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Rethinking Europe beyond the west

Positive forecasts for growth in central and eastern Europe are good for both domestic businesses and those beyond the borders looking for investment, trade or partnership opportunities. But in the context of global financial and political uncertainty, how can we measure a country’s prospects – especially one relatively new to a major economic bloc?

In 1934, economist Simon Kuznets wrote: “the welfare of a nation can scarcely be inferred from a measurement of national income.” He was warning of the limitations of the success metric he had himself developed – the now-dominant concept of GDP. Eighty years later, Slovenian politician Janez Potočnik, then European Commissioner for Environment, echoed those sentiments, urging an escape from the “handcuffs of GDP”.

Interestingly, Slovenia is doing well, even within the handcuffs of GDP, with better than expected growth, a credit rating lift, and outstanding results in the manufacturing sector. And Slovenia is not alone. Central and Eastern European (CEE) countries, in general, are looking good based on a more holistic set of indicators – GDP, social progress, and the happiness index.

While GDP is still the prevailing gauge of a country’s development and growth, it is only part of the wider picture. The Social Progress Index assesses countries based on how well basic needs are met and, importantly for longer-term economics, the ability of people to improve their lives – based on equality, personal rights and access to advanced education. All CEE countries are ranked as high or upper middle, and Slovenia, the Czech Republic and Estonia all come within the world’s top 25.

Based on 155 countries, the World Happiness Report 2017, commissioned by the United Nations and produced by the Sustainable Development Solutions Network SDSN, also reveals that all CEE countries (with the exception of Slovenia and Ukraine) stand out for having made some of the most significant gains in happiness levels between 2007 and 2016. In comparison, some of the greatest drops in levels of happiness were in Western Europe.

In Poland, UHY is represented by Biuro Audytorskie Sadren Sp.z o.o. and UHY ECA Group.

Speaking for UHY ECA Group, business development specialist Aleksandra Pilecka, agrees that GDP is a poor guide to social and economic welfare. “National figures on economic growth fail to consider differences between regions and ignore quality of life,” she says. “This is why the quality of economic growth needs to be measured, rather than just the quantity. We need to reinvent the way we measure the economy.”

Wieslaw Lešniewski is managing partner at Biuro Audytorskie Sadren. He believes that a mix of factors lies behind Poland’s success, including initiatives from the country’s new government and growth in employment, production and consumption. “Economy and wellbeing are linked - there is a new perspective for Polish people,” he says. “There are positive impacts now for people’s lives, earnings and economic standing.”

In Romania, Camelia Dobre, managing partner at UHY Audit CD S.r.l. in Bucharest, sees social progress as essential for business opportunity.

“We do not have a better measurement tool than our gradual convergence with the European Union’s average for quality of life. Our level has gone up continuously and constantly in the ten years since Romania joined the EU. Understanding Romania takes more than just looking at the GDP figures.”

Georg Stöger, managing partner at AUDITOR, spol. s r.o., UHY’s member firm in the Czech Republic, agrees that indicators apart from GDP are valuable. “I think these are good measures of Czech Republic´s progress,” he says, “and I believe the country shouldcontinue to put pressure on regulation against corruption, for example, to advance more on these indices.”

THIS WAY FOR BOOMING GROWTH

Whichever way you look at it, however, CEE is booming.

“And it looks like this could last for a while,” says Richard Grieveson, an economist with the Vienna Institute for International Economic Studies and a specialist in Central, South-Eastern and Eastern Europe.

“We see the region growing at around double the rate of Western Europe in the next few years, which means further convergence with EU15 income levels. Tighter labour markets mean higher wages and greater domestic spending power. The start of the new EU funding cycle means more investment. And Western Europe is undergoing an impressive cyclical upswing, which is driving demand for goods made in CEE.”

Richard also highlights two elements measured in the Social Progress Index – equality and access to education. “Some countries in the region have impressively low levels of inequality by European standards,” he says. “Our research shows that the education levels of workers almost everywhere in CEE have improved in the last few years.”

Aleksandra Pilecka highlights Poland’s huge resource of well-educated young people and competitive labour costs. “Each year, more than 500,000 Polish students graduate, and Poles are well ahead of their peers from many European countries when it comes to languageproficiency. Technical schools are more and more popular in Poland too, thanks to a growing awareness of market needs and to public support programmes.”

IMPROVING THE BUSINESS CLIMATE

Although the region is not without its challenges, there is a drive to make it easier for companies to do business. Jasmina Macura, managing partner at UHY Revizija in Belgrade, Serbia, says the country’s projection for growth is 4% by 2020, with especially good prospects in agriculture, infrastructure and tourism.

“The government is making a number of legislative changes that should attract more foreign investors to the country,” says Jasmina. “There will be a simplified tax law, modernised labour law, a more favourable land law, and a lot of red tape done away with.

