Strategies for Escaping the Middle-Income Trap in Europe and Central Asia: Insights from a World Bank Economist
Breaking Free from the Middle-Income Trap: Insights from World Bank Chief Economist Ivailo Izvorski
Economists have long pondered the reasons behind the struggle of some countries to transition from middle-income status to high-income, while others thrive. World Bank Chief Economist for Central Asia and Europe, Ivailo Izvorski, sheds light on why escaping the middle-income trap has been challenging and how countries can break free from it.
During a recent visit to Kazakhstan in February, Izvorski presented the World Development Report 2024 and a companion report titled “Greater Heights: Growing to High Income in Europe and Central Asia.”
Recent figures from the report reveal that 27 countries have attained high-income status since 1990, with ten of them in Europe and Central Asia joining the European Union. The World Bank defines high-income status as achieving a gross national income per capita of at least $14,005, adjusted regularly for inflation.
While 20 countries in Europe and Central Asia have experienced prosperity since the 1990s, many are stuck in the middle-income trap due to slow domestic structural reforms, a large share of state-owned enterprises, limited competition, and demographic challenges such as falling birth rates and aging populations.
Izvorski explains that the complexity of transitioning from middle-income to high-income is due to the need for more efficient and productive economic structures. While middle-income countries in Europe and Central Asia possess 71% of the human and physical capital per worker compared to the United States, their GDP per capita is only 38% of the U.S. level, highlighting inefficiencies in productivity.
The path to high-income status involves transitioning from investment to infusion, adopting new technologies, ideas, capital, and expertise from abroad, and then progressing to innovation, where enterprises drive growth through innovation. Kazakhstan is currently transitioning from infusion to innovation, with more enterprises focusing on innovation to reach high-income status.
To achieve high-income status, countries must embrace reforms that reduce inefficiencies, improve competition, tap into the potential of the private sector, and address talent misallocation and energy intensity for productivity growth. Success stories from countries like Estonia, the Czech Republic, and Poland emphasize the importance of political will, determination, and deep integration with the global economy in transitioning to high-income status.
While challenges remain, the potential for middle-income countries to reach high-income status is within reach if they make decisive reforms and prioritize innovation, efficiency, and competitiveness in their economies.
