The Future of Work in Central Europe

The future of work in Central Europe

by Tomasz Kasprowicz and Galan Dall May 2020

ABOUT

Visegrad Insight is the main platform of analysis and media on Central Europe. It is organised by Res Publica Foundation in Poland, an independent NGO with 40 years of experience in thought provoking journalism and analysis.

Under project theme DemocraCE it is fostering regional dialogue that promotes and defends core democratic values in Central Europe. In this project Visegrad Insight produces four scenario-based reports explaining Central European Futures and 100 articles in 12 national languages and publishes them in the region’s key media outlets.

The reports and articles will address key issues such as the shrinking space for civil society, disinformation, and cybersecurity. The Foundation will also identify, strengthen, and link emerging pro-democratic opinion leaders in the region by holding Visegrad Insight Breakfasts - a series of networking events across the region.

Regular media corporations with:

Capital (Bulgaria), Dziennik Gazeta Prawna (Poland), HlídacíPes (Czechia), Hospodářské noviny (Czechia), HVG (Hungary), Lithuania Tribune/Delfi.lt (Lithuania), Polityka.pl (Poland), Reform.by (belarus), SME (Slovakia), and many others on ad hoc basis

Visegrad Insight DemocraCE Fellows:

Bence Bámer (Hungary), Spasimir Domaradzki (Bulgaria/Poland), Jarosław Gwizdak (Poland), Ruslanas Iržikevičius (Lithuania), Matej Kandrík (Slovakia), Aliaksei Kazharski (Belarus), Zuzana Kepplova (Slovakia), Jan Klesla (Czechia), Aro Velmet (Estonia), Marcin Zaborowski (Poland), Edit Zgut (Hungary)

Authors of this report:

Tomasz Kasprowicz Galan Dall Economy section editor Editor [email protected] [email protected]

Author of the illustration: Paweł Kuczyński Publisher: Visegrad Insight, Res Publica Foundation, Gałczyńskiego 5, Warsaw, Poland DemocraCE project is supported by the National Endowment for Democracy. The views expressed in this paper represent the opinions and analysis of the authors and do not necessarily reflect those of the National Endowment for Democracy or its staff.

www.visegradinsight.eu 1 EXECUTIVE SUMMARY

Today, the democracies of the Visegrad region are under tremendous political, economic and demographic pressures, and while the Covid-19 crisis has exacerbated their situations, it has also shown where potential spaces for development lie.

The Future of Work is a topic often filled with angst as the “status quo” is never static, and preparing for our working lives requires years of tuitiledge and training in ever advancing fields. While many assume (correctly) that manufacturing and transport will be the sectors most affected by automation initially, many more have been optimistically naive about the continued need for human labour in their own sectors - whether this be in the fields of wholesale and retail or finance and insurance.

Generally speaking, the fulcrum of our analysis rests in the successful development of artificial intelligence (AI) and automation and whether or not the countries of Central Europe will be able to transition their economies to absorb and utilise the technological advances approaching in the near future.

When writing these scenarios, there were a few premises we made which will affect how aspects of one or another may develop. Namely, we have assumed that the current recession caused by the Covid-19 crisis has put the global economies in hibernation, and that after restrictions are lifted, many will - in due time - return to their previous levels and with upward trajectories. The reasons for this are that it was triggered by the SARS-Cov-2 (Covid-19) pandemic and that the current recession has not been caused by any systemic issues within the economies themselves.

We do accept that certain industries will not be able to bounce back quickly (or ever) to their previous levels, such as aviation, accommodation and some brick and mortar retail businesses. However, some of the currently hardest hit (i.e., education) also have some of the brightest futures in a world where AI and automation expand further into our daily lives.

Like any monumental societal shifts in the past, these moments come with both opportunities and threats. It is quite plausible that non-democratic leaders and movements could take advantage of overskilled and underemployed workers (A Recipe for Populism), or that xenophobic and economically-protective tendencies could grow when faced with considerable state and personal financial burdens (Missed Opportunities); optimism awaits, however, in a Central Europe that is able to adapt and shift their societies to the AI and automated reality quickly approaching (A New Golden Age), but stagnation is likely if the promises of AI will not be fulfilled (Arrested Development).

