There is no evidence for poverty or middle income traps and development policy should reflect this reality

Country income classifications, with their division into
low ( less than $1,036),
middle ($1,036–$12,625), and
high ( over $12,625) are arbitrary.

$1.25 and $2 poverty lines are also arbitrary.

1. There is no natural grouping of economies based on GNI per capita.

2. Country income status does not correlate with trend breaks or end points in anything else we care about.

Out of all of the potential variables out their covering health, education, components of national output, the environment, and everything else there are some indicators that suggest some sort of break somewhere near the low- or middle-income cutoffs, but it would be fair to say that’s by luck not design.

SOURCE – Charles Kenny, Center for Global Development

No evidence of poverty trap or middle income traps – they grow faster, some grow very fast but they grow faster than developed

We conjure ‘poverty traps’ because some countries are still in low-income status. Aart Kraay and David McKenzie look for evidence of poverty traps and find little of it. In particular, they divide the world by 1960 income into five quintiles and find the poorest 22 countries grew at an average rate of 2.2 percent per capita over the next 50 years compared to the richest quintile growing at 2.1 percent (it is true the second poorest quintile grew an average of only 0.9 percent — perhaps potential evidence for a ‘lower-middle-income trap’ if someone was looking for a new trap to find. But even that 0.9 percent over 50 years translates into a 65 percent income increase, suggesting that even were this not a mere statistical fluke, the trap would eventually be escaped.) Kraay and McKenzie note that “the initially-poorest 10 percent of countries has grown at a rate similar to the historical growth rate of the United States over the past 200 years is difficult to square with models of poverty traps.”

We conjure ‘middle-income traps’ and appear concerned about incomplete structural transformations because fewer countries have crossed from middle- to high-income status than from low to middle. Otherwise sensible World Bank senior advisors fret that “only 13 of 101 middle-income economies in 1960 reached high-income status by 2008” and conclude “middle-income countries seeking to reach the next stage of development can no longer import or imitate existing technologies or capabilities; they must build their own.” But there isn’t something especially difficult about crossing the $12,000 line (otherwise we’d see the line in Figure 1 go flat sometime before crossing it). The reason comparatively few countries have crossed it is because most middle-income countries started their life as middle-income designees a long way from the cutoff, and the middle-income range is considerably larger than the low-income range. From the poorest low-income country to the low-income threshold is about a fourfold increase in GNI per capita. From the bottom to the top of the middle-income category is a twelvefold increase in GNI per capita. And there’s no evidence that countries in the middle of the distribution tend to grow more slowly than countries at either end. Figure 3 looks at per capita GDP growth rates by income decile over time. The first bar for each decile records average growth rates for countries in that decile between 1960 and 2010. The second bar records average growth rates for countries in that decile between 1970 and 2010 –and so on. Countries in the middle appear on average to grow faster, if anything.

So, given that these boundaries are arbitrary, what should we do?

1. Accept that income cutoffs divide a world which doesn’t want dividing, and act accordingly. We should be thinking about gentle graduations from IDA or GAVI or any of the other income-determined aid programs. At the other end we should think about gentle enrollment matriculation into common but differentiated responsibilities including action to limit greenhouse gas emissions and the expectation to provide ODA.

2. Try to design groupings fit for purpose. For example, if we want to divide the world into countries that are ODA eligible and those that aren’t, why not take some definition of what we most want ODA to do. As I’ve suggested previously, take Martin Ravallion’s work on which countries could plausibly end $1.25 poverty without outside assistance and declare that the cutoff (around $2,300 Atlas GNI). Or, as it might be, all countries that would need external finance to meet a post-2015 agenda of zero $1.25 poverty, child mortality below 3 percent, and universal access to clean water. If you think aid only works in countries with a CPIA above 3, use that as an additional cutoff. If you think aid only works if you give more than $10 per capita and you only have $10 billion to give, use a calculation that takes that into account.

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