Digitalisation can sustain economic recovery in the Eastern Partnership

Andreas Schaal discusses the effects of the pandemic on the EU's Eastern Partner countries, and what measures could be taken to help their economies recover. Banner image: Shutterstock/Monkey Business Images
Digitalisation can sustain economic recovery in the Eastern Partnership

This article is part of a series in which OECD experts and thought leaders  from around the world and all parts of society  address the COVID-19 crisis, discussing and developing solutions now and for the future.

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The European Union’s Eastern Partner (EaP) countries—Armenia, Azerbaijan, Belarus, Georgia, Republic of Moldova and Ukraine—have been hit hard by COVID-19. Recovery from the previous two shocks, the 2008-09 global financial crisis and the end of the commodity super-cycle in 2014-15, was already sluggish (Fig.1). As a result, even before the pandemic growth rates had long been too low to bring the countries to OECD productivity and income levels (Fig. 2).

This pattern must not repeat itself. If EaP countries are to regain their dynamism, it is vital that recovery policies align with long-term structural needs and provide new impetus for productivity growth.

Figure 1 – Real GDP growth (annual %)

Source: IMF, World Economic Outlook (April 2021). Data for 2020 are preliminary estimates.

Figure 2 – GDP per capita as % of OECD average (average of EaP countries)

Source: IMF, World Economic Outlook (April 2021)

Structural weaknesses hold EaP economies back

The pandemic has once more thrown into sharp relief some of the longstanding structural vulnerabilities of EaP countries. Most have highly concentrated export profiles—particularly in terms of goods exported—with raw materials accounting for over 80% of Azerbaijan’s exports and around 30% for Armenia, Georgia and Ukraine; in many cases, there has also been a heavy reliance on just a few export markets. Across most of the region, capital-intensive sectors that generate few jobs often drive growth, so most employment is concentrated in low-productivity activities. Diversifying economic activity, employment and exports will not only serve as a cushion against shocks but also helps to support growth that is more equitable and inclusive.  

Against this backdrop, policymakers should also bear in mind the disproportionate impact that COVID-19 is having on specific groups. Small and medium-sized enterprises have faced more serious liquidity constraints and decreases in sales compared to larger firms. Women and informal workers have endured deep reductions in pay and employment, which has exacerbated pre-existing gaps and vulnerabilities. The OECD has tracked these impacts in the Eastern Partnership and the related policy responses since the early phases of the pandemic, and proposed policy solutions to minimise long-term economic damage.

Create an environment that allows the private sector to thrive

“Building back better” in the EaP region means above all continuing to improve the business environment, allowing risk-taking entrepreneurs to invest and competitive markets to drive the best allocation of resources. In this regard, the recommendations in the latest SME Policy Index: Eastern Partner countries 2020 offer a useful compass for policy makers. EaP countries need to work on strengthening institutions and public governance, while creating sound conditions for investment, entrepreneurship and innovation. Well-designed and well-functioning regulatory and tax regimes are critical, together with secure property rights, fair competition and open markets.

Governments must design recovery plans and take actions to minimise long-term economic damage and to strengthen productivity. This means addressing the structural weaknesses that inhibit the competitiveness of their economies, along with the short-term impact of the COVID-19 pandemic.

First protection and targeted support should be maintained as restrictions are gradually eased. This is especially important for the frequent-contact, service-oriented sectors that have been hit hardest or that will be slower to re-open, such as travel and hospitality.

Second, COVID-19 should not be allowed to erode the entrepreneurial spirit in the EaP region. To manage the expected increase in the number of businesses facing financial difficulties, countries should reform their insolvency frameworks to allow for faster restructuring and increased asset recovery. They must also ensure that honest entrepreneurs are not unduly punished or, more importantly, prevented from starting new businesses in the near future.

Find more on the Forum Network: Put the public back in tech policy, by Marietje Schaake, President, Cyber Peace Institute; International Policy Director, Cyber Policy Center, Stanford University

Digitalisation is central to recover from the COVID-19 crisis, but technology adoption is only half of the story

Finally, while SMEs have suffered disproportionately from containment measures, they have also experienced the positive impact of digital technologies on their business— in many cases for the first time. Widespread SME digitalisation is one of the main ways to increase productivity in Eastern Partner countries—for instance, optimising business processes and reaching a whole new set of clients at low cost—and should be one of the centrepieces of their recovery plans.

Across OECD countries, SMEs lag behind larger firms’ adoption of digital technologies, and the gaps widen with more sophisticated tools like big data and artificial intelligence. Despite scarcity of data, similar patterns can also be observed in the EaP region.

Since digitalisation is an important driver of productivity and wage growth, low adoption of digital technology contributes to increasing inequalities among firms, people and places. Governments have a role to play narrowing digital divides, by promoting a reform agenda that keeps small and medium enterprises up-to-date on the digitalisation of their businesses.

Countries willing to pursue this direction should keep in mind that a true digital business transformation requires a digital culture to drive technology adoption; this means, first and foremost, boosting entrepreneurs’ awareness of digital solutions. Equally, SME owners and managers must be equipped with the tools to adapt their business processes to the increased availability of data, depth of customer insight, geographic reach and speed of market interactions. But it also requires digital acumen to spot new business models, and to build the necessary safeguards for data privacy and security.

To accompany EaP governments in this endeavour, as part of the EU4Business initiative a new OECD project provides policy advice to advance digital business transformation in the region. Building on our work to improve overall framework conditions for the digital economy, it recommends specific policy measures that governments and enterprise support agencies can put in place so that businesses can truly go digital.

Find out more about the OECD's work with Eastern Partner countries

Find out more about the OECD's work with Eastern Partner countries

Learn more about COVID-19 crisis response in Eastern Partner countries

Learn more about COVID-19 crisis response in Eastern Partner countries

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