Central and eastern European (CEE) countries should adjust their development strategies to regain economic momentum, McKinsey, a global consultancy, stated in its recent report A New Dawn: Reigniting growth in central and eastern Europe. Countries in the region should pursue investment-led development rather than consumption-led, and increase their ability to finance future growth and FDI attraction, the report reads.
Before 2008, the region was among the fastest growing in the world, fulled by trade links with western Europe, which accounted for 80% of all FDI inflows to CEE and consumed 60% of goods and services produced in the region. When exports and FDI from western Europe plummeted, as a consequence of the global economic crisis, CEE economies stopped expanding, exposing how volatile their growth model was.
While recognising that the model cannot be implemented in every CEE country, McKinsey's experts say that most of the countries in the region should expand their exports by developing knowledge-intensive manufacturing, targeting more high-value added outsourcing, offshoring projects, and encouraging new projects in food processing and agriculture to become a pan-European food hub.
The report also recommends raising productivity in underperforming domestic sectors, such as construction, transportation, retail and utilities, and improving the self-funding capacities of CEE economies.
Additionally, according to the authors of the report, CEE countries should increase investment in infrastructure, develop policies enabling urbanisation and fund initiatives aimed at workforce quality. On the top of that, a bigger push for innovation is needed, especially given that, in 2010, average spending on R&D in the region was just 0.9% of GDP, compared to 2.9% in the US, 2.1% in western Europe and 1.5% in Brazil, Russia, India and China.
Apart from an increase in funding, the report advocates further development of industry clusters in blue chip industries, increased support for start-ups and improved collaboration between the private sector and universities.
At the same time, the report states that main factors behind CEE's pre-crisis success remain intact. Apart from its strategic location and educated labour force – with hourly wages on average 75% lower than in western Europe – the report praises the region's attractive business climate, including its favourable corporate taxes and transparency. It also highlights the region's stable macroeconomic environment, including relatively the low level of public deficit and stable exchange rates of local currencies in relation to the euro.