Understanding the Developed/Developing Country Taxonomy

Development is a concept that is difficult to define; it is inevitable that it will also be challenging to construct development taxonomy. Countries are placed into groups to try to better understand their social and economic outcomes. The most widely accepted criterion is labeling countries as either developed or developing countries.

There is no generally accepted criterion that explains the rationale of classifying countries according to their level of development. This might be due to the diversity of development outcomes across countries, and the restrictive challenge of adequately classifying every country into two categories.

History

The developing/developed countries taxonomy became common in the 1960s as a way to easily categorize countries in the context of policy discussions on transferring resources from richer to poorer countries (Pearson et all, 1969). For want of a country classification system, some international organizations have used membership of the Organization of Economic Cooperation and Development (OECD) as a main criterion for developed country status. Though not expressly stating a country classification system, the preamble to the OECD convention does include a reference to the belief of the contracting parties that “economically more advanced nations should co-operate in assisting to the best of their ability the countries in process of economic development. This consequently resulted in about 80-85 percent of the world’s countries labeled as developing and 15-20 percent as developed.[1]

Due to the absence of a methodology in classifying countries based on the level of development, this article will focus on the development taxonomies of the UNDP, World Bank and IMF.[2]

1. United Nations Development Programme’s (UNDP) Country Classification System

The UNDP’s country classification system is calculated from the Human Development Index (HDI),[3] which aims to take into account the multifaceted nature of development. HDI is a composite index of three indices measuring countries achievement in longetivity, education and income. It also recognizes other aspects of development such as political freedom and personal security. The 2013 report which follows on from the 2010 report used the Gross National Income per capita (GNI/n) with local currency estimates converted into equivalent US dollars. It also uses equal country weights to construct the HDI distribution. In the classification system, developed countries are countries in the top quartile of the HDI distribution. Developing countries consists of countries in the high group (HDI percentiles 51-75), medium group (HDI percentiles 26-50), and the low group with bottom quartile HDI. Currently, 47 countries out of 186 compared.[4]

To identify high HDI achievers and consequently developed countries, the UNDP used a number of factors. One way is is to look at countries with positive income growth and good performance on measures of health and education relative to other countries at comparable levels of development. Another way was to look for countries that have been more successful in closing the “human development gap,” as measured by the reduction in their HDI shortfall (the distance from the maximum HDI score).[5]

1. The World Bank’s Country Classification Systems

The classification tables include all World Bank members, plus all other economies with populations of more than 30,000. The World Bank’s classification of the world’s economies is based on estimates of gross national income (GNI) per capita. Previous World Bank publications might have referred to this as gross national product, or GNP. The GNI is gross national income converted to international dollars using purchasing power parity rates.[6] An international dollar has the same purchasing power over GNI as a U.S. dollar has in the United States. The GNI per capital is also used as input to the Bank’s operational classification of economies, which determines their lending eligibility. The most current World Bank Income classifications by GNI per capita (updated July 1 of every year) are as follows[7]:

• Low income: $1,025 or less
• Lower middle income: $1,026 to $4,035
• Upper middle income: $4,036 to $12,475
• High income: $12,476 or more

Low- and middle-income economies are usually referred to as developing economies, and the Upper Middle Income and the High Income are referred to as Developed Countries.

The World Bank adds that the term is used for convenience; ‘it is not intended to imply that all economies in the developing group are experiencing similar development or that other economies in the developed group have reached a preferred or final stage of development’. [8]

1. The IMF’s Country Classification Systems

The main criteria used by the IMF in country classification are i) per capita income level ii) export diversification iii) degree of integration into the global financial system. The IMF uses either sums or weighted averages of data for individual countries.

However, the IMF’s statistical Appendix[9] explains that this is not a strict criterion, and other factors are considered in deciding the classification of countries.

The IMF refers to the classification of countries as Advanced and Emerging and Developing Economies. Advanced Economies are sub-catergorised[10] into Euro Area, Major Advanced Economies (G7), Newly Industrialized Asian Economies, Other Advanced Economies (Advanced Economies excluding G7 and Euro Area), and the European Union. The Emerging and Developing Economies are sub categorised into Central and Eastern Europe, Commonwealth of Independent States, Developing Asia, ASEAN-5, Latin America and the Caribbean, Middle East and North Africa, Sub-Saharan Africa.

Table 1. Country Classification Systems in Selected International Organizations

Conclusion

A number of different criteria exist for defining whether a country is considered a developing country or not. The definitions usually have to do with the country’s right to receive development aid under the rules of a multilateral or bilateral agency.

Aderonke Gbadamosi is a former A4ID intern and currently works as a volunteer at Carbon Leapfrog.

References

Pearson, Lester B, et al, 1969, Partners in Development: Report of the Commission on

International Development (New York: Praeger Publishers).

Lynge Nielsen (2011) Classifications of Countries Based on Their Level of Development: How it is Done and How it Could be Done IMF Working Paper  WP/11/31

[1] http://stats.oecd.org/glossary/detail.asp?ID=6330

[2] The UNDP is a subsidiary body of the UN established pursuant to a UN General Assembly resolution. The

World Bank and IMF are UN specialized agencies.

[3] http://hdr.undp.org/en/statistics/faq/

[4] The HDI rankings featured above were published in the 2013 Human Development Report: The Rise of the South: Human Progress in a Diverse World.

[5] http://hdr.undp.org/en/statistics/faq/

[6] http://search.worldbank.org/data?qterm=Gross%20national%20income%2C%20GNI&language=EN

[7] http://data.worldbank.org/news/newest-country-classifications-released

[8] http://data.worldbank.org/about/country-classifications

[9]http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/groups.htm#wa

[10]http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/groups.htm#wa