How does the World Bank classify countries by income?

Core Framework: World Bank Income Classification

• Purpose: Provides a standard method for comparing national incomes globally.
• Classification Groups:
  • Low-income: ≤ $1,135
  • Lower-middle income: $1,136–$4,495
  • Upper-middle income: $4,496–$13,935
  • High-income: ≥ $13,936
• Metric Used: Gross National Income (GNI) per capita
  → Includes domestic + income from abroad.

Relevance : GS 3(Growth and Development ) , GS 2(International Relations)

Methodology of Calculation

• Currency Conversion: GNI figures converted to USD using Atlas exchange rates.
• Annual Adjustment: Thresholds revised yearly based on global inflation (not relative economic performance).
• Absolute Nature: A country’s status is independent of others’ growth—purely based on whether it crosses a fixed threshold.

Origin and Evolution of the System

• Initiated: Late 1980s.
• Initial Purpose: To guide lending decisions—e.g., eligibility for concessional loans like IDA.
• Over time: Decoupled from operational decisions; now mainly used for economic comparison and monitoring progress.

Trends in Global Income Distribution (2004–2024)

• 2004:
  • Low-income population: 37% of global total.
  • Upper-middle income population: <10%.
• 2024:
  • Low-income population: <10% — massive reduction in global poverty.
  • Upper-middle income population: 35% — surge in economic advancement.

Countries That Slid Down

• Examples of Downward Mobility:
  • Syria and Yemen fell from lower-middle to low-income in 2017 due to conflict and collapse of GDP.
• Triggers: War, currency depreciation, population revisions, prolonged recession.

Upward Mobility: General Trends

• Most countries show positive movement over 2–3 decades.
• Examples of Progress:
  • India:
    • 2004: Lower-middle income.
    • 2024: On the cusp of upper-middle income; GNI per capita around $2,700–$2,900 (as per recent estimates).
  • China:
    • Crossed into upper-middle income around 2010.
    • Now approaching high-income threshold.

Why These Classifications Matter for Policy

• Targeting Aid & Development Programs: Income groupings guide international aid, development priorities, and eligibility for concessional finance.
• Benchmark for National Policy: Helps assess progress under schemes like Atmanirbhar Bharat, Digital India, Skill India, etc.
• Investors & Analysts: Use income classification to assess country risk and market potential.

Limitations & Criticisms

• GNI per capita masks inequality: Rising averages can hide internal disparities.
• Currency fluctuations: Reclassification can occur due to exchange rate volatility, not real income changes.
• Absolute thresholds can delay recognition of structural poverty improvements or declines.

India’s Relevance in Global Context (2024)

• Status: Lower-middle income, close to threshold of $4,496.
• Policy Goals:
  • Achieve upper-middle income status by early 2030s.
  • Reduce dependency on external aid; shift to regional development leadership.
• Structural Enablers:
  • Digital Public Infrastructure (DPI): UPI, CoWIN, ONDC.
  • Manufacturing push: PLI schemes.
  • Welfare inclusion: DBT, Jan Dhan-Aadhaar-Mobile (JAM trinity).