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Our Experience Ensures Your Success EMS-Fehn-Group ĐŽŶƐŝƐƚƐ ŽĨ Ϯϯ ĐŽŵƉĂŶŝĞƐ ǁŝƚŚ ŽĸĐĞƐ ŝŶ >ĞĞƌ͕ ƌĞŵĞŶ͕ ,ĂŵďƵƌŐ͕ >ƺďĞĐŬ͕ ŽƌƚŵƵŶĚ͕ >ĞǀĞƌŬƵƐĞŶ͕ ĞƌŐĞŶ͕ ZŝŐĂ͕ ŽůnjĂŶŽ͕ WĂůĞƌŵŽ͕ ZŝũĞŬĂ͕ ƵƌƌĞƐ͕ ^ŬŽƉũĞ͕ ^ƚ͘ WĞƚĞƌƐďƵƌŐ ĂŶĚ &ƚ͘ >ĂƵĚĞƌĚĂůĞ͘ D^Ͳ&ĞŚŶͲ'ƌŽƵƉ ŝƐ ĂĐƟǀĞ ŝŶ ĐŚĂƌƚĞƌŝŶŐ͕ ůŽŐŝƐƟĐƐ͕ ƐƉĞĐŝĂů ƚƌĂŶƐƉŽƌƚƐ͕ ĐƌĂŶĞ ƐĞƌǀŝĐĞƐ͕ ǁŽƌůĚͲǁŝĚĞ LJĂĐŚƚ ƚƌĂŶƐƉŽƌƚ͕ ƐŚŝƉ ŵĂŶĂŐĞŵĞŶƚ͕ ƚĞƌŵŝŶĂů ŽƉĞƌĂƟŽŶƐ͕ ǁĂƌĞŚŽƵƐŝŶŐ ĂŶĚ ĐƌĞǁŝŶŐ͘ D^&ĞŚŶͲ'ƌŽƵƉ ĞŵƉůŽLJƐ ĂďŽƵƚ ϮϬϬ ƐƚĂī ŵĞŵďĞƌƐ ĂƐŚŽƌĞ ĂŶĚ ϭϰϬ ĂďŽĂƌĚ͘ ůů ĐŽŵƉĂŶŝĞƐ ĂƌĞ ŽǁŶĞƌŵĂŶĂŐĞĚ ĂŶĚ ƵŶĚĞƌ 'ĞƌŵĂŶ ŵĂŶĂŐĞŵĞŶƚ͘ D^ &ĞŚŶ 'ƌŽƵƉ ŝƐ ƌĞƉƌĞƐĞŶƚĞĚ ŝŶ ůďĂŶŝĂ ďLJ EMS Albanian Port Operator ĂŶĚ 'ĞƌŵĂŶ ůďĂŶŝĂŶ >ŽŐŝƐƟĐƐ ŐĞŶĐLJ >ŽĐĂƚĞĚ ŝŶ ƚŚĞ WŽƌƚ ŽĨ ƵƌƌĞƐ͕ 'ĞƌŵĂŶ ůďĂŶŝĂŶ >ŽŐŝƐƟĐƐ ŐĞŶĐLJ ŝƐ Ă ĨƵůů ƐĞƌǀŝĐĞ ƉƌŽǀŝĚĞƌ ĨŽƌ ůŽŐŝƐƟĐƐ ƐŽůƵƟŽŶƐ 'ĞƌŵĂŶ ůďĂŶŝĂŶ >ŽŐŝƐƟĐƐ ŐĞŶĐLJ ^ŚƉŬ >ĂŐũũĂ ϭ͕ Zƌ͘ ͞dĂƵůĂŶƟĂ͞ <ƵůůĂƚ ŝŶũĂŬĞ͕ <ĂƟ ϯ͕ Durres, Albania

DĂŝů͗ ŝŶĨŽΛŐĂůĂͲĂů͘ĐŽŵ Website: ǁǁǁ͘ŐĂůĂͲĂů͘ĐŽŵ DĞŵďĞƌ ŽĨ D^Ͳ&ĞŚŶͲ'ƌŽƵƉ ǁǁǁ͘ĞŵƐͲĨĞŚŶͲŐƌŽƵƉ͘ĚĞ

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“squeezed between the low-wage poor country competitors that dominate in mature industries and the rich-country innovators that dominate in industries undergoing rapid technological change” (Gill and Kharas, 2007).

