Off the mark: ‘Middle’ isn’t middle

Nothing catches on like a catchy phrase; it serves to both focus and deflect attention. Of late the phrase 'middle income country' seems to have caught the imagination of an important section of the people. Policymakers at the highest level, and lesser mortals, have repeatedly expressed their firm resolve to work towards turning Bangladesh into a middle income country (MIC) within the shortest possible time. The pitch of the resolve seems to increase with the descent of angels from overseas development partners on the capital. The ordinary people are bemused wondering what really is a middle income country?

Sometime ago, I attended a seminar that assembled a number of very distinguished people as speakers and discussants. Some of them mooted the prospect of Bangladesh becoming a middle income country in a short time if only policies were right and the state of governance improved.

However, when a participant asked what 'middle income' meant, it was discovered very few in the seminar actually knew the precise connotation of the phrase, or those who knew did not share their wisdom with the rest. Someone speculated that middle income started from about US$1000, and that become the basis of further discussion.

Indeed, a large number of people seem to hold the same view. This is reflected, for example, in the lead editorial of the reputed English daily The Daily Star: "… the per capita income at US$750 per head (sic) is well below graduation threshold [for MIC] of US$1056." (26 Nov 2010)

There are two problems in this quote and in the discourse on this issue. First, the threshold for middle income is not US$1056; and second, the currency symbol before Bangladesh's per capita income is not the same as that before the middle income threshold figure although both are quoted in US$.

The confusion regarding the threshold is due, among other reasons, to different uses of this term. The UN system does not seem to officially use this term for classification (I could not find any definition of the term in its website), but UNCTAD does classify countries into three categories according to their per capita income: low, middle and high. A middle income country is one that has a per capita income between US$1000 and US$4500. However, it is not evident what use this classification has in UNCTAD. For the UN system, the operationally relevant categories are developed and developing countries (although there is no established convention for such designation). Within developing countries there are least developed countries (LDC) and non-LDC developing countries. Landlocked Developing Countries and Small Island Developing States are also recognised for some purposes.

The classification of countries along low, middle and high income is actually an artifact of the multilateral lending agency, the World Bank (WB), and holds great importance for its lending operations. It takes great care not only to rigorously define these income categories, but also to estimate the gross national income and per capita income of more than 200 countries in line with its definition.

The member countries are classified according to their gross national income (GNI) per capita in 2009 as estimated by WB. Low income countries are defined to be countries with per capita income up to $995, middle income countries up to $12,195 and high income above $12,195. The middle income countries are divided into lower middle income, $996 to $3,945, and upper middle income $3,946 to $12,195.

The definition of 'middle income' immediately strikes one as rather odd. Middle has a connotation of something being in the middle or of an average. If one looks at the country-wise distribution of per capita income, as provided by WB, the middle (the mathematically accurate term is median) income is more than $3,800, while the country average is above $12,700. Even on a world per capita basis the income is above $8,500. Any of these figures are far removed from the World Bank threshold for middle income of $995. Note that at this income the country would still be desperately poor. Why is it then chosen as the threshold for middle income?

The appellation middle income country is related to World Bank's lending criteria. The classification allows immediate determination of the economic strength of individual countries.

"The economies whose per capita GNI falls below the Bank's operational cut off for "Civil Works Preference" are classified as low-income economies; economies whose per capita GNI is higher than the Bank's operational threshold for "Civil Works Preference" and lower than the threshold for 17-year IBRD loans are classified as lower-middle income economies; and those economies whose per capita GNI is higher than the Bank's operational threshold for 17-year IBRD loans and lower than the threshold for high-income economies are classified as upper-middle income economies."

Low income countries as well as all countries with per capita GNI of less than $1165 (in 2009) are regarded as lacking the financial ability to borrow from IBRD; they qualify for IDA loans. Such loans are "deeply concessional — interest-free loans and grants for programs aimed at boosting economic growth and improving living conditions. IBRD loans are non-concessional."

Thus, the only objective of WB in graduating a country from low to middle income is to reduce the amount of concessional advantages extended to it. Being a multilateral development agency, WB wants to appear generous by providing various concessional advantages, such as grants, to the poorest countries of the world.  However, when they are re-branded 'middle income', something many of them including Bangladesh seem to cherish, it is easier to impose more competitive or onerous terms on them.

