Title page 1

Contents 7

Foreword 12

Acknowledgments 14

About the Authors 16

Main Messages 18

Abbreviations 22

Country Classifications Used in This Report 23

Overview 24

Introduction 24

Investment, Infusion, and Innovation to Achieve and Sustain High-Income Status 27

Understanding Growth Through the Lens of Schumpeterian Creative Destruction 28

The Three Fundamental Drivers of Economic Growth 30

Notes 37

References 37

1. Transitioning to High Income-or Not 38

Country Case in Brief: Poland 38

Introduction 39

Historical Income Convergence: The Region Has Experienced Both Success and Stagnation 41

Determinants of Growth and Convergence 44

Lessons from Europe: The ECA Convergers Offer Insights 49

Lessons from Europe: Assessing Convergence Through a Schumpeterian Lens 52

Conclusions and Introduction to the Rest of the Report 60

Notes 60

References 61

SPOTLIGHT 1.1. The Lessons of High-Income Transitions in East Asia and in Latin America 63

SPOTLIGHT 1.2. Assessing ECA MICs Relative to Global Convergers 64

2. Enterprises and Productivity 67

Country Case in Brief: Estonia 67

Introduction 68

Supporting Creation: The Drivers of Productivity Growth in the Region 69

The Forces of Preservation: Small Firms and Incumbent SOEs 80

Understanding Firm Dynamism and Job Creation 90

Conclusions and Policy Recommendations 93

Annex 2.1: Main Dataset and Methodological Definitions 99

Annex 2.2: Estimating Firm-Level Labor Productivity and Defining the Frontiers 100

Annex 2.3: Dataset Characteristics 101

Notes 103

References 105

3. Talent and Social Mobility 109

Country Case in Brief: Finland 109

Introduction 110

Rewarding Merit: Social Mobility and Economic Growth in Europe and Central Asia 112

The Forces of Creation: Better Education and Innovation 120

Talent on the Move: High-Skill Migration from and to ECA Countries 129

Weakening the Forces of Preservation: Perceptions of Mobility and Support for Reform 132

Conclusions and Policy Recommendations 137

Notes 140

References 140

4. Energy 145

Country Case in Brief: The United Kingdom 145

Introduction 148

Carbon Emissions and Energy Intensity 150

ECA Transitions and Foundations 154

Strengthening the Forces of Creation 155

Weakening the Forces of Preservation 165

Cushioning the Impact of the Forces of Destruction 169

Conclusions and Policy Recommendations 172

Notes 175

References 176

Tables 11

TABLE 1.1. Passing the HIC threshold will be challenging 44

TABLE 1.2. ECA Convergers offer lessons for ECA MICs that look to their own HIC transition 50

TABLE 1.3. Classifying emission intensity, ECA countries, 2021 59

TABLE 2.1. Enterprises and productivity: summary of recommendations 98

TABLE 3.1. Number of universities in the global top 500 of the Times Higher Education ranking 127

TABLE 3.2. Talent and mobility: summary of recommendations 139

TABLE 4.1. Policies to support the adoption of green technologies 164

TABLE 4.2. Energy and emissions: summary of recommendations 174

Figures 8

FIGURE O.1. Ten ECA countries have achieved high-income status since 1990 25

FIGURE O.2. Economic growth in the middle-income countries of ECA has stagnated, 2000-25 26

FIGURE O.3. Reaching high-income status requires two transitions: from 1i to 2i and then to 3i 27

FIGURE O.4. Balance creation, preservation, and destruction to reach high-income status 29

FIGURE O.5. Drivers of productivity growth: between-firm reallocation and within-firm upgrading 31

FIGURE O.6. In Europe and Central Asia, higher education quality is low relative to basic education 34

FIGURE 1.1. In Europe, 13 countries have transitioned from middle- to high-income status since 1990 43

FIGURE 1.2. There is still a wide income gap between the successful Convergers and their high-income peers 44

FIGURE 1.3. Investment rates in ECA show no clear pattern across the country groupings 47

FIGURE 1.4. Labor force participation rates are higher among Convergers and Europe HICs 47

FIGURE 1.5. ECA MICs are closing the TFP gap with Europe HICs and Convergers 48

FIGURE 1.6. Europe HICs and Convergers are reducing emissions intensity at a more rapid pace 48

FIGURE 1.7. Convergers and Europe HICs trade more intensely compared with ECA MICs 48

FIGURE 1.8. Convergers and Europe HICs perform better on measures of governance and institutional quality 48

FIGURE 1.9. The most rapid convergence was in the late 2000s, when 8 MICs passed the HIC threshold 51

FIGURE 1.10. MICs have to balance creation, preservation, and destruction 53

FIGURE 1.11. Europe HICs spend much more on R&D 54

FIGURE 1.12. R&D spending: flat among ECA MICs, but rising steadily among Europe HICs and Convergers 54

FIGURE 1.13. Differences in technology licensing and management practices are relatively small 55

FIGURE 1.14. A sizable gap in patent applications remains between Europe HICs versus Convergers and ECA MICs 55

FIGURE 1.15. The state plays a significant role in business in ECA MICs 56

FIGURE 1.16. Fewer regulatory barriers are correlated with greater economic complexity 56

