The productivity gap that Central Europe can no longer ignore.
For three decades, Central and Eastern Europe had a growth model that worked. Low(er) labour costs, proximity to Western markets, and a steady flow of EU structural funds drew foreign factories and investment. Incomes rose. Unemployment fell. Convergence with Western European living standards, once a distant aspiration, began to look achievable within a generation.
That model is now running out of road.
A new report from the World Bank Group, published on March 12, puts numbers to what many economists have been muttering for years. Bulgaria, Croatia, Poland, and Romania could raise labour productivity by up to 15 per cent through wider adoption of digital technologies, particularly software and AI-enabled tools. With EU GDP growth running at barely one percent a year, gains of that scale would be transformative. The gap between what the region is achieving and what it could achieve, the report implies, is largely a matter of choices not yet made.
The diagnosis is uncomfortable. Research and development spending across the four countries sits below 1.5 per cent of GDP, against an EU average of 2.2 per cent. Romania and Bulgaria have barely managed 0.8 per cent since 2016. Firms invest less in the intangible assets (software, data, management systems) that increasingly drive productivity in modern economies. In Poland, the most advanced of the four, only 26 per cent of corporate investment goes to intangibles, versus 37 per cent across the EU. Smaller firms in Bulgaria and Romania lag furthest behind on digital adoption, and those are precisely the firms that dominate both economies.
“Central and Eastern Europe has made impressive progress over the past two decades, bringing incomes closer to EU levels and expanding opportunity for millions of people,” said Anna Akhalkatsi, division director for the European Union at the World Bank Group. “Sustaining that progress will depend on raising productivity—through wider use of digital technologies, stronger investment in skills, and clear, predictable rules that help businesses innovate, grow, and compete. This is how economies create more and better jobs while building resilience for the future.”
The report, titled Innovation Rising: Lifting Central and Eastern Europe’s Jobs and Growth Potential, frames the challenge as structural rather than cyclical. Working-age populations are shrinking—Bulgaria faces a projected 35 per cent decline by 2050, Poland 30 per cent. With labour supply contracting and wages in the region rising towards Western European levels, the old competitive advantages are eroding. Sustaining convergence now means moving up the value chain: higher-value goods, more sophisticated services, firms that compete on what they know rather than what they cost.
None of that happens without investment in innovation, and investment in innovation requires capital markets, institutions, and policy frameworks that CEE governments have been slow to build. The World Bank’s analysis suggests that simply closing the digital gap with the EU average could lift productivity by six to eight per cent. Going further, and actually embedding digital tools deeply into how firms operate, could deliver 10–15 per cent. The arithmetic is straightforward. The execution, as the region’s policymakers are well aware, is rather less so.
Photo: Dreamstime.