The Competitive Edge in Central and Eastern Europe

.

Ciprian Dascalu

About Ciprian Dascalu

Ciprian Dascalu is Chief Economist at ING Bank in Romania. He graduated with an Msc from the Doctoral School of Finance and Banking - European Centre of Excellence, Bucharest University of Economic Studies. He started his career in 2003 with National Bank of Romania as an economist within the Monetary Policy Department and joined ING first time in 2006 as a senior economist. He left briefly for two years for a career as a trader at Millennium Bank, followed by a one year as financial markets business manager with Unicredit, before returning to ING in February 2015 as Chief Economist.

Joining the EU has unlocked robust GDP growth and continues to aggregate positive energy in the Central and Eastern European (CEE) countries. Adhering to the common market has brought a surge in trade, positive institutional changes and improvements in the business environment. However for many countries, it has also led to a migration of the labour force, which could affect long-term economic growth prospects.

The CEE region has attracted international players who are looking to expand their business to new EU members. The region has also appeared on the radar as an outsourcing destination that has a number of advantages: lower labour costs, an available and skilled labour force and a friendly corporate tax regime, but the story is far from homogenous. Some of the disparities within the CEE date back to the communist regime and its relative rigidity, but most have to do with the speed of reform and structural changes during the post-communism period.

There are significant gaps between the first group of states that joined the EU extension to the east and the late comers. Coming from very low productivity levels, all the countries benefited from external capital inflows leading to productivity gains that significantly outpaced the EU average, with Romania displaying the strongest performance amid the low statistical base. Most countries have seen an improvement in their World Economic Forum competitiveness index over the last ten years, but overall momentum is showing signs of fatigue and some countries are even witnessing an erosion of their competitive edge.

Labour costs are still competitive, relative to the EU, with the lowest being observed in Bulgaria (13.9 per cent of Eurozone average for business economy in 2015) and the highest in the Czech Republic (33.6 per cent of average). At the same time, although wages are growing quickly, government policies are raising minimum wages faster than average and labour productivity. While minimum wages remain about one third, relative to the Eurozone, the ratio between the minimum and average wages is relatively in-line with Western Europe. This is because politicians want to appeal to voters without a direct fiscal impact.

These wage pressures are coming on top of labour market tightening, with surveys showing that the manufacturing sector is seeing labour shortages as an increasingly important factor for limiting growth (at eye catching levels in Hungary). While such policies usually affect the lower skilled and younger workers, the CEE competitive edge is not only about a cheap labour supply.

Increasing labour costs, which are not always correlated with productivity gains, risk provoking job losses in these still labour-intensive economies. With the exception of the Czech Republic, a larger percentage of jobs in the CEE countries are threatened by technological advances, relative to the EU average. Some countries have put more effort into the education system, spending above the EU’s average on budget resources (notably Poland).

However, others are continuously underfunding education (3.1 per cent of GDP state funds are allocated for education in Romania vs the 4.9 per cent EU average). Functional illiteracy is high among students in CEE, with Poland being the notable exception, mainly because their reforms began over a decade ago and are bearing fruit. Once again, in terms of the number of employees with a tertiary education, Poland stands out positively, while Romania stands out also, but for negative reasons. This is mainly related to the countries resolve in implementing reforms, but there is also limited social inclusion for some social categories, especially in Romania and Bulgaria. This is very important because a person with a tertiary education is more likely to be employed and is generally more productive.

Alarmingly, many in the so-called ‘Y generation’ are shunning both education and the labour market. Bringing them back into work is vital, as the ageing population poses one of the biggest dangers for Europe. This is of even higher importance for CEE countries, which have experienced lower fertility rates and are less attractive to migrants than Western EU countries, leading to the risk of a dwindling workforce in the decades to come.

