Article Critique 1- WEF EU11 Report

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World Economic Forum on Europe and Central Asia

Expanding the Frontiers of Innovation Vienna, Austria 8-9 June 2011



The electronic version of the 2011 World Economic Forum on Europe and Central Asia report allows access to a richerlevel of content from the meeting, including photographs, session summaries and webcasts of select sessions. It isavailable on the World Economic Forum website:

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Other specic information on the World Economic Forum on Europe and Central Asia in Vienna, Austria,on 8-9 June 2011, can be found at the following links:

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REF 200711



Contents

Preface Page 3

Executive Summary – Expanding the Frontiers of Innovation Page 4

Strategies to Boost Global Competitiveness Page 8

Partnerships to Build Risk Resilience Page 12

Models to Solve the Resource Equation Page 16

Acknowledgements Page 22

Contributors Page 24


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Preface

The World Economic Forum on Europeand Central Asia brought together over500 business, government academicand civil society leaders from 67 nationsworldwide.

The meeting took place against abackdrop of complex and challengingissues such as the Eurozone debt crisis,oil price volatility and uncertaintiesaround the impact of the Arab Spring,but it also explored a number of potentially game-changing opportunitiesfor the region, ranging from greengrowth to, biotech to investment inbreakthrough infrastructure projects.

The overarching theme of the meetingwas Expanding the Frontiers of

Innovation, and this provided a Call to

Action in that it conveyed a sense of urgency about the pressing need forthe region to realize its potential in theglobal competitive landscape. One of the core messages coming out of themeeting was that Europe and Central Asia cannot compete by cutting costs,because its economies have movedbeyond that stage of development;therefore it must compete on the basis

of quality. And quality is synonymouswith innovation.

Sessions under the rst thematic pillar,Global Competitiveness, scanned thepolicies and business models thatare required to unlock the region’sinnovative potential. Discussionsfocused on:

• “Intrapreneurship”: how largeorganizations can retain anddevelop their entrepreneurial spiritand agility

• Hubs and clusters: how regionalcentres of excellence can be

created to foster innovation andfacilitate start-ups

• Game-changers: identifying thenext wave of disruptive thinkers

and entrepreneurs, and enablingthem to grow

The second pillar, The Resource

Equation, concentrated on the pressingneed to develop an overarchingstrategy for sustainable growth acrossthe region. Priorities included:

• Energy security: how newpartnerships can be forged todeliver greater natural gas supplystability and sustainability, throughdiversication

• Green growth: new businessmodels and policy frameworks toaccelerate the transition to a low-carbon future

• Human capital: concrete actionsto design labour markets that offerexibility, security and dynamism

The third pillar, Risk Resilience,

identied the most prominent risksand roadblocks confronting the region,and recommended strategies tomitigate and build resilience. Sessionsexamined:

• Future of the European Union: theEU is facing a number of majorchallenges, ranging from the debtcrisis, to schisms between thecore and the periphery, to the riseof nationalism. Nevertheless, theEU is still the world’s largest trading bloc and clearly too big to fail.Now is not the time to disintegratebut rather to move to a moreintegrated, better coordinatedUnion.

• Corruption: seen by many as thesingle most important inhibitor of sustainable growth across muchof the region, participants had arobust debate on the causes and

consequences of corruption, andidentied a number of examplesof best practice, anti-corruptionstrategies for replication.

• Arab spring: the popular uprisingsacross the Middle East and North Africa were warmly welcomed,but concerns were raised aboutEurope’s response. This plenarysession pointed to a number of risks around the direction that the Arab spring might take if Europeand the rest of the internationalcommunity fail to rise to thechallenge.

The discussions and debate weresupported by the launch of a numberof key reports, including The Russia

Competitiveness Report, andprivate sessions on the new energyarchitecture and the future of personaldata, which provided additional insightfor the ofcial programme. Moreover,

a Memorandum of Understandingwas signed between the Forum’sPartnership Against Corruption Initiative(PACI) and the Vienna-based Anti-Corruption Academy.

The consensus among participants wasthat this complex and diverse regioncan no longer afford to think in silos.Instead it must integrate and innovateif it is to develop and prosper intoday’s increasingly competitive globallandscape.

Stephen Kinnock

Director, Head of Europe and Central Asia


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The 2011 World Economic Forum on

Europe and Central Asia was held in Vienna, Austria, the gateway betweenthe Western and Eastern sides of theEurope and Central Asia region. Themeeting brought together over 500leaders from business, government,academia and civil society from morethan 67 nations – from across Eurasiaand from around the world – to discuss“Expanding the Frontiers of Innovation”.

Innovation cross-cuts the issues of

social and economic development,energy supply, reform, fragility andstability – all of which are at the topof political agendas, from Lisbon to Vladivostok.

Historical ties were strengthened whenthe USSR fractured in 1991 and Europebegan to engage with the formerSoviet space, thus building many of thecommercial, political and people-to-people connections that would come todene the new world order.

Opening a land route connectingthe Pacic, China and East Asia withWestern Europe – the “Silk Road” –promises to cut transport times to lessthan one-fourth of their current cost.Some countries along the route couldincrease their GDP by more than 40%as a result of increased business andservices.

Since independence, Central

Asian countries have moved fromthe periphery of the Europeanneighbourhood towards the centre of anew global architecture. The countriesare rich in natural resources andhuman capital. The Customs Union of Kazakhstan, Russia and Belarus haslaunched free trade negotiations, animportant step in integrating Central Asia into the international tradeand economic system. A free tradeagreement among these countries

would be an important element in theshifting, dynamic Asia-Pacic economicarchitecture.

While the economies of the Europeand Central Asia region are diverse,they all share an interest in achievingsustainable growth based on innovativebusiness models. Moreover, therelationship between Europe andCentral Asia has reached a critical juncture. The advanced economies of the EU are suffering from scal austerity,slower growth and the EuropeanUnion – the world’s largest tradingbloc – is losing its competitive edge.Meanwhile, emerging economies acrossthe former Soviet space are over-relianton hydrocarbons and urgently need todiversify their economic base.

This year’s programme was built onthree pillars: global competitiveness, riskresilience and the resource equation.

