Low, Middle and High Income Countries

As industrialization, Urbanization, and capitalism have spread around the world, wealth and income gaps between countries have become more pronounced. Many different theories have been developed to explain this increasing inequality between countries. Some theories, such as the culture of poverty thesis and modernity theory, suggest that lower-income nations are merely less developed than wealthier nations and could become equal with wealthier countries by shifting to a more modern value system and/or industrializing. Competing theories such as dependency theory and world systems theory argue that the wealthier countries have deliberately shaped modern capitalism to maintain their wealthier, more powerful global position.

Keywords Capitalism; Colonialism; Core/Semi-periphery/Periphery; Culture of Poverty; Dependency Theory; International Division of Labor; Mode of Production; Modernization; Primary Sector; Secondary Sector; Tertiary Sector; Surplus Value; World Systems Theory

Global Stratification > Low, Middle & High Income Countries

Overview

As the world becomes more interconnected through the processes of globalization, the impact of industrialization and capitalism has been felt unequally around the world. Some nations have amassed great wealth while others are mired in poverty, with stagnant economies and low average standards of living. Wealth can lead to an overconsumption of resources within a nation; poverty can lead to a multitude of problems from poorer health and higher mortality rates to political instability. Inequality between nations can also cause instability between nations and can cause (or result from) the abuse of power and exploitation. Understanding the causes of inequality between nations is necessary to create political and social programs that address these problems.

What is Income?

Immanuel Wallerstein (2004) identified five types of income in the global economy:

• Wage-income, which are wages paid for one's labor.
• Subsistence activity, which he defines as any work done to further one's existence; for example, cooking for oneself or one's family.
• Petty commodity, a kind of piece-work approach to production.
• Rent, and
• Transfer payments, made because of an obligation (personal or governmental) (pp. 32–34).

Categorizing World Income

The World Bank categorizes countries by computing the average wealth of each nation's inhabitants; that is, it divides the annual gross national income (the output of goods and services each year) by the country's population, and then ranks the country as low, lower-middle, upper-middle, or high-income. This is useful for comparing average incomes, but does not tell much about the actual distribution of income within each nation.

Many of the highest-income countries industrialized in the early days of the industrial revolution. The wealthiest countries include Western Europe, Australia, the United States, and Canada. Asian countries such as Japan and Taiwan, which industrialized later but caught up rapidly, have also moved into this category. Countries from the former Soviet bloc, oil-exporting nations in the Middle East make up much of the middle-income category. South American nations such as Chile, Venezuela, and Argentina are at the upper end of the middle. Much of Africa (excluding the northern nations) and countries in Asia and Eastern Europe with less industrialized economies fall into the low income category. These countries may have rural populations who are moving into rapidly growing cities; low standards of living; and exploding populations ("Country Classification," 2008; Giddens, Duneier, & Appelbaum, 2005; "International Comparisons," 2008).

As of 2003, the World Bank reported that only 15 percent of the world's population lived in high income countries, but these countries took in over 80 percent of the world's income. About 40 percent of the world's population lived in low-income countries, but they shared less than 4 percent of the world's wealth. About 44 percent of the world's population lived in middle-income countries, but they only earned 16 percent of the world's income (Giddens, Duneier, & Appelbaum, 2005). The World Bank has projected that by 2015, only 13 percent of the global population will live in high-income countries, with 62 percent living in low-income countries and 25 percent in middle-income countries.

While individual countries may move up and down in these categories from year to year, global inequality is fairly entrenched, even though the global standard of living as a whole has risen. Depending on which set of statistics are consulted, one can get the impression that the gap between high and low income countries is expanding, or that it is shrinking. This is because many countries have seen significant economic growth (China and India are the prime examples) while many countries are still struggling (Sernau, 2006).

Historical Inequalities

Industrial societies are those in which the dominant mode of the production of goods is through the use of machines in manufacturing. Historically, as countries have industrialized, they have also become wealthier, developed a highly specified division of labor, become more bureaucratic, urbanized, and seen a declining reliance on subsistence agriculture.

