the middle class. Birdsall et al.’s measure corrects for this important shortfall.
21 See: .J.G. Eisenhauer, “An Economic Definition of the Middle Class,” Forum for Social Economics, Vol. 37, No. 2, 2008, pp. 103-113.
22 See: N. Birdsall, C. Graham, S. Pettinato, “Stuck in the Tunnel: Have New Markets Muddled the Middle?” Center on Social and Economic Dynamics Working Paper 14, Brookings Institution, Washingotn D.C., 2000.
23 Ibid., p. 8.
24 E.g. B.W. Cashell, “Who are the ‘Middle Class’,” Federal Publications Congressional Research Service (CRS), Cornell University ILR School, 2007.
■ Second, it avoids the opaque and highly variable occupational or industrial categories (e.g. manufacturing or managerial jobs).
■ Finally, it can be used to compare the middle class across countries.
In terms of the three definitional components outlined above, the definition presents income as a measure and the cutoffs points are also clear. However, when it comes to the third component Birdsall et al. offer no reason why one should treat an agent at 75 percent of the median income differently than one at 74 percent, or why individual’s earning more than 125 percent of the median income should be excluded from the middle class. Without such justifications, the concept of the middle class is vacuous. Definitions of the middle class should explain not only what it means to be rich or poor but also why these categories are theoretically different from being middle class.
Alongside the weak theoretical foundation is a problem of comparability across countries. Median incomes vary drastically from country to country. For example, the middle class of the United States, with a median income well above $40,000, is strikingly different in character than the middle class of Burundi, where the median income hovers around $700. When it comes to creating a unified conception of the middle class that is as relevant to an individual in the United States as it is to an individual in Burundi, the Birdsall et al. approach is flawed.
Like Birdsall et al., Eisenhauer’s “economic” definition of the middle class begins with household income as a measure.25 Eisenhauer, however, fasten the cut points and endow them with a theoretical grounding. Eisenhauer adopts the poverty line as the appropriate bottom cut point. Eisenhauer identifies the top cut as made of individuals that can subsist above the poverty line in perpetuity without working. He constructs the upper bound with crude financial measures: the poverty rate, a family’s total net worth, and the risk-free rate of investment. Hypothetically, if one could liquidate all of one’s assets and deposit the proceeds from those assets in an interest-bearing but relatively risk-free account (e.g. US treasury bonds) and survive above the poverty line for one’s life, then that person is sufficiently wealthy so as not to belong in the middle class.
Eisenhauer’s definition rests on more solid theoretical ground but is problematic on other accounts. First, if one takes Eisenhauer’s upper bound seriously, the middle class is likely to be, in most countries, significantly narrower than the middle class as discussed in ordinary language. If one adopts the U.N.’s standard of $1 per day for absolute poverty, one assumes a risk-free rate of investment of 4 percent, then anyone with an annual income above approximately $10,000 is considered wealthy beyond inclusion in the middle class. Clearly this is too narrow to be compatible with ordinary understandings of the middle class. If one keeps Eisenhauer’s original U.S. Census Bureau poverty line, this is much less of a problem—for a household of 3, the “wealthy line” jumps to over $400,000. Even then, many would not consider a family with a net worth of $400,000 ultimately wealthy. Many middle class families in the U.S. are worth more while behaving and consuming like other middle class households.
Eisenhauer’s theory suffers from a deeper theoretical flaw. His upper bound is based on the distinction between those who have to work to avoid poverty and those who do not. We may ask if falling below subsistence is the only kind of economic insecurity with which one might be concerned. One may want to continue working until at least minimal access to physical security, health care, and education are secured in perpetuity.
