Economist at the World Bank Offers Insights on Breaking Free from the Middle-Income Predicament in Europe and Central Asia
Busting the Middle-Income Barrier: A Chat with World Bank Chief Economist Ivailo Izvorski
Hey there! Let's dive into an fascinating conversation Ivailo Izvorski, World Bank's Chief Economist for Central Asia and Europe, recently had with The Astana Times. He discussed why some countries find it challenging to break free from the middle-income trap and offered solutions to finally make that leap.
After visiting Kazakhstan in February, Ivailo presented the World Development Report 2024 and the companion report, Greater Heights: Growing to High Income in Europe and Central Asia.
Recent Stats
The report highlights that 27 countries have reached high-income status since 1990, with ten in Europe and Central Asia joining the European Union. The World Bank defines high-income status as $14,005 or higher in gross national income per capita, a figure adjusted for inflation regularly. Interestingly, another 20 European and Central Asian countries have been prosperous since the 1990s, yet they've been stuck in the middle-income trap.
The Middle-Income Snag
Ivailo pointed out that the main reason for this slowdown in growth and the middle-income trap is that it becomes increasingly complex to change economic structures and policies as countries become more advanced. As your economy evolves, you'll need more than just increased investment; you'll need productivity and efficiency improvements.
Measured using purchasing power parity, enterprises in middle-income countries in Europe and Central Asia boast 71% of the human and physical capital per worker that the United States does, yet they produce only 38% of the U.S. level of GDP per capita. What happened to the remaining productivity and efficiency? Well, there are numerous inefficiencies in the use of capital, labor, and energy.
For instance, in Kazakhstan, enterprises use four times more energy per unit of output than those in EU countries. For Europe and Central Asia, this is about two and a half to three times more!
The Road Ahead
Izvorski identified two primary transitions that middle-income countries need to carry out to reach high-income status:
- Infusion to Innovation: Embrace new technologies, ideas, capital, and expertise from abroad and diffuse them domestically.
- Infusion to Innovation: Firms not only accumulate capital, bring foreign expertise and technology, but also advance innovation.
Kazakhstan is currently working on transitioning from infusion to innovation, according to Izvorski. If the country manages to maintain 6-7% annual growth and currently has a GDP per capita, it might take five to six years to reach high-income status. However, the 2024 figures show a 4.8% economic growth rate, which means the government needs to kick things into high gear to achieve its goal of doubling income per capita by 2029.
Creative Destruction
This transition involves a delicate balance between destruction, preservation, and creation for an economy to thrive. In Europe and Central Asia, creative destruction is out of balance, and the forces of preservation have taken the driver's seat, hindering innovation.
Izvorski stressed the importance of relaxation in property rights, reining in state-owned enterprises, and allowing competition among young, innovative firms for economies to prosper. Success stories like Estonia, Czech Republic, and Poland demonstrate the power of strong political will, determination, and a clear vision of progress.
Looking Ahead
Izvorski emphasized that countries need to focus on reforms to reduce inefficiencies, improve competition, and tap into the potential of the private sector to thrive. This journey requires a unique blend of innovation, educational enhancement, private sector reforms, effective governance, and economic management strategies.
So, let's keep an eye on these countries as they take giant leaps towards high-income status, leaving behind the middle-income trap once and for all! 🚀👍
- To effectively transition from the middle-income trap to high-income status, countries in Europe and Central Asia must focus on fostering innovation, as identified by Ivailo Izvorski, World Bank's Chief Economist for Central Asia and Europe.
- As discussions about economic growth continue, the role of finance and business in sports industries can provide valuable insights, with sports often embodying elements of innovation and the delicate balance of creative destruction, as highlighted by Izvorski in his conversation with The Astana Times.
