The Middle-Income Countries Perspective

on Sustainable Development in CIS, Eastern and Southern Europe

Olga MemedovicChief, Europe and NIS ProgrammeBureau for Regional ProgrammesProgramme Development and Technical Cooperation Division, UNIDO

Regional Conference16-17 May 2013, Minsk, Belarus

Addressing challengesMiddle income countries (MICs)

of Europe and Central Asiaare facing in the context of the post-

2015 development agenda

I. Middle income countries classificationsII. MICs confront a wide range of challenges

simultaneously III. Is there a Middle Income trap or there

are various traps? IV. Post 2015 agendaV. MICs development priorities and Role of

UNIDO

Outline

I. Middle income countries classifications

EUR & NIS Programme: country coverage28 countries, diverse in terms of geography, population, history, endowments , political systems and the levels of socio-economic development. The region extends over 25 million square km, and includes around 480 million people

Country Classifications

Sub-groups Eastern Europe, Central Asia and Caucasus South East Europe EU New Member States

High Income Countries(HIC) >$12,476

Croatia Cyprus, Czech Republic, Hungary, Malta, Poland, Slovakia, and Slovenia

Middle Income Countries(MICs)$1,026 -$12,475

Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, Russian Federation, Turkmenistan, Uzbekistan, and Ukraine

Albania, Bosnia & Herzegovina, FYR Macedonia, Montenegro, Serbia, and Turkey

Bulgaria Romania

Low Income Countries(LIC) <$1,025

KyrgyzstanTajikistan

World Bank country income groups (GDP per capita)Low income: $1,025 or less Lower middle income: $1,026 to $4,035 Upper middle income: $4,036 to $12,475 High income: $12,476 or more

II. MICs confront a wide range of challenges simultaneously

Challenges of transition, post-transition and middle-income economy

Regional challengesGeopolitical issues

Global challenges (globalization, international rules and regulations, climate change, environmental degradation

Post 2015 Agenda

.

New realities of globalizationNew rules and regulation: liberal trade and investment regimes;

international environmental agreements, conventions, initiatives ICT and modularization leading to functional and geographical

fragmentation of value chains in production and services, and rising demand to comply with plethora of internationally agreed and private standards

Early and late developers did not face all these issues

National Quality

Infrastructure

Testing

Standardization

Metrology

Accreditation

Certification

GVC mediated trade accounts for around 80% of global tradeGlobal trade in intermediate, consumption and capital goods1962 – 2011

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

Billi

ons

Imports Intermediate Goods Imports Consumption Goods Imports Capital Goods

Imports

Global trade in intermediate, consumption and capital goods, 1962 – 2011

Exports

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

Billi

ons

Exports Intermediate Goods Exports Consumption Goods Exports Capital Goods

.

MICs Dilemma: What industrial development path to choose?

Engaging in GVC-mediated division of labour dynamics, or in nationally or regionally bounded division of labour

Engaging in international and regional DoL (GVC and GPNs) creates opportunities for fast track technological learning and catching up, for more efficient use of resources, and for reaching welfare gains

Stages of catching-up Industrialization

STAGE ZERO

Monoculture, agriculture, aid

dependency

STAGE ONESimple

manufacturing under foreign

guidance

STAGE TWOHave supporting

industries but still under foreign

guidance

STAGE THREEManagement &

technology mastered, can produce high quality goods

STAGE FOURFull capability in innovation and design as global

leader

Pre - industrialisation

Arrival of manufacturing

FDI

Agglomeration(acceleration of

FDI)

Technologyabsorption

Creativity

Japan, US, EU

Korea, China

Initial FDI absorption

Internalizing parts and

componentsInternationalizing

skills and technology

Internationalizing innovation

Middle Income Trap

. New realities of globalizationinnovation

MICs Dilemma: What industrial development path to choose?

but Engaging in international and regional DoL (GVC and GPNs) compress development time and stages; Sequential developments now occur simultaneously, and forces

MICs need to address a number of challenges at the same time, Simultaneous de-industrialization and re-industrialization Extreme wealth and poverty The social frictions associated with the co-mingling of pre-

industrial, industrial, and post-industrial societies

This is challenging sequential and liner model of development

Trade in intermediate goods 1992-2011

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Billi

ons

Industrialized Developing CIS

III. Is there a Middle Income trap or there are various traps?

Multiple traps facing Europe and Central AsiaModern market economy(non-state-owned enterprises)

Planned economy(state-owned enterprises)

Econ

omic

dev

elop

men

t (in

dust

rializ

ation

)Slower economic growth

Tran

sition

to a

mar

ket

econ

omy

Middle-income trap Transition trap Stagnating growth Slow structural transformation Lack of innovationWeak institutions Ageing population and shrinking labour forceLoss of competitiveness

Slow transition to market economyPoor market regulationsPolitical reforms and democratization before economic and educational reforms

Sustainable development issues

Where do MICs in the region stand in terms of facing various traps?