“The government is very open to foreign investors,” she adds. “Infrastructure projects are primarily implemented through public-private partnerships and contracted under favourable terms for the private partner. As far as other investors are concerned, the advantages include subsidies for employees, longer-term tax breaks, plus low rent for land and thegovernment’s commitment to upgrade the infrastructure around plants.”

For Poland, Wieslaw Lešniewski points to high employment growth as a majorcontributor to the country’s positive business environment. “Every eighth new job is created in Poland,” heexplains. “Production for 2017 is likely to be 10% up on 2016, and in the first ten months of the year 223,000 industrial jobs were created.”

Aleksandra Pilecka says there is also a recognition of political risk, but argues that “what is more important and constant is the interest international companies have in Polish markets, largely thanks to the favourable business conditions. This state of affairs is very unlikely to change in the coming years.”

Created in the 1990s, special economic zones (SEZs) offer advantages including exemption from income and property tax – and the Polish government has committed to extending SEZs up to the end of 2026. Poland has also improved its ranking for the simplicity of its tax system, but Aleksandra says there is still a way to go.

“Among our clients, the most commonly reported problems are with the interpretation of legal rules. It is very important to keep up with this somewhat turbulent tax and legal environment,” she says.

In Romania, a change in government attitude has seen a move away from legislation that would have made it more difficult to do business.

“The private sector raised a strong voice against some of the fiscal proposals being presented, and they were listened to,” says Camilia Dobre. “We are also seeing a move from policies that promote consumption to those that support investment and strengthen the labour market through vocational training.”

Prague, Bratislava and other cities and regions of the CEE are now among the richest parts of theEU in per capita PPP terms.

“This is a staggering achievement, but it hides the fact that many rural areas in most of CEE remain very poor,” says Richard Grieveson of the Vienna Institute for International Economic

Studies. “Making sure that the gains of economic growth are shared will be a big challenge for policymakers in the coming years. If they do not do this, they could face a political backlash.”

INVESTMENT AND OPPORTUNITIES

In 2017, the UK Financial Times newspaper reported that the former communist countries that joined the EU after 2004 offered “superior growth to Western Europe and many other emerging markets, combined with the benefits and protections of EU membership”. ‘Core’ countries such as Poland, Hungary, the Czech Republic, Slovakia and Romania were “growing faster than any region in the world, with the exception of Asia-Pacific”.

Outside that core, the report suggested there were also opportunities for bolder investors, as countries started to come out of recession or weak growth.

Richard Grieveson agrees: “Some countries in the region have been very successful in attracting large amounts of FDI from Western Europe, and there is no reason that the rest should not now follow. We are already seeing a gradual shift eastward in Europe’s manufacturing core, with supply chains stretching from Germany and Italy into places like Romania and Serbia.”

Camelia Dobre in Romania says every sector is proving attractive to business.

“Huge opportunities could come from the birth of a sovereign fund for development and investment,” she says, “providing it is in line with best international practices, and a possible mechanism for making EU-funded projects more effective and efficient.”

Poland’s economic growth over the last 27 years has been particularly impressive. The country is the EU’s largest beneficiary, with EUR 105.8 billion allocated between 2014 and 2020, and has a domestic market of more than 38 million people.

“These funds will contribute to investment in Polish infrastructure, environmental and technology projects, and both human and regional development,” says Aleksandra Pilecka. “We already have hundreds of kilometres of new motorways, faster intercity trains and better logistics.”

Aleksandra suggests that the main opportunity, especially for foreign investors, is business process outsourcing. “We already have more than a thousand shared service centres and outsourcing companies in 40 locations, employing around 200,000 people. Businesses can take advantage of low labour costs, well qualified staff who speak multiple languages, exemption from some taxes and availability of office space.”

Some CEE countries have huge and booming export sectors, especially the Czech Republic, Slovakia and Hungary.

According to Georg Stöger, the Czech Republic’s strong export orientation is “the main factor behind the country´s strong growth – and a major economic sector is the automotive industry.” But unlike Poland, for example, where employment growth has been rapid, Georg has concerns for the future – “The economy is growing by about 3-4% but increasingly, companies are facing a lack of additional workforce. This situation is worsened by the fact that relatively few people from abroad are available on the Czech Republic´s labour market.”

While others have so far struggled to achieve positive export markets, there is no doubt that infrastructure improvements – with significant help from EU funds – will help these countries attract more FDI into the tradeable sector. In turn, this should increase employment, productivity and growth, with new opportunities in those CEE countries that are becoming sources of demand rather than sources of labour for goods consumed elsewhere.

The article can also be viewed via the full UHY Global publication here

Notes for Editors

UHY press contact: Dominique Maeremans on +44 20 7767 2621

Email: d.maeremans@uhy.com - www.uhy.com