Problems with measuring poverty

The growing number of middle-income countries (MICs) and the related decline in the number of low-income countries (LICs) has been the subject of some discussion on these pages. A total of 26 countries "graduated" to MIC status in the first decade of this century, and last month a further two, Zambia and Ghana, were reclassified from LIC to MIC, meaning their per-capita income is over $1,000. There are now only 35 LICs.

This shift has led to calls for the role of aid and development co-operation to be reassessed. It is certainly symbolic of the fact that the first decade of this century has been relatively good for poverty reduction. I emphasise the word relatively. Things are still bad, but they are better than in the 1980s and 1990s, during which – in most poor countries (particularly Africa and Latin America) – they actually got a lot worse, with devastating consequences for poor people.

That point links to the caveat I want to make about the huge surge in MICs, which I mentioned in my recent paper on the role of aid in middle-income countries. As the 80s and 90s so clearly proved, countries can slide back as well as progress. Between 1978 and 2003, 25 nations fell back from MIC to LIC status. Some countries found themselves swapping between the two every few years.

Georgia, for example, was classified an MIC in 1991, became an LIC in 1993, rose again in 1996, returned to LIC status in 1999, and has been an MIC since 2003.

Indonesia became an MIC in 1993 and remained at that level until the east Asian crisis of 1998 dragged it back down to LIC status. It took five years for it to recover MIC status.

For Honduras, 1990 was the year of regression to LIC status. It regained MIC status in 1998. Yemen, the subject of much interest this year, was an MIC until 1991, when it fell back to LIC; it only regained MIC status in 2009.

In Africa, Cameroon had been an MIC for some years until 1994, when it regressed to LIC status. Only in 2005 did it regain MIC status. Other African countries, such as the Democratic Republic of the Congo, Ivory Coast and Senegal, have similar stories, while Zimbabwe is yet to re-emerge as an MIC, a status it held until 1991.

In fact, of the 26 countries that went from LIC to MIC status in the last decade, 18 had been MICs in the past but had relapsed to LIC status, mostly in the early 1990s.

It is possible we have entered an era where falling back from MIC to LIC status is less likely than previously, but that will depend on a range of factors, both internal and external. There have been periods of optimism in the past, only for unexpected shocks to undermine what was assumed to be linear progress. Climate change is the great uncertainty in the modern world.

Average income measures are, anyway, limited assessments of poverty, which is why more complex analyses have been developed, including the UN's human development index and the multidimensional poverty index.

Uneven, jobless growth has become a major concern for many countries, not only in the poor world. Having said that, there is a clear relationship between higher income per capita and higher human development indicators. Life expectancy, institutional quality, technological advance, percentage of the population living in poverty – all are indicators that tend to improve as income per capita increases. The only exceptions to this general rule are inequality and higher education, where there is no clear statistical difference between LIC and MIC status.

That is why the concept of least developed countries (LDCs) is a useful one. Countries are formally defined as "least developed" by criteria that take into account human development indicators and economic vulnerability, as well as income per capita. Large economies are excluded by a limit on population size of 75 million. Countries can choose whether to be classified as LDC or not. Becoming an LDC means entering into a UN process with significant benefits, such as preferential trade access. Only 12 LICs are not also classified as LDCs.

Because the LDC classification is based on a more nuanced assessment of a country's predicament than solely per capita income, a number of MICs are LDCs, 14 as of April 2011. Unlike the LIC/MIC classification, which has seen much movement between camps, the LDC group is very stable. A total of 27 countries have been added to the original 1971 list of 25, and only four have left the classification, meaning that today there are 48 LDCs. According to the United Nations Conference on Trade and Development, likely graduates in the near future are Equatorial Guinea, Samoa, Tuvalu and Vanuatu.

None of this denies the important trend towards MIC status since the turn of the century. But there is still uncertainty about how things will pan out, especially as climate concerns affect access to resources. The message for policymakers, then, is that international support strategies should be long term and not depend too heavily on the latest analysis of a country's per capita income.