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Sustainable development and the “European middle-income country trap”

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. Six questions. What’s a “middle-income country”? What is the “middle-income country” trap? Why does this happen?

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Sustainable development and the “European middle-income country trap”

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  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 • What’s a “middle-income country”? • What is the “middle-income country” trap? • Why does this happen? • Why has this narrative not been applied to transition economies? • Should it be? • Sustainable development implications?

  3. (1) What’s a middle-income country? Ask the World Bank * 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 Per-capita GNI (2011) Low-income countries Upper middle-income countries Lower middle-income countries * As per UNSC resolution 1244 (1999). Source: World Bank.

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

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

  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, orstagnant 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) GDP (2008 = 100) Source: IMF World Economic Outlook database, UNDP calculations.

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

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

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