Tanzania: Economic Classifications and What They're All About

On July 1, 2020, Tanzania officially crossed a threshold and was elevated from the low-income to the lower middle-income bracket of developing countries in the World Bank's classification of countries. This is an important milestone. However, this must not be confused with a country graduating from the United Nations' least developed countries (LDCs) category. Tanzania has made great strides in economic growth in the last two decades, but it still has a long way to go before climbing out of the LDC group.

The World Bank classifies countries based on gross national income (GNI) per capita. Currently, the GNI per capita thresholds are as follows: low-income economies - $1,035 or less; lower middle-income economies - between $1,036 and $4,045; upper middle-income economies - between $4,046 and $12,535; and high-income economies - $12,536 or more. Tanzania's GNI per capita in 2019 was $1,080. The World Bank updates the thresholds annually.

Separately, the category of the LDC countries was established by the United Nations in 1971 with the objective of giving special attention to developing countries that have entrenched and widespread development challenges that impede their economic development.

Review and recommendations

The inclusion in and graduation from the LDC category are done through reviews and recommendations by the Committee for Development Policy (CDP), a subsidiary body of the Economic and Social Council of the United Nations.

Three criteria are used to identify LDCs: (a) GNI per capita; (b) structural impediments related to a low level of human assets (human assets index); and (c) a high vulnerability to economic and environmental shocks (economic vulnerability index). The human assets index is calculated based on education indicators (secondary school enrolment and adult literacy rate) and health indicators (percentage of population undernourished and under-five mortality rate). Economic vulnerability is calculated based on a number of factors including population size, export concentration, and share of agriculture, forestry, and fishing in gross domestic product. Countries whose sources of export revenues are not diversified, for example, tend to be more vulnerable to occurrences that are beyond their control, as is the case for countries that are highly dependent on oil exports or tourism.

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The CDP carries out extensive reviews of LDCs every three years to determine their readiness for graduation. The next triennial review is this coming year (2021).

Only three Sub-Saharan African countries so far have graduated out of the LDC category - Botswana, Cabo Verde, and Equatorial Guinea, in 1994, 2007, and 2017, respectively. Angola and Sao Tome and Principe are scheduled to graduate in 2021 and 2024, respectively. There are currently 47 LDCs, 33 of them in Africa. All members of the East African Community, except Kenya, are LDCs.

The review process conducted by the CDP, from the time it starts to the time a recommendation for an LDC to graduate is endorsed, takes at least three years. An LDC for which graduation has been recommended and endorsed, has 3 to 6 years to prepare for graduation. The review process and the preparation for graduation are deliberate and measured to prevent economic shock to graduating countries.

Countries don't take pride in being LDCs, but there are some perks that come with that status. For example, products from LDCs have special preferential access to markets in developed countries under various programs, such as the EU Everything But Arms (EBA) program.

The EBA program removes quotas and tariffs for all products originating in LDCs, except for weapons and ammunitions.

When the time comes for Tanzania to graduate from the LDC category, the margin of trade preference for Tanzanian products will fall.

Domestic exporters

While Tanzania has not yet been recommended to graduate from the LDC category, it is important for domestic exporters who take advantage of preferential trade arrangements to conduct their long-term planning strategically and invest in ways to reduce production costs. Tanzania will not remain an LDC forever and that is good. Being elevated from low-income to the lower middle-income class is a step forward.

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