At Your Service? For Central Europe, It Is Not Enough

Countries with the right balance between services and manufacturing economies are more resilient to various shocks. This is the lesson from the crises in the last two years, and Central Europe has done its homework.

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The economic situation of Central European countries demonstrates the need to diversify economies with the right proportions of both services and industry. Photo: istock.com / lcva2

Until recently, the notion that the economy’s future is in services has persisted. The higher the percentage of GDP they produced, the more developed a country was considered to be. However, since the pandemic and the global economic turbulence it caused, it has become clear that a strong focus on services is no guarantee of success in the modern world. So what counts?

The new black in business speak

Back in the 1980s, theories about the future being a service-based economy were treated as a joke or even as a dangerous fantasy. “We cannot build a vital economy by delivering pizzas to one another,” – said Jim Wright, Speaker of the United States House of Representatives during Ronald Reagan’s presidency. The share of services in the global economy has always been high, but since the 1990s, it has started to grow dynamically.

The pandemic and the global economic turbulence it caused, made clear that a strong focus on services is no guarantee of success in the modern world

According to data from World Bank, in 1997, the service’s share of the global economy was 63%. It increased to 68.9% in 2015. This trend was very rapid, especially in highly developed countries. In 2015 service economy made up 78.9% GDP of the United States. In 2017 86% of Americans worked in the service industry.

It seemed that the future was bright: the economy of the developed countries would consist almost entirely of services. “Dirty” areas of the economy related to industry and manufacturing became the domain of countries lower down the global development chain. But such a significant change could not happen without consequences. The shift from a manufacturing economy to a service economy has left its mark on the labor market.

Service economy: Where the jobs are

“The labor market experiences of many young people and those with less than tertiary education have worsened over the past decade. The young with less than tertiary education have been particularly affected by these changes, as the share experiencing under-employment, non-employment and low-pay has increased,” wrote the Organization for Economic Cooperation and Development (OECD) in its report in 2019.

Earlier workers described in this report could find a job in the manufacturing sector. But these workplaces have been mainly terminated and outsourced from Western countries to the Far East. The sad outcome of the civilization change.

There has been a U-turn in this way of thinking about the economy in recent years. The COVID-19 crisis has highlighted the problems associated with overstretched supply chains. McKinsey’s report from 2020 showed that 73% of entrepreneurs had problems with providers during the pandemic as lockdowns in many countries have effectively frozen global cooperation.

The vulnerability of supply corridors was clearly exposed during the Suez Canal blockage when the container ship “Ever Given” had blocked for six days one of the most critical routes in global trade generating over 50 billion dollars loss for the world economy. Another blow to global trade was the war in Ukraine, which further complicated trade routes and supply chains. Suddenly it turned out that the manufacturer was king – although such a term sounded obsolete only a few years ago. Today, “shortening supply chains” is the new black in business language.

Fundamentals apply

The service economy is responsible for making up 73% of GDP in European Union countries. Eurostat report shows that in 2020 73% of Europeans will work in this sector. How these figures are changing best shows the direction of economic change on the old continent. In 2000 services gave jobs to 64.6% of Europeans. In contrast, 19.9% of inhabitants of EU countries worked in the industrial economy then, but it was 16% twenty years later.

A significant drop, given that there has been virtually no change in employment in the construction sector during these two decades. “The fundamental things apply/As time goes by,” sang Sam in the film classic “Casablanca.” In the XXI century, these “fundamental things” in the economy were the shift from manufacturing to services; Europe was one of the leaders of this pivot.

But not the whole of Europe. Looking closer at data from the Eurostat report, one can notice a difference between Europe’s Western and Central parts. To put it shortly: Central European countries are less dependent on the service economy than others. The Eurostat report confirms this. For example, 83% of Dutchmen work in services, as well as 81% of Belgians, 80% of French, and 75% of Germans. But at the same time, only 49% of Romanians have a job in the service economy. This also applies to 58% of Bulgarians, 59% of Poles, 65% of Croatians, and 68% of Hungarians.

This difference – only in the opposite direction – is apparent when analyzing employment figures for the industrial sector. For instance, only 8% of Luxembourgians work in industry, 9% of Dutchmen, 10% of French, and 11% of Spaniards. Things look different in countries of Central Europe. 28% of Czech have a job in manufacturing, 23% of Poles and Slovakians, and 20% of Croatians and Hungarians.

As time goes by

The same pattern in the organization of economies in EU countries can also be seen when the structure of the economy of every state is analyzed. In Western European countries, services account for a larger share than CEE countries. In Luxemburg, services generate 88% of gross value added. In France, it is 80%, in Netherlands and Belgium – 78%, in Portugal – 75%. On the second side of this axis are countries from Central Europe. 64% of gross value added in Czechia comes from the service economy, 66% of revenues in Poland, 67% in Hungary, and 68% in Slovakia.

The explanation for this difference is simple. Countries of Central Europe still lag behind their Western partners in economic development. The long shadow of their communist past has a very present impact on their financial standing. However, the recent crises – lockdowns caused by the pandemic and the war in Ukraine – showed that the situation perceived as an economic burden suddenly became an advantage. Countries seen as less developed in financial terms unexpectedly manage much better in turbulent times.

The proof? The unemployment level is lower in countries with a more significant industry share in their gross value added. In July 2022, the average level of unemployment in EU countries was 6%. But in countries like Spain and Greece, over 12% of workers could not find a job. Above EU average are, among others, Italy, Sweden, France – and only two CEE countries (Latvia and Croatia). The lowest unemployment – below 3 percent – was recorded in Czechia, Poland, and Germany. 10 of 12 countries of the Three Seas Initiative had unemployment below the EU average.

“On that, you can rely/No matter what the future brings/ as time goes by” – to quote the famous song from “Casablanca” once again. The economic situation of Central European countries shows precisely what they may rely on: arranging the economy in the right proportions, in which there is room for both services and industry. Thanks to cheaper labor costs than in Western Europe and a well-educated workforce, the region has been able to build a strong industrial base. In part by preserving factories established during the Communist era, in part by taking over production pushed from the West to the East through outsourcing, and in part by expanding their own capabilities.

This has successfully created a modern mix to circumvent recent economic turbulences. When you find the right balance, the country’s economies are resilient to crises, no matter what the future brings. Not forgetting about manufacturing, CEE countries proved that they had done their homework.

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