Strategies to Boost Global

Competitiveness

Europe was losing its competitive edgebefore the economic crisis hit in 2008.Since then, the reverberations of thecrisis across the continent galvanizedpolicy-makers to rethink – and redesign– the European social model. TheEurope 2020 Strategy aimed to put theEU on a sustainable growth trajectory. The recent Euro Pact outlines keyindicators of competitiveness.

In Central Asia, economies haveachieved staggering growthperformance over the past 10 years –labour productivity has grown between3 and 6% above the world average,GDP has grown by about 8% annuallyand FDI has grown nine-fold. Theeconomic crisis in 2008 and 2009 cutGDP growth in half. This underminedthe region’s competitiveness andexacerbated pre-existing challengessuch as shortfalls in the educationsystem that are causing a worrisomeskills gap, too few opportunitiesfor developing SMEs, governanceshortfalls, infrastructure needs and anover-reliance on energy resources.

Russia and the Caucasus are expectedto play a growing, strategic role in theregion. Russia’s economy is laggingbehind other large emerging BRICS andis facing multiple challenges but has thepotential to grow.

• Improve the innovation pipeline:Innovation is the lynchpin forthe European and Central Asian economies to regain theircompetitive edge in a multipolar,dynamic and rebalancing globaleconomy. Developed economiescannot compete with China on thebasis of price. Competitiveness intoday’s global marketplace mustbe based on quality, which is drivenby innovation. Europe and Central Asia must expand the frontiers of innovation across geographies,sectors and generations.

Executive Summary:

Expanding the Frontiers of Innovation


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• Reform policies to meet the

challenge of rapidly shifting

demographics: The economy of

the region requires deep structuralreforms in labour markets, services,R&D, human resources andeducation. Demographics in Europerequire policies that encouragelifelong learning, enabling elderlypeople to work longer to pay forsocial safety nets. Public policiesmust encourage retraining to enablethe unemployed to get back intothe workforce.

• Start building human capacity at

an early age: The region is sufferingfrom skills shortages, causedby alarming shortfalls in primary,secondary and post-secondaryeducation. Building human capitalstarts at a very young age. Thefocus should not only be onteaching but also on how to gainknowledge, build capacity andspark entrepreneurship.

• Create an enabling environment

for SMEs: SMEs are engines of innovation and growth but needsupport and resources to ourishand expand. For example, the MP3audio format and Skype were bothEuropean ideas that were scaledup offshore. In Central Asia, thepotential for SMEs to power growthis huge but they need nancing andcapacity building.

Partnerships to Build Risk

Resilience

The Europe and Central Asia region

needs to overcome political, social andnancial challenges if it is to achievelong-term, sustainable competitiveness. The nancial crisis hit the entire regionhard and the road to recovery has beenslow and fraught with difculties. Thecrisis exposed serious fault lines inEurope’s institutions and structures. InCentral Asia, the crisis cut growth byhalf.

Corruption is a persistent obstacleto social and economic progress inparts of Eastern Europe and Central Asia. With 75% of FDI in Central Asia coming from Russia and theMiddle East, the region is particularlyvulnerable to entrenched corruption.However, corruption is not intractable– as demonstrated by countries suchas Georgia and Russia, which haveimplemented a raft of anti-corruptionreforms.

• Seize the current opportunity and

take urgent steps to create more resilient political integration: Onlythrough cooperation, political willand economic literacy can theEurozone countries solve the fourinterrelated concurrent crises: asolvency crisis, a banking crisis, acrisis of relative competitivenessand a crisis of political legitimacy. The euro is facing its greatest threat– the sovereign debt crisis – andthe time to act is now.

• Co-design more integrated regional

infrastructure: In Central Asia,the focus should be on buildingresilience via cross-countrycooperation, including harmonizing

“[Central Asian countries have]

moved from the periphery ofthe European neighbourhood

to the centre of a new global

architecture.”

Heinz Fischer, President of Austria

“We have been through the

deepest economic crisis for

many decades. Key everywhere

is growth and growth is

synonymous with innovation.”

Sir Michael Rake, Chairman, BT Group Plc,United Kingdom; Co-Chair of the World Eco-nomic Forum on Europe and Central Asia

“To achieve more sustainable

and innovative growth, for

a number of countries it

is [important] to ensure

diversication. Diversication

and innovation are synonymous.”

Herman Gref, Chairman of the Board and Chief Executive Ofcer, Sberbank, Russian Federa-tion; Co-Chair of the World Economic Forum onEurope and Central Asia


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customs regulations andeliminating cross-bordercorruption, and by creating anew land route across Asia.More integrated regionalinfrastructure will de-risk supplychains and expand business/ service operations as well asenhance greater talent mobility.

• Provide support from

neighbouring countries to the

MENA region: Two paradoxesfollowed from the Arab uprisings– the gap between societalaspirations and economicreality, and increased short-term uncertainty together withenhanced long-term stability. Atthe same time, political unrestis posing problems for Europe

as trading with some nationsis becoming difcult and theconict in Libya has disruptedenergy supplies. “Much isrequired to prevent a hopefulautumn turning into a terriblewinter.”

• Rethink organizational models

to enhance performance: The organizational revolutionis redening companies’operational systems byimplementing the Hollywoodmodel, hiring innovativefreelancers for specic projectswithout incurring permanentpersonnel costs.

• Establish legal norms and

practices on data security and

privacy : This is essential toprevent organized crime and21st century cyber warfare.

Models to Solve the Resource

Equation

Europe needs a new energyarchitecture that balances energysecurity, energy independenceand climate change. This can onlybe achieved with new top-downregulatory frameworks and individualcitizens’ bottom-up behaviourallifestyle changes.

Growth may be burgeoning inCentral Asia, but there are disparitiesin GDP per capita among countries.Poverty remains a severe problemin many of the countries. Those rich

in natural resources need to diversifytheir economies and invest in humancapital. Increased oil price volatility andthe difculty of predicting future demandimpede investments in developing newoil reserves.

• Introduce a well-dened resource

pricing mechanism: In Europe, such

a mechanism could incentivizebusinesses to adopt moresustainable operational measuresand to avoid the risk of free riding.Ways forward include introducingnew sustainable taxing systems:“Tax not what you earn but taxwhat you burn.”

