by Jan Priewe, University of Applied Sciences, Berlin

 

1. Old classification systems losing usefulness


The widespread use of the terms “developing” or “developed” country and “emerging” country lacks clarity and coherence. Due to a lack of consensus, there are three typologies in use. The World Bank had classified developing countries (until 2016) according to their gross national income per capita, with presently USD 12,476 – occasionally adjusted alongside inflation - as the watershed between the developing and the developed world. Low, lower middle and upper middle-income countries have the thresholds below USD 1,025 USD, USD 4,035 and USD 12,476 USD, respectively. However, the thresholds are somewhat arbitrary.

 

If further development would occur, the low-income class would shrink, and the upper middle class too. Until now, only very few and mostly small countries could access the high-income threshold. In 2016, the Bank announced using these thresholds now without the vocabulary “developing or developed”. This should trigger the question what then developing countries are in the Bank’s mindset and why then the high-income countries remain unclassified despite strong diversity. The UN takes the categories developing, transition and developed countries, with G7 as the “Major developed countries”, and “Least Developed Countries” at the bottom, using geographical and a number of specific criteria without coherent methodology. UNDP prefers the three-dimensional Human Development Index with the criteria GNI per capita, life expectancy and education to establish a classification in low, medium, high and very high human development countries - with arbitrary thresholds.
Due to the shortcomings of these three classification systems, the term “emerging economies” came up, partly used by the IMF without a definition. Apparently, there is a grey area between traditional developing and developed countries – nameless territories. Some conclude, countries are so complex and so different, we better discard all old classifications, especially the term “developing country”.


2. What are “Emerging Economies”?


The origin of the term was the wish of investment bankers to find an appealing name for investment funds based on securities from a diverse set of countries called “emerging market economies”. This is a proper financial term, based on the idea of diversification of financial portfolios, but not proper for classifying countries from a developmental perspective. Typical emerging economies funds include countries so diverse as India, Greece and Qatar, like in the well-known MSCI fund. In contrast, the term “emerging economies” focuses on upper middle-income countries on the verge of reaching the World Bank threshold for high income countries. This aroused the question whether these countries are still developing countries. And it revealed that the category “high income” ranges from USD 12,476 to above 90,000, presently, implicitly contending that there is no development in this range. So, we don’t really know what emerging countries are. Others consider those countries that truly develop from their old status to a higher class as “emerging”, often with a strong focus on above average GNI or GDP per capita growth. Countries growing over considerable periods at rates above the world average can be found in all sub-groups of countries below the high-income margin of the World Bank. This leads us to questioning the rationale of the category “high income” or “developed countries” – they are so diverse and not necessarily converging to the US level or other high reference countries. Besides, there is little doubt that “developed” countries should also develop, as they are challenged by their distance to the global innovation frontier, by climate change, income inequality, stagnation or financial risks, apart from lack of social inclusion. Developed countries can no longer be categorised as “industrial countries”, since the share of value added in industry (or manufacturing) is remarkable lower than in the majority of upper middle-income countries. Thus, the term development needs to be clarified, in contrast to GDP growth, and be considered applicable to all countries, poor and rich as well.


3. Can’t we do without classifications?


The confusion of terms stems from the obsolescence of the notion that all countries converge sooner or later to the rich country group, with the UK or the US representing the former colonial powers as advanced capitalist systems. The latter were considered, implicitly, as the final stage of development to which catching-up in all dimensions occurs, sooner or later, with pioneers and laggards. Once achieved, “development” fades away. As this notion falters, without being replaced by another realistic one, we have landed in uncertainty and seem stuck in complexity. If there are economic and social similarities between different groups of countries, by and large, we need to detect them and search for proper criteria and labels. As it is obvious that societies at the bottom and the top billion of global population, in terms of average income per capita, differ so conspicuously on many dimensions, despite commonalities of certain fractions of the population across poor and rich countries, we should not throw out the baby with the bathtub, succumbing to observed diversity, complexity and abundance of data.
The term development needs a broader understanding, complementing the generic term preferred by most economists, i.e. growth of income. Development embraces structural change and economic, social, technological as well as environmental progress, hence it is a multidimensional term. In countries at the bottom of the global hierarchy, the key challenges are reducing absolute poverty, shrinking subsistence economy, satisfying basic needs, containing population growth and raising life expectancy, supplemented by early industrialisation. On the top, advanced countries struggle with social inclusion and inequality, environmental issues, financial system risks and the like, although many of the old issues are still unresolved. Development is everywhere an issue besides growth, but with different contents.


4. The search for a new classification methodology


A brief sketch of a new classification system might go in the following direction embracing three ideas.
First, classification according income per capita is indispensable as it shows the economic potential of countries. The thresholds should be linked to the – always moving – world average and include different classes for the hitherto so-called high-income countries. One might distinguish three classes below the average, as a rough first guideline take <10%, 10-49%, 50-149% as low, lower middle and middle-income countries, and 150-249%, 250-399% and above 400% as low high, high and top income countries (note that in 2015, world average GNI per capita in constant 2010 USD was around USD 10,000). Indeed, these thresholds look somewhat arbitrary too, but the groups face common key challenges. Within each country group emerging countries could be identified, defined now as those with strong growth dynamics to graduate from their class and capable entering the next soon. A more sophisticated approach would add a coefficient for income distribution to the simple average GNI per capita, thus giving more weight to countries with less income inequality.
Second, the traditional developing countries, say those below 150% of the world average income per capita, as well as the low high-income group, should be classified with a set of not more than ten criteria which are synthesised to an aggregate indicator similar to the HDI index, but going beyond human development indicators. They should include four sub-sets: the three HDI criteria, an income-inequality indicator, indicators for the productive capacity of a country (reflected for instance in the degree of industrialisation, non-traditional exports, expenses for R&D, labour productivity etc.), key environmental indicators. This would reflect the traditional production approach of development economics to analysing the capacity of countries to catch-up with the advanced group of countries. Such information would shed more light on the capacity of traditional “developing countries” to generate economic dynamics, so to speak as an engine for growth and equity – key issues for middle income countries. The term “developing” should apply to all countries below a certain threshold defined by the multi-dimensional analysis. A multi-dimensional analysis for the above world average countries according to other developmental criteria would shed more light on the main factors which differentiate these groups of countries.
Third, a special group of countries are those depending excessively on natural exhaustible resources, mainly fossil energy or scarce minerals (sub-soil-resource-rich countries). This group encompasses countries with quite different income levels (compare Qatar, Botswana and Nigeria), and differs strongly from all other country groups. A fraction of this group would be a special sub-group of developing countries in the sense sketched above.
In order to change the classification system, a new competing system should be launched, without waiting for prior global consensus.

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