THE BOT - MODEL FOR FINANCING SLOVENIA'S RAILWAY INFRASTRUCTURE DEVELOPMENT

The development of the railway infrastructure is of essential importance for Slovenia which lies at the crossing of V. and X. trans-European transport corrido~ and has been recently confronting the increasing road traffic and severe environmental conditions. To successfully cope with these challenges and achieve positive multiplicative macroeconomic effects of railway infrastructure investment the government formulated the Resolution on National Program of Public Railway Infrastructure Development (ReNPPRID). The investment program, its realization being planned for the period between 2005 and 2020, was divided into two parts: (i) the development part which includes investment to upgrade and enlarge the public railway infrastructure, and (ii) the regular part referring to implementation of public service and maintenance of existing infrastructure. Since the regular part is going to be financed from the state budget, we will focus only on the financing of those infrastructure projects that are included into the development part and promise a considerable quality improvement of the railway network and transport services.

Introduction
The development of public-private partnerships (PPPs), including different forms of cooperation between the state or local communities and legal entities or natural persons of the private sector, has not emerged until the economic and socio-political environment enabled private companies to actively participate in the implementation of public services and ensured access to public infrastructure. This refers primarily to the period marked by deregulation and enterprise ownership transformation, which renders possible the creation of an institutional framework that allows implementation of public services to the private sector.
In professional literature, we find different forms of public-private partnerships that can be divided into two groups according to the level of private sector participation in the implementation of public services and the provision of public infrastructure: various forms of private sector cooperation with the right of ownership to a civil or construction engineering object remaining in hands of the public sector and only the implementation of activity being privatised, and forms of privately managed operations where the right of ownership of an object is temporarily or permanently passed over to the private sector. As stated by Haarmeyer and Mody (1998), service performance contracts, public infrastructure management contracts, lease contracts and classical concession contracts can be placed into the first group, while different forms of partial or total divestiture and different approaches to project financing belong to the second group.

Project financing
Project financing represents an off-balance sheet form of providing medium and long-term capital for capital intensive projects. This requires formation of a capital structure in which project assets and cash flow will cover all obligations resulting from liabilities. Because of the limited ownership rights of a civil or construction engineering object (i.e. the outcome of concession relationship), cash flow represents the most important guarantee for repayment of obligations resulting from liabilities. That's why the creditors, when establishing the concessionary's debt capacity, favour infrastructural projects which provide a higher level of certainty in the anticipation of future cash flows, while at the same time they are not interested in the debt capacity of the sponsors (except if they would guarantee for the concessionary's obligations with all their property). There is a considerable difference between project and enterprise financing. While with project financing the servicing of obligations resulting from liabilities is ensured by project assets and cash flow, in case of enterprise and on-balance sheet financing these obligations are covered by the assets and cash flow of the enterprise and not only by a single investment project. However, this is not true, if for the purpose of an investment project implementation a new enterprise would be set up. In such a case, the value of recognized assets and liabilities would be equivalent for the enterprise as well as for the contractually segregated infrastructural project. When evaluating the economic acceptability of an infrastructural project, the key decision-making factor for potential investors will be the calculation of the project long-term positive net cash flow. If a positive cash flow would not be ensured, the profitability of implementation or the project implementation should be guaranteed by the state or local community.
This financing technique can be used only when it is possible to structure single infrastructural projects in separate units and transfer them to a private concessionary by granting him a concession for operation and maintaining. We distinguish three basic forms of project financing: -non-recourse project financing, -limited-recourse project financing, and -full-recourse project financing.
With the full-recourse form of project financing there is no off-balance sheet effect on the recognition of assets and obligations to liabilities.
Non-recourse project financing is a financing technique when creditors and other investors have no direct or indirect access to project sponsors' property ex volo, as they do not guarantee the repayment of obligations with all their property, but only to the amount of paid-in capital or to the amount defined by the contract. Therefore a future cash flow with a higher risk level requires a higher amount of guarantee or a bigger volume of the equity capital which represents the basic guarantee for repayment of obligations resulting from liabilities and the base for attaining a positive financial leverage. The financial construction of an investment project should be let known to potential investors in advance,otherwise they will not be able to come to a decision whether they find a project economically acceptable and whether the return on investment is proportional to the risk taken, while at the same time in unstable circumstances they would be exposed to a too high risk of bankruptcy. Things are utterly different in case of limited-recourse project financing where risks are allocated among individual contractors in such a way that a limited guarantee of 116 project sponsors exists for the repayment of obligations resulting the from liabilities, usually in form of guarantees or by setting aside a fixed amount of the sponsor's assets to the tutorship account. With this guarantee project, sponsors or third parties acting upon their instructions bind themselves to pay a fixed amount to the other party should their co-contractor fail to meet his obligations in due time. When the instrument of tutorship account is used as a form of guarantee, a sufficient amount of money must be remitted to the account for an eventual repayment of unsettled obligations resulting from the investment project.
We can distinguish another two forms of project financing: project financing with the segregation of the investment project into an ad hoc founded project enterprise (Single Purpose Stock Company or Special Purpose Vehicle) and project financing with a contractual segregation of the investment project, which organisationally remains part of the sponsor as a legal entity, while in contracts (above all in credit contracts) limitations regarding the investor's access to the sponsor's assets are defined and all other legal relations are regulated. In project financing, an entity of private law enters a concession relation with an entity of public law (state or local community). To protect public interest, state or local government can limit the legal capacity of a concessionary to make new concession contracts and thus to prevent the encumbrance of the net cash flow with obligations resulting from other concession relations. Nevertheless, both project financing forms have their advantages and weaknesses. Limitation of project enter-prise activity can usually lower the risk of contractual opportunism, but cannot exclude it completely.

BOT form of project financing
The modern BOT form of project financing is most frequently employed in financing capital-intensive cross-border projects. The main feature of this form of financing is a concession for the construction and maintenance of public infrastructure or other public service facilities granted by the host state, with the concessionary taking on the responsibility to provide all the missing financial resources and to transfer all rights of ownership resulting from the project back to the grantor after the expiration of the concession period without any additional transaction costs. As stated by Hyman and Shah (2003), in this way the state or local community are able to transfer part of responsibility for financing, construction and maintenance of the public infrastructure from public to the private sector, with private co-contractors being given the possibility to maximize the rate of return on the invested capital by increasing the operation efficiency. The return on invested capital is unlimited upwards (unlimited up-side potential) and represents the most important motive for the participation of private investors in public infrastructure development.
As stated by Wu Lu and Lin (2000), the BOT form of project financing involves a temporary privatization of public infrastructure, therefore, before signing a concession agreement, the state or local community (principal) must carry out four analyses: analysis of public infrastructure and of the level of population provision with public services and goods, analysis of existing mechanisms of regulation, analysis of the relation of interest groups to the admission of private sector to public economic service operations, analysis of financial and other possibilities for the introduction of the publicprivate partnership. In the opposite case, the missing consent of interest groups to the temporary privatization of public infrastructure could put the financial close or the investment project implementation at risk. The BOT financing technique is employed primarily in the economic activities where prices of products or services are regulated by the state and for this reason the future cash flow can be anticipated with a relative certainty. When this is not possible, the stability of sales revenues will have to be guaranteed by the state or local community. The latter is opposed by many who believe that through aid in different forms of guarantees, transfers and subsidies, an aid-seeking line of economy (rent-seeking industry) starts to grow and finances the X-inefficiency of the concessionary. This also answers the question why the incorporation of the private sector into public provision services still does not guarantee a higher efficiency in providing population with public goods.

The financial model
In the last years, Slovenia is encountering the growing road traffic (mostly transit) and ever sharper requests regarding the protection of space and environment that represent new requirements and opportunities by forming the Resolution on National Program of Public Railway Infrastructure Development TOTAL (ReNPPRID). According to the proposal of the resolution, we divided the investment program, whose realization was planned for the period between 2005 and 2020, into two parts: the development part, which includes investment into upgrading and enlarging the public railway infrastructure, and the regular part, referring to the implementation of public service and maintenance of existing infrastructure I • Since the regular part is going to be financed from the state budget, we will be focusing only on the financing of the infrastructure projects that belong to the development part and promise a considerable quality improvement of the railway network and transport services. The estimated value of investment from the developmental part of the proposal of the ReNPPRID amounts to 6.22 billion euros, taking into account fixed prices from 2005, with single projects sorted into four basic groups as follows: upgrading of the existing railway infrastructure, new construction, construction of high velocity railway lines, and I Thking into account the fIXed prices from 2005, the new sum total investment value would be 9.19 bil-Hon€.

