After the shocks of the Covid-19 pandemic and the war in Ukraine, new research published at the end of November suggests that Europe’s emerging countries could be at the forefront of reorganised global supply chains. Experts from the Vienna Institute for International Economic Studies have highlighted that the central and eastern European (CEE) region stands to significantly benefit from the nearshoring trend as Europe seeks to secure supplies of critical resources.
CEE countries have made significant economic and political strides in recent decades, offering a wide range of assets attractive to multinational investment. However, to maximise the region’s nearshoring potential while ensuring that it continues to attract high levels of foreign direct investment (FDI) critical to its socioeconomic development, domestic challenges, namely lagging transport infrastructure and skilled labour shortages, must be addressed.
Western convergence journey
Over the three decades of the post-communist era, the CEE region has experienced meteoric economic growth. According to the European Investment bank (EIB), GDP per capita in the region shot up from roughly 43% to 66% of the EU average between 1995 – just 4 years after the fall of the Iron Curtain – and 2017, a full decade after the EU enlargement waves of 2004 and 2007 that incorporated countries including Poland, Romania and the Baltics.
This economic transformation has largely been fueled by waves of FDI as these countries progressed along the EU integration path, with the European Bank for Reconstruction and Development highlighting in a recently-published report that FDI levels in the CEE averaged a towering 4.4% of GDP between 1993 and 2020, significantly exceeding the global rate of roughly 2.5%.
Most of this investment – about 60% – has come from western EU countries, with Germany and Austria’s private sectors leading the charge; at the end of 2020, German firms had invested over €100 billion in the region, contributing to strong job creation and poverty reduction.
Region of great potential
But as Phillipp Haussmann of the German Eastern Business Association has emphasised, this East-West economic relationship has not been a “one-way street.” The global competitiveness of the German economy has greatly benefited from CEE market integration and lower production costs, with its trade with the region reaching €360 billion – more than with the US and China combined.
The CEE is now primed to become even more vital. Experts have tapped the region as a high-potential location for major Western EU economies keen to “friendshore” key sectors such as manufacturing and energy following the Covid-19 and Ukraine war impacts on global supply chains. Beyond its competitive production costs, the region offers a huge investment market, strategic geographic position, strong manufacturing bases, shared culture and values, stable governments and a low-tax, pro-business regulatory environment.
A new wave of FDI from nearshoring will also be critical for the CEE region’s future growth, particularly considering that domestic issues have contributed to lagging productivity growth and declining FDI impact and attractiveness in recent years.
Connecting the continent
One of the main challenges holding back growth in the CEE region is lagging transport infrastructure stemming from decades of insufficient investment, with the EIB highlighting the importance of filling infrastructure gaps.
But promising new transport developments are emerging within the region’s Three Seas Initiative to drive regional infrastructure connectivity and growth along the underdeveloped north-south axis from the Baltic to the Adriatic and Black Seas, including Poland’s Centralny Port Komunikacyjny (CPK), Rail Baltica and Visegrad 4 HSR.
Incorporating a new Solidarity Airport and roughly 2,000 km of new high-speed railways, CPK will boost transport links within Poland as well as with the wider CEE region and Ukraine, helping to integrate the Ukrainian economy within the EU. Meanwhile, Rail Baltica and Visegrad 4 HSR will provide high-speed rail connections between the Baltic and Visegrad capitals, respectively, with CPK serving as the interconnector hub between these projects, all of which will create a robust high-speed rail network with trans-continental connectivity provided by Solidarity Airport.
In revolutionising regional transport links, these developments will deliver significant economic benefits. Transport connectivity contributes to long-term growth by improving labour market efficiency and productivity while bolstering supply chain resilience. What’s more, these projects will boost regional competitiveness by helping to attract FDI and fueling cheaper cross-border trade, thereby creating new jobs for the CEE and investment opportunities for Western European countries to unlock the full potential of the EU Single Market.
Building a high-skilled region
Beyond transport infrastructure, skilled labour shortages in the CEE have emerged as a major barrier to growth, investment and innovation, stemming from a combination of high emigration, decline of working age population and a growth-induced rise in labour demand. Foreign firms considering investing in the CEE as part of nearshoring supply chains and accelerating the digital and green transitions will look for strong local skills, so the region must ensure that its people are prepared to capitalise on new opportunities.
In recent years, governments have sprung to action to fill the skills gap. For example, the Bulgarian government has launched tertiary education reforms and training programmes to target skilled labour shortages in specific sectors key to economic innovation and productivity, such as ICT and engineering. And in Hungary, the government has introduced a Digital Education Strategy to bolster local digital skills.
While training is crucial, Poland has also implemented programmes to promote strategic sectors facing skills shortages, including by attracting increased female participation in STEM education and boosting enrollment in technical courses. Regarding inequalities in labour access, Slovakia is bolstering its childcare provision to facilitate the inclusion of women in the workforce while offering increased support to the long-term unemployed.
After decades of growth after the fall of communism, central and eastern Europe is set for its next generation of development. With the right investment climate, created by a plethora of existing strengths and the realisation of current projects to bolster transport infrastructure and skilled labour supply, the region seems primed to be the big winners of the EU’s friendshoring drive.
