For most of the 2010s, investment in several ECA economies—including Albania, Armenia, Bulgaria, and Romania—failed to regain ground lost in the wake of the GFC and European debt crises. In the region’s energy exporters, investment weakened alongside the sharp fall in oil prices over 2014-16. The rise in geopolitical tensions following Russia’s annexation of Crimea in 2014 also triggered a broad decline in investor confidence. The maturing of global value chains—the expansion of which had been a major driver of productivity-enhancing investment—is also likely to have played a role in slowing capital accumulation, given ECA’s deep integration into global markets.

While demographic developments in some other EMDE regions were supportive of output growth over the past two decades, in many ECA economies a combination of aging populations, low birth rates, and emigration weighed on growth. In several ECA economies, particularly those in Central Europe, the share of the elderly in the population rose rapidly. In Poland, the increase in the share of the population aged 65 years or older exceeded 5 percentage points over the 2010s—well above the EU average of 3 percentage points (European Commission 2021). In many parts of the region, emigration added to the pressures arising from the natural drop in the population and the effect of population aging on labor-force growth (Bossavie et al. 2022). As a result, growth in working-age populations and labor supplies slowed and labor shortages in individual sectors were common (figures 8.C and 8.D). Demographic developments, however, have been uneven across ECA. Over the past two decades, half of the region’s economies saw population declines, while others, especially in Central Asia and Türkiye, reported population gains (and in some cases strongly).

Demographic pressures in many ECA countries stem from low labor force participation, especially among those living in rural and underserved areas. Precarious employment and low-quality jobs contributed to a high incidence of undeclared work in some ECA economies, including those in Central Europe where informality tends to be lower than in other parts of the region (El-Ganainy et al. 2021; Ohnsorge and Yu 2021). Employment opportunities for women, especially migrants, were more limited than those for men with similar levels of tertiary education (Frattini and Solmone 2022). This was most evident in Romania. As a result of these challenges, labor activity rates in many ECA countries have remained below those of EU peers. Because of these trends, the average contribution of labor force growth to potential output growth in ECA remained modest though stable between 2000-10 and 2011-21.

The accumulation of human and physical capital lost momentum in the last decade— weighing on potential TFP growth. Gains in both life expectancy and educational achievement leveled off, with educational reform losing momentum after the large strides of the early 2000s (Patrinos 2022). Although school enrollment rates in ECA have been high for decades and the average number of years of education is the highest among EMDE regions for both males and females, quality-adjusted years of education and PISA scores trail the EU average in many cases, with some backsliding even in the decade prior to the pandemic (figure 8.E; World Bank 2020d). The levels of basic skills in reading, mathematics, and science, as measured by PISA scores, fell between 2006 and 2018,