The Problem with Global Income Categories

With so many countries experiencing rapid rates of growth, with so much income disparity and with so many countries whose particular demographic/economic situations are of a complexity which belies the simplicity of mere income-based rankings, how come the World Bank’s famous global income categories, measured in Gross National Income per capita are still used with such authority?

Several possible reasons stand out: 1-because GNI per capita and global income categories are widely understood and used categories, useful for communicating and coordinating with a multitude of international actors; 2-because these categories can be indicative of countries’ capacities to produce goods and services; 3-because many developing countries have embraced the terminology derived from these categories, with attaining the middle income category being seen as a significant achievement.

The Middle Income Angle
Much of the debate within international financial institutions, development agencies and global fora is focused on identifying the position and role of middle income countries in global development assistance architecture. Key considerations include whether to continue to allocate resources to middle income countries, whether or not to prioritize certain middle income countries in global aid and lending strategies, identifying the role of middle income countries as emerging donors and sources of development experience and expertise, as well as specifying the type of engagement that the international development world needs to take in middle income countries.

The conventional view espoused by the main development and lending organizations as well as some OECD donor countries is that rapidly narrowing poverty gaps and growing GDP in middle income countries, along with increased capacity to formulate and actuate viable development solutions means that a higher priority should be given to lower income countries in development assistance, and at the least that support to MICs should not come at the expense of support to other categories of countries, such as LDCs.

Middle income countries have better access than their lower income counterparts to funds through their tax bases or their ability to enter sovereign bond markets, mobilize more competent bureaucracies and provide additional support for expanded social safety nets, and therefore less in need of development assistance.

The critique to the conventional view suggests that while specific country needs and responses by the international community may change with a ‘graduation’ to middle income status, this does not necessarily mean that serious problems do not exist within MICs, or that less priority should be placed on all middle income countries.

Recent studies have noted that with 74 per cent of the world’s poor (living on under 1.25$ per day) now living in middle income countries, the only way to make significant gains in the struggle against global poverty is for international development cooperation to give special attention to poor people, not just poor countries.

livingthemiddleincomedream

Living the middle income dream at $ 2.25 a day

Moreover the growth in GNI that can push countries across the imaginary line to another income category is not necessarily a reflection of commensurate increases in the wellbeing of all of their population. Many countries have persisting inequality and ‘pockets of poverty’, often in underserved regions or among marginalized populations, which national governments are often unable or unwilling to address. In short GNI growth by itself is misleading, and efforts must be made to better represent the relative quality of growth in global-level discussions.

While the conventional view generally acknowledges a broad diversity in countries which cuts across income categories, it still makes reference to and accepts these categories as approximate indications of the overall wellbeing of a country. However the link between income and other areas of development is not always very clear, and discussions on a variety of development-related topics, including food security, run the risk of becoming misleading if they take their cue from income categorizations.

Dissonance in Development Discourse: ‘Africa Rising’

I recently wrote my frustration with the conception of risk and vulnerability in the African continent as dealt with by a Davos World Economic Forum debate. There is a similar line in the ‘Africa Rising ’ discourse, which as the Davos debate, centered almost exclusively on growth, investment and interest in the continent’s economic future. What is missing from these conversations is a serious consideration of how growth is benefiting the citizens of each country, and how international development efforts and international capital should approach this evolution.

Part of the problem is a dissonance between aid/development actors and business and investment actors when it comes to developing economies on the continent. The discourse of shared growth, welfare, investment in local economies and the like are pillars of the broader aid/development discourse, and are put into practice through different programs and policy advising.

The business and investment end does not have the same angle of attack. To be sure there are differences between foreign direct investment and financial speculation, bank driven investment and the like. The nature of the investment and the timeframe considered for the investment are such that in the latter case, there is a smaller incentive to care about second-degree causes of success, such as a country’s education level. There is a tendency across the board to look at indicators such as the World Bank’s Ease of Doing Business, ‘hard’ infrastructure such as roads, electricity, internet, but also the ‘soft’ infrastructure indicators that are laws, regulations, corruption indices and the like.

This is why debates like Davos can come up, and this is why McKinsey and Co. keeps coming out with reports (relevant and useful though they may be) on how Africa’s rise is being driven by privatization, low inflation rates and other ‘strong fundamentals’. So, that the question of ‘whose benefit’ has not been featured as prominently as it should be in a certain (nebulous) sector’s articulation of ‘Africa Rising’ is certainly one glaring obstacle.

Nairobi Marketplace

Nairobi Marketplace

African Consumption

There is another very interesting line, running parallel to the previous one, but with a more African-centered focus: it’s the way in which Africa’s rise is equated with the rise of an African middle class and of an African consumer. (This is a real leit motif of whoever is in charge of African markets research over at McKinsey, because they are all over this one- and here, and here). The actual numbers are very interesting. Consumer product industries slated to grow by 400 billion dollars by 2020. Private consumption on the continent rose by 568 billion dollars from 2000 to 2010. All very exciting stuff.

