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40 I 30 Years of transition bne December 2019
are creating high skilled jobs, replacing medium skilled jobs so there is some development in a positive direction.”
EU accession was the other critically important factor for Central Europe as it “locked in the reforms”, says Javorcik. “Essentially for countries offered the prospect of EU accession, this prospect provided an anchor ... tied the hands
of policymakers because no matter which party was in power there was wide-ranging support for joining the EU, so no government could afford
to change course. Locking in reforms was enormously important and I think that’s what really made the difference.”
And the benefits didn’t end with accession. Once the Central European countries got into the EU, structural and cohesion funds helped greatly with infrastructure development.
The governance gap
But while there has been an economic catch-up, Javorcik points out that the gap between transition countries and advanced economies still remains
quite large when it comes to institu- tions such as control of corruption, rule of law, quality of regulation and effectiveness of governments, and improvement in these areas has stalled.
This has serious practical implications: “If half of the governance gap with
the G7 countries was closed, income convergence would be brought forward by almost a generation,” says Javorcik.
“The governance gap matters very much because the early sources of growth have already been tapped, the low-hanging fruit has been reaped so now it becomes harder to grow. If these countries want to grow now they need to focus more on innovation-led growth, and for this kind of growth institutions matter very much,” says Javorcik. “They need this new source of growth because wages are increasing and their com- petitiveness as locations with relatively cheaper labour force is being eroded.”
The challenges ahead
Looking ahead, Central Europe faces two major challenges: handling demo-
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graphic decline, and climate change and the transition to a low carbon economy.
It’s no surprise that demographics is one of the big concerns for the future. On top of the slowdown in population growth typically seen as countries get richer, CEE has seen huge outflows of people, with countries losing substantial numbers of their populations. While some countries dealt with tightening labour markets by inviting labour migrants in particular from Ukraine, demography remains a challenge
not just in terms of finding enough
western peers because high pollution is a legacy from central planning: “Even though they have made progress, on average these countries are 20% more polluting per unit of output than comparable emerging markets”. Poland in particular faces
a heavy challenge due to its “addiction to coal”; Poland’s energy intensity
is nearly twice the EU average.
While the EBRD and other international financial institutions active in the region are stepping up their investments into the green economy, government
“Another way of dealing with the challenge
of the tight labour market is to respond with automation, moving up the value added chain to better, more sophisticated, higher paying jobs”
workers but because, for example, of the questions it raises about the sustainability of the pension systems
“Another way of dealing with the challenge of the tight labour market is to respond with automation, moving up the value added chain to better, more sophisticated, higher paying jobs,” says Javorcik. There are some signs this is happening already, with the opening
of R&D centres in the region, and
the creation of higher skilled jobs.
However, Javorcik adds, “moving to better paid, higher value add jobs is
not trivial and this brings us back to
the challenge of improving governance.” To really achieve innovation-led growth, “countries in the region have
to address the governance deficit.”
Going green
The second big challenge ahead is the transition to a green economy. “This will happen,” says Javorcik. “The pressures will increase because climate change
is becoming more and more apparent and we will need to take action.”
She acknowledges this will be more difficult for CEE countries than their
action will most likely be the decisive factor in pushing companies towards green investment. The EBRD’s 2019 Transition Report due to be published later this month is set to include a survey in which around 60% of companies responding said that green investments were not a priority. “What emerges is there is very limited awareness of the need to undertake green investment,
to think ahead,” says Javorcik. “Not surprisingly firms are more likely to undertake green investments if they are forced by regulation.”
And this is not just a technical challenge; as Javorcik point out, thousands of jobs are heavily dependent on polluting industries, and energy intensive industries tend to be geographically concentrated. This means governments will need to think carefully about how
to help people that will be negatively affected by the shift to a low carbon economy as jobs are lost in some traditional industries – even while there are clear benefits ahead in the reduction of air pollution and the creation of sunrise industries.