IFI governance


Country classifications

18 November 2011 | Inside the institutions

A state’s relationship with the IFIs and the type of assistance it receives is determined by its country classification. Some crucial types of classifications are: the World Bank’s operational lending categories; the Bank’s analytical categories used in the World Development Report (WDR); the IMF’s operational and analytical categories; the International Finance Corporation (IFC, the Bank’s private sector arm)’s frontier market category; the Bank’s fragile state category; and the distinctions used by the Bank and IMF in determining and reporting success in governance reforms.

The analytical classifications the Bank uses in its WDR are based on gross national income (GNI) per capita converted into US dollars adjusting for inflation and exchange rate fluctuation. Updated every three years, they currently are: low-income, $1,005 or less; lower-middle-income, to $3,975; upper-middle-income, to $12,275; and high-income, more than $12,275. These classifications are widely used, notably in forming the basis of the Organisation for Economic Co-operation and Development’s (OECD) definition of official developmental assistance (ODA). The OECD’s Development Assistance Committee, compiles a list of countries eligible for ODA, consisting of those that are classified as low or middle-income in the Bank’s methodology. However, it differs from the Bank by guarding against fluctuation: a country must be classified as high income for three consecutive years to be considered so. It also adds the category least developed countries.

The Bank’s operational lending categories are based on the same data as the analytical classifications. The lending thresholds for fiscal year (FY) 2012 were: civil works preference, $1,005; International Development Association (IDA) eligibility (operational), $1,175; IDA eligibility (historical) $1,905; International Bank for Reconstruction and Development (IBRD) graduation, $6,925. Civil works preference is the cut-off at which the Bank demands international competition in procurement for Bank assisted projects, and IBRD graduation marks the point where a state graduates from the IBRD to donor-country status. IDA eligibility is of crucial importance as it determines whether a country is eligible for concessional credit from IDA or should seek market-based loans from IBRD. Due to resource constraints, the IDA operational cut-off of $1,175 is lower than the historical eligibility ceiling based on $250 in 1960. Countries with per capita income falling under the historical eligibility threshold, but not the operational, include Papua New Guinea and Bolivia (based on the 2010 GNI data used in FY11).

Andy Sumner of the Institute of Development Studies notes that this IDA allocation threshold is approximately 15 per cent higher than the low-income country/middle income country (MIC) threshold, and it is these IDA-eligible MICs that tend to form the ‘blend’ countries. ‘Blend’ countries are those that are eligible for IDA funding based on per capita income but which are at the same time deemed credit-worthy by the markets. In this case the Bank allows them limited IDA funds supplemented by the market-based IBRD, forming a ‘blended’ loan package.

IDA eligibility also forms the basis of other important categories, such as the Bank’s definition of a fragile state, the IFC’s definition of a frontier market and eligibility to the IMF’s concessional lending facility.

The data itself is calculated based on GNI per capita converted into US dollars via a formula known as the Atlas Method, designed to adjust for inflation and exchange rate fluctuation. Despite their suggestion of a relative measure, the Bank’s analytical thresholds are absolute figures remaining constant in real terms. One consequence of this is that if average world income continues to increase along current trends, then the high-income country threshold will eventually fall below the average world income level.

The classifications do not consider the distribution of wealth within countries, which explains how most of the world’s poor live in countries that are classified as middle-income. The exclusive use of GNI per capita figures in absolute thresholds is justified by the Bank as based on a stable link between measures of wellbeing such as infant mortality on the one hand, and economic variables on the other.

A ‘fragile state’, formerly referred to by the Bank as a ‘low-income countries under stress’, is a low-income country that has a harmonised average Country Policy and Institutional Assessment (World Bank/Asian Development Bank/African Development Bank) score of 3.2 or below, out of 6 (see Update 63, 52, 43). This is contentious as the assessments contains no measure of security and it means that countries that are not low-income are precluded from definition as fragile. Two sub-categories in the fragile state category are eligible for exceptional IDA allocation: re-engaging and post-conflict states. Re-engaging states are those that had disengaged from the Bank for an extended period, but are now making commitments to reform and are undertaking debt clearance. Post-conflict states are those that have had: a severe, long-lasting conflict disrupt their borrowing and aid; a short, intensive conflict that has disrupted IDA involvement; or a new state emerging from a violent break-up of a former sovereign entity. There is no formal World Bank definition of conflict.

