STORY Sep 09, 2019 Espen Beer Prydz Divyanshi Wadhwa

Classifying countries by income

Are richer countries polluting more than poorer ones? What progress in poverty reduction has been made in countries affected by fragility and conflict? To help shed light how different groups of countries are doing, the World Bank categorizes countries based on various characteristics, such as geography, lending eligibility, fragility, and average level of income. When it comes to income , the World Bank divides the world's economies into four income groups:  high, upper-middle, lower-middle, and low.

The income classification is based on a measure of national income per person, or GNI per capita, calculated using the Atlas method. In 1978, the first World Development Report introduced groupings of "low income" and "middle income" countries using a threshold of $250 per capita income as threshold between the groups. In the 1983 WDR, the "middle income group" was split into "lower middle" and "upper middle" groups, and in 1989 a "high income" country definition was introduced.

Since then, the thresholds to distinguish between the income groups have been adjusted for prices over time. As of 1 July 2019, low-income economies are defined as those with a GNI per capita, calculated using the World Bank Atlas method, of $1,025 or less in 2018; lower middle-income economies are those with a GNI per capita between $1,026 and $3,995; upper middle-income economies are those between $3,996 and $12,375; high-income economies are those with a GNI per capita of $12,376 or more. The chart shows how the thresholds, and various countries' economies have evolved over time.

As seen in the above chart, many countries' incomes have transcended the income group thresholds over time. Because most parts of the world have experienced considerable economic growth in recent decades, and the classification thresholds are held stable in real terms, there are now fewer low-income countries and more countries have gained middle or high-income status. Just since 2003, the number of low-income countries has nearly halved, declining from 66 to 31 in 2019. The number of high-income countries is currently 80, up from less than 50 in the 1990s. The number of middle-income countries is 107 (60 UMICs and 47 LMICs) and has not changed much as countries have transitioned both in and out of this group. The chart below summarizes the number of countries in each group over time.

The changes are even starker when looking at the share of the world population that live in each type of countries. The vast majority (75 percent) of people currently live in countries defined as lower or upper-middle income countries. As large countries, such as India and China, have transitioned from low income countries to middle income countries, the population shares have shifted dramatically. In the 1990s, more than 6 in 10 people of the world's population lived in low-income countries, while today it is just about 1 in 10.

With only a small share of the world currently classified as "low income" and as the thresholds not having changed since 1988 (in real terms), critics argue that these income groups are losing relevance, and are somewhat arbitrary and dated.

There are many ways of grouping economies and organizing analysis of development data, and  the income classification is only one of many. Yet, the absolute nature of the thresholds, and the long history of the classification scheme, provide a useful way of tracking progress over time. And analysts can always select and analyze data for custom groupings using data from our Databank.

It is important to emphasize that the income classifications are intended to aggregate and analyze data for groups of similar economies.  Among other things, income classifications are used in the WDI and SDG Atlas to shed light on the following questions:

Until recently, the World Bank only used the income classifications for analytical purposes, but they now also affect some  operational policies. Starting on July 1, 2018, there are surcharges in IBRD loan pricing for high income countries as described in the Development Committee Paper "Sustainable Finance for Sustainable Development."