World Economic Forum on Europe and Central Asia Expanding the Frontiers of Innovation Vienna, Austria 8-9 June 2011

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The electronic version of the 2011 World Economic Forum on Europe and Central Asia report allows access to a richer level of content from the meeting, including photographs, session summaries and webcasts of select sessions. It is available on the World Economic Forum website: http://www.weforum.org/europereport/2011 (HTML) http://www.weforum.org/europereport/2011/pdf (PDF) Other specific information on the World Economic Forum on Europe and Central Asia in Vienna, Austria, on 8-9 June 2011, can be found at the following links: Meeting news Photographs Session summaries Webcasts

http://www.weforum.org/Europe2011 http://wef.ch/viennapix http://www.weforum.org/EU11Sessions http://www.weforum.org/live

The views expressed in this publication do not necessarily reflect those of the World Economic Forum. World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: 41 (0)22 869 1212 Fax: 41 (0)22 786 2744 E-mail: [email protected] www.weforum.org ©2011 World Economic Forum All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. REF 200711

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Contents Preface

Page 3

Executive Summary – Expanding the Frontiers of Innovation

Page 4

Strategies to Boost Global Competitiveness

Page 8

Partnerships to Build Risk Resilience

Page 12

Models to Solve the Resource Equation

Page 16

Acknowledgements

Page 22

Contributors

Page 24

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Preface Stephen Kinnock Director, Head of Europe and Central Asia

The World Economic Forum on Europe and Central Asia brought together over 500 business, government academic and civil society leaders from 67 nations worldwide. The meeting took place against a backdrop of complex and challenging issues such as the Eurozone debt crisis, oil price volatility and uncertainties around the impact of the Arab Spring, but it also explored a number of potentially game-changing opportunities for the region, ranging from green growth to, biotech to investment in breakthrough infrastructure projects. The overarching theme of the meeting was Expanding the Frontiers of Innovation, and this provided a Call to Action in that it conveyed a sense of urgency about the pressing need for the region to realize its potential in the global competitive landscape. One of the core messages coming out of the meeting was that Europe and Central Asia cannot compete by cutting costs, because its economies have moved beyond that stage of development; therefore it must compete on the basis of quality. And quality is synonymous with innovation. Sessions under the first thematic pillar, Global Competitiveness, scanned the policies and business models that are required to unlock the region’s innovative potential. Discussions focused on: •

“Intrapreneurship”: how large organizations can retain and develop their entrepreneurial spirit and agility

•

Hubs and clusters: how regional centres of excellence can be

created to foster innovation and facilitate start-ups •

•

Energy security: how new partnerships can be forged to deliver greater natural gas supply stability and sustainability, through diversification

•

Green growth: new business models and policy frameworks to accelerate the transition to a lowcarbon future Human capital: concrete actions to design labour markets that offer flexibility, security and dynamism

The third pillar, Risk Resilience, identified the most prominent risks and roadblocks confronting the region, and recommended strategies to mitigate and build resilience. Sessions examined: •

Corruption: seen by many as the single most important inhibitor of sustainable growth across much of the region, participants had a robust debate on the causes and consequences of corruption, and identified a number of examples of best practice, anti-corruption strategies for replication.

•

Arab spring: the popular uprisings across the Middle East and North Africa were warmly welcomed, but concerns were raised about Europe’s response. This plenary session pointed to a number of risks around the direction that the Arab spring might take if Europe and the rest of the international community fail to rise to the challenge.

Game-changers: identifying the next wave of disruptive thinkers and entrepreneurs, and enabling them to grow

The second pillar, The Resource Equation, concentrated on the pressing need to develop an overarching strategy for sustainable growth across the region. Priorities included:

•

•

Future of the European Union: the EU is facing a number of major challenges, ranging from the debt crisis, to schisms between the core and the periphery, to the rise of nationalism. Nevertheless, the EU is still the world’s largest tradin g bloc and clearly too big to fail. Now is not the time to disintegrate but rather to move to a more integrated, better coordinated Union.

The discussions and debate were supported by the launch of a number of key reports, including The Russia Competitiveness Report, and private sessions on the new energy architecture and the future of personal data, which provided additional insight for the official programme. Moreover, a Memorandum of Understanding was signed between the Forum’s Partnership Against Corruption Initiative (PACI) and the Vienna-based AntiCorruption Academy. The consensus among participants was that this complex and diverse region can no longer afford to think in silos. Instead it must integrate and innovate if it is to develop and prosper in today’s increasingly competitive global landscape.

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Executive Summary: Expanding the Frontiers of Innovation The 2011 World Economic Forum on Europe and Central Asia was held in Vienna, Austria, the gateway between the Western and Eastern sides of the Europe and Central Asia region. The meeting brought together over 500 leaders from business, government, academia and civil society from more than 67 nations – from across Eurasia and from around the world – to discuss “Expanding the Frontiers of Innovation”. Innovation cross-cuts the issues of social and economic development, energy supply, reform, fragility and stability – all of which are at the top of political agendas, from Lisbon to Vladivostok. Historical ties were strengthened when the USSR fractured in 1991 and Europe began to engage with the former Soviet space, thus building many of the commercial, political and people-topeople connections that would come to define the new world order. Opening a land route connecting the Pacific, China and East Asia with Western Europe – the “Silk Road” – promises to cut transport times to less than one-fourth of their current cost. Some countries along the route could increase their GDP by more than 40% as a result of increased business and services.

