wellbeing-and-poverty-a-new-way-to-improve-the-income-classification-of-countries

Vaggi, Gianni (2017). 'Wellbeing and poverty; a new way to improve the income classification of countries.' Paper presented at the annual conference of the HDCA, Cape Town 2017.

Abstract

Development is a multidimensional process and cannot be squeezed into a one-dimensional economic indicator. Since 1990 e have the Human Development Index, perhaps the most famous alternative to GNI, Gross National Income per Capita. The 2000 Millenium Development Goals have brought to the fore the international poverty line, sometimes called absolute poverty with the one dollar a day threshold, now updated to $1.90. More recently the 2008 book by Fitoussi, Sen and Stiglitz has re-opened the debate on wellbeing and the 2012 Oxford Multidimensional Poverty Index tries to highlight the actual quality of life of people, without explicitly including in the index an indicator for income. During the last few years Andy Sumner has shown that most of the poor people no live on Middle Income countries, rather than in the low income ones, a fact that might have important implications for aid and development policies(see Sumner 2012). This debate shows how difficult it is to classify countries according to their relative wealth and relative poverty. Even more complicated is to  understand where the really needy ones are and how one should intervene, also because of the many challenges that development community is facing with the 2015 Sustainable Development Goals.

The paper clarifies some of the above issues and to contributes to a better identification of rich and in particular of poor countries.

First, the paper reviews some of the most important indicators of wellbeing particularly with a view to the literature on the capability approach and it shows how little of this debate has entered the national accounting systems of developing countries.

Secondly, the paper examines the most widespread system of countries’ classification, which is still the World Bank GNI per capita, which clusters countries into four groups. Low Income Countries, LICs, Lower Middle Income Countries, LMICs, Upper Middle Income, UMICs, and High Income, HICs. The four groups are separated by three thresholds. According to the official thresholds all developing countries have made remarkable progress between 1987 and 2015: the number of LICs has decreased from 42 to 31, while that of the HICs has increased from  25 to 79. The paper shows that this rosy picture is largely due to the fact that the thresholds have been updated in a conservative way. In this paper we revise the thresholds according to the a factor which reflects the increase in the world income per capita during those 28 years. With the new revised thresholds a number of countries will not look much better in 2015 than they were in 1987 in terms of income per capita groups. Many new HICs will go back to the UMICs group and some LMICs will find themselves still belonging  to the LICs group. The paper shows that the revised income thresholds give a more moderate, but also a more realistic, description of the economic improvements during those twenty eight years and suggest the GNI per capita thresholds should be increased in a more realistic way.

Thirdly, the paper discusses the implication of the new thresholds for the extreme poverty line, which in 2015 has been updated to 1.90 US$ a day at 2011 Purchasing Power Parities prices. As it is well known according to the current World Bank’s classification the middle-income countries host the vast majority of the poor. According to the new methodology proposed in this paper this is still true, but only because India marginally belongs to the LMICs group. We also compare the list opf countries according to the two different income classifications with that based on the Human Development Index and with the group of Least Developed Countries. It emerges that these two latter lists are quite coherent with that of the countries which are classified as Low Income according to the revised thresholds. This fact can have important implications for aid policies.

Finally, the paper discusses the implication of this new classification for how to relate income based classifications to well being and to multidimensional poverty.

 

 

Keywords: aid, poverty, wellbeing, income

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