Most early nations were monarchies with agricultural economies. States controlled economic activity within their borders in many ways, by making rules controlling the flow of people, capital, and goods in and out of the nation; codifying a system of property rights; structuring economic exchange; and trading with other states (Wallerstein, 2004).

Some areas of the world have always been richer in natural resources than others, and history shows civilizations rising and falling in terms of wealth and technological development. However, modern inequalities between nations are different from past inequalities for several reasons:

• They take place within a system based on modern nationhood;
• They take place under a modern system of capitalism and a global economy;
• Industrialization changed the nature of global inequality, as it raises the standard of living for industrialized nations;
• The inequality was shaped by the global spread of colonialism (Maddison, 2007).

Exploration and subsequent colonialism offered obvious advantages to Western European nations. They found new supplies of raw materials from metals to foodstuffs, found land on which to expand, and found a new source of labor to exploit through the slave trade. While patterns of colonial contact and interaction varied, generally colonialism's impact on colonies' economies was more negative than positive: it often replaced older agricultural forms with plantation agriculture, monoculture, or other forms of agricultural production that eliminated the colony's ability to be self-sustaining by siphoning off surplus value to the colonizers (Maddison, 2007). Often this economic exploitation took place in the presence of political oppression, racial exploitation, slavery, and other forms of domination. The cumulative effect of colonialism thus stunted the economies of colonies, and many former colonies retain the footprint of their reorganization under imperialism.

Further Insights

Theories of Inequality between Nations

Modernization Theory & Its Criticisms

Modernization theory is the idea that low-income countries will become higher income once they move through the stages of urbanization, industrialization, and modernization that have characterized the high income countries' development. This approach became popularized by W. W. Rostow in the 1960s, shaping US foreign policy toward developing nations. There are many assumptions embedded in this idea: that the transition from traditional agrarian societies to modern capitalism is inevitable, that it constitutes a distinct forward progress, and that cultural innovations, technology, and values will diffuse around the globe, making this change possible (Farley, 2003; Giddens, Duneier, & Appelbaum, 2005).

Modernization theory is criticized for its ethnocentrism. Like the culture of poverty thesis, it assumes that Western ideologies and cultural values are superior to those of developing countries, and it accepts the ideology that progress is invariably positive without question.

Culture of Poverty & its Criticisms

Postulated by Oscar Lewis in the 1960s, the culture of poverty thesis suggests that some poor people are enmeshed in cultures that keep them from developing; they are poor because their traditional cultural patterns are holding them back. Traits thought to be found in these populations include the lack of a sense of history, lack of connection with the world and a sense of helplessness, and a short-term approach to planning (Lewis, 1963). John Kenneth Galbraith (1979) expanded this idea to the national stage by distinguishing individual or "case" poverty from mass poverty. In underdeveloped, rural countries, he argued, poverty becomes cyclical as people accommodate to it culturally. Adaptations that are the result of existing poverty thus cause future poverty.

While neither Lewis nor Galbraith intended to fall into habits of victim blaming, their arguments have often been used to that end; this draws criticism from theorists who believe that structures of capitalism are more to blame for poverty than traditional cultures. Pointing out cultural adaptations that mire people in poverty also only provides a partial solution; the initial cases of poverty and inequality also need to be addressed in any full analysis.

Core/Periphery

In the 1950s, scholars at the United Nations Economic Commission for Latin America, led by Raul Prebisch, developed an analysis of high- and low-income countries that sorted the countries of the world into core and periphery nations. Core nations were those with more developed economies. They were able to set trade terms with the weaker periphery nations to their own benefit, expropriating the periphery's surplus value. Because this approach argued that inequality was the result of political manipulations and power rather than a strictly economic function, it stimulated debate about the exact causes of global inequality and how to reduce its negative outcomes (Wallerstein, 2004).

