Digitalization. Investment in accelerating the digital transformation could support faster growth of productivity and output in ECA, while also strengthening economic resilience in times of crisis (Hallward-Driemeir et al. 2020; ITU 2020). During the pandemic, over 50 percent of small and medium-sized enterprises (SMEs) surveyed by the OECD increased the use of digital tools to ensure business continuity in the wake of reduced mobility (OECD 2021a). Preliminary evidence also suggests that innovation and digitalization may have helped promote firm survival (Muzi et al. 2021).

Although ECA fares well relative to other EMDE regions on digital connectivity, weak investment in recent years has led to large infrastructure gaps in telecommunications, limiting the capacity for further regional integration (IMF 2014). Moreover, outdated technologies, lagging innovation, misallocation of labor to inefficient sectors, and market rigidities have weighed on productivity and contributed to divergences in total factor productivity (TFP) across countries and firms (Bahar and Santos 2018; HallwardDriemeir et al. 2020; Syverson 2011). While the number of individuals using the internet in countries in Central Europe is on par with the rest of the EU, it is below the global average in several of ECA’s poorest EMDEs, hindering their ability to close the distance to the TFP frontier (Burunciuc 2021; UN 2020). The digital divide also extends to firms, with SMEs trailing larger companies in digital connectivity and adoption, particularly in high-speed broadband and e-commerce tools, which makes narrowing productivity gaps with larger companies even more challenging (Hallward- Driemeir et al. 2020; OECD 2021a).

For many ECA countries, improving digital infrastructure and expanding access to highquality digital connectivity will require boosting investment in communications infrastructure (Hallward-Driemeir et al. 2020). Liberalized telecommunications, coupled with regulatory independence, effective control of monopoly power, and efficient taxation of digital services, can catalyze private sector investment to lower the cost of access to digital services and increase use of the internet, with positive spillovers to the rest of the economy (Arezki et al. 2021; Rodriguez-Castelan et al. 2021). Public investment can also play a role in supporting the digital transformation for firms by reducing cost barriers and accelerating digitalization, particularly by finance-constrained SMEs.

# 6.4 Regional policy priorities

For ECA’s EU economies, private and public investment will benefit from the phasing in of projects financed by EU funds. The EU’s National Recovery and Resilience Plans (NRRPs), which are supported by the largest funding package ever approved by the EU, provide a unique opportunity to promote economic recovery as well as green and digital infrastructure, and to help close investment and income gaps with more advanced EU members. In all, NextGenerationEU funds to support the NRRPs amount to 9.3 percent of 2021 GDP in Bulgaria, 11.0 percent in Croatia, 6.3 percent in Poland, and 12.1 percent in Romania—much larger than the EU average of 5.6 percent. Since the passage of the NRRPs, private investment prospects have also improved. In Bulgaria— the EU’s poorest economy, where output per capita is only about 55 percent of the EU average—private-