“Middle-income trap” holding countries back from moving up to next level
Countries where the European Bank for Reconstruction and Development (EBRD) invests need a new growth model to help them shift to an era of sustained future economic growth, the EBRD’s latest annual economic report says.
The EBRD’s Transition Report 2017-18: Sustaining Growth, says growth in these countries is currently lagging behind that seen in similar emerging markets and many economies appear to have become stuck in a “middle-income trap”, that holds them back from moving up to the next level.
“Having exhausted the advantages that used to underpin their strong growth performance in the past, the countries of the EBRD region now require a new growth model,” the report says.
The publication focuses on three key areas that the new model needs to embrace: improving productivity of individual firms, infrastructure investment and an emphasis on green growth.
In his foreword to the Transition Report, EBRD Chief Economist Sergei Guriev does not underestimate the challenges facing transition economies in their bid to sustain growth. “There is no silver bullet – no one size-fits-all solution,” he says. And the report notes there is often opposition to change from those with an entrenched vested interest in maintaining the status quo.
But Professor Guriev sees room for optimism. “By strengthening their institutions, supporting firm dynamics and innovation, integrating their firms into the global economy and investing in sustainable infrastructure, the countries of the EBRD region should be able to complete their transition to sustainable market economies,” he says.
In its assessment of the current levels of productivity in the EBRD region, the Transition Report refers to large numbers of inefficient smaller firms whose lack of business dynamism is holding back economic growth.
The report makes a series of policy recommendations and says policy-makers should focus on creating a level playing field which helps innovative young firms that want to grow to expand their market shares and enter new markets. It also says authorities need to pay more attention to flexible labour and capital markets as well as better competition policies to facilitate the efficient reallocation of resources.
In addition, governments can help firms and industries improve their performance by supporting their integration into global value chains, the report says.
In highlighting the importance of effective infrastructure networks, the report says most economies in the EBRD region need major expenditure to maintain, upgrade and expand their infrastructure in order to support economic growth and to help income levels converge with those of advanced economies.
It estimates overall infrastructure needs at €1.9 trillion for the next five years. The publication draws on examples from Turkey, where upgrading the country’s large road network had a major positive impact on domestic trade among the provinces. ““This evidence from Turkey provides new insight into the considerable benefits that improvements in market integration can have for employment and development in more isolated regions,” the report says.
The Transition Report draws a clear link between environmental protection and economic growth and sees significant potential for green growth in the EBRD’s emerging economies, where pollution levels remain significantly higher than in similar middle-income countries despite substantial progress since the start of the transition period.
It says stronger policies are required in order to put the region’s economies on a path to green growth and points specifically at the elimination of energy subsidies.
““As long as electricity and fuel are cheap, firms will choose more energy-intensive production structures. When energy is appropriately priced, well-managed firms respond to price signals and reduce their emissions,” the report says.
The report also finds that equity markets are optimistic about the future profits of green companies, which suggests that the transition to green growth is likely to be successful.