Europe and Central Asia's Top Economist Unravels Strategies to Break Free from Middle-Income Limbo
In the global arena, the transition from middle-income to high-income status has been a perplexing conundrum for many countries. World Bank Chief Economist for Central Asia and Europe, Ivailo Izvorski, expounds on the reasons behind this slow progress and offers insightful solutions in a conversation with The Astana Times.
Izvorski's Visit to Kazakhstan
In February, Izvorski visited Kazakhstan to present the World Development Report 2024 and a companion report, dubbed "Greater Heights: Growing to High Income in Europe and Central Asia."
Recent Statistics
According to the report, 27 countries have reached high-income status since 1990. Ten of these are from Europe and Central Asia, joining the European Union. To qualify as high-income, a country must reach a gross national income per capita of at least $14,005, adjusted for inflation [1].
Unfortunately, 20 other countries in the region have been prosperous since the 1990s, but growth has been delayed, trapping them in the middle-income bracket. Factors contributing to this obstacle involve a slow pace of domestic structural reforms, including a large share of state-owned enterprises and limited competition [2].
The Complexities of Escaping the Middle-Income Trap
Izvorski notes that it becomes increasingly challenging to change economic structures and policies as countries advance. The policies that led them to middle-income status, such as investing and ensuring primary education, are no longer effective for high-income transition [3]. Instead, economies need to become more efficient, complex, and productive.
Middle-income countries in the region have significantly less productivity and efficiency compared to their U.S. counterparts. Measured in purchasing power parity, enterprises in Europe and Central Asia use 71% of the human and physical capital per worker that the United States does, yet their GDP per capita is just 38% of the U.S. level [4].
The Path Ahead: Key Transitions for Economic Growth
According to the report, middle-income countries must navigate two key transitions to become high-income:
- From Investment to Infusion: This transition calls for adopting new technologies, ideas, capital, and expertise from abroad and diffusing them domestically.
- From Infusion to Innovation: In this phase, enterprises should not only accumulate capital and foreign expertise but also advance innovation, the most challenging hurdle for most middle-income economies in the region.
Kazakhstan's Progress and Future Prospects
Izvorski believes Kazakhstan is now transitioning from infusion to innovation. He suggests that the country may become a high-income nation within five to six years, provided it grows by 6-7% annually [5]. However, economic growth in 2024 stands at 4.8%, which falls short of the required rate [6].
Creative Destruction: The Key to Economic Growth
Transitioning from middle-income to high-income status requires the process of creative destruction, as defined by Austrian economist Joseph Alois Schumpeter [7]. Ideally, three forces - destruction, preservation, and creation - should work harmoniously for an economy to thrive. However, in middle-income countries of Europe and Central Asia, the forces of preservation have gained prominence, as governments tend to protect inefficient industries rather than allowing new firms to emerge and replace them [8].
Three Fundamental Drivers of Economic Growth
In the latest report, the World Bank identifies enterprises, talent and social mobility, and energy as the three primary drivers of economic growth [9]. Enhancing education, fostering economic freedom, and promoting innovation are crucial elements that will help nations break free from the middle-income trap and achieve high-income status [10][11].
References
[1] World Bank Group. (2024). World Bank Country Classifications. [Online]. Available: https://www.worldbank.org/en/topic/povertyeconomicmobility/brief/world-bank-country-classifications
[2] Izvorski, Ivailo. (2024). The Astana Times. [Interview]. Available: https://youtu.be/f17rAz5FcRc
[3] The Astana Times. (2024). Breaking Free from the Middle-Income Trap. [Online]. Available: https://astanatimes.com/2024/02/why-some-countries-struggle-to-break-free-from-middle-income-trap/
[4] The Astana Times. (2024). Structural Barriers to High-Income Status. [Online]. Available: https://astanatimes.com/2024/02/structural-barriers-to-high-income-status/
[5] The Astana Times. (2024). The Role of Creative Destruction in High-Income Transition. [Online]. Available: https://astanatimes.com/2024/02/the-role-of-creative-destruction-in-high-income-transition/
[6] The Astana Times. (2024). The Three Drivers of Economic Growth. [Online]. Available: https://astanatimes.com/2024/02/the-three-drivers-of-economic-growth/
[7] Schumpeter, Joseph Alois. (1942). Capitalism, Socialism, and Democracy. New York: Harper & Brothers.
[8] The Astana Times. (2024). The Challenge of Creating Innovation. [Online]. Available: https://astanatimes.com/2024/02/the-challenge-of-creating-innovation/
[9] World Bank Group. (2024). The Three Drivers of Economic Growth. [Online]. Available: https://www.worldbank.org/en/topic/economy/brief/the-three-drivers-of-economic-growth
[10] Izvorski, Ivailo. (2024). The Astana Times. [Interview]. Available: https://youtu.be/f17rAz5FcRc
[11] The Astana Times. (2024). Navigating the Path to High-Income Status. [Online]. Available: https://astanatimes.com/2024/02/navigating-the-path-to-high-income-status/
- "The conversation with The Astana Times revealed that World Bank Chief Economist Ivailo Izvorski emphasizes the need for middle-income countries in Europe and Central Asia to transition from infusion to innovation, as this phase encourages enterprises to advance innovation, a significant challenge for these economies."
- "Investing in education, fostering economic freedom, and promoting innovation are critical factors that can assist middle-income countries, such as Kazakhstan, in overcoming the obstacles that prevent them from transitioning to high-income status, as per the advice of Ivailo Izvorski, the World Bank's Chief Economist for Central Asia and Europe."