• Increase public investment in

green infrastructure and renewable

energy sources: At a time of

escalating demographic trendsand growing negative impacts onthe environment in the region, thechallenge is to balance short-termactions that fuel economic recoverywith actions that ensure long-termsustainability.

• Share wealth of resources to

ensure economic and political

stability : Europe has a specicinterest in cooperation in the energysector, particularly as Central Asian countries are consideringbuilding renewable energy sources. Therefore, Central Asia is lesshomogenous than its Europeanneighbours. Some countries inCentral Asia have massive waterresources, but no hydrocarbon ormineral resources.

• Diversify energy supplies: Europeand countries such as Ukraineneed to diversify their supplies of

energy. Europe needs to reduce itsreliance on Russia for natural gasby completing projects such asthe Nabucco pipeline, the new gasbridge from Asia to Europe and theSouth Stream natural gas project.

• Redesign social support systems

to improve labour markets: In theregion, economic policies needdeep reform. To substantiallyimprove damaged and edglinglabour markets, supercial reformis not enough. Sweeping changeto macroeconomic modelsand complete restructuring arerequired – including tax and welfare

systems, as well as adopting newemployment models.

• Reduce the skills gap through

public-private sector collaboration:Governments can do more tosupport entrepreneurship andSMEs, as well as invest in science,technology and R&D. Companies

can do more to invest in skillstransfer and on-the-job training.

• Look beyond the economic crisis

and focus on the bigger picture: The challenge for the region is tobalance short-term actions that fueleconomic recovery with actionsthat ensure long-term sustainability.

“Kazakhstan is investing

in centres for science and

engineering with partners like

GE, and sponsors thousands

of students to attend the best

universities in the world every

year.”

Kairat Kelimbetov, Minister of EconomicDevelopment and Trade of Kazakhstan; Co-Chair of the World Economic Forum on Europeand Central Asia

“We need to preserve the

entrepreneurship that comes

from the diversity and the

heterogeneous structure that wehave in Europe.”

Jim Hagemann Snabe, Co-Chief ExecutiveOfcer, SAP, Germany; Co-Chair of the WorldEconomic Forum on Europe and Central Asia


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Strategies to Boost

Global Competitiveness



The economies of Europe and Central Asia are linked – 75% of foreigndirect investment in Central Asiacomes from Europe, Russia and theMiddle East, 60% of which is in theextractive industries. China has alarger share of trade with the regionthan Russia or the European Union.

The neighbourhood also includes the

North Caucasus and South Caucasus.Developed economies cannotcompete with China on the basis of price. Competitiveness in today’sglobal marketplace must be based onquality, which is driven by innovation.

Europe was losing its competitiveedge before the nancial crisis hit in2008. Since then, the reverberationsof the economic crisis across thecontinent galvanized policy-makers

to rethink – and redesign – theEuropean social model. The Europe2020 Strategy aims to put the EUon a sustainable growth trajectory,with innovation as one of the agshipinitiatives to address Europe’sinnovation emergency.

The recent Euro Pact outlines keyindicators of competitiveness.National governments are nowobliged to adopt measures toimprove competitiveness relating toindex-linked wages, retirement age,recognizing qualications, exiblelabour laws to encourage talentmobility, harmonizing corporate taxesand ensuring nancial stability.

Central Asia: Huge Potential in

the Face of Many Obstacles

In Central Asia, economies haveachieved staggering growthperformance over the past 10 years –labour productivity has grown between3 and 6% above the world average,GDP has grown by about 8% annuallyand FDI has grown nine-fold. But the

economic crisis in 2008 and 2009 cutGDP growth in half.

This undermined the region’scompetitiveness and exacerbatedpre-existing challenges such as adeteriorating education system thatis causing a worrisome skills gap,too few opportunities for developingSMEs, governance weaknesses,infrastructure needs and an over-reliance on energy resources. The

region is expected to grow at 6% overthe next several years, but is facingmany obstacles.

Competitiveness and Private Sector

Development: Central Asia 2011

Competitiveness Outlook , publishedby World Economic Forum andthe Organisation for Economic Co-operation and Development, urges theregion to address the poor quality of its business environment. Today, theregion must focus on capturing moreand better investment.

Key areas for improvement includereinforcing legal and economicinstitutions, developing better nance

“Innovation is about breaking the

rules: in Europe we have lots of

regulations, but we need to give

people the opportunity to break

the rules as well.”

Doreen Lorenzo, President, frog design, USA

Central Asia, CEE and CIS economiesare forecast to gain share of the global economy Europe and Central Asia's share of the global economy

Source: IMF World Economic Outlook (April 2011); PwC analysis

S h a r e o f g l o b a l G D P

( m a r k e t e x c h a n g e r a t e s )

2000 2005 2010 2015F

40%

30

20

10

0

CIS

Central Asia

EuropeanUnion

Centraland EasternEurope

26.4%30.3%

25.9%23.5%

1.1%1.9%

2.6%

2.8%

2.9%

2.2%

3.1%4.4%

0.1%

0.2%

0.3%0.4%

mechanisms, supporting SMEs andbuilding the capacity of businessintermediary organizations to engagein business advocacy. Dialogue amongstakeholders such as employers,private sector representatives and civilsociety is critical to create a businessenvironment bolstered by transparentand effective policies.

Increasingly, Western attention isfocusing on Central Asia becauseof its natural and human resources.Central Asia’s population of 92 million,near universal literacy and abundantenergy resources are making it anincreasingly attractive destinationfor investment and trade, and itis strategically located. It is at thecrossroads of Europe and Asia, andsurrounded by Russia, India and

China.

Russia and the Caucasus areexpected to play a growing, strategicrole in the Eurasia region. Russia’seconomy is lagging behind other largeemerging BRICS and is facing multiplechallenges but has the potential togrow. Russia has bounced backfrom the economic crisis and is usingits development bank to supportinnovative SMEs.



Spotlight on RussiaRussia’s economy is lagging behindother large emerging BRICS and isfacing multiple challenges but has thepotential to grow. There is a seriouslack of institutional trust in Russia –

corruption is the number one factordeterring investors. However, in itspush to secure membership in theWorld Trade Organization and OECD,Russia has introduced new regulationsto combat corruption.

