How to Classify Countries Based on Their Level of Development

The paper analyzes how the United Nations Development Programme, the World Bank, the International Monetary Fund and the World Trade Organization classify countries based on their level of development. These systems are found lacking in clarity with regard to their underlying rationale. The paper argues that a country classification system based on a transparent, data-driven methodology is preferable to one based on judgment or ad hoc rules. Such an alternative methodology is developed and used to construct classification systems using a variety of proxies for development attainment. The methodology provides a way to construct a linear approximation of a Lorenz curve such that the difference between the linear approximation and the actual Lorenz curve is minimized. The linear segments represent different categories of countries (e.g., low development and high development countries). The methodology has wider applicability; it can be used whenever there is a need to construct a classification system of relatively few categories from a large heterogeneous sample.