6226
100.0 project management and preparation of the project and investment documentation (see Table 1)2. .

The organizational aspect of the model
The financial model was planned by taking into consideration the present situation and longterm strategic starting-points for public railway infrastructure development as the BOT form of project financing. From the organisational point of view, the investment project is in most cases segregated as an ad hoc founded project enterprise to whom later a concession for the implementation and managing of a single project or a complete investment program is granted by the state or local community. As stated by Winkelmann (2000), the foundation of a project enterprise is logical, especially when hereby the debt capacity and possibility for project implementation is increased. This was one of the reasons why, along with the development of this model, we anticipated a foundation of a segregated investment enterprise (special investment vehicle) whose founders should enter an international competition for concession activity. The selected concessionary, be it a private consortium or a private enterprise, would be offered a concession contract by the state as a grantor and market regulator. By signing it, the concessionarywould contract the obligation to implement a single project or a complete investment program and to provide the missing financial resources. In this part of the concession relation, the role of a segregated investment enterprise is very important as it enables the transfer of private capital into the financial structure of the BOT project implementation. In order to diminish the project risks, it is desired for the project enterprise to be organized as an equity joint venture having the right to make an outsourcing contract.
Beside the foundation of a segregated investment enterprise, within the framework of this paper also a foundation of a segregated financial fund (special financial purpose vehi-c1e) is suggested. This fund would manage the in-flowing means and the payment of annual availability compensations (availability payments) to the concessionary. As quoted by Trujillo et al. (1998), the setting up of a segregated financial fund is logical, primarily to diminish the risk of contractual opportunism that could endanger the financial construction and implementation of the project. According to Dewatripont and Legros (2005), the advantage of a segregated financial fund is displayed in the fact that the state as the founder has access to all important information regarding fund managing and allocation control of financial resources, thus lowering the risk of information asymmetry and inadequate use of project resources. The fund would also be responsible for checking the concessionary's right to the receipt of annual compensation and a correct use of project resources, what is, according to Ergenzinger and Biischgen (1993), of key importance for a successful implementation of planned investments. With regard to the different sources for the pay-out of concession payments anticipated within the framework of the paper, such as revenues originating from usage fees, sources of cross-financing, budgetary funds, etc. (see Table 2), the foundation of a segregated financial fund would also be important for harmonizing the obligations of potential investors, while the concessionary could focus primarily on the operative implementation of infrastructural projects.
Usage fees are planned to be the main source of the financial fund -users shall pay the greatest share for the public infrastructure construction. The national budget is tradition- ally an important financing source of railway infrastructure financing because infrastructural objects have a public good characteristics. The national budget shaU remain a major source of financing also in public-private partnerships, at least for the following reasons: state funds are necessary to attract private capital, state (government) becomes the final owner of the public infrastructure, state (government) is the protector of public interest in public-private partnerships. Cross-financing is considered an important source of financing for the foUowing reasons: since Slovenia gained independence, the road transport infrastructure has been favoured, which resulted in the unequal development of transport infrastructure. Cross-financing is therefore a means for more equal development of road and transport infrastructure. Other sources of financing are to complement the main financial sources of the fund.

The financial aspect of the model
The financial model cash flow simulation is based on the starting points of the preliminary study on the possible public railway infrastructure financing models in the Republic of Slovenia and program documentation of the Ministry of Transport. Taking into account the assumptions and limitations of railway infrastructure financing, the estimated value of the investment and the activation period, the cash flow simulation anticipates a concession period of 36 years, coinciding with the concession payment period between 2008 and 2040, during which concession payments will be effected from a segregated financial fund on a yearly basis. The pay-off of concession payments is frequently linked to the transfer of a long-term concession right to the use of railway infrastructure back to the grantor. However, this is not the case with the BOT project financing form as here the transfer of ownership rights is effected only after the expiration of the concession period, with the exception of cases where the principal has the right to buy-back the infrastructure before the expiration of the concession period (early buyback) or when they mutually agree to ferminate the contract (early termination by negotiation). In project financing, the timing of ownership rights transfer is very important, as at that moment the concessionary loses the right to control the cash flow creating resources.
Taking into consideration the annual estimated values of investments from the program documentation, the projection of cash flow etc., between 2008 and 2040 the segregated financial fund should pay-off 6.65 billion euros of concession payments to a segregated investment enterprise. However, as stated by Kay and David (1991), when employing this project financing technique, the potential investors must pay a great deal of attention to ensuring the efficiency of the received concession payments use or they will run the risk of the project enterprise over-indebtedness. That is why an important task of the segregated financial fund would be to control the use of financial resources. In addition to ensuring and managing the financial resources, the fund should also take care of the transparency and efficiency of use of the in-flowing resources. As stated by Trujillo et al. (1998) another task of the segregated financial fund is to ensure the stability of project financing, which displays the fund's capability to substitute the loss of whichever of the resources, not allowing it to affect the fulfilment of contractual obligations to the concessionary. In the opposite case, the loss of one of the resources could endanger the financial stability of the investment implementation anticipated in the cash flow projection and according to which between 2005 and 2020 the segregated investment enterprise should ensure an additional sum of 2.13 billion euros (see Table 3) in order to bridge the difference between obligations and liabilities. Together with the state, the enterprise should also apply for exploitation of EU funds in the amount of 1.54 billion euros. Taking into account the cash flow projection, financially the most demanding period for the segregated investment enterprise would be between 2014 and 2020. During this period it should cover the total difference between the investment value and revenue resulting from concession payments as the exploitation ofEU funds is anticipated only for the period of the next EU financial perspective -2007-2013. Since the successful implementation of project financing requires resources to refinance the obligations resulting from liabilities and to realize the return on the capital invested by private investors, the model simulation anticipates a segregated investment enterprise that would be receiving concession payments until the expiration of the concession period (i.e. to the year 2040) when it would, together with the segregated financial fund, cease to operate.

Conclusions
The financial model presented in this paper is based on an organisational structure which enables a more optimal allocation of financial, technical and technological, operational and other risks that could jeopardize the financial close and implementation of the investment program. The main feature of this structure is the incorporation of three key participants: state as the grantor of concession; a segregated investment enterprise whose private founders enter an international competition for the implementation and managing of the complete investment program, and a segregated financial fund which during the concession period takes care of managing the in-flowing financial resources (budgetary resources, funds from cross-financing sources, ecological taxes, usage fees and funds from other sources) and for the annual availability payments to the concessionary who will use them for refinancing the obligations resulting from liabilities, including the payment of the requested profit rate on the equity capital invested by private investors. The public-private partnership structure of the presented financial model shall contribute to the distribution of financial sources and risks, ensure the public (state) budget relief (contribute to sustainability of public finances) and attract the private capital to speed up the construction of the railway infrastructure. Within the financial fund, usage fees are planned to comprise the greatest share of financial sources, followed by the national budget and cross-financing. The modem "Build, Operate, Transfer" (BOT) form of project financing represents an off-balance sheet form of providing medium and long-term capital for capital-intensive projects. It is most frequently employed in financing capital-intensive cross-border projects. The main feature of this form of financing is a concession for the construction and maintenance of public infrastructure or other public service facilities granted by the host state, with the concessionary taking on the responsibility for providing all the missing financial resources and transferring all rights of ownership resulting from the project back to the grantor after the expiration of the concession period without any additional transaction costs.
There is a considerable difference between project and enterprise financing. While with project financing the servicing of obligations resulting from liabilities is ensured by project assets and cash flow, in case of enterprise and on-balance sheet financing these obligations are covered by the assets ;;lnd cash flow of the enterprise and not only by a single investment project. However, this is not the case, if for the purpose of an investment project implementation a new enterprise is set up. In such a case, the value of recognized assets and liabilities would be equivalent for the enterprise as well as for the contractually segregated infrastructural project. When evaluating the economic acceptability of the infrastructural project feasibility, the key decision-making factor for


extfieldsofstudy: Sociology Medicine

text:
Study of Child Labor Among School Children in Urban and Rural Areas of Pondicherry

Child labor is broadly defined as any form of economic activity for at least 1 hour per week and/or domestic chores for at least 7 hours per week and/or school labor for at least 5 hours per week.(1)

According to estimates, in developing countries alone there are 250 million children in the age group of 5-17 years who are toiling in economic activity - i.e., one out of every six children in the world today. In absolute terms, it is Asia (excluding Japan) that has the most child workers (approximately 61% of the world's total).(2) A study done in Pondicherry determined that 15% of children in the urban school in Pondicherry were engaged in some form of economic work.(3) The policy appears to have little impact on the situation, as poverty is deep rooted and compels children to work.(4) Hence the complex issue of child labor and its ramification is worth investigating. It was strongly felt that children who work and attend school could have some disadvantage compared to school children who are not engaged in work. It was therefore decided to carry out the present study on working children who attend school, as it was felt that they may have special problems of having to cope with the burden of studies and work.