Slower economic growth

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

European Union Middle income EECA MICs EU NMS

Source: World Bank

GDP growth (current US$)

Sustainable development challenges(details are in Annex)

Rising inequality

Rising poverty: almost 30% of the people are living in poverty

35% of population is excluded from the formal economy

Business environment conditions in some countries need

significant improvements

Shallow regional integration processes in EECCA countries

Tertiarisation since 1970

Deterioration of competiveness in NMS and marginal

improvements in other countriesMaterial efficiency rising but still

significantly below the EU-15 average

Gender inequality (index) Western Europe 0.13 Eastern

Europe: 0.21

Eco innovation capabilities low: Import dependency of environmental goods

Little investment in innovation and technological development

Renewables represent smaller shares in total energy generation, but have demonstrated growth

Youth unemployment rates vary from 10 to 35% Waste and water quality issues

Industrial diversification based on high value added goods still elusive development goal

Still one of the most energy intensive region in the world, but with progress in energy efficiency

Industrial modernization too slow

Social Environmental Economic

Structural changes in the region: strong tertiarisation process in economy

Value added by sub-sectors, based on UNIDO database (INDSTAT2 2011).Note: shares in current prices and exchange rates, in US$.

Structural transformation- Increasing urbanization in MICs

Growing urban populations

Patterns of export specialization

For many countries in the region, the share of competitive high value-added manufacturing sectors in manufacturing exports remain low

0

10

20

30

40

50

60

Bulgari

a

Cyprus

Czech

Repu

blic

Eston

ia

Hung

aryLa

tviaMalta

Polan

d

Roman

ia

Slova

k Rep

ublic

Slove

nia

Alban

ia

Bosn

ia an

d Herz

egov

inaCroa

tia

Maced

onia,

FYRTu

rkey

Armen

ia

Azerb

aijan

Belarus

Georgi

a

Kazakh

stan

Kyrgyz

Repu

blic

Moldov

a

Russ

ian Fe

derat

ion

Ukraine

2005 2009NMS SEE EECCA

Source: UNIDO; Share in % of medium and high technologies in exports

Economic - Intra-industry trade (IIT) scores (0-10) – two way trade of products within the same sector

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

NMS EECA MICs

IIT growth is associated with and expansion in trade through greater specialization and economies of scale, foreign direct investment, innovation and the accumulation of knowledge.

Source: UNIDO, based on UN Comtrade

Share in world manufactured intermediate goods exports and imports The share in world manufactured intermediate goods exports and imports remains very low. > economic diversification still remain elusive development goals for many countries in the region

Imports

0 10 20 30 40 50 60 70 80 90

100

1988 1994 2000 2010

%

Industrialized countries Developing countries

CIS

Exports

0 10 20 30 40 50 60 70 80 90

100

1988 1994 2000 2010

%

Country/Economy Score (0-100)

Rank(1-125)

Income Rank Region Rank GII Past Years2010 2009

Switzerland 63.82 1 HI 1 ECS 1 4 7Sweden 62.12 2 HI 2 ECS 2 2 3Singapore 59.64 3 HI 3 EAS 1 7 5Estonia 49.18 23 HI 23 ECS 14 29 29Hungary 48.12 25 HI 25 ECS 16 36 47Czech Republic 47.30 27 HI 27 ECS 17 27 33Cyrus 46.45 28 HI 28 ECS 18 32 45Slovenia 45.07 30 HI 29 ECS 19 26 36Latvia 39.80 36 HI 34 ECS 23 44 60Slovak Republic 39.05 37 HI 35 ECS 24 37 35Moldova, Rep. 38.66 39 LM 2 ECS 25 n/a 116Lithuania 38.49 40 UM 3 ECS 26 39 42Bulgaria 38.42 42 UM 4 ECS 27 49 74Poland 38.02 43 HI 36 ECS 28 47 56Croatia 37.98 44 HI 37 ECS 29 45 62Romania 36.83 50 UM 8 ECS 30 52 69Serbia 36.31 55 UM 10 ECS 31 101 92Russian Federation 35.85 56 UM 11 ECS 32 64 68Ukraine 35.01 60 LM 6 ECS 33 61 79Turkey 34.11 65 UM 15 ECS 35 67 51

Global Innovation Index rankings (INSEAD)

Euro

pe a

nd N

IS R

egio

n

Country/Economy Score (0-100) Rank(1-125)