Dependency Theory & Its Criticisms

Branching off of ideas in core/periphery analysis of unequal exchange, dependency theory criticized the core nations, saying that their policies deliberately kept peripheral nations in a state of underdevelopment. The unequal economic situation created by colonialism and the development of capitalism in Western nations was maintained through a deliberately cultivated dynamic that kept underdeveloped countries dependent on developed nations. The theory focused on exploitation of the weak by the powerful, which gave it a Marxist flavor, but instead of analyzing the modes of production in differing countries or global sectors, it focused on the patterns of trade and exchange between nations. Because peripheral nations depend on core nations for technology, infusions of capital investment, and markets for their raw materials, and because the existing system makes it difficult for undeveloped countries to accumulate enough power and capital to break free of dependency, the relationship between nations remains unequal (Ghosh, 2001).

Dependency theory is criticized by world-systems theorists for focusing on nations in isolation, and the theory has been criticized by culture of poverty theorists for its Marxist overtones. Even its practitioners believe it needs additional theorizing in the areas of academic, consumer, environmental, biological, military, and policy dependency (Ghosh, 2001).

World Systems Theory & Its Criticisms

World systems theory, which developed from insights in dependency theory, was created in the early 1970s largely by Immanuel Wallerstein. Wallerstein argued that analyzing the global economy country by country made little sense because the world has one large connected economy tied together by the international division of labor. The focus on the division of labor makes world-system theory more rooted in Marxist analysis than dependency theory. Unlike dependency theory, world systems theory uses the global economy as its unit of analysis, whereas dependency theory uses the nation as the unit of analysis. Wallerstein believes that the world economy came into being gradually in the sixteenth century as capitalism was born in Europe. As capitalism spread to Western Europe and later the United States, and as colonialism created a flow of goods and services around the globe, the world's economy began to follow the logic of capitalism, drawing countries that were less developed into the system as satellites to the powerful core. The creation of a global economy reversed the dynamics found in the colonial era. Whereas in the past, nations had attempted to control large areas politically, while leaving local economies to themselves, in the new world-system, there were numerous political entities and one interconnected economy (Wallerstein, 2004).

World-systems analysis uses the core/periphery categories but focuses analysis on not just the strength of economies but the modes of production found in each. Core nations are politically powerful, industrialized, wealthy, able to carry out their own agendas, and are economically diverse. They are likely to focus their production on the creation or processing of information or to have service-based economies (known as tertiary production) and they also produce physical products for sale (known as secondary production). Periphery nations are likely to be poor, to have an economy that is controlled heavily through investments by foreigners and multinational corporations, and to have economies dominated by the extraction of natural resources from the environment (known as primary production). Wallerstein and other world-systems theorists argue that as long as labor is divided this way around the globe, the core countries profit from the underdeveloped economies of the peripheral nations and work to keep the basic core/periphery structure in place through the intentional international manipulation of capital. For example, using world-systems theory analysis, the International Monetary Fund and World Bank's policies are a form of economic domination that keeps peripheral nations in a state of underdevelopment and dependency (Farley, 2003).

Critics say world-systems theory neglects culture and politics, that it has not done a good job of incorporating socialist economies into its view of global capitalism, and that it overemphasizes international dynamics while denying the continuing relevance of local economies and national economic organization. For example, in industrial economies, the majority of production is aimed at the domestic market, as is the lion's share of investment. National cultures also create differences in the corporate styles found in each nation. To explain income dynamics between countries, it is likely that analysis needs to proceed on multiple levels, from the individual, local, and institutional at one extreme to the national and international on the other (Jaffee, 1998).

Current Issues

Neo-classical economic theory predicted that the income levels of poor nations and wealthy nations would eventually converge. Modern data show mixed results, as some nations have experienced a relative increase in income. Others have actually fallen further behind, though, and on average, the gap between high-income and low-income countries is increasing (Balcerowicz and Fischer, 2006.). There are many explanations for this. Higher levels of investment by core nations are associated with a lower standard of living in peripheral nations. Core nations use the majority of the output of raw materials generated by peripheral nations, expropriating their surplus value. Multinational corporations are much more likely to have their headquarters in core nations (Farley 2003).

Economists have many suggestions for how to stimulate the periphery's economies and increase income in poorer countries. These ideas include increasing free trade within internal borders (Parente & Prescott, 2006), stabilizing democratic governments with checks and balances (Keefer, 2006), and educating the labor force.

