1. Sustainable development and the “European middle-income country trap” Ben Slay Poverty practice team leader UNDP Regional Bureau for Europe and CIS Minsk, 16 May 2013

2. Six questions 1.What’s a “middle- income country”? 2.What is the “middle- income country” trap? 3.Why does this happen? 4.Why has this narrative not been applied to transition economies? 5.Should it be? 6.Sustainable development implications?

3. (1) What’s a middle-income country? Ask the World Bank Country classificationPer-capita GNI* Low-income countryBelow $1026 Middle-income countryBetween $1026 and $4035 - Lower-middle income - Between $1026 and $4035 - Upper-middle income - Between $4036 and $12,475 Upper income countryAbove $12,475 * Using Atlas exchange rates “... Based on the Bank’s operational lending categories”, reflecting “comparative estimates of economic capacity”.

4. Most of the region’s transition, developing economies are MICs * As per UNSC resolution 1244 (1999). Source: World Bank. Low- income countries Lower middle-income countriesUpper middle-income countries Per-capita GNI (2011)

5. Some other MICs Source: World Bank. Per-capita GNI (2011)

6. (2) What’s the “middle-income country trap”? Per-capita GDP Time LIC UIC MIC “Middle-income country trap” “OECD-DAC” “South Korea” “Argentina”

7. (3) Why does this happen? Traditional explanation Some MICs “get stuck”—unable to transition: – Away from natural resource-based production, exports, based on low-/semi-skilled labour... –... To manufacturing sectors that: Absorb cutting-edge technology Are integrated into global value chains Produce goods that are competitive on OECD-DAC markets Corollary results: – GDP growth does not significantly exceed population growth – Industrial structures remain undiversified – Education, health systems remain far from global best practices Under-investment in human capital

8. (4) Why hasn’t this narrative been applied to transition economies? Separation/compartmentalization of “economics of development” from “economics of transition” Conflation of “Europe” with “upper income countries” – EU-15 countries are largest group within OECD-DAC – Most EU enlargements took in UICs – Countries (e.g., Greece, Portugal) that were MICs at time of accession quickly obtained UIC status Implication: “If you’re in Europe, you don’t have to worry about the middle-income country trap”

9. (5) Should the MIC trap paradigm be applied to Europe? YES “Europe is not a silver bullet” – Transition economies face many traditional MIC- trap issues Natural resource-based development models Undiversified industrial structures Major competitiveness issues Concerns about quality of education, social services – Inherited pre-transition human capital not enough “European contagion”: European MICS are vulnerable to economic stagnation in EU

10. Vulnerability to European economic stagnation: Key drivers Trade: Slow, or stagnant export growth Finance: Weak bank financing for subsidiaries Labour market: Slow or stagnant growth in remittances

11. “European MIC trap” kicks in with the global financial crisis (2008) Source: IMF World Economic Outlook database, UNDP calculations. GDP (2008 = 100)

12. EU membership “no silver bullet” * UMIC. Source: IMF World Economic Outlook database, UNDP calculations. GDP (2008 = 100) Most deeply integrated into European supply chains

13. By contrast: Some economies are not much affected by the crisis GDP (2008 = 100) Source: IMF World Economic Outlook database, UNDP calculations.

14. Social dimension: Unemployment rates—high and rising... Sources: IMF World Economic Outlook database, ECOFIN.

15. ... Especially for vulnerable groups Sources: ILO, national statistical offices, UNDP Roma vulnerability database.

16. (6) Implications A “European MIC trap” does seem to be emerging Key characteristics: – Traditional MIC-trap “competitiveness” problems... –... Vulnerability to European economic stagnation... –... Or both Being a resource-based economy may not be such a bad thing—if the resource is energy European accession/integration: – Not a silver bullet—particularly in the short term... –... But longer term, wealth and geography matter

17. Sustainable development implications The region needs to concentrate on the “economic growth” pillar – Without this—social pillar is also at risk... –... Especially in light of inequality, vulnerability, employment concerns Environmental pillar—wise management of fossil fuels bounty needed – Reductions in fossil fuels subsidies?

18. Thank you very much! ben.slay@undp.org Empowered lives. Resilient nations.