Poverty Conundrum Why Most Poor People Live in 'Middle-Income Countries'

One might think that the countries where most poor people live would be classified as poor themselves. But they aren't. The World Bank's "middle-income countries" designation means that huge numbers of the poorest are placed at further disadvantage.

A woman bathes her daughter in a village in Uttar Pradesh

A woman bathes her daughter in a village in Uttar Pradesh

By Rema Nagarajan

With a population of over 204 million, the Indian state of Uttar Pradesh would be the fifth most populous nation in the world -- after China, India, Indonesia and Brazil -- if it were a separate country. But it would also be extremely poor, with very poor development indicators and high levels of deprivation. The share of children affected by malnutrition and the infant mortality rate would be similar to or even higher than in those designated as low-income countries by the World Bank. But Uttar Pradesh is part of India, which is classified as a middle-income country (MIC). And this classification is problematic for the socially deprived in multiple ways -- and is symptomatic of the situation facing many of the world's poorest.

Over 75 percent of those suffering from extreme poverty in the world live in countries that are considered middle income. India alone is home to 275.9 million of the poorest, living on less than the $1.90 per day used by the World Bank as the cut-off for extreme poverty. All other lower income countries -- located mainly in sub-Saharan Africa with a few in Asia, such as Afghanistan, Nepal and Cambodia -- have just 258.3 million put together.

The situation is similar when looking at those suffering from hunger: Here again, the UN's 2015 report on global hunger shows that lower-middle-income countries account for over half the hungry people in the world compared to just 18 percent in low-income countries.

* Living on less than $1.90 per day

When Is a Country Considered Middle-Income?

The classification of countries is done annually by the World Bank based on the previous year's per capita Gross National Income (GNI). In recent years, several countries have moved from the low-income group to the group called lower-middle-income countries, a sub classification of MICs. But if MICs are home to the largest number of people suffering from extreme poverty, how can they be classified as middle income?

The answer is that their per capita GNI --or the total national income divided by population -- exceeds a critical threshold: per capita GNI of $1,045. MICs are those with a per capita GNI of more than $1,045 but less than $12,736. Within this category, those countries with per capita GNI of below $4,125 are further classified as lower-middle-income economies.

High-income economies are those with a per capita GNI of $12,736 or more. The axis has been cut off at the value for Germany ($47,460 per capita GNI) for reasons of legibility.

Why Are Most People In These Countries Not Middle-Income?

The problem is that income distribution is not taken into account when countries are classified. In countries recently reclassified as middle income, the majority of the population remains poor even as the country might be getting richer because wealth remains concentrated in the hands of the rich. This inequality is often further exacerbated by factors such as race, gender, caste or the rural-urban divide.

"Since 2000, 27 countries have graduated and 707 million poor people 'moved' into MIC countries because despite growth the absolute number of poor people hasn't fallen sufficiently in these countries," wrote Ravi Kanbur, a professor of applied economics at Cornell University in the US, and Andy Sumner, a development economist in Kings College London, in a 2011 paper titled "Poor Countries or Poor People? Development Assistance and the New Geography of Global Poverty."

This is amply illustrated when you compare the share of income or consumption of the bottom 10 percent with that of the top 10 percent in various countries. In an upper-middle-income country like Brazil, for example, the bottom 10 percent is responsible for just 1 percent of total consumption while the top 10 percent consumes almost 42 times as much. In India, the bottom 10 percent accounts for just 3.5 percent of the total consumption, while the top 10 percent accounts for 30 percent.

Income Classification and Inequality

Disadvantages of MIC Categorization

MICs, especially the lower-middle-income countries, face huge challenges in lifting millions out of extreme poverty. The re-categorization of many of these originally low-income countries as middle-income in the last decade has added to their woes as it has meant losing trade and tariff concessions given to low-income countries. That's why many middle-income countries challenge the MIC as a category and demand that they be part of the international development debate like any other developing country.

For instance, the General Agreement on Tariffs and Trade, a multilateral agreement regulating international trade, has a special section on trade and development that includes provisions saying that when rich countries grant trade concessions to poorer ones, they should not expect matching concessions in return. The World Trade Organization tries to ensure significant flexibility for the least developed countries in trade agreements, both in the terms of the agreement itself and in the time frame for compliance. Countries moved from the low-income to the middle-income category lose many of these concessions.

A glaring example of the re-categorization disadvantage is in pharmaceuticals and drug pricing. Most major pharmaceutical companies like Merck, Pfizer and GSK have stopped providing preferential pricing or reduced prices on many important drugs to middle-income countries. "Over the last two years, lower-middle- and middle-income countries have been locked out of company discount programs and are forced to negotiate prices on a case-by-case basis, which has led to higher prices," noted Doctors Without Borders (MSF) in a 2012 press statement.

For the pharmaceutical companies, this is a good deal of course -- even if the majority of the population cannot afford the higher drug prices. Brook Baker, a senior policy analyst for the Health Global Access Project, a non-profit organization based in New York, was quoted in Nature magazine as saying that in middle-income countries with high income inequality, companies make more money selling drugs to rich people than they do selling to the 90 percent of people who are poor. After all, the richest 10 percent of the population in many of these countries often includes several million people. In Bangladesh, with a population of 156 million, for example, the wealthiest 10 percent accounts for more people than the population of countries like Belgium, Sweden or Greece.

Keeping the Poor in Poverty

Thus, the re-categorization of low-income countries as lower-middle-income countries not only hides the fact that the majority of the world's poor actually live there, but the subsequent loss of concessions could lead to even higher levels of inequality, especially on something as basic as access to health care.

Is that a sustainable proposition if two of the United Nations declared Sustainable Development Goals are to wipe out hunger and halve poverty by 2030? A sustainable development strategy would have to push for better distribution of wealth and inclusion in development, across and within countries.

For this, a more realistic statistical measure of peoples' situation in middle-income countries is necessary. While many emerging economies seem to face similar challenges depending on their income level, grouping solely based on income does not reflect levels of economic or social development. The fact that the poor in Uttar Pradesh have to suffer all the limitations placed on a middle-income country highlights the arbitrariness of classification by per capita GNI. Moreover the MIC category appears too broad and heterogenous with even the division between upper-middle and lower-middle income seemingly arbitrary.

The UN Development Program's Multidimensional Poverty Index (MPI) is often said to be a better measure, as it identifies multiple categories of deprivation -- such as in education, health and standard of living -- and not just per capita income. It is certainly a better reflection of the development challenges facing MIC countries. Hence, a classification based on the share of people suffering multidimensional poverty might be more accurate and useful in addressing it.

The fate of the hundreds of millions of poor people living in so-called middle-income countries depends on it.

Rema Nagarajan is a 2016 fellow of the "Media Ambassadors India-Germany" program. She is a senior assistant editor at the Times of India and frequently writes about public health policy and other health-related issues.

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