Removing the World Bank Blinkers – Income Categories and Foreign Aid

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In one of my very first posts I looked at the recent decision by the UK government to cut foreign aid to India. One of the main justifications used by policy makers was that India had now reached a level of development which enabled it to fight poverty on its own. Arguably the main driving force behind this opinion was India’s graduation to middle income country status (MIC) in 2007. However these average income based measures adopted by the World Bank and OECD have rarely come under close scrutiny. Whilst income has always been highly correlated with many other development indicators, such measures can still mask many important macro level issues.

In a 2011 publication by the ODI, Jonathan Glennie highlights some of the main problems which can evolve from using such measures. Firstly, although low income countries (LICs) tend to have larger proportions of people living in poverty, the bulk of the world’s poor live in MICs. For instance in 1990 94.4% of those living on less than $1 a day were situated in LICs, however by 2008 this number had diminished to just 23.3%. This shift has been mainly attributed to the five major countries known as the PICNIs who recently graduated from LIC to MIC status. The group includes China (which reached MIC status in 1999), Indonesia (1999), India (2007), Nigeria (2008) and Pakistan (2008); all which combined account for 70% of the world’s poorest individuals.

Next Glennie explains that such measures have been criticized for being arbitrarily set with bandwidths that exhibit little rationale. For instance in table 1 we can see that the MIC category has an extremely large bandwidth.

Table 1. World Bank Income Categories

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This means that for at country at one end of the spectrum can be up to 12 times more richer than those at the the lower end. Unfortunately, as highlighted by Glennie, such categorizations can lead to countries receiving less in aid once they cross over into the MIC category. Prominent examples include Japan which has reduced the proportion of its total aid dedicated to MICs from 66% to around 34% over a ten year period. Similarly countries such as Canada and the Netherlands have cut theirs by around a third.

This highlights a worrying trend whereby aid is being shifted away from MICs despite the fact that they contain the highest number of poor individuals. The Economist also stresses this issue by stating that policymakers may soon face a dilemma where global poverty is mostly focused in countries which may be seen as rich enough to not require aid. Naturally, with the current economic difficulties,  policymakers and the media in the west will look to these arbitrary categories to justify cuts in aid.  In contrast, if more multidimensional indicators of development were accounted for such cuts would be more difficult to justify.

For instance former international secretary Andrew Mitchell has recently proposed for aid to be withdrawn from Ghana, Uganda and Zambia by stating,

“The aim of aid is to do itself out of business so it should not be needed any more. Ghana, Uganda and Zambia are countries making significant progress and are candidates.”

Both Ghana and Zambia achieved middle income country status in 2011 and Uganda is expected to reach the threshold by 2017. On this basis alone it would be easy to accept Mr Mitchell’s claim. After all the word ‘middle’ conjures up connotations of faring okay or not doing too bad. Its the center ground, not too poor but still striving for top. However look at a multidimensional indicator of development such as the UN’s Human Development Index, which takes into account statistics such as life expectancy and education, and the picture changes dramatically.

In the latest 2012 rankings all three countries rank outside of the top 100 countries, Ghana ranks 135th, Uganda 161st and Zambia 165th. With a total of 186 countries included in the measure these countries no longer reflect the middle ground. Likewise it is hard to justify that these countries are making ‘significant progress’ in relation to the rest of the world. If you click on the graph below you can also see that the countries also exhibit high levels of poverty (Y Axis),  in Zambia for instance 68.5% of the population live on less than $1.25, and score among the highest for gender inequality (X Axis) – I also added India’s position on the graph to further highlight how misleading the MIC classification can be.

Graph 1. HDI Data showing headcount poverty and gender inequality measures.

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Source: UN HDI Website

After observing these statistics it is extremely hard to accept that these countries are prime candidates for the immediate withdrawal of aid. Although they may be exhibiting high levels of economic growth and a middle income status these countries still have a long way to go when we look at a broader definition of development.

A new focus is therefore needed, policymakers must shrug their dated view that most poor people live in poor countries, this is no longer the case. Aid allocation models should no longer be modeled upon World Bank income categories. Instead they should take into account absolute levels of poverty and other social indicators of deprivation. In this sense aid should be focused on the poorest and most deprived individuals not the poorest sovereign states. After all this is the key principle for giving aid in the first place.

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