EU funds play an important role, allowing CEE countries to reduce regional discrepancies, improve infrastructure and tackle labour market frictions. In absolute terms, Poland receives the most of the EU funds that are CEE-directed, followed by Romania. But as a ratio to GDP, EU funds matter more for Bulgaria and Croatia than CE4 (on average).

Currency strength can also be a factor and different exchange rate measures which have been deflated by prices, unit labour costs, manufacturing labour costs and export prices, show that currencies are, generally speaking, fairly valued when compared to each other, with the exception of the Bulgarian currency (pegged to EUR) which seems to be at a disadvantage.

Corporate tax is also attractive in the CEE, relative to the Western Eurozone, but labour taxation is not as friendly. The infrastructure is generally behind Western standards and in some cases it represents an important disadvantage (notably Romania). At the same time, the institutional framework is mainly discouraging. CEE countries each have different selling points when it comes to business. Some shine (and outshine) in education (Poland), while others still offer very attractive labour costs (Bulgaria and Romania). Moreover, sectorial and geographically targeted state incentives could make the difference when choosing a location.

In the medium-term, growth is likely to continue to outpace growth in the Eurozone, but there are risks on the horizon. Populism, which seems contagious, and policy uncertainty reign supreme in the CEE. The idea of a two-speed Europe is not looking good for the CEE space with the approach varying from one country to another, and at a time when geopolitical challenges need close monitoring.

_______________

The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.

RELATED ARTICLES

Central and Eastern European Consumers Are Joining the Global Trends for Change

Adam Smith’s Warning for Poland

Juncker’s “More, Together” Offers Romania a Better Future

aspen institute romania emerging europe

Nurturing a Needed Knowledge and Innovation Culture

It cluster cluj

Office Real-Estate Is Burgeoning in Romania

romania office space emerging europe

Fiscal Policy Predictability in CEE — It’s Time for Change

Poland’s Drift Away From Democracy

Europe at Odds over OPAL and Nord Stream 2

United or Divided? Europe in the Face of the Challenges of Tomorrow

Falling into Old Ways in 2017? Ukraine’s Struggle for Functioning Economic Institutions

Changing Perspectives and Showing That True Romania is a Vibrant Innovative Country

Romania’s Government Plans to Grow the Country’s Already High ICT Reputation

romania ICT emerging europe

Moldova Falls Victim to Politicising

moldova emerging europe

Romania in 2017 in Brief

romania emerging europe

Big Fish, Small Fish, Where to Fish? On the Eve of the Fourth Industrial Revolution

People Power Reminds the Government of the Rule of Law

International Women’s Day — Let’s Take Action And Then Celebrate

Romanian Wine: A Growing Opportunity

halewood wine

We, the Post-Communist Generation, Have the Skills to Rid of the Past And Create Our Own Future

Finalising the DCFTA is Expected to Bring Multiple Benefits to Ukraine

Outsourcing in Germany: Stop Talking at and Start Talking to

The Bucharest Stock Exchange Has Started the Year on a Promising Note

stock exchange bucharest

Poland’s Confusing GDP Growth

The CEE Region Is Making Advances in Prioritising Waste-to-Energy Projects

The Global Outsourcing Industry — the Rise of the Phoenix

Princess Marina Sturdza: Things Are Bound to Improve for Romania

Central square in Iasi town Moldavia Romania

Bulgaria Needs a Reform-Oriented Government to Take Full Advantage of its EU Membership

bulgaria emerging europe

Nagorno-Karabakh Conflict Moves from Frozen to Kinetic

Nagorno-Karabakh

20 Years of Romanian-US Cooperation

usa romania emerging europe

EU-CEE Is Still Growing at a Healthy Rate

Prague emerging europe

Business Moving Forward with Cautious Optimism — Can Investors Win the Confidence Game?

How Will Trump’s Visit Affect Polish Politics?

