Is it enough to achieve the middle-income country status?

Achieving the middle-income country (MIC) status is a professed objective of the Government of Bangladesh. This will be achieved by 2021, according to the upcoming budget speech to be placed in parliament on June 4, as reported in the news media quoting senior ministry of finance officials.

If that happens, Bangladesh would meet one of the targets of the Istanbul Programme of Action (IPOA) for least developed countries (LDCs), agreed at the 4^th United Nations conference on LDCs in Istanbul in 2011. Specifically IPOA aims to enable half of the LDCs to meet the criteria for graduation.

The identification of LDCs is currently based on three criteria: (i) per capita gross national income (GNI), (ii) human assets and (iii) economic vulnerability to external shocks.

The low-income criterion is based on a three-year average estimate of GNI per capita, calculated by using the World Bank Atlas method – under $992 for inclusion, above $1,190 for graduation as applied in the 2012 triennial review by the Committee for Development Policy (CDP), a subsidiary body of the UN Economic and Social Council of the UN (ECOSOC).

The Human Assets Index (HAI) is based on indicators of: (a) nutrition: percentage of population undernourished; (b) health: mortality rate for children aged five years or under; (c) education: the gross secondary school enrollment ratio; and (d) adult literacy rate.

The Economic Vulnerability Index (EVI) based on indicators of: (a) population size; (b) remoteness; (c) merchandise export concentration; (d) share of agriculture, forestry and fisheries in gross domestic product; (e) share of population living in low elevated coastal zones; (f) instability of exports of goods and services; (g) victims of natural disasters; and (h) instability of agricultural production.

Thus, it can be seen that reaching the per capita threshold does not necessarily guarantee a country to graduate to a middle-income country. To become eligible for graduation, a country must reach threshold levels for graduation for at least two of the above three criteria, or its GNI per capita must exceed at least twice the threshold level, and the likelihood that the level of GNI per capita is sustainable must be deemed high. To be recommended for graduation, a country must be found eligible at two successive triennial reviews by the Committee for Development Policy.

The overarching goal of the IPOA is to overcome the structural challenges faced by the LDCs in order to eradicate poverty and achieve internationally agreed development goals, with a special focus on MDGs. IPOA targets at least 7% GDP growth annually; but growth has to be sustained for a considerable period; and it has to be equitable and socially inclusive. With the emerging sustainable development goals in the post MDGs period (2015), one can add that growth must also be environmentally sustainable.

That is, even if a country reaches or passes a middle-income threshold ($1,190), it may still have endemic poverty as well as high degree of social exclusion and inequality unless equity policies are not integrated with growth policies. This is because, trickle down does not automatically happen.

As a matter of fact, research by Andy Sumner at the Overseas Development Institute (UK) reveals a surprising result: only 7% of world poverty remains in low-income, stable countries. That is, most of the world's extreme poor no longer live in the world's poorest or least developed countries.

Andy Sumner's research also finds the following distribution of global poverty: half of the world's poor live in India and China (mainly in India), a quarter of the world's poor live in other MICs (primarily populous lower MICs such as Pakistan, Nigeria and Indonesia) and a quarter of the world's poor live in the remaining 35 low-income countries. Andy Sumner describes this finding as a 'poverty paradox'. (Andy Sumner's paper can be found here)

While the above is the global picture, let us look at a country level to demystify the obsession with the middle-income status or graduation objective. Botswana, a land-locked country in Southern Africa, graduated from a LDC to an upper middle income country in 1994. Its per capita income in 2013 was $7,770 (The World Bank Atlas method, current US$) – the highest in Sub-Saharan Africa.

However, its poverty rate is over 19% and around 23% of its population live below the minimum threshold levels in each of the dimensions of the UNDP's Human Poverty Index (HPI). Unemployment has remained persistently high at nearly 20% (with youth unemployment over 34%); life expectancy at birth fell by 11 years from 58 years (in 1995) to 47 years (in 2013) and Botswana is the world's 3^rd most unequal society with the common measure of income inequality, Gini, of 0.61!

Botswana's environmentally harmful CO2 emissions at 2.7 metric tons per capita (2010) is the highest in Sub-Saharan Africa. Thus, despite its middle-income status, Botswana continues to grapple with significant environmental and social challenges including unequal distribution of wealth, high levels of poverty, unemployment and HIV/AIDS prevalence. (Botswana's basic socio-economic and environmental data can be obtained here).

Therefore, focusing on per capita GDP growth alone will not be sufficient for Bangladesh where inequality has been rising at a rapid rate since the early 1990s. Gini coefficient in Bangladesh has increased from 0.36 in 1973-74 to 0.46 in 2010, a value exceeding the danger mark of 0.40. Data from the Bangladesh Household Income and Expenditure Survey 2010 show that the share in total income increased substantially only for the top 10% of the households whereas the share of the bottom 40% of the households declined considerably.

The rate of environmental degradation in Bangladesh, especially in the cities, is also alarming. For example, the density of airborne particulate matter (PM) reaches 463 micrograms per cubic meter (mcm) in Dhaka during December-March period – the highest level in the world. City dwellers and road users regularly breathe, contains lead in concentrations reportedly almost ten times higher than the government safety standard set by the Department of Environment. About 50 tons of lead are emitted into Dhaka city's air annually.

According to a recent New York Times report, "Bangladesh is already one of the world's most environmentally fragile places … Even as pollution threatens agriculture and public health, Bangladesh is acutely vulnerable to climate change, as rising sea levels and changing weather patterns could displace millions of people and sharply reduce crop yields … Bangladesh has laws to protect the environment, a national environment ministry and new special courts for environmental cases. Yet pollution is rising, not falling … largely because of the political and economic power of industry."

Therefore, the focus of the forthcoming budget should be environmentally sustainable production and consumption, diversification of the economy, and social progress, including reduction of poverty, inequality and social exclusion. The government should use its fiscal measures – revenue (taxes) and expenditure – to attain above objectives; and should not just aim at achieving the highest possible growth rate at any cost with the hope that it can clean up the environment and distribute the fruits of growth later. This, however, requires considerable political will and reconfiguration of power relations.

Readers are urged to read this in conjunction with two previous op-eds. "Budget 2014: Deficits, borrowings and the political economy" and "Why agonise over economic growth?"

­­­­­­­­­Anis Chowdhury, former Professor of Economics, University of Western Sydney, Australia.