Tuesday, October 11, 2011

11/10/2011: Central Europe: a Catalyst for empowering the EU

On September 9th, GE and Malopolska Regional Development Authority sponsored on of the three plenary sessions at the Krynica Economic Forum 2011, that I chaired, on the future development of the CEE region: "EU 2020 for CEE: a Catalyst to empower the CEE Region?"

This is the edited transcript of the session proceedings.

The objective of the session was to continue building on previous Economic Fora dialogues concerning the long-term development agenda for the CEE region, and how it fits into the EU frameworks and the EU perspective in terms of development and investment, structural funds, and core policy platforms.

The plenary session, chaired by Dr. Constantin Gurdgiev (Head of Research with St Columbanus AG and Adjunct Lecturer in Finance, Trinity College, Dublin), consisted of:
Mr. Ivan Miklos, deputy PM and the Minister for Finance in Slovakia
Mr. Zoltan Csafalvay, the Minister of State for National Economy of Hungary
Mr. Johannes Hahn, the EU Commissioner for Regional Policy
Mr. Ferdinando Beccalli-Falco, the President and CEO of GE Europe and North Asia
Mr. Stephen Gomersall, the Chairman of Hitachi Europe and
Mr. Pedro Pereira da Silva, CEO of the Jeronimo Martins Group.

Economic development, competitiveness and regional experience

Minister of State for National Economy of Hungary, Mr. Zoltan Csafalvay opened the discussion about the CEE regional development in the context of broader EU economic and social development. Minister Csafalvay stressed that although we perceive the traditional divide across Europe to be along the East-West axis, the current crisis shows that this divide is superficial. Instead, "...if we look at the competitiveness gap between Northern and Southern part of Europe, you can see this in productivity, level of flexibility, innovation, and even in economic freedom there is a gap between Northern and Southern part of Europe."

CEE countries are also performing very well during this crisis. For example, the ongoing fiscal consolidation in Hungary in 2011 also coincides with "a very strong pro-business agenda, including cutting taxes, introducing flat tax, reducing red tape, increasing the flexibility of the labour market and reforming the public sector."

Deputy Prime Minister of Slovakia, Mr Ivan Miklos further developed the theme that the lesson from the CEE region past experiences is that coming out of the current crises, "the EU states need to provide fiscal consolidation... [and] deep structural reforms. These are the main pre-conditions for increasing competitiveness." There are two approaches for dealing with the crises currently on the table. The first one is via a political and fiscal union with euro bonds, "which mean to have stronger and stronger coordination and centralization. The other approach is to have more strict and enforced rules, based on competition. I'm strongly convinced that the second approach is a much better approach, because ...in current conditions, a political union will, in my opinion, be politically unsustainable. Economically this kind of policy is not creating a good environment for necessary fiscal consolidation and structural reforms. ...I'm convinced, and the story of the reforms in CEE countries is a strong evidence, that what we need in Europe, is more competition, because we need deeper and more comprehensive structural reforms."

These points were echoed by Minister Csefalvay who stressed the need to increase competitiveness of Europe as a whole, while retaining competition between countries and regions within Europe. The main challenge is "to find a point where we can increase the competitiveness of Europe's single market is certainly a core point, and energy, transport and R&D focus are important. But, if we want Europe to be competitive on the global stage, we should maintain tax competition between member states, competition between different social and economic models, between what different business environments can offer."

EU Commissioner for Regional Policy, Mr Hahn touched upon the issue of policy cohesion and the regional leadership within the context of the need for accelerating economic recovery. "The question we are asking ourselves today is how we should use this investment to transform Europe's economy, so we can recover from the crisis... The answer to that lies in the Europe 2020 strategic framework. There is a need to continue working on removing the obstacles to a competitive economy and this means investing in better transport, energy, water, wastewater treatment, etc." In addition, Europe's success will depend on the capacity to invest in education, research and development, fostering innovation, supporting clusters and information technology developments. "Europe needs to identify paths of smart specialization. Countries of the CEE region have to see that investing in people and in better products and technology is not a luxury..."

