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The middle income hoax

M A Taslim

To achieve high, a nation must aim high.

The vision or goals of a nation should be consistent with the aspirations, opportunities, and genius of its people. At the least, the goals should be home-grown and set indigenously. Unfortunately, our government seems to be in thrall to foreign forces including multilateral organisations. The major goals of the nation during the last several years have been the achievement of the Millennium Development Goals (MDGs) and attaining the ‘Middle Income’ status. These were enshrined in the Perspective Plan and the 6th Five Year Plan. The MDGs have been envisaged by international bureaucrats or experts in the UNO, and middle income is an operational classification of the World Bank. While one could drum up some arguments in favour of the former as the collective goals of the member nations of the UNO agreed at the Millennium Summit, it is the latter that is difficult to accept as a goal of a proud nation.

The World Bank is a multilateral lending institution involved in development work all around the developing world. To determine its operational lending policy, the World Bank divides the client countries into several categories such as low income, middle income (lower and upper), and high income. Although the lower middle income threshold coincides with the operational threshold for ‘granting civil works preference to eligible domestic contractors in evaluating civil works bids procured under international competitive bidding,’ it does seem that concessional loans are given mostly to the low income countries, and lending terms become increasingly harder as a country moves up.

For example, the loan for the botched Padma Multipurpose Bridge project was to be interest-free (but with a service charge of 0.75 percent). Hence, the concessions are substantial. The World Bank cannot earn much revenue from its loans to low income countries. When a low income country moves to a middle income status, it gradually loses some of these concessions and hence, has to pay more to service the same amount of debt. A recent news report revealed that the repayment and grace periods on IDA concessionary loans to Bangladesh have been reduced, which effectively raises the average per annum debt service payments. The country may expect increases in debt service payments in the near future.

It is not difficult to see why the World Bank should be keen to see a fewer number of low income countries. The objective is facilitated by a low threshold income for graduation. Currently, a low income country with a per capita gross national income (GNI) in excess of $1045 per annum (but below $4126) is classified as a lower middle income country. This is undoubtedly a very low income at which a very large fraction of the population of a country would be below the abject poverty level of $1.25/day. (According to World Development Indicators 2014, 43.3 percent of the population of Bangladesh was below this threshold in 2010 at 2005 international prices. The percentage rises to 76.5 at $2/day.)

Nonetheless, the World Bank regards this income as sufficiently high to extract more from poor countries. The operational classification of the World Bank has resulted in nearly three-fourths of the world’s poor living in middle income countries by the end of the first decade of the new millennium. Almost all poor people lived in low income countries only two decades ago. Since the per capita real incomes of the low income countries are increasing and the middle income threshold has remained virtually constant in real terms for over four decades, there will not be many low income countries left by the end of the third decade of the millennium. Should a sovereign nation elevate a lending institution’s operational category to a national visionary goal?

Although the threshold income for graduation is expressed in US dollars, it is not the same as the US dollar at market rate. The dollar used for this purpose is derived by employing ‘Atlas method’ which takes into account both the variability of the dollar exchange rate and the divergence of country’s inflation rate from the inflation rates of the major countries. The per capita GNI of Bangladesh as calculated by the World Bank, and that estimated by BBS are reported in the Table included below. These estimates are not the same since the BBS estimates are based on market exchange rates while the World Bank uses the Atlas method.

If one looks at the trend of the GNI per capita of Bangladesh as estimated by the Atlas method, there can be little doubt that it will exceed the lower middle income threshold by a considerable margin when 2014 GNI data are made available. If so, Bangladesh would have already crossed the threshold income of $1045 during the last fiscal year. As the World Bank states: ‘Each year on July 1, the World Bank revises analytical classification of the world’s economies based on estimates of gross national income (GNI) per capita for the previous year. The updated GNI per capita estimates are also used as input to the World Bank’s operational classification of economies that determines ‘lending eligibility.’ In view of this, it is not advisable to declare with so much fanfare that Bangladesh will attain the middle income status by 2021. The claim is not in sync with the current situation and should be abandoned. It is also not appropriate to include middle income status as a major goal of the 7th Plan. The nation certainly has sufficient local talent to define its own strategy of economic development and set its own goals.

A major reason for the earlier-than-anticipated graduation to the middle income status is the change of base year from 1995-96 to 2005-06 and the consequent revision of the national income data. This revision resulted in increasing the per capita GNI by about 14 percent, which has brought forward the graduation by a few years. A similar thing happened in Ghana in 2010 when it revised national income data. GNI per capita increased considerably, which led to its early graduation.

The UN uses a different income classification scheme; the UN category corresponding to low income of the World Bank is ‘least developed country (LDC)’ albeit the latter is a much broader concept. Graduation from LDC to a developing country depends on an economic vulnerability index (EVI) and a human asset index (HAI) in addition to GNI per capita. It will take much longer to come out of the LDC status both because it will take longer to qualify, and also because the graduation process itself is more involved. A good guess is that Bangladesh will be, barring unexpected developments, graduated when the relevant UN committee convenes in 2024.

There can be no question that Bangladesh should strive for a high growth rate, which is absolutely essential for an improvement in the standard of living of the general population. With the economy growing the country shall, sooner or later, graduate out of the low income and the LDC group. Graduation from LDC is a more significant economic event than the attainment of a middle income status. When Bangladesh graduates to a developing country it will automatically lose the GSP trade privileges including duty-free quota-free access that the most developed and some developing countries offer to LDCs. It will also lose some other benefits such as IPR exemptions. Bangladesh will have to compete in the international market at par with other developing countries such as China, India, and Malaysia. Hence, the graduation to a developing country will pose difficult challenges. Bangladesh should spend the time it has till graduation in working out how these challenges can be best met.

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