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Europe and Central Asia Economic Update




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COVID-19 and Human Capital

October 7, 2020
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The COVID-19 pandemic has sunk the global economy into the deepest recession in eight decades. In the emerging and developing countries of Europe and Central Asia, GDP is expected to contract 4.4 percent in 2020. This update summarizes recent developments and presents the outlook for the region. The report also focuses on human capital, an area that requires serious attention given the severe impact of the pandemic on health and education.


Summary

In Europe and Central Asia, regional output collapsed in the first half of 2020, as growing domestic outbreaks and pandemic-related restrictions caused domestic demand to plummet, exacerbated supply disruptions, and halted manufacturing and services activity. The sharp decline in remittance inflows — which account for about 10 percent of GDP in the region, excluding the Russian Federation and Turkey — contributed to the slide in retail sales.

The economies hardest hit were those with strong trade or value chain linkages to the Euro area or Russia and those heavily dependent on tourism or energy and metals exports. Economies that were slower to implement measures to stem the spread of the virus suffered more widespread outbreaks, higher death rates, and steeper declines in activity than economies that did so more rapidly, as restrictions to contain the pandemic had to be more stringent.

Growth is projected to recover in 2021, but the pace of recovery is highly uncertain and depends on the duration of the pandemic, the availability and distribution of a vaccine, and the degree of improvement in trade and investment. The recovery could be weaker than expected if the pandemic worsens, necessitating prolonged restrictive measures and/or escalating geopolitical tensions.

Once the health and economic crises caused by the COVID-19 pandemic are brought under control, policy efforts in the region will need to address the steep fall in productivity growth over the past decade and focus on structural reforms that are essential to reignite long-term growth prospects. Strengthening governance and improving institutional quality could yield growth dividends and attract investment.

Structural bottlenecks, including limited exposure to international competition and low innovation rates, continue to weigh on the business environment. Boosting investment in human capital and climate resilience will be crucial to raise living standards and foster inclusive and sustainable growth.

Addressing these headwinds to long-run growth will require a well-targeted reform agenda to increase productivity growth, improve the investment climate, and foster digital development. The feature chapter of this update examines human capital outcomes in the region and the ways in which the pandemic is likely to affect them, in an effort to identify policy priorities in health and education.

The COVID-19 pandemic has hit human capital directly in Europe and Central Asia, adversely affecting both education and health. School closures may lead to learning losses equivalent to a third to a full year of schooling, and they are likely to exacerbate inequalities, by disproportionately affecting students from disadvantaged backgrounds.

The disease has already killed thousands of people, and some people who survive will suffer long-term damage to their health. Recovery from the pandemic will require strong investment in both education and health.

Countries in the region provide relatively good basic education and health services; the region’s citizens begin their lives in a much better position than their peers in other regions of the world. Job markets now demand higher levels of human capital than they did in the past, however. Basic education is therefore no longer enough; higher education institutions must prepare students for the challenges the future of work may hold.

On the health front, just surviving is not sufficient. Adults need to remain healthy and active, to continue learning and acquiring skills throughout their lives, not just in the initial years. Reducing the health risks of obesity, smoking, and heavy drinking are particularly important for active and productive aging.

Overall, modernizing the foundations of education systems, increasing access to tertiary education and improving the quality of tertiary education, and reducing adult risk factors for health are all key for the region.

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PUBLICATIONS AND UPDATES

 

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REGIONAL UPDATES
The Office of the Chief Economist publishes a Regional Economic Update every year in both spring and autumn. Each update includes an outlook for economic growth and analysis of a special topic important to the region.

 

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REGIONAL FLAGSHIP REPORTS
Regional flagship reports analyze trends and key issues in the region and are targeted to a broad audience.

 

 

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WORKING PAPERS
Working papers share researchers’ findings from work in progress to encourage the exchange of ideas about development issues.