The crucial category for the IFC is ‘frontier markets’, which forms the first of its strategic five pillars. A ‘frontier market’ is an IDA eligible country, a ‘fragile state’ (using the Bank’s definition), or a ‘frontier region’ in a middle-income country. A ‘frontier region’ is primarily defined by the per capita income of the region with adjustments for business risk issues in the country.

The Multilateral Investment Guarantee Agency(MIGA) guarantees investments from member countries into developing countries against political risks. Developing member countries are those signatories in ‘category two’ of MIGA’s convention, as opposed to the industrialised ‘category one’. However, category two contains several countries that the World Bank listed as high-income in FY11, such as South Korea and Qatar. MIGA does not seem to base its classifications on any formal measure, offering a definition of a developing member country as that which it lists as developing in its convention.

The IMF has its own analytical and operational classifications. The analytical classifications are used in its World Economic Outlook (WEO) report to categorise states as advanced or developing economies. This classification, as the 2011 report explains, is “not based on strict criteria, economic or otherwise”. Despite this, they do give the main criteria as per capita income level, export diversification, and integration into the global financial system. The IMF listed 34 advanced economies in its September 2011 WEO, compared to the Bank’s 70 high-income countries for the same period. The countries that make the Bank’s top category and not the IMF’s are largely made up of off-shore banking centres and oil-exporting countries, but also include Croatia and Hungary.

The key IMF operational classification is eligibility for the Poverty Reduction and Growth Trust (PRGT), its concessional lending trust fund. Countries are added to the PRGT-eligibility list if their annual per capita GNI is below the IDA operational threshold, or if they lack access to capital markets on a “durable and sustainable basis”, as evidenced if a country has borrowed up to 100 per cent of its Fund quota in three of the last five years, or if the IMF judges that they could have done so. A country is considered to have graduated from PRGT eligibility if they persistently exceed double the operational IDA per capita threshold or have substantial access to financial markets, and if they do not face any near-term risk. As such, the PRGT eligibility list includes non-IDA blend countries such as Georgia, Uzbekistan, Papua New Guinea and Zimbabwe.

Economic data used by the IMF is based on gross domestic product weighted by purchasing power parity (PPP) rather than market exchange rates, a significant departure from the Bank’s methodology. GDP measures the market value of all goods and services produced within the state, while GNI measures the production of that state’s citizens and companies regardless of their location. So, for example, a German-owned factory operating in Peru would count towards Peru’s GDP but Germany’s GNI.  The IMF uses PPP to avoid reliance on market valuation.

Despite having numerous existing categories, when the Bank and Fund reported the outcomes of their governance reform negotiations in 2010, they created bespoke classifications that resulted in over-reporting of the share of votes shifted to developing countries (see Update 72, 70). The Bank used the classifications ‘developed countries’ and ‘developing and transitional countries’; seemingly based on the Bank’s analytical classifications outlined above but with some changes. IDA splits its governance structure into Part 1 and Part 2 members for the sake of voting rights and subscriptions payment. Membership of  each is based on countries’ relative economic positions upon joining IDA at its inception in 1960 with Part 2 members – those allowed to pay less subscriptions – used as an equivalent of ‘developing’ with regard to governance reform.

The IMF used the terms advanced and emerging/developing countries (EMDCs) for quota discussion based on its categorisation of countries in the WEO – with some other factors considered. The nature of these factors are unclear but the Fund’s 2010 quota reforms counted South Korea and Singapore and other EMDCs despite their being classified as advanced economies in that year’s WEO (see Update 73). Also of importance are the two overlapping sub-distinctions which are the focus of quota re-allocation: ‘under-represented’ and ‘dynamic EMDC’s’. These two categories are distinct but overlapping, with ‘under-represented’ constituting any country that has less quota shares than the current formula suggests they should have, and a ‘dynamic EMDC’ any country whose share in PPP GDP is larger than their quota share.