With these scenarios in mind and knowing that none of them are mutually exclusive, we offer the following policy recommendations for Central European governments and the wider EU to consider when confronting the challenges the Future of Work poses.

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Policy recommendations:

● State-funded and dynamic education and reskilling programmes for human-resource-dependent and burgeoning sectors, specifically in the areas of AI, computer engineering and classical engineering for all segments of society; initially focusing on workers in the most at risk industries.

● Climate change and green energy offer the EU and Central Europe the chance to take leadership positions, not only in policy but in technological development, and this must be supported vigorously by all levels of government.

● While we highlight some of the potential issues if universal basic income (UBI) is phased in without additional support or being tailored appropriately for a region, the governments must address issues of social inequality through increasing safety nets and should invest in infrastructure and social services to buffer the likely increase in unemployment.

● In light of the Covid-19 crisis, the service industry could be buttressed through tax incentives (at least temporarily) as this sector will need to grow once the wealth generated from automation will leave many with excess money to spend in a potentially underdeveloped sector.

● Governments across the EU and regionally in Central Europe should collaborate to spread the wealth, resources and opportunities that AI and automation will bring in order to diminish the levels of inequality which are sure to develop if left unchecked.

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Arrested Development Scenario 1 The expected benefits of AI do not materialise, and the V4 enters a period of stagnation due to the recession caused by the Covid-19 and demographic crises as FDI is redirected.

Developments of AI and automation algorithms hit significant hurdles.

Firstly, the problem is seen in regional production facilities. Factories that were fully automated have proven to be very expensive to adapt to any changes both in terms of money and time. This is not a problem in certain industries that have been using robotics for a long time - like the automotive - but proves to be fatal for others.

Subsequently, the failings of AI highlight the strength of human labour, mainly that while people are initially more costly on an everyday basis, this is more than compensated by their flexibility, which offers some hope for the industries located in Czechia, Poland and Slovakia.

However, large investments into nearshored factories become a burden for corporations and, in large part, are closed; the transnational corporations decide to move further east or return to Asia for the cheaper labour costs, bringing with them the new technologies

1 retrieved on 29.4.2020 from: https://www.conference-board.org/blog/labor-markets/Labor-Markets-Central-Eastern-Europe www.visegradinsight.eu 4 despite suffering heavy criticism for being short-sighted concerning the economic needs and potential of their domestic markets2.

These protracted challenges exacerbate a problem the V4 region shares with all developed countries: an aging population. As the working-age population dwindles and pay continues to converge towards the EU average, the incentives for building factories in Central and Eastern Europe diminish.

The political landscape, already highly polarised in the V4, becomes further dominated by intergenerational conflicts as the largest voting block belongs to people retired or close to retirement. Political parties, catering to this electorate, keep the retirement age low and attempt to maintain purchasing power of pension payments. This places a large burden on the working population through high levels of taxation.

These trends result in GDP stagnation per capita in the V4, and the total GDP falls due to the decreasing population, caused by both the emigration of younger generations and the retirement of large swathes of the older generations. Public finance is highly strained as inflows were insufficient for growth to cover social security and healthcare spending.

To avoid these economic hardships they have inherited and feeling disenfranchised by a political system deaf to their concerns, those younger citizens who do not emigrate turn to the grey economy. Subsequently, this forces governments to enlist the help of central banks in order to maintain spending levels, using mechanisms (printing money) first developed during the coronavirus outbreak of 2020.

These moves by Central European governments translate into permanent high inflation. However, this road is not available for Slovakia - due to its participation in the eurozone - but discussions about leaving the single currency grow in number and vigor around Bratislava.

All V4 countries contemplate closing the borders in order to curb emigration, but this would translate into exiting the EU. Nevertheless, this option is heavily debated in the public arena and when coupled with the growth in popularity of newly domestically-focused media and infotainment, so too euroscepticism grows throughout the region, albeit under a new guise.

