Boom and bust in Eastern European IT

Eastern Europe's technology boom

Brains boxed in
Mar 1st 2007
From The Economist print edition


How long can the good times last?

ON THE face of it, Romania's software industry could hardly be doing better. Foreign firms such as Microsoft, Alcatel and Hewlett-Packard are piling in, attracted by cheap, skilled and multilingual programmers, and proximity to rich Europe. It is part of a wider boom stretching from well known hotspots such as Estonia (home to Skype) to autocratic Belarus.

Cornelius Brody of iQuest, which writes software for companies including Virgin Atlantic and Lloyd's of London, now employs 160 people after ten years in Romania. He praises the “multilingualism, multiculturalism and Western-oriented mentality” in the northern part of Romania, which used to be part of the Austro-Hungarian empire. But business is getting harder. His programmers' salaries are now at 50% of Western levels and are rising by as much as 20% a year. When the discount to Western salary levels drops to around a quarter, it is scarcely worth going abroad, he notes.

That squeeze is common across the region. Over the past decade foreign firms have snapped up workers with excellent maths and thrifty programming habits honed by the educational system and hardware shortages of the communist era. “Everyone is facing the same problem,” says Steve Keil of Sciant, based in Bulgaria. “More foreign direct investment means fewer programmers available.” To cope, his firm has shifted some work to Vietnam.

As it struggles to respond, eastern Europe's software industry faces two big tests. The first is to move away from low-margin offshoring towards higher-value work. “When we started our typical customer was a foreigner wanting something done cheaply,” says Pawel Zak of IMPAQ, a thriving Polish software firm. “Now it is a Polish firm wanting something done quickly.”

The second test is getting enough graduates of sufficient quality out of ossified education systems. Natasha Starkell of Goal Europe, a consultancy, notes that Ukraine, with a population of 47m, produces 30,000 computing graduates a year. This gives it an edge over Romania, with a population of 22m, which produces only 8,000. Zsolt Nagy, the Romanian government minister responsible, admits there is a bottleneck, but insists that public-private partnerships in education will increase capacity.

Yet across eastern Europe, higher education—almost always state-run—has been remarkably resistant to reform. Ms Starkell says that universities are run as “fiefs” where innovations such as teaching by outside practitioners are strongly resisted. Higher demand for graduates tends to result in corruption in entrance requirements or a drop in standards, rather than better teaching.