Income Rank Region Rank GII Past Years

2010 2009

Macedonia 33.47 67 UM 16 ECS 36 77 89Armenia 33.00 69 LM 11 ECS 37 82 104Georgia 31.87 73 LM 12 ECS 38 84 98Bosnia & Herzegovina 30.84 76 UM 18 ECS 39 116 n/aAlbania 30.45 80 UM 22 ECS 40 81 121Kazakhstan 30.32 84 UM 25 ECS 41 63 72Kyrgyzstan 29.79 85 LI 2 ECS 42 104 122Azerbaijan 29.17 88 UM 26 ECS 43 57 57Tajikistan 24.50 116 LI 13 ECS 44 115 112Yemen 20.72 123 LM 32 MEA 15 n/a n/aSudan 20.36 124 LM 33 SSF 24 n/a n/aAlgeria 19.79 125 UM 30 MEA 16 121 108

Source: INSEAD (2011)

Note: World Bank Income Group Classification (January 2011): LI = low income; LM = lower-middle income; UM = upper-middle income; and HI = high income; World Bank Regional Classification (January 2011):ECS = Europe & Central Asia; MEA = Middle East & North Africa; SSF = Sub-Saharan Africa; EAS = East Asia & Pacific; SAS = South Asia; NAC = North America; and LCN = Latin America & Caribbean

Global Innovation Index rankings (INSEAD)

(continued)

unable to compete with low income, low wage economies in manufacturing exports and unable to compete with advanced economies in high skill innovations

unable to compete with low income, low wage economies in manufacturing exports and unable to compete with advanced economies in high skill innovations

Economic - World Bank Doing Business 2010/2013

rankings

DOING BUSINESS 2010 DOING BUSINESS 2013

Georgia 11 9 Georgia

FYR Macedonia 32 23 FYR Macedonia

Azerbaijan 38 32 Armenia

Armenia 43 49 Kazakhstan

Bulgaria 44 51 Montenegro

Romania 55 58 Belarus

Belarus 58 66 Bulgaria

Kazakhstan 63 67 Azerbaijan

Montenegro 71 71 Turkey

Turkey 73 72 Romania

Albania 82 83 Moldova

Serbia 88 85 Albania

Moldova 94 86 Serbia

Bosnia & Her 116 112 Russian Fed

Russian Fed 120 126 Bosnia & H.

Ukraine 142 137 Ukraine

Uzbekistan 150 154 Uzbekistan

• Georgia and FYR Macedonia best performing countries in 2010 and 2013

• Many EECCA countries have improved their rankings between 2010 and 2013, but remain near the bottom of the table

Social - % population aged 65 and aboveMany MICs in the region have rapidly ageing populations

Source: Word Bank

Social - % population below the poverty line in MICs

Social - Youth unemployment, % of labour force ages 15-24

Source: World Bank 2012

Income inequality: distribution of income by quintile

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Albania

Armenia

Azerbaijan

Belarus

Bosnia and Herzegovina

Bulgaria

Croatia

Georgia

Hungary

Kazakhstan

Kyrgyz Republic

Latvia

Macedonia, FYR

Moldova

Montenegro

Poland

Romania

Russian Federation

Serbia

Tajikistan

Turkey

Ukraine

Poorest 20% Second 20% Third 20% Fourth 20% Richest 20%

Environment - CO2 emissions (metric tons per capita)

Source: Word Bank

0

2

4

6

8

10

12

14

16

18

Croa

tiaCy

prus

Czec

h Re

publ

icLit

huan

iaHu

ngar

yPo

land

Slov

ak R

epub

licSl

oven

iaAr

men

iaAz

erba

ijan

Bela

rus

Bosn

ia a

ndBu

lgar

iaGe

orgi

aKa

zakh

stan

Mac

edon

ia, F

YRM

oldo

vaM

onte

negr

oRo

man

iaRu

ssia

nTu

rkey

Turk

men

istan

Ukra

ine

Uzbe

kist

anKy

rgyz

Rep

ublic

Tajik

istan

1992

2009

Material productivity –rising material and energy efficiency, but not enough

to close gap with EU 15

Source: UNIDO and SERI

Source: UNECE 2011

‘Green economy’ patents filed under Patent Cooperation Treaty, 1992-2010, annual average per technology type.

