Bulgaria Classified as a High-Income Country by the World Bank
Earlier this week, it was announced that the World Bank now classifies Bulgaria as a high-income country. This news is an important reflection of the long-term growth trajectory and the process of catching up with developed countries, especially those in the European Union. However, this does not mean that Bulgaria has a guaranteed place among the wealthy nations, nor does it mean that the country does not have significant challenges to address.
Since 1987, when the World Bank introduced this classification, there have been numerous examples of countries that have risen to this status, only to later encounter difficulties and regress. This classification serves as a reminder that while progress has been made, there is still work to be done in addressing various issues and ensuring sustainable growth in Bulgaria.
Understanding a Country’s Economic Classification
There are various factors that contribute to a country being classified into a lower category, whether it is due to a decrease in national income or an increase in the criteria for a certain category. While the achievement may be somewhat symbolic, it is still important from a historical perspective. This article is dedicated to explaining in more detail how a country is defined as rich or not, what is Bulgaria’s history with this classification, and how we compare to similar countries.
The World Bank uses the indicator of Gross National Income per capita to classify countries into different categories. This indicator is essential in determining the economic status of a country and plays a significant role in international comparisons.
Income Categories and Thresholds
Income categories are defined by the World Bank based on the gross national income (GNI) per capita of each country. As of 2023, the thresholds for income categories are as follows: countries with a GNI per capita above $14,005 are classified as high income, those with a GNI per capita above $4,516 are classified as upper middle income, those with a GNI per capita above $1,146 are classified as lower middle income, and the rest are classified as low income.
These thresholds are updated annually to account for global price changes, making the criteria for whether a country is considered wealthy or not dynamic. In 1989, when Bulgaria was first classified, the thresholds were different, reflecting the ongoing changes in the global economy.
The Economic Development of Bulgaria
Bulgaria’s income levels are considered to be moderate to high, but they are close to the minimum for this category. However, back in 1990, Bulgaria found itself among the countries with medium to low incomes and in the following years, it moved away from the minimum threshold for medium to high incomes. Gross national income per capita began to grow steadily towards the end of the 1990s, and in 2004 it crossed the threshold between medium-low and medium-high incomes.
Since then, Bulgaria has consistently been approaching the next threshold, although the catching up process was interrupted in the period 2012-201.
The Fastest Growth in GDP per Capita
Since 2020, there has been a significant increase in GDP per capita in the country, attributed to a strong recovery after the pandemic and updated population estimates. This growth is projected to push the country into the high-income category by 2023.
Understanding the World Bank’s Methodology
It is important to understand the methodology used by the World Bank for classification. As mentioned, the indicator used is Gross National Income (GNI), which measures the value added by all citizens of the country, including transfers to local citizens from abroad.
The Difference Between Gross Domestic Product (GDP) and Gross National Income (GNI)
Gross National Income (GNI) is a measurement that takes into account the total income earned by the citizens of a country, whether from wages or property. It is similar to the more popular Gross Domestic Product (GDP), which measures the value of production within a country over a period of time. However, the key difference is that GNI includes the income of a country’s citizens generated in other economies, while excluding the income of foreigners generated in the local economy.
In simpler terms, GDP focuses on what is produced within the territorial boundaries of a country, while GNI focuses on what is produced by its citizens. This is why GNI is a preferred indicator by the World Bank when classifying economies.
Income Classification by the World Bank
The World Bank classifies countries based on their income levels. To do this, they use a method called the Atlas method, which converts a country’s Gross National Income (GNI) into their national currency and then into US dollars. This method is unique in that it does not simply rely on the current exchange rate between the dollar and the specific currency, but instead divides the national GNI in local currency by the so-called Atlas coefficient, which averages the annual exchange rates (the value of one dollar in local currency) for the past three years.
Furthermore, before averaging, exchange rates for the previous years are adjusted for inflation to ensure accuracy in the classification process. This method allows for a more comprehensive and stable representation of a country’s income level, taking into account fluctuations in exchange rates over time.
Understanding International Inflation Rates
When looking at economic indicators, it’s important to consider how inflation impacts different countries around the world. Inflation rates can vary significantly from one country to another, affecting everything from exchange rates to income thresholds.
One method used to account for these differences is to adjust previous year’s data by the annual inflation rate in a given country. This adjusted data is then divided by the International Monetary Fund’s coefficient for international inflation. This same coefficient is also used to update income thresholds for different income categories in countries.
The idea behind using the coefficient instead of the standard currency exchange rate is to filter out short-term movements of national currencies against the dollar caused by inflation dynamics in different countries. By doing so, economists can get a clearer picture of how inflation impacts global economic trends.