It’s exciting because an African consumer of enough significance could really change the way foreign capital looks at African countries, in addition to deepening markets for African businesses. In pointing this out, these reports, op-eds and books play an important role in getting the message out- that is, we are long past the days when ‘development’ in African countries meant simple aid money. Okay, all well and good.

Upon Further Inspection…

But this discourse and these studies are still very detached from that of shared growth and social welfare. The business community, the investors who have African countries, companies, and projects in their portfolios aren’t as eager to talk social protection, insurance and welfare.

And yet there is a real need to do so. Not simply because there is a large vulnerable population on the continent, but because sometimes the very growth that is touted in all these statistics comes at the expense of the more vulnerable population. So yes, there is a rising African consumer. But when you look closer, you learn that 81% of African private consumption is concentrated in 10 countries- only 5 of which are in sub-Saharan Africa (and they are all pretty much the usual suspects). One more step and you learn that a vast majority of labor on the continent is informalized. Another step and you see that while Diaspora communities returning ‘home’ can bring some economic advantages, it also perpetuates existing social inequalities.

You can be satisfied with the quotation here below for only so long…

In the 1990s African economies embraced the World Bank and the International Monetary Fund’s (IMF) structural adjustment programmes, which advocated free market policies.“The introduction of liberalisation, which focused on private sector-led growth, is key to the growing middle class on the continent,” said Bategeka. “Countries introduced sound economic policies which controlled inflation, benefiting investments in their economies.” Source

…before you remember what structural adjustment also did to the African state’s ability to protect the most vulnerable in the 1980s and 1990s.

In the end…

There is nothing wrong with growth. But when you keep listening to Davos and to McKinsey and the others, it is easy to forget that growth and wealth in and of itself is not the end goal. Equatorial Guinea is classified by the World Bank as a High-Income country since 2007, even while 77% of the population lives on less than 2 dollars a day.

How can more of the population be involved in and see benefits from growth? How can growth serve to protect the most vulnerable from the risks of a globalizing domestic economy, from environmental changes, from health concerns? These are all questions of importance to the continent, and yes, to its overseas investors as well. This is the type of debate I would like to see grace center stage at forums like Davos.

‘De-risking’ Africa, Davos-Style

The World Economic Forum hosted a (televised- see video below) debate asking how to ‘de-risk’ Africa. The debate, while interesting, did not at all venture beyond first-order economic improvement and political stability. This could have been an enlightening and dynamic debate on the effects of economic growth and distribution, or lack thereof, on the continent. Instead it was a list of risks which, while accurate, doesn’t venture further down the prescriptive road past “states need to do everything they can to allow the growth to continue.” Whose growth and whose benefit? Mystère et boule de gomme, as they say. This is my attempt to add another dimension to the debate.

Why is this debate one-dimensional?

The prompt for this debate was rightfully put into question by Jacob Zuma, president of South Africa, at the outset. But the subsequent conclusion drawn by the panelists was short-sighted. ‘De-risking’ Africa could imply that Africa is an inherently more risky place (from an economic standpoint- this is the WEF after all) than other continents. Zuma and two other entrepreneurs sitting on the panel with him (a panel which also included Louise Arbor, the president of the International Crisis Group, and Nigerian president Goodluck Jonathan) responded that Africa was, far from a continent of risk, one of the most promising future economic opportunities.

But most panelists took this one line about growth and the ‘rise of Africa’ as the entire response to the question. That is to say, 1) the intrinsic answer to economic risks is economic growth. 2) Africa will continue to experience good economic growth, ergo, 3) Africa has a good answer to the question of ‘risk’.

WEF Africa

World Economic Forum

In particular the discussion emphasized the ‘hard infrastructure’ needed to facilitate economic activity and the implantation of foreign companies (roads, electricity, internet). A slight mention of ‘soft infrastructure’ (laws and regulations, governance-related factors) was made by Ms. Arbor. This back and forth, while interesting, misses a more fundamental question/critique of the debate prompt: risk for who?

Risk for who?

The WEF being what it is, this debate saw company owners, investors and politicians talking at length about economic prospects in the continent. But it was significantly less clear from discussion who these prospects were supposed to benefit, and why ordinary Africans should be more interested in the bright prospects of their continent.

The panelists talked about risks to investors- foreign and domestic, emphasizing large companies as vehicles for such investment. They talked about risks to states- in governance, in managing development cooperation on a regional level. They also talked about risk to people- but only to the extent that this meant the risk to physical security: the risk of conflict.

