Upper-Middle Income Countries
The upper-middle income category includes several countries from Latin America and Eastern Europe, as well as a handful in Asia and Africa. It includes the Brazil-Russia-India-China-South Africa (BRICS) economies, with the exception of India. These are countries nearing advanced economy income levels, with considerable income at their disposal, yet which demonstrate varied levels of inclusiveness in their growth processes.
Argentina provides relatively good basic services such as healthcare and sanitation, although years of underinvestment have eroded the quality of its infrastructure. The education system gives access to much of the population, although its quality is in dire need of improvement and there are vast differences in performance among students from different socioeconomic backgrounds. Red tape hinders the creation of new companies, and combined with difficult access to finance and high levels of corruption, holds back the new business creation that Argentina needs to reduce unemployment, particularly among young workers. Despite relatively positive results in terms of taxation (total revenue and progressivity), there is a great deal of room for improvement in terms of exploiting market levers and minimizing distortions.
Brazil benefits from a high level of financial inclusion, ranking best in this area out of all countries in this income group, which has provided ample resources for business development. Registered unemployment is lower than in many other countries, although the informal sector remains significant, draining potential tax revenues. Brazil has made progress on the social protection front in recent years, in particular with cash transfer programs. Improving the quality of the education system is imperative to provide relevant skills and ensure greater equity of outcomes regardless of socioeconomic background, which is particularly critical given the country’s high wealth and income inequality. Corruption remains endemic and must be tackled in earnest to foster greater trust in the system and level the playing field. Finally, to grow more sustainably and inclusively, Brazil must do a better job of developing infrastructure and providing basic services such as healthcare.
Chile benefits from relatively good infrastructure and provision of basic services. Access to education has improved markedly over the years, although the focus must now turn to improving quality and equity across students of different income levels. Fostering entrepreneurship is another priority, along with increasing the participation of women in the labor force, which would bring much additional talent into the economy. This could be encouraged by more generous parental leave as well as narrowing the very large pay gap between men and women. A more progressive tax system and more comprehensive social safety net would also make economic outcomes more inclusive.
A number of key indicators for China are not available, particularly related to the equity of outcomes in the education system and questions of distribution more generally. Still, available indicators show that China benefits from high levels of competition and business creation, supported by financing from various sources. This dynamism has translated into strong employment outcomes, with a high labor force participation rate, and low unemployment. It will be important for China to continue to invest in its infrastructure and basic services (such as healthcare) to tackle corruption, and to extend the social safety net to more of the population (especially in rural areas) in order to improve median living standards. China under-utilizes the fiscal transfers lever, and despite impressive poverty reduction in recent years, still has 27.2% of its population living on less than $2 a day and only 21.9% living on $10-$50 dollars a day. The vast majority falls in the low income bracket, between $2 and $10 a day.
Costa Rica makes efficient use of its talent and high social mobility. It has developed a relatively high-quality and accessible healthcare system and has limited the extent of urban slums, ensuring relatively good public health outcomes through improved sanitation and clean drinking water, although transportation infrastructure requires further improvement. To ensure more inclusive growth, a major priority must be boosting human capital: although education on average is of relatively good quality, wide equity gaps persist among students from different income groups. Costa Rica would also benefit from more developed financial markets and better access to capital for business development.
Malaysia has a number of strengths relative to its income group and takes advantage of a wide range of policy levers (both pre- and post-transfer). It ranks highest out of all upper-middle income countries in the corruption and rents pillar, with comparatively low levels of corruption and strong business and political ethics. Its markets are characterized by high levels of competition rather than coddled incumbents. The country has also developed quality infrastructure and basic services, including healthcare that meets advanced economy standards. Malaysian businesses have access to significant financial resources through channels including banks and equity markets, and the culture is relatively entrepreneurial. To further boost inclusive growth, Malaysia must improve the access, quality, and equity of its educational system, and reexamine its social safety net, which remains somewhat limited as evident in the relatively high level of inequality after taxes and transfers.
Mexico faces a number of challenges in securing an inclusive growth process. On a positive note, unemployment is relatively low, although it is much higher among young people, while labor force participation is low particularly for women. As a result, there is a large informal sector, which deprives workers of the security of formal employment and reduces the tax revenues needed to provide basic services. Income going to labor is relatively low and has declined significantly over the last decade despite modest productivity gains. Improving the education system, including vocational and on-the-job training, will be key to providing the economy with the highly skilled workers it needs to grow sustainably and equitably. Mexico must also tackle corruption and address the problem of market dominance by a few large firms in some industries, which stifles competition and innovation.
Poland tops the education and skills pillar among this group, attributable to its comparatively high quality of education and training, and the relative equity in outcomes among students from different income groups. Businesses have reasonable access to finance for developing their activities, and the market is characterized by reasonably high competition, avoiding excessive market dominance by individual firms. In addition, the country benefits from a social safety net that is significant for its income level. The country managed to bring its level of inequality as measured by the Gini coefficient down by over 10 points from 41.19 to 29.26 between 2001 and 2011 (ranking fifth overall). However, Poland should revisit its tax system, which is regressive and distorts decisions to work or invest. This would raise funds to build transport infrastructure and basic services, which remain underdeveloped by European standards.
The Russian Federation benefits greatly from its education system, which is universal and ensures relatively equitable outcomes regardless of income group, although its quality requires improvement. The country also benefits from good employment outcomes compared with its peers, particularly the relatively low registered unemployment rate, although official labor force participation remains somewhat low and the informal economy large. To improve Russia’s ability to deliver more inclusive growth, it will be critical to tackle wealth inequality, corruption, and undue influence, and to build a tax system that is much more progressive and able to provide the revenues needed for delivering critical basic services to a large and rapidly growing middle class.
South Africa has strengths in more complex areas, but weaknesses in the provision of basic services. Despite some gains in poverty reduction in recent years, the country has the highest level of inequality among upper-middle income countries before and after taxes and transfers. Relatively strong entrepreneurial activity is supported by a highly developed financial system which allocates ample resources to business development. On the other hand, the education system is not producing the talent needed for operating in a sophisticated economy, with low levels of vocational and tertiary enrollment relative to upper-middle income countries. Unsurprisingly, unemployment is high, particularly among the youth. Corruption also remains a significant concern, diverting much-needed financing from the provision of basic services like health and education.
Turkey benefits from relatively high competition among companies, ensuring that large individual firms do not dominate the economy and stifle activity. It also has a relatively sophisticated financial sector, which adds to this business dynamism by providing investment. On the other hand, the education system must be improved to make outcomes more equitable regardless of income and provide the skills necessary to reduce the relatively high unemployment rate, particularly among the young. Greater female participation in the workforce would usher in further talent and creativity, which could be encouraged by reducing the very wide pay gap between men and women, and would further expand the already growing middle class.
Venezuela’s government, having had several years of windfall oil revenues to draw on, has articulated the goal of improving conditions among the poorest members of society. However, the results of this framework demonstrate that the country fares poorly across most measures of inclusive growth and is failing to take advantage of policy space. The education system does not yet ensure universal access even at the primary level, and overall education quality is among the poorest of all countries in this income group. The country suffers from underdeveloped infrastructure and struggles to provide even basic services. There is little capital available for business investment, and red tape hinders the creation of new businesses and jobs. Unemployment remains high, particularly among the young, who are driven into the precarious informal sector. No less than 12.9% of the population still lives on under $2 a day and median living standards have stagnated over the last several years (at around $9 a day).