It would appear that, for the moment, the gains to be made in investing in South East Europe are greater than the risks posed by crime and corruption. In the prepara-tion of the 2005 World Development Report, the World Bank conducted Investment Climate Surveys in 53
emerging countries around the world, including most of the countries in South East Europe. Businesses were asked whether a number of factors posed a constraint on business investment in the region. In some countries in the region a high share of businesses felt that crime was a major constraint, but this share was below the average of the 50 countries where this question was answered. Even in Moldova, the country with the larg-est share concerned with crime, other factors were con-sidered more significant, including tax rates and policy uncertainty.
Share of respondents who feel unsafe walking in their area alone after dark Figure 95:
Source: ICVS 2000423
Positive response to the statement Figure 96:
“only kin can be trusted” in 2003
Source: Mungiu-Pippidi 2005424
Percentage of firms regarding crime to Figure 97:
be a major constraint on investment
Source: World Bank 2005 38
47 48
65
72
0 10 20 30 40 50 60 70 80
Montenegro Serbia Romania Bulgaria FYR Macedonia
%
3 5 9 9
13 14 15
19 19 20 20 21 23 25 27
0 5 10 15 20 25 30
Slovenia Hungary Croatia Serbia Turkey Czech Rep. Slovakia Bosnia & Herzegovina Bulgaria Romania FYR Macedonia Albania 50 country average Poland Moldova
18
24 25
31
40 42
51 53 57
63 66
0 10 20 30 40 50 60 70
Sweden West Europe Average England and Wales Croatia Albania Spain CE Europe Average Poland Romania Russia Bulgaria
%
The impact of crime on social, economic and political progress
Corruption was considered a more important constraint than crime in every country in the region. The issue was most acute in Albania. Albania ranked second highest among the countries polled in the share of firms reporting that bribes were paid in the normal course of business, with a remarkable 85% so reporting. It was second only to Bangladesh (98%), the country reportedly perceived to suffer the most from corruption, according to the 2005 Transparency International Corruptions Perceptions Index. In most of the countries of South East Europe, over half the firms said bribes were paid. Interestingly,
far more said they paid bribes than said that they felt this requirement was an impediment to business. This suggests that bribery may be driven by the businesses themselves, a technique used by new firms to compete with former state-run enterprises.425
The presence of judicial sector corruption is particularly problematic for potential investors, who may have to avail themselves of the courts in order to enforce com-mercial contracts. Many of the firms from the region re-sponding to the Investment Climate Surveys conducted in the preparation of the 2005 World Development Re-port said that the court system stood as a major con-straint on investment.
One means of assuring a constant flow of bribes for a wide range of actors is to create an impermeable bu-reaucracy. In such a system, obeying all the regulations is nigh on impossible, and so ‘greasing the wheels’ be-comes the only practical way of doing business. As one study of the informal economy in Bulgaria concludes:
The shadow economy is greater in the developing and transition countries due to higher corruption and the low incomes of the population… The licensing and registra-tion procedures impede the business activity, create fa-vourable conditions for corruption of the state and local administration. Surveys of the Institute for Market Econ-omy show that the business regulation and the constant-ly changing number of regulations are reasons for the firms to prefer the informal sector of the economy.426 The World Bank’s “Doing Business” project measures exactly these regulatory barriers in 178 countries around the world. In their 2008 report, Albania was ranked 168th
Percentage of firms saying bribes are Figure 100:
paid in the normal course of business
Source: World Bank 2005 Factors considered a major constraint on
Figure 98:
investment in Moldova
Source: World Bank 2005
Percentage of firms regarding Figure 99:
corruption to be a major constraint on investment
Source: World Bank 2005 5
11 20
27
40 40
55 57
0 10 20 30 40 50 60
Electricity Labour skills Courts Crime Finance Corruption Tax rates Policy uncertainty
% of respondents mentioning
6 9 13 16
23 24 25 28 28 31 35 35 40
48
0 5 10 15 20 25 30 35 40 45 50
Slovenia Hungary Czech Rep. Serbia Croatia Turkey Bulgaria Slovakia Poland FYROM B