Since then the concept has been used frequently and interpreted in various ways

by Asian Development Bank, IMF, African Development Bank, EBRD, UN, government leaders, academics and media.

Particularly now that striving for sustainable growth is on highlight, it is very difficult to diagnose all the possible constrains and realize what the next move is. Above all, more concerning is the assumption that these middle-income economies have FALLEN….in a TRAP, and will STAGNATE.

Is it to be blamed or to be taken action…?

Middle Income Trap

By Morena SHETA

Popular expectations assume that when things seem to be going well, is the time to be prudent about the future.

What triggers the most awful “Time magazine cover curse” scenarios is the fear of being trapped, sometimes for a long time and performing below potentials. BUT… if it would be framed differently, would it change the game?

History has shown that economies might experience some “red-carpet” periods and gradually go through transition fog.

Like it happened with ASEAN countries (Indonesia; Malaysia; the Philippines; and Thailand) and Latin America (Argentina; Brazil; Chile; Colombia; and Mexico) which had already leveled up as a result of a successful transition from low-income to middle-income status, but their past successful growth could not be surely projected forward to high-income status.

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… But time has proved that societies in transition struggle and sometime fail in defining. It leaves open the question of how prevalent are the existent economic theories to suggest a well-constructed growth framework for middle-income economies in transition.

To have a better understanding of “transformation trap” process, let’s revert back to the origins of the definition.

Then and Now: Thirteen Years of Hindsight Might not be the first, but for sure not the last one to write about middle-income trap, taking into consideration that already by 2015 there were over 3,000 articles in Google mentioning the term.

It is seen as more important to understand how it all started back on 2005 when no credible growth strategy was useful for middle income countries and what it was meant to define.

In this environment ASEAN middle-income countries where straddling between a growth labor-intensive exports strategy against China export juggernaut and a considerable interest in transforming to “knowledge economies”.

The concept was introduced back in 2007, describing economies that were being

Thirteen years after, studies clarify some facts that diminish its prevalence: - It was more of an “ignorance trap” about the nature of growth in middleincome countries, falling between endogenous growth theories useful for high-income economies and the Solow growth model applicable for low-income countries.

- The trap was meant to convey an empirical work to prove that past growth is just not that informative about future growth and its predictive ability is generally even lower over longer horizons.

- It was short-hand for “a trap that can catch middle-income countries”, but not a statement.

What can be concluded and generalized in thirteen years hindsight, the most widelyaccepted proposition is that a “trap” is characterized by a context where growth is below potential, and slow-downs in productivity can occur at all income levels. Following that, all middle-income countries pass through some key transitions.

- The Lewis turning point occurs at middle-income levels, where economies must move away from labor-intensive technologies.

- Technological upgrading, where industrial policy becomes more important in managing the transition to greater technological sophistication.

- The move from authoritarian to democratic regimes, which it requires greater institutional stability and a move to democracy can prove to be beneficial.

Middle-income countries find themselves straddling between both strategies, thus they are so in need for a new growth model.

December 2018

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FYRoMMontenegro

Serbia

Source: National statistical offices.

Through which transitions is the Western Balkans passing?

The concept of transition has been reviewed taking into consideration the complexity of the process from low to high income status. According to EBRD, under that updated interpretation of transition, a sustainable market economy is regarded as being competitive, well governed, green, inclusive, resilient and integrated.

Assessment of transition qualities in EBRD countries

- Labor Productivity Gap: Firm level labor productivity is about 60% of the EU-11, and mostly the gap is driven by the low productivity in manufacturing sector.

Albania scores the lowest labor productivity among WB-6 countries, especially in service sector.

EU Eastern Europe

Western Balkans

Source: IMF World Economic Outlook

processing are the most undersupplied sectors in Albania.

- Challenging cross boarder integration: due to poor quality of transport infrastructure which makes trade more costly and time consuming.

The average cost to export in the EU-11 is at US$ 34 per unit compared with US$ 65 in Albania.