But what about all the other risks? There have been a few other bloggers writing about how the debate was framed, mentioning especially the problem of environmental risks being almost entirely overlooked in the debate. There is also the risk to people’s livelihoods and ability to live decently, caused by the cocktail of unpredictable commodity prices and high dependence on imports for basic goods that you see in so many Africa countries. There is the risk of the rough transition from agricultural production for unready emerging economies: university graduates without jobs, shrinking agricultural sector and rapidly rising urbanization.

These risks have a social dimension that was entirely bypassed during the debate. As the gains from economic development are built upon more and more, the social welfare of Africans will become a vital factor in determining the economic soundness of societies. To reduce this problem to one of the ‘security risk caused by the youth bulge’, or to ignore it entirely in favor of a monochrome view of how foreign companies are settling in African countries to not understand the important roles that Africans are playing and will play in their economies.

Growth or de-risking? Growth is de-risking?

Incidentally it strikes me as interesting that the  almost unanimous answer from the panelists be to ‘help growth’ on the continent in order to reduce risk. This is firstly because there is always an element of risk in economic expansion. But also because certain types of economic activities can signify more risks to vulnerable populations. For example, oil exploitation in Nigeria can certainly be a motor or economic growth, but unless it addresses the severe negative environmental externalities it causes, and unless it finds more successful ways to reinvest profits in the local economy, expansion of this activity could mean expanded risk- not for those making the profits of course, but for those who bear the brunt of the side-effects.

That’s not to say that growth and de-risking are directly opposable concepts. It’s a question of finding out how to help growth serve the people of the country in sustainable ways. It is also a question of further involving the people in economic activity, and make them active participants, or ‘shareholders’ with a more direct interest in the growth their country experiences.

The missing social element

Where was then the discussion on social safety nets and social insurance? Programmes to help solidify the most vulnerable in a country through cash transfer programmes, subsidies, fee waivers and others have seen some rather publicized successes in South America. Social insurance formed one of the cornerstones of South Korea’s social policy during its middle-income period.

Assuring that the basic needs of citizens are met is one of the reasons there is a state to begin with. But social safety nets and social insurance are not simply ‘soft’ humanitarian band-aids to poverty. They can help increase schooling rates, or bolster domestic consumption. Solidified ‘African demand’ can in turn bolster trade among African countries, which in turn could also contribute to the ‘hard’ infrastructure projects the panelists mentioned. It can help create a more dependable workforce, more reliable, more educated and if trained, with more know-how.

Just as African countries cannot rely on aid as the principle mechanism to advance their development, they cannot count on simply continuing growth trends without a long and serious national conversation on how the engines of growth should be shaped to address environmental problems and problems of social welfare. It is a debate that is taking place all over the world- just not as this particular debate in Davos.

Emerging Africa: More Questions

View from the Heritage Hotel, Dar es Salaam- Seyemon

View from the Heritage Hotel, Dar es Salaam- Seyemon

The tone was slightly reminiscent of an afro-pessimism/afro-optimism debate, but the January 11 rebuttal article of Rick Rowden’s Foreign Policy piece certainly makes some good points.

The interesting framing of the problem, (à savoir, ‘going the way it is going and pursuing the path it is on, will many countries on the African continent achieve more economic development?’) is in terms of what African countries do with the resources they have.

The authors of the book The Fastest Billion: The Story Behind Africa’s Economic Revolution make five big arguments for progress on the continent:

  1. Social and economic policies in many African countries are seeing a shift akin to that which took place in East Asian countries before their ‘takeoff’
  2. African countries are doing (and will keep doing) better at reinvesting the gains from agriculture and primary goods exports into infrastructure, services and other higher value-added production which will drive production in the future
  3. Rising wages in China and other Southeast Asian countries can cause a renewed interest in African countries for labor-intensive production
  4. Education levels are also rising on the continent, which will spur on the advent of industrialization and manufacturing
  5. Ease of doing business indicators have been getting better, corruption as well, and this is creating a more favorable environment for growth

After reading this I simply must get my hands on this book, The Fastest Billion. There are simply too many questions that I could not find answers for in the short Foreign Policy article. The book, I think, should be great for providing paths to the following questions:

–          Is agriculture really doing all right? Are the African countries in the so-called middle income stage of growth being supported by the agricultural sector? The authors mentioned the importance of agriculture as a basis for industrialization in Korea; is this the same case in African countries? Niger and Gabon are two countries with interesting plans to reduce reliance on food imports- is this type of state-led program the way to go?

–          Is it really easier to do business on the continent? There might be some improvement over the last 5 years in African countries’ scores on the World Bank’s Doing Business Index, but are these the result of steady improvement in policies? Here I surmise the answer will vary vastly among countries. Rwanda’s indicators for this year are leaps and bounds better than just four years ago, and are driven by a government dedicated to change. But so many countries are not showing much steady progress, while they also face trouble in corruption indicators.

