By Nevena Krasteva
Regional output collapsed in the first half of 2020, as growing domestic outbreaks and pandemic-related restrictions caused domestic demand to plummet, exacerbated supply disruptions, and halted manufacturing and services activity, the World Bank says in its latest economic update. The economies hardest hit were those with strong trade or value chain linkages to the euro area or Russia and those heavily dependent on tourism or energy and metals exports.
The economies in Southeast Europe (SEE) were not affected by the COVID-19 pandemic as much as other countries but a drastic drop in consumer spending, a deep recession in their main trading partners and supply chain disruptions continue to weigh heavily on growth. What are your expectations for the region’s economic development in 2021 and what are the main factors that will influence its recovery?
Profound uncertainties surrounding the pace of economic recovery remain. After a sharp recession in 2020, we expect growth to rebound in 2021 according to our latest regional economic update. This will be supported by external and pent-up demand from key trading partners. Large stimulus packages, including EU funds received under the multiannual budget funds 2021-2027, and the recently approved EU economic recovery plan will provide further support to countries in the region. Nevertheless, output levels are not expected to reach pre-crisis levels until 2022 and in some cases maybe even later.
The economic outlook is dependent on several factors that remain uncertain. How the COVID-19 pandemic evolves, the availability and distribution of an effective vaccine, public behavior, the return of business confidence as well as the degree of improvement in trade and investment, to name a few. A proactive fiscal and monetary response to COVID-19 throughout the region encouraged firms to retain employees, supported household incomes and helped avoid mass closure of otherwise viable firms. However, even as many governments have introduced measures to protect jobs, employees have had to step back from work resulting in declines in incomes and hours worked – even though employment remains stable. Job losses occurring in manufacturing, tourism and trade sectors are affecting vulnerable groups disproportionately. Our EU report called Restarting Resilience highlights that even as societies have reopened, at least one in eight households may continue to face income losses and that one in five women is likely to have greater difficulty returning to work compared to one in ten men. Countries in the region must set the basis of a post-pandemic resilient recovery by continuing to strengthen governance, improving the regulatory environment, fostering innovation and digital development, and investing in the green economy. Moreover, sustained investment in quality education and health care are especially critical.
Where do you see SEE’s strategic advantages in terms of economic development in the post-COVID-19 world and what are the most pressing issues the countries in the region should tackle to make the best use of them?
While economic activity will remain subdued until health risks abate, the magnitude of the COVID-19 impact on the economies in Southeast Europe will depend on three factors: their own economic resilience, a repeat of prolonged lockdowns, and the effectiveness of government support measures to households and businesses. The scale of the economic contraction expected in the region in 2020 highlights the importance of strengthening the resilience of these economies. Key policies that increase the ability of an economy to absorb and recover from shocks include rule of law and strong institutions, transparency, fairness and equity in sharing the burden.
The use of support to firms across many countries in Europe has clearly helped alleviate pressure for those in employment during the early stages of the pandemic. We’ve produced some quick assessments on how firms and households in select European countries have been reacting to the evolving situation. To cope with the crisis, we’ve seen that firms have been electing to reduce hours or wages instead of firing workers outright. As a result, 3–5% of employed workers in Poland, Bulgaria, Slovakia, Finland, the Czech Republic applied for short-time work or furlough schemes. We’ve also seen that micro and small firms are the worst hit. Many have had to close-up shop in the depths of the crisis due to significant slowdowns in sales.
On employment, it’s clear that the effects of the crisis are not hitting workers in equal measure. Those earning lower wages suffered hard at the depth of the crisis. Across Romania, Poland, Croatia and Bulgaria we see that during the lockdowns in May, approximately 25-30% of lower wage workers had stopped working compared to about 10% of higher wage workers. While employment patterns somewhat normalised by late July, workers with limited contractual protections – women, younger and lower-wage workers continue to be more likely to be out of work. They have also suffered prolonged income losses despite expansive government programs in some countries.
The COVID-19 pandemic has prompted a number of global companies to consider shortening their supply chains and relocating production currently in Asia. What steps should countries in SEE take to lure these potential investments?
A significant shortening of global supply chains as a result of the COVID-19 crisis is not a forgone conclusion. Production costs will continue to be the decisive question on where businesses choose to locate, and it is on this issue that government policies can be most effective. Measures that contribute to reducing domestic production costs relative to competitors are crucial. For example, incentivising technology adoption, including automation and AI (Artificial Intelligence) could play an important role. Our upcoming report, Europe 4.0, will look at the region’s potential for leadership in the digital arena.
Lower trade costs, including transport and tariffs in both domestic and reciprocal markets, can also ensure fair access to components for finished goods. A regulatory environment that protects investors and contracts is important in this respect. In a globalised world, it’s critical that complex supply chains that span multiple borders can operate smoothly and at a sustainable cost.
What, in your opinion, is the best course of action for the economies in the region, most of which are heavily reliant on coal, in respect to the Green Deal?
Coal-dependent economies are aware that they need to phase out loss-making production and reap the benefits of clean energy. In addition to bearing the fiscal implications, countries are facing additional pressures because of the environmental and health implications of coal. The World Bank is advising countries on solutions for decarbonisation that are economically viable, tailored to their unique needs, and reflect the latest policy, financial and technological innovations. From 2015 to 2019, more than 90% of the World Bank’s global lending in power generation went to renewables.
The European Green Deal presents an opportunity to decarbonise EU economies while also ensuring competitiveness is a top priority. In terms of action, there are four priority areas to ensure countries can make effective low-carbon transitions: 1) supporting those communities where the direct and indirect impacts of the transition will be felt most; 2) speeding up access to available financing to accelerate shifts towards low-carbon sectors; 3) phasing out coal subsidies and redirecting finances towards green energy production; 4) removing investment barriers to sectors such as renewables, energy efficiency and emobility.
The COVID-19 pandemic and the massive shift to work from home which it introduced offers an opportunity for the countries in the region to reverse the brain drain of recent years, as factors other than wage size come to the fore. What major deficiencies in their business environment should the countries in the region tackle to bring back talent?
Many factors affect people’s decision to migrate. Among these, a major driver continues to be the large wage differentials between Western and Southeastern European countries, especially for workers with tertiary education. Currently, a young graduate from Bulgaria or Romania can expect to earn almost eight times more by working in Denmark, and over six times more in Austria or the Netherlands. These large differentials will continue to be a strong pull factor for many years to come. However, there are other issues that can affect an individual’s decision to move. Some of these can be addressed by the governments in SEE to retain talented or skilled workers. This includes improving working conditions, creating opportunities for career progression, upskilling and cultivating quality public services.
To reduce outward migration, countries in Southeast Europe will need to create better labour conditions for workers. First, ensure that employment protection legislation does not discourage job creation and entry into the labor market. Flexible markets can also facilitate job hires or upgrades, reducing the desire to emigrate. Second, reduce hiring costs for firms. This could be done by providing incentives for employers when they hire specialist and non-specialist workers. Third, easing the transition from temporary to permanent contracts in the early stages of an individual’s career. Improving job conditions and security can particularly benefit the young as they are more likely to migrate. Finally, address challenges in governance, quality of institutions and corruption. Poor governance and institutional quality can affect both entrepreneurship decisions and firms’ capacity to invest and grow, undermining the business environment, especially in lagging regions. These “push” factors can all impact a decision to emigrate, especially for the high-skilled.