Driving Growth in ECA: Strategies for High-Income Transitions with Global Insights

The World Bank report highlights how strong institutions, innovation, and effective governance drive middle-income countries in Europe and Central Asia toward high-income status, drawing lessons from South Korea and Finland. It emphasizes institutional reforms, public-private collaboration, and tackling challenges like state capture and inefficiencies for sustainable, inclusive growth.

The World Bank’s comprehensive analysis, authored in collaboration with experts from the University of Michigan, the University of Denver, and other leading institutions, examines how states can drive middle-income countries (MICs) in Europe and Central Asia (ECA) toward high-income status. Drawing lessons from South Korea and Finland, the report highlights the importance of institutional quality, economic resilience, and innovation in enabling this transition. South Korea’s transformation from a war-torn economy in the 1950s to a high-income, innovation-driven state by the 1990s is attributed to targeted institutional reforms, a focus on education, and strategic state-led industrial policies. Through coordinated industrial incentives, investments in infrastructure, and governance reforms, South Korea fostered globally competitive manufacturing sectors while addressing inefficiencies and corruption. Similarly, Finland’s post-World War II journey highlights the significance of early industrial breakthroughs, robust institutions, and collaborative public-private investments in education and research. Both countries demonstrate the critical role of state intervention in creating the conditions for sustained growth and global competitiveness.

The Uneven Transitions of Europe and Central Asia

The analysis explores the diverse trajectories of ECA countries since their transition from centrally planned economies in the 1990s. Early convergers like Poland, the Baltic states, and Czechia successfully implemented institutional reforms, benefiting from EU accession processes and strong governance frameworks. These countries created a virtuous cycle of institutional quality, private investment, and economic growth. Though achieving high-income status, late convergers like Romania and Bulgaria progressed more slowly due to weaker starting institutions. Current MICs such as Ukraine, Moldova, and several Central Asian nations face challenges like state capture, corruption, and underperforming institutions, which limit their ability to attract investments and foster innovation. The report underscores that institutional quality, including the rule of law and government effectiveness, remains a critical determinant of economic success, influencing growth's pace and sustainability.

Fiscal Policies: Balancing Resources with Efficiency

Fiscal governance emerges as a central theme, with ECA countries displaying large fiscal footprints compared to other regions. Aging populations and substantial social expenditures have resulted in high revenue-to-GDP ratios across the region. While these revenues support critical public services, their efficiency depends heavily on institutional quality. Estonia and Slovenia serve as examples of how countries can balance high fiscal revenues with efficient service delivery, showcasing the value of targeted reforms. Conversely, many MICs face inefficiencies in public procurement, high corruption levels, and poorly managed state-owned enterprises (SOEs). These challenges hinder fiscal management and public service delivery, placing undue burdens on businesses and citizens. The report highlights the transformative potential of digital governance systems, which have already reduced corruption and enhanced transparency in some ECA countries.

The Innovation Gap: Bridging Knowledge and Growth

Innovation is identified as a key driver of economic advancement, yet many ECA countries lag behind global leaders like South Korea. While Estonia and Czechia have emerged as regional leaders in digital innovation and patent applications, much of the region’s R&D investment remains below global benchmarks. Public-private collaboration, as seen in Finland and South Korea, is emphasized as essential for creating knowledge-intensive economies. These countries effectively combined state-led foundational research with private sector-driven commercialization, setting a model for ECA nations to emulate. Current MICs, however, face barriers such as weak links between academia and industry, limited institutional support, and inadequate funding for innovation. The report stresses the importance of fostering entrepreneurship, strengthening education systems, and incentivizing R&D to close the innovation gap and accelerate transitions to knowledge-driven economies.

Reforms for Resilience: A Roadmap for the Future

The report concludes with actionable recommendations for ECA states seeking to transition to high-income status. First, improving institutional quality is paramount, particularly in areas such as rule of law, anti-corruption measures, and public administration. These reforms are critical for fostering trust in governance and creating a level playing field for businesses. Second, governments must balance fiscal resources with efficient public service delivery, ensuring tax burdens do not stifle economic activity. Third, addressing state capture and promoting competitive markets are vital for dynamic growth and innovation. State capture, which disproportionately benefits connected firms at the expense of fair competition, remains a significant barrier for many MICs and even some high-income ECA nations. Finally, governments must adopt adaptive roles across sectors, from enabling renewable energy transitions to improving quality assurance in education and healthcare. By strategically managing risks and pursuing reforms during both economic booms and downturns, ECA states can strengthen their resilience to external shocks.

The analysis underscores the symbiotic relationship between innovation and institutional quality. Countries like Estonia, Latvia, and Poland have successfully leveraged their strong institutions to foster innovation-based growth. In contrast, many MICs focus more on technological infusion than cutting-edge innovation, missing opportunities to build competitive, knowledge-intensive economies. The report identifies this as a critical area for lower MICs to develop, particularly through investments in education and digital infrastructure. By upgrading institutions, reducing corruption, and fostering competitive markets, ECA nations can create a sustainable foundation for inclusive growth. These insights provide a roadmap not only for the region but also for countries globally seeking to navigate the complexities of economic development in an increasingly interconnected world.