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.

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‘Resilience’ Worries at Davos World Economic Forum

The World Economic Forum

-Robert Scoble

The 2013 Davos World Economic Forum’s vision, articulated by its founder and executive chairman Klaus Schwab in a recent Project Syndicate article, leaves me with a couple furrows on my brow. Not that I am unfamiliar with the rather single-minded nature of the Davos discussion agenda, or with the criticisms that are leveled against the Forum. This time though, the issue with the Forum’s large frame/theme is rather subtle.

There are, we are told, two main objectives to this year’s forum:

First, the economic crisis has created a more defensive, more self-centered, and – at the level of states – more protectionist attitude. Grand unifying visions are missing, and the pressure for separation, not union, continues to increase. This has stalled progress on many of the issues – including reducing carbon emissions, establishing global financial regulatory measures, and concluding the Doha Round of global trade talks, to name a few – that require global attention.

The first objective is then to foster further global cooperation, under the idea that combined solutions (a “grand vision”?) to economic and financial problems are needed to bring the world economy into a new growth dynamic. Discursively speaking, nothing new. The second point is as follows:

The Forum has always promoted the notion of corporate social responsibility – or, expressed differently, of business leaders being accountable not only to their employees and shareholders, but also to their communities and society at large. So, my second objective for Davos this year is for all leaders to recognize that along with their economic responsibilities come moral as well as social obligations.

The second objective is slightly newer (but not really) in that it puts forward a social responsibility for the private sector, specifically mentioning (later on in the text) corporate social responsibility. Ultimately the idea is probably to pose the question of the ill-effects of austerity and adjustment policies in countries hit by the global financial and Eurozone crises.

Objectives Properly Addressed?

The talk always sounds great. But there is no indication that any of this is actually going to happen, beyond words, at Davos. When you look at the response of states and companies to the financial crisis in terms of cooperation (here mainly in Europe) it is clear that not only is there much to be desired, that which is being decided comes from a logic of relative economic influence, political clout (and interestingly enough, discursive identity) within the EU’s echelons of power. The WEF will probably not have an impact significant enough to change the way European countries interact in their own playground.

Second point of worry: even a layperson can see that objective number one is going to overpower objective number two without any special consideration for this latter one. How are French companies coming together with the government and labor to solve competitiveness problems and factory closings? Answer: They’re not. The order of the day, much to the chagrin of French minister Arnaud Montebourg (holder of the most unenviable title of ‘Minister of Industrial Renewal’) is for companies to argue that, affected as they are by the crisis, they have no choice but to lay off workers and have the remaining workforce take on longer or more irregular hours for less pay- or else the company closes up shop and moves to Morocco. The French government has an active hand in promoting these sorts of flexibility deals- anything to put a band-aid on the employment situation. The companies may become slightly more protected, but it’s not at all clear that the workers who get laid off or those who slip into poverty gain much in resilience.

Third point: while corporate social responsibility (CSR) is a nifty model which can and has demonstrated that win-wins are possible, most interestingly in developing economies, the question is less if CSR should be promoted, and more how to ensure CSR design that contributes to sustainable development. How to ensure that CSR is carried out in coherence with existing development agenda? Will proper attention be given to the failures and the lessons of profitable but not social viable CSR projects at the forum? This is one point I continue to watch with interest.

It is right to bring resilience to the table- it is yet another way that the traditionally very… economic WEF can inject a little social in its veins.

But in rushing to pose the question of resilience, Davos may have forgotten to ask ‘whose resilience?’

The Korean State and Private Actors: Building Capacity

hanriver

What do welfare and R&D have in common? They’re both keys to an interesting policy lesson from Korea.

The nexus between the public and private sectors is an integral part of Korea’s development history during its middle-income period (from about the mid-1970s to the mid-1990s), and has always gotten special attention. Most known are the Chaebol conglomerates, private businesses which, through their very close relations to political power contributed to the country’s industrialization.

There are many lenses through which one can look at the relationship between state and private sector; here is an interesting and often overlooked one:

In many middle-income countries (MICs), development problems often revolve around capacity issues: state capacity to provide services, private sector capacities in investment or infrastructure-building for example. These challenges go along with that of properly negotiating the role of the state vis-à-vis private actors, ensuring cooperation for development. In this respect the Korean example is very germane, giving policy insight into a number of specific issues.

Two examples show rather well how the relationship between the state and the private sector was established and subsequently evolved over time.

The first one is that of research and development. In Korea, the state played a strong architect role, initially establishing research institutes in the 1960s such as the Korea institute of Science and Technology to promote technological ‘catch-up’. But from the mid-1960s onwards the state enlisted its tax regime, credit allocation system and trade policy to push for higher private sector investment in R&D. The private sector shouldered a very large portion of research and development investments starting in the mid-1960s, with its share in total investments reaching around 75% twenty years later. The state investments made early-on corresponded to the immediate needs of its developing private sector which, coupled with incentives, pushed the private sector into more ownership of the R&D process. The attached graph shows the rapid evolution in the private sector’s share of R&D investment.

Longterm Trend Korea's R&D Expenditures

Long-term Trend in Korea’s R&D Expenditure

The second example is that of welfare policy. The Korean welfare system started in the 1970s by placing almost the whole burden for financing on the shoulders of the private sector. The state instituted mandatory but privately funded welfare programs. For medical insurance, coverage was taken on by companies with more than 500 employees in the mid-1970s. This was subsequently expanded to companies with 100 or more employees (1984), then 16 or more (1986), then finally to the self-employed by the late 1980s. But it was with the 1997 financial crisis and increased public vulnerability that spurred increased state expenditure on welfare (the government instituted a minimum living standard guarantee for the first time). Here, the state-planned, privately-implemented system was brought further into the public realm as time passed.

These issues are of great importance to MICs as well. Countries like Thailand struggle to increase the portion of private investment in R&D, while countries like the Philippines are looking for ways to expand welfare coverage in the population.

welf

To be sure there are setbacks, not the least of which was the exclusion of small firms and of the self-employed from social policies for the longest time. There is also the fact that the ‘transfer’ of the burden for R&D onto the private sector was not made in a fair or equitable way, and was very much tied to the political relations that different companies had with the state. This contributed to widening the gap between chaebol and small and medium enterprises.

The state was also had a rather limited idea of its social responsibilities for quite some time (still today really). It boiled down to the provision of different types of insurance, and was heavily weighted on employment. So when the 1997 ‘IMF crisis’ hit and the number of unemployed soared, or in the aftermath when the portion of temporary employment climbed to over 50%, the inadequacy of the systems of protection were laid bare. This is a problem that continues to this day.

But despite its shortcoming, the Korean experience raises interesting questions on how the state and private sector reinforced each other’s capacity weaknesses, and how that relationship changed over time with economic growth.

Is this pattern prevalent in other countries as well? How has financing for social policies and R&D been informed by the relationship between the state and private sectors?

Also, the Korean example is one of a very strong state, with a tight handle on its finances; but have similar policies been pulled off with any success (or not) by more decentralized states, and in more recent climates of economic openness?

And the most important question, are such policies possible in today’s climate of liberalized public services? That is, do countries have the policy breathing room to start taking on more welfare-related responsibilities given the push (free trade agreements are part of this) to privatize medical services and other ‘social’ allocations? Or is it more of a capacity problem, where the state is simply unable to envision upgrading its social service responsibilities in the first place?

Chris Blattman

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