While each explanation of global income inequality has its critics, the entire emphasis on income also draws fire. The emphasis on income inequality between nations has been criticized for ignoring other measures of the quality of life, such as the presence or absence of racism, sexism, health care, education, and political and civil rights (Bourguignon, 2005; Nussbaum, 2005).

Also, income is not always a fitting measure of quality of life. It is possible for nations to have relatively high incomes and extreme income inequality, so that only a few benefit from the relatively high standing. It is also possible for a country's gross national product to increase while the standard of living falls, or for wealthy nations to have extreme inequality and unrest within their borders.

A complex and useful method for analyzing the income of countries would involve measures of inequality between countries, but it would also consider how income is distributed within a country. It would not depend on income as the only measure of development and the quality of life and would consider education, health care, and political and civil rights as also contributing to world economy and global income dynamics.

Terms & Concepts

Capitalism: An economic system in which the means of production are privatized, the market is controlled by market dynamics (for example, by supply and demand), and economic activity is geared toward profit.

Colonialism: A form of imperialism, colonialism is the domination and exploitation of one country by another, militarily, culturally, politically, and/or economically.

Core: In world-systems theory, core nations are characterized by wealth, global economic power, and economies dominated by the production of information and goods and the dominance of the service sector.

Culture of Poverty: Theory created in the 1960s by Oscar Lewis, who argued that in all countries, some poor people have cultural adaptations that keep them in poverty; later further developed by Galbraith.

Dependency Theory: A reaction to modernization theory, dependency theory claimed that colonialism created a global economy in which wealthier countries create policies that deliberately appropriate the wealth of poor countries and keep them in a state of dependence.

International Division of Labor: A system where nations specialize in the primary, secondary, or tertiary sector. Also the division of the steps of the manufacturing process for a commodity among many nations.

Mode of Production: The combination of the relations of production and the forces of production. The forces of production include the means through which goods are made (by hand or by machine, for example); the relations of production refers to the interactions between people and the means of production (whether they own the means privately or in common, whether they use production for profit or other goals).

Modernization Theory: The idea that, as poorer nations industrialize, their incomes will arise to the level of wealthier nations and they will gradually structurally resemble industrialized nations.

Periphery: In world-systems theory, poorer, unindustrialized nations with economies dominated by the primary sector.

Primary Sector: The portion of the economy that extracts raw materials from nature.

Secondary Sector: The part of an economy that manufactures goods from raw materials.

Semi-Periphery: In world-systems theory, the nations that are neither core not periphery; generally partially industrialized nations, often former members of the Soviet bloc, or countries in the early stages of industrialization, or oil-rich countries.

Tertiary Sector: The part of an economy that produces services. This can include the production of information.

Surplus Value: A form of profit found under capitalism, surplus value is the gap between what it costs to produce goods (the value of a worker's subsistence plus the value of materials) and the value of those goods on the market.

World-Systems Theory: Created by Immanuel Wallerstein, this theory argues that the world has one capitalist economy, which is linked together by a global division of labor, characterized by separation of nations into a core (wealthier industrialized nations), semi-periphery, and peripheral nations (poorer, unindustrialized).

Bibliography

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Maddison, A. (2007). Contours of the world economy, 1-2030 AD. New York: Oxford University Press.

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Sernau, S. (2006). Global problems: The search for equity, peace, and sustainability. New York: Pearson Education, Inc.

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Suggested Reading

Apkarian, J., Fletcher, J. B., Chase-Dunn, C., & Hanneman, R. A. (2013). Hierarchy in mixed relation networks: warfare advantage and resource distribution in simulated world-systems. Journal of Social Structure, 14, 1–17. Retrieved November 7, 2013 from EBSCO online database SocINDEX with Full Text. http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=90461559

Braverman, H. (1974). Labor and monopoly capital. New York: Monthly Review Press.

Nelson, J.I. (1995). Post-industrial capitalism. Thousand Oaks, CA: Sage.

Skocpol, T. (Ed.). (1998) Democracy, revolution, and history. Ithaca, NY: Cornell University Press.