Introduction
Child labor is broadly defined as any form of economic activity for at least 1 hour per week and/or domestic chores for at least 7 hours per week and/or school labor for at least 5 hours per week. (1) According to estimates, in developing countries alone there are 250 million children in the age group of 5-17 years who are toiling in economic activity -i.e., one out of every six children in the world today. In absolute terms, it is Asia (excluding Japan) that has the most child workers (approximately 61% of the world's total). (2) A study done in Pondicherry determined that 15% of children in the urban school in Pondicherry were engaged in some form of economic work. (3) The policy appears to have little impact on the situation, as poverty is deep rooted and compels children to work. (4) Hence the complex issue of child labor and its ramification is worth investigating. It was strongly felt that children who work and attend school could have some disadvantage compared to school children who are not engaged in work. It was therefore decided to carry out the present study on working children who attend school, as it was felt that they may have special problems of having to cope with the burden of studies and work.

1)
To determine the prevalence of child labor among school children in the rural and urban areas of Pondicherry; and 2) To study the factors related to child labor -like the reasons for working, problems faced by the child, workplace conditions, etc.

Materials and Methods
The study was carried out in the schools situated in the service areas of Jawaharlal Institute Rural Health Center (JIRHC) and Jawaharlal Institute Urban Health Center (JIUHC). The JIRHC and JIUHC are the rural and urban field practice areas of Jawaharlal Institute Postgraduate Medical Education and Research Center (JIPMER), Pondicherry. It was decided to conduct the study among students in classes VI to X.
For the purpose of the study, child labor was defined as any kind of work done by a school-going child for remuneration in cash or kind. For calculating the sample size, the average prevalence of school-going child labor was taken as 35% (50% in rural areas and 15% in urban areas). Using the formula 4PQ/L (2) the required sample size was estimated to be 743, rounded off to 750.

Procedure
The principals of the schools selected from the service area were contacted, and the purpose of the study was explained to them in detail. Permission was then obtained from the Director of Education, Pondicherry, to conduct the study in selected schools of the rural and urban areas of Pondicherry.
The questionnaire and the interview schedule were first tested among 10 students of another school, not in the service area. After making a few modifications based on the responses obtained, the questionnaire was finalized. To attain the required sample size, all the students enrolled in classes VI to X of the two schools in the JIUHC service area were included. In the schools of the JIRHC service area, lots were used to decide which classes were to be included. There were 759 eligible students in the classes of the selected schools, and only 720 students (414 urban and 306 rural) could be contacted. The children who were working were further interviewed using a pre-tested interview schedule. Interview was conducted for the working children alone in their respective houses with the help of the identification data collected in the questionnaire.
Chi-square test and t-test were used to find out the association between the attributes. Logistic regression analysis was done to find the adjusted odds ratio for the selected risk factors using SPSS software (SPSS version -13).

Results
The overall prevalence of child labor in the study was 32.5%. The number of students who worked in the rural and urban area was 131 (42.8%) and 103 (24.9%) respectively.

S hort Article
Irrespective of the area, educational level of the mother, crowding in the family, families being in debt, presence of a handicapped or alcoholic member in the family, gender and religion were significantly associated with the working child [ Table 1].
Ninety percent of the children in the rural area and 80.8% in the urban area said low income was the main reason for them to go to work. Overall, 78.6% visited a health facility like a health center or hospital in the past 1 year for any health complaints. About 75.9% of the rural working children reported that their employer scolded them at the workplace. The proportion of working children who were scolded by their employer at the workplace in urban area was 87.2%. In the rural area, 65.1% of the working children were beaten or scolded by their employer for working slowly. Similarly in the urban area, 62.8% of the working children were beaten or scolded for slow work.

Discussion
The study revealed that 32.5% of children went to work. In the rural area, the proportion of students who worked was 42.8%; in the urban area, the corresponding proportion was 24.8%. From a community-based study conducted among school children in Nigeria, Bolanle M Fetuga et al. found that 64.5% of the school-going children were engaged in work. (5) Nitin et al. in a cross-sectional study found that prevalence of child labor among the slum children in Nagpur was 21.3%. (6) A communitybased cross-sectional study among school children in Pondicherry found the prevalence of child labor to be 15% among school children. (3) The differences in the prevalence may reflect the differences in methodology and mode of data collection and the lack of standard definition of child labor. In the informal sector of the economy, the magnitude of working children is virtually unknown because many of the establishments are not registered with the proper government regulatory agencies.
In the present study, it was observed that more children from families from the lower socioeconomic stratum (i.e., Class V of the Modified Kuppuswamy score) went to work. Nitin et al. in their study in Nagpur found that a lower socioeconomic status of the family was significantly associated with child laborers. (6) The present study showed that irrespective of whether the children came from families in poverty or otherwise, in the rural areas the children went to work. This may also be because the quantification of the income of the parents in the rural area is difficult; and therefore it appears that regardless of the total household income, the child has to engage in some work. The present study revealed that in both the rural and urban areas, working children spent less time studying as compared to their nonworking counterparts. Nivethida et al. in their study from the same urban area found that half of the children felt that their work affected their studies.
Logistic regression analysis showed that children coming from families in debt had 2.78 times the risk of having to go to work compared to those from debt-free families. Presence of a handicapped member or an alcoholic in the family put the child at 3.07 and 2.07 times the risk respectively of having to go to work compared to there being no such member in the family. Children who came from overcrowded families had a higher risk of having to go to work. Children of mothers who had no formal school education had 1.73 times the risk of being sent to work compared to those of mothers who had formal school education. In the rural and urban areas where the study was conducted, the living conditions were more or less the same, and hence there was not much difference in the risks associated with the working status of a child.

Acknowledgment
We express our gratitude to Mr. Thevanithi Dass, Director of the Department of Education, Puducherry, for having given permission to conduct the study; and to the principals, teachers and especially the students who participated in the study. Galaxy of 21 prominent experts have contributed in this book. Each chapter provides a brief description of the state-specific program and has been written to act like an operational guide for the implementation of the program. Authors have nicely and succinctly compiled the information available at various places, and have also given resource references for further reading at the end of each chapter. Editor has very rightly claimed that the book can be labeled as a rapid reader for the doctors working at peripheral facility. This can also be good resource for public health students undertaking Masters of public health (MPH) or Doctorate in Medicine (MD) in the specialty. This would also be a good resource for all States to enable them to draft their own State-specific resource books and to have a ready reference for the programs that are operational in Rajasthan.


extfieldsofstudy: Economics Medicine

text:
What is Middle Class About the Middle Classes Around the World?

This paper uses household surveys from 13 developing countries to describe consumption choices, health and education investments, employment patterns and other features of the 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. The data sheds light on differences and similarities between the middle classes and the poor and helps discriminate between various theories of the role of the middle classes in the development process. We find that the average middle class person is not an entrepreneur in waiting: while he or she might run a business, this is usually a small, not very profitable business. The single most important characteristic of the middle class seems to be that they are more likely to be holding a steady job. Perhaps as a result, they also have fewer, healthier, and better educated children. While there are clear differences in consumption patterns between the poor and the middle classes, there are also very strong resemblances within countries, and contrasts across countries, which might either reflect the importance of relative prices in shaping consumption decisions or the power of norms/fashions in determining consumption.

