Economic Development in the Western Balkans: On the Road to Competitive Market Economies?

Abstract

IntroductionToday, more than ever, economic security is the main challenge facing the Western Balkans.1 Poverty, unemployment and inequality threaten the everyday security of average citizens in the region. Indirectly affected by the world economic recession through trade and finance spillover channels and strong dependence linkages with European Union markets, this region became highly vulnerable, falling into a double dip recession.2 The economic downturn has worsened socio-economic conditions, diminishing consumers' confidence in markets, socially dividing the societies in terms of income and wealth levels, declining living standards and shaking social foundations, and threatening the hopes of eventual convergence with advanced countries. To reverse the downhill slide, the Western Balkans need to change gears, revising the model of growth by accelerating socio-economic reforms and speeding up measures to develop its economy. In desperate need of modernization, institutional transformation and sustained economic growth, countries should rely on deeper regional cooperation and integration with the EU as the foremost option for positive development. The most important driver of growth will be the catch up with technologies and market-friendly institutions of the advanced countries.State of Play in the Western BalkansThe rapid growth of a decade ago and the catching-up process of the Western Balkans' economies came to an abrupt end in 2009, with a GDP contraction of an average of 3.9 percent. Continuing to struggle with another recession in 2012, the GDP shrank again by 1.2 percent.3 It appears the region exited the recession only in 2013, with anemic growth reflecting the prolonged recession in the Euro zone and particularly the weak economies of Greece and Italy. Also, the prospects ahead show weak growth rates and a sluggish recovery, as shown in Figure 1.The lagging reaction of the Euro zone crisis still continues to burden the fragile transitioning economies of the Western Balkans, which are battling a sluggish recovery, weak economic output, unemployment and dangerous high public debts.The main negative contagion channels have been the fall of foreign direct investment (FDI) in the Western Balkans, experiencing the sharpest decline of any emerging market in 2009 with a contraction of more than 30 percent on average;4 the decline in exports and trade in general; and the fall of remittances from expatriate works. The ongoing credit crunch in the Western Balkans is perpetuated by foreign ownership of the banking system and the serious impact of the Greek economic crisis, the latter being a strategic investor in the region and one of the main trading partners.Western Balkan economies lag behind the rest of Europe with very low incomes and living standards. The average income levels in the region are as low as 36 percent of the EU-27, varying from Kosovo, with only 22 percent of the EU 27 average, to 61 percent in Croatia.5At the same time, unemployment in the Western Balkans is the highest in Europe, with an average of 24 percent, twice the West European average. The economic crisis worsened this picture, with more plunging incomes, rising poverty and unemployment.Although GDP per capita almost doubled in the last decade, unfortunately it was a jobless growth that did not translate into increased employment. Western Balkan countries suffer comparatively low participation rates and a lack of opportunities for young workers. Simultaneously, the incidence of informal unemployment continues to remain large in the still transitioning economies of the Balkans, with estimated levels to be between 30 and 40 percent.The most devastating consequence of the high incidence of joblessness is poverty.6 Levels of poverty are highly persistent in the neighboring region of Western Europe. The incidence of poverty is extremely high in Albania and FYROM with 58.5 percent and 40.6 percent, respectively, of the population living with less than $ 5 a day. …