CEE is experiencing demographic decline and its consumption-driven model of economic development is in dire need of a tune-up. But there is still room for extensive growth.
Back when Great European Powers were deciding on how to partition Poland, a common thread in diplomatic discourse was that it was somewhat more backward, less aligned with European Enlightenment ideals, and could otherwise make use of a guiding hand if not an older brother.
Hitherto, this general perception has maintained currency through the Revolutions of 1848, the Industrial Age, the Soviet period, and even the post-Soviet period.
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Certainly, CEE is significantly poorer. At PPP GDP 2017, Polish GDP is about 30 per cent of Germany’s, Hungary’s is about seven per cent, Romania’s 13 per cent and Slovakia’s only three per cent.
However, in GDP per capita at PPP rates, Poland’s 43,268 US dollars is 79 per cent of the European Union average while Romania’s 41,887 US dollars is 77 per cent, close to Hungary’s GDP PPP of 41,906 US dollars.
Large discrepancies remain: in GDP per capita terms, Bulgaria is about half as rich as Austria. But those discrepancies are magnified far too widely in popular perception.
As such, it merits discussion to look at the positives of CEE. Specifically: the extensive growth that remains to be had, friend-shoring, the potential for intensive growth, and the geographical expansion of the term itself.
The extensive growth that remains
It is well known that CEE is experiencing demographic decline, with some of the highest rates of emigration globally as well as some of the lowest birth rates in the world. Furthermore, the consumption-driven model of economic development is in dire need of a tune-up at the very least.
That acknowledged, there is still in fact room for extensive growth. For starters, current human capital is actually highly underutilised. Only about 15 per cent of Romania’s working-age population actually has any tertiary education, with figures of 21 per cent for Czechia and 28 per cent for Poland. That stands in contrast to a figure of 47 per cent for the United Kingdom, 34 per cent for Japan and 47 per cent for Ukraine.
Furthermore, relatively low unemployment figures actually hide a participation problem. The labour force participation rate for the region is quite low: only 51 per cent of Romania’s 15+ population is actually in the labour force, with figures of 56 per cent for Bulgaria, 59 per cent for Czechia, and in contrast with the United Kingdom’s 64 per cent or Japan’s 62 per cent. Quite simply, it is statistically more likely that a woman is in the labour force in Japan than in Bulgaria, Romania, Poland, or Ukraine.
While all three factors point to problems, they also point to a pool of potential growth that is not being utilised or showing up in GDP statistics. In fact, some of the demographic decline would be offset by simply increasing the participation rate or better equipping future workers. This wouldn’t necessarily be an easy task, but a larger pool of available labour is hardly something to complain about.
But what would these people do if they joined the labour force? This is where the second factor comes into play, namely friend-shoring.
CEE is for better or worse anchored into European Union and NATO structures, as well as into the Organisation for Economic Co-operation and Development (OECD), in many cases. That comes with investor assurance that a set of legal structures will be followed—or at least enforceable—while political maneuvering will be kept within fairly pre-established bounds.
In other words, it makes the region a more or less safe place to move parts of a supply chain.
Indeed, in the context of friend-shoring it can be stated that CEE is one of the best places to do so: access to EU markets, trade routes relatively close to Asia and the MENA region, and a labour force that is still significantly cheaper than in Western Europe.
The potential for intensive growth
In isolation however, friend-shoring would most likely not be able to fully employ all of the region’s underutilised labour. This is where the third factor comes in, namely the potential for digitally-focused intensive growth.
As McKinsey notes, while digital economies in CEE did not grow as fast as those in the Nordic countries over the past few years, they did grow faster than those in western Europe.
The demand is there: the number of senior citizens who adopted online services increased by over 40 per cent in the context of the Covid-19 pandemic, bringing the total to three in four people—otherwise on par with the European average.
Although, as the report notes, CEE suffers from a declining ratio of STEM graduates, relatively low PISA rankings for maths and science as well as a ‘brain drain’ of current talent, and it still has the supply to fulfil that demand.
Furthermore, it need not re-create the Chinese, or Californian, Bay Area to increase intensive, technology-driven economic growth—it may simply need to meet pre-existing demand domestically with mostly pre-existing technologies.
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