Although Robert Zoellick pushed the World
Bank to open its much-prized treasure chest of
data to the public during his five-year term as
president, he did little to reform how the bank
works with that data. Whoever becomes the next
president of the World Bank should make it a
priority to reevaluate the country classification
system. Doing so would have a wide and beneficial
impact on the development community.
For
instance, look at all the discussion in
development policy circles about the sharp
reduction in the number of low-income countries in
recent years. Some believe this news should be
trumpeted as a policy
success. For others, the reduction suggests that
there is a "New Bottom Billion" of poor people
living in middle-income countries, forcing a
change in donor focus. For yet another group, it
indicates that foreign aid as a concept should be
updated to blend more loans with grant money.
But has all that much changed? Does the
World Bank system accurately identify the
countries in need of outside assistance?
The World Bank's classification system
divides its 187 member countries into four
categories: low income (US$1,005 or less); lower
middle income ($1,006 - $3,975); upper middle
income ($3,976 - $12,275); and high income
($12,276 or more).
Whether a country is
low income (LIC) or middle income (MIC) affects
many things, from eligibility for concessional
lending from the multilateral banks, to donor aid
policy (see, for instance, the 2006 European
Consensus on Development [1] ), to trade access
(low-income countries are more likely to have
access to rich-world markets).
The system,
however, presents a distorted picture. Using just
one number - income per capita - to determine a
country's status may be "convenient", as the World
Bank puts it, but it produces results that do not
reflect real-world situations. Ignoring issues
such as inequality, human development, social
exclusion, and government capacity - all of which
matter tremendously to the robustness of states
and the lives of the poor - does a disservice to
the organizations and people who use the system.
There are many ways that this single
number can be misleading. When a state has oil or
other natural resources that can be exploited in
small enclaves unconnected to the rest of the
economy, average incomes say little about
development progress and the welfare of the
population.
Nigeria, Angola and Sudan all
are middle-income by the World Bank's reckoning,
but have problems typical of less developed
places. A substantial drop in commodity prices
would immediately have a large effect on their
average incomes.
If a state runs up its
debt in an unsustainable manner, as many
developing countries did in the 1970s, income
levels may not be sustainable no matter how widely
they are distributed.
In both these cases,
countries may achieve a higher status that is not
sustainable. In fact, between 1978 and 2003, 25
countries fell from MIC to LIC. Most of the
countries that have graduated from LIC to MIC
status in the last decade were actually MIC at
some point in the past.
There is also the
question of cut-off points. Why are countries with
$1,005 average incomes rated LIC while those with
$1,006 MIC? Are countries that are one dollar
wealthier that much more developed? The rationale
for how bandwidths are drawn is not available and
seems fairly arbitrary, as Jonathan Glennie has
pointed out. [1]
Changing the parameters
that determine a country's status would change the
results substantially. If the cut-off point were
$1,500, for instance, 18 more states would be
considered LICs.
If countries with low
levels of human development, as measured by the
United Nations Development Program's Human
Development Index, were chosen instead, there
would be 46 countries in the lowest category
instead of 35. If a country's dependence on
natural resource exports mattered, perhaps a dozen
MICs would lose their status.
The United
Nations uses a different classification system,
whereby its "least developed countries" are
selected because they have low incomes (under $750
to be added to the UN list, above $900 to graduate
from it), weak human assets, and high levels of
economic vulnerability. According to Simon
Maxwell, under its stricter system 18 MIC
countries would still be classified as least
developed. [2]
A better system would
completely change the conversation about the
reduction of LICs for a number of reasons.
First, the most populated mover, China,
had many of the qualities of a low middle-income
country well before it reached MIC status in 1999.
Its human development indicators and state
capacity were far superior to most low-income
countries. And its poverty rolls were declining
sharply throughout the 1980s and 1990s (something
that quite a number of the newer middle-income
countries have not achieved yet).