Russia has bounced back fromthe economic crisis and is usingits development bank to supportinnovative SMEs. Russia has a hugemarket at its doorstep. An imminentfree trade agreement with Kazakhstanand Belarus will be an importantelement in the shifting, dynamic Asia-Pacic economic architecture. The EUis committed to supporting its largestneighbour. On 8 June, the EuropeanCommission announced 2 billion euros

to bolster the EU-Russia Partnershipfor Modernization.

Deep Structural ReformsNeeded

The economies of Europe and Central Asia require deep structural reformsin labour markets, services, R&D,human resources and education.Policy reforms are needed in Europeand Central Asia to meet the challengeof rapidly shifting demographics.Demographics in Europe requirepolicies that encourage lifelonglearning, enabling elderly people towork longer to pay for social safetynets.

Public policies must encourageretraining for the unemployed to getback into the workforce. Central Asia’spopulation is growing, while EasternEurope’s population is shrinking. Atthe same time, Europe’s highly skilled

professionals could help Central Asiarealize its ambition to modernize itsindustrial base.

Building Human Capital

Talent mobility within Europe andCentral Asia can only ll gaps forshort periods of time. The region issuffering from skills shortages, causedby alarming shortfalls in primary,secondary and post-secondaryeducation. According to a reportprepared by PwC for the WorldEconomic Forum, skills gaps areemerging throughout the labour forcein the region. For example, a recentMicrosoft survey found that the ICTskills needed for many jobs in Centraland Eastern Europe are low but willrise quickly over the next few years.

Building human capital starts at a veryyoung age. The focus should not onlybe on teaching but also on how to

160

140

120

100

80

Service industries have ledEuropean growth since 1995Sectoral growth in Europe

Source: Eurostat

Note: Gross value added is measured in euros at constant 2000 prices

I n

d e x

o f g r o s s

v a

l u e

a d d e

d ( 1

0 0 = y e a r

1 9 9 5 )

2000 20051995 2005 2010

Retail/ Hospitality/ Transport

Financialservices/ Real estate

Agriculture/ Fishing

Construction

Publicadministration

Manufacturing

“Without innovation, countries

and companies cannot survive in

the long term.”

Jim Hagemann Snabe, Co-Chief ExecutiveOfcer, SAP, Germany; Co-Chair of the World

Economic Forum on Europe and Central Asia



work outside the EU; 75% of grossdomestic expenditure on R&D takesplace in other regions and 69% of patent applications are made outsidethe EU. However, in 2007, the EUaccounted for 40% of the patentsrelated to climate change technology,demonstrating that targetedresearch and investment in key areas

combined with policies to supportmarket development can lead to newtechnologies and innovations.

Europe and Central Asia shoulddevelop policies to encourage socialentrepreneurs, dened by the SchwabFoundation as “visionaries whoachieve large-scale, systemic andsustainable social change throughnew inventions and approaches”by providing innovative solutions

for today’s – and tomorrow’s –challenges.

gain knowledge, build capacity andspark entrepreneurship. The lack of an entrepreneurial spirit in Europemeans there is little drive for growthand Europe’s workforce is laggingbehind. Without investing more inhuman capital, entrepreneurship – thevery heart of competitiveness – willnot ourish. Europe’s risk-averse

business climate, particularly withregard to bankruptcy, is stiingentrepreneurship.

Central Asia’s entrepreneurs are muchless risk averse, having weatheredthe growing pains of an often difculttransition from centrally plannedeconomies. SMEs are engines of innovation and growth but needsupport and resources to ourish andexpand. For example, the MP3 audio

format and Skype were both Europeanideas that were scaled up offshore.Central Asia is on the verge of takingoff, which means that entrepreneurscan ourish and SMEs can powergrowth given the right conditions.

Innovation – The Lynchpin ofCompetitivenessInnovation is the lynchpin of the European and Central

Asian economies to boost theircompetitiveness in a multipolar,dynamic and rebalancing globaleconomy. The region must expandthe frontiers of innovation acrossgeographies, sectors and generations.

Europeans remain prisoners of theindustrial paradigm, victims of “silothinking”. Patchwork efforts to spurinnovation will prove futile; what isneeded is systemic change to createan innovation ecosystem. The single

market must be leveraged to fostercompetitiveness and innovation.Many argue that the single marketis dysfunctional but in certain areas,such as manufacturing, it functionssmoothly.

It is time to build on Europe’ssuccesses, such as the cross-border collaboration that resulted in

Airbus. Europe has also succeededin standard setting. New models,whereby competitors such as Ericssonand Nokia collaborated on the GSMstandard, could be replicated in othersectors. There is no time to waste –about 80% of scientic researchers



Partnerships to

Build Risk Resilience



The diverse and highly interdependenteconomies of Europe and Central

Asia have reached a critical juncture.While the advanced economies of the European Union are experiencingslower growth, scal austerity andschisms between Eurozone andnon-Eurozone members, emergingeconomies further east and in Central

Asia are grappling with the pressuresof rapid growth, entrenched corruptionand infrastructure decits.

At the same time, there is the impact of political unrest in the Middle East andNorth Africa, where political leadershave stepped down in Egypt and

Tunisia in the face of popular revolt. Thesituation is far from settled; sectarianviolence continues in Syria, Yemen andEgypt while NATO is bogged down in

Libya after two months of airstrikes. Thousands of illegal immigrants areocking to the safety of Europe.

These chronic challenges limit growthpotential and represent a systemicthreat to regional resilience that canonly be addressed in an integratedmanner. However, the nature of risk issuch that it also represents a range of opportunities for development.

Stress Tests for EuropeEurope is facing four concurrent crises:a solvency crisis, a banking crisis, acrisis of relative competitiveness anda crisis of political legitimacy. Thesecrises are interrelated and cannot besolved separately. The issue is not the

European Union; rather it is the lackof competitiveness in some Eurozonecountries and widespread auntingof the decit limits set out in theMaastricht Treaty.

Visionary political leaders are neededto rise above populist pressures andset out a comprehensive management

plan, rather than react to headlines dayto day.

