World Bank: Croatia Must Strengthen Innovations for High Income

Ivailo Izvorski, Chief Economist of the World Bank for Europe and Central Asia, today delivered a lecture at the Croatian National Bank titled ‘Higher Heights: The Path to High Income in Europe and Central Asia’.

Since 1990, 27 countries have achieved high-income status, including ten members that joined the European Union. Another 20 countries in the region have made significant progress, but their path to high income has slowed, partly due to weakening domestic structural reforms and partly due to the deterioration of the global environment.

The World Bank report ‘Higher Heights’ analyzes how these countries can avoid the middle-income trap and advance towards high-income status. A key aspect of this is the transition from an investment-driven growth model to a growth model focused on attracting global capital, knowledge, and technology – ultimately leading to the promotion of innovation. An innovation-driven strategy is equally important for countries that have already reached high-income status.

– Since the early 1990s, countries in Central and Eastern Europe, along with those in the Central Asia region, have made impressive progress. After the end of the Cold War, many of them – including Croatia – achieved high-income status on the wave of democratization and market reforms. Ten countries became members of the European Union, and EU membership provided not only economic integration but also a framework for continuing structural reforms and development. Other countries in the region have also made solid progress, but many have yet to move to the next level.

Why is this the case? The answer lies in a combination of stalled structural reforms and a more challenging global environment. Growth was once primarily driven by investments and integration into global trade. Participation in global supply chains spurred rapid growth and constant convergence towards higher income levels. This worked well when the world was opening up to trade, and those countries that joined saw significant inflows of foreign direct investment benefited the most. However, things have changed significantly since the global financial crisis of 2008.

Today, we face a different world, marked by geopolitical fragmentation, trade disruptions, and high uncertainty. For small, open economies like many in our region, this is a particularly difficult environment. The constantly changing global landscape requires a new approach to growth – a shift from merely attracting investments to attracting technology and knowledge and, crucially, developing our own innovations – emphasized Governor Boris Vujčić in his opening speech.

Ivailo Izvorski noted that the study ‘Higher Heights: The Path to High Income in Europe and Central Asia’ relies on the 3i strategy described in the ‘World Development Report 2024 – Investments, Infusions, and Innovations’ to propose policy options to assist middle-income countries in Europe and Central Asia in their efforts to achieve high-income status.

– Relying on comprehensive empirical analysis, the report offers practical recommendations that will enable policymakers to enhance stronger economic growth across the region. Such a transition will require continuous and sustainable fundamental reform to maximize the drivers of economic growth while simultaneously redirecting towards new transformative reforms to promote the development of more complex economic structures and institutions.

This includes the need to discipline existing entities, strengthen the role of the private sector, enhance the competitive environment, and reward merit. The emphasis on an innovation-driven strategy is also critically important for those countries that have already achieved high-income status and are facing challenges in maintaining their achievements – emphasized Izvorski.

Ivailo Izvorski has been the Chief Economist of the World Bank for Europe and Central Asia since 2022. He joined the World Bank in 2005 as a senior economist for Bosnia and Herzegovina and has since held various positions, including that of head of the global macroeconomics, growth, and debt department. He holds a PhD in economics from Yale University and has also built his career at the International Monetary Fund and the Institute of International Finance.