Since independence, Central Asian countries have moved from the periphery of the European neighbourhood towards the centre of a new global architecture. The countries are rich in natural resources and human capital. The Customs Union of Kazakhstan, Russia and Belarus has launched free trade negotiations, an important step in integrating Central Asia into the international trade and economic system. A free trade agreement among these countries would be an important element in the shifting, dynamic Asia-Pacific economic architecture. While the economies of the Europe and Central Asia region are diverse, they all share an interest in achieving sustainable growth based on innovative business models. Moreover, the relationship between Europe and Central Asia has reached a critical juncture. The advanced economies of the EU are suffering from fiscal austerity, slower growth and the European Union – the world’s largest trading bloc – is losing its competitive edge. Meanwhile, emerging economies across the former Soviet space are over-reliant on hydrocarbons and urgently need to diversify their economic base. This year’s programme was built on three pillars: global competitiveness, risk resilience and the resource equation.

Strategies to Boost Global Competitiveness Europe was losing its competitive edge before the economic crisis hit in 2008. Since then, the reverberations of the crisis across the continent galvanized policy-makers to rethink – and redesign – the European social model. The Europe 2020 Strategy aimed to put the EU on a sustainable growth trajectory. The recent Euro Pact outlines key indicators of competitiveness. In Central Asia, economies have achieved staggering growth performance over the past 10 years – labour productivity has grown between 3 and 6% above the world average, GDP has grown by about 8% annually and FDI has grown nine-fold. The economic crisis in 2008 and 2009 cut GDP growth in half. This undermined the region’s competitiveness and exacerbated pre-existing challenges such as shortfalls in the education system that are causing a worrisome skills gap, too few opportunities for developing SMEs, governance shortfalls, infrastructure needs and an over-reliance on energy resources. Russia and the Caucasus are expected to play a growing, strategic role in the region. Russia’s economy is lagging behind other large emerging BRICS and is facing multiple challenges but has the potential to grow. •

Improve the innovation pipeline: Innovation is the lynchpin for the European and Central Asian economies to regain their competitive edge in a multipolar, dynamic and rebalancing global economy. Developed economies cannot compete with China on the basis of price. Competitiveness in today’s global marketplace must be based on quality, which is driven by innovation. Europe and Central Asia must expand the frontiers of innovation across geographies, sectors and generations.

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“We have been through the deepest economic crisis for many decades. Key everywhere is growth and growth is synonymous with innovation.” •

Reform policies to meet the challenge of rapidly shifting demographics: The economy of the region requires deep structural reforms in labour markets, services, R&D, human resources and education. Demographics in Europe require policies that encourage lifelong learning, enabling elderly people to work longer to pay for social safety nets. Public policies must encourage retraining to enable the unemployed to get back into the workforce.

•

Start building human capacity at an early age: The region is suffering from skills shortages, caused by alarming shortfalls in primary, secondary and post-secondary education. Building human capital starts at a very young age. The focus should not only be on teaching but also on how to gain knowledge, build capacity and spark entrepreneurship.

•

Create an enabling environment for SMEs: SMEs are engines of innovation and growth but need support and resources to flourish and expand. For example, the MP3 audio format and Skype were both European ideas that were scaled up offshore. In Central Asia, the potential for SMEs to power growth is huge but they need financing and capacity building.

Partnerships to Build Risk Resilience The Europe and Central Asia region needs to overcome political, social and financial challenges if it is to achieve long-term, sustainable competitiveness. The financial crisis hit the entire region hard and the road to recovery has been slow and fraught with difficulties. The crisis exposed serious fault lines in Europe’s institutions and structures. In Central Asia, the crisis cut growth by half. Corruption is a persistent obstacle to social and economic progress in parts of Eastern Europe and Central Asia. With 75% of FDI in Central Asia coming from Russia and the Middle East, the region is particularly vulnerable to entrenched corruption. However, corruption is not intractable – as demonstrated by countries such as Georgia and Russia, which have implemented a raft of anti-corruption reforms. •

•

Seize the current opportunity and take urgent steps to create more resilient political integration: Only through cooperation, political will and economic literacy can the Eurozone countries solve the four interrelated concurrent crises: a solvency crisis, a banking crisis, a crisis of relative competitiveness and a crisis of political legitimacy. The euro is facing its greatest threat – the sovereign debt crisis – and the time to act is now. Co-design more integrated regional infrastructure: In Central Asia, the focus should be on building resilience via cross-country cooperation, including harmonizing

Sir Michael Rake, Chairman, BT Group Plc, United Kingdom; Co-Chair of the World Economic Forum on Europe and Central Asia

