Which Number Does The World Bank Use To Determine

The World Bank relies on Gross National Income (GNI) per capita to classify economies and determine eligibility for various programs and forms of assistance. This single number acts as a crucial yardstick, reflecting the average income of a country's residents and influencing its access to concessional financing, technical assistance, and research resources. Understanding why the World Bank prioritizes GNI per capita, how it's calculated, and its limitations is essential for grasping the dynamics of global development and poverty reduction efforts.

Why GNI per Capita? The World Bank's Rationale

The World Bank's choice of GNI per capita stems from its mandate to reduce poverty and promote sustainable development in low- and middle-income countries. GNI per capita offers several advantages as a primary classification tool:

Comprehensive Income Measure: GNI represents the total income accruing to a country's residents, regardless of where that income is earned. This includes income from domestic production, as well as net income received from abroad (e.g., remittances, dividends, and interest). Unlike Gross Domestic Product (GDP), which measures the value of goods and services produced within a country's borders, GNI focuses on the income available to its residents, making it a more relevant indicator of their economic well-being.
Cross-Country Comparability: GNI per capita is expressed in US dollars, using the World Bank Atlas method (more on that later). This standardized approach allows for easy comparison of income levels across countries, facilitating the identification of those most in need of assistance.
Established Methodology: The World Bank has a well-defined and consistently applied methodology for calculating GNI per capita, ensuring transparency and minimizing the potential for manipulation. This established track record lends credibility to the classification process.
Operational Relevance: GNI per capita directly informs the World Bank's operational decisions, such as determining lending terms (interest rates, repayment periods), eligibility for grants, and the allocation of technical assistance resources. It acts as a key filter, ensuring that resources are directed to countries with the greatest needs.

The Nuts and Bolts: Calculating GNI per Capita

Calculating GNI per capita involves several steps, starting with the measurement of Gross National Income and culminating in dividing that figure by the country's population. Let's break down the process:

Measuring Gross National Income (GNI): GNI is calculated by starting with Gross Domestic Product (GDP) and adding net primary income from abroad.
- GDP: Represents the total value of goods and services produced within a country's borders during a specific period (typically a year).
- Net Primary Income from Abroad: This is the difference between income earned by a country's residents from investments and labor abroad and income earned by foreign residents from investments and labor within the country. This includes items like:
  - Compensation of employees (wages and salaries earned by residents working abroad)
  - Investment income (dividends, interest, and profits earned from foreign investments)
  - Less: Similar payments made to non-residents.
The formula for GNI is:

GNI = GDP + Net Primary Income from Abroad
Converting to US Dollars using the Atlas Method: GNI is initially calculated in a country's local currency. To facilitate cross-country comparisons, it needs to be converted to a common currency, the US dollar. The World Bank uses the Atlas method for this conversion, which aims to reduce the impact of short-term exchange rate fluctuations.
- The Atlas Conversion Factor: This factor is calculated as the average of a country's exchange rate for the current year and the two preceding years, adjusted for the rate of inflation between that country and the G-5 countries (United States, Japan, United Kingdom, France, and Germany). This smoothing mechanism helps to provide a more stable and representative exchange rate for calculating GNI in US dollars.
- Why use the Atlas Method? Standard exchange rates can fluctuate significantly, especially in developing countries. Using a simple current exchange rate to convert GNI could lead to dramatic changes in a country's GNI per capita from year to year, even if the underlying economic situation has not changed substantially. The Atlas method mitigates this volatility, providing a more reliable basis for classification.
Calculating GNI per Capita: Once GNI has been converted to US dollars using the Atlas method, it is divided by the country's mid-year population.

GNI per Capita = GNI (in US dollars) / Population

The resulting figure represents the average income per person in the country, expressed in US dollars.

The World Bank's Income Classifications: A Ladder of Development

Based on GNI per capita, the World Bank classifies economies into four income groups:

Low-Income Economies: These are defined as countries with a GNI per capita of $1,135 or less (in 2022). These countries typically face significant development challenges, including high poverty rates, limited access to education and healthcare, and weak infrastructure.
Lower-Middle-Income Economies: These countries have a GNI per capita between $1,136 and $4,500 (in 2022). They are often characterized by a growing manufacturing sector, increasing urbanization, and improvements in social indicators.
Upper-Middle-Income Economies: This group includes countries with a GNI per capita between $4,501 and $13,845 (in 2022). These economies tend to be more diversified, with a stronger emphasis on services and technology. They often have more developed infrastructure and social safety nets.
High-Income Economies: These are countries with a GNI per capita of $13,846 or more (in 2022). These economies are typically characterized by high levels of human development, advanced infrastructure, and a strong emphasis on innovation and technological progress.

