data for 2019 indicate that institutional weakness hindered private sector activity: firms highlighted obstacles related to meeting with tax officials in Bulgaria and Romania and competition from informal firms in Bulgaria and Poland (figures 9.E and 9.F).

Another important driver of TFP growth is R&D spending, which promotes technological innovation (Hallward-Driemeier et al. 2020).<sup>12</sup> Average R&D spending in the region remained under 1 percent of GDP throughout the 2010s, whereas in the EU it rose from about 2 percent in 2010 to 2.2 percent by 2018. Thus, a deteriorating business environment, weakening governance, and sluggish R&D investment have likely all tended to slow or constrain TFP growth in the past decade, with the average contribution of TFP growth to potential output growth estimated to have declined from 1.7 percentage points in 2000-10 to less than 1 percentage point in 2011-21.

The COVID-19 pandemic and the Russian invasion of Ukraine are likely to have weakened ECA’s potential growth through several channels. Fixed investment is likely to have been dampened by increased uncertainty, including about the longer-term international economic landscape and risks of deglobalization, and by reduced investor confidence.

The pandemic has also set back human capital formation. Schools in ECA were closed completely for nearly 65 days and partially for over 75 days, on average, between March 2020 and September 2021 (Donnelly and Patrinos 2021; Patrinos 2022). Survey data point to a year’s worth of learning losses among students in at least 11 ECA countries (Patrinos 2022). The adverse economic effects will become more pronounced as the cohort of current children enters the labor market. Education losses from the pandemic have likely been larger in poor and vulnerable populations and underserved regions, partly owing to preexisting challenges that include uneven digital connectivity, low public expenditure on education, and inequitable learning opportunities and outcomes. On top of that, Russia’s invasion of Ukraine has triggered an influx of displaced people from Ukraine—about half of which are children—to neighboring ECA countries, which will require additional resources to meet their educational needs.

As in past crises, the pandemic triggered a rise in the share of young people who are neither employed nor in education or training. The recent increase raises concern that many of today’s young people will remain out of the labor market for years to come, facing a higher likelihood of poverty and reducing actual and potential output in the countries where they live (European Commission 2022).

Prior to the invasion of Ukraine, ECA working hours had nearly returned to their prepandemic trend (ILO 2022a). The negative impacts of the pandemic on labor supply and markets has varied across ECA countries, partly owing to differing levels of government support for jobs and incomes, resulting in an uneven shock to country-level potential growth. In some economies, job losses were partly mitigated by employment retention

> 12 Innovations are typically the result of a financially demanding research processes that generates intellectual property assets. These include patented inventions or ideas for the digital setting that are protected by copyright or otherwise (Pelikánová 2019).