Earlier this month, it became clear that the World Bank has classified Bulgaria as a high-income country. This news is an important reflection of the long-term growth trajectory and catching-up process of the developed countries, particularly those in the European Union. Still, it is far from meaning that Bulgaria already has a guaranteed spot in the rich countries club and does not have any difficult problems to solve.
Since 1987 when the World Bank introduced its classification, numerous examples of countries have moved up and fallen into a lower category, either because their national income has fallen or because the criteria for a given category has risen. While the achievement is somewhat symbolic, it is still important from a historical perspective, which is why we devote this article to explaining it in more detail. How is a country defined as rich or not? What is Bulgaria’s history with this classification? How does it perform in comparison with countries similar to Bulgaria?
The World Bank uses the gross national income (GNI) per capita as an indicator to classify countries into four categories – low-income, middle-low income, middle-high income, and high-income. The thresholds for the categories by 2023 are: countries with an annual GNI per capita above 14,005 USD are high-income, those with a GNI per capita above 4,516 USD are middle-high-income, those with above 1,146 USD are middle-low-income, and the rest are low-income. These are updated each year based on global price growth, which means that the criteria for whether a country is rich or not are floating.
In 1989, when Bulgaria was first included in the classification, its income was defined as middle-high but was close to the minimum for the category. As early as 1990, however, Bulgaria found itself among the middle-low-income countries and in the following years moved away from the minimum threshold for middle-high income. Gross national income per capita started to rise steadily towards the end of the 1990s and in 2004 crossed the border between lower-middle and upper-middle income.
Since then, Bulgaria has been moving relatively steadily towards the next threshold, although the catching-up was interrupted in the period 2012-2017. The fastest growth in GNI per person has been observed since 2020 (a combination of strong post-pandemic recovery and updated population estimates), which led to the crossing of the high-income threshold in 2023.
Nevertheless, let us pay a little attention to the methodology followed by the World Bank in the classification. As mentioned, the indicator used is GNI, which measures the value added of all citizens of a country, including transfers to nationals from abroad (income from wages or property).
The indicator is similar to the more popular GDP, which measures the value of output within a country over a period of time, the difference being that GNI includes the income of nationals generated in another economy and excludes the income of foreigners generated in the domestic economy. Put another way, GDP focuses on what is produced within a country’s territorial boundaries, while GNI focuses on what is produced by its citizens, which is why it is the World Bank’s preferred indicator for classifying countries by income.
In its calculations, the World Bank uses the so-called Atlas method to convert a country’s GNI in its national currency into GNI in US dollars. What is specific about the method is that it does not simply use the current exchange rate between the dollar and the specific currency, but divides the national GNI in local currency by the so-called Atlas factor, which averages the annual average exchange rates (the value of one dollar in local currency) over the last three years.
Moreover, before averaging, the exchange rates for the previous year and the year before are multiplied by the annual inflation rate in the country and divided by the International Monetary Fund’s international inflation factor[1]. Incidentally, the same global inflation indicator is also used in updating the thresholds for different income categories of countries. The idea behind using the Atlas coefficient instead of the standard exchange rate is to filter out short-term movements of national currencies against the dollar caused by inflation dynamics in different countries.
In 2023, the GNI per person in Bulgaria reached 14,460 USD and crossed the border between the middle and high incomes, finally, according to the World Bank, all EU countries got in the club of the rich. In fact, most countries in Europe are in it, except for the Western Balkans (North Macedonia, Albania, Kosovo, Serbia, Montenegro and Bosnia and Herzegovina) and a few in Eastern Europe – Belarus, Moldova and Ukraine.
Despite the war, the other two countries in Europe that jumped up a category in 2023 were Russia and Ukraine. Ukraine entered the group of upper-middle-income countries for the first time thanks to its strong growth in per capita income in 2023. This is partly a consequence of large increases in investment and construction alongside efforts to recover from the war, as well as a decline in population due to high mortality from the conflict. Russia has seen a re-entry into the high-income category (it was previously in the group between 2012 and 2014), with accelerated growth there resulting from military investment and trade recovery.
Furthermore, it is significant to look at how Bulgaria is performing in the process of catching up with the high-income category against countries with a similar profile that underwent a transition to a market economy in the 1990s. For example, as of 1997, Bulgaria and Romania were roughly equidistant from the threshold – just over 8,000 USD per person below the lower bound of the “high income” category. Until about 2007, the two countries shortened the distance at a similar pace, but Romania then approached the threshold much faster and managed to jump it in 2019, then fell almost to the limit in 2020, but recovered the rapid upward trend thereafter.
Some countries similar to Bulgaria are starting their catch-up from a much better base. For example, in 1997, Croatia was only about 4,000 USD per person away from the high-income threshold, twice as close as Bulgaria. After staying roughly at this distance for several years, it accelerated its growth at the beginning of the new decade and fell into the top income group in 2006. Subsequently, it moves further away from the threshold in the following years, and by 2023 it is almost 6,700 USD away.
The dynamics are similar in Poland, which, however, is further from the threshold in 1997 and manages to cross it in 2008, being around 5,700 USD by 2023. An example of an exceptionally good performance in this direction, however, is Lithuania. In 1997, it was about 7,000 USD below the threshold, and in the following years, its GNI per person grew steadily and very rapidly, giving the country access to the high-income category as early as 2008. There were 1-2 years of stagnation, but then rapid growth resumed, and by 2023 the country was already comfortably above the lower bound with a gap of almost 11,000 USD.
Bulgaria’s achievement in the growth of gross national income per capita is commendable and the recognition of this country as a high-income country by the World Bank can be seen as a kind of recognition of our growth path. However, this does not mean that its work is done. Bulgaria needs to consolidate this result and move steadily upwards away from the high-income frontier. Otherwise, it risks losing its newly acquired status, especially given that the benchmark is also growing over time. It will be interesting to see whether Bulgaria can continue its good performance, given the risks to growth posed by political instability, relatively low levels of investment, and problems in education.
[1] This is the so-called Special Drawing Rights (SDR) deflator, which equals the weighted average of the GDP deflators of the US, China, Japan, the euro area, and the UK. In fact, the SDR represents a basket of different currencies and appears as the currency unit for international reserves. The weight of the aforementioned economies in the deflator calculation is equal to the weight of their currencies in the basket. More detailed information can be found here.
Written by Teodor Nedev
