Tatra Summit Insight Report 2020


CEE strategic transformation

Crises are potent catalysts of change. As economies, economic systems, societies, businesses, policymakers, and other key economic actors get drawn outside their comfort zones due to disruption – and as Schumpeterian creative destruction ensues – crises have the power to make or break.

The COVID-19 pandemic likely marks an inflexion point for the global economy and the global order more broadly. Its arrival has also reset the clock for the economies of Central and Eastern Europe (CEE). The disruptions brought on by COVID-19 have magnified the shortcomings of its existing macroeconomic model, accentuated its vulnerabilities and structural deficiencies, and further underscored the need to leave behind the largely manufacturing-reliant, low value-added production narrative, and replace it with an alternative governed by an exhaustive macro-financial framework where key economic actors –  firms and workers – could flourish.

The pandemic-induced changes are presenting economies and societies globally with new opportunities but also distinct challenges. In the meantime, pre-COVID-19 challenges have not gone anywhere. While – having barely crossed over to the new decade, – the pandemic has taken centre stage, the terrain of the global economy is being simultaneously impacted by peripheral transformational forces that have been lurking in the pipelines before the pandemic’s onset, including a 4th Industrial Revolution, unrelenting technological progress, climate change, human capital outflows and growing demographic challenges.

The CEE economy’s strategic transformation is a winning transformation that leans heavily on innovation, while being intensely aware of the region’s past and present, its growth drivers to-date, and its regional macroeconomic, financial, and structural makeup. Incremental non-structural pre-pandemic approaches to resuscitating CEE growth momentum will not suffice. The region needs to jump on the bandwagon of exhaustive and deep economic restructuring to bring itself on par with the new economic age, where relentless and rapid change is the only constant.

The index

The 2020 edition of The Tatra Summit Insight Report marks the birth of the CEE Strategic Transformation Index (STI), a new composite measure of economic progress for the region of Central and Eastern Europe (CEE). As the past decade concluded, 2020 began abruptly with an unprecedented and violent shock to the global economy caused by the COVID-19 pandemic. This placed the global economy into a standstill sending seismic shockwaves across our economies and societies, making it evident that its effects will long outlive the virus’ onset.

The STI caters to the plea of deep restructuring of the CEE economy, as it offers insights into the past multi-faceted economic performance of nine CEE economies while emphasizing key forward-looking policy areas to unlock sustainable long-term growth, including innovation, education, and the twin green and digital transition. As such, it provides a composite quantitative diagnostic tool for capturing economic progress in the region, by benchmarking the CEE region at an aggregate level and the nine CEE economies – Austria, Bulgaria, Croatia, Czechia, Hungary, Poland, Romania,  the Slovak Republic, and Slovenia – individually, within a broader context of a selected control group of advanced European economies.

STI benchmarks a country’s ability, and that of the region, towards the strategic transformation frontier. It measures the extent to which the underlying macroeconomic, resilience and innovation drivers – both old and new – are in place, benchmarks relative progress of countries in terms of these drivers and presents the country strengths and weaknesses. Covering 9 CEE economies and 47 indicators in this first edition, the index identifies the best-performers in the CEE9 region when it comes to openness, external resilience, productivity and value-added, and financial structure; as well as innovation cluster of variables, including education, green and digital transition and innovative capacity.

The index is to be periodically updated before each Tatra Summit to provide a well-timed basis for policy dialogue on this platform. Availability at an aggregate regional-level and individual country-level offer insights into overall year-on-year regional and country performance, respectively. Eight disaggregated thematic clusters (i.e. sub-indices) offer more granular insights into macro-resilience and innovation developments and enable the identification of country strengths and weaknesses and the formulation of corresponding policy leads.

STI is being launched as a flagship initiative at the GLOBSEC Tatra Summit 2020. GLOBSEC Tatra Summit is an annual high-level gathering of political elites, top-of-the-line policy experts and researchers, private sector leaders, academia and third sector frontrunners which every October take the pulse of the European and by gathering over most pressing challenges and conundrums our economies and societies are facing. The GLOBSEC Tatra Summit platform thus serves to anchor the STI project and amplify its impacts. STI can be used as an evidence-basis to underpin the high-level policy dialogues taking place at the Tatra Summit platform by identifying key weakness areas, and as such, it is designed to suit policymakers and leaders in the quest of taking an informed action on a revived economic transformation policy dossier with a useful diagnostic tool. It can also help businesses in formulating their business strategies and establishing practices, buttressing economic transformation outcomes from the bottom-up. The bottom line is that the broad policy priority leads STI articulates are to offer a compass for strategic policy and business action in the CEE9 region on the path towards more dynamic, resilient and sustainable economies.