FIGURE 1.17. ECA MICs exercise greater restrictions on product and market competition 57

FIGURE 1.18. Barriers in ECA MICs are higher in network sectors than in service sectors 57

FIGURE 1.19. There is a persistent gap in business environment indicators between Europe HICs and ECA MICs 57

FIGURE 1.20. Europe HICs clearly lead Convergers and ECA MICs on measures of social mobility 57

FIGURE 1.21. Innovation indicators show a consistent gap between ECA MICs and Europe HICs 58

FIGURE 1.22. There is a strong correlation between innovation and GNI per capita 58

FIGURE 1.23. Energy intensity among ECA MICs has fallen in recent years 59

FIGURE 1.24. Europe HICs exhibit lower energy intensity than ECA MICs 59

FIGURE 2.1. Within-firm productivity growth does not drive overall ECA MIC productivity growth 71

FIGURE 2.2. ECA MICs lag Europe HICs on innovation 73

FIGURE 2.3. The innovation gap between ECA MICs and ECA HICs has not narrowed 73

FIGURE 2.4. Relatively few ECA firms access long-term financing 75

FIGURE 2.5. Venture capital is underdeveloped in the ECA region 76

FIGURE 2.6. MICs tend to have worse product market regulation and therefore less competition 78

FIGURE 2.7. ECA MICs tend to exhibit greater market concentration 80

FIGURE 2.8. ECA MICs: employment density is low because firms do not expand sufficiently 81

FIGURE 2.9. MIC micro-, small, and medium enterprises are less productive 82

FIGURE 2.10. ECA countries have too little employment in large firms-the missing large problem 84

FIGURE 2.11. Larger firms are not always more productive in the ECA MICs 85

FIGURE 2.12. The labor productivity gap with Germany is considerable 86

FIGURE 2.13. Performance of the top 100 firms in the ECA, the EU, and the United States, 2019 88

FIGURE 2.14. ECA firms show stunted job growth 91

FIGURE 2.15. Young firms and start-ups account for nearly half the gross job creation in the economy 93

FIGURE 3.1. ECA: absolute mobility is similar to, but relative mobility is greater than the world average 114

FIGURE 3.2. Absolute upward educational mobility has declined among younger generations, ECA 115

FIGURE 3.3. Upward mobility in education has declined across generations, ECA 116

FIGURE 3.4. Upward mobility in higher education has increased among younger generations, ECA 116

FIGURE 3.5. Relative mobility may exhibit a U-shape across generations 117

FIGURE 3.6. Upward mobility in higher education is associated with higher incomes, ECA, 2000-20 118

FIGURE 3.7. The female labor force participation rate is heterogeneous, ECA, 2022 119

FIGURE 3.8. PISA mathematics scores have been declining in the ECA region since 2015 121

FIGURE 3.9. Vocational-track students perform significantly worse than general-track students 123

FIGURE 3.10. ECA: higher education is worse than expected given the quality of basic education 125

FIGURE 3.11. The lower quality of higher education translates into low skill proficiency among adults 126

FIGURE 3.12. Small shares of university graduates may mean high emigration rates among graduates 130

FIGURE 3.13. Optimism about social mobility is linked to greater willingness to invest in education 134

FIGURE 3.14. The income needed to avoid vulnerability has increased over time 136

FIGURE 4.1. Carbon and energy emissions intensity and emissions per capita 151

FIGURE 4.2. Energy intensity, primary energy 152

FIGURE 4.3. GDP and energy use, ECA and comparators, 2000-19 152

FIGURE 4.4. Decomposing per capita carbon emissions, index, 2000 = 100 153

FIGURE 4.5. The changing structure of electricity production 154

FIGURE 4.6. Solar energy and onshore energy costs 163

FIGURE 4.7. Explicit and implicit subsidies, ECA region 166

FIGURE 4.8. The state is present in many economic sectors, ECA region 167

Boxes 8

BOX 1.1. Growing to High Income Is Not Easy 42

BOX 1.2. Income Convergence with Advanced Economies 51

BOX 3.1. Vocational Education and Training in Europe and Central Asia Need to Be Better 122

BOX 3.2. Research and Higher Education: Germany, the United Kingdom, and the United States 128

BOX 4.1. Solar Panel Manufacturing in Türkiye 161

BOX 4.2. Poland's Rapid Adoption of Heat Pumps 162

Box Figures 9

FIGURE B1.2.1. Few ECA MICs have achieved relative convergence with the US 52

Spotlight Figures 10

FIGURE S1.2.1. In investment, ECA MICs and Global Convergers perform at a similar level 65

FIGURE S1.2.2. ECA MICs lag Global Convergers, notably in labor utilization 65

FIGURE S1.2.3. ECA MICs lag Global Convergers in productivity 65

FIGURE S1.2.4. ECA MICs lag Global Convergers in trade openness 65

FIGURE S1.2.5. Institutional performance indicators are better in Global Convergers than in ECA MICs 66

FIGURE S1.2.6. The gap in R&D spending between Global Convergers and ECA MICs is widening 66

Annex Tables 11

TABLE A2.1.1. Firm characteristics, by country 99

TABLE A2.3.1. Information sources, industry coverage, and country dataset characteristics 101

TABLE A2.3.2. Data availability, by country 102