Speeches & Transcripts

Press Conference - Knowledge Economy Forum IX

May 5, 2010

Philippe H. Le Houérou, Vice President, Europe and Central Asia, The World Bank Berlin

As Prepared for Delivery

May 5, 2010, Foreign Press Center, Berlin — Thank you very much for joining us today. We are very pleased to be here in Berlin for the World Bank's 9th annual Knowledge Economy Forum.

We are particularly fortunate to have as our co-host this year the Fraunhofer Center for Central and Eastern Europe — a member of Germany's elite research network, one that is responsible specifically for building productive research and innovation partnerships with transition economies across Central and Eastern Europe. Thorsten Posselt, Director of the Fraunhofer Institute, joins me here.

I am also joined by Gerardo Corrochano, Director of Private and Financial Sector for the World Bank's Europe and Central Asia, as well as two ministers from the Europe and Central Asia Region — Myqerem Tafaj, Minister of Education and Science, Albania, and Nerses Yeritsyan, Minister of Economy, Armenia. I appreciate their presence.

The Knowledge Economy Forum is a flagship event held every year to support European and Central Asian countries in their transition to becoming increasingly knowledge-based. We are delighted that this year's audience includes representatives from most Europe and Central Asian countries, including representatives of ministries of economy, finance, industry and trade, science and education, innovation, as well as the private sector and academia.

Countries of Europe and Central Asia hardest hit by the crisis and could be the slowest to recover

Let me begin by saying that over the last twenty years of transition, the countries of the Europe and Central Asia integrated remarkably well into the global economy across many dimensions such as trade, financial, and labor flows. In fact, GDP in the Region grew by two-thirds from 2000 to 2008 — an enviable growth of an average of 6.5 percent a year.

Yet despite this progress, emerging economies in Europe and Central Asia were hit the hardest by the global economic crisis. Growth in the Region, which had peaked at about 7 percent in 2007, fell to a negative 6 percent in 2009. 2010 is going to be a tough year for the Region with growth projected at around 3 percent at best. The prospects for 2011-2013 are only marginally better, as compared to approximately 5 percent in the Middle East and 8 percent in developing Asia. At 3 percent, GDP growth forecasts for ECA are about half that of the developing world.

How the crisis has affected the Region

In many ways, the pre-crisis boom years masked a deterioration in competitiveness in many countries in the Region. Significant capital flows, high commodity prices, and strong growth in export markets in the pre-crisis period masked the fact that countries were not tackling bottlenecks to growth.

First and foremost, governments in Emerging Europe and Central Asia across the income spectrum spend more than their developing country counterparts in other regions. Average fiscal deficits amounted to 6 percent of GDP in Emerging Europe and Central Asia between 2008 and 2009, compared with 1 percent in the Middle East, 3 percent in Latin America, and about 4 percent in developing Asia and Africa.

General government spending in the Region's middle-income countries such as Poland, Russia, Ukraine, and Turkey is now higher than 40 percent of GDP in contrast with the 30 percent for middle-income countries elsewhere.

The aftermath of the crisis is likely to result in fiscal tightening across the Region, as financial markets have become more discriminating and capital flows to transition and developing countries are likely to be considerably lower than before the crisis. Given the present fiscally-strapped environment for Western European banks, fresh flows of external capital to the Europe and Central Asia Region are unlikely to reach pre-crisis levels.

The crisis has also revealed the overreliance of some countries in the Region on a single commodity, further exposing them to commodity shocks and severely affecting their current account balance – driving home the importance of economic diversification through modernization and innovation.

In addition, most Europe and Central Asia countries' quality lags behind high-income countries, middle-income competitors such as China, and the world average — putting them at a disadvantage in terms of international competitiveness and economic growth.

And as you well know, most advanced economies realize the importance of continuing the support on R&D and enterprise innovation and have done so through stimulus packages of various kinds. In Europe and Central Asia, however, fiscal constraints are forcing countries to make dramatic expenditure cuts, some of whom are turning to cuts in their R&D budgets — potentially stifling prospects of future innovation.

Lastly, there is a growing mismatch between the skill level needed by the private sector to enhance productivity and those outputs that are being produced by the Region’s higher education systems. Europe and Central Asia has a high level of educational attainment, but paradoxically, a shortage of skills emerged as one of the most important constraints to growth. The two predominant reasons for this are a lack of the right skills among graduates, and few opportunities for adults to retain and upgrade skills or acquire new skills during their careers.

Going forward — a call for a new growth model

In order to address the exposed structural weakness and facilitate post-crisis recovery, it is imperative for the countries of the Europe and Central Asia Region to promote new sources of growth fueled by innovation. This will put a premium on how public spending can support the commercialization of research and development, support economic diversification and quality, and strengthen the skills of the Region's workers.

And this is why we are here in Berlin for the Knowledge Economy Forum.

The EU 2020 Strategy lays out a plan for continued commitment to creating smart growth out of the crisis by developing an economy based on knowledge and innovation, advancing sustainable growth by promoting a low-carbon, resource-efficient and competitive economy, and fostering inclusive growth by promoting fostering a high-employment economy delivering social and territorial cohesion.

A number of key action areas to foster a knowledge-based growth are emerging, and the World Bank’s alignment with the EU 2020 Strategy is crucial in:

  • promoting diversified economies that are able to withstand commodity shocks;
  • building up countries' national quality infrastructure — certification, standards, and accreditation bodies;
  • emphasizing the importance of leveraging public R&D expenditures to stimulate greater private sector R&D,
  • generating greater efficiency in public spending on R&D by continuing the governance and financing reforms of public R&D sector;
  • promoting commercialization of public R&D via intellectual property rights regimes that facilitate taking research to markets; and
  • delivering the skills that will be needed in order to develop new areas of regional growth and ensure the employability and productivity of every worker.

So while the projections for the Europe and Central Asia Region are the lowest among the regions in the world, much can be done in the next few years to prove these projections wrong. These combined measures will contribute to a rise in productivity and employment and help enhance the innovation capacity and competitiveness of countries — significantly benefiting economic recovery and longer-term growth.

This Forum, and more broadly all of the World Bank's work in the Region, is our attempt to ensure that we see a much more robust recovery for the Region.

Before giving the floor to Thorsten Posselt, Director of the Fraunhofer Center for Central and Eastern Europe, I would again like to thank him and his colleagues from several academic and research agencies, as well as representatives at various levels of the German government for co-hosting and supporting this flagship event of the World Bank's Europe and Central Asia Region.

Thank you for joining us today.