World Economy II

Delhi Law Academy


•            In 1978, the World Bank, for the first time, constructed an analytical country classification system. The occasion was the launch of the World Development Report.

•            Annexed to the report was a set of World Development Indicators (WDI), which provided the statistical underpinning for the analysis.

•            The first economic classification in the 1978 WDI divided countries into three categories:

(1)         developing countries

(2)         industrialized countries, and

(3)         capital-surplus oil-exporting countries.

•            Developing countries were categorized as low- income (with GNI/n of US$250 or less) and middle- income (with GNI/n above US$250).

Major Characteristics of Developing Countries are:-

  • Lower per-capita income
  • Low levels of human capital
  • High levels of poverty and under-nutrition
  • Higher population growth rates
  • Predominance of agriculture and low levels of industrialization
  • Low level of urbanization but rapid rural-to-urban migration
  • Dominance of informal sector
  • Underdeveloped labor, financial, and other markets.

Major Characteristics of Emerging Countries are:-

  • the small size of the economy,
  • GNP/Capita much lower than in developed countries,
  • a reduced opening for accepting foreign investors,
  • a high volatility of the exchange rate which implies greater risk in trading.

Major Characteristics of Developed Countries are:-

  • Average income per capita of the population is generally high.
  • Education level of high average population.
  • Life expectancy of the population average height.
  • Population growth rate per year is relatively small.
  • The death rate per year is relatively small population.
  • Life-style market economy.
  • His wide and varied field.
  • Economic activity in most industry sectors, as well as export commodities.
  • The majority of the population lives in cities.
  • Relatively high level of population health.


•            There are no WTO definitions of “developed” and “developing” countries. Members announce for themselves whether they are “developed” or “developing” countries.

•            However, other members can challenge the decision of a member to make use of provisions available to developing countries.

•            The WTO Agreements contain special provisions which give developing countries special rights. These provisions are referred to as “Special and Differential Treatment” (S&D) provisions.

The special provisions include:

  • Longer time periods for implementing Agreements and commitments,
  • Measures to increase trading opportunities for developing countries,
  • Provisions requiring all WTO members to safeguard the trade interests of developing countries,
  • Support to help developing countries build the capacity to carry out WTO work, handle disputes, and implement technical standards, and
  • Provisions related to least-developed country (LDC) Members.

Benefits to Developing Countries in the WTO:

•            The Agreement Establishing the World Trade Organization specifies that international trade should benefit the economic development of developing and least-developed countries.

•            General Agreement on Tariffs and Trade (GATT) — gives developing countries the right to restrict imports, if doing so would promote the establishment or maintenance of a particular industry, or assist in cases of balance-of-payments difficulties.

•            Part IV of the GATT includes provisions on the concept of non-reciprocal preferential treatment for developing countries, i.e. when developed countries grant trade concessions to developing countries they should not expect the developing countries to make matching offers in return.

•            However, developing countries claim that Part IV has been without practical value as it does not contain any obligations for developed countries.


•            Recently, U.S. President had put pressure on the WTO to change how it designates developing countries, singling out China, with which the United States is engaged in a trade war, for unfairly getting preferential treatment.

•            The United States also recently proposed, that in current and future negotiations, following should not invoke the self-declaration option:

  • Members of the Organization for Economic Cooperation and Development (OECD)
  • Members of the Group of 20 (G-20),
  • High income countries as per the World Bank definition, or
  • Countries that account for 0.5% or more of global merchandise trade.

•            In a rebuttal to the US approach, China, India, South Africa, and others submitted a proposal of their own. While reiterating that self-declaration is appropriate in the WTO context, they make the point that per capita indicators must be given top priority when assessing development levels.

•            WTO members can consider the following steps to help integrate developing countries in global trade:

  • Countries can decide to follow South Korea’s example and not claim differentiated treatment, without the need to declare themselves “developed.”
  • Negotiations should provide for differentiated treatment taking into account the policy making challenges in developing countries without establishing permanent exemptions. These provisions should either be time-bound or have clear threshold and phase-out criteria, as in the WTO Agreement on Subsidies and Countervailing Measures.


•            The United States of America has removed India from its list of countries that are classified as “developing” economies for trade purposes.

•            Apart from India, the US has also removed some other countries from the list.

•            Now, these countries will be classified as “developed” economies, thus stripping them of various trade benefits.

•            This move has led to doubts over the chances of a trade deal being signed between India and the US, during their President’s visit to India in February 2020.

What is the “developing country” status?

  • The office of the United States Trade Representative maintains a list of countries that it classifies as developing, developed, and least developed.
  • The “developing” countries are allowed to export certain goods to the US without being hit by punitive tariffs that are usually imposed on goods from “developed” countries.
  • The “developing country” status owes its origin to the US Trade Act of 1974.
  • This Act authorized the Generalized System of Preferences (GSP) to help poor countries develop faster.
  • These benefits were extended further under the World Trade Organization, wherein rich countries grant trade benefits to countries that classified themselves as poor.
  • About two-thirds of countries that are WTO members classify themselves as “developing” countries and avail benefits.

Is such a classification justified?

  • Any classification of whether a country is “developing” or not is bound to be arbitrary.
  • Some people see the economic progress that India and China have achieved over the last few decades as reason enough to get rid of their special status.
  • Others point to the various development indicators in which India and China still lag behind the rich world.
  • Further, the opinion on whether such a classification is required in the first place is divided.

Why is India being stripped of this status?

  • The US has repeatedly accused fast-growing countries such as India and China of wrongly claiming trade benefits that are reserved for truly “developing” countries.
  • This, it believes, is enough reason to scale back the various trade benefits.
  • It has further cited the share of global trade enjoyed by India and China and their membership in the G20 club to argue that they enjoy significant economic power.
  • Therefore, it has sought to renegotiate trade deals with countries; essentially trying to make these deals more ‘fair’ to the US interests.

How will India be impacted by this move?

  • India had been one of the largest beneficiaries under the GSP, with over 2,000 goods exempted from import tariffs.
  • But, in 2019, the Trump administration stripped off this special benefit.
  • With the current change in India’s status under the USTR’s classification, the task of reclaiming the lost GSP benefits now becomes even harder.

How will the US decision affect global trade?

  • Any move to end duty-free access for foreign goods into the US, will increase the overall tax burden on goods crossing international borders.
  • This will add further pressure on the global economy, which has already witnessed a slowing of growth this year.
  • The countries that are stripped of their “developing” status may retaliate by imposing tariffs on US import.
  • If so, it could raise further the growth effects of a tariff war.
  • Recently, India offered to scale back tariffs on American dairy and other products that are imported into India.
  • This came after the US complained about the restricted access that its companies have to developing countries.
  • If such trade tactics manage to bring down trade barriers on both sides, it can benefit the global economy.
  • But, the US and its various warring trading partners look to protect their domestic producers rather than consumers.
  • So, a general fall in tariffs across the board may seem unlikely.