- As established in 1971, the initial criteria for designating a country as least developed required a low per capita gross domestic product (GDP) and structural impediments to growth. The presence of such impediments was indicated by a small share of manufacturing in total GDP (under the then current assumption that a high the level of industrialization was a structural characteristic of developed or “advanced” countries), as well as a low literacy rate (indicating the extent of development of the country’s human capital).
- A number of improvements to the criteria have been made since 1971. Nonetheless, the underlying principle of identifying LDC as countries which face structural handicaps to growth has essentially remained the same.
- Currently, the following criteria are used to classify countries as least developed:
- Gross national income per capita
- Human Asset Index
- Economic Vulnerability Index
In addition, low income countries with population larger than 75 million inhabitants are not eligible to be considered for inclusion
- In the review process, the Committee determines threshold levels on each of the three criteria to identify the countries to be added to or graduated from the category.
- To be added to the category, a country must satisfy all three criteria, that is, reach the threshold levels for inclusion based on all three criteria and have a population no larger than 75 million inhabitants.
- Since graduation rules have been established in 1991, one of the guiding principles in designating LDCs has been to ensure that graduation will take place only after a country’s development prospects have significantly improved, and that the graduated country can sustain its development path. There is therefore an intentional asymmetry between the inclusion and graduation criteria:
- Thresholds for graduation have been established at a higher level than those for inclusion;
- In order to be eligible for graduation a country must cease to meet not just one, but two out of the three criteria (except in cases where GNI per capita is at least twice the graduation threshold levels);
- Eligibility for inclusion is ascertained once, whereas eligibility for graduation has to be observed over two consecutive triennial reviews;
- Inclusion is immediate, while graduation takes place only after three years, in order to give the country time to prepare itself for a smooth transition from the list;
- Inclusion requires approval from the country concerned, whereas graduation does not.
- The criteria are applied to countries classified as LDCs at the time of the review (even if no longer a low-income country) as well as other developing countries classified by the World Bank as low-income countries in any one year of the three-year reference period considered at the triennial review.
- In the case of the 2006 review, the World Bank thresholds for low-income countries were $755 (2000), $745 (2001) and $735 (2002), which corresponded, respectively, to the World Bank’s assessment in years 2002-2004 and the classification used in the Bank’s corresponding fiscal years. Income data were collected for 132 developing countries. Of these, 65 were retained for further review (50 already in the LDC category in 2006 and 15 low-income countries not previously classified as least developed).
- The threshold for inclusion is based on a three-year average of the level of GNI per capita, which the World Bank defines for identifying low-income countries. The threshold for graduation is set at a higher level. For the 2006 triennial review, the threshold for graduation was $900, about 20 per cent above the $745 threshold for inclusion.
- The human assets index (HAI) provides information regarding the level of development of human capital. It is a combination of four indicators. There are two indicators of health and nutrition:
And, two for education:
- The original data for each variable are converted into index numbers using a max-min procedure and re-scaled to remove significant outliers. All indicators carry equal weight in the calculation of HAI. The HAI is thus an average of its four components.
- The HAI threshold for inclusion is determined by the index number corresponding to the third quartile in the distribution of HAI results for all least developed and low-income countries under review. Countries with HAI values lower than the threshold meet the HAI criterion for inclusion in the list of least developed countries. The threshold for graduation has been established at 10 per cent above the inclusion threshold.
- For the 2006 review, the threshold for inclusion in the list of least developed countries was an HAI value of 58 and the threshold for graduation was established at 64.
- Economic vulnerability to trade and natural shocks are major structural obstacles to development. The EVI is designed to reflect the risk posed to a country’s development by exogenous shocks, the impact of which depends on the magnitude of the shocks, and on structural characteristics that determine the extent to which the country would be affected by such shocks (resilience).
- The EVI incorporates a combination of the following seven indicators:
- population size
- remoteness
- merchandise export concentration
- share of agriculture, forestry and fisheries in gross domestic product
- homelessness owing to natural disasters
- instability of agricultural production and,
- instability of exports of goods and services
- The indicators are grouped into two broad areas comprising an exposure index, determined by indicators (i) to (iv) above, and a shock index constructed from indicators (v) to (vii). The weights attached to each indicator in each composite index and sub-index are shown in figure 1. The EVI is the average of the exposure index and shock index.
- In keeping with the previous reviews, the EVI threshold for inclusion in the 2006 review was the value of the index between the third and fourth quartiles of the values for the 65 countries. As in the case of the HAI, the Committee applied a difference of 10 percent between thresholds for inclusion and graduation. In the 2006 review the threshold for inclusion in the list of least developed countries was 42 and the threshold for graduation was 38.
- Population size is both a component of the EVI and a condition that determines whether a country should be eligible for least developed status. In 1991, the CDP ruled that countries with a population exceeding 75 million should not be considered for inclusion in the list of least developed countries. The population cut-off does not apply to countries that were on the list when the parameter was introduced. Additionally, population size is not a criterion for graduation.
The following technique is used to develop smooth index number series to facilitate aggregation and comparison of data from different sources: the original data is transformed into indices ranging from 0 to 100, based on minimum and maximum values in a set of reference countries.
- The scaling between minimum and maximum values, however, raises the question of possible distortions arising in cases where distributions are skewed or have long tails. In these cases, the ranking of countries could be unduly bunched and would obscure the extent of the differences among the majority of countries. Therefore, to minimize these problems, bounds are imposed on the extreme outliers to allow for better comparison of values in the distribution. The bounds are numbers used to define the low and high end of the distribution of the index number series before application of the “max-min” procedure. Accordingly, the bounds replace the actual country data in the calculation of the index concerned. For instance, in the case of population, a minimum bound of 150,000 persons and a maximum bound of 100,000.000 persons were imposed on countries with populations below or above those levels, respectively, in the 2006 review (see table below). Thus, countries with populations smaller than the lower bound had the value of that variable replaced by 150,000, while 100,000,000 was used for those countries with populations above the upper bound.
- The index numbers are derived by subtracting the minimum value in the distribution from each observed value in the series and expressing the result as a percentage of the difference between the maximum (max) and minimum (min) values in the distribution as indicated by the following formula:
I = [(V-min)/(max-min)] x 100
where,
- V is the observed value in the series, and
- I is the new, rescaled, index-number representation with a value ranging from 0 to 100.
- The indices are defined in such a way that the higher the value of the component variables of the HAI, the better the human assets score (and vice versa). In contrast, higher values of the EVI components indicate the presence of increased vulnerability (and vice versa).
- Some adjustment in the formula is needed in the case of certain components. For instance, if the max-min procedure described above were applied to such variables as under-five mortality and population, the procedure would generate indices whose values would be the opposite of what they were supposed to reflect in the HAI and EVI indicators. A higher index value for under-five mortality (one of the component variables in the HAI) should contribute to a lower HAI score since this would indicate, ceteris paribus, the existence of lower human assets in that country. Thus, if unadjusted, countries with high child mortality rates would yield relatively high index number values and high HAI scores (indicating a high level of human assets). Similarly, countries with large populations (a proxy for economic size) would yield high index number values and high EVI scores (indicating high vulnerability), which is not the case, as countries with larger populations usually have relatively greater resilience to shocks. In such cases, the following variant of the max-min procedure is used:
II = [(max-VV)/(max-min)] x 100, or
II = 100-I
where,
- VV is the observed value in the series, and
- II is the rescaled index number representation with values ranging from 0 to 100.
- Redefining the relevant components in this manner now gives the desired result of countries with the highest child mortality rates having relatively lower index numbers and lower HAI scores. Similarly, countries with larger populations would have lower index values and lower EVI scores.
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