“[Central Asian countries have] moved from the periphery of the European neighbourhood to the centre of a new global architecture.” Heinz Fischer, President of Austria

“To achieve more sustainable and innovative growth, for a number of countries it is [important] to ensure diversification. Diversification and innovation are synonymous.” Herman Gref, Chairman of the Board and Chief Executive Officer, Sberbank, Russian Federation; Co-Chair of the World Economic Forum on Europe and Central Asia World Economic Forum on Europe and Central Asia | 5

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customs regulations and eliminating cross-border corruption, and by creating a new land route across Asia. More integrated regional infrastructure will de-risk supply chains and expand business/ service operations as well as enhance greater talent mobility. •

•

•

Provide support from neighbouring countries to the MENA region: Two paradoxes followed from the Arab uprisings – the gap between societal aspirations and economic reality, and increased shortterm uncertainty together with enhanced long-term stability. At the same time, political unrest is posing problems for Europe as trading with some nations is becoming difficult and the conflict in Libya has disrupted energy supplies. “Much is required to prevent a hopeful autumn turning into a terrible winter.” Rethink organizational models to enhance performance: The organizational revolution is redefining companies’ operational systems by implementing the Hollywood model, hiring innovative freelancers for specific projects without incurring permanent personnel costs. Establish legal norms and practices on data security and privacy: This is essential to prevent organized crime and 21st century cyber warfare.

Models to Solve the Resource Equation Europe needs a new energy architecture that balances energy security, energy independence and climate change. This can only be achieved with new top-down regulatory frameworks and individual citizens’ bottom-up behavioural lifestyle changes. Growth may be burgeoning in Central Asia, but there are disparities in GDP per capita among countries. Poverty remains a severe problem in many of the countries. Those rich

in natural resources need to diversify their economies and invest in human capital. Increased oil price volatility and the difficulty of predicting future demand impede investments in developing new oil reserves. •

Introduce a well-defined resource pricing mechanism: In Europe, such a mechanism could incentivize businesses to adopt more sustainable operational measures and to avoid the risk of free riding. Ways forward include introducing new sustainable taxing systems: “Tax not what you earn but tax what you burn.”

•

Increase public investment in green infrastructure and renewable energy sources: At a time of escalating demographic trends and growing negative impacts on the environment in the region, the challenge is to balance short-term actions that fuel economic recovery with actions that ensure long-term sustainability.

•

Share wealth of resources to ensure economic and political stability: Europe has a specific interest in cooperation in the energy sector, particularly as Central Asian countries are considering building renewable energy sources. Therefore, Central Asia is less homogenous than its European neighbours. Some countries in Central Asia have massive water resources, but no hydrocarbon or mineral resources.

•

•

Diversify energy supplies: Europe and countries such as Ukraine need to diversify their supplies of energy. Europe needs to reduce its reliance on Russia for natural gas by completing projects such as the Nabucco pipeline, the new gas bridge from Asia to Europe and the South Stream natural gas project. Redesign social support systems to improve labour markets: In the region, economic policies need deep reform. To substantially improve damaged and fledgling labour markets, superficial reform is not enough. Sweeping change to macroeconomic models and complete restructuring are required – including tax and welfare

systems, as well as adopting new employment models. •

Reduce the skills gap through public-private sector collaboration: Governments can do more to support entrepreneurship and SMEs, as well as invest in science, technology and R&D. Companies can do more to invest in skills transfer and on-the-job training.

•

Look beyond the economic crisis and focus on the bigger picture: The challenge for the region is to balance short-term actions that fuel economic recovery with actions that ensure long-term sustainability.

“We need to preserve the entrepreneurship that comes from the diversity and the heterogeneous structure that we have in Europe.” Jim Hagemann Snabe, Co-Chief Executive Officer, SAP, Germany; Co-Chair of the World Economic Forum on Europe and Central Asia

“Kazakhstan is investing in centres for science and engineering with partners like GE, and sponsors thousands of students to attend the best universities in the world every year.” Kairat Kelimbetov, Minister of Economic Development and Trade of Kazakhstan; CoChair of the World Economic Forum on Europe and Central Asia

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Strategies to Boost Global Competitiveness

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The economies of Europe and Central Asia are linked – 75% of foreign direct investment in Central Asia comes from Europe, Russia and the Middle East, 60% of which is in the extractive industries. China has a larger share of trade with the region than Russia or the European Union. The neighbourhood also includes the North Caucasus and South Caucasus. Developed economies cannot compete with China on the basis of price. Competitiveness in today’s global marketplace must be based on quality, which is driven by innovation. Europe was losing its competitive edge before the financial crisis hit in 2008. Since then, the reverberations of the economic crisis across the continent galvanized policy-makers to rethink – and redesign – the European social model. The Europe 2020 Strategy aims to put the EU on a sustainable growth trajectory, with innovation as one of the flagship initiatives to address Europe’s innovation emergency. The recent Euro Pact outlines key indicators of competitiveness. National governments are now obliged to adopt measures to improve competitiveness relating to index-linked wages, retirement age, recognizing qualifications, flexible labour laws to encourage talent mobility, harmonizing corporate taxes and ensuring financial stability.

