Cambodia is now a lower-middle income economy: What does this mean?

The World Bank
Sodeth Ly

Photo supplied

Two decades of economic growth have helped make Cambodia a global leader in reducing poverty.

The success story means the Southeast Asian nation that overcame a vicious civil war now is classified as a lower-middle income economy by the World Bank Group (WBG).

The new classification this year is based on thresholds set by the WBG in a system with roots in a 1989 paper that outlined the methodology. The table below shows the different levels of classification based on Gross National Income (GNI):

Threshold	GNI in July 2016
Low-income	<$1,025
Lower-middle income	$1,026 - $4,035
Upper-middle income	$4,036 - $12,475
High-income	> $12,476

Cambodia’s GNI per capita for 2015 was $1,070, according to WBG figures published on July 1, 2016. That is above the threshold of $1025 for low-income countries for the WBG’s 2017 fiscal year.

These classification thresholds are updated every year to account for inflation rates of countries whose currencies are included in the International Monetary Fund Special Drawing Rights currency basket.
How does the World Bank Group (WBG) classify countries?

The WBG classifies economies by geographic area, per capita income and operational lending category. More details are provided here, but the one I want to focus on is income – particularly, countries classified using their GNI per capita.

GNI per capita is a readily available indicator that, when converted to a common currency, can be compared between countries. We choose to use the US dollar as the common currency, with an adjustment to avoid problems caused when exchange rates fluctuate in a volatile manner. We call this adjustment the “Atlas method.”

GNI is slightly different from its better known sister indicator, Gross Domestic Product (GDP), though they are usually highly correlated. For more on why GNI per capita is used, see here.

What does this mean?

The classification system is a useful measure of progress in the country’s development path. Robust economic growth averaging 7.6 percent per year in the past two decades has transformed Cambodia from one of the world’s poorest countries to a lower middle-income country today. Read more details of recent economic developments here.

The poverty rate has dropped from 53percent in 2004 to 20.5 percent in 2011, surpassing all expectations and far exceeding the country’s Millennium Development Goals (MDGs) poverty target. Among 69 countries that have comparable data, Cambodia ranked fourth in terms of the fastest poverty reduction in the world from 2004-2008. See more details of Cambodia’s achievements on poverty reduction here. The poverty rate fell to 10 percent in 2013, and further reduction of poverty is expected for both urban and rural households throughout 2015-2016. However, human development, particularly in the areas of health and education, remains an important challenge and development priority for Cambodia (read more details here).

As a lower-middle income country, Cambodia is still eligible to borrow from the International Development Association (IDA), the WBG fund for the poorest nations. See more details of IDA eligibility here. Eligibility for IDA support depends first and foremost on a country’s relative poverty, defined as GNI per capita below an established threshold and updated annually. For fiscal year 2017, the threshold for IDA eligibility is $1,185. In addition to GNI per capita, other factors such as creditworthiness, the policy and institutional environment, and other economic and social indicators are reviewed and assessed in determining eligibility to receive IDA support.