The Middle-Income Countries Perspective on Sustainable Development in CIS, Eastern and Southern Europe

1. Regional Conference 16-17 May 2013, Minsk, Belarus 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

2. Addressing challenges Middle income countries (MICs) of Europe and Central Asia are facing in the context of the post-2015 development agenda

3. Outline • Middle income countries classifications • MICs confront a wide range of challenges simultaneously • Is there a Middle Income trap or there are various traps? • Post 2015 agenda • MICs development priorities and Role of UNIDO

4. Middle income countries classifications

5. EUR & NIS Programme: country coverage 28 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

6. Country Classifications 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

7. II. MICs confront a wide range of challenges simultaneously

8. Global challenges (globalization, international rules and regulations, climate change, environmental degradation Challenges of transition, post-transition and middle-income economy Regional challenges Geopolitical issues • Post 2015 Agenda

9. . • New realities of globalization • New 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 Metrology Testing Certification National Quality Infrastructure Accreditation Standardization

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

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

12. . 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

13. Stages of catching-up Industrialization Creativity Technology absorption STAGE FOUR Full capability in innovation and design as global leader Agglomeration (acceleration of FDI) Arrival of manufacturing FDI STAGE THREE Management & technology mastered, can produce high quality goods STAGE TWO Have supporting industries but still under foreign guidance Japan, US, EU STAGE ONE Simple manufacturing under foreign guidance STAGE ZERO Monoculture, agriculture, aid dependency Korea, China Middle Income Trap Internalizing parts and components Internationalizing skills and technology Initial FDI absorption Pre - industrialisation Internationalizing innovation

14. 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 New realities of globalizationinnovation .

15. Trade in intermediate goods 1992-2011

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

17. Multiple traps facing Europe and Central Asia Modern market economy (non-state-owned enterprises) Slower economic growth Economic development (industrialization) Transition to a market economy Middle-income trap Transition trap Stagnating growth Slow structural transformation Lack of innovation Weak institutions Ageing population and shrinking labourforce Loss of competitiveness Slow transition to market economy Poor market regulations Political reforms and democratization before economic and educational reforms Sustainable development issues Planned economy (state-owned enterprises)

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

19. Slower economic growth GDP growth (current US$) Source: World Bank

20. Sustainable development challenges(details are in Annex) Social Environmental Economic Rising poverty: almost 30% of the people are living in poverty Still one of the most energy intensive region in the world, but with progress in energy efficiency Shallow regional integration processes in EECCA countries Industrial diversification based on high value added goods still elusive development goal Tertiarisation since 1970 Renewables represent smaller shares in total energy generation, but have demonstrated growth Rising inequality Deterioration of competiveness in NMS and marginal improvements in other countries 35% of population is excluded from the formal economy Material efficiency rising but still significantly below the EU-15 average Little investment in innovation and technological development Youth unemployment rates vary from 10 to 35% Waste and water quality issues Industrial modernization too slow Gender inequality (index) Western Europe 0.13 Eastern Europe: 0.21 Eco innovation capabilities low: Import dependency of environmental goods Business environment conditions in some countries need significant improvements

21. 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$.

22. Structural transformation- Increasing urbanization in MICs Growing urban populations

23. Patterns of export specializationFormany countries in the region, the share of competitive high value-added manufacturing sectors in manufacturing exports remain low NMS SEE EECCA Source: UNIDO; Share in % of medium and high technologies in exports

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

25. Share in world manufactured intermediate goods exports and importsThe 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 Exports 100 100 90 90 80 80 70 70 60 60 % 50 % 50 40 40 30 30 20 20 10 10 0 0 1988 1994 2000 2010 2010 1988 1994 2000 Industrialized countries Developing countries CIS

26. Europe and NIS Region Global Innovation Index rankings (INSEAD)

27. 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

28. Economic - World Bank Doing Business 2010/2013 rankings • 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

29. Social - % population aged 65 and aboveMany MICs in the region have rapidly ageing populations Source: Word Bank

30. Social - % population below the poverty line in MICs

31. Social - Youth unemployment, % of labour force ages 15-24 Source: World Bank 2012

32. Income inequality: distribution of income by quintile

33. Environment - CO2 emissions (metric tons per capita) Source: Word Bank

34. Material productivity –rising material and energy efficiency, but not enough to close gap with EU 15 Source: UNIDO and SERI

35. Source: UNECE 2011 ‘Green economy’ patents filed under Patent Cooperation Treaty, 1992-2010, annual average per technology type.

36. Imports of environmental goods

37. IV. Post 2015 agenda

38. Post 2015 agenda Energy efficiency Renewable energy Material efficiency Energy and Water access Eco-innovation Leveraging globalization and deep regional integration Industrial diversification /modernization Competitiveness Innovation Global/regional governance Addressing public goods/bads Poverty reduction Equality Social and economic inclusion Job creation

39. V. MICs development priorities and UNIDO role

40. Development priorities of MICs and LICs, by sub-region Central & Eastern Europe – EU member states South Eastern Europe – non-EU member states

41. MICs are recipients and donors of development assistance Matching donor and recipient needs: UNIDO solutions Donor country priorities (including MICs donors) International financial institutions priorities Regional Communities priorities Multilateral funds requirements Recipient country development priorities (UNDAF-14 / DAO-4), MICs and LICs UNIDO solutions tailored to the country and sub- regional context and priorities ( HIC, MIC and LIC) UNIDO Thematic Priorities Poverty Reduction Trade Capacity-building Energy & Environment

42. UNIDO TC response SME Development Women &Youth entrepreneurship Industrial upgrading and modernization Agribusiness strengthening and upgrading Innovation and technology promotion Industrial Energy Efficiency Green industry and green jobs Water and waste management Cleaner Production Trade capacity-building Skills development UNIDO response Normative and standard setting Analysis & Policy Advice Knowledge dissemination and networking Global challenges Transition and post transition economy challenges Regional challenges Middle income trap 42

43. UNIDO solutions for inclusive growth • Securing jobs for marginalized and vulnerable groups The empowerment of poor and vulnerable in rural areas SME development and women entrepreneurship Youth employment

44. Addressing challenges and UNIDO solutions: • Securing jobs through industrial diversification and upgrading Automotive industry supply chain upgrading Industrial modernization Agribusiness upgrading Trade capacity building

45. Achieving sustainable production and consumption using smart business models Greening of industry under the Montreal Protocol Greening of industry and green industry Eco industrial parks Waste and water management

46. 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 Industrial energy efficiency

47. Ensuring commitment to sustainable development through partnershipwith private sector • 1. UNIDO and METRO Group agreement • Joint commitment to more efficient supply • chains and better food supplies • Countries: Egypt, India and in Russian Federation; Planned: Armenia, China, Indonesia, Kazakhstan, Pakistan, Turkey and Viet Nam 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.

48. 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

49. Thank you for your attention! o.memedovic@unido.org