CEE Special Report | How to remain competitve?
CEE Economies Special Report , 17. Jul
Over the last decade, most of the CEE countries experienced cumulative real productivity growth in double-digits. More importantly, real productivity gains exceeded the real labor cost increases in most of the CEE countries. Productivity gains are part of the convergence pattern, but there is still room for catching up. Relative competitiveness is intact, as labor costs remain lower compared to EU27. In other words, the CEE region still offers a cost advantage, i.e. low labor costs compared to productivity levels. From that perspective, Romania remains a sweet spot: low labor costs compared to a decent productivity level relative to the EU average.
Labor, capital and technology are the key elements of classical production function. We look at these three elements to see whether there is still growth potential stemming from each of them. As far as labor as a production function element is concerned, the negative impact of a shrinking labor force may only be mitigated by higher participation rates (elders and female workforce) or increased productivity (use of AI). As far as capital accumulation is concerned, capital stock remains relatively low in the region. The CEE countries could still capitalize on higher investments and faster capital accumulation as capital stock per employee remains relatively low. Further, we recognize opportunities for the region in the fast adoption of new technologies and not necessarily in “reinventing the wheel”. While R&D expenditures in the region have been lower compared to the Western Europe, innovation may take different forms. Czechia and Slovenia allocate the highest share of total investment spending to new products or processes, in terms of firms, countries or globally, according to the EIB Investment Survey 2024. The strategy of fast adoption may help to sustain high growth with limited R&D intensity, as has been the case over the last decade.
Looking across sectors: CEE has been named a hub of the automotive industry, but it needs to make further investment in EV manufacturing plants and the development of the necessary charging infrastructure. The necessity to increase defense spending across Europe offers an opportunity for the defense sector to support economic development in the region over the coming years. Although the size of the defense sector is smaller compared to the automotive sector, particularly in CEE, the dynamic increase of production related to the military sector may become a growth trigger in the near future. Finally, there is no way around the green transition. The green transition will be associated with high investment needs in the region, as CEE economies remain energy-intensive. At the moement, the high energy costs are seen as an obstacle to investment and currently weigh on competitiveness. Tackling rising energy prices will thus be a key challenge.
Labor, capital and technology are the key elements of classical production function. We look at these three elements to see whether there is still growth potential stemming from each of them. As far as labor as a production function element is concerned, the negative impact of a shrinking labor force may only be mitigated by higher participation rates (elders and female workforce) or increased productivity (use of AI). As far as capital accumulation is concerned, capital stock remains relatively low in the region. The CEE countries could still capitalize on higher investments and faster capital accumulation as capital stock per employee remains relatively low. Further, we recognize opportunities for the region in the fast adoption of new technologies and not necessarily in “reinventing the wheel”. While R&D expenditures in the region have been lower compared to the Western Europe, innovation may take different forms. Czechia and Slovenia allocate the highest share of total investment spending to new products or processes, in terms of firms, countries or globally, according to the EIB Investment Survey 2024. The strategy of fast adoption may help to sustain high growth with limited R&D intensity, as has been the case over the last decade.
Looking across sectors: CEE has been named a hub of the automotive industry, but it needs to make further investment in EV manufacturing plants and the development of the necessary charging infrastructure. The necessity to increase defense spending across Europe offers an opportunity for the defense sector to support economic development in the region over the coming years. Although the size of the defense sector is smaller compared to the automotive sector, particularly in CEE, the dynamic increase of production related to the military sector may become a growth trigger in the near future. Finally, there is no way around the green transition. The green transition will be associated with high investment needs in the region, as CEE economies remain energy-intensive. At the moement, the high energy costs are seen as an obstacle to investment and currently weigh on competitiveness. Tackling rising energy prices will thus be a key challenge.