The European project started witheconomic integration to reach politicalgoals, whereas now more politicalintegration – surrender of additionalnational sovereignty – is needed. Somesee a viable solution in the EuropeanCentral Bank issuing eurobonds tobuy back unserviceable sovereigndebts of countries such as Greece,

Ireland and Portugal. With this debtrepresenting only 1% of assets and 6%of Eurozone GDP, new bond issuancewould increase money supply by about5% (versus the increase in US moneysupply of 20% during the credit crisis).

While this solution was notwholeheartedly endorsed by all, it wasagreed that it makes no economicsense for Eurozone members toconsider returning to their pre-euronational currencies or risk destroyingthe European Union. The largestEurozone countries have benetedfrom the euro in terms of lower interestrates, stable exchange rates and acommon currency trading zone.Despite the European Union’scurrent difculties, most countries

“Help [to the Middle East and

North Africa Region] is required

now or the whole process is put

at risk.”

Mustapha Kamel Nabli, Governor of theCentral Bank of Tunisia

$160

140

120

100

80

60

40

20

0

80%

70

60

50

40

30

20

10

0

Oil prices have risen three-fold since early 2009

Oil prices and price volatility

Source: Thomson Reuters Datastream; PwC analysis

Note: Prices are for West Texas Intermediate.Volatility is standard deviation of daily price changes over trailing 50 trading days.

C r u

d e o i l p r i c e ( U S $ p e r b a r r e l )

V ol a t i l i t y

Oil prices(left axis)

Volatility (right axis)

2001 2002 2003 2004 2005 200820072006 2010 20112009

Oil pricevolatility

Crude oil(US$/barrel)



support further European integrationand countries such as Croatia andMontenegro are in the process of EUaccession. However, politicians needto better communicate the benets of membership to their constituents.

Participants were optimistic that theEurozone problems can be solvedbut agreed that it will require greatercooperation between the membercountries and political leaders to mark

out a clear roadmap of reform andintegration.

Arab Spring AftermathLeaders from business, governmentand academia warned that the popularuprisings in the Middle East and North

Africa may fail without Europeansupport. The situation is far fromsettled: Egypt is in a fragile transitionalstage, sectarian violence continues in

Yemen and Syria, Libya needs NATOto step up its efforts and Tunisia issuffering from an inux of refugees anda catastrophic decline in tourism.

Over recent months the desire of thepeople for change has been expressedin a visible way; now is the time forinstitution building and creating civilsociety. Many participants expressedthe view that social media tools, suchas Facebook and Twitter, will continueto play a critical role in the development

process.

However, post-revolution institutionbuilding is hindered by two paradoxes:rst, the gap between societal

aspirations and economic reality (a keytrigger of the revolutions) has increasedrather than decreased. Second, thereis increased short-term uncertaintydespite enhanced long-term stability– dramatically affecting tourism,consumer condence and privatesector investment.

As a result, economic woes aremounting and further externalsupport is urgently required. Europemust continue to play a key role insupporting the revolutions as it entersthis new phase. Above all, help shouldbe directed towards ensuring that theyoung people who triggered the Arabspring revolutions are empowered toparticipate in the new system.

Corruption: Old Problem, New

NormsCorruption is a persistent obstacle to

social and economic progress in partsof Eastern Europe and Central Asia.With 75% of FDI in Central Asia comingfrom Russia and the Middle East, theregion is particularly vulnerable toentrenched corruption.

However, corruption is not intractable– as demonstrated by countries suchas Georgia and Russia, which haveimplemented a raft of anti-corruptionreforms.

Georgia has made great strides incombating corruption as evidenced in alarge improvement of its ranking on the

Transparency International CorruptionPerception Index. The current Georgian

Western Europe

Higher

Lower

A v e r a g e s c o r e

i n t h e

C o r r u p

t i o n

P e r c e p

t i o n s

I n d e x

Eastern Europe Central Asia

2005

2010

8

6

4

2

0

perceivedlevels

ofcorruption

Perceptions of corruption are improvingin Eastern EuropeEurope and Central Asia in the Corruption Perceptions Index

Source: Transparency International (2010)

Note: Averages include 20 economies in Western Europe and 5 countries in Central Asia for both years;and 20/22 Eastern European economies in 2005/2010.

“Migrant workers should have

the same rights as domestic

workers; however, there are

some difculties related to long-

term unintended consequences

and integration remains an open

question.”

John Evans, General Secretary, Trade Union Advisory Committee to the OECD, Paris



government has taken the positionthat there is no culture of corruptionthat cannot be changed. It has red

thousands of trafc police and otherpublic ofcials for taking bribes,reduced the number of requiredlicences and is enforcing clear rulesagainst graft.

In May 2011, Russia signed the OECDanti-bribery convention as part of itseffort to become an OECD member.However, approximately 70% of corruption involves extortion by publicofcials, which is difcult to combatthrough conventional means.

Business has an important role toplay in ghting corruption, which oftentakes the form of sales employeespaying bribes to procurement ofcersof public or private customers to obtainorders. Businesses seeking to ghtcorruption should adopt and requiretheir employees to sign codes of ethicsand enforce the codes consistentlywith zero or near zero tolerance.

Top management and boards of

directors must lead by example. Largebusinesses can help small businessesresist demands for bribes by creatingumbrellas of protection, for example,by adopting codes of conduct forsubcontractors.

There are four pillars in the battleagainst corruption: criminalization,prevention, cooperation and education.

An interdisciplinary approach is neededand anti-corruption educationalproblems should be introduced at anearly age.

Resilient and Responsive

Infrastructure – Building the

New “Silk Road”

Opening a land route connectingthe Pacic, China and East Asiawith Western Europe – the “SilkRoad” – promises to cut transporttimes to less than one-fourth of their current cost.

The countries involved havecommitted to a massiveinfrastructure campaign, costingfrom US$ 50 billion to US$ 80billion, with completion by 2050.

Projections by the United NationsDevelopment Programme (UNDP)are that some countries along theroute could increase their GDPby more than 40% as a result of increased business and services.

In addition to investment in“hardware” infrastructure projects,including highway, railway and airtransport facilities, a substantialinvestment will be necessary in“software” – harmonizing cross-border customs and immigrationprocedures, upgrading theeducation and training of personnel,as well as dealing with corruptionare all essential components of the project’s success. A new,virtual “Silk Road” will also providebroadband Internet access to mostof the region.