Imports of environmental goods

IV. Post 2015 agenda

Environmental sustainability

Peace & Security

Inclusive social development

Inclusive economic

development

Post 2015 agendaLeveraging globalization and deepregional integrationIndustrial diversification /modernization CompetitivenessInnovation

Poverty reductionEqualitySocial and economic inclusionJob creation

Energy efficiencyRenewable energy Material efficiencyEnergy and Water accessEco-innovation

Global/regional governanceAddressing public goods/bads

V. MICs development priorities and UNIDO role

Development priorities of MICs and LICs, by sub-regionRegion Thematic priorities

Bulgaria Romania Environmental protection

Social inclusion

Albania Bosnia and

Herzegovina FYR Macedonia Montenegro Serbia Turkey

Renewable energy Environmental protection Cleaner production Trade capacity building Eco-tourism Social inclusion of

disadvantage group, including youth and ethnic minorities

Textile industry upgrading

Cent

ral &

Eas

tern

Eur

ope

–

EU

mem

ber s

tate

sSo

uth

East

ern

Euro

pe –

no

n-EU

mem

ber s

tate

s

Region Thematic priorities

Caucasuso Armeniao Azerbaijano Georgia

Energy efficiency SME development Agro-industry Social inclusion of disadvantage group,

including youth and ethnic minorities Industrial parks Trade capacity building Light industry

Central Asiao Kazakhstano Turkmenistano Uzbekistan

o Kyrgyzstano Tajikistan

Agro-industry Waste management Environment protection Cleaner production Trade capacity building Investment and technology promotion SME development Diversification of economy

Russian Federation Environment protection Trade capacity building Automotive industry Energy efficiency Investment and technology promotion Waste management

Western NISo Belaruso Moldovao Ukraine

Industrial energy efficiency Renewable energy RECP Automotive industry upgrading Environment protection Technology foresight

MICs are recipients and donors of development assistance Matching donor and recipient needs: UNIDO solutions

UNIDO Thematic Priorities

Donor country priorities(including MICs donors)

Recipient country development priorities (UNDAF-14 / DAO- 4),

MICs and LICs

International financial institutions priorities Regional Communities prioritiesMultilateral funds requirements

Poverty ReductionTrade Capacity-buildingEnergy & Environment

UNIDO solutions

tailored to the country and sub- regional context and

priorities ( HIC, MIC and LIC)

42

Global challenges

Transition and post transition economy challenges

Regional challenges

Middle income trap

UNIDO TC responseSME DevelopmentWomen &Youth entrepreneurshipIndustrial upgrading and modernizationAgribusiness strengthening and upgradingInnovation and technology promotionIndustrial Energy Efficiency Green industry and green jobsWater and waste managementCleaner ProductionTrade capacity-buildingSkills development

UNIDO response Normative and standard setting

Analysis & Policy Advice

Knowledge dissemination and networking

UNIDO solutions for inclusive growth

Securing jobs for marginalized and vulnerable groups

The empowerment of poor and vulnerable in rural areas

Youth employment SME development and women entrepreneurship

Addressing challenges and UNIDO solutions:

Securing jobs through industrial diversification and upgrading

Automotive industry supply chain upgrading

Trade capacity buildingIndustrial modernization Agribusiness upgrading

Achieving sustainable production and consumption using smart business models

Greening of industry and green industry Waste and water management Eco industrial parks

Greening of industry under the Montreal Protocol

Leveraging new opportunities for IEE under GEF-6

Thematic Focus:

Industrial energy efficiency: ISO 50001 and system optimization

Low-carbon technologies (Hydrogen and Carbon Capture and Storage-CCS)

Renewable energy for industrial applications

46Industrial energy efficiency

Ensuring commitment to sustainable development through partnership with private sector

2. UNIDO and H&M Cooperation on sustainable supply chain development in the textile industry (applying Corporate Social Responsibility (CSR) principles and practices): pilot project in Turkey

3. AEON, Auchan Group, Migros and Walmart Current Negotiation with leading retailers and manufacturers to establish partnerships for sustainable supplier development in Malaysia, Russian Federation.

1. UNIDO and METRO Group agreement Joint commitment to more efficient supplychains and better food supplies

Countries: Egypt, India and in Russian Federation; Planned: Armenia, China, Indonesia, Kazakhstan, Pakistan, Turkey and Viet Nam

Funding possibilities and prospects• East- East (South-South) cooperation • BRICS UNIDO platform and triangular cooperation • EU financial instruments: Eastern Partnership on Cleaner Production and Resource

Efficiency (co-financing requirements) • Partnerships with regional groupings: Economic Cooperation Organization-ECO on

thematic areas such as TCB, SMEs development, woman entrepreneurship, WTO accession, FDI inflows, and technology transfer); Regional economic integration initiatives (Eurasian Economic Community-EurAsEC)

• Strengthening partnerships with national and regional institutions, other international organizations (UNDAFs and DAOs) and civil society for joint fund mobilization.

• Multilateral Funds (Montreal and GEF-co-financing requirements)• Self-funding through trust funds

Thank you for your attention!

o.memedovic@unido.org