Clarifying the MIC-LDC confusion

This is part one of a series of articles based on the Centre for Policy Dialogue's (CPD) research on Bangladesh's graduation out of the LDC group.
PHOTO: Sandeep MM/ Flickr

The national development discourse in Bangladesh often mistakenly considers graduating from the Least Developed Country (LDC) category and becoming a middle-income country (MIC) as interchangeable. Senior-level policymakers continue to express their aspiration for the country to join the middle-income group by 2021, which marks the 50th anniversary of Bangladesh's independence. However, this status has been achieved when Bangladesh joined the lower-middle-income country category on July 1, 2015. Conversely, graduation from the LDC group is almost certain, but not until 2024, if the country meets all the technical requirements in the coming years. To strategise the country's direction effectively, it is essential that relevant stakeholders are adequately informed and conceptually clear about the two classifications with varying policy implications for the country.

The roots of the ambition to be an MIC by 2021 can be traced to the publication of Bangladesh Vision 2021 in August 2007 by the Nagorik Committee 2006, convened by the Centre for Policy Dialogue (CPD). Goal 3 of this aspirational document, which emerged from a country-wide consultative process, reads, "We believe that Bangladesh has the potential to join the ranks of the middle-income countries by 2021." The ruling Awami League party's path-breaking election manifesto of 2008 resonated with similar optimism. It was rather encouraging to see that the Sixth Five Year Plan for the 2011–15 period explicitly targeted the attainment of middle-income status by 2021.

However, there are three reasons why the planned objective was achieved before time. These are: revision of the base year to calculate gross domestic product (GDP), sustained inflow of remittances, and stable exchange rates. When CPD initially highlighted Bangladesh's potential to join the ranks of middle-income countries by 2021, its predictions were centred on the GDP data that had a base year of 1995–96. It is likely that Awami League's subsequent election manifesto was based on similar conjectures. In 2013, the base year for GDP calculations in Bangladesh was revised to 2005–06 to better reflect the role of emerging sectors in real economic growth. As a result, GDP growth and gross national income (GNI) per capita (one of the three identification criteria for LDCs) estimates were increased by 0.15 percent and 13 percent, respectively. Moreover, personal remittances grew exponentially between 2005 and 2014 and exchange rates remained stable defying historical trend. The substantial growth in GNI per capita that followed was unforeseen in initial predictions. Thus, Bangladesh crossed the 2015 lower-middle-income country inclusion threshold of USD 1,046 six years earlier than expected. While greatly acknowledged as a milestone everywhere, the achievement did not make it into updated political statements.

The issue of Bangladesh graduating from the LDC group did not gain policy momentum until 2011, when the Istanbul Programme of Action for LDCs clearly targeted half of them to meet the graduation criteria by 2020. Since then, many people have been wrongly equating middle-income status to that of LDC graduation, so much so that even CPD was faced with criticism following the launch of the 2014 report of the UN Conference on Trade and Development in which the projected timeframe of Bangladesh's LDC graduation in 2024 did not coincide with the 2021 middle-income vision.

Distinguishing the two classifications

One needs to be clear that the two classifications in question differ along many aspects. The LDC is an official UN country classification sanctioned by the United Nations (UN) General Assembly. The Committee for Development Policy (CDP) of the UN Economic and Social Council confers LDC status on countries based on the three inclusion and graduation criteria—GNI per capita, the Human Assets Index (HAI), and the Economic Vulnerability Index (EVI)—at triennial reviews. To be included, a country has to meet inclusion thresholds for all three criteria. A country also has the choice of accepting or rejecting the status or opt out of it at any point in time. A population cap of 75 million has been in place since 1991 to be considered an LDC.

On the other hand, the World Bank, for its operational lending activities, categorises countries into four groups based on GNI per capita—low-income, lower-middle-income, upper-middle- income and high-income—the lists for which are updated every year. Even if a country has high income owing to, for instance, its natural resources, it may still be considered an LDC due to weak social progress or vulnerabilities to external shocks. Within the LDCs, the number of low-income countries decreased while the number of lower-middle-income, upper-middle- income and even high-income countries increased over the years. Equatorial Guinea was once a high-income country retaining LDC status that later slid back to the upper-middle-income category despite its graduation from the category.

Another significant difference is the plurality of pathways for LDC graduation. There are two ways a country can graduate from the LDC category: meet two out of the three graduation criteria or have GNI per capita that is twice the graduation threshold. These criteria must be met at two consecutive triennial reviews to effectively graduate after three more years. Decisions are not automatic as country considerations are duly assessed. At least six years are needed for a country to graduate after it has met the criteria for the first time. Given that Bangladesh will meet the graduation criteria for the first time in 2018, the earliest the country can graduate is 2024. In case of the income classification, as long as a country meets the income threshold in a particular year, it will be considered an MIC. There is no endorsement process or lag involved, only a statistical exercise.

Implications of the differences

Arguably, while the purpose of the World Bank's income-based classification is to assess the credit worthiness of a country (not oversee its development outcomes per se), the purpose of the UN's LDC classification is to eliminate a country's structural deficits. Relatively higher costs of external borrowing are an immediate result of becoming an MIC as opposed to the various costs and benefits associated with LDC graduation that have implications beyond financing. Graduating with momentum and smooth transition after graduation are a major concern for the soon-to-graduate LDCs, whereas middle-income countries are more likely to be concerned with avoiding the "middle-income trap". What the differences between the two classifications mean for Bangladesh will affect the policy options that the country should pursue in view of the forthcoming transitions and associated costs.

As far as becoming an MIC is concerned, Bangladesh should be recognised as having achieved the status back in 2015, well ahead of the target of 2021. It was undoubtedly a great milestone in Bangladesh's developmental journey for which credit is overdue. The country will reach another significant milestone when it meets the LDC graduation criteria for the first time in 2018 and graduate in 2024. A nuanced understanding of the two classifications—among policymakers, government officials, development partners, civil society and all other stakeholders—is thus imperative to inform upcoming policy design and strategic outcomes.

Debapriya Bhattacharya and Sarah Sabin Khan are Distinguished Fellow and Research Associate at the Centre for Policy Dialogue (CPD), respectively.

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