Central Asia: Huge Potential in the Face of Many Obstacles In Central Asia, economies have achieved staggering growth performance over the past 10 years – labour productivity has grown between 3 and 6% above the world average, GDP has grown by about 8% annually and FDI has grown nine-fold. But the economic crisis in 2008 and 2009 cut GDP growth in half. This undermined the region’s competitiveness and exacerbated pre-existing challenges such as a deteriorating education system that is causing a worrisome skills gap, too few opportunities for developing SMEs, governance weaknesses, infrastructure needs and an overreliance on energy resources. The region is expected to grow at 6% over the next several years, but is facing many obstacles. Competitiveness and Private Sector Development: Central Asia 2011 Competitiveness Outlook, published by World Economic Forum and the Organisation for Economic Cooperation and Development, urges the region to address the poor quality of its business environment. Today, the region must focus on capturing more and better investment.

mechanisms, supporting SMEs and building the capacity of business intermediary organizations to engage in business advocacy. Dialogue among stakeholders such as employers, private sector representatives and civil society is critical to create a business environment bolstered by transparent and effective policies. Increasingly, Western attention is focusing on Central Asia because of its natural and human resources. Central Asia’s population of 92 million, near universal literacy and abundant energy resources are making it an increasingly attractive destination for investment and trade, and it is strategically located. It is at the crossroads of Europe and Asia, and surrounded by Russia, India and China. Russia and the Caucasus are expected to play a growing, strategic role in the Eurasia region. Russia’s economy is lagging behind other large emerging BRICS and is facing multiple challenges but has the potential to grow. Russia has bounced back from the economic crisis and is using its development bank to support innovative SMEs.

Key areas for improvement include reinforcing legal and economic institutions, developing better finance

Central Asia, CEE and CIS economies  are forecast to gain share of the global economy Europe and Central Asia's share of the global economy

Share of global GDP (market exchange rates)

40% 0.2% 2.2% 30

0.1% 1.1% 1.9%

2.6%

0.3% 3.1% 2.8%

0.4% 4.4% 2.9%

30.3%

23.5%

2015F

Doreen Lorenzo, President, frog design, USA

European Union 25.9%

10

0 2000

2005

Central and Eastern Europe

“Innovation is about breaking the rules: in Europe we have lots of regulations, but we need to give people the opportunity to break the rules as well.”

20 26.4%

Central Asia CIS

2010

Source: IMF World Economic Outlook (April 2011); PwC analysis

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Spotlight on Russia

Russia’s economy is lagging behind other large emerging BRICS and is facing multiple challenges but has the potential to grow. There is a serious lack of institutional trust in Russia – corruption is the number one factor deterring investors. However, in its push to secure membership in the World Trade Organization and OECD, Russia has introduced new regulations to combat corruption. Russia has bounced back from the economic crisis and is using its development bank to support innovative SMEs. Russia has a huge market at its doorstep. An imminent free trade agreement with Kazakhstan and Belarus will be an important element in the shifting, dynamic AsiaPacific economic architecture. The EU is committed to supporting its largest neighbour. On 8 June, the European Commission announced 2 billion euros

to bolster the EU-Russia Partnership for Modernization.

Deep Structural Reforms Needed

The economies of Europe and Central Asia require deep structural reforms in labour markets, services, R&D, human resources and education. Policy reforms are needed in Europe and Central Asia to meet the challenge of rapidly shifting demographics. Demographics in Europe require policies that encourage lifelong learning, enabling elderly people to work longer to pay for social safety nets. Public policies must encourage retraining for the unemployed to get back into the workforce. Central Asia’s population is growing, while Eastern Europe’s population is shrinking. At the same time, Europe’s highly skilled

professionals could help Central Asia realize its ambition to modernize its industrial base.

Building Human Capital

Talent mobility within Europe and Central Asia can only fill gaps for short periods of time. The region is suffering from skills shortages, caused by alarming shortfalls in primary, secondary and post-secondary education. According to a report prepared by PwC for the World Economic Forum, skills gaps are emerging throughout the labour force in the region. For example, a recent Microsoft survey found that the ICT skills needed for many jobs in Central and Eastern Europe are low but will rise quickly over the next few years. Building human capital starts at a very young age. The focus should not only be on teaching but also on how to

Service industries have led European growth since 1995 Sectoral growth in Europe

Index of gross value added (100=year 1995)

160 Financial services/ Real estate Retail/ Hospitality/ Transport

140

Public administration Manufacturing

120

Agriculture/ Fishing Construction 100

80 1995

2000

2005

2005

2010

“Without innovation, countries and companies cannot survive in the long term.” Jim Hagemann Snabe, Co-Chief Executive Officer, SAP, Germany; Co-Chair of the World Economic Forum on Europe and Central Asia

Note: Gross value added is measured in euros at constant 2000 prices Source: Eurostat

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gain knowledge, build capacity and spark entrepreneurship. The lack of an entrepreneurial spirit in Europe means there is little drive for growth and Europe’s workforce is lagging behind. Without investing more in human capital, entrepreneurship – the very heart of competitiveness – will not flourish. Europe’s risk-averse business climate, particularly with regard to bankruptcy, is stifling entrepreneurship.

work outside the EU; 75% of gross domestic expenditure on R&D takes place in other regions and 69% of patent applications are made outside the EU. However, in 2007, the EU accounted for 40% of the patents related to climate change technology, demonstrating that targeted research and investment in key areas combined with policies to support market development can lead to new technologies and innovations.