2 A case in point, Adidas’ “speed factories” located in Ansbach, Germany, were fully automated and could produce half a million shoes annually, yet the company decided to take its 3-D printing technology and automated systems back to Asia where the rest of its production line was situated. www.visegradinsight.eu 5 Missed Opportunities Scenario 2 AI and automation is phased in globally as predicted, but the V4 countries fail to adapt to the new economy. The biggest beneficiaries of automation are developed countries.

Development of AI and algorithms speed ahead as predicted, affecting segments of society unevenly, especially those with low or medium levels of education. Slovakia and Czechia are the most vulnerable, but Poland is not far behind.

Generally, the V4 countries are slow to adapt to digitalisation, as hangovers from Soviet bureaucracy made all the necessary changes painfully slow. This becomes evermore apparent when the digital frontrunners embrace the technology with a dizzying pace. As a result, corporations prefer nearshoring and place new factories in their home countries.

At the same time, Central Europe undergoes brain drain at a large scale offering unparalleled employment vacuums. The economic development since the mid-1990s in the V4 is reversed, leaving them countries of old men and women.

Failing public finances are unable to provide social security and healthcare on appropriate levels. Following previous global trends in economically disadvantaged nations, the CE population is supported by offspring transferring money from their new homelands while the state budgets are forced to rely significantly on financial support from other EU countries.

3Graphic source: https://ec.europa.eu/digital-single-market/en/digital-scoreboard. The highest ranking V4 country is Czechia, which is 18th out of 28. www.visegradinsight.eu 6 Furthermore, the Covid-19 crises highlighted a critical flaw in the Polish economy, mainly that only a fraction (12% according to Eurostat) of business was prepared to digitalise, which decreases confidence in the largest V4 economy and FDI plummets.

The situation in Poland is particularly hit hard as developments regarding automated conversational agents and processes used to read emails and documents replace much of the work offered by the ever stressed call-centre market. Czechia is also negatively affected since the time-saving programmes are also geared for HR and IT teams, though to a more acceptable extent since their level of digitalisation was the most developed in the region.

Nevertheless, there are sectors where AI is more successfully implemented in the V4, including medical diagnostics. Still, mostly this AI and automation is used as a supporting tool rather than a replacement to human resources.

In the wider economy, the reskilling of personnel throughout Centre Europe lags behind global competitors, and the new jobs created in the sector (i.e. to deal with the maintenance of these programmes) is outsourced to places like India or returned to developed markets due to economic incentives brought in protective governments.

An ongoing administrative trend in the V4 countries reflects the struggles of the societies; none of them have fared exceptionally well in the 2018 United Nations E-Government Survey (the last year statistics are available). Out of 193 countries, Czechia was ranked 54th, Slovakia - 49th, Hungary was 45th and Poland - 33rd. This became more notable during the Covid-19 crisis as online access to government services had become crucial when administrative offices were either closed or their staff and hours reduced. Even when those processes were available online, the technology was often outdated and far from user-friendly.

Politically, the V4 become paradigmatic cases of failed states; they are administered rather than governed. Local governments are under the heavy influence of outside forces complying with orders given by the suppliers of funds.

www.visegradinsight.eu 7 A New Golden Age Scenario 3 The foretold technological revolution of AI and automation meets its targets and the V4 countries are able to adapt to trends in digitalisation as well as becoming attractive locations for the nearshoring of factories. Productivity increases and the V4 become core members of the EU through further integration

The coronavirus pandemic creates momentum for change in V4 countries. Months after the start of containment in most European countries, proof that the use of new technologies is a valuable aid to fight against the virus spurs on government and business investment in the field.

Tied to a widespread, cross spectrum push by political parties, artificial intelligence makes it possible to identify, track and predict the outbreaks of the virus; moreover, the digitalisation and use of smartphone apps can speed up the processing of healthcare reimbursements. Drones deliver medical supplies and try to better enforce containment.

