Tides of Change

Igniting Productivity Growth in Europe and Central Asia

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Europe and Central Asia must seize the opportunity for more productivity-driven growth. By advancing Trade, Investment, Digitalization, Efficiency, and Skills—the TIDES reform agenda—the region can transform its growth trajectory. These five levers offer a bold path to better jobs, higher wages, and resilient economies.

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After years of reform-driven growth in the early 2000s, productivity in Europe and Central Asia (ECA) has slowed significantly since the global financial crisis of 2008, leaving incomes far below potential. TIDES of Change: Igniting Productivity Growth in Europe and Central Asia dives deep into the region’s productivity challenges, showing how misallocation, weak competition, and underutilized technologies are holding back progress. Drawing on firm-level data and labor market insights, the report outlines a five-pillar reform agenda—Trade, Investment, Digitalization, Efficiency, and Skills (TIDES)—to boost productivity, create better jobs, and close gaps with advanced economies. The report offers a compelling roadmap for igniting growth and resilience across ECA.

Key Messages

  • Overview
  • Chapter 1.

    • Since the global financial crisis, the region’s growth deceleration has been overwhelmingly a productivity story: capital and labor continued to contribute at roughly similar rates, but total factor productivity growth fell by about half.  

    • Simply adding more capital can no longer deliver convergence: the incremental output generated by investment has declined, and efficiency gaps loom larger than capital gaps. 

    • This productivity slowdown coincided with a loss of reform momentum, leaving long-standing distortions unaddressed and misallocation entrenched.  

    • Misallocation of resources has been the main factor behind ECA’s productivity slowdown, as large state-owned enterprises (SOEs), concentrated market structures, and restricted access to finance dampen competition and hinder the reallocation of labor and capital to more productive firms.

  • Chapter 2.

    • Global economic integration—through trade and foreign direct investment (FDI)—offers some of the most powerful yet underused levers for productivity growth in ECA.

    • ECA countries, particularly in the eastern part of the region, export well below their potential, resulting in large amounts of “missing trade.”

    • Fostering more exports could result in large productivity and employment gains, as exporters make up only a small share of firms but are responsible for large parts of value added, employment, wages and investment.

    • FDI inflows, often concentrated in a few sectors, are not sufficiently embedded in the domestic economy.

  • Chapter 3.

    • Digital technology can boost within-firm productivity growth in ECA.

    • Despite almost universal access to basic digital enablers (internet, PCs, smartphones, cloud services), firms in ECA struggle to intensively use advanced digital technologies in their core business functions, which undermines their productivity gains.

    • Skills of workers and managers and having access to large and more efficient markets are the key enablers for digital technology adoption in firms.

  • Chapter 4.

    • Becoming more energy efficient is strongly linked with higher firm-level productivity across countries and sectors.

    • Most gains in energy efficiency have come from within-firm improvements rather than from market reallocation.

    • Fossil-fuel subsidies and low electricity tariffs dampen incentives to upgrade equipment and optimize energy use, slowing diffusion of resource-efficient technologies that raise productivity.

  • Chapter 5.

    • There is significant skill misallocation, particularly in middle- and low-income ECA countries, whereby skilled workers are often not placed in larger, more productive firms, and vertical skill mismatches—where workers’ education differs from what their jobs require—are common, especially with overqualification. 

    • The misallocation results in considerable productivity losses, as overqualified workers are significantly less productive than their well-matched counterparts. 

    • Underwhelming proficiency in foundational skills is both a drag on productivity and a critical reason for skill misallocation.

    • Insufficient demand for skills and structural characteristics of the labor market, such as the extent of informal employment, play a significant role in skill misallocation.