January 11, 2012
This is a joint post with Owen McCarthy.The development community breathed a sigh of relief on December 23 when President Obama signed a nine-bill spending package that included healthy funding for the International Affairs budget. But there is more in this behemoth than topline funding numbers. Tucked away in the State, Foreign Operations portion are new income definitions for the Millennium Challenge Corporation’s (MCC) low income and lower middle income country categories.At first glance, this may seem like news only for MCC wonks and income data nuts, but the new specifications will have far-reaching effects. The new income definitions will create new low income country (LIC) and lower middle income country (LMIC) groups with new indicator medians that could change a country’s passing/failing status. MCC legislation also dictates that only 25% of MCC funds may be used for LMICs; the new income definitions will alter the countries that fall under this cap by altering the income country groups.So what are the new income groups? The MCC will continue to use the same metric – gross national income per capita as measured by the World Bank – to determine income groups, but the cut-offs have been adjusted. In a nutshell, the low income group will now be the poorest 75 countries and the lower middle income group will be the 76th poorest country at the lower bound and World Bank’s LMIC income ceiling at the upper bound. Previously, the cut-off between LIC and LMIC was IDA’s historical ceiling for LICs. In 2010, the MCA Monitor proposed this solution to mitigate the negative effects of country fluctuation within income groups and the LMIC cap. You can see how these changes affect the FY2012 pool of countries in the table below.
By assigning the LIC/LMIC threshold an absolute value (the 75th poorest country) rather than a constantly changing income level, the new income definitions will provide more stability to income country groups that previously experienced a high level of fluctuation. Take, for example, the Philippines. It has seen sustained income growth over the past eight years, but it has changed income categories three times since the MCC’s inclusion of an LMIC category in FY2007.How will the new income definitions affect MCC countries’ FY2012 indicator scores? Fifteen countries move from LMIC to LIC status: Bhutan, Republic of Congo, Egypt, Georgia, Guatemala, Indonesia, Iraq, Kiribati, Micronesia, the Philippines, Sri Lanka, Swaziland, Syria, Tuvalu, and Vanuatu. The table below shows those MCC countries that have a different result on their indicators test under the new income definitions.
There are six new results under these income definitions. (Note that more countries shifted income group, but had the same indicators test result). The changes are at times quite dramatic, such as Indonesia moving from passing 7 indicators as an LMIC to 17 indicators as a LIC. There are also less serious shifts, such as Guatemala, which only failed by corruption as an LMIC and now passes as a LIC.While the MCC indicators test is still a useful but imperfect method of identifying effective partners, this small change in policy makes a significant improvement in making the process fairer and more effective.
By assigning the LIC/LMIC threshold an absolute value (the 75th poorest country) rather than a constantly changing income level, the new income definitions will provide more stability to income country groups that previously experienced a high level of fluctuation. Take, for example, the Philippines. It has seen sustained income growth over the past eight years, but it has changed income categories three times since the MCC’s inclusion of an LMIC category in FY2007.How will the new income definitions affect MCC countries’ FY2012 indicator scores? Fifteen countries move from LMIC to LIC status: Bhutan, Republic of Congo, Egypt, Georgia, Guatemala, Indonesia, Iraq, Kiribati, Micronesia, the Philippines, Sri Lanka, Swaziland, Syria, Tuvalu, and Vanuatu. The table below shows those MCC countries that have a different result on their indicators test under the new income definitions.There are six new results under these income definitions. (Note that more countries shifted income group, but had the same indicators test result). The changes are at times quite dramatic, such as Indonesia moving from passing 7 indicators as an LMIC to 17 indicators as a LIC. There are also less serious shifts, such as Guatemala, which only failed by corruption as an LMIC and now passes as a LIC.While the MCC indicators test is still a useful but imperfect method of identifying effective partners, this small change in policy makes a significant improvement in making the process fairer and more effective.Disclaimer
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