Donald trump

LGBT in CEE — A New Acceptance Is Being Born From Migration

The EU’s Benign Neglect Of Eastern Europe

CEE-Benefits and Disadvantages of Joining the Eurozone

forint zloty euro

What Was First on the Romanian Table?

food romania dragut emerging europe

Azerbaijan: The Rich Get Richer and the Poor Get Nothing

Baku

2018 Elections — Vital Decisions for Hungary’s Future

Victor Orban energing europe

Poland: Is it Ready, and is it Time to Adopt the Euro?

Europe Needs To Be More Proactive In Embracing Armenia

Serbia’s New PM Is Cut From a Familiar Cloth

Serbian flag emerging europe

Examining How a Strong Swiss Franc Could Single-Handedly Topple Poland’s Economy

Surprising Resilience of Romanian Social-Democrats

BUCHAREST ROMANIA - June 21 2017: Liviu Dragnea President of Social Democrat Party speaks in front of Parliament during a no-confidence vote against Sorin Grindeanu's Cabinet.

Macedonia’s Controversial Coalition Government

SKOPJE MACEDONIA emerging europe

Ex-Transition Economies’ FDI Recovery

dollar euro fdi

Czech Republic Renaming Has Real Economic Costs

Breaking With Imitations of the Past

Not All Quiet on the Eastern Front

Romania Surviving the Waves of Recent Political Tsunamis in Europe

Merging and Growing Romania’s Outstanding Broadband and Other Infrastructures

electrogrup emerging europe

The Netherlands’ Objection to the Ukraine-EU Association Agreement could be Costly to Europe

A Bosnian Referendum Shows Russia’s Influence in the Balkans—As Well As Its Limits

Impact of Brexit on EU-CEE Not Overstated

theresa may brexit

Stuck in Neutral: Georgia’s Constitutional Reforms

Tbilisi Parliament Georgia

The GREAT London Food Scene

Bakery in London

The Long Tail of Global Expansion

Romgaz and GE Partner in a New Power Project

romania GE

Ukraine’s Reputation for Cheap Labour May Not Ring True in the Long-term

It’s Time for Romania to Roar

outsourcing romania emerging europe global sourcing association

Brexit: Let’s Learn the Lesson and Hope a Better Europe Will Arise

Risky (but Rewarding) Business

risky business

Poland’s Capital Saturation Lower Than the Czech Republic’s

deloitte fdi poland

Hungary and Israel: the Collision of Past and Present

Budapest synagoge

Seven Reasons for Optimism in Romania

gazelle emerging europe romania

Romanian IT Business Statistics Are Promising

ANIS romanian ICT

When Neutrality Isn’t an Option

President of the Russian Federation Vladimir Putin

Resignation in Ukraine: War, Revolution, Crisis — Some Things Never Change

Romania Could Catch Up in Innovation

innovation emerging europe

Could the West At Least Help Ukraine To Insure FDI Against Political Risks?

Romania Can Foster German Partnership

frankfurt emerging europe

Robust First-Quarter Growth in Romania

emerging europe romania brasov

Romania’s Infrastructure Development Is Slow

roads romania

Hungary’s Nationalist Assault on Free Enquiry

victor orban ceu

Building on CEE’s Established Reputation for Quality and Value

Romania’s 140 Years of UK Cooperation

Can Armenia Keep a Foot in Both Camps?

European union armenia russia emerging europe

European Volatility Makes Economic Development Slower for Ukraine

How strong is V4?

Viktor Orban

Let’s Stop Wasting Time Redefining our Place in Europe

Will a Two-speed European Union Side-line the Visegrad Four?

The Sharing Economy Could Bring New Business Models to CEE

Where’s My Cheese? – The GREAT British Food Tour 2014

Cheese Shop

A Positive and Modern View of Entrepreneurship

Romania’s Economic Outlook Is Bright

Different Romanian Lei Banknotes on the table

Global Expansion in the Digital Age

Romanian Wine Is Making a Comeback

Good Match But Unlikely Marriage

History as Destiny? Institutional Erosion in Ukraine and Poland

The Capital Markets Union: a New Beginning in the European Financial Sector?