2018 Report by EBRD shows that WB-6 are experiencing:

Albania’s economic growth is projected to slow to about 3.5 % by 2019-20 as the increased economic dynamics gradually closes the output gap.

EU Southern Europe

- Significant resilience: Banking system has demonstrated resilience during recent year’s crisis, but still NPL rates are high. Over more progress towards transportation and implementation of the Third Energy Package.

In Albania the NPL rates are still in double-digit levels, albeit on a declining trend in all cases.

Countries in the region are at various stages of progress on three transitions: the transition to market economy, the transition to EU membership, and the transition to high-income status.

- Living Standards Gap: The WB-6 countries have significant convergence towards EU living standards. GDP per capita is roughly 1/2 of that of Eastern EU countries, 1/3 of southern EU members and a mere quarter of the richest EU members in the Western Europe.

EU Western Europe

- Public Governance lags behind: Progress has been made on political stability, but control on corruption still remains concerning.

Especially in Albania political connections as more important than either effort and hard work, or intelligence and skills, as the key to success in life

- EU Membership: which is the key driver of political, economic and institutional reforms.

Albania is facing challenges to cope with competitive pressure within the EU.

Albania’s GDP Growth 14 12

- Environmental- green challenges: Air pollution is a serious problem and level of carbon intensity is very high.

In Albania 10% of renewable energy comes from hydropower plants and 40% from biofuels/waste.

10 Albania’s GDP growth

8

Comparator

6 4 2 0 -2 -4

- Less inclusive growth: Inadequately educated labor force remains the main obstacles. Shortcomings in VET, preparational training, startup financing are not meeting the market needs.

Agriculture, forestry, hospitality and food

Transition scores for six qualities of a sustainable market economy Competitive

Wellgoverned

Green

Inclusive

Resilient

Integrated

Average

Albania Bosnia and Herz.

FYR Macedonia Kosovo Montenegro Serbia

4.4 4.7 5.4 3.4 4.9 4.9

4.4 4.7 5.4 3.4 4.9 4.9

4.4 4.7 5.4 3.4 4.9 4.9

4.4 4.7 5.4 3.4 4.9 4.9

4.4 4.7 5.4 3.4 4.9 4.9

4.4 4.7 5.4 3.4 4.9 4.9

4.4 4.7 5.4 3.4 4.9 4.9

WB-6 EU-11 EBRD

4.6 6.5 4.9

4.6 6.5 4.9

4.6 6.5 4.9

4.6 6.5 4.9

4.6 6.5 4.9

4.6 6.5 4.9

4.6 6.5 4.9

-6

2018

Kosovo

18

2017

BIH

21

2016

21

0

2015

Albania

23

5,000

2014

18

27

- Lack of Competitiveness: In market size, labor market efficiency, and weak business sophistication and innovation capacity.

Albania is less competitive for market size, infrastructure and labor market efficiency.

2013

25

2012

14

18

2011

20

15,000 10,000

2010

21 14

25,000 20,000

2009

14

13

35,000 30,000

2008

19

16

9

Others Information & Communication Professional, Sci. & Admin. Services Financial & Insurance Activities Construction Real Estate Activities Agriculture, Forestry & Fishing Public Adm., Defense & Social Security Industry Trade, Transport & Food Services

2007

10

10 18

5

11

2006

14

5

8

2005

22

14

2004

23

7

12

45,000 40,000

2003

6 7

3 5 6 4

2002

5

7

3 5 4 5

3 4 4 3

2001

11

4 5

7

2000

3 6 4 4

GDP per capita (PPP adjusted)

GDP PPP per capita Current International Dollar

3 3 5 3

- Loss due to business environment obstacles: Total annual sales loss counts to 13.2 % on average compared to 9.8% in the EU-11.

In Albania competition from informal sector, electricity, corruption and tax administration are the biggest business obstacles.

1999

GDP breakdown by sector in WB 6

Source: IMF

Economies are really moving slowly, but they are making more progress in the headway than they realize. The key is to focus at the headway, not how far they had yet to go. Forewarned, policy makers can make adjustments so that passage through transitions becomes an opportunity for continued rapid growth.

It is time to frame uncertainties and “now what?” into opportunities and “why not!”

Source: EBRD.

December 2018

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