Ghana: Middle Income Blues

Graduation is normally a moment of joy, pride and a sense of achievement for the graduating student. The day is full of smiles and photo opportunities. It does not take long when reality starts sinking in about future job prospects especially if the graduand has not secured one at the time of graduation.

Such has been the graduation blues for Ghana after the country moved from being a Lower Income Country (LIC) into a Middle Income Country (MIC) in 2010. Ghana is finding out that the system of development assistance is not necessarily rewarding to countries that graduate into MIC status.

For years the World Bank had calculated the country's Gross Domestic Product (GDP)-the total amount of goods and services produced in a country in a year- using 1993 as its base year. A base year is the year in which a lot of data is available on an economy. However in 2010 the base year was changed from 1993 to 2006, revealing that over $13 billion of economic activity had been missed in all those previous years. The country's GDP thus jumped to over 62% and this led to the graduation from a LIC to a MIC.

So what does it mean when a country is said to be  Middle income?
MIC according to the World Bank refers to having an income per person of US$1,000 per year. Or to use economic terminology, incomes have risen in per capita terms. Middle income has been further sub-divided into lower middle income and upper middle income and Ghana is lower middle-income.

Ghana is not in an exclusive club. Several African countries have moved from lower income to middle income in the last few years and these include Senegal, Cameroon, Angola, Congo-Brazaville, Nigeria and Zambia.

In announcing Ghana's MIC status back in 2010, then government statistician ,Dr. Grace Bediako said the re-basing was in line with international best practices and had been possible due to up-to-date data available on the economy for example, the contribution of the Telecommunications sector.

Becoming middle income also means many household incomes are rising leading to the growth in the middle class of citizens. Or many people or households have become richer with disposable income to save or spend.

When a country attains this status, it has its advantages like its credit rating with international credit rating agencies improving. However the positive sides are few. The graduating country is rather met with stringent economic conditions regarding international development assistance as discussed below.

Africa's poorest countries (LIC) qualify for concessionary loans from the World Bank's International Development Association (IDA). The payback periods run up to 40 years and the interest rates are very low or close to zero. Countries that become middle income now qualify for loans from the International Bank for Reconstruction and Development (IBRD).

Writing in the Africa Report magazine, journalist Taimour Lay explains that new MICs loan's are non-concessionary and carry very high interest rates. To make matters worse, the new MIC has to repay the old cheaper IDA loan at a much faster rate.

According to Taimour, graduation actually takes at least 3 years to manage with the international financial institutions. It is thus a process and does not mean once the announcement is made, then all the poor people in Ghana have disappeared overnight.
Ghana like many other African countries is poor and had been an LIC for a while.

However once a country attains MIC status. One problem is its share of overseas development aid is reduced. India finds itself in this situation. In December 2012, the United Kingdom (UK) government decided that it will stop giving financial aid to India from 2015 because India is now a middle income country and could take care of its poor. The UK will only offer technical assistance to India.

In December 2012, the director of the Ghana Health Service (GHS) Dr. Ebenezer Appiah-Dankyira told Accra based JOY FM News that many external donors have reduced their financial aid for GHS programs like immunisation, training and research due to Ghana becoming a MIC. The GHS according to the director, was not looking at ways to raise alternate sources of income.

Franklin Cudjoe of local think tank Imani Ghana foretold this scenario in 2010 after  Ghana became MIC. In an interview with JOY FM Mr. Cudjoe said "it could have negative effect on the country's debt servicing ratio as donor countries are no longer obliged to support Ghana's economy".

But is the withdrawal or threat of withdrawal of international financial development assistance to MICs the right decision?

Several economists have disagreed with the World Bank and its method used in classifying countries as MIC.

According to Martin Ravallion of the Bank's Development Research Group, much should not be made of the threshold separating LIC from MIC. The bank uses a method called the Atlas Method for this classification. The method is the Gross  National Income (GNI) per capita of a country in US dollars and adjusted for inflation and exchange rate fluctuations.