Initially dependent on American companies, the success in the diagnostic process garners popular support from the people, and European governments move rapidly to phase in the technology in areas of energy and security, collectively financing European firms with the capability to scale up.

www.visegradinsight.eu 8 Furthermore, the repeated social distancing measures instigated a real change in approach to digitalisation in the V4, which translates to many bureaucratic limitations being abolished.

At the same time, the education system successfully adapts to distance learning but also fully embraces technology as both a subject and means for instruction. It evolves into a digitally-oriented curriculum and even manages to involve older generations.

Remote working becomes the new norm and also allows for the extension of the productive working age, and thanks to this, the V4 countries are able to provide high quality human capital and become a natural destination for nearshoring.

In Poland, logistics and delivery companies hire more workers to meet the increased demand for their services, a trend which is echoed in Czechia and Slovakia4. The entire V4 endeavours to make strides in green technologies in order to tap into the continent’s transformation away from carbon-based energy sources.

This rapid increase in productivity stabilises the tax base and somewhat eases the intergenerational (including political) tensions. Moreover, these developments led to a natural limiting of emigration. The population is further buttressed by the application of AI to elderly care, which helped to increase engagement of the young in the workforce as their burden to care for their parents and grandparents is significantly reduced.

Consequently, the V4 becomes more deeply integrated in the economic system of the EU and is a driving force behind furthering the integration. The solidarity displayed during the protracted recession among EU member states - in comparison to non-EU neighbours - presents a clear dichotomy to the public of Central Europe; either move towards a more federalised Europe, one with more entwined systems or weather the storms in relative isolation.

Also, these developments push the V4 to become vocal proponents of further eastward EU expansion, to countries including Ukraine, the Balkan and Caucasian states. In this geopolitical shift, the V4 countries become core participants in the EU, replacing countries in the south (e.g., Italy) that were struggling to adapt to the new economic environment and actually contemplate exiting the EU.

4 https://visegradinsight.eu/digitalisation-as-a-cure-covid19/ www.visegradinsight.eu 9 A Recipe for Populism Scenario 4 AI is too successful and takes work away from people before new employment opportunities could develop. This once utopian image of the future brings numerous, new problems as human nature is directly linked to work and the feeling of self-worth.

5 The development of AI exceeded expectations. Coupled with new inventions in the fields of IT, big data analysis and quantum computing, robots are able to overtake the majority of unwanted human activity. We are freed from the curse of work and meaningful occupations are served by about 30% of the population that oversee the system and design improvements.

While developed nations like Germany, Singapore and South Korea have already made the adjustments to working alongside robots, the problems occur in countries where manufacturing was moved to after the 1980s (i.e., Central Europe).

Globalisation is reversed as the developed countries are able to satisfy the majority of their needs in-state.

Regionally, there is some success in the growth of artisan trades as well as a return to the ways of life akin to bucolic idylls, but this is only for the few who have the privilege to afford the risks as well as have the talent and opportunity to exploit such pockets in the market.

Generally, the lack of work creates huge challenges for the governments of Central Europe. The states are unable to abate the worst of these outcomes, and it leads to gigantic

5Source: PwC https://www.pwc.com/hu/hu/kiadvanyok/assets/pdf/impact_of_automation_on_jobs.pdf

www.visegradinsight.eu 10 inequalities in society, eventually resulting in only a tiny percentage of the population capturing nearly all the profits while the rest would have to go back to primitive farming to provide sustenance for themselves.

This, of course, is politically unrealistic and states approach the problem with various strategies. A few introduce universal basic income (UBI); however, this becomes problematic for some people who - when devoid of work - lack purpose and, therefore, a willingness to act. This in turn leads to an increase in psychological problems as well as pathological behaviour for segments of the population which puts an added strain on the social services. Other countries turn to providing jobs to all citizens, but these were objectively useless and result in similar negative societal outcomes as UBI. The largest scandals of the times come with revelations of these facts.