Technological innovation is the driving force for the future of CEE economies and for Europe at large and EU regional and cohesion policies are here to help. "For instance for 2007-2013 cohesion policy will spend more than 86 billion euro on R&D and innovation, in particular for small and medium size enterprises. There are significant differences across the regions. Germany for instance invest 28% of it's total cohesion policy allocations in R&D, Poland and Hungary invest 15% and Slovakia only 10%. This is something we have to change... Don't forget that Europe has a negative technological trade balance of  38%. So we import more patents from outside Europe than we export ...[because] we are yet to bridge the gap between basic research" and business innovation. This is where the regional cohesion policy will move in the next years.

 From R&D focus to innovation-supporting services and technologies

There is significant role to be played by the core infrastructure systems development in facilitating human capital-intensive innovation-based economy that the policy frameworks like Europe 2020 envision. This infrastructure - bridging existent gaps in energy, water, wastewater, transport, education and healthcare - can serve as both the source of competitive advantage and the originator of innovation.
To deliver such supports, the economies of scale from regional cohesion and integration in infrastructure development and investment should be used as a significant point of strength, as stressed by Mr. Ferdinando Beccalli-Falco, the President and CEO of GE Europe and North Asia. These economies of scale reach beyond physical investment, to the heart of institutional competitiveness and the potential of the common market.

The need for transforming the current policies and institutional frameworks is exemplified by the CEE region. "There is a huge potential in this area. GE organized a seminar in Budapest where we were discussing the unification of the energy system of CEE in order to gain the economies of scale and create competitiveness. This was in 2007. What happened? Nothing. We repeated in 2008. What happened? Nothing." The core obstacle is not availability of funding, but the lack of common regional framework and the lack of will to invest in newest technology, not just catching-up but leading in technological capital. "...When we use these funds, let's try to use them to create the newest, most up-to-date technology, to make sure that we are not just buying technology which quickly becomes obsolete."

This is a part of addressing the European and CEE regional competitiveness challenges. "Competitiveness in Europe nowadays is represented by high level of education and by the creation of new technology, not the cost of manufacturing. When GE bought Tungsram in the late 1980s the differential in cost between Western Europe, or the United States, and Hungary was huge. Today, the reason why Tungsram can survive is because we are introducing the latest technology. Cost is not the name of the game anymore." To enhance this potential at the regional level requires re-prioritization of EU policy agenda. "The European budget today consumes a considerable percent in agricultural subsidies, which support a sector that accounts for just 3 percent of the total GDP. The new budget should be dedicated more to technology and education development." This will also benefit the CEE region, which has strong base of human capital.

The stress, placed by Mr Ferdinando Beccalli-Falco on harnessing CEE region potential in human capital, R&D and technological innovation, within the broader EU policy frameworks and budgetary supports, was complementary to the focus on institutional and 'soft' innovation (policy and business process development) raised by other speakers. These points were further expanded by Mr. Pedro Pereira da Silva the CEO of Jeronimo Martins Group who focused in his contribution on the need to see CEE region as the source of talent, creative workforce and business innovation.

"Over the last two decades we've been a part of the process of transformation in our industry and we have seen a remarkable transfer of know-how in the CEE region, massive investments and economic modernization. As an example: it took 15 years in Poland to open 350 hypermarkets; the same takes 25 years in Spain. So everything happens much faster, more dynamically, with more competition in the CEE region than in the other parts of Europe."

"As we see from the euro area experience, today we have much more risk, more uncertainty, we also are seeing slowdown in investment. You can see this as a challenge or as an opportunity." Until now, CEE countries have been focused on internal development but "the next stage will be regional consolidation in production and distribution sectors." This represents yet another, but related, regional opportunity as CEE economies become more closely integrated within the region.

Mr. Stephen Gomersall, the Chairman of Hitachi Europe took a more specific approach to the issue of regional integration - the perspective of the foreign direct investors in the region, building on the contributions by Minister Csafalvay  and Deputy Prime Minister Ivan Miklos concerning the importance of interconnecting public policies with private sector competitiveness. "...From our point of view those are key factors for bringing more investment into Europe."

Firstly, according to Mr Gomersall, although CEE countries do have a deficit in infrastructure, "they have strong macro-economic frameworks, and young and vibrant workforce. The region also has the advantage of investing in infrastructure at a time when much more sophisticated and efficient solutions are available. So you can get a much bigger effect from the investment."