Europe’s Economic Growth in 2023
In 2023, the average income per person in the EU has reached $14,460, surpassing the threshold between middle-high and high incomes. According to the World Bank, all countries in the EU now fall into the category of the rich. In fact, most European countries are part of this club, except for the Western Balkans (North Macedonia, Albania, Kosovo, Serbia, Montenegro, and Bosnia and Herzegovina), as well as a few countries in Eastern Europe – Belarus, Moldova, and Ukraine.
Despite the war, the other two countries in Europe that are moving into a higher category in 2023 are Russia and Ukraine. Ukraine is entering this category for the first time.
Russia’s Economic Growth and Income Levels
In 2023, Russia has seen a significant increase in income levels, pushing it into the category of countries with medium to high income. This growth can be attributed to strong increases in investments and construction as part of efforts to recover from the war, as well as a decrease in population due to high mortality rates from the conflict.
Russia has re-entered the high-income category (having been in this group from 2012-2014) with accelerated growth driven by military investments and trade recovery. It is important to analyze the factors contributing to this economic growth and income level increase in Russia.
Income Disparities in Eastern Europe
Eastern European countries such as Bulgaria and Romania have undergone significant economic transitions since the 1990s. Both countries were close to the threshold of the “high income” category in 1997, with just over $8000 per capita income. By 2007, they had been narrowing the gap at a similar pace, but Romania started to catch up much faster. In 2019, Romania managed to surpass the income threshold, while both countries experienced a setback in 2020.
This trend highlights the dynamic nature of economic development in Eastern Europe, with some countries making faster progress towards higher income levels. It also underscores the importance of continuous monitoring and analysis of economic indicators to understand the factors driving these disparities.
The Economic Development of Eastern European Countries
Eastern European countries have shown a remarkable economic development in the past few decades. While some of these countries, like Bulgaria, have faced challenges in catching up with the high-income threshold, others, such as Croatia, have managed to accelerate their growth and reach the top income group.
For example, in 1997, Croatia’s income per capita was only about $4000, which was twice as high as Bulgaria’s. However, in the early 2000s, Croatia experienced a rapid growth and by 2006, it had entered the highest income group. In the following years, Croatia continued to distance itself from the threshold, reaching almost $6700 per capita by 2023.
This economic success story highlights the potential for growth and development in Eastern European countries, even for those starting from a lower base. With the right policies and strategies in place, these countries can achieve significant progress and improve the living standards of their citizens.
Dynamic Economies in Eastern Europe
Eastern Europe has seen significant economic growth and development in recent years, with countries like Poland and Lithuania experiencing impressive progress. In Poland, the economy has steadily grown since 1997, surpassing the average income threshold in 2008 and reaching around $5700 per capita by 2023.
However, Lithuania stands out as a prime example of exceptional economic performance. In 1997, Lithuania was lagging behind, with an income level of around $7000 below the threshold. Yet, in the following years, the country’s GDP per capita grew rapidly and steadily, enabling Lithuania to enter the high-income category as early as 2008.
Although there was a period of stagnation for 1-2 years, Lithuania quickly resumed its rapid growth trajectory and by 2023, the country had established itself as a dynamic and prosperous economy in Eastern Europe.
Bulgaria’s Economic Growth and Income Status
Bulgaria has made significant progress in increasing its gross national income per capita, being recognized as a high-income country by the World Bank. This achievement is commendable and reflects the country’s efforts towards economic growth. However, this does not mean that Bulgaria’s work is done. The country must continue to build on this success and move sustainably beyond the high-income threshold. Failure to do so risks losing the newly acquired status, especially given the competitive global economic landscape.
It is important for Bulgaria to focus on long-term economic development strategies that promote innovation, investment, and productivity. By diversifying its economy and investing in education and skills development, Bulgaria can ensure continued growth and prosperity for its citizens. Additionally, fostering a business-friendly environment and promoting entrepreneurship will help attract foreign investment and create new opportunities for economic advancement.
Overall, Bulgaria’s progress in increasing its income status is a positive step towards economic stability and prosperity. However, continued efforts and strategic planning are necessary to solidify this achievement and ensure sustained growth in the future.
The Challenges of Economic Growth in Bulgaria
As time passes, the criteria for economic growth in Bulgaria also increase. It is interesting to see if Bulgaria will be able to continue its good performance, considering the risks to growth posed by political instability, relatively low levels of investment, and issues in the field of education.
Source: Institute for Market Economics