We expect a lot from the middle classes: Jim Frederick, writing in Time Magazine in 2002, puts it bluntly---"China's burgeoning middle class holds the key to the future of the country". In a more academic vein, Easterly (2001) concludes, based on a comparison of large number of countries, that countries that have a larger middle class tend to grow faster, at least if they are not too ethnically diverse. In another piece, Birdsall, Graham and Pettinato (2000), rue the shrinking of the middle class---"the backbone of both the market economy and of democracy in most advanced societies"---in the face of burgeoning globalization. And the economic historian David Landes, writing about The Wealth and Poverty of Nations (1998), explains England's early ascendancy in terms of "the great English middle class" of the 18 th and 19 th centuries.
There is, of course, nothing new about this faith in the middle class---it follows a long line of theorizing going back, at least, to Max Weber (1905). There are at least three distinct arguments that traditionally get made: 2 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 (for a formalization of this argument, see for example, Acemoglu and Zilibotti (1997)). 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 (see for example Doepke andZilibotti (2005, 2007)).The third view, a staple of the business press, emphasizes the middle-class consumer, the consumer who is willing to pay a little extra for quality. It their demand for quality consumer goods that feeds investment in production and marketing, which, in turn, raises income levels for everyone (Murphy, Shleifer and Vishny (1989)).
This essay asks what we should make of these arguments, in the context of today's developing countries. Starting from data on patterns of consumption and investment by the middle class we look for what is distinct about the global middle class, especially when compared to the global poor--defined as those whose per capita daily consumption, valued at purchasing power parity exchange rates, is below $2 a day---who were the subject of a previous essay in this journal (Banerjee and Duflo, 2007a). In particular is there anything special about the way the middle class spends their money, earn their incomes, or bring up their children?

Identifying the middle class
No global dataset exists to answer these kinds of detailed questions on a worldwide basis. However, a growing number of household surveys have been done in low-and middleincome countries around the world. Thus, we turn to the household surveys for 13 countries: Guatemala, India, Indonesia, Ivory Coast, Mexico, Nicaragua, Panama, Pakistan, Papua New Guinea, Peru, South Africa, Tanzania, and East Timor. From each of them we extracted the same information on two groups of households: Households whose daily per capita expenditures valued at purchasing power parity (PPP) is between $2 and $4 and those where it is between $6 and $10. These are the groups that we will call the middle class. Figure 1 shows the average consumption in each of the group we will consider, in the rural and urban areas. The choice of these two groups is (obviously) ad hoc, though, as we will argue later in this section, both broadly fit the definitions other people have used. The reason to pick two groups at the two ends of the middle class is to get a sense of how much is driven by the choice of the comparison group and to observe whether the drift we observe between the poor and the bottom of the middle-class continues as we move towards the top of that category.
The surveys we use include the Living Standard Measurement Surveys (LSMS) conducted with support form the World Bank, the Family Life Surveys conducted by the RAND Corporation, and two surveys of regions in India-Udaipur and Hyderabad--that we conducted with co-authors. Detailed tables presenting all the data discussed in this paper on a country-by-country basis is presented in an on-line Appendix available with this paper at <http://www.e-jep.org>. Both the LSMS and the Rand surveys are generally considered to be very high quality data, and are extensively used both to compute country wide statistics (e.g. poverty level) and as data sets for studies of household behavior (Deaton (1997), Glewwe and Grosh (1999)).
In what sense should people living on between $2 and $10 per day be called "middle class"? These households are still very poor by developed country standards: The poverty line in the U.S. for someone who lives in a family of five, for example, works out to be about $13 per day.
On the other hand, they are clearly much better off than the poor in these countries, who live on less than $1 or $2 a day. Easterly (2001) defines the "middle class" as those lying between the 20 th and 80 th percentile on the consumption distribution. Table 1 shows the position of the $1, $2, $4, $6 and $10 lines compared to the various percentile cut-offs in the income distribution of the thirteen countries in our sample. For surveys meant to be representative of a country's population, this information is generated directly from the survey (although many argue that household surveys in low-income countries probably do not include enough of those with very high incomes to categorize this group). For countries where the survey focuses on those with lower income levels, and thus is not representative of the entire population, we used data from the World Bank "Povcalnet" website.
In all thirteen of our studied countries, except for the rural parts of three of them (India, Pakistan, Panama), the $2 to $4 per day category comprises between 23 and 40 percent of the population, and is primarily composed of those between the 20 th and the 80 th percentile of income. In rural India and Pakistan, the $2 line lies above the 80 th percentile of consumption, so that the $2 to $4 category is richer than the middle class by Easterly's (2001) definition. But even in these countries, it seems reasonable to think of this group as a middle class, especially since it seems hard to imagine calling them rich. Panama is the one country in our sample where most of those whose consumption lies between $2 and $4 are actually poorer than the middle class, as defined by Easterly.

Eating and drinking
As observed more than hundred years ago by Engel (1895), the share of the budget spent on food falls with increases in the standard of living. In rural Guatemala, for example, the share of the budget spent on food falls from 65 percent among the extremely poor on less than $1 per day to 13.5 percent among those with daily per capita expenditures between $6 and $10. While the Guatemala example is extreme, in other countries the share spent on food varies between 35 and 65 percent among rural households with daily per capita expenditures of $6 to $10, while it is between 50 and 77 percent among those with daily per capita expenditures below $1 (see figure 2 for weighted average across the countries in our sample). The patterns are similar in urban areas. This decline in the share of income spent on food is also accompanied in general by a shift toward better tasting, more expensive foods, so that the number of calories consumed grows more slowly than spending on food (Deaton, 1997).
No comparable pattern exists for alcohol and tobacco: The share of income spent on these goods goes up in some countries and down in others as incomes rise. There are opposing forces at work. On the one hand, alcohol and tobacco are luxury goods. On the other hand, the middle class may also be more conscious of the health and social consequences of such spending (though they do end up spending more. Moreover, it is possible to make the argument (though this remains, at best, a hypothesis) that the poor are more subject to the kinds of acute stress that might lead to substance abuse.

Entertainment
Some of the resources freed up by the lower share of income going towards food are spent on entertainment. The share of expenditure devoted to entertainment rises with income, increasing from next to zero among the extremely poor to between 1% and 5% among those with daily per capita expenditures between $6 and $10, both in rural and in urban areas. The increase is about half as much among those with daily per capita expenditures between $2 and $4. The share of income spent on festivals increases with the standard of living as well.
Similarly, as incomes rise, there is also a very sharp increase in the fraction of households that own a television (see figure 4). In the urban areas of most of our thirteen countries, over 80 percent of the households with daily per capita expenditures between $6 and $10 have televisions (the exceptions are East Timor and Tanzania, where television ownership remains low), while the corresponding share is between 25% and 63% for the extremely poor. The same is true in rural areas, where the share of television ownership is less than 26% among the extremely poor, and between 35% and 76% in the $6 to $10 category (except in Papua New Guinea and Tanzania (no data is available for East Timor)).

Education and Health Care
In most countries (with the exception of Panama), the share of budget devoted to educational spending remains more or less constant as the standard of living rises. Looking it is also constant in the some countries, and in the others, it rises with income. For example, in Nicaragua, the rise is from 5.6 percent among the extremely poor, to 8.6 percent for those with daily per capita expenditures between $2 and $4, and 9 percent for those with daily per capita expenditures between $6 and $10. Similar patterns of an increased share of spending going to education as consumption rises are found in Mexico, Peru, Indonesia and Panama.
The pattern is clearer for health. Health care spending as a share of daily per capita expenditures rises in most countries, in both rural and urban areas; for example, in rural Mexico it goes from 1 to more than 4.5 percent, in urban Indonesia from 1.4 to 3.4 percent, in Hyderabad from 5 to 17 percent.

Domestic Infrastructure
Not surprisingly, households with higher incomes live in bigger houses---their houses have between 2.5 (Mexico) and 6 (Indonesia) rooms. In most countries, they have about 1.5 extra rooms than those of the extremely poor, despite the fact, to be discussed later, that their families tend to be smaller.
More importantly, the basic amenities in the homes of the middle class are completely different than in those of the poor. While the poor often live without access to electricity, running water, or a latrine, the fraction of households with tap water at home increases with daily per capita expenditures in most countries and in some countries by a lot: From 1 percent for the extremely poor to 19.7 percent for those with daily per capita expenditures between $6 and $10 in rural Ivory Coast; 18 to 48 percent in Nicaragua; and 5 to 40 percent between these consumption groups in rural South Africa. In the urban areas of five out of the eight countries for which we have data, 70 percent or more of the households with daily per capita expenditures from $6 to $10 have tap water, whereas the share is below 50 percent in all countries but two for the extremely poor (see figure 3 for the average across the sample).
The same pattern holds for latrines, where the share of those who have one among the urban households with daily per capita expenditures between $6 and $10 is above 80 percent in seven of the nine countries, and also for electricity, where the share of urban households that have access to electricity in this group is above 90 percent in seven of the studied countries.