Central Asia’s entrepreneurs are much less risk averse, having weathered the growing pains of an often difficult transition from centrally planned economies. SMEs are engines of innovation and growth but need support and resources to flourish and expand. For example, the MP3 audio format and Skype were both European ideas that were scaled up offshore. Central Asia is on the verge of taking off, which means that entrepreneurs can flourish and SMEs can power growth given the right conditions.

Europe and Central Asia should develop policies to encourage social entrepreneurs, defined by the Schwab Foundation as “visionaries who achieve large-scale, systemic and sustainable social change through new inventions and approaches” by providing innovative solutions for today’s – and tomorrow’s – challenges.

Innovation – The Lynchpin of Competitiveness

Innovation is the lynchpin of the European and Central Asian economies to boost their competitiveness in a multipolar, dynamic and rebalancing global economy. The region must expand the frontiers of innovation across geographies, sectors and generations. Europeans remain prisoners of the industrial paradigm, victims of “silo thinking”. Patchwork efforts to spur innovation will prove futile; what is needed is systemic change to create an innovation ecosystem. The single market must be leveraged to foster competitiveness and innovation. Many argue that the single market is dysfunctional but in certain areas, such as manufacturing, it functions smoothly. It is time to build on Europe’s successes, such as the crossborder collaboration that resulted in Airbus. Europe has also succeeded in standard setting. New models, whereby competitors such as Ericsson and Nokia collaborated on the GSM standard, could be replicated in other sectors. There is no time to waste – about 80% of scientific researchers World Economic Forum on Europe and Central Asia | 11

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Partnerships to Build Risk Resilience

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The diverse and highly interdependent economies of Europe and Central Asia have reached a critical juncture. While the advanced economies of the European Union are experiencing slower growth, fiscal austerity and schisms between Eurozone and non-Eurozone members, emerging economies further east and in Central Asia are grappling with the pressures of rapid growth, entrenched corruption and infrastructure deficits. At the same time, there is the impact of political unrest in the Middle East and North Africa, where political leaders have stepped down in Egypt and Tunisia in the face of popular revolt. The situation is far from settled; sectarian violence continues in Syria, Yemen and Egypt while NATO is bogged down in Libya after two months of airstrikes. Thousands of illegal immigrants are flocking to the safety of Europe. These chronic challenges limit growth potential and represent a systemic threat to regional resilience that can only be addressed in an integrated manner. However, the nature of risk is such that it also represents a range of opportunities for development.

Stress Tests for Europe Europe is facing four concurrent crises: a solvency crisis, a banking crisis, a crisis of relative competitiveness and a crisis of political legitimacy. These crises are interrelated and cannot be solved separately. The issue is not the

European Union; rather it is the lack of competitiveness in some Eurozone countries and widespread flaunting of the deficit limits set out in the Maastricht Treaty. Visionary political leaders are needed to rise above populist pressures and set out a comprehensive management plan, rather than react to headlines day to day. The European project started with economic integration to reach political goals, whereas now more political integration – surrender of additional national sovereignty – is needed. Some see a viable solution in the European Central Bank issuing eurobonds to buy back unserviceable sovereign debts of countries such as Greece, Ireland and Portugal. With this debt representing only 1% of assets and 6% of Eurozone GDP, new bond issuance would increase money supply by about 5% (versus the increase in US money supply of 20% during the credit crisis).

“Help [to the Middle East and North Africa Region] is required now or the whole process is put at risk.” Mustapha Kamel Nabli, Governor of the Central Bank of Tunisia

While this solution was not wholeheartedly endorsed by all, it was agreed that it makes no economic sense for Eurozone members to consider returning to their pre-euro national currencies or risk destroying the European Union. The largest Eurozone countries have benefited from the euro in terms of lower interest rates, stable exchange rates and a common currency trading zone. Despite the European Union’s current difficulties, most countries

Oil prices have risen three-fold since early 2009 Oil prices and price volatility $160

80% 70

Oil prices (left axis)

120

60

100

50

80

40

60

Volatility (right axis)

40

30 20

20

10

0

Volatility

Crude oil price (US$ per barrel)

140

Crude oil (US$/barrel) Oil price volatility

0 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Note: Prices are for West Texas Intermediate. Volatility is standard deviation of daily price changes over trailing 50 trading days. Source: Thomson Reuters Datastream; PwC analysis

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Perceptions of corruption are improving in Eastern Europe Europe and Central Asia in the Corruption Perceptions Index