Important Note: These thresholds are updated annually by the World Bank to reflect changes in global prices and exchange rates.

Beyond the Number: Limitations and Considerations

While GNI per capita is a valuable tool for classifying economies, it is important to acknowledge its limitations and consider other factors when assessing a country's development progress.

Averages Can Be Misleading: GNI per capita is an average and does not reflect the distribution of income within a country. A country with a high GNI per capita may still have significant income inequality, with a large proportion of the population living in poverty.
Non-Market Activities are Excluded: GNI only captures economic activity that is formally recorded in the market. It does not account for non-market activities such as unpaid housework, subsistence farming, or the informal sector, which can be significant in developing countries.
Purchasing Power Parity (PPP): GNI per capita is converted to US dollars using the Atlas method, which can be affected by exchange rate fluctuations. Purchasing Power Parity (PPP) adjustments attempt to account for differences in the cost of goods and services across countries. PPP-adjusted GNI per capita can provide a more accurate picture of the relative living standards in different countries. The World Bank also uses PPP in its analyses, although GNI per capita (Atlas method) remains the primary classification tool.
Focus on Income, Neglect of Other Dimensions: GNI per capita focuses solely on income and does not capture other important dimensions of development, such as health, education, environmental sustainability, and political freedom. The Human Development Index (HDI), published by the United Nations Development Programme (UNDP), provides a more comprehensive measure of human development by combining indicators of health, education, and income.
Data Quality and Availability: The accuracy of GNI per capita estimates depends on the quality and availability of data from national statistical agencies. In some developing countries, data collection and processing can be challenging, leading to potential errors and inconsistencies.
"Graduation" and its Implications: Countries that exceed the high-income threshold for three consecutive years "graduate" from being eligible for World Bank lending. While this signifies economic progress, it can also pose challenges as countries lose access to concessional financing and technical assistance. This "graduation cliff" can be particularly problematic for countries that are still facing significant development challenges, even though their GNI per capita has increased.

The Future of Classification: Exploring Alternative Metrics

The World Bank continuously reviews its classification methodology and considers alternative metrics that could provide a more nuanced and comprehensive assessment of development progress. Some potential alternatives and complementary indicators include:

Multidimensional Poverty Index (MPI): The MPI measures poverty based on a range of indicators beyond income, including health, education, and living standards. It provides a more detailed picture of the deprivations faced by poor households.
Inequality-Adjusted Human Development Index (IHDI): The IHDI adjusts the HDI to account for inequality in the distribution of health, education, and income. It provides a more accurate measure of human development in countries with high levels of inequality.
Sustainable Development Goals (SDGs) Index: The SDGs Index tracks a country's progress towards achieving the 17 Sustainable Development Goals, which cover a wide range of economic, social, and environmental objectives.
Environmental Performance Index (EPI): The EPI assesses a country's environmental performance based on indicators related to environmental health and ecosystem vitality.

While these alternative metrics offer valuable insights, they are not without their own limitations. Data availability, comparability, and the need for a single, easily understood classification tool remain key considerations for the World Bank.

GNI per Capita in Action: Examples and Case Studies

To illustrate the practical implications of GNI per capita, let's consider a few examples:

Afghanistan: As a low-income country, Afghanistan is eligible for the World Bank's most concessional financing terms, including interest-free loans and grants. These resources are crucial for supporting the country's reconstruction and development efforts.
India: India is classified as a lower-middle-income country. This classification determines the types of loans and grants that India can access from the World Bank. While India has made significant progress in reducing poverty, its GNI per capita remains relatively low compared to other major economies.
China: China transitioned from a lower-middle-income country to an upper-middle-income country and is now approaching the high-income threshold. This reflects China's rapid economic growth over the past few decades. However, China still faces significant development challenges, including income inequality and environmental degradation.
South Korea: South Korea is a remarkable example of a country that has transitioned from a low-income country to a high-income country in a relatively short period. This transformation was driven by a combination of factors, including strong government policies, investments in education and technology, and a focus on export-oriented growth.

Conclusion: GNI per Capita as a Guiding Star

In conclusion, GNI per capita serves as a fundamental metric employed by the World Bank to classify economies and guide its development assistance strategies. While it provides a valuable snapshot of a country's average income level and facilitates cross-country comparisons, it is crucial to recognize its limitations. Factors such as income inequality, non-market activities, and the neglect of non-income dimensions of development must be considered alongside GNI per capita to gain a more comprehensive understanding of a country's development progress. As the global development landscape evolves, the World Bank continues to explore and refine its classification methodology, seeking to incorporate a broader range of indicators that reflect the multifaceted nature of sustainable and inclusive growth. The ongoing debate and refinement of these metrics are essential for ensuring that development assistance is targeted effectively and contributes to a more equitable and prosperous world.