Banerjee and Duflo26 look at “13 developing countries to describe consumption choices, health and education investments, employment patterns and other features of the economic lives of the “middle classes” defined as those whose daily consumption per capita is between $2 and $4 or between $6 and $10.”27 Banerjee and Duflo reach a few unsurprising conclusions on this front: that the “average
25 See: J.G. Eisenhauer, op. cit., p. 110.
26 See: A. Banerjee, E. Duflo, “What is Middle Class about the Middle Classes Around the World?”.
27 Ibid., p. 1.
middle class person is not an entrepreneur in waiting,” that “the single most important characteristic of the middle class seems to be that they are more likely to be holding a steady job,” and finally that those in the middle class are likely to “have fewer, healthier, and better educated children.” The chief problem with Banerjee and Duflo’s is the absence of any theoretical foundation. Why should we consider those whose daily consumption is between $2 and $10 as the middle class? Like all the other definitions Banerjee and Duflo’s pick income as the appropriate measure (component one). They choose a more conventional lower and upper bounds at $2 and $10 as the right cut points (component two). These cut points suffer from the arbitrary nature of the other definitions. But most importantly, Banerjee and Dulfo provide no explanation why those bounds are appropriate (component three).
3.2. A Property Rights Theory of the Middle Class
We believe that our property rights approach can greatly improve on the earlier efforts discussed above. Our goal is to select a set of proxies that most closely delineate the set of all members of the middle class based on the association between the middle class and the property rights that protect it.
We define the middle class as the set of all people who have secure access—or in our language some protected property rights over the access—to the goods required to be productive in a modern industrial economy—namely: subsistence goods, basic healthcare, and at least some postsecondary education—but do not have sufficient wealth to self-insure access to these goods. The theory thus is one of publicly secured property rights or public goods. Those in the middle class rely on those well defined, properly secured property rights to provide themselves with the goods most critical to participate in the marketplace—they cannot do it alone and simply purchase these goods on the open market, they depend on their central economic and political institutions to secure these accesses and, thus, have a vested interest in paying the cost of securing and improving the institutions and their commitment to the security of the property rights upon which they depend. Such institutions may be government based, like broad networks of social safety nets; market based as insurance and securities trading institutions and anything in between like non for profit research and education institutions in the U.S. or NGOs of many kind and structural forms. Table 1 is a first cut summary of how the measures of the middle class can be organized to enable rigorous study of the issues discussed here.
Table 1
Preliminary Measures of the Middle Class and Potential Proxies
Measure Potential Proxies
Access to Health Care Number of women receiving mammograms, number of men receiving colonoscopies, number of children receiving vaccinations, number of children with access to psychiatric care
Access to Education Primary, secondary and tertiary enrollment and attainment; Number/% in population with 13 years of education or more
Access to Capital Interest rates, mortgage rates, debt per capita
Table 1 (continued)
Measure Potential Proxies
Housing Average home size, number of homes with (non-dirt) floors, homelessness rate, government expenditures on public housing
Wealth Mean income, median income, income distribution
Employment Insurance Government expenditures on unemployment insurance
Clean Water Number of people with improved water source
Sanitation Number of people with improved sewer and sanitation
4. What We Hope to Achieve and What We May Say of the Current Political Economy of the Caucasus?
It will take years to develop the database to help us figure out the institutional determinants of the strength and sustainability of the middle class and the effect that these determinants may have on social, economic and political welfare of states. In order to justify this immense effort, we need to show some preliminary results that are suggestive of the benefit of getting this complex matrix right.
One proxy measure of the middle class is the Gini coefficient. By construction, states with high Gini coefficients have a small middle class (e.g. Bolivia, Bosnia, Brazil, and Namibia all with G > .55). However, countries with relatively low Gini coefficients may be countries of mostly poor people (Belarus, Croatia, and Czech Republic all with G < .3) or rich countries with a very large middle class (Denmark, Norway, France, and Germany all with G < .3). Countries with reasonably sizeable and strong middle classes would almost always have moderate Gini coefficients (Israel, Russia, and Singapore all with ~ .4). But very poor countries can have similar numbers (Malawi, Senegal, and Morocco all ~ .4). So the negative correlation between the Gini and the size of the middle class is only due to the correlation between high values of the former with low values of the latter. For the sake of the discussion later is worth pointing out that the Caucasus is relatively low with Georgia at .4, Azerbaijan at .36, and Armenia at .41).28
Sened, Thompson, and Walker find an inverse U-shaped correlation between the Gini coefficient and different measures of economic growth. They also note however a U-shaped correlation between the Gini and measures of state failure.29 Fig. 1 summarizes the dual effect of the Gini on economic growth and state failure.
