Introduction
In this year’s Transition Report, we discuss the challenge of sustaining economic growth in the EBRD’s countries of operations. This challenge is threefold. First, while the countries of the EBRD region enjoyed strong growth and convergence with their richer neighbours prior to the global financial crisis of 2008-09, since the crisis their growth rates have consistently been lower than those of similar emerging markets elsewhere in the world. Second, many of those countries have now reached middle-income status and have to overcome the problem of the “middle-income trap”. And lastly, in order to ensure that growth is sustainable in the long run, those countries need to develop environmentally friendly growth models.
About
The EBRD seeks to foster the transition to an open market-oriented economy and to promote entrepreneurship in its countries of operations. To perform this task effectively, the Bank needs to analyse and understand the process of transition. The purpose of the Transition Report is to advance this understanding and to share our analysis with partners.
The responsibility for the content of the report is taken by the Office of the Chief Economist. The assessments and views expressed are not necessarily those of the EBRD. All assessments and data in the online country assessments are based on information as of late October 2017.
Highlights
Beyond the middle-income trap
Middle-income countries appear to experience weaker productivity growth, with this slow-down happening at income levels of around one-third to two-thirds of that of the United States of America. As economies’ incomes rise, productivity growth fails to keep up, with countries finding it difficult to switch from a growth model based on investment and the adoption of technology to one involving innovation and the development of new technology. This is one reason why episodes of strong growth have, historically, been difficult to sustain for more than a decade or two. Moreover, more than 40 per cent of all long periods of strong growth end in protracted periods of poor growth performance.
Firm dynamics and productivity
This section takes an in-depth look at the factors underlying productivity slow-downs in the EBRD region and other emerging markets. It discusses the effectiveness of various policies in terms of avoiding such a slow-down as countries transition from low-income to high-income status.
Infrastructure and growth
High-quality infrastructure connects people and markets, facilitating the efficient allocation of resources, while inadequate infrastructure hinders productivity. Most of the countries in the EBRD region have basic infrastructure, but there is still room for improvement in terms of sanitation and the supply of energy in poorer countries, and most of the region is lagging behind in terms of access to broadband internet. Meanwhile, firms in many EBRD countries of operations regard poor transport infrastructure as a major constraint on their business.
Highlights
Beyond the middle-income trap
Middle-income countries appear to experience weaker productivity growth, with this slow-down happening at income levels of around one-third to two-thirds of that of the United States of America. As economies’ incomes rise, productivity growth fails to keep up, with countries finding it difficult to switch from a growth model based on investment and the adoption of technology to one involving innovation and the development of new technology. This is one reason why episodes of strong growth have, historically, been difficult to sustain for more than a decade or two. Moreover, more than 40 per cent of all long periods of strong growth end in protracted periods of poor growth performance.
Middle-income economies also tend to have the most carbon-intensive production structures (in terms of emissions per US dollar of GDP), as these countries tend to have established manufacturing industries, but their firms may not yet be using the most advanced environmentally friendly technology. Chapter 4 looks in more detail at the challenge of increasing energy efficiency and cutting emissions in middle-income economies.
Having achieved middle-income status, many economies in the EBRD region are now in need of a new growth model. In the 1990s and the 2000s, the region’s economies consistently outperformed comparable emerging markets elsewhere in the world. In sharp contrast, however, the region’s average performance has consistently been weaker than that of its emerging market peers since the 2008-09 financial crisis.
While the region’s growth prior to 2008 was driven predominantly by rising productivity, the main contribution to growth in recent years has come from the accumulation of fixed capital. And yet, in virtually every country in the EBRD region, investment still lags far behind the levels seen in comparable economies elsewhere in the world. The cumulative capital stock gap between countries in the region and other emerging markets is now estimated at €2.2 trillion (equivalent to 18 per cent of the region’s total capital stock). Increasing investment in infrastructure could give growth in those countries a much-needed boost, as discussed in the section titled infrastructure.
Analysis of recent episodes of sustained strong growth shows that investment, the availability of domestic savings in order to finance it and the quality of infrastructure play by far the most important role in explaining episodes of both strong and weak growth. Indeed, most sustained periods of income convergence, such as that seen in South Korea, involve rapid capital accumulation, often leveraging earlier advances in productivity. The quality of economic and political institutions also plays a major role when it comes to explaining growth performance, as do the development of equity markets and demographic variables.
Events
Where we work
The national borders or regional boundaries shown here are not necessarily the same as those recognised by the EBRD or its shareholders.
The EBRD is investing in changing people’s lives and environments across a region that stretches from central Europe to Central Asia, the Western Balkans and the southern and eastern Mediterranean.
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