TIDES of Change (E): Igniting Productivity Growth in Europe and Central Asia (E)

Europe and Central Asia (ECA) stands at a critical juncture. After the global financial crisis, growth slowed sharply, overwhelmingly due to a collapse in productivity, while capital and labor contributions remained steady. Efficiency gaps now loom larger than capital gaps, with the widespread misallocation of labor and capital— exacerbated by stalled reforms, weak market contestability, and the drag of underperforming state-owned enterprises— holding back convergence. Drawing on a novel dataset of more than 40 million firm-level observations across sectors and countries, TIDES of Change: Restoring Prosperity Through Productivity shows that removing distortions could raise aggregate productivity by 30– 85 percent, with especially large gains in less advanced economies. The payoff is substantial: faster wage growth, more and better jobs, and a restored path to higher living standards. The report sets out a practical path to reignite convergence by riding the TIDES of higher productivity— Trade, Investment, Digital, Efficiency, and Skills. It calls for reconnecting to dynamic markets and cutting trade costs; anchoring quality FDI and amplifying spillovers; turning connectivity into intensive digital use; leveling the playing field and unleashing reallocation; aligning talent and driving a lifelong upskilling. With limited fiscal space, first-best reforms and targeted support must be paired with stronger institutions that embed productivity at the core of national strategies. The central challenge in the region is not a lack of capital or connectivity, but their effective use.