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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‘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.

‘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?’

Chris Blattman

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