–          Are resources being properly reinvested in value-added industries? There is much talk as to the extent to which these resources need to all be funneled into new industries- they are not the end-all be all of economic development, and first ensuring a population’s basic needs are addressed makes more sense on so many levels. But where are the oil dollars and copper and bauxite dollars going? I don’t have nearly as good an idea of this as I would like.

–          Are African countries really on track to absorb higher value added production, successfully move up global commodity chains and mobilize their population’s rapidly growing education? My most vivid memory over the last year were the protests in several countries by what were essentially overeducated youth, who invested precious years in study only to find that there were few, if any jobs available for them in their countries. Successes in primary education in Africa are becoming more and more known, and many have pointed to tertiary education as a sort of new education frontier for many countries. But how well is this skilled labor being absorbed by these economies? I really want to know.

For now there are only questions.

But the beginning of an answer will probably come more from looking at individual countries, as opposed to trying to rationalize trends across the great diversity that is the Continent.

Emerging Africa, Full of Holes

bmk-dakar-casa-maart-2011-5

Inside a Senegalese factory

There is a very refreshing new Foreign Policy article on development on the continent, running counter to a lot of the discourse of ‘rising Africa’ and the economic successes of countries in Africa. The author essentially deplores the statistics and articles by the likes of the Economist citing supposedly high African growth and rising incomes, saying in a nutshell that this does not prove that development is taking place, nor does it give reason to the liberal prescriptions of free trade that are still made to so many of these countries. The reason? So many of these countries are developing without substantial increases in their manufacturing industries or (though it’s not said explicitly) in total factor productivity. Shortly put, there aren’t any large gains in actual production, be it quality or quantity, or efficiency.

“The very idea of industrialization has been dropped from the official development agenda. Yet there’s a reason why we all regularly refer to the rich, industrialized countries in the OECD as ‘industrialized.'” -Rick Rowden

The author, Rick Rowden, does not reconsider his basic assumption that industrialization (of the economy) is an unavoidable step on the path to development, but I’m not sure that he needs to. To a certain extent one could point to countries like Qatar and Dubai and say that they have covered much ground without relying so much on their manufacturing bases. But look more closely and one will find that even oil producing countries like Qatar are expanding their manufacturing sectors.

This is an easier critique to make in today’s ongoing financial crisis environment, when there is a better understanding that actually producing goods of value is essential to the foundations of a solid economy.

But in Africa, the trend is certainly not being picked up on as much, especially in oil and primary resource-exporting countries in its West and Central regions. Gabon’s manufacturing sector is around 4%, and Equatorial Guinea’s is also laughably small. But these countries are classified by the World Bank and upper-middle and high-income countries respectively.

Their manufacturing industries are not growing like they should, they are urbanizing at great rates (Gabon has in between 80 and 85% urbanization), and agriculture’s share in GDP keeps falling. The answer for sustainable development, according to some of these governments? The services sector. Now this certainly seems like an improvement of some sort, because a more active services sector would enable production of higher value-added services and can have positive second-order impacts on other industries. For example becoming a hub for international conferences can boost tourism-related activities.

Transportation infrastructure building in Gabon

Transportation infrastructure building in Gabon

But most of these countries are not fit to take on service industry development (not without calling on the likes of international telecom companies to ‘partner’ with them to provide said services). Before being a question of software, it’s a question of hardware. Most are not able to set up the proper facilities, such as industrial parks or expanded electrical grids, internet connections, etc. Then, it’s a question of human capital and know-how. It is true that Gabon (keeping with the example) has a lot of overqualified young people in its cities who do not have jobs- they’ve made that clear. But having a degree and having experience is not the same thing.

So that’s for service sector development. Ultimately the more important point, as if it needed repeating, is that these countries need comprehensive strategies to shift their production, their exports and the makeup of their economy away from the crude exploitation of primary-resources. Fluctuating world market prices in primary goods are one reason for this. Others are: missing out on labor force training and professionalization, industry modernization, total factor productivity growth… The choice for African states is very clear.

Take a look at these tree maps showing a country’s main exports (obtained from Wikipedia):

Gabon exports

Gabon’s Exports

Guinea exports

Guinea’s Exports

China_Export_Treemap

China’s Exports

The two most salient points to come out of the most cursory of examinations of these three squares are: 1) China has a much more diversified production for export (the comparison is unfair, yes, but the contrast is telling). And 2) China exports goods which were worked on in China.

The next step for African countries is to see how they can move to boost their manufacturing/industry capacities. And here as well, Gabon is a country to keep one’s eye on.

Chris Blattman

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