“Migrant workers should have the same rights as domestic workers; however, there are some difficulties related to longterm unintended consequences and integration remains an open question.” John Evans, General Secretary, Trade Union Advisory Committee to the OECD, Paris

Average score in the Corruption Perceptions Index

8

Lower

6

perceived 4 levels of corruption

2005 2010

2 Higher

0 Western Europe

Eastern Europe

Central Asia

Note: Averages include 20 economies in Western Europe and 5 countries in Central Asia for both years;  and 20/22 Eastern European economies in 2005/2010. Source: Transparency International (2010)

support further European integration and countries such as Croatia and Montenegro are in the process of EU accession. However, politicians need to better communicate the benefits of membership to their constituents. Participants were optimistic that the Eurozone problems can be solved but agreed that it will require greater cooperation between the member countries and political leaders to mark out a clear roadmap of reform and integration.

Arab Spring Aftermath

Leaders from business, government and academia warned that the popular uprisings in the Middle East and North Africa may fail without European support. The situation is far from settled: Egypt is in a fragile transitional stage, sectarian violence continues in Yemen and Syria, Libya needs NATO to step up its efforts and Tunisia is suffering from an influx of refugees and a catastrophic decline in tourism. Over recent months the desire of the people for change has been expressed in a visible way; now is the time for institution building and creating civil society. Many participants expressed the view that social media tools, such as Facebook and Twitter, will continue to play a critical role in the development process. However, post-revolution institution building is hindered by two paradoxes: first, the gap between societal

aspirations and economic reality (a key trigger of the revolutions) has increased rather than decreased. Second, there is increased short-term uncertainty despite enhanced long-term stability – dramatically affecting tourism, consumer confidence and private sector investment. As a result, economic woes are mounting and further external support is urgently required. Europe must continue to play a key role in supporting the revolutions as it enters this new phase. Above all, help should be directed towards ensuring that the young people who triggered the Arab spring revolutions are empowered to participate in the new system.

Corruption: Old Problem, New Norms

Corruption is a persistent obstacle to social and economic progress in parts of Eastern Europe and Central Asia. With 75% of FDI in Central Asia coming from Russia and the Middle East, the region is particularly vulnerable to entrenched corruption. However, corruption is not intractable – as demonstrated by countries such as Georgia and Russia, which have implemented a raft of anti-corruption reforms. Georgia has made great strides in combating corruption as evidenced in a large improvement of its ranking on the Transparency International Corruption Perception Index. The current Georgian

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government has taken the position that there is no culture of corruption that cannot be changed. It has fired thousands of traffic police and other public officials for taking bribes, reduced the number of required licences and is enforcing clear rules against graft. In May 2011, Russia signed the OECD anti-bribery convention as part of its effort to become an OECD member. However, approximately 70% of corruption involves extortion by public officials, which is difficult to combat through conventional means. Business has an important role to play in fighting corruption, which often takes the form of sales employees paying bribes to procurement officers of public or private customers to obtain orders. Businesses seeking to fight corruption should adopt and require their employees to sign codes of ethics and enforce the codes consistently with zero or near zero tolerance. Top management and boards of directors must lead by example. Large businesses can help small businesses resist demands for bribes by creating umbrellas of protection, for example, by adopting codes of conduct for subcontractors. There are four pillars in the battle against corruption: criminalization, prevention, cooperation and education. An interdisciplinary approach is needed and anti-corruption educational problems should be introduced at an early age.

Resilient and Responsive Infrastructure – Building the New “Silk Road” Opening a land route connecting the Pacific, China and East Asia with Western Europe – the “Silk Road” – promises to cut transport times to less than one-fourth of their current cost. The countries involved have committed to a massive infrastructure campaign, costing from US$ 50 billion to US$ 80 billion, with completion by 2050. Projections by the United Nations Development Programme (UNDP) are that some countries along the route could increase their GDP by more than 40% as a result of increased business and services. In addition to investment in “hardware” infrastructure projects, including highway, railway and air transport facilities, a substantial investment will be necessary in “software” – harmonizing crossborder customs and immigration procedures, upgrading the education and training of personnel, as well as dealing with corruption are all essential components of the project’s success. A new, virtual “Silk Road” will also provide broadband Internet access to most of the region.

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Models to Solve the Resource Equation

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Europe and Central Asia urgently need a new energy architecture that can balance energy security, energy independence and climate change. A key policy instrument to achieve a more sustainable future is public investment in green infrastructure and renewable energy sources. This is particularly relevant at a time when economies are less sustainable than ever before and demographic trends are exacerbating environmental impacts. As different countries have different levels of development, incentive structures need to reflect this diversity. The private sector has a role to play but resources need to be priced fairly to incentivize businesses to adopt more sustainable measures. Increasing incentives and investment in energy efficiency are among the most important steps that governments can take. This brings the focus on behavioural issues, which can complement the top-down policy frameworks through individual, bottom-up strategies by citizens to change their lifestyle and consumer pattern.