Tangentially, the sector of infotainment balloons as people need to feel that they are informed even if the “news” is superficial. It puts an additional burden on an industry already collapsing and media takeover occurs across the region. The situation is exacerbated by changes in the general mediasphere. Investigative journalism, which is currently in high demand across Central Europe due to the fragility of democracy in the region, is a costly endeavour. It is not feasible in the long-term for small, energetic, highly-motivated online-based teams if only supported by grants and small online advertisement income, as has been witnessed in Hungary.6

In turn, this triggers aspiring and established populist movements and leaders to once again offer the largely dissatisfied populations with the traditional scapegoats and promises of a return to an idealised, revisionist past utopia. They champion a Europe of Nations where the individual peoples had clearly defined identities, religious and social affiliations, where some cultural traits are shared and others easily distinguished, in order to paint an image of a happy, unified nation.

The typical villains (globalisation, Islamophobia, elities, the media as well as attacks on the LGBTQ+ community, etc.) are once again repurposed for well-trodden campaigns - themselves acts of nostalgia - in order to justify the authorities centralisation of power around non-democratic actors.

Here, the autarchic governments attempt to cater to all its own needs. This in turn means work for people as imports from automated factories are banned. The world gets divided into countries that have enough capital to push automation and those that could not afford it and cannot compete and hence close themselves off in the old economy. For those countries, this translates into a withdrawal from the WHO, the EU and other free trade agreements, further reversing globalisation.

Like the unforeseen ailments to the internet before it, the robustly expanding AI and automation into our lives has the unintended consequences of empowering illiberalism across Central Europe through its perpetuation of ennui among an overskilled and underutilised workforce.

6 Adapted from: https://visegradinsight.eu/an-era-of-creative-destruction-future-work-media/ By Martin Ehl. www.visegradinsight.eu 11 Further readings by our Fellows & Authors ● Coronavision for Central Europe: Is a Better Future Possible? By Vít Dostál 28 April 2020. ● Digitalisation as a Cure: Will the Pandemic Shake Up Our Analogue Habits? By Martyna Trykozko 27 April 2020 ● An Era of Creative Destruction? The Future of Work in Media. By Martin Ehl 27 April 2020 ● Let’s See What We’re Made Of: A New Reality for the V4 Labour Market. By Martyna Trykozko, 23 April 2020. ● Viktor Orbán’s Work-Based Society: An Examination of the Term Reveals its True Colours. By Péter Felcsuti ● A Worrying Vision: Eastern Europe Ten Years Ahead. By, Bendarzsevszkij Anton, 14 April 2020. ● The Key to Their Future: We Don't Teach Our Children How to Code. By Bence Bámer, 19 February 2020 ● Protecting the Vulnerable: Postmodern Relativism and Digital Natives in Central and Eastern Europe. By Edit Zgut, 9 January 2020. ● How Long Will It Take? Automation Could Decimate the Hungarian Labour Market. By Bence Bámer, 3 December 2019. ● Tightening Bond. By Quincy Cloet, 28 November 2019. ● Digital Natives As Citizens of a New World. By Anna Kuczyńska 1 August 2019. ● Digital Power Part 4: V/I questionnaire on media and digital transformation, 31 May 2019. ● Saving Independent Journalists: A pillar of democracy battles with the industrial revolution 4.0. By Ruslanas Irzikevicius, 30 May 2019. ● Society’s Much Needed Cure: Journalism is a vaccination for democracy. By Ruslanas Irzikevicius, 18 May 2019. ● Civil Society is Ageing: New blood and ideas needed now. By Piotr Górski, 20 March 2019 ● Securing Investment: The issues concerning foreign investors By Sharon Freeman, 28 January 2019. ● Leapfrogging to the Digital Future. By Wojciech Przybylski, 15 March 2018 ● Europe is missing innovation: An interview with Peter Stracar CEO for GE in Central and Eastern Europe, 12 July 2016. ● Can the V4 take the lead in the EU’s digital agenda? V4 MEP Caucus on the digital policy. By Gabriela Rogowska 22 November 2016. ● Uncanny under-performer: fixing V4 digital gap By Maciej Kuziemski, 18 November 2016. ● Today is already tomorrow: Central Europe is finally catching up. By Wojciech Przybylski, 20 June 2014.