SEE countries must incentivise companies to invest in R&D to close competitiveness gap

 

Arup Regional Banerji, Director for the European Union countries for the World Bank Group

According to the World Bank’s Growing United report, the share of workers in EU member states in Southeast Europe (SEE), particularly in their lagging regions, who lack the skills needed to position themselves well on the labour market, is increasing. At the same time, in some countries and regions companies do not enjoy a supportive innovation environment, which cuts further into their productivity and competitiveness. SeeNews talks to Arup Banerji, Regional Director for the European Union countries for the World Bank Group, about the actions that the countries in SEE should take to address these disparities.

Q: What particular challenges within the framework of the EU convergence strategy are EU member states in South- east Europe (SEE) facing and what steps should they take to close the inequality gap?

The Convergence Strategy as a whole, at the level of countries, has worked extremely well. Countries such as Croatia, Romania and Bulgaria have actually converged quite rapidly to the EU average in terms of per capita GDP, for example. So in that sense the convergence ma- chine is working and working well.

What we do, though, is to look below the surface at what is happening, below the national level, at the regions within a country – are they also converging equally? And at individuals within a country – are they also improving their standards of living equally? The answer to both questions is no, unfortunately.

Across the European Union, what has been happening over the past five to seven years is that there is a growing divide among regions and sub-regions of countries. The capitals – Bucharest, Sofia, Zagreb, Athens – are doing much better than the rest of the respective countries, and the so called lagging regions, which are the poorest parts of a country, are falling further and further behind. A similar thing is happening to populations. Some of the people in these countries are among the very best skilled in the world – think of the flourishing tech sector here in Bulgaria, or the really equivalently flourishing tech sector in Romania. In Romania and Bulgaria there is a long history of students winning math Olympiads. At the same time the poorest part of the population – we look at the poor- est 20% of the population – has seen their incomes actually stagnate and in some cases fall over the last decades. That is the challenge for these countries.

So where are the potential solutions?

There are no immediate fixes. This is a trend that has been going on for a long time but what we find is that it has been accelerated by the advent of new disruptive technology. New disruptive technology is actually making the best in the countries and the best among the companies able to become much more productive, be much more competitive. The example that I often give is the smartphone. The smartphone has made all of us who use it more productive – perhaps we look at Facebook too much though – but at the same time it has made life easier. We do not have to have a separate thing for communicating and for taking photographs and doing mathematical calculations or writing emails, it is all there in one.

At the same time there are whole groups for which technology – not just smartphones but industrial technology, commercial processes, the advent of communications technology that takes over the old functions that we used to do – is wiping out old categories of jobs and in the future will be even more disruptive as technology gets better.

The challenge for every one of the countries in Europe, including SEE, is how to make sure that the poorest people and the smallest firms are able to compete better in the new economy and with the available technologies. The biggest challenges are going to be in learning for the poorest countries and the poorest populations.

The last PISA scores show that countries in SEE are really falling behind on this score. It is not about whether students are completing their education and going to university, it is about whether they are able to not just read a paragraph but understand fully what it means. Are they able to not just do the calculations but apply that in a complex situation. In Bulgaria, the last PISA tests found that 42% of the population are not functionally capable of operating in mathematics and with difficult text. That means that four out of ten Bulgarian fifteen-year olds are actually not fully equipped to deal with this new economy.

With firms we find that in Southern Europe, and including parts of SEE, such as Greece, they are remaining small rather than grow and take advantage of techno- logical innovation and invest in R&D. And that is partly because of the business environment that does not allow them or incentivise them to grow. These are the challenges that these countries have to take very, very squarely.

These challenges are not unique for SEE. The challenges are being faced by every country in Europe, and frankly, every country in the world. But for policy makers the question is whether this is in the forefront of policy conversations, as it is for example in countries like China, as it is in countries of Northern Europe. Estonia in our study comes out as a country that has really seen these problems coming and is acting aggressively to em- power the bottom parts of the population and to make technology the centre of all the work they do. And the advice I give to policy makers across Europe is that other countries have to follow that example and make this a priority.

Q: Fundamentally, is there a difference in how these issues should be tackled on a national level and on a higher, EU level?

There are different problems that have different solutions. Firstly, these problems cannot be solved in Brussels because education policy or industrial policy is subordinated to the national level under the European framework, so these are governed by national policies. In some ways the challenges are to be solved at national levels and different countries have different ways to do that because they have different problems. The particularities of the stories of Romania are not the same as those of Bulgaria, or Croatia, or Greece, and that has to be tackled on the national level. The broad part is that the problems are similar, but the solutions may be particular to the countries themselves.

Q: What concrete advice could you give to the governments in SEE to make local companies more competitive by supporting innovations?

Innovation is one of the toughest things. The least important thing that the academic literature, which has studied what makes firms innovative, talks about is money. Throwing money at innovations maybe necessary but it is by far not sufficient. When you look at successful innovation clusters, there are a few things that actually matter. What matters is that there is a supply of people, of workers, who have the sort of skills that allow them to be creative and to have ideas and those ideas are supported by the overall infrastructure. That is one of the reasons why innovative clusters often grow around universities. Good universities, especially universities with students specialised in science and technology and mathematics, are centres of innovation. Silicon Valley in the U.S. is centred on Stanford University, there is a big innovation cluster around Cambridge in England. Similar smaller innovation clusters are there all around Europe and those are using the particular skills of talented students. So that is one of the necessary conditions.

A second condition though, and that is where Europe as a whole probably does not do as well as other parts of the world, is allowing the commercialisation of discoveries and inventions made in universities.

Q: Does the problem lie more in the link between companies and the academia, or rather in the governments and the reg- ulations?

There are regulatory aspects, too. Let me give you one particular regulatory challenge that is very, very important to think through, and many countries are thinking through. There is one truth about innovation and that is that you will fail. Innovation and entrepreneurship is a series of typically many failures and one giant success. The question is: Is there an environment that allows people to fail and companies to fail and then recover and try again? This is an appetite for risk question. For example, one of the main features that help innovation in the U.S. is a bankruptcy law called Chapter 11 that allows companies to actually fail but not lose their entire assets, so it is more friendly to the debtor rather than the creditor.

Q: A sort of a safety net?

Yes, exactly. And a second factor which is important for innovators is whether you are actually funding the innovations through debt capital, i.e. borrowing from banks, or venture capital, which is having other people who are richer share the risk.

These are actually factors that many countries are looking at and understanding that you need to have innovative companies that have a higher tolerance for risk, a regulatory structure that allows them to take risk and also have a funding structure,  financing structure that shares the risk with other investors, rather than just with banks. Innovation is a complex situation, where there are actually regulatory factors, as well as some traditional factors like the link between university professors and new start-up companies that are important.

Q: What would you like to say in conclusion?

The last thing that I want to talk about is that there are large parts of society and large parts of countries that are really being left out of this prosperous future that we have because of technology. Our report is a call for governments to spend their energy and attention not to just look at the average, or at the rich- est parts of society but look after the least fortunate, whether it be people or firms.

by Nevena Krasteva