When the health and economic crises caused by the COVID-19 pandemic are brought under control, policy efforts in Europe and Central Asia (ECA) will need to address the steep fall in productivity growth over the past decade and focus on structural reforms that are essential to reignite long-term growth prospects. Strengthening governance and improving institutional quality could yield growth dividends and attract investment. Structural bottlenecks, including limited exposure to international competition and low innovation rates, continue to weigh on the business environment.
Boosting investment in human capital and climate resilience will be crucial to raise living standards and foster inclusive and sustainable growth. To address the headwinds to long-run growth, the experts at the World Bank proposed a well-targeted reform agenda to increase productivity growth, improve the investment climate, and foster digital development as follows:
Over the long term, institutional quality is one of the most important determinants of productivity growth. In ECA, productivity catch-up to advanced economies was particularly pronounced in Central Europe prior to the global financial crisis, reflecting the anchoring of structural and institutional reforms to the EU accession process. ECA continued to face governance challenges prior to the COVID-19 crisis. Structural reforms to improve governance can lead to sizable productivity gains, particularly in countries that are farthest from best practices.
In terms of improving productivity, a well-targeted reform agenda is needed to reignite productivity growth, especially in light of the possible persistent economic effects of the pandemic. This could include initiatives to boost investment in physical and human capital, encourage female participation, and stimulate innovation in firms. Reforms to boost private sector development and transition to competitive and inclusive markets are needed to attract private investment and capital flows to the region, particularly to economies outside the European Union.
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Boosting health and education systems is critical for raising human capital and productivity at the aggregate level. In some economies in ECA, particularly in Central Asia, inadequate investment in human capital has left a portion of the workforce poorly equipped for rapid technological change, even prior to the COVID-19 pandemic. Health status is captured by including risk factors such as obesity, smoking, and heavy consumption of alcohol, all of which are prevalent in the region. This exercise highlights the importance of investing in tertiary education for many countries in the region, as well as the importance of preventing risk factors for noncommunicable and infectious diseases in the aging societies of the region.
The COVID-19 crisis underscores the critical need for investment in digital skills and technology to facilitate teleworking and virtual learning, particularly for vulnerable households. Policies that support the digital framework, such as increasing broadband access, could improve productivity growth by enabling innovation and reducing the costs of a range of business processes. In recent years, Turkey has undergone a digital transformation by boosting research and development expenditures, increasing its capacity to absorb and utilize new technologies, and bolstering information technology skills.
Improving connectivity can also be paired with policies that promote more widespread adoption of digital technologies, including in the delivery of financial and public sector services. Technologies can bolster financial inclusion and boost productivity by encouraging innovation and improving private sector and government efficiency. In economies with large informal sectors, more widespread adoption of digital technologies could also help expand tax bases through the fiscalization of informal sector transactions. Increasing small and medium-size enterprises’ access to finance could help these firms increase their average size and reduce their reliance on retained earnings to fund investment, in turn supporting job creation.
Major adverse events – such as climate or epidemiological disasters – can have large, sustained negative effects on productivity through dislocation of labour, tightening of credit, disruption of value chains, and decline in innovation. As the world continues to grapple with the COVID-19 pandemic and its immediate health and economic effects, it will also be crucial to lay the foundation for building resilience and ensuring sustainable growth in the longer run. Building resilience to the risks posed by climate change, including higher frequency of severe storms and droughts, rising sea levels, and lower crop yields, is critical in ECA given the region’s large presence of agricultural exporters and numerous coastal populations. In addition, protecting lives is crucial, especially as the concentration of air particulates in many ECA countries is well above World Health Organization safety guidelines.
Some economies have begun to implement policies that promote sustainability, including green transport, such as improving public transportation and urban mobility and modernizing railways. Several economies have also implemented or scheduled carbon pricing tools, made progress in reducing energy intensity, and harnessed technology to improve and modernise weather forecasting.
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