Secondly, alongside the contributions from Mr. Beccalli-Falco and Mr. da Silva, Mr Gomersall said that, "from an investment perspective, growth comes from empowering the private sector. Governments play a vital role in providing the framework for national development, for regional development, and as sponsors of innovation, but there are four key factors I would mention for growth and for business. The first is a stable economic environment, the availability of credit, stable currency and a climate conducive to foreign investment. The second is a secure and stable energy supply... [with] the right mix of energy sources... The third factor - good intercity and regional transport links, ...and an efficient IT environment." In at least two of those areas, according to Mr Gommersall, policy framework and IT deployment, "Poland is already a very strong player and becoming a leader in Europe in implementing, for example, e-government technologies".

Thirdly, "new infrastructure development will require very large investments. The EU programs and structural funds are of enormous importance, but there is also the need for private finance, so projects need to be not political or social projects, but based on solid economic returns and optimal efficiency." CEE region needs "innovative methods for blending public and private finance ...to deliver public services, for example in energy and transport. ...Many of these projects are trans-national: cross-border. For example, Lithuanian's nuclear power project involves investment from four nations and a unified or at least interconnected grid. Without regional cooperation, it will be much more difficult to make this investment efficiently. So, the coordination of policies and projects at the regional level makes enormous sense."

Regional policy and investment platforms

Overall, the panel was in consensus on the need for developing more competitive economic models, including regional models, especially in the areas of human capital and services. The question that remained is whether the CEE can act as a functional regional platform for competitiveness and innovation-supporting technologies and best practices.

Mr Gomersall referred to the specific example of Poland that shows the intrinsic resources available within the CEE region that can be used to drive both the policy dimension of stimulating competitiveness and for merging investment and technology platforms to deliver on regional objectives. "It's well known that the level of scientific education in Poland is high, and therefore the propensity in Poland to adopt new technology solutions is also high. We've been working with a number of government and private partners here in Poland for the development of biometric technologies. These are means of ...ensuring the security of business transactions, and transactions between the government and citizens online. Poland has actually proven to be the most fertile ground for the development of these technologies EU-wide." Mr. Ferdinando Beccalli-Falco added that from GE experience, "the human capital is  already here, [in the CEE region, and] the tradition for the development of technology is here."

Mr. Zoltan Csefalvay pointed out that despite the demand for the latest technological investments in the area of infrastructure in the CEE region, little funding is available in these areas. "If you look at the future financing period 2014 to 2020, there is an EU-wide investment facility for infrastructure development and transport development. Of 49 transportation projects identified under this, only two are related to Hungary." The lack of prioritization of CEE regional investments by the EU implies the need, according to Mr Csefalvay, "to place Central and Eastern Europe in the centre of the European debate."

The central issue is how can CEE translate the points of national excellence to a regional framework? Can focusing on the more specific areas for investment such as, for example, energy or infrastructure or healthcare reshape the regional framework for development and avoid the differentiation between local competition and regional competition and global competition. According to Mr Beccalli-Falco, "the initiative to create a unified regional energy system" is a strong positive. "Where we find a roadblock is in the political will to do it. I am afraid there is not enough vision to understand the advantages that such a system could bring."

Mr Pedro Pereira da Silva focused on the three key concepts that, in his view, will drive regional growth within the CEE and indeed across Europe. "Innovation, efficiency and competition for me are the three key words we need to focus on in the EU". For CEE states "a key point, is that extra effort is needed on the education side to support talent capital, which really makes a difference."

Mr. Gomersall echoed these views while focusing more on specific example of large scale regional infrastructure integration in transportation systems: "Obviously EU funds and national development funds are limited and therefore it's important to ensure that they are used in the most efficient manner for the future development ...and not just for social stabilisation. ...[However] the volume of new capital coming in from the private sector, particularly from the United States, Japan, China, South Korea, etc, is far in excess of the funds from the European Union. So, the key point is really to create a climate which will continue to attract that investment and make it profitable, and that includes, obviously, taking further steps on the single market and deregulation."

Mr. Beccalli-Falco concluded the panel discussion with a comment summing up the core areas for investment and policy development at the regional levels, mentioned by other speakers: "I'd like to say that my three concepts, are: continue to focus on education, full utilisation of the European funds, and support foreign direct investments, which, as was said by others, are much bigger than what is contributed by Europe. If we can combine these three things together, I think that Central and Eastern Europe is going to become a highly productive, highly competitive area in the world."

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