Key findings

The results are intuitive and provide clues for policy action to unlock economic growth and the continued rise of CEE societies’ living standards. The report findings specifically highlight that progress for all CEE countries is overdue on the education dossier. Most CEE would, furthermore, benefit from an actionable and targeted policy approach to move towards higher value-added domestic activities. This requires prior identification of where in the macroeconomy such ‘moving-up’ can be feasibly and rapidly achieved. Importantly, STI results across most countries underscore the need for a country-wide innovation strategy. These long-term policy priorities – targeting education, productivity, value-added and the capacity innovate – should be pursued alongside the green and digital twin transitions, and whilst using it as the means to an end, and a stable element of the CEE growth paradigm. Even top performers need improvements in these policy areas to close the gap vis-à-vis the control group of advanced European economies and to move closer to the 'distance to frontier' – the aggregate ‘ideal’ across all sub-indices of strategic economic transformation. Specific policy leads for each CEE country are drawn and presented in the Country Profiles section.

Austria sets the overall mark for the CEE region, with an overall STI score of 63.9 points. The index value is interpreted as being almost at a 2/3rd point between the worst and the best performer in the sample between 2010 and 2018. Thus, the index benchmarks each country and places it on a scale, positioning its historical progress and vis-à-vis future potential advancement, as set by a global top performer in the broad sample. Austria is followed by Slovenia (56.3), Czechia (53.7), Poland (50.8), Hungary (49.6), the Slovak Republic (45.9), Croatia (40.7), Romania (35.2) and Bulgaria (32.4).

However, to rewrite the CEE growth narrative, bold leadership, political will and a proactive, mission-oriented and collaborative approach to policymaking will be required to achieve a meaningful change. Public-private crossovers to design workable solutions for the new, post-COVID-19 terrain may be also a key to success. Furthermore, the pandemic has highlighted that economic, health, social and environmental portfolios can no longer be approached in isolation, but should be pursued together, as a part of integrated growth policy agenda.


The CEE Strategic Transformation Index 2020: Global Ranking

The CEE Strategic Transformation Index 2020: Global Ranking

Pillar 1. Economic Structure & Resilience (LHS); Pillar 2. Innovation Economy (RHS)

Pillar 1. Economic Structure & Resilience (LHS); Pillar 2. Innovation Economy (RHS)

