Low income countries: Meaning, Criticisms & Real-World Uses

What Are Low Income Countries?

Low income countries (LICs) are a classification of the world's economies, primarily defined by the World Bank Group based on their Gross National Income (GNI) per capita. This categorization is a fundamental concept within development economics, serving as a broad indicator of a nation's economic capacity and overall development status. As of July 1, 2024, for the World Bank's fiscal year 2025, low income countries are those with a GNI per capita of $1,135 or less in 2024.²⁹ These nations often face significant challenges, including high levels of poverty, limited infrastructure investment, and vulnerability to economic shocks. The classification of low income countries influences international aid flows, access to concessional financing, and global development initiatives.

History and Origin

The system of classifying countries by income level was established by the World Bank, with classifications updated annually on July 1st. This methodology, which primarily relies on Gross National Income (GNI) per capita, has evolved over time. The Atlas method, used for converting local currencies to U.S. dollars to calculate GNI per capita, was introduced in its current form in 1989.²⁸ The thresholds that separate the income groups (low, lower-middle, upper-middle, and high income) are adjusted annually for inflation, using a weighted average of the GDP deflators of several major economies to keep them fixed in real terms.²⁷

Initially, these classifications were linked to the World Bank's operational policies for lending money, determining which countries were eligible for highly concessional loans.²⁶ Over the decades, there has been a significant shift in global income distribution; for instance, in 1987, 30% of reporting countries were classified as low income, but by 2023, this share had fallen to 12%.²⁵

Key Takeaways

Low income countries are defined by the World Bank based on a specific threshold of Gross National Income (GNI) per capita.
The classification is updated annually and influences eligibility for international aid and concessional financing.
These countries often face significant development challenges, including high poverty rates and limited access to essential services.
While GNI per capita is a useful indicator, it does not fully capture internal income inequality or the nuances of economic development.
International initiatives like the Heavily Indebted Poor Countries (HIPC) Initiative aim to support low income countries in managing their debt burdens.

Formula and Calculation

The primary metric used to classify low income countries is Gross National Income (GNI) per capita. This is calculated by dividing a country's total GNI by its mid-year population. GNI represents the total income earned by a country's residents, regardless of where the income is earned, including income from abroad.²⁴ The World Bank converts GNI figures from local currencies to U.S. dollars using the Atlas method. This method averages exchange rates over the current and two preceding years, adjusted for inflation in the respective countries, to smooth out temporary fluctuations in exchange rates.²³

The formula can be conceptually expressed as:

\text{GNI per Capita} = \frac{\text{Total GNI}}{\text{Mid-year Population}}

Where:

Total GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad.
Mid-year Population refers to the total number of people residing in the country at the midpoint of the year.

For a country to be classified as a low income country, its GNI per capita must fall below the annual threshold set by the World Bank. For example, in 2024, this threshold was $1,135.²²

Interpreting Low Income Countries

The classification of a country as a low income country carries significant implications for its perceived economic standing and access to global resources. It signals to international organizations, investors, and policymakers that the country likely requires substantial development assistance. This status often correlates with lower GDP per capita, higher incidence of poverty, and generally lower living standards.

For instance, low income countries are typically eligible for highly concessional loans and grants from multilateral development banks and bilateral donors, which are crucial for financing essential services and development projects. This classification helps direct resources towards areas most in need of poverty reduction and human development. Analysts often use this categorization to contextualize various economic indicators, such as literacy rates, life expectancy, and access to clean water, which tend to be lower in LICs.²¹

Hypothetical Example

Consider a hypothetical country, "Agriland," heavily reliant on subsistence agriculture. For the World Bank's fiscal year 2024, Agriland had a total GNI of $50 billion and a mid-year population of 50 million. Its GNI per capita would be:

\text{GNI per Capita} = \frac{\text{\$50,000,000,000}}{\text{50,000,000}} = \text{\$1,000}

Given the 2024 threshold for low income countries of $1,135, Agriland, with a GNI per capita of $1,000, would be classified as a low income country. This classification would highlight Agriland's need for international support for initiatives such as improving public health, enhancing education, and diversifying its economy beyond agriculture to stimulate economic growth.