Given appropriate scale, renewable energy can also become genuinely competitive and a self-sustaining investment proposition. Despite impressive growth over the past two decades, the renewable energy industry continues to face obstacles and will require more than just public and private finance to operate at scale. Further market development is highly sensitive to administrative barriers, grid access and the risk of policy change. Renewable energy would be more competitive if there is a level playing field. This can be achieved if the leadership comes up with effective pricing models to ensure that all externalities are included. For example, most European and Central Asian countries could generate 20-30% of their power needs from wind energy. The economics of wind energy are improving fast while the low-carbon benefits are clear: wind turbines are carbon neutral within three months of use.

Europe Needs a New Energy Architecture

There are also opportunities for Europe in unconventional shale gas, second- and third-generation biofuels as well as innovation in storage solutions.

Of the many challenges facing Europe and Central Asia in the 21st century, climate change and the dwindling supply of low-cost energy are two of the largest. Renewable energy has the potential to solve both.

Nuclear power will remain an important part of Europe’s energy mix. While Fukushima has changed the game for some countries in Europe – such as Austria, Germany and Sweden – others such as France and

“The most valuable assets in the region are not oil, gas or metals but people.” Bozidar Djelic, Deputy Prime Minister for European Integration of Serbia

Renewables are forecast to supply an increasing share of European energy demand Energy mix in Europe and the Caspian region

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the United Kingdom are proceeding with their nuclear programmes. Nuclear energy is one of the few that satisfies the conflicting needs of energy security, energy independence and reducing climate change. Austria, whose vision is to rely exclusively on green energy by 2050, is serious about achieving a more sustainable future. The country has created 10,000 jobs in the green energy sector in the past year alone, thus setting an impressive benchmark for other countries. One example of these efforts is the town of Güssing in eastern Austria, which uses wood to produce gas and oil.

needs to build a new energy architecture – old methods and technologies are no longer sustainable economically or ecologically.

The Energy Security Equation

Price volatility is affecting investment in developing new oil reserves. Restoring price stability may require regulatory efforts by major consumers such as the European Union. Enough reserves exist to fulfil demand but tapping into the reserves requires substantial investment in infrastructure and logistics.

Greece, despite its financial and fiscal difficulties, is committed to a new economic growth model that emphasizes green and renewable energy. In a strategy agenda to 2020, Greece sees competitiveness not only as a matter of dealing with debt and deficits but also as a European project aimed at producing growth.

For example, there is sufficient oil and gas in the Caspian region to meet European needs. The main issue is logistics. The International Energy Agency expects US$ 84 billion of investments in the Caspian region on gas transmission and distribution facilities through 2035. In Russia, another US$ 234 billion of investments are anticipated during the same period.

As an urgent next step, the efforts of individual countries need to be elevated to the level of the European Union to encourage innovation and new technologies to use energy and resources in a more efficient way. Over 1 trillion euros of new energy investment may be required to meet the EU’s Lisbon Treaty goals for security of supply, competitiveness and sustainability. Above all, Eurasia

It is not so much a question of how many pipelines need to be constructed as to what kind of pipelines. While China is already receiving gas from the region and China and India are likely to become major consumers in the future, Europe is still seen as the major market. Georgia is also developing its hydroelectric resources and will export electricity to a number of external

“Renewable energy . . . will increase energy security, promote employment and development, thus fostering prosperity and social balance.” Werner Faymann, Federal Chancellor of Austria

Highly skilled immigrants add significantly to output in large economies $300

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200

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Note: Highly skilled includes very highly educated people and those who perform specialized occupations where particular expertise is crucial to value creation. Source: OECD; EIU; destatis; national statistics institutes; BCG analysis

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clients, including Serbia. Kazakhstan will double its oil output by 2015 but much of the increased production will meet domestic energy consumption. Transit arrangements will become critical as Kazakhstan, Uzbekistan and Georgia could become main conduits for gas transit.

in Europe, about 30% of employers say that they are struggling to find the right people – primarily because of a huge skill mismatch. Indeed, there are between 2 and 4 million unfilled vacancies in Europe. Thus, the employment crisis is better framed as one of “employability”.

At the same time, Europe and countries such as Ukraine need to diversify their supplies of energy. Europe needs to reduce its reliance on Russia for natural gas by completing projects such as the Nabucco pipeline, the new gas bridge from Asia to Europe and the South Stream natural gas project.

The public and private sectors must work together to reduce the skills gap. Governments can do more to support entrepreneurship and SMEs, as well as investing in science, technology and R&D. Companies can do more to invest in skills transfer and on-the-job training. The challenge is to balance short-term actions that fuel economic recovery with actions to ensure longterm sustainability.

Climate change is another key driver of the energy security equation. For the EU to meet its targets for reducing greenhouse gas emissions, efficient use of resources is crucial. Russia has also indicated it can accept emissions reductions targets of 2025% by 2020. Finally, Kazakhstan plans to reduce emissions 15% by 2020 (from a base of 1992) under the Copenhagen Accord.