The middle class consumer
It seems clear that the middle class goes for what is conventionally known as "quality of life"---better health care for the family and more expensive education for the children (see the section on Investing in Human Capital, found later in the paper, for more details), as well as more and better housing, more expensive eatables and more entertainment, tobacco and alcohol. Despite its reputation for thrift, some "frivolous" consumption is as middle class as a commitment to education or healthcare.
While our data does not permit us to look more carefully into this question (we cannot, for example, look at the demand for brand-named goods or the susceptibility to "lifestyle" advertising), the evidence is consistent with the hope pinned on the middle class in developing countries by so many marketing experts.

The middle class and the poor: what they have in common
The middle class lives very differently from the poor in so many ways, that it is striking how much the poor in a particular country have in common with their own middle class, in terms of how budgets are allocated. For example, the relative ranking of countries by the fraction of amount spent on food is very similar across the various income categories. The countries that are below the median in terms of the budget share those under $1 a day in rural areas devote to food, are Guatemala, India (Udaipur), Ivory Coast, Mexico, Nicaragua, and Pakistan. The countries in the $2 to $4 category are almost identical, with the one difference that Panama comes in place of Ivory Coast. The list of countries that are below the median in terms of the food share of those under $1 a day in urban areas is also similar: out of the four countries in that list, three (India, Mexico, and Nicaragua) are also in the corresponding rural list, despite the fact that people living in urban areas typically spend much less on food than their rural counterparts.
The same point could be made using any of the other categories of spending: for tobacco and alcohol spending, the bottom five countries are East Timor, Guatemala, Peru, Nicaragua and South Africa in the rural under $1 category and East Timor, Guatemala, Peru, Nicaragua and Pakistan in the rural $2 to $4 group. The corresponding countries in the urban under $1 group are East Timor, Nicaragua, Peru and India (Hyderabad). For education the bottom six countries, both in the rural under $1 rural category and the rural $2 to $4 category are Guatemala, East Timor, Peru, Papua New Guinea, South Africa and India (Udaipur). The corresponding countries in the urban $1 list are East Timor, Nicaragua, Peru and India. For health care the only difference between the list of the five lowest countries in the rural $1 category and in the rural $2-$4 category is that Ivory Coast comes in the place of Mexico. And the list continues… Why should being from the same country be so important? After all, there are enormous differences within countries in how people live---between, say, the mansions of Mumbai and the hovels of Hyderabad. A possible answer is that everyone we look at, including the $6 to $10 group, is still poor. But this story does not quite add up: In South Africa, for example, the average rural person who spends $2 per day spends about 67 percent of that amount on food, which suggests that one can more or less survive while spending about $1.30 per day per person on food in that country. Someone who is living on $8 a day in the same country spends roughly $3.50 per day on food (using the 44 percent average food share for those between $6 and $10). Thus, that household could save about $2.20 a day by buying cheaper food. For a family of five, this savings adds up to $11 a day, or roughly $4,000 a year. This is far from negligible. The income of the middle class (especially at the upper range) opens to them options to consume very differently from the poor, if this is what they chose to do.
Why then do we see a connection between the consumption habits of the poor and the middle class within the same country? One depressing possibility is that each country has unique flaws in its data collection apparatus, which create the appearance of patterns that seem to affect everyone within the country. Similarly, perhaps certain reporting biases systematically vary across countries. For example, in Pakistan, there may be some reluctance to admit consumption habits that are proscribed by Islam. However, as we indicated, the LSMS benefit from the World Bank's oversight, and are generally considered to be of good quality (Grosh and Glewwe (1996), Deaton (1997)). So this probably does not explain everything.
Of course, there could also be national differences in taste that, in turn, could be a result of geography. For example, coca leaves grow in Peru, which may be why everyone smokes and drinks less alcohol there. There are almost surely some common norms about appropriate forms of consumption, though whether that reflects shared intrinsic values or the pressure to keep up appearances on the part of the poor remains an open question. For example, the anthropological literature on South Africa seems to suggest that the often extravagant funerals are a result of the middle class setting norms that the poor feel pressured to emulate.
Another idea, one that comes naturally to economists, is that everyone within a country behaves in a relatively similar way because they are all responding to the same relative prices. In South Africa, $4,000 in savings is equivalent to about $2,000 in purchasing power parity terms to buy traded goods that sell on the world market. In India, the same amount will only buy $800 worth of the traded goods that sell on the world market. In other words, if one family in South Africa and another in India have the same amount to spend, the one in India can afford much less in terms of traded goods--but is compensated by being able to buy goods that do not get traded on the world market much more cheaply than in South Africa. Hence, we might expect Indians to be more inclined towards those non-traded goods like eating out, locally made cigarettes, traditional garments, while South Africans towards traded goods like televisions, refrigerators, and certain kinds of edibles.
Price differences can also result from institutional differences. The share of expenditures on health care is so very low in Mexico, Peru and South Africa not because people in these countries are especially healthy (or because they don't care about their health), but because decent public health care is available more or less for free. On the other side, poor performance of the nominally free public health care system probably explains why in India and in Pakistan even the poorest spend quite a bit on health care.

Occupational patterns
At first blush, the occupational patterns of the middle class seem surprisingly similar to that of the poor.
One difference is that in rural areas, the middle class seem less directly connected to agriculture than those with low incomes. Strikingly, the rural middle class are actually less likely to own land than the in all but three of our countries. Correspondingly, the middle class are also less likely to be self-employed in agriculture. For example, in Nicaragua, the fraction of households self employed in agriculture goes from 56 percent among the extremely poor (daily per capita expenditures below $1 per day) to 36 percent for those with daily per capita expenditures between $6 and $10; in Panama, the numbers are respectively 65, 32, and 18 percent. The middle class are not working for a wage in agriculture either: The fraction of people who are earning a wage in agriculture among those with daily per capita expenditures between $6 and $10 falls to below five percent everywhere but Guatemala (20 percent) and Ivory Coast (60 percent).
How do middle class households make a living in rural areas, if not from agriculture? In some countries, the rural middle class are local entrepreneurs: 52 percent of those with daily per capita expenditures between $6 and $10 in rural areas are self-employed outside agriculture in Indonesia (versus 36 percent among those with daily per capita expenditures below $1). The rural middle class are also more likely to be entrepreneurs outside agriculture in Udaipur (India), Nicaragua, Panama and South Africa. In other countries, the rural middle class are no more likely to own a business than those with low incomes. For example, in Guatemala and Mexico, it is roughly constant. In those countries, the rural middle class are typically salary earners working outside of agriculture. Of those with daily per capita expenditures between $6 and $10, 52 percent are working for a wage outside agriculture in Ivory Coast, 73 percent in Guatemala, and 68 percent in Mexico. Figure 5 shows that overall, the share of households which has a non agricultural business increases with income in rural areas.
In urban areas, the broad occupation patterns are remarkably similar between the poor and the middle class. The share of entrepreneurs stays roughly the same, as does the share of employees. The middle class is also quite diversified: depending on the country, 14 percent to 36 percent of the households receive incomes from multiple sectors.