Second,
the third-largest mover, Indonesia, was actually
regaining a status it had lost during the Asian
financial crisis, when its average incomes fell
due to political instability. Its poverty levels
began falling in the 1970s. It probably did not
deserve to be an LIC a decade ago.
On the
other hand, the fourth- and fifth-most important
movers, Nigeria and Pakistan, do not really
deserve to be considered MICs now. Both have
enormous governance problems and very low levels
of human development, making their inclusion in
the higher category rather tenuous, and even
misleading. The former is only an MIC because of
its oil exports.
Of the five most populous
countries that shifted from lower- to
middle-income status in recent years, only India
really has seen changes that can be classified as
increasing its development level from low to lower
medium, and this shift hides great differences
between various parts of the country. The north
and northeast are still comparable to an LIC.
Therefore, only one of the five largest
countries that moved up a notch according to the
World Bank since 1999 can be said to really
deserve this accolade during this time period. The
great shift in global poverty from LICs to MICs
depends almost exclusively on what has happened in
these five countries. If we remove them from the
equation, there has hardly been any change in the
percentage of poor people living in MICs since
1990. [2]
A more accurate classification
system would affect a wide range of debates and
policies concerning the poor besides this one
example.
For instance, while it may be
correct to say that 36% of the United Kingdom's
total bilateral aid budget is allocated to MICs
between 2010 and 2015, the high proportion of this
money going to places such as Nigeria, Pakistan,
and Yemen (all of which are seeing a doubling of
aid) means that the proportion going to
medium-developed countries is far lower. An
accurate picture would completely change the
conversation - and many policies along with it.
[3]
Formulations such as MIFFs -
middle-income, failed, or fragile states, as
designated by The Economist - would be irrelevant
if countries were better categorized. Most of the
countries on that particular list are either oil
producers (Nigeria, Angola, Iraq, Sudan), heavily
aid dependent (East Timor, Djibouti, Papua New
Guinea), or weakly governed (Pakistan, Yemen). Few
have decent development indicators. [4]
So
what should a more sophisticated and less
arbitrary system look like?
First, it
should aim to measure levels of development rather
than levels of income. This would require taking
into account political and social development in
addition to economic development, and taking a
more nuanced view of the latter.
Making it
clear that the bank considers these factors
important would itself mark a break with the past,
and give a much needed boost to efforts across the
development community to focus more on
non-economic issues.
Second, it should
include many more factors, more akin to what the
United Nations uses now than the current World
Bank system. These would include a variety of
social, economic, and political indicators, such
as the average level of human development, the
quality of public services, macroeconomic
conditions, the degree of export diversification,
and the extent of social conflict. Income would
still matter but much less than it does now.
Third, it should consist of more
categories to better reflect the complexity of the
world. Ideally, this would mean creating groups
based on unique characteristics instead of putting
all countries on the same scale. For instance,
middle-income countries that depend almost
exclusively on petrochemical exports and have done
little to raise the human development of most of
their citizens would be grouped together (such as
Nigeria and Sudan). Especially violent societies
might fit into another grouping (such as Honduras
and El Salvador).
A gradualist approach,
whereby countries would not jump abruptly to
higher levels but would instead be grouped into
multiple categories or be moved upward slowly over
time, would better take into account the messiness
of reality. At the very least, the current three
levels (or four if you consider upper and lower
MICs distinct categories) need to be reformulated
into five to seven categories.
Making
these changes would improve the ability of the
bank and the rest of the development community to
fight poverty, promote development, and improve
the workings of poorer countries.
Seth Kaplan is a business
consultant to companies in developing countries as
well as a foreign policy analyst. His book
Fixing Fragile States: A New Paradigm for
Development (Praeger, June 2008) critiques
Western policies in places such as Somaliland,
West Africa, Syria, and Pakistan and lays out a
new approach to overcoming the problems they face.
His articles on fragile states and development
have appeared in the Washington Quarterly, Orbis,
the Journal of Democracy, the Wall Street Journal,
the New York Times, and the International Herald
Tribune.
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