A new World Bank report reveals that Eastern Europe and Central Asia is trading 45 per cent below potential.
The reshoring bonanza was supposed to be Central and Eastern Europe’s moment. Western multinationals, spooked by Chinese supply chains and Ukrainian grain corridors, have spent three years talking up ‘friend-shoring’ and ‘near-shoring’ as if discovering that Georgia sits closer to Stuttgart than Shenzhen was a revelation worthy of a strategy presentation. Meanwhile, the World Bank has done what it does best: assembled 40 million data points to explain why the region that should be printing money is instead running a productivity crisis so severe that its GDP could be 62 per cent higher if it simply matched its own pre-2008 performance.
The diagnosis, delivered in a report with the forced acronym TIDES of Change: Igniting Productivity Growth in Europe and Central Asia, reads like an economics seminar crossed with a self-help manual. Trade, Investment, Digitalisation, Efficiency, Skills—the five pillars that apparently stand between the region and prosperity. Yet the truly remarkable finding isn’t what Europe and Central Asia needs to do. It’s what they’re determinedly not doing, despite the evidence being rather less subtle than a Warsaw crane skyline.
The 45 per cent
Here’s the counter-intuitive bit: ECA countries trade 45 per cent less than they could, according to the Bank’s modelling. Not five per cent. Not 15 per cent. Nearly half. Imagine a factory running at 55 per cent capacity whilst orders pile up at reception. Now imagine that factory spanning 16 countries and multiple time zones, with every government insisting they’re ‘investment-ready’ whilst systematically preventing their firms from actually trading at potential.
The report’s authors, wielding firm-level data from national statistical offices and tax authorities across 16 countries between 2008 and 2023, have essentially caught the region with its productivity trousers around its ankles. The growth slowdown after the global financial crisis—which most European officials still blame on external shocks—was “almost entirely driven by a slowdown in productivity”. Not demographics. Not the euro crisis. Not even Russian gas. Just the boring business of making better use of what you’ve got.
“When competition is robust, when firms can access technology and finance, when trade and investment is open, and when workers have the skills to adopt technologies and adapt, productivity rises,” notes Asad Alam, Regional Director for Europe and Central Asia, Prosperity at the World Bank. “Firms grow, employ more people, and show greater business dynamism. This propels the growth of incomes and the success of countries.”
The two-speed treadmill
The report’s most uncomfortable revelation is that ECA economies are bifurcating into parallel universes. Exporters—that small, productive minority plugged into global value chains—are sprinting ahead. They “disproportionally contribute to jobs, investments, and value added in most ECA countries”, making up a tiny fraction of firms but generating outsized returns. Everyone else is jogging in place, or perhaps walking backwards whilst insisting they’re pioneering a new fitness regime.
This isn’t the knowledge economy versus the old economy. It’s the globally integrated versus the domestically protected. And guess which one governments find easier to tax, regulate, and stuff with cousins who need jobs?
A 10 per cent increase in productivity would add close to two million jobs, the report calculates. If productivity growth had merely matched its pre-2008 pace—not exceeded it, not even done particularly well, just maintained the previous mediocre standard—the region’s GDP could be 62 per cent higher.
The nearshoring trap
Here’s where it gets interesting. The report notes that multinational firms are indeed shifting toward “closer-to-home and more resilient value chains”—the corporate euphemism for no longer trusting China and realising that “just-in-time” works less well when pandemics keep interrupting. This should be ECA’s moment. Western firms want to be close to European markets. The region offers educated labour at lower costs. Transport links improve daily.
Yet “exploiting that opportunity will require business environment reforms and strengthening capabilities of domestic firms so they can better engage with these highly productive multinational firms”. Translation: you’re standing at the station whilst the nearshoring train pulls in, but you’ve forgotten to build the platform.
The cruel irony is that the region’s exporters—those productive few—are already positioned perfectly. They know how to work with multinationals, navigate regulations, and meet quality standards. They’re the ones who could absorb and amplify the nearshoring wave. But they’re a minority, operating in economies where the majority of firms remain trapped behind walls of inefficiency, protected by governments who mistake preservation for strategy.
The 62 per cent Question
Without productivity improvements, the report warns, “the returns to additional capital investments yield less output than they used to”. Which means that all those EU funds, all those infrastructure projects, all those glittering headquarters buildings are generating diminishing returns. You can build a motorway to a factory that produces at 55 per cent efficiency, but you’re still just helping inefficiency travel faster.
The report’s data harmonisation—assembling 40 million firm-level observations from tax offices and statistical agencies—represents the kind of grinding empirical work that makes economics conferences exciting and normal people somnolent. But it does offer something rare: proof. Not theory, not anecdote, not the latest fashion from California or consultants’ PowerPoints. Actual evidence that ECA countries are running well below potential whilst opportunity knocks.
The TIDES that don’t lift all boats
“The findings underscore the urgent need for a revitalised reform agenda”, the report concludes. It emphasises “the crucial role of governments in mainstreaming the productivity agenda into national plans and budgets, enabling market competition, ensuring transparency in public procurement, and measuring progress on reforms”.
The reshoring wave is real. The nearshoring opportunities exist. The 45 per cent trade gap represents genuine potential, not economic fantasy. But exploiting it requires countries to make their entire economies competitive, not just the exporters who’ve already escaped the gravitational pull of domestic protectionism.
The TIDES acronym is clever. Because what ECA really needs isn’t another framework. It’s the political courage to let resources flow to their most productive uses. Until that happens, the region will keep underperforming by 45 per cent, watching the nearshoring bonanza from the dock, whilst explaining at length why this time, next year, absolutely, they’ll finally implement those reforms.
The 62 per cent question isn’t whether ECA can boost productivity. The data shows it can. The question is whether it wants to badly enough to actually do it. Based on post-2008 evidence, the answer appears to be: not quite yet.
Photo: Dreamstime.
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