Until 2009, the Western Balkan countries experienced substantial improvements in many macroeconomic indicators [see Uvalic, 2012]. During 2004-2008, countries in the region registered high real GDP growth rates, on average for the five-year period ranging from 4 percent in Croatia to 7 percent in Montenegro. The positive trend was interrupt-ed by the global economic crisis which began to be felt in most Western Balkan
coun-in economic growth thereafter, and all Western Balkan countries except Albania and Kosovo had negative GDP growth in 2009, particularly Montenegro (-6%) and Croatia (-6.9%). There was a mild economic recovery in most countries in 2010-11, following similar trends in the EU, but it was short-lived. Given the increasing integration of the Western Balkan countries with the EU economy and the high degree of ‘euroisation’ (see below), the sovereign debt crisis in the eurozone pushed most Western Balkan countries into a second round of recession in 2012 (Figure 1). The present situation therefore remains extremely fragile.
fIguRE 1. gRoWTh In REal gDP (%), 2004-2012
Source: Author’s elaboration based on IMF, World Economic Outlook, October 2012, except for 2012: EBRD, January 2013.
Over the past decade the Western Balkan economies have achieved increasing macr-oeconomic stability – particularly important after many episodes of hyperinflation in the 1990s. Inflation rates have gradually been reduced to one-digit figures, also in those countries that previously experienced extreme monetary instability (e.g. Serbia). There was also some fiscal consolidation thanks to cuts in public expenditure, reforms of the taxation system and stricter fiscal rules. The level of public debt in 2011 was still below 60 percent of GDP in all Western Balkan countries, thus lower than in a number of EU member states.
milica uvalic milica uvalic
Trade liberalisation with the EU and other countries in the region after 2001 has con-tributed to a remarkable increase in the volume of foreign trade, which in some cases has increased fourfold or even fivefold. The revival of trade brought an even faster in-crease in imports, leading to increasing trade deficits. This positive trend was reversed in 2009, when both exports and imports registered a decline due to the global economic crisis. Interestingly, most Western Balkan countries have not succeeded in reorienting an increasing proportion of their exports towards the EU. The EU share in total exports in 2011 ranged from 40 percent in Kosovo to 50-60 percent in the other Western Balkan countries, except for Albania (74 percent). For most Western Balkan countries, intra-regional trade links inherited from the former Yugoslavia have remained an important part of their overall trade.
fIguRE 2. WESTERn Balkan CounTRIES mERChanDISE ExPoRTS, 2001-09 (BIllIon uS$)
Source: Author’s elaboration based on data from the EBRD online database.
After a decade of extremely low Foreign Direct Investment (FDI), the Western Balkan coun-tries have finally seen the arrival of foreign investors, mainly from the EU councoun-tries but also from Russia, Turkey, Norway and Canada, a phenomenon which was prompted by priva-tisations of enterprises and banks and improved economic prospects. However, around two thirds of FDI has gone into non-tradable services (banking, telecommunications, retail trade, real estate) rather than manufacturing, so FDI has only marginally contributed to industrial restructuring and to export-led growth [Uvalic, 2010]. Since 2007, there has been
fIguRE 3. annual fDI InfloWS In ThE WESTERn Balkan CounTRIES, 2003-2011 (In mIllIon uS$)
Source: Author’s elaboration based on UNCTAD data (World Investment Report).
The Western Balkan countries have also converged towards the ‘ideal’ model of a market economy over the past ten years, as confirmed by the most recent transition indica-tors of the European Bank for Reconstruction and Development (EBRD).1 Croatia has achieved the best results so far, but the other Western Balkan countries have also caught up in the meantime. By 2011, there were no longer large differences in various areas of economic reforms between the ‘early’ reformers (Albania, Croatia and FYROM) and the
‘late’ reformers (Bosnia and Herzegovina, Montenegro and Serbia), as was the case in 2001 [Bartlett, 2008] (see Table 1). Reforms in the area of price liberalisation, trade and foreign exchange systems and small-scale privatisation have been practically completed, while progress has been slower regarding governance and firm restructuring and com-petition policy. Enterprise privatisation has contributed to the gradual expansion of the private sector which today accounts for 60-75 percent of the Western Balkan countries’
GDP. However, privatisation has often not led to improved corporate governance or to deep enterprise restructuring, since apart from foreign investors the new owners often lacked the resources and skills to successfully modernise their firms. Many bureaucratic procedures for doing business have been abolished, with large cross-country
differen-1. These EBRD indicators estimate progress in various areas of economic reform in all 29 countries in transition, on the basis of scores which go from 1 (no or limited reform) to 4+ (comparable to a developed market economy).
milica uvalic milica uvalic
ces: in the World Bank’s 2013 Doing Business report that ranks 183 countries, FYROM occupies the best position (23rd), while Bosnia and Herzegovina the worst (126th).
The privatisation of the Western Balkan countries’ banking sector has greatly contrib-uted to strong financial and capital markets’ integration with the EU: major EU banks today own 75-95 percent of banking assets. The foreign ownership of banks, though a welcome feature in the initial process of bank restructuring and privatisation, was also an important channel for contagion by the global financial crisis. Today, the Western Balkans are especially vulnerable to the effects of the eurozone crisis because of the high degree of ‘euroisation’ [Bartlett and Uvalic, 2013]. Montenegro and Kosovo have adopted the euro as legal tender without the approval of the European Central Bank, Bosnia and Herzegovina has a currency board which ties its currency to the euro, while the other Western Balkan countries have pegged their currencies to the euro (all except Serbia and Albania) and have little room for manoeuvre as a large proportion of domes-tic liabilities are denominated in euro.
TaBlE 1. EBRD TRanSITIon InDICaToRS, 2012
Source: EBRD, Transition Report (2012).