FRIEDRICH-EBERT-STIFTUNG – A NEW GROWTH MODEL IN EU-CEE Digital opportunities beyond the pandemic: Transi­tion to a more digitalised economy could significantly boost EU-CEE’s growth potential. For a region with a spe­cialisation in just-in-time manufacturing, both the transi­tion towards industry 4.0 and the development of IoT tech­nologies are particularly significant opportunities. Particu­larly in those countries with high levels of human capital, digital services represent the opportunity for leap-frog­ging. Starting in 2021, the EU’s Digital Europe Programme will provide EUR 9.2 billion to support certain aspects of digitalisation, with a particular focus on SMEs. Green transition: Although there are reasons to see the green transition is a threat from an EU-CEE perspective, for some it is also an opportunity. This can also go way beyond the obvious, such as the recycling industry. In the case of EU-CEE’s very low level of»circular materials use,« there seems to be major growth potential in the establishment of a wider circular economy. The Just Transition Fund is a promising development for EU-CEE and will likely go a long way to pacifying resistance in countries like Poland. The switch to renewables and improvements in energy efficien­cy are likely to act as a small net benefit for overall employ­ment. New global value chains based on renewable ener­gy, e-mobility, and environmentally friendly goods could place their production and R&I capacities in the region, providing further growth and job creation potential. Automation: EU-CEE countries have imported robotics for use in industry at a higher rate than almost anywhere else in the world in the last few years. This is a natural re­sponse to rising labour costs, as firms choose to invest in labour-saving technologies. This is also potentially impor­tant in the context of declining working-age populations. Automation can be seen as an opportunity for EU-CEE to retain its strong position in manufacturing despite the de­mographic shift. 4.4 THREATS The functional specialisation trap: Our analysis suggests that many EU-CEE countries are way more specialised in production than their income levels would suggest. This im­plies many industries in EU-CEE could be stuck in a trap, lim­ited to serving as the manufacturing hubs for Western Euro­pean multinationals without viable strategies to diversify the economy through headquarter activities and greater relative specialisation in more lucrative parts of the value chain. The production that manufacturers in the EU-CEE region spe­cialise in can be conducted by many firms in many countries, meaning that competition is high, margins are low, and the threat of production being moved to a cheaper location(or due to big government incentives) is quite elevated. As countries specialised in production rely on relatively low wages, EU-CEE economies are especially exposed here. Reliance on low labour costs in a changing world: It is clear that, despite major other advantages, cheap labour constitutes a major part of the EU-CEE appeal to foreign di­rect investors. In the current context, there are two very concrete threats in this area. First, labour shortages have pushed up unit labour costs in recent years, reducing EU­CEE’s advantage here. Second, an over-specialisation in pro­duction leaves EU-CEE countries exposed to competition from even lower-wage countries further south and east. Back-shoring due to full automation of production: For now, the fundamental incentive for German and other Western European firms to outsource labour-intensive pro­duction remains extant. However, as technological im­provements continue to support automation and a greater share of production is done with little or no human in­volvement, Western firms may decide to bring production not only nearer but even to their home country. A barrage of threats for the automotive sector: One of EU-CEE’s most important sectors is facing a large num­ber of threats, which have only been added to by the pan­demic. These include skills shortages, rising unit labour costs, changing consumer demand, and new regulations. Demographic decline creates imbalances and FDI goes elsewhere: Although the pandemic has pushed back the point at which economies effectively run out of workers somewhat, fundamental factors suggest that it will still come. If wage pressures increase without productivity im­provements amid a shrinking pool of workers, there is a risk that macroeconomic imbalances will emerge, and foreign direct investors will look elsewhere. Political backlash against foreign investors: In the last ten years or so, the large repatriation of profits by foreign firms in EU-CEE has received increased(and increasingly negative) attention in local debates. Economic nationalism has already crossed into the political mainstream in Hunga­ry, with large parts of the economy being taken back under state control. State capture and rent-seeking are key parts of this new agenda, which could harm economic development in the medium and long-term. The new agenda may dis­courage further important FDI projects in parts of EU-CEE. Unequal distribution and economic insecurity in the new digital economy: Much of EU-CEE is characterised by fairly low income inequality in the EU context. There is a dan­ger that the rise of the digital economy will threaten this, as a small number of high-paid ICT jobs in capital cities might push the ceiling higher without spilling over to the rest of the economy. This may reinforce the existing urban/rule digital divide in EU-CEE. Many digital jobs are insecure, with a lack of labour protection of lower-income employment. Perpetuating the carbon lock-in and falling behind in green technologies: The slow pace of decarbonisation, obsolete technologies, inadequate waste management systems and discouragement of environmental values in the society are all threats from the perspective of many EU­CEE countries. This could prevent the region from reaping the economic rewards of the green transition through the development of comparative advantages and capabilities. 50