Practical Applications

The classification of low income countries is a critical tool in global finance and international development. It guides numerous practical applications:

Development Aid and Lending: International organizations such as the World Bank and the International Monetary Fund use this classification to determine eligibility for highly concessional loans, grants, and technical assistance programs. These funds are vital for financing public services, infrastructure, and social programs.
Debt Relief Initiatives: Low income countries, particularly those with unsustainable debt burdens, are often targets for multilateral debt relief programs. The Heavily Indebted Poor Countries (HIPC) Initiative, launched by the IMF and World Bank in 1996, aims to reduce external debt to sustainable levels, freeing up resources for poverty reduction and other development priorities.²⁰,¹⁹ This has allowed many participating countries to spend significantly more on health, education, and other social services than on debt service.¹⁸
Investment and Trade Policies: Investors and multinational corporations often consider a country's income classification when evaluating market opportunities and risks. Additionally, trade agreements and preferences sometimes offer special provisions for low income countries to promote their integration into the global economy.
Sustainable Development Goals (SDGs): The categorization helps track progress towards the Sustainable Development Goals (SDGs) adopted by the United Nations. Many SDGs, such as ending poverty and hunger, improving health and education, and providing clean water and sanitation, are particularly challenging for low income countries.¹⁷,¹⁶ Significant investment is still needed to achieve these goals in low and middle-income countries, for instance, an additional $1.4 trillion annually to guarantee basic social protection floors.¹⁵

Limitations and Criticisms

While the GNI per capita classification for low income countries is widely used, it faces several limitations and criticisms. A primary concern is that a single average number like GNI per capita may not accurately reflect the complex socio-economic realities within a country. For instance, it does not account for the distribution of wealth, meaning a country could have a high GNI per capita due to a small, wealthy elite, while a large portion of its population lives in extreme poverty.¹⁴ This can obscure significant internal income inequality.

Furthermore, GNI may be underestimated in low income countries where a substantial portion of economic activity occurs in the informal sector or involves subsistence activities not fully captured in official statistics.¹³ The conversion of local currencies to U.S. dollars using the Atlas method, while attempting to smooth out exchange rate fluctuations, does not entirely mitigate their impact.¹² Critics also argue that the fixed thresholds between income categories can create arbitrary distinctions, with countries just above or below a cutoff facing different implications for aid and policy despite similar development levels.¹¹ This approach may oversimplify complex development challenges, ignoring crucial aspects such as the quality of institutions, human development indicators, and vulnerability to external shocks.¹⁰

Low Income Countries vs. Heavily Indebted Poor Countries (HIPC)

While both "Low Income Countries" (LICs) and "Heavily Indebted Poor Countries" (HIPCs) refer to nations facing significant economic challenges, they represent distinct classifications used by international financial institutions.

Feature	Low Income Countries (LICs)	Heavily Indebted Poor Countries (HIPCs)
Primary Basis	Gross National Income (GNI) per capita threshold.	Unsustainable debt burden that cannot be managed through traditional debt relief methods.⁹
Classification Body	World Bank Group.	Joint initiative by the International Monetary Fund (IMF) and the World Bank.⁸
Purpose	General economic categorization for analytical purposes and determining eligibility for concessional aid.⁷	To provide comprehensive debt relief to the world's poorest and most indebted countries.⁶
Eligibility	Based solely on GNI per capita falling below a specific threshold (e.g., $1,135 in 2024).⁵	Must be eligible for World Bank's IDA and IMF's Poverty Reduction and Growth Trust loans, face unsustainable debt, and have a track record of reform.⁴
Overlap	Many HIPCs are also classified as low income countries due to their economic conditions.	Not all low income countries are HIPCs; some may manage their debt more effectively or not meet all HIPC criteria.

The main point of confusion often arises because the HIPC Initiative specifically targets a subset of the world's poorest nations, many of which would also fall into the low income country classification based on GNI per capita. However, the HIPC status implies a severe debt problem requiring a structured program of debt reduction, which is a more specific condition than merely having a low average national income.

FAQs

What is the current GNI per capita threshold for low income countries?

As of July 1, 2024, for the World Bank's fiscal year 2025, low income countries are defined as those with a Gross National Income (GNI) per capita of $1,135 or less, based on data from 2024.³ These thresholds are updated annually to account for inflation.²

How does being a low income country affect a nation?

Being classified as a low income country means a nation typically has limited economic capacity, faces significant poverty reduction challenges, and may have reduced access to basic services like education and healthcare. This classification often makes them eligible for highly concessional financial assistance from international organizations like the World Bank and IMF, aimed at fostering economic growth and development.

What factors can cause a country to move out of the low income category?

A country can move out of the low income category primarily due to sustained economic growth that increases its GNI per capita above the classification threshold. This growth can be driven by factors such as increased investment in human capital and infrastructure, economic diversification, improved governance, and favorable exchange rates. However, economic setbacks, such as recessions or natural disasters, can also cause a country to move back into the low income category.¹