Ravallion is at a loss why the WB uses the Atlas method instead of its own Purchasing Power Parity (PPP) to calculate the exchange rates. He argues that development aid should not be held back from new MICs because households that were poor before their countries became middle income are the same ones who now find themselves in the new MIC, so they should not be treated differently.

As Ravallion puts it, it is not good enough to assume that after a country crosses from a MIC to LIC then suddenly they have a lot of money to re-distribute to the poor just by passing an arbitrary line.

Andy Sumner of the UK's Institute of Development Studies believes the WB's threshold is not the best because there are some MICs that after careful study will reveal that, they are still eligible for IDA-funding. These are countries he terms 'blend countries'.

That is those countries eligible for IDA money based on per capita income but who are at the same time credit-worthy and can also access funding from the IBRD. He advises that these blend countries instead of been restricted, should rather enjoy a 'blended loan package' to aid their growth and reduce poverty.

In an article in the UK's Guardian newspaper in 2011, and quoting from economists Ravi Kanbur and Andy Sumner titled "Poor Countries or Poor People? Development Assistance and the New Geography of Global Poverty", they revealed that a decade ago 93% of poor people lived in LICs. Now most of the world's poor no longer lived in poor countries.

These poor people are now called the 'new bottom billion'. They are 960 million poor people or 72% of     the world's poor and they now reside in stable Middle income countries.

In other words only about 25% of the worlds paupers live in poor countries most of them in Sub-Saharan Africa. According to the paper this new bottom billion have not physically moved to stay in mew countries. They still reside in their countries but those countries have gotten richer in PER CAPITA terms and have been reclassified. China and India together account for half of these bottom billion and even if India and China are removed from the equation, the proportion of the world's poor has still tripled.

Will this trend continue in the forseable future?

Economists Laurence Chandy and Geoffrey Gertz at the Brookings Institute through their research estimate that by 2015, the proportion of the world's poor living in MICs will continue to be around 55%. So this new geography of poverty will be with us for a while.
Now that most of the world's poor now live in MICs, should aid be cut back to them?
Kabur and Sumner offer reasons that aid should still be given to MICs.

They argue that this new MICs are 'just middle income'. They suggest that old and new donors should tweak aid as many countries are not homogenous. Some countries have special features and these need to be identified and supported so that aid will have the maximum impact.

Just middle income also means a MIC economy that depends on rain-fed agriculture could revert to LIC in a year of severe drought to affected agric production. Or even political instability like the one experienced in the Ivory Coast in 2011 could draw a country back.

Although aid may be small compared to the size of  economies of say Nigeria and Indonesia, their country's capacity to introduce poverty-reduction schemes may not be strong. Thus aid may still be needed to support the poor living in these countries. Aid will also be needed for other countries like Ghana and Zambia to support productive sectors of their economy. That is no matter where poverty occurs, aid is still needed.

When donors give out aid and engage MICs, aid agencies will gain very valuable knowledge which could be useful in drawing up poverty-reduction policies in LICs. For instance by engaging with Ghana, aid agencies can learn lessons on social safety programs like school feeding programs, free textbooks and uniforms for schools, free maternal care for the poorest and so on which could be replicated in LICs like Baurkina Faso and Liberia.

There may be moral obligations for which development assistance must not be cut to new MICs. Although MICs are still part of global trade and finance transactions, the very nature of these global transactions and power relations puts MICs at a disadvantage compared to richer countries.

Lastly Martin Ravallion argued that when aid is cut to new MICs they could be forced to tax heavily the few middle class citizens in their countries with the hope of spending on the poor. This he believes will be unreasonable and if even so, what marginal tax rate will be optimum to help close the poverty gap?

Countries becoming  middle income is good news but they cannot take care of the poor in their countries alone. They still need financial and technical aid.

Writer's email: sedtony@yahoo.com