Models to Solve

the Resource Equation



Europe and Central Asia urgentlyneed a new energy architecture thatcan balance energy security, energyindependence and climate change.

A key policy instrument to achievea more sustainable future is publicinvestment in green infrastructureand renewable energy sources. Thisis particularly relevant at a time when

economies are less sustainable thanever before and demographic trendsare exacerbating environmentalimpacts. As different countries havedifferent levels of development,incentive structures need to reect thisdiversity.

The private sector has a role to playbut resources need to be pricedfairly to incentivize businesses toadopt more sustainable measures.

Increasing incentives and investmentin energy efciency are amongthe most important steps thatgovernments can take. This bringsthe focus on behavioural issues,which can complement the top-downpolicy frameworks through individual,bottom-up strategies by citizens tochange their lifestyle and consumerpattern.

Europe Needs a New Energy

ArchitectureOf the many challenges facing Europeand Central Asia in the 21st century,climate change and the dwindlingsupply of low-cost energy are two of the largest. Renewable energy has thepotential to solve both.

Given appropriate scale, renewableenergy can also become genuinelycompetitive and a self-sustaininginvestment proposition. Despiteimpressive growth over the pasttwo decades, the renewable energyindustry continues to face obstaclesand will require more than just publicand private nance to operate at

scale. Further market developmentis highly sensitive to administrativebarriers, grid access and the risk of policy change.

Renewable energy would be morecompetitive if there is a level playingeld. This can be achieved if theleadership comes up with effectivepricing models to ensure that allexternalities are included. Forexample, most European and Central

Asian countries could generate20-30% of their power needs fromwind energy. The economics of windenergy are improving fast while thelow-carbon benets are clear: windturbines are carbon neutral withinthree months of use.

There are also opportunities forEurope in unconventional shale gas,second- and third-generation biofuelsas well as innovation in storagesolutions.

Nuclear power will remain animportant part of Europe’s energy mix.While Fukushima has changed thegame for some countries in Europe– such as Austria, Germany andSweden – others such as France and

“The most valuable assets in the

region are not oil, gas or metals

but people.”

Bozidar Djelic, Deputy Prime Minister forEuropean Integration of Serbia

S h a r e o f t o t a l p r i m a r y e n e r g y d e m a n d

Renewables are forecast to supply an increasingshare of European energy demandEnergy mix in Europe and the Caspian region

Source: World Energy Outlook 2010, IEA

Note: Forecasts under the "New Policies Scenario," which presumes that announced plans become national policy.Caspian region includes South Caucasus and Central Asia.

2020F 2020FEU Caspian region

20082008

100%

75

50

25

0

Otherrenewables

Coal

Oil

Biomassand wasteHydro

Nuclear

Gas



the United Kingdom are proceedingwith their nuclear programmes.Nuclear energy is one of the fewthat satises the conicting needs of energy security, energy independenceand reducing climate change.

Austria, whose vision is to relyexclusively on green energy by 2050,

is serious about achieving a moresustainable future. The country hascreated 10,000 jobs in the greenenergy sector in the past year alone,thus setting an impressive benchmarkfor other countries. One example of these efforts is the town of Güssing ineastern Austria, which uses wood toproduce gas and oil.

Greece, despite its nancial andscal difculties, is committed to a

new economic growth model thatemphasizes green and renewableenergy. In a strategy agenda to 2020,Greece sees competitiveness not onlyas a matter of dealing with debt anddecits but also as a European projectaimed at producing growth.

As an urgent next step, the effortsof individual countries need to beelevated to the level of the EuropeanUnion to encourage innovation andnew technologies to use energy andresources in a more efcient way.Over 1 trillion euros of new energyinvestment may be required to meetthe EU’s Lisbon Treaty goals forsecurity of supply, competitivenessand sustainability. Above all, Eurasia

needs to build a new energyarchitecture – old methods andtechnologies are no longer sustainableeconomically or ecologically.

The Energy Security EquationPrice volatility is affecting investment indeveloping new oil reserves. Restoring

price stability may require regulatoryefforts by major consumers such asthe European Union. Enough reservesexist to full demand but tappinginto the reserves requires substantialinvestment in infrastructure andlogistics.

For example, there is sufcient oil andgas in the Caspian region to meetEuropean needs. The main issue islogistics. The International Energy

Agency expects US$ 84 billion of investments in the Caspian regionon gas transmission and distributionfacilities through 2035. In Russia,another US$ 234 billion of investmentsare anticipated during the sameperiod.

It is not so much a question of how many pipelines need to beconstructed as to what kind of pipelines. While China is alreadyreceiving gas from the region andChina and India are likely to becomemajor consumers in the future,Europe is still seen as the majormarket. Georgia is also developing itshydroelectric resources and will exportelectricity to a number of external

“Renewable energy . . . will

increase energy security,

promote employment and

development, thus fostering

prosperity and social balance.”

Werner Faymann, Federal Chancellor of Austria

L u x e m

b o u r g

C o n t r i b u t i o n o f h i g h l y s k i l l e d i m m i g r a n t s t o G D P ,

2 0 0 7 ( U S $

, b i l l i o n s

, P P P ) S

h ar e of h i gh l y sk i l l e d

mi gr an t si n

w or k f or c e

F i n l a n d

Highly skilled migrants’ shareof workforce (right axis)

Highly skilled immigrants contributionto GDP (left axis)

$300

200

100

0

45%

30

15

0

G e r m a n y U K

F r a n c e

S p a i n

S w i t z e r l a n d

N e t h e r l a n d s

B

e l g i u m

A u s t r i a

I r e l a n d

P o r t u g a l

S w e d e n

G r e e c e

N

o r w a y

D e n m a r k

P o l a n d

H u n g a r y

Highly skilled immigrants add significantly to output in large economiesContribution of highly skilled immigrants in select European countries

Source: OECD; EIU; destatis; national statistics institutes; BCG analysis

Note: Highly skilled includes very highly educated people and those who perform specialized occupations where particularexpertise is crucial to value creation.



clients, including Serbia. Kazakhstanwill double its oil output by 2015 butmuch of the increased production willmeet domestic energy consumption.

