The six economies in Eastern Europe and the South Caucasus (EESC) - Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova, Ukraine - have grown rapidly following a rocky and difficult transition from centrally planned to market economies over the past decades. Countries such as Georgia stand out as star reformers. This momentum, however, is slowing: as current growth drivers wane, countries must sustain and ramp up governance and market reforms. Overreliance on remittances, a narrow range of commodity exports, and private and public debt, rising sharply in response to the economic and social effects of the COVID-19 pandemic, leave the region exposed to external shocks - the pandemic alone may trigger a decline in GDP of 3% up to 7.2% in these countries in 2020, according to the IMF.

The new Innovation Policy Outlook (IPO) of the United Nations Economic Commission for Europe (UNECE) reviews and compares innovation performance and governance across the EESC sub-region (see Annex 2 for country snapshots). Complementing quantitative composite indices, the IPO compares innovation ecosystems in six countries with similar economic, structural, legacy and institutional features, challenges, and opportunities. It is an essential part of UNECE’s ambition to support trade and economic cooperation among its member States in the pan-European region.

These trends underscore the need for ramping up innovation to find and scale up the ideas that could form the foundation for sustainable development. “Innovation must be at the heart of sustainable development strategies: the ability to experiment with ideas for creating value, using technology, reforming governance, and capturing opportunities; as well as to design policies, institutions, and processes that enable and promote such experimentation for the benefit of people”, notes Olga Algayerova, Executive Secretary of UNECE. 

The IPO notes that several building blocks for successful innovation systems are already in place:

• EESC countries show strong political commitment to innovation overall and to research and entrepreneurship in particular; they engage in a range of measures to support innovation in the private sector. Azerbaijan, for example, has a national strategy and new agencies dedicated to innovation.
• The labour force has high levels of educational attainment. Ukraine, in fact, sports among the highest levels of tertiary enrolment in the world.
• EESC countries have a strong legacy of public applied and basic research with solid institutional networks.
• Some innovation-led diversification is taking place. The rise of technology business process outsourcing services, especially in Armenia and Belarus, demonstrate clear potential.
• Foreign investments have in several cases spurred competitive new sectors. In Moldova, a modest investment by a German manufacturer in a free economic zone sparked a growing, competitive, and diversifying automotive supply sector.
• Countries offer a wide array of innovation infrastructure. All EESC countries have set up technology parks, incubators, special economic zones, and similar initiatives.

Many of these measures, however, have limited impact as several factors constrain their effectiveness. The prevailing emphasis of innovation policy on public research and technology start-ups rather than on gradual, adaptive innovation overall misses most of the potential. Private sector development policies tend to cater to sectors and MSMEs rather than the small sub-group of innovative, potentially high-growth entrepreneurs that drive economic experimentation. Finally, funding and institutional capacities are often not sufficient to put ambitious plans into practice.

The inherent uncertainty of innovation upends traditional approaches to policy design and governance. The problem in the sub-region lies in the lack of institutions and processes that adequately enable and encourage experimentation in governance: trying things out and systematically stopping, phasing out or reforming what is not working. “To promote innovation, policy makers have to be innovative themselves” remarks Ms. Algayerova. As innovation is, by definition, uncertain, its very nature conflicts with the traditional, planning-oriented approach to policy and public support – making a solid, transparent yet flexible approach to the different steps in the innovation policy cycle essential in all EESC countries. Specifically, there is a lack of solid policy foresight exercises, broad stakeholder consultations, in-depth analysis of and clarity about market failures and the rationale for intervention, clear and detailed performance indicators. Existing arrangements do not meet the need for continuous monitoring and evaluation of interventions against clear, quantifiable objectives and performance indicators to inform continuous learning and improvement throughout the policy cycle. Without these essential components, the cumulative positive effect of measures will remain sub-optimal and at times distortionary.

The complexity of innovation systems and the scope of the challenge, especially in the broader context of the SDGs, require a significantly higher degree of coordination and alignment. At the policy level, long-term innovation strategies do not systematically align with SDG priorities and those of central, related policy areas such as industrial development, SME promotion and public research. At the level of policy design and implementation, few systematic mechanisms exist for interministerial coordination and multi-stakeholder consultations to explore needs and complementarities, align and consolidate efforts, and monitor and evaluate impact.

The challenge for the region is creating ecosystems where such experimentation and momentum emerges, and innovative solutions diffuse much more systematically. This challenge is front and centre of the IPO, which outlines the reforms central to enabling and promoting such dynamics. This includes comprehensive strategies, transparent and efficient institutions, and coordination mechanisms and processes with the flexibility to respond quickly to needs and opportunities.

In this spirit, recommendations of the IPO include:

• Strengthen innovation governance through reforms that fill legal and institutional gaps, build capacity, and set up bodies and mechanisms for continuous coordination and regular stakeholder consultation at different levels. Legal and institutional frameworks are not sufficiently robust to support innovation policy effectively in the sub-region. Regulatory gaps and constraints on risk capital investment, insolvency, start-ups and spin-offs need to be removed, national legal frameworks need to be aligned with international standards and best practices, and the enforcement of laws and regulations needs to be strengthened.
• Sharpen targeted innovation policy tools supporting the private sector through incentives, training and finance to enhance the focus on making sure resources flow into innovation that has high potential for positive social return. This is also important for innovation, where public support is likely to have a catalytic role. In the EESC sub-region, in addition to low access to finance for innovation, a clear life-cycle perspective is missing, with many gaps in support at different stages. Relationships and linkages among actor need special attention through targeted incentives and support mechanisms.
• Improve innovation policy processes. Countries need rules that are effective but grant flexibility, and solid institutions and processes along the innovation policy cycle: from foresight over initial analysis and policy design to implementation and continuous monitoring and evaluation of impact. Innovation foresight practices are needed to better identify the strategic direction for innovation to better capture future trends and improve the quality of policy development. Comprehensive, continuous, and systematic monitoring and evaluation are essential to ensure and optimize impact of interventions.

UNECE developed the Sub-regional IPO under the guidance of the UNECE Team of Specialists on Innovation and Competitiveness Policies and launched it at a high-level event on 25 November 2020.