Sustainable Economic Development

Sustainable economic development is an important goal in the global economy. The advanced economies have reached this goal. The emerging market and developing countries continue to work toward this goal. The vast majority of the world's population lives in the emerging market and developing countries. Through growth-oriented domestic policies and foreign assistance, the world's poorer economies seek to transform the vicious cycle of poverty into a virtuous cycle of development. Key challenges to sustainable economic development are global poverty, the marginalization of people in the informal sector of economies, and unsustainable external debt.

CLASSIFICATIONS OF ECONOMIES

Major multilateral institutions such as the World Bank and the International Monetary Fund use different classification systems to group the world's economies. The income classification, for example, identifies four categories of countries by gross national income (GNI) per capita. Income classification helps determine a country's eligibility for certain loans, grants, or other assistance. Another classification system distinguishes economies by level of economic development. This system distinguishes between the advanced economies, and the emerging market and developing economies.

Classification by Income Level

The World Bank and many other international institutions classify countries or economies by their gross national income per capita. Gross national income (GNI) measures the nation's total income by adding the value of all final goods and services produced in an economy each year with the net receipts of other wage or investment income from abroad. The GNI per capita states people's average annual income by dividing the GNI by the country's mid-year population. The World Bank introduced the GNI per capita measurement in 2000. It replaced the gross national product (GNP) per capita as the preferred method of comparing nations' relative well-being.

Economists sometimes speak of countries and economies in the same breath, but they are not always the same thing. In 2012, for example, there were 214 economies but just 195 countries in the world. The main reason for this disparity is that some countries

Table 13.1 Classification of the World's Economies, 2012 (measured in $US)

Source: World Bank, “New Country Classifications,” July 2, 2013.

control one or more affiliated regions that report their economic data separately. Economic data for China, for example, is reported separately from its two special administrative regions (SARs), Hong Kong SAR and Macao SAR. Similarly, economic data for the U.S. economy is reported separately from its affiliated economies such as American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands.^[1]

The World Bank classification identifies four categories of economies based on GNI per capita. These categories include low-income economies, lower-middle-income economies, upper-middle-income economies, and high-incomes economies, as shown in Table 13.1.^[2] The low-income and middle-income economies are generally called developing economies. The World Bank emphasizes that the term “developing economies” is a term of convenience and “is not intended to imply that all economies in the group are experiencing similar development or that other economies have reached a preferred or final stage of development. Classification by income does not necessarily reflect development status.”^[3] In fact, of the 75 high-income economies that existed in 2012, less than half were considered advanced economies. A number of high-income economies—such as Liechtenstein, Monaco, Kuwait, Poland, Qatar, the Russian Federation, and the United Arab Emirates—were not considered advanced economies due to the inadequate size or sophistication of their economies.

The GNI per capita offers a basis for national comparisons of economic well-being. Yet there are limitations to using income data alone to compare economies. First, nations' income data is generally confined to reported business activity, which ignores barter transactions and other transactions in the informal sector of the economy. As a result, the government may understate national income. Second, income data, particularly data collected in the developing world, is often unreliable. Third, GNI per capita cannot assess the actual distribution of income within an economy. In many economies much of the income is skewed in favor of the rich over the poor.^[4] Fourth, the Atlas method of reporting GNI data, which uses official market exchange rates to convert the value of currencies, fails to account for differences in currencies' purchasing power. To address this issue, some international data is adjusted on a purchasing power parity (PPP) basis. Simply stated, purchasing power parity estimates the actual buying power of different currencies, taking into account differences in product prices around the world. The average income comparisons shown in Table 13.1, using either the Atlas or PPP measures, show a significant advantage for people in high-income economies.

• [1] World Bank, “Country and Lending Groups,”; Central Intelligence Agency (CIA), The World Factbook
• [2] World Bank, “New Country Classification,” July 2, 2013; World Bank, “Gross National Income per Capita, 2012: Atlas Method and PPP,” “Country and Lending Groups,” 2013
• [3] World Bank, “How We Classify Countries,”
• [4] World Bank, “Table 2.9: Distribution of Income or Consumption,” World Development Indicators: 2012 (New York: World Bank, 2012), 74–76.