Unlocking Growth: Strategic Reforms for Middle-Income Countries in Europe and Central Asia

The region remains the most energy-intensive among developing economies, with state-owned enterprises and high energy subsidies contributing to inefficiencies.

Middle-income countries in the Europe and Central Asia region must implement critical reforms to attract capital, foster knowledge and expertise, stimulate private sector innovation, and significantly enhance education outcomes to transition to high-income status, according to a newly released World Bank report.

The report, titled Greater Heights: Growing to High Income in Europe and Central Asia, highlights the need to eliminate inefficiencies and barriers to economic dynamism, focusing on structural reforms that can accelerate growth and resilience.

Progress and Challenges

Since 1990, ten countries in the region have successfully reached high-income status and joined the European Union. However, for the remaining 20 middle-income nations, the path has been slower, with growth prospects hindered by limited progress on structural reforms and an increasingly challenging global economic environment, particularly following the 2007–09 global financial crisis.

“To attain high-income status, governments must continue to strengthen economic growth drivers while shifting towards transformative policies that support complex economic structures and institutions,” said Ivailo Izvorski, Chief Economist for the Europe and Central Asia region and lead author of the report. “Key strategies should involve improving market competition, increasing private sector participation, and rewarding innovation and merit.”

Private Sector and Innovation: Key Growth Engines

The report underscores the pivotal role of firms and productivity in achieving sustainable economic advancement. Policymakers should prioritize support for dynamic startups and young firms rather than broadly targeting small and medium enterprises (SMEs). Enhancing access to long-term credit and risk capital through the development of venture capital markets and reducing state-directed lending is essential for businesses to innovate and scale.

Strengthening Human Capital and Education

A significant obstacle to growth is the lack of an adequately skilled workforce. Countries need to modernize vocational and higher education systems, forging stronger links between academia and the private sector to drive innovation. Education reforms should include:

• Postponing early student specialization to allow broader learning experiences.
• Strengthening partnerships between universities and industries.
• Consolidating universities and integrating research centers to foster innovation.
• Promoting merit-based academic progression to enhance quality and motivation.

Ensuring social mobility is also crucial. People must see tangible improvements in educational opportunities compared to previous generations. A lack of social mobility discourages support for critical policy changes, particularly in education.

Energy Efficiency and Sustainable Growth

The region remains the most energy-intensive among developing economies, with state-owned enterprises and high energy subsidies contributing to inefficiencies. To ensure sustainable growth, middle-income countries must:

• Implement policies to reduce energy consumption and inefficiencies.
• Transition to lower-cost and renewable energy sources through strategic planning.
• Address political economy challenges while phasing out fossil fuel subsidies, balancing these reductions with targeted income support.

 

Achieving high-income status requires a combination of foundational and transformative reforms. By fostering private sector innovation, enhancing educational outcomes, improving social mobility, and addressing energy inefficiencies, middle-income countries in Europe and Central Asia can unlock their full economic potential and accelerate their transition to prosperity.