The middle-class entrepreneur
The striking fact about business investments, especially given the differences in the potential to save, is how little difference there is between those of the middle class and those of the poor.
As we saw above, the middle class is about as likely to be business owners as the poor, and less likely to be in the farming business when they live in rural areas. When the middle class do operate a non-agricultural business, the type of business they operate is also not very different from that of the poor. The number of employees who are not family members is still tiny: specifically, the businesses of those with daily per capita expenditures between $6 and $10 have on average only 0.5 to 1 more paid employee (see figure 6). Businesses owned by the middle class still seem to operate with very little in the way of assets, such as machinery or a form of transport. For example, unlike radios and televisions, ownership of bicycles does not increase substantially as incomes rise from poor to middle class. In fact, bicycle ownership actually goes down for households between $2 to $4 a day and $6 to $10 a day in some countries.
What kinds of businesses do those with daily per capita expenditures between $2 and $4 in Hyderabad run? In our data 21 percent are general stores, 17 percent are tailor shops, 8.5 percent are telephone booths, and 8 percent are fruit or vegetable businesses. The rest are spread across a wide variety of occupations including rag-picking, selling milk, and collecting cow-dung. These are also the most common businesses among those with consumption under $2 a day, though the poor are spread across an even wider range of activities; for the poor, stores are only 13 percent of all businesses; 13 percent are tailors; and 5 percent are phone booths operators.
General stores like the ones we see in Hyderabad are a familiar sight all over India, urban and rural, and in most other developing countries. Each village has several such stores, typically run out of a corner of somebody's house or a rented kiosk by the road, often little bigger than four feet wide and four feet deep. Table 2 shows the inventory of one such shop in a village on the outskirts of the town of Gulbarga in Northern Karnataka, about a five-hour drive from Hyderabad. The family runs a metal scrap business and the household's daily consumption puts it into the $2 to $4 category. The store consisted of a set of plastic jars arranged on top of one another in a dimly lit side-entrance to the house. During the two hours we spent with household, we saw two clients. One bought a single cigarette; the other a box of incense. Given this level of business, the very modest inventory detailed in table 2, probably makes sense, though from the owner's point of view it would seem to be a problem that the shop was selling exactly the same things that one would find in all the other stores in the village, often within few hundred feet of each other (indeed, with some small local variations, this was also what one find at any of the millions of similar venues elsewhere in India). In other words, there seemed to be nothing that would make one want to come to this particular store, either in terms of its product lines or the shopping environment (though in the personality of the owner, a vivacious woman of around 30, this particular shop seemed to have a potential commercial advantage). The business seemed to be not much more than a way to allow the woman to earn a little of extra cash while she takes care of the family, on a fairly minimal outlay.
This sense of getting something without a large resource commitment appears to infuse most businesses of the middle class. In Hyderabad, as elsewhere, the businesses run by the middle class have very few employees: the maximum number was three, and the 95 th percentile was one. These businesses are mostly run by one person, though 25 percent of the businesses have two or three household members working, although the other household members usually work only an hour or two each day.
On the other hand, owners commit a lot of time to the businesses they own, at least when they work full time. Sixty-two percent of the businesses in the sample are operated fulltime by the owner (in the other cases, they spread their activities around several jobs). Where the owners work full time, they report very long hours: in our data, the number of hours worked in the last week ranges between 40 hours per week and 119 hours per week. The mean is 72, and the median is 77, which means more than ten hours a day, seven days a week. Some businesses, like the shop we saw in Gulbarga, are part-time businesses, one of the many activities the owner undertakes: part-time owners averaged 24 hours per week.
The average monthly sales of these businesses in Hyderabad are Rs 11,751 ($900 at purchasing power parity), and the median is Rs 3,600 ($280). The average monthly profit, after deducting any rents they pay but not including the unpaid time spent by household members, is Rs 1,859 (about $150), and the median is Rs 1,035 (about $80), a real but modest gain. Fifteen percent of the businesses have lost money in the last month, after subtracting rents. When we value the hours spent by household members, even at the low rate of Rs 8 an hour (which would give someone close to the minimum wage for a eight hours day), the average profits turn mildly negative. However, running one's own business offers flexibility and the ability to do other things at the same time, such as taking care of children. The woman who owned the shop outside Gulbarga could afford to spend two hours talking to us while running her store, with only occasional interruptions.
Working on their own thus allows owners to make slightly more money than if they worked for someone, in exchange for long but less intensive hours. These businesses might be less an engine of growth than a means of sustenance, a way of "buying a job." There may also be an important gender dimension to these businesses. In an interesting randomized experiment (described below) De Mel, McKenzie and Woodruff (2007b) contrast the returns to capital for businesses owned by men and women. They find much lower rates of return for women. The business of middle class women may be seen as a complement to the men's activities, compatible with child rearing. On the other hand, a woman may also get something out of having her own little operation that she could not get otherwise---some cash of her own, an opportunity to go out occasionally, a chance to meet other people, a challenge. In other words, neither side may see the extra work for what it looks like to us---hours of avoidable tedium.

Credit constraints?
Despite these low profits, the returns to investing in the capital stock of those firms seem quite high: De Mel, McKenzie and Woodruff (2007a) gave randomly selected owners of firms in Sri Lanka that were very similar to these an infusion of capital equal to 100 to 200 percent of the capital stock and found very high returns to capital on average--over 5 percent per month (although as we just saw, the results were different for men and women). This result is consistent with the fact that when these businesses borrow, the interest rate is on average 3.84 percent per month.
An obvious interpretation of this finding is that these businesses are severely undercapitalized, because the middle class, much like the poor, does not have particularly good access to capital. The reason why average returns are low even though the marginal returns are very high (at least for businesses operated by men) is that running a business has significant fixed costs (including the cost of the owner's time), and a business needs to sell enough to cover these fixed costs before it can be profitable. The shop in Gulbarga was a case in point. With so little to sell, there was very little our host could have done to increase her productivity. In sum, the middle class does not run very different businesses than the poor. It is usually not the money they make in this businesses which makes them middle class.
Yet compared to the poor, the middle class has substantially better access to formal sources of credit.
While the fraction of households who are borrowing from anyone stays roughly constant across income groups, the fraction of those loans which have been extended by a bank is larger, especially for urban households (although it varies a lot from country to country). For example, in urban Indonesia, the share of loans to households extended by banks is 23 percent for households with daily per capita expenditures below $1, and it is 74 percent for households with daily per capita expenditures between $6 and $10. In Pakistan, the share goes up from 1.6 for the poorest to 10 percent for households with daily per capita expenditures between $2 and $4.
Of course, the middle class may still lack as much access to financing as they would want. We did find that in Hyderabad, those among the middle class who borrow for their businesses pay rates that are comparable to those paid by the poor (about 4 percent per month), though probably for larger loans. In addition, it is possible that much of their bank credit is tied to specific purchases of consumer durables, and can't be diverted to starting or expanding a business.
However the mystery does not entirely end here. The lack of access to capital and the resulting under-capitalization raises a further conundrum: Why don't those in the middle class save more in order to grow their businesses? Clearly, for someone who is paying four percent per month on a loan, savings would have a return of at least four percent per month (depending on whether they use the money to pay down the loan or invest more). At those lucrative rates, saving more certainly appears worthwhile.
This puzzle is especially sharp because the middle class accumulates other assets. Middle class people buy durables like a television and/or a radio. They own larger houses with better amenities. They are much more likely to have a savings account: in rural areas, in all countries but Ivory Coast where it is higher, about one-third of the middle class households have a savings account. In urban areas, the share is larger. They spend a lot on health and education.
Yet businesses owned by the middle class remain resolutely small, even as their health care spending, for example, explodes. In Hyderabad, the poor spend 5 percent of their daily per capita expenditures on healthcare. The middle class, defined as those between $2 and $4 daily per capita expenditures, spends about 10 percent. If the middle class families spent 5 percent of their overall budget on health care, like the poor, they would still be spending much more per capita in absolute terms, because they are richer and have smaller families. By doing this, a family of five in the $2-$4 a day category could save enough to allow the shop outside Gulbarga that we described earlier to double the value of its (rather meager) stock. A family with higher income could obviously do even better. If these middle class families do not build up their enterprises, it is because it is not their priority: human capital investments seem to be more important to them.
It is difficult therefore, to view the middle class as particularly entrepreneurial. There are no doubt many successful entrepreneurs who have come out of the middle class, but for the median middle class family that owns a business, the business is just a source of some additional cash and not a huge amount at that.
That is not to say that the emergence of new entrepreneurs is not an important part of the growth process. But it is possible that the profits that the typical family based businesses can aspire to may be too small, in most cases, to justify putting too much effort into them. We have argued (Banerjee and Duflo, 2006) that the Indian economy seems to be characterized by high efficiency gains at high levels of capitalization, and fastdiminishing returns for medium sized businesses. It is possible that to be a really effective entrepreneur in today's economy one has to set up a business that is much bigger than what an average middle class family can afford. To find the family businesses that are really dynamic and successful, one might look among families that are significantly richer than what we are calling the middle class, or ones that have the right social connections. For most of our families (there are always a few exceptions, those who are especially lucky or talented), focusing on getting the best education for their children may well be a better investment.