The dollar value used by WB for estimating GNI and classifying countries is not the same as the market exchange rate, but a WB concoction. The local currency GNI of each country is converted into US dollar value by using a complex formula that it calls the Atlas method. The exchange rate is derived by using the market exchange rate and the price level of the country during the last three years and the price levels of the G-4 countries, i.e. Eurozone, Japan, the UK and the USA, which are measured by their SDR deflators. The per capita income is then estimated by dividing GNI by the population. The Atlas method is purportedly used to smooth fluctuations in prices and exchange rates so as to make the figures comparable across countries.

The Atlas method provides different estimates of GNI and per capita GNI from what one would find in the official statistics of individual countries. For example, the per capita income of Bangladesh is reported by our government to be US$676 in 2009, but the figure estimated by WB is US$590. Thus, in order to reach the threshold income (assuming it does not change) for MIC, our per capita GNI has to grow by 68.6 percent, and not 32.6 percent as estimated from our statistics. If we can maintain the average rate of growth achieved during the new millennium we should be ready for graduation in less than a decade, and not two or three decades as suggested by The Daily Star editorial: "It is, therefore, expected that the present government would devise its strategy accordingly to achieve the status of an MIC within the next two or three decades." (ibid)

However, if the threshold is raised it will obviously take longer. The threshold at the end of the last millennium was US$785; thus it was raised by 27 percent by FY2011. A similar increase in future would push the graduation date beyond a decade. On the other hand, if Bangladesh can raise its economic growth rate significantly, the graduation year will be brought forward.

The concept of low income country is sometimes confused with that of the least developed countries. As mentioned earlier, the latter is an analytical category used by the UN agencies and also by the WTO. LDCs are defined as low-income countries suffering from severe structural handicaps to growth. The definition of LDC is thus wider than that of low income countries of WB. Per capita income is only one of the three criteria used to determine if a country is an LDC. The other two criteria are human assets weakness and economic vulnerability. The graduation level of income is US$1086. It seems that the Committee for Development Policy uses WB estimates of per capita GNI.

The human assets index is a composite index based on: (i) nutrition (the percentage of the population that is undernourished); (ii) health (the child mortality rate); (iii) school enrolment (the gross secondary school enrolment rate); and (iv) literacy (the adult literacy rate). The current threshold value of the index for graduation is 66.

The economic vulnerability index is also a composite index based on: (i) natural shocks (the index of the instability of agricultural production, and the share of the population displaced by natural disasters); (ii) trade shocks (the index of the instability of exports of goods and services); (iii) exposure to shocks (the share of agriculture, forestry and fisheries in GDP, and the index of merchandise export concentration); (iv) economic smallness (the population in logarithm); and (v) economic remoteness (the index of remoteness). The country qualifies for graduation if the index value is no more than 38.

Bangladesh has already met the economic vulnerability criterion by a substantial margin. At the rate it has performed during the last review in 2009 by the Committee for Development Policy, it may cross the threshold value of the human assets weakness index in about 15 years, but it could attain the current threshold income within a decade. However, if the graduation values are changed, it might take longer.  Considering the processes involved it seems unlikely that Bangladesh could formally graduate out of the LDC category in less than 15-20 years unless its performance improves markedly. A final point to note is that LDC and low income countries are not synonymous. Kenya, India and Pakistan are low income countries, but none is an LDC, while a number of LDCs have per capita GNI far in excess of the threshold income.

Graduating from LDCs is certainly a desirable objective; indeed any increase in the general welfare of the people is a cherished outcome. However, it should be understood that moving to the higher category involves some responsibility. As mentioned above, the country will lose the privilege of receiving concessional loans from WB, i.e. foreign borrowing will become much more expensive. More importantly, the country will lose the duty-free and quota-free market access that it now enjoys. It will also have to open up its own market to foreign competition as the current non-reciprocal advantages will be replaced by the principles of reciprocity. It will also lose the diplomatic leverage it now wields in multilateral organisations such as WTO by virtue of being in the leadership position of the LDC group; it is unlikely to be in a similar position among the developing country group in the foreseeable future. Bangladesh will have to prepare its economy for this transition during the next one to two decades.

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Professor M A Taslim is the CEO, Bangladesh Foreign Trade Institute