An automated metro train in Turkey Gurcan Ozturk/Getty Images

A New Growth Model for Europe’s Neighborhood

Countries in Europe and its broader neighborhood cannot base long-term growth on their low-wage comparative advantage. Instead, they must lay the foundations of future-oriented growth models, including by improving governance, investing in infrastructure, and promoting environmental sustainability.

LONDON – More than ten years after the global financial crisis, the world economy is finally enjoying a broad-based recovery. Europe and its broader neighborhood are no exception: economic growth in almost every country in Central and Eastern Europe, Central Asia, the Middle East, and North Africa, as well as in Russia and Turkey, has accelerated in the last year, and is projected to remain robust. Yet new challenges loom. If not addressed, these regions’ prospects will dim.

As the European Bank for Reconstruction and Development’s new Transition Report shows, before the Great Recession, the countries of Europe and its broader neighborhood were outperforming comparable emerging economies elsewhere. In recent years, however, the tables have turned – and the gap is growing.

The explanation is straightforward. Previously, Europe and its broader neighborhood enjoyed high total factor productivity (TFP) growth. By eliminating many of the inefficiencies inherited from their socialist or otherwise dirigiste pasts, these countries were putting their capital and labor to increasingly good use.

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