Transit arrangements will becomecritical as Kazakhstan, Uzbekistan andGeorgia could become main conduitsfor gas transit.

At the same time, Europe andcountries such as Ukraine need todiversify their supplies of energy.Europe needs to reduce its reliance onRussia for natural gas by completingprojects such as the Nabuccopipeline, the new gas bridge from

Asia to Europe and the South Streamnatural gas project.

Climate change is another key driverof the energy security equation. For

the EU to meet its targets for reducinggreenhouse gas emissions, efcientuse of resources is crucial. Russiahas also indicated it can acceptemissions reductions targets of 20-25% by 2020. Finally, Kazakhstanplans to reduce emissions 15% by2020 (from a base of 1992) under theCopenhagen Accord.

Making European Labour

Markets WorkSince the global nancial crisis,unemployment rates have risenmore than 50% in OECD countries.Over 20 million new jobs must becreated simply to return to 2007employment levels. In many Europeancountries, the unemployment crisis isexacerbated by stagnant economicgrowth; projections are for only 2.2-2.3% growth in 2011 for the EU.

Creating jobs in Europe is not a

problem of labour markets – it is aproblem of economic policies. Forsmaller countries like Hungary – withparticularly low workforce participationrates – labour market reform is notenough. Entire systems need to berestructured, including taxation andwelfare systems, as well as enhancinglabour market exibility.Despite persistent high unemployment

in Europe, about 30% of employerssay that they are struggling to ndthe right people – primarily becauseof a huge skill mismatch. Indeed,there are between 2 and 4 millionunlled vacancies in Europe. Thus, theemployment crisis is better framed asone of “employability”.

The public and private sectors mustwork together to reduce the skills gap.Governments can do more to supportentrepreneurship and SMEs, as wellas investing in science, technologyand R&D. Companies can do more toinvest in skills transfer and on-the-jobtraining. The challenge is to balanceshort-term actions that fuel economicrecovery with actions to ensure long-term sustainability.

In this regard, Germany shines as apositive example with its model of apprenticeships, strong system of social partnership and higher degreeof trust between employers andemployees.

Despite deep-seated structuralproblems with European labourmarkets, the tone was cautiouslyoptimistic. While short-term challengesdominate the headlines, long-termdata in the EU27 show improvementsin trend employment rates over thepast decade – despite the economiccrisis.


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The Organizational Revolution

In a fast-moving, global landscape fraughtwith geopolitical and environmental uncertainties, how must large organizationsevolve to stay ahead of the curve?

• In a modern corporation with widelydispersed ofces and diverse cultures,traditional top-down, command-and-control management approachesdo not work. Modern managerscannot be expected to have all theanswers. They can, however, providesubordinates with the tools theyneed to accomplish their job. It isimportant or managers to grow theirteams, delegate authority and avoidundercutting subordinates.

• Managers need to embrace theunpredictability o innovation and use it

in a strategic way.

• Organizations need to establish clearobjectives and then create a roadmapto reach them. Flat hierarchies,

W i n n i n g S t r a t

e g i e s t o B o o s t

I n a w o r l d w h e

r e g e o p o l i t i c a l a

n d e n v i r o n m e n

t a l d i s r u p t i o n s a

r e c h a n g i n g t h e g l o b a l l a n d s

c a p e,

h o w c a n t h e r e g i o n

l e a r n r o m b e s t p r

a c t i c e s t o u l f l i

t s p o t e n t i a l o r c

o m p e t i t i v e n e s s?

• E u r o p e ’ s c

o m p e t i t i v e n e s s

i s o b s t r u c t e d b

y n u m e r o u s f a c

t o r s. W i n n i n g s t

r a t e g i e s i n c l u d e

u n l e a s h i n g t h e p

o t e n t i a l o f t h e s

i n g l e m a r k e t, w h

i c h c o u l d s p a r k

i n n o v a t i o n.

• E u r o p e n e e

d s t o b r e a k o u t

o f t h e i n d u s t r i a

l p a r a d i g m a n d c

r e a t e a n o p t i m a

l e n v i r o n m e n t t h

a t

e n c o u r a g e s i n n o

v a t i o n.

• P u b l i c- p r i v a

t e p a r t n e r s h i p s

c a n h e l p b u i l d h u

m a n c a p i t a l.

• E u r o p e a t t

r a c t s 4 0 % o f g l o

b a l f o r e i g n d i r e c

t i n v e s t m e n t. A t t

h e s a m e t i m e,

7 0 % o f E u r o p e ’

s

G D P i s f r o m s e r v i c e s; y e

t, o n l y 2 3 % a r e

e x p o r t e d. C e n t

r a l A s i a h o l d s h

u g e p o t e n t i a l,

p a r t i c u l a r l y i f E u r

o p e c r e a t e s s m o o t h e r i

n t e r l i n k a g e s f o r

t w o- w a y t r a d e.

C o r r u p t i o n : O l d P r o b l e m , N e w N o r m s

W h a t a r e t h e n e w a p p r o a c h e s t o c o m b a t i n g c o r r u p t i o n ?

• C o r r u p t i o n u n d e r m i n e s e c o n o m i c d e v e l o p m e n t , c o r r o d e s s o c i e t i e s a n d h u r t s p o o r p e o p l e .

• R u s s i a , l o n g s u e r i n g r o m e n d e m i c c o r r u p t i o n , h a s r e c e n t l y t a k e n s e v e r a l s t e p s t o c o m b a t

c o r r u p t i o n . • G e o r g i a h a s r e c e n t l y m a d e g r e a t s t r i d e s i n f g h t i n g c o r r u p t i o n .

• E e c t i v e l y f g h t i n g c o r r u p t i o n r e q u i r e s c l e a r r u l e s , c o n s i s t e n t e n o r c e m e n t , e d u c a t i o n a n d

c o o p e r a t i o n a m o n g g o v e r n m e n t , b u s i n e s s a n d c i v i l s o c i e t y .

