AIDS—is creating the preconditions for an increasingly productive future workforce (Asiki et al. 2016; Barofski, Anekwe, and Chase 2015).

# **_Improved business climates and policy frameworks_**

The business climate has improved in the majority of the 2001 LICs between the 1990s and the 2010s. More specifically, the ease of starting a business, obtaining credit, and trading across borders has, on average, increased by 20-30 index points since 2006 (World Bank 2019c). Similarly, the _Worldwide Governance Indicator_ scores for the rule of law have strengthened by about 20 percent, and there have been more moderate improvements in regulatory quality and political stability.

A growing number of LICs have strengthened their fiscal management through medium-term debt management strategies (World Bank 2019a). Some have strengthened their monetary policy frameworks and their buffers against shocks by adopting flexible exchange rate arrangements and using their policy instruments to target low domestic inflation; more than one-quarter of 2001 LICs had flexible exchange rate regimes in 2016, compared to fewer than one-fifth during 2001-10, on average.<sup>6</sup> Improved policy frameworks and increased resilience to external shocks among the 2001 LICs have also been supported by increases in foreign exchange reserves from 8 percent of GDP in 2001 to 14 percent of GDP, on average, in 2017.

# **3. How have these factors affected LIC progression to MIC per capita incomes?**

The 2001 LICs that became MICs benefited somewhat more from the factors discussed above than those that remained. On average, the 2001 LICs that became MICs had stronger policy frameworks, better governance and business environments, better-developed infrastructure, larger improvements in human capital, and more fiscal resources due to revenue-to-GDP ratios being significantly larger—by more than one-quarter. The 2001 LICs that became MICs also had a geographical advantage, as around one-third were landlocked compared to almost half of today’s LICs. Furthermore, the 2001 LICs that were landlocked but became MICs had, on average, neighbors with per capita incomes that were 52 percent higher than current incomes among the neighbors of today’s landlocked LICs.

# **_LICs that achieved MIC per capita income levels_**

Between 2001 and 2020, 35 LICs achieved middle-income status (Figure 5). The progress made by LICs that have become MICs has helped lift 20 percent of the global poor in 2001 out of poverty by 2016, more than offsetting the increasing poverty headcount among the countries that remained LICs.<sup>7</sup>

- _Favorable initial conditions._ The 2001 LICs that have become MICs were some of those countries closest to the middle-income threshold to begin with: their average per capita

> 6 Exchange rate regimes are grouped according to the classification in Ilzetski, Reinhart and Rogoff (2017), with the only exception that freely falling currencies are also regarded as flexible exchange rate arrangements.

> 7 Due to data limitations, poverty headcount data exclude the following 11 LICs of 2001: Afghanistan, Azerbaijan, Haiti, Cambodia, Myanmar, Democratic People’s Republic of Korea, Somalia, Sudan, Turkmenistan, Uzbekistan, and Zimbabwe. In 2001, their combined population accounted for 8 percent of the total 2001 LICs population.

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