Making European Labour Markets Work

Since the global financial crisis, unemployment rates have risen more than 50% in OECD countries. Over 20 million new jobs must be created simply to return to 2007 employment levels. In many European countries, the unemployment crisis is exacerbated by stagnant economic growth; projections are for only 2.22.3% growth in 2011 for the EU.

In this regard, Germany shines as a positive example with its model of apprenticeships, strong system of social partnership and higher degree of trust between employers and employees. Despite deep-seated structural problems with European labour markets, the tone was cautiously optimistic. While short-term challenges dominate the headlines, long-term data in the EU27 show improvements in trend employment rates over the past decade – despite the economic crisis.

Creating jobs in Europe is not a problem of labour markets – it is a problem of economic policies. For smaller countries like Hungary – with particularly low workforce participation rates – labour market reform is not enough. Entire systems need to be restructured, including taxation and welfare systems, as well as enhancing labour market flexibility. Despite persistent high unemployment

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WorkStudios are designed to facilitate a high level of interaction and exchange among participants. At the World Economic Forum on Europe and Central Asia, five sessions were WorkStudios and generated new insight and new solutions to a range of complex issues and opportunities pertinent to the region: winning strategies to drive competitiveness; new approaches to fight corruption; collaborative models to facilitate hubs, clusters and spin-offs; ecosystems to foster social innovation; revolutionary structures for today’s large organizations.

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The Organizational Revolution In a fast-moving, global landscape fraught with geopolitical and environmental uncertainties, how must large organizations evolve to stay ahead of the curve? •

In a modern corporation with widely dispersed offices and diverse cultures, traditional top-down, command-andcontrol management approaches do not work. Modern managers cannot be expected to have all the answers. They can, however, provide subordinates with the tools they need to accomplish their job. It is important for managers to grow their teams, delegate authority and avoid undercutting subordinates.

•

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Keep it simple. Technology is shaping the opportunity landscape but it must be enabling. It should not be so advanced or complicated that users cannot follow it. Too much data can be as harmful as not having enough information. In the new, interconnected world, “micro-multinationals”, employing expert talent, can have a global reach and may prove more nimble and innovative than larger corporations. While it is important to build in-house expertise, the “Hollywood” model, in which outside talent is hired for specific projects, can be a way to introduce innovative ideas without needing to establish fixed personnel assets.

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o ion t ovat work n n i l s ocia ? ctor ter s ivate se tral Asia s o f r o n t p e s nd ty. or dC tion ocie t act public arope an s a n n v e i r ed iffe d the ut Eu nno er d n gniz o ial I an reco geth ociety a through c o y t l o g ming ing civil s dels sin rS o g a c n o i e e r r f o b nc s can of b em m is ing i stem e forefronotmy. Howlicate thes yste e be s y r o a ecks s c s tor ttlen on e i a o Eco t at th ole econ and rep v b a o s l i v n a o h pe en al in anci l inn Euro fit the w trength soci ocia of fin s d s e n m a n a e o l re be ther t rs rob age whe eneu the p arly toge oint e e repr l p t k n n n c a e io ial to ta rs at flect ity. Soc oach an in ible real eneu r r t • p p a p e r a t pe is tang tive s. al en Euro asingly nova preneur soci n i e e n • m r a entre inc beco l g” is d to ndin y socia e u r f i p d n ins Mixe d by ma o be • ed t e face n ople n. g pe ducatio n u o e Y ugh • thro | 21

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Acknowledgements The World Economic Forum would like to thank the Government of Austria for its generous support in co-hosting the World Economic Forum on Europe and Central Asia. The World Economic Forum would also like to thank The Coca-Cola Company for its support. Strategic Partners AUDI AG Basic Element BT CA Technologies Deutsche Post DHL Do uş Group HCL Technologies Ltd Infosys Technologies ManpowerGroup METRO GROUP Nomura Holdings NYSE Euronext Omnicom Group Sberbank System Capital Management Volkswagen AG

Regional Partners EastOne Group Group DF Lynx Energy Partners RU-COM State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank)

Official Carrier Austrian Airlines

Meeting Supporters International Bank of Azerbaijan OMV OTKRITIE Financial Corporation

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Contributors Stephen Kinnock, Director, Head of Europe and Central Asia Malte Godberson, Senior Director, Head of Information Technology Emma Loades, Director, Programme Development Team The report was written by Dianna Rienstra and Gareth Shepherd. The summary writers at the meeting included William Dowell, David Watkiss and Victor Willi. The World Economic Forum would like to express its appreciation to all of them for their work at the meeting. Editing and Production Nancy Tranchet, Associate Director, Editing and Writing Kamal Kimaoui, Associate Director, Production and Design David Bustamante, Senior Content Producer Photographers Benedikt Loebell Heinz Tesarek Jakob Polacsek The World Economic Forum would like to thank PwC for its help in preparing the data and statistics underpinning this report.

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The World Economic Forum is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas. Incorporated as a not-for-profit foundation in 1971, and headquartered in Geneva, Switzerland, the Forum is tied to no political, partisan or national interests. (www.weforum.org)

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