Salaried employment
If the middle class is not primarily made of successful entrepreneurs, what is distinctive about the way they earn their money?
The key distinction between the middle class and the poor is who they are working for, and on what terms. While the household surveys typically lump together daily and casual laborers with salaried workers into one category (wage workers) the distinction between those two forms of employment is crucial. Casual workers work on a farm, a construction site, a truck or a shop, on short-term contracts with no job security. The hours worked by the poor often fluctuate tremendously over time with the availability of jobs, and they frequently migrate temporarily to find a job. This makes it harder for them to acquire occupation specific skills. In addition these jobs do not come with health or retirement benefits, which adds to the risk the poor have to bear.
In contrast, those in the middle class are much more likely to be in relatively secure, salaried jobs. Most surveys do not attempt to classify the job by degree of "job security", or formalization, but a convenient proxy is the frequency of payment. While casual jobs are often paid daily or hourly, regular jobs are paid weekly or monthly.
Assuming that this is a reasonable proxy, it is clear that the middle class is much more likely to hold salaried jobs than the poor (see figure 7 for the average across the sample). In urban areas, for all the countries for which we have these data, between 67% and 99% of those in the $2 to $4 category are paid weekly or monthly. The proportion is above 89% in four countries out of the seven for which we have data. The fraction is even higher among those in the $6 to $10 category. In contrast it is between 38% and 83% for those earning less than a dollar a day. In rural areas, the pattern is similar (the only exception are Indonesia and South Africa, where only 41% of those in the $2 to $4 category are paid weekly or monthly).
Having a regular, well paying salaried job, may thus be the most important difference between the poor and the middle class. There are very few people who live on more than $4 per day in our Udaipur sample but we accidentally met several of them on one of our trips. Their village was about an hour from Udaipur city through largely deserted country like many other villages in our sample (though in this case there was a paved road leading up to the village). Signs of their relative well-being were apparent: an corrugated metal roof, two motorcycles in the courtyard, and a teenager in a starched school uniform. It turns out that, in the families we interviewed in the village, everyone of working age was working in the local zinc factory.
In one particular family, many years ago the father of the current head of one of the household (a man in his late 50s) was hired to work in the kitchen of the factory, and then went on to work on the factory floor. His son (the gentleman who was talking to us) was part of the first batch of (8) boys in the village to complete grade 10. After finishing school, he also went on to work in the zinc factory, where he became a foreman. His two sons both finished high school. One of them works in the same zinc factory, and the other shuttles between the village and temporary jobs in Ahmedabad, the capital of the neighboring state of Gujarat. He also has two daughters, who completed high school before getting married. He is now retired.
For this family, the fact that the zinc factory was set up near their village was an original stroke of good luck, which set off a virtuous circle of human capital investment and progression up the employment ladder. Unfortunately there is little in our data that helps us understand how general this phenomenon might be. Do middle class people get the better jobs because they are more educated, more talented, more willing to make investments, or is a lot of it due to luck? A study by Andrew Foster and Mark Rosenzweig (forthcoming) shows that the role of factory employment in promoting wage growth in Indian villages goes far beyond this particular anecdote. Using a panel data set representative of India covering 30 years , they examine the impact on poverty and inequality of factory employment, growth in local businesses, and agricultural growth. Over this period, India experienced both fast growth in the productivity of agriculture and a very rapid increase in factory employment in rural areas, in part due to a pro-rural investment policy. Rural factory employment increased tenfold between 1980 and 1999. In 1999, about half of the villages in their sample were located near a factory, and in those villages, 10% of the male labor was employed on a factory. Foster and Rosenzweig show that these factories tended to locate themselves in places where wages were low (so that they were actually less likely to be set up in places that had experienced high agricultural productivity growth) and more likely to be in States were the labor laws were more favorable to employers (according to the index developed by Besley and Burgess (2004) Moreover, they mainly employed unskilled labor. Household level data suggest that neither education (availability of schools in the past), nor landownership, predict employment in a factory.
Foster and Rosenzweig's estimates of the impact of agricultural productivity growth and factory employment on income show that both forms of growth reduce poverty, but that the growth in rural factory employment over the 1982-1999 period in India accounts for twice the share of rural wage growth compared to the improvement in yields over the same period. They also show that, because these factories employ low skilled workers, and settle in poorer areas, they contribute to the decline of both inter-village and intravillage inequality.
This analysis suggests that getting a job because a factory decided to start in one village rather than in another has significant effect on poverty. While we are certainly not suggesting that this is the only reason why the middle class has better jobs, luck clearly plays a major role in getting a virtuous circle started.

Migration and labor supply
Migration decisions of the middle class differ substantially from those of the extremely poor: Unlike the poor, the middle class are actually quite likely to have moved from elsewhere to the areas where they now work. In urban areas, the share of people who have migrated since birth among those with daily per capita expenditures between $6 and $10 ranges between 31 percent in Pakistan and 77 percent in East Timor; for those with daily per capita expenditures between $2 and $4 it ranges between 30.5 percent in Pakistan and 75 percent in East Timor, and only between 16 and 60 percent among the poor. Even in rural areas, a much higher fraction of the middle class has permanently changed location since birth for work reasons. Also, while temporary migration remains as important a phenomenon for the middle class as it is for the poor (about 52 percent of the households in Udaipur who live on more than $2 a day have had a temporary migrant over the last year), the migration takes them further (64 percent of temporary migrants from households living on more than $2 a day have gone to a city outside Rajasthan, compared to 42 percent for the extremely poor), and lasts longer (twice as long as it lasts for the very poor).
Both of these suggest a greater commitment to the job that they are pursuing when they are away from home and a greater investment in finding the right job (one reason why they hold a better job might be that they have migrated to get it). However, this is not necessarily a sign of their greater intrinsic motivation. It could also be that the opportunities to migrate to get a better job are rare, and those who get it take it and then do better. Or the middle class may be compelled to migrate because they are better educated and there may not be many jobs commensurate with their particular education in their home town or village. Also since we observe the economic status of an individual's household after he or she has migrated, we cannot distinguish between the effects of migration per se, and the differences between people who migrate.
Another difference shows up in the hours of work. In rural areas, conditional on having worked at least part of the week, men living in households with daily per capita expenditures between $2 and $4 work more hours per week than the extremely poor in all countries. The difference is around three hours per week-in total those between $2 to $4 work between 40 hours a week (Panama) and 55 hours (South Africa). The same is largely true in urban areas. The same general pattern also holds for women. Here again this could be a sign of their motivation ("hard workers tend to be from the middle class"). But it could also be a rational response to the fact they earn higher wages, or simply a result of the fact that the poor are casually employed and as a result, occasionally they end up not finding any thing to do.
Whatever be the ultimate cause, it remains that a core driver of the differences between the poor and the middle class is that they work longer hours, on more stable, higher paying jobs, which they often had to go to some trouble to find. That, rather than their propensity to take risk and run businesses, seems to be at the core of their (relative) economic success.

Family size and fertility
The middle class lives in smaller families, and has fewer children, compared with the poor. One measure of this difference is that the share of the population that is under the age of 18 is smaller for the middle class than for the poor. Among the rural poor, the number of people under 18 as a ratio of the total family size ranges from 40 percent in Nicaragua to 62 in Panama. In urban areas, the range is similar, from 33 to 60 percent. This ratio falls substantially in all countries as incomes rise, although it remains high by the standards of high-income countries. The share of population under age 18 ranges between 16 and 54 percent for those with daily per capita expenditures between $6 and $10 in rural areas, and 20 to 52 percent for that group in the urban population.
This, by itself, does not have to mean that the poor have more children: they could just have higher mortality in the older cohorts (as we will see later, this is also true). Unfortunately the lack of consistent fertility histories in most Living Standard Measurement Surveys makes it hard to measure fertility directly. What we do see is that the number of children per adult woman in the household falls sharply as incomes rise. Among the extremely poor at below $1 a day, there are between 1.8 (Ivory Coast) and 3.6 (Panama) children under 13 per adult woman in the household. Everywhere except in Guatemala and Ivory Coast, the number drops by at least 0.5 when we move to the $2 to $4 category. In Nicaragua, Pakistan and Peru, the number of children actually drops by more than one. The number of children per family drops again by about the same amount when we go from the $2 to $4 category to the $6 to $10 category. As a result, the rural families in the $6-$10 per day range have between 1 and 1.3 children per adult woman in all of our countries except Guatemala and Papua New Guinea.
It is possible that this difference partly reflects differences in taste-poor people do not do as much to control fertility (which, in part, is what makes them poor). It could also be bad luck---people are poor because they had too many children. However the most natural story probably has to do with incentives. As Gary Becker pointed out, perhaps the poor lack the financial or social resources to make the really paying investments in their children: sending them to private school, paying for college education, and so on (Becker, 1991). Given that the poor know that they will not be able to make these investments, it perhaps makes economic sense for them to have many children and send them to work young. Either way, differences in fertility may be an important part of what allows the middle class to stay ahead of the poor.

