FRIEDRICH-EBERT-STIFTUNG – A NEW GROWTH MODEL IN EU-CEE a result of the current pandemic. Using greater state power to re-mould the EU-CEE growth models means industrial policy would have a particularly expanded role. There are two basic ways to think about this in the EU-CEE context. First, EU-CEE countries could aim to create domestic inno­vation-leading companies. Japan, South Korea, Taiwan and China have moved up into the league of technological in­novators by producing»national champions« who then proved competitive in international markets and developed their own research and development(R&D) capabilities. The lack of strong, innovative companies is a weakness of the current EU-CEE model(just as it is a weakness of the economic structure in the former GDR and in Southern EU countries like Portugal and Greece). 4 The existence or non-existence of these kinds of internationally competitive firms marks the difference between catching up success­fully and remaining in the second division. The second way to think about industrial policy in the EU­CEE context is via the idea of an»entrepreneurial state« (Mazzucatto 2013) to create new markets and support the development of new activities and products. This is a formi­dable task that also has great potential. Some authors (Mazzucatto 2013; Wade 2012; Wade 2014) argue that the most technologically advanced economies, such as the United States, owe their technological leadership to the state and its agencies’ active support for and facilitation of the development of new technologies and whole new mar­kets. The successful establishment of an entrepreneurial state requires top-quality public officials and a dense net­work of specialised agencies 5 — both public and private— providing research and technical support. Moreover, the state and these agencies do not act in a vacuum but need to interact and coordinate with many other actors, includ­ing universities, development banks, and most importantly lead firms in the targeted sector or field of technology. These firms are vital because the idea behind the entrepre­neurial state is not to replace private firms but to comple­ment their activities in the field of basic research, infrastruc­ture, training, and educational facilities where private activ­ities are scarce. The innovating capacity of firms can be sup­ported through a well-developed national innovation sys­tem(NIS) led by a far-sighted state. In turn, these innovative firms will support the development of an innovation eco­system. These two approaches— national champions and an entre­preneurial state— may well both include elements that can 4 It should be kept in mind here that having strong, internationally competitive firms does not guarantee fast growth. Take the exam­ples of Japan and Italy. Both are blessed with highly sophisticated and technologically innovative firms. However, both countries have fared pretty badly in terms of growth for many decades. Why? Firstly, the domestic macroeconomic environment is crucial for the development of such companies and, secondly, there might be a discrepancy be­tween company performance(e.g. relocating significant parts of its activities internationally) and its impact on the domestic economy. 5 Examples include DARPA and NASA in the US and the Fraun­hofer-Gesellschaft in Germany. be successfully implemented in EU-CEE countries. However, neither represent anything close to a complete solution to the current and future threats to the EU-CEE growth mod­el. Taking both areas together, we see two central difficul­ties in implementing these approaches in EU-CEE. First, building up national champions following the West­ern European or East Asian model is simply not possible within the current EU. The successes in building»national champions« in parts of Western Europe and East Asia in­volved many decades of incubation. During these decades, the future national champions tended to be strongly pro­tected and subsidised by their respective national govern­ments. Apart from the fact that the direct, heavy involve­ment of the state does not guarantee ultimate success(as evidenced by the experience of Latin American countries 6 ), the levels and forms of protectionism, industrial policies, and public aid that used to be acceptable in Western Eu­rope(and is still practised in China, for example) are no longer possible in the contemporary EU. The imposition of import tariffs or quotas restricting access to the domestic market in order to protect budding national champions is unthinkable. Meanwhile, providing subsidies to domestic firms cannot be squared with the principle of fair EU-wide competition. Second, even if there were no obstacles as part of EU membership, at present most EU-CEE countries lack the in­stitutional capacity to fully support national champions or implement an entrepreneurial state. Institutional capacity — including innovation-promoting ecosystems of basic re­search, application-oriented research, and training systems and companies— has been a bedrock of German success since World War II. Despite many improvements, EU-CEE institutions do not compare with»best practice« examples like Germany. In the last decade, institutional quality has gone backwards in parts of EU-CEE, posing additional dif­ficulties to this approach for some countries. Although the situation varies between countries, in at least some parts of EU-CEE, it is questionable whether state capacity is compatible with the notion of an entrepreneurial state. These constraints on government action are important. Yet, our paper will set out to identify the areas where state action is permitted by EU rules, where it is feasible given the institutional capacity of EU-CEE, and where it would be desirable in the current political context. Very few coun­tries in the world, not only in EU-CEE, can hope to enact the ambitious policies outlined above in full. Within these constraints, we hope to show there is a great deal that EU­CEE governments can and should do to help their econo­mies transition to a new and more sustainable growth model. 6 The Latin American states have proved to be rent-seeking rather than modernizing. All EU-CEE strategic segments of the economy have remained public. In effect, the EU-CEE states conduct a form of industrial policy through the management of these segments. There is some evidence that the management of public-owned firms is of­ten guided by rent-seeking motives rather than modernization. 6