CEE Challenge - Regional Development

CEE - 10 challenges for the new decade

No.8 Regional Development

Regional income disparities within CEE countries narrowed between 2006 and 2016, but they remain significant. With living standards in CEE capitals close to western European ones, rural areas are lagging behind in education, digital skills and access to the internet.

With more than 80% of global GDP generated in cities¹, urbanization can foster economic growth, if managed properly. The migration of people from rural to urban areas results in the accumulation of human capital that can be used in a more efficient way and allows for knowledge and innovation spillover effects. People living in cities are better educated (the share of people 30-34 years old with tertiary education is 50% in cities vs. 28.4% in rural areas), have better digital skills and use the internet to a greater extent.

However, urbanization is far less advanced in CEE compared to the European average. A relatively high share of the population in CEE is still living in rural areas, occupying jobs in the agriculture sector. The share of the CEE population living in rural areas is the biggest in Romania, Slovakia and Poland, and among the highest in the EU. Having said that, the pursuit of economies of scale in CEE should see people from rural areas becoming more productive in cities, a development that would translate into overall productivity growth.

Although access to Cohesion Funds supported the increase of productivity in rural areas across CEE and improved living standards, there is still space for improvement. Over the 2006-16 period, in most CEE countries, the regional income gap between the richest 10% and poorest 10% of regions narrowed. However, regional disparities persist.

CEE capital cities are catching up quickly

Increasing attention has recently been paid to regional development, with a focus on removing inequalities. Regional development - which in many cases involves the development of the rural areas in a country - has become a focus of policy-makers. Politicians are being forced to address the issue of providing equality, given the increasing discrepancies between the status of capital cities and the rest of a particular country.

According to an OECD study², together with faster growth in high per capita income countries since 2011, the regional disparities between the countries increased. On the other hand, the regional economic disparities within countries have been falling since their peak at the beginning of the global financial crisis. However, they remain significant in most OECD countries. In 2016, on average, GDP per capita was more than twice as high in the top 10% of a country’s regions as in the bottom 10%.

Regional income disparities within and across the countries arise from differences in labor productivity. Higher labor productivity is in general associated with regions with a large share for the services sector - those are usually the capital regions. The OECD points to the high and increasing importance of capital regions, which on average accounted for more than one quarter of national GDP in 2016. The capital cities and metropolitan areas (agglomerations of at least 500,000 inhabitants) are important for the overall convergence of the country, as they tend to have higher rates of innovation and firm creation.

In CEE, the division between more and less developed regions is seen around a west-east axis. The eastern parts of CEE countries usually have much lower GDP per capita compared to central regions. Despite the availability of Cohesion Funds that should mainly support the less developed regions, the pace of convergence differs visibly between capital cities and the rest of the country.

With the fast income convergence of CEE capital cities, the satisfaction of living in those cities has also been rising. According to the European Commission Quality of Life study³ from 2019, the overall satisfaction with living in the city among the CEE capitals is the highest in Warsaw, Prague, Bratislava, Ljubljana and Zagreb, where 90-92% of respondents strongly or somewhat agree with the statement. In Budapest and Bucharest, the overall satisfaction is slightly lower, standing at 86% and 81%, respectively, while in Belgrade the situation looks the least favorable, as the satisfaction rate stands at 63%.

Prevailing domestic disparities

In the CEE region, more than one third of the total population is living in rural areas that are characterized by lower living standards. The access to Cohesion Funds supported regional convergence, as the gap in disposable income between the richest 10% and poorest 10% of regions over the 2006-16 period narrowed in all CEE countries but Poland. In Poland, the regional divergence was due to the better performance of the richest region. Elsewhere, faster catching-up of the poorest regions resulted in regional income convergence. Although living standard have improved in rural areas across CEE, poorer access to education and equal chances in less developed areas remain the key obstacle in the catching-up process.

Enrollment in tertiary education shows strong regional disparities. While in the cities, the share of the population enrolled in tertiary education is above or close to the EU27 average in all CEE countries, in the rural areas this holds only for Slovenia and Poland. Other CEE countries are characterized by a lower share of the population with higher education in rural areas compared to the EU27 average.

Poorer access to education results in an outflow of the talented, skilled and young workforce to urban areas, which offer a broader range of opportunities. Poorer access to higher education and limited job opportunities result in increased migration from rural areas to urban areas, namely from poorer to more wealthy regions. Those who leave are usually young people seeking better employment opportunities in the cities. As a result, rural areas are depopulating and are characterized by increasing old age dependency ratios.

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