The interpretation of the result is straightforward. Countries with no middle class have a strong elite and a large poor class that does not threaten the ruling elite. Countries with relatively low Gini coefficient are also rich countries with very strong middle class where state failure is very unlikely but
28 All Gini coefficients are taken from the CIA——The World Factbook as customary.
29 See: I. Sened, M. Thompson, R. Walker, The State, Property Rights and the Middle Class: A Fresh Start, Unpublished manuscript, Washington University, St. Louis, 2010.
Figure 1
The Dual Effect of the Gini on Economic Growth and State Failure
4
2 \V N. GDP Growth
0 z' Inverse
State Failure
-2 -
-4 -
~\---------1---------1---------1---------1--------r
0 20 40 60 80 100
Gini Coefficient
economic growth is also moderated by the investment in the sustainability of this large middle class. It is the states in the middle range where larger values of inequality are potential incentive for faster growth, but the weakness of the middle class may translate into state failure.
The lesson for the Caucasus is straightforward. In the last two decades since becoming independent, the Caucasus are struggling with inequality measures that put them at relatively high risk of state failure while trying to build larger and better protected middle class while maintaining reasonable economic growth. The oil industry has helped Azerbaijan stay on a relatively steady course, but both Georgia and Armenia have experienced their fair share of turmoil as the analysis suggests they should.
5. Concluding Remarks
In this article we develop a new approach to the study of the middle class that relies directly on neo-classical economic foundations instead of ad-hoc measurements. We propose an extensive research program that will rely on the theoretical foundations that tie the middle class not so much to its arbitrary place in the middle but to a set of property rights and induced incentives that explain both the determinants of its strength—the property rights institutions that protect it—and the positive effects many speculate it may have on political stability and sustainability, economic growth and social prosperity.
The research program we espouse here has only a skeleton theory. We associate the middle class with protected property rights. We state that governments have an incentive to grant some property rights to enhance economic activity to increase tax base and other benefits to them. We then suggest a Northean circle consisting of petitions from the middle class to protect their property rights in return for political support and expected social welfare gains by more or less marginal improvements of the structure of property rights institutions by the governments as a response to those petitions.30
Much theoretical development and data collection are still needed before the actual merits of this tentative effort can be genuinely appreciated.
30 For a detailed account of this dynamic interplay between governments and constituents, see: I. Sened, op. cit.
We submit the paper in the context of globalization and the Caucasus as a particularly good fit where the combination of the size of the theoretical questions and the very actual challenges facing the region may be fitting the innovative effort characterization of the question we propose in this essay.
Nurali YUSIFBEYLI
D.Sc. (Tech.), director, Azerbaijan Scientific-Research and Design-Prospecting Power Engineering Institute
(Baku, Azerbaijan).
Valekh NASIBOV
Ph.D. (Tech.), head of Energy Security Laboratory, Azerbaijan Scientific-Research and Design-Prospecting Power Engineering Institute
(Baku, Azerbaijan).
Rena ALIZADE
Lead engineer, graduate student at Energy Security Laboratory,
Azerbaijan Scientific-Research and Design-Prospecting Power Engineering Institute
(Baku, Azerbaijan).
FACTORS AFFECTING THE SCALE AND PATTERN OF GENERATION CAPACITY EXPANSION AND AZERBAIJAN’S ENERGY SECURITY
Abstract
T
his article examines the factors affecting the development and use of modern energy technologies. The authors
attempt to analyze the mutual influence of current generation capacity expansion and Azerbaijan’s energy security.
I n t r o d u c t i o n
Among the problems addressed as part of systems research in the electric power industry, projecting the development of energy facilities (generation capacity expansion) is the most difficult and,