WorkStudios are designed to acilitate a high level o interaction and exchangemong participants. At the World Economic Forum on Europe and Central Asia, fveessions were WorkStudios and generated new insight and new solutions to a range complex issues and opportunities pertinent to the region: winning strategies to driveompetitiveness; new approaches to fght corruption; collaborative models to acilitateubs, clusters and spin-os; ecosystems to oster social innovation; revolutionarytructures or today’s large organizations.


http://slidepdf.com/reader/full/article-critique-1-wef-eu11-report 23/28| 21

A s i n c u b a t o r s o f n e w k n o w l e d g e , p r o d u c t s , t e c h n o l o g i e s a n d b u s i n e s s , h o w c a n t h e p u b l i c a n d

p r i v a t e s e c t o r s w o r k t o g e t h e r t o b o o s t t h e d y n a m i s m a n d c o m p e t i t i v e n e s s o f t h e r e g i o n ’ s h u b s

a n d c l u s t e r s ? • H u b s a n d c l u s t e r s h a v e a i l e d o r m a n y r e a s o n s . I n t o d a y ’ s d y n a m i c , s h i t i n g b u s i n e s s

e n v i r o n m e n t , t h e r e i s p o t e n t i a l o r s u c c e s s w i t h t h e r i g h t m i x o p u b l i c p o l i c y , u n d i n g ,

l e a d e r s h i p a n d c o m p e t i t i v e n e s s .

• H u b s a n d c l u s t e r s a r e a b o u t p e o p l e . L o c a t i o n i s c r i t i c a l o r s e v e r a l r e a s o n s , i n c l u d i n g

a t t r a c t i n g t a l e n t a n d q u a l i t y o l i e . L e a d e r s h i p a n d v i s i o n a r e k e y s u c c e s s a c t o r s .

• G o v e r n m e n t s c a n o s t e r h u b s a n d c l u s t e r s b y b e i n g a “ p o l i c y e n a b l e r ” , b u t t h e y s h o u l d k n o w

w h e n t o w i t h d r a w . V e n t u r e c a p i t a l i s i m p o r t a n t b u t n e e d s t o b e t r e a t e d w i t h c a r e .

H u b s , C l u s t e r s a n d S p i n - O f f s

E c o s y s t

e m s f o r

S o c i a l I n

n o v a t i o

n

E u r o p e i s a t t h e o r e r o n t o b r i n g i n g t o g e t h e r d i e r e n t a c t o r s t o o s t e r s o c i a l i n n o v a t i o n t o

b e n e f t t h e w h o l e e c o n o m y. H o w c a n c i v i l s o c i e t y a n d t h e p u b l i c a n d p r i v a t e s e c t o r s w o r k

t o g e t h e r t o s t r e n g t h e n a n d r e p l i c a t e t h e s e m o d e l s t h r o u g h o u t E u r o p e a n d C e n t r a l A s i a ?

• S o c i

a l e n t r e p r

e n e u r s a n

d s o c i a l i

n n o v a t o r s

a r e b e i n

g i n c r e a s

i n g l y r e c o

g n i z e d i n

s o c i e t y.

• E u r o

p e i s a t a n i n e

c t i o n p o i n

t w h e r e a

s o c i a l i n

n o v a t i o n

e c o s y s t e m

i s b e c o m

i n g a n

i n c r e a s i n g

l y t a n g i b l e r e a l i t y.

• M i x e

d u n d i n g

” i s a n i n n

o v a t i v e a p p r o a

c h t o t a c k

l e t h e p r o

b l e m o f

n a n c i a l b o

t t l e n e c k s

a c e d b y

m a n y s o

c i a l e n t r e p

r e n e u r s.

• Y o u n

g p e o p l e

n e e d t o

b e i n s p i r e

d t o b e c o

m e s o c i a

l e n t r e p r e n e u r s

a t a n e a

r l y a g e

t h r o u g h e

d u c a t i o n.

open lines o communicationand transparency are crucial toorganizational success.

Keep it simple. Technology isshaping the opportunity landscapebut it must be enabling. It shouldnot be so advanced or complicatedthat users cannot ollow it. Toomuch data can be as harmul asnot having enough inormation.

In the new, interconnected world,“micro-multinationals”, employingexpert talent, can have a globalreach and may prove morenimble and innovative than largercorporations. While it is importantto build in-house expertise, the“Hollywood” model, in which

outside talent is hired or specifcprojects, can be a way to introduceinnovative ideas without needing toestablish fxed personnel assets.



The World Economic Forum would like to thank the Government of Austria for its generous support in co-hosting theWorld Economic Forum on Europe and Central Asia.

The World Economic Forum would also like to thank The Coca-Cola Company for its support.

Acknowledgements

Strategic Partners

AUDI AGBasic ElementBTCA TechnologiesDeutsche Post DHLDo uş GroupHCL Technologies LtdInfosys TechnologiesManpowerGroupMETRO GROUPNomura HoldingsNYSE EuronextOmnicom GroupSberbankSystem Capital Management

Volkswagen AG

Regional Partners

EastOne GroupGroup DFLynx Energy PartnersRU-COMState Corporation Bank

for Development andForeign Economic Affairs(Vnesheconombank)

Meeting Supporters

International Bank of Azerbaijan

OMVOTKRITIE Financial

Corporation

Ofcial Carrier

Austrian Airlines





Stephen Kinnock, Director, Head of Europe and Central AsiaMalte Godberson, Senior Director, Head of Information TechnologyEmma Loades, Director, Programme Development Team

The report was written by Dianna Rienstra and Gareth Shepherd. The summary writers at the meeting included WilliamDowell, David Watkiss and Victor Willi. The World Economic Forum would like to express its appreciation to all of them fortheir work at the meeting.

Editing and Production

Nancy Tranchet, Associate Director, Editing and WritingKamal Kimaoui, Associate Director, Production and DesignDavid Bustamante, Senior Content Producer

Photographers

Benedikt LoebellHeinz TesarekJakob Polacsek

The World Economic Forum would like to thank PwC for its help in preparing the data and statistics underpinning thisreport.

Contributors





The World Economic Forum is an independentinternational organization committed to improvingthe state of the world by engaging business,political, academic and other leaders of societyto shape global, regional and industry agendas.

Incorporated as a not-for-prot foundation in 1971,and headquartered in Geneva, Switzerland, the Forumis tied to no political, partisan or national interests.(www.weforum.org)

Documents

Article Critique 1- WEF EU11 Report