Education
We already saw that while the rural middle class spends more or less the same fraction on education as the poor, the urban middle class often spends substantially more. Therefore in both cases, they spend much more in absolute terms per child, especially since they have fewer children.
In part this extra spending is explained by the fact that the middle class is more likely to send their children to school than the poor (figure 8). Enrollment rates in the 7-12 age group both in urban and rural areas rise by a substantial amount in Ivory Coast, Pakistan, Udaipur, Nicaragua, Panama, Papua New Guinea, Tanzania and East Timor when we move from the below $2 category to the $6 to $10 group. The increase is especially large (by a factor of two or more) for both boys and girls in Ivory Coast (urban and rural) and for girls in rural Pakistan. Elsewhere, there is either no change or a slow increase.
Despite these increases, a substantial fraction of middle class children are not in primary school: In Tanzania, Papua New Guinea, Pakistan and Ivory Coast, the fraction of both boys and girls from families in the $2 to $4 category going to primary school is less than 80 percent. This phenomenon is not due to isolated rural poverty; the lowest enrollment rate for this age group for middle class families (60 percent) is actually for girls in urban Ivory Coast.
Among the children above 13 the relationship between enrollment and economic wellbeing is, understandably, somewhat steeper. The share of children that age in school goes up by more than 50 percent in a majority of countries and even triples in some (like Ivory Coast) though there are some places where it is flat or even goes down (like East Timor, Peru, and South Africa).
Even with these large increases in enrollment, if the expenditure per child in school remained the same, we would expect those between $6 and $10 to spend a smaller share on education than those below $1, partly because the share of children going to school doesn't rise six-fold, and partly because the rich have fewer children. In short, the middle class spends more, often much more, per child educated than the poor.
A part of this extra money pays for the fact that middle class children are more likely to remain in school after they are 18, but a substantial part of it also goes to pay for private schools or on tutoring outside school hours. In almost all countries, the share of children attending private school increases substantially both in rural and urban areas, although there is a lot of variation across countries. Another common phenomenon is tutoring after school. Kochar (2001) reports that, in India, the ratio of urban boys getting after-school tutoring was about 20 percent for primary age children and close to 40 percent for the secondary age groups. The idea of someone below the U.S. poverty line paying for private schooling for their children might seem bizarre to people who have in mind the image of private schools in high-income countries, but that analogy would be misleading. Private schools in developing countries are often very cheap (in South Asia, it is not uncommon for them to cost less than $150 per year) and largely unregulated, and the quality is correspondingly mediocre or worse. There used to be a large billboard on the outskirts of the city of Udaipur cheerfully advertising a new Engleesh Medium School.
The fact that the people are not sending their children to the free public schools, even for the lower grades, reveals something about the quality of those public schools. Indeed, looking at teacher absence rates in India, Kremer et al. (2005) show that, in villages, private schools spring up in areas where the public schools are particularly bad, and in those communities, the private school teachers are much less likely to be absent than the public school teachers, even though they are often paid a fraction of what public school teachers make.
The switch towards private schools and tutoring could also explain why the phenomenon of increasing educational spending is primarily an urban phenomenon. As a greater share of high-income people live in urban areas and the population is more geographically concentrated, it is natural that there would be a greater supply of more expensive options for education in urban areas. In addition, households living with daily per capita expenditures between $6 and $10 in urban areas are more likely to live among even higher-income people who set the norms for the education that they want for their children. Yet another possibility is that households in urban areas are more often migrants who may therefore be especially ambitious for themselves and their children. Finally, the returns to education may be larger in urban areas.

Health Care
The likelihood that an individual will see a health provider when they are sick goes up sharply with daily per capita expenditures in both rural and urban areas. The increase seems to be steeper in rural areas. The middle class also consumes more expensive health care. With this combination of higher quantity and higher price, health care spending as a share of daily per capita expenditures rises quite sharply in most countries; for example, in Mexico it goes from 1 to 5 percent, in urban Indonesia from 1.4 to 3.4 percent, and in Hyderabad from 5 to 17 percent.
In part, this pattern reflects a shift towards private health care for the middle class. However, this cannot be the whole story, since in some countries (like India and Pakistan), even the poorest in our sample say that they go to private doctors, while in others (Mexico) everyone says that they use the public health system. In these countries, the middle class are presumably going to more expensive private doctors when they go and perhaps paying more to public doctors to jump the queue; the doctors they see are more competent and exert more effort (Das and Hammer (2007) find this pattern among the slum-dwellers of Delhi). In addition, the middle class probably buys more of the medicines suggested by the doctors, get more tests done, go for the recommended surgery and deliver children in hospitals rather than at home.

Investment or consumption?
The middle class lives distinctly healthier lives than the poor. They go to the doctor more often and spend more per visit. As we saw earlier, they are also much more likely to have access to running water, latrines, and electricity. As far as children's education is concerned, they spend much more per child, partly in more years of schooling and partly in better quality.
Economists are used to thinking of health and education choices as investment decisions, but it is possible that much of this extra spending on health and education by the middle class should be seen as consumption. Even though spacious houses and latrines contribute to cleaner environments and better health, and tap water is safer to drink, are these mainly for comfort, or do they lead to better health outcomes? Does the more expensive doctor give them better treatment or is he just pandering to their hypochondria? Or is it actually true that the extra expenditure in health and education pay off in terms of a healthier life or a higher income?
In Banerjee and Duflo (2007b), we ask whether there is a payoff in terms of the starkest possible outcome---mortality. We observed that middle class adults are more likely than the poor to report that their parents are alive, which suggests lower mortality among those 50 and above. We then used panel data from the two countries (Indonesia and Vietnam) where we have detailed consumption data and where the households were interviewed twice, with about five years between the two interviews, to answer a very simple question: Are those who were poor in a particular survey year less likely to survive until the next survey year compared to the middle class?
The answer turns out to be surprisingly clear cut. Among those who were 50 years or older in the base year, the poor are much more likely to die than the middle class. In Indonesia, for example, about 15 percent of those who were 50 and above in 1993 and poor had died by 1997. The corresponding number for those between $6 and $10 was 7 percent. The difference is particularly striking in rural areas (15 versus 3 percent) but substantial also in urban areas (18 versus 11 percent). The patterns are similar in Vietnam.
Of course, the direction and channels of causality here are unclear. Perhaps people become poor because they are already sick. Or perhaps poor health is in part inherited, so that less healthy old people live with low-income and less healthy younger adults. But on balance, it seems plausible that the richer households live substantially longer in part because they live healthier lives. An interrelated combination of their economic life, their life decisions, and their investments in home life---better sanitation, water on tap, a latrine, less strenuous physical labor, better doctors, fewer child births, better nutrition--not only allow the middle class to live more comfortable lives or to show off their wealth: they also allow them live longer.

What is middle class about the middle classes?
Nothing seems more middle class than the fact of having a steady well-paying job. While there are many petty entrepreneurs among the middle class, most of them do not seem to be capitalists in waiting. They run businesses, but, for the most part, only because they are still relatively poor and every little bit helps. If they could only find the right salaried job, they might be quite content to shut their business down. If the middle class matters for growth, it is probably not because of its entrepreneurial spirit.
They also have fewer children, and spend much more on the education and health of these children as well as on their own health. It is interesting to speculate whether this has something to do with the kind of jobs they have. Perhaps the sense of control over the future that one gets from knowing that there will be an income coming in every month -and not just the income itself-is what allows the middle class to focus on building their own careers and those of their children.
The reason why this matters---indeed why it might matter a lot--is that it leads us to the idea of a good job. A good job is a steady, well-paid job, a job that allows one the mental space that one needs to do all those things that the middle class does well. This is an idea that economists have often resisted, on the grounds good jobs may be expensive jobs, and expensive jobs might mean fewer jobs. But if good jobs mean that children grow up an environment where they are able to make the most of their talents, one might start to think that it may all be worth it. Doepke, M. and F. Zilibotti (2005)  in the year the survey was carried out and the CPI in 1993.

5)
To compute average consumption per capita and the proportion of people in poverty, observations are weighted using survey weight*household size 6) The Mexican Family Life Survey is documented in Rubalcava and Teruel (2004) and available at http://www.radix.uia.mx/ennvih/ 7) The LSMS are available from the World Bank LSMS project page.
10) The paper does not report statistics based on cell sizes with fewer than 35 observations