Financial Transparency Coalition

Classification is important—in any discipline. Classification of symptoms helps doctors determine the correct treatment for patients. It helps us pick out the right book in a library, settle on the appropriate sentence for a convict, and compare species of plants.

For similar reasons, researchers collect countries into groups based on a variety of metrics that define prosperity. These systems allow us to compare gains in development, to better understand how gains in development can be achieved, and determine appropriate aid packages. It isn’t always easy because there isn’t any one parameter that successfully defines wealth or prosperity.

The most ubiquitous parameter of wealth is Gross Domestic Product (GDP) or Gross National Income (GNI). I won’t get into the finer details of the difference between the two, but if you don’t know already and you’re interested, check out this explanation. In fact, GNI per capita is the standard and only parameter by which the World Bank classifies economies. The Bank notes:

The Bank’s analytical income categories (low, middle, high income) are based on the Bank’s operational lending categories (civil works preferences, IDA eligibility, etc.). These operational guidelines were established based on the view that since poorer countries deserve better conditions from the Bank, comparative estimates of economic capacity needed to be established. GNI, a broad measure, was considered to be the best single indicator of economic capacity and progress; at the same time it was recognized that GNI does not, by itself, constitute or measure welfare or success in development. GNI per capita is therefore the Bank’s main criterion of classifying countries. [emphasis mine]

As I’ve noted before, and as the Bank and other organizations recognize, GDP and GNI are problematic measures of wealth and prosperity. These statistics tend to over-emphasize certain elements of wealth and under-estimate others. So grouping nations along these lines would (misleading) place some countries in higher income categories than their true level of development (for example, Qatar, which has one of the highest rates of GDP per capita in the world, but is still …) or might classify an otherwise prosperous nation as developing.

No where are these distinctions more important—or more difficult—than in the classifications between low income and middle income economies. Many countries have a relatively high GDP per capita, but still struggling populations living in poverty. Take Nigeria, which falls into the World Bank’s category of “lower-middle income economies,” with a GDP per capita of $2,500. YetNigeria still suffers from serious developmental blocks, including widespread poverty, poor governance, and instability.

Nigeriais not alone. In fact, a phenomenon is now emerging that this group of economies is rapidly growing. As the Economist recently noted, 15 of the 56 countries on the “bank’s lower-middle income list (ie, over a quarter) also appear on the list of fragile and failed states maintained by the OECD.” The article calls them MIFFs or Middle-Income Fragile or Failed states and accurately notes that they present a huge developmental obstacle for aid-donors. As the Economist observes, “Being no longer poor, their elites rarely see the need for aid, military or developmental. Being fragile, their governments often consist of complex, fractious coalitions that are hard to deal with.”

It is important that we do not treat these countries like their low-to-middle income cohorts that are successfully growing out of poverty. Their political systems prevent them from achieving true development, despite growing incomes or resource endowments. In some places—Equatorial Guineacomes to mind—this prosperity actually hinders development. As in medicine, treatment requires an accurate diagnosis, which can only be achieved with a nuanced and precise classification of symptoms.