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A Review of the analytical income classification

Shaida Badiee's picture

This post originally appeared on Let's Talk Development.

The World Bank’s classification of economies as low-, lower-middle-, upper-middle-, or high-income has a long history. Over the years these groupings have provided a useful way of summarizing trends across a wide array of development indicators. Although the income classification is sometimes confused with the World Bank’s operational guidelines, which set lending terms and are determined only in part by average income, the classification is provided purely for analytical convenience and has no official status.

The classification is based on gross national income per capita, calculated annually in U.S. dollars using a three-year average exchange rate, the so-called Atlas methodology. Because the thresholds are frozen in real terms while real incomes have risen, the number of countries in the low- and lower-middle-income groupings have decreased and poverty rates have declined, even as hundreds of millions of people remain in absolute poverty. This is hardly news. When China crossed the threshold from low- to middle-income twelve years ago, a quarter of the world’s poorest people moved with it. And after India crossed the same threshold nine years later, a majority of the people living on less than $1.25 a day lived in middle-income economies. In another decade it is likely that no country will remain below the current low-income threshold, even though absolute poverty, whether measured by dollars or life expectancy or education levels, will certainly persist. As Martin’s note suggests, this calls into question the usefulness of the current classification scheme.
 
For this reason the Data Group at the World Bank is reviewing income classification system. To inform this review, we welcome inputs from all users and colleagues in the research and development community. We would appreciate any comments or suggestions on the following questions:

  1. Does a classification of economies by development status have some usefulness in analysis and research? 
  2. Should the classification be based on average income or some other indicator or combination of indicators? Should income be measured by exchange rates or purchasing power parities (PPP). Should we go “beyond GDP,” and, if so, how should such a measure be constructed?
  3. Should  poverty rates be used as a classification criterion? Does Martin’s analysis of “capacity for redistribution” have any application?
  4. How should the categorical thresholds be set? Are there “natural” dividing lines between categories measured along a GNI per capita scale or by some other indicator?
  5. How and how frequently should the classification be updated? Should the thresholds be updated or only the rankings of countries?

Please send your inputs to SBadiee@worldbank.org

Comments

Submitted by Andy Sumner on
Dear Shaida, good points - ones I have made myself since the very first paper on this matter and in the World Development article recently. Interestingly, if you remove India and China (respectively a third and about 15% of world poverty in Povcal data) one is left with world poverty split evenly between LICs and other MICs. However, of course nothing suddenly happens when a country crosses a line - a point I've made on numerous occasions but the World Bank does treat countries quite differently on that basis - and yet that seems surprising - so why is that? (btw when I calculated it for the UN Least Developed Countries - which does have a more conceptual basis - are 25% of world poverty). Lest we forget - MICs do have higher average incomes than LICs and they are less poor in some senses. There are presumably more resources for poverty reduction as a result of higher per capita incomes. One important question I think is looking closely at why so many countries are attaining much higher per capita incomes whilst retaining structural characteristics of very poor nations. And on the new thresholds/categories - if you didn't catch my comment on Martin's blog the paper below may be of interest which suggests development isn't linear and there are five clusters of quite different developing countries with different challenges faced: www.ids.ac.uk/idspublication/beyond-low-and-middle-income-countries-what-if-there-were-five-clusters-of-developing-countries Happy to continue discussing and help in any way if I can. Andy Sumner King's College London

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