Poland and Romania: Almost 100 Years of Friendship That Is Still Growing

warsaw poland emerging europe

Romania’s European Values Are Changing Public Misinformed Opinions

world bank emerging europe

Privatisation, Past and Present in Romania

energy privatisation romania emerging europe

Romanian Market Moving Towards Rebalancing

A Country of Beauty and Warmth That Will Reward Those Who Visit With an Open Mind

Cityscape Brasov

Poland Needs to Cling to the Eurozone

zloty euro emerging europe

Romanian Banks Must Use Lessons Learned

romania emerging europe banks

The EU’s Choice: Fundamental Reform Or Disintegration

Netherlands and Romania’s Love-Match Continues

romania netherlands emerging europe

Prepare for a New Europe

Old Fashioned Skulduggery Overshadows the Elections in Moldova

Measuring Growth of Societies with GDP Alone Shows an Incomplete Picture

Romania’s EU Membership Was Slow to Be Appreciated But Now the Tide Is Turning

Romanian Palace Of Parliament

The Voice of European Business Must Be Heard Loud and Clear by Brexit Negotiators

Romania’s Short-Term Prospects Remain Solid

romania economist

EU Visa-Liberalisation Strengthens Georgia’s Pro-Western Path

georgia emerging europe eu

Are Labour Shortages Driving Economic Growth?

Polish Tax Laws — Fighting a Winning Battle Against Tax Evaders

Romania Works to Cement its Position in the EU

european union

E-lifestyle and Cyber Security: Some Views From Estonia

Cyber Security Protection Firewall Interface Concept

Will the New Five-day Visa-free Regime Encourage More Visitors to Belarus?

How Will Poland Approach the Brexit Negotiations?

Romania Will Be a Hot Topic in Europe

Alexandru Petrescu: Romania Is Working to Solidify the Highest Growth Rate in Europe

BUCHAREST ROMANIA - MAY 1: Unidentified people relax and socialize in the green area of the Promenada Mall on May 1 2014 in Bucharest Romania. The mall has a gross floor area of approx. 110000 m.

China: A Giant That Is Hard to Crack

Romania To Stay Close After Brexit

Greg Hands

Can Romania’s success last longer?

brasov adecco emerging europe

Romania Needs to Follow its EU Membership With Some Sweeping Reforms to Avoid Stagnation

Bucharest Romania - March 07 2016: Bucharest Sky Tower Business Center. Bucharest urban landscape.

Romania Says No to Corruption

Corruption romania

Romania — Decades After Two Milestones

View of Palace of Parliament in Bucharest Romania

A Family Between Britain and Romania

london emerging europe

The Morawiecki Plan Promises a Brighter Future for Poland

Czech Own Currency Insures Against Euro Losses

Euro Czech republic emerging europe

A New Division Between Eastern And Western Europe?

Are There Differences Between How Tax Regulations in Poland and IAS Treat Intangible Assets?

The Goal for Romania — the Positives Outweigh the Negatives

ebrd emerging europe romania

After 25 Years of Restructuring, the Romanian Power Sector Is at a Crossroad

The Right to Water: Who Can Change Today’s Situation?

Poland’s Unicorn, Slovakia’s Flying Car and the Future of Europe

Driving the Romanian Automotive Industry

opel romania

CEE — Do We Need a Launch Pad For Our On-Site Tech Intelligence in the Silicon Valley

January Kicks Off an Exciting Year for Emerging Europe

Belarus 2020: Turning the Vicious Circle Into an Upward Spiral

Albania’s Election Apathy

tirana albania

Political In-fighting Must Be Resolved

Sorin Grindeanu

Romanian Upgrade to Emerging Market is on the Cards

Romania capital market

PiS Uses Media Control to Bring Poland to Heel

Jaroslaw kaczynski pis emerging europe

Leave a Reply

Your email address will not be published. Required fields are marked *