Relative performance by sub-index

The CEE Strategic Transformation Index 2020 by sub-index

The CEE Strategic Transformation Index 2020 by sub-index

STI 2020 Heatmap: CEE9 vis-à-vis Control Group

Heatmap: CEE9 vis-à-vis Control Group

The Road Ahead for Government

  • CEE9, set against the milieu of the European and global economy, is experiencing extraordinary economic developments. The challenges posed by the COVID-19 crisis on trade, value chains, jobs, commerce, and public finances depress confidence and act as a brake on exports, investment, and growth. Developments in CEE9 and elsewhere call for novel initiatives and enhanced coordination to soften the landing for its economies and societies. In these unprecedented times it is important to take stock of where future growth is likely to come from, and how this may be best achieved.
  • STI caters to the plea identified, as a part of the broader quest for a sustainable growth paradigm. The leads provided by the index highlight the recurring themes and corresponding implications for government action, both, in terms of scope and means. The report specifically highlights that progress is overdue in the following areas:
  • Continued progress on the education dossier: STI shows that all CEE9 countries can benefit from upskilling, lifelong learning and education upgrades to align outcomes with the needs of labour markets of tomorrow, supporting an economy’s productivity, the move towards higher value-added, and propping up the digital transformation. The report indicates that numerous education and upskilling aspects – including access, quality, and funding – can be improved
  • Progress towards higher value-added activities: requires pinpointing strategic industries based on economy-specific strengths and existing productive capacities, where headway can be feasibly achieved. For many CEE9 economies, this will mean a move to advanced/knowledge-intensive manufacturing, for others, upgrading services (such as tourism), or moving towards more advanced services (professional and business services)
  • Addressing vulnerabilities in a turbulent world: in the mostly open, export-oriented CEE9 economies, export profile diversification, recipient markets and export product sophistication can be further improved and act as a valuable coping strategy against external disruptions. On the financial front, monitoring and addressing risks (such as household debt, non-performing loans in the banking sector, and housing market bubbles) will safeguard the relatively sound financial structure and resilience
  • Tackling the laggard innovation performance: in addition to education, the capability to innovate, including outcomes, access to funding for new business ventures, and R&D capabilities and staff, can be improved by a large margin. Country-tailored innovation strategy formulation drawing of country strengths in liaison with the private sector and other key stakeholders is key to escape the middle-income trap
  • Making green and digital transitions a necessary part of the CEE9 growth paradigm, and the means to an end: easy productivity gains can be reaped from adopting existing and new digital technologies across private and public domains. Transition to the green economy cannot be postponed indefinitely and the time to act is now. The intense rescue efforts in response to the coronavirus pandemic and policy impetus created should be harnessed to make green growth a part of CEE9’s growth narrative. Swift action on the green agenda and towards the low-carbon economy in conjunction with innovation can lift the regional economies to the forefront of emerging green enterprises, industries, and green industry clusters responding to climate change
  • In addition, while the time to act is now, kickstarting a transformation requires time. Allowing adequate time for policies to work and creating long-lasting structures to support stable delivery is key. Trade-offs/short-term sacrifices may be inevitable in catalysing an enduring change. Many policy decisions in the right direction will not immediately show up in traditional measures of economic success, such as GDP growth and employment. To jump on the transition bandwagon for all key actors and win the broad support necessary for a successful transition, raising awareness, with a full understanding of the long-term strategy and benefits for well-being and prosperity is key. The narrative should be packaged ‘right’: understandably, transparently, and attractively.
  • Igniting a transformation requires concerted action. The policy solutions should benefit from collaborative, strategic partnerships with the private sector and other key actors to deliver anticipated market outcomes. Governments must think beyond traditional top-down policymaking, in favour of mission-oriented policymaking, capitalizing on the cross-over of public and private domains to design solutions that work under real-life conditions in an ever-complex, and still new, post-COVID-19 terrain.
  • It is becoming increasingly obvious that policy ends cannot be pursued in isolation as a part of secluded portfolios. Rather, to be successful, economic, environmental, and social goals must be pursued together, as a part of an integrated, wholesome strategic policy agenda that is inter-disciplinary, sustainable, inclusive, whilst targeting the incentives and motivations of key economic actors.
  • Kickstarting a deep transformation requires long-term leadership and commitment. Governments should play a balancing role, levelling the playing field in terms of access to opportunity, harmonizing policy formulation in terms risks and opportunities, and making sure incentives of all key involved actors are aligned. This also involves facing the spillover effects and policy externalities, both deliberate and unintentional, of economic policies beyond the direct goals they pursue.

The Road Ahead for Business

  • Businesses are counting on greater clarity from the government on its long-term approach to supporting business in difficult economic times. But the ambitious policy agenda must be propelled from the ground-up, through both, proactive role in formulating policy solutions, and strategic business action. A lasting change can be achieved but an upgrade of business practices is essential to this end
  • It is necessary to take the lead in actively shaping the prevailing model of capitalism in the region. While governments are to create enabling policy context, businesses must drive underlying change. Commitment to sustainability, modernization, greater productivity through existing and new digital technologies, and resilient business models must be demonstrated in daily economic transactions and the interactions of key actors
  • To work to balance profits with purpose, promote equality practices in organizational structures, entrench sustainability as a part of a business strategy, instil trust and help positively shape and grow consumer bases
  • Joining forces on new approaches to improving (traditionally) public ends is needed, such as enhanced education outcomes, articulating a new approach to jointly financing such efforts between the public and private sector. There is a business case as companies today face sizeable risks from system challenges
  • Collaborative approaches are important also in the competitive marketplace. A strategic change can be better facilitated through liaisons and collaborations at sectoral- industry-/levels of the economy
  • Enduring alliances created by key economic actors around the same goals may be key to carrying the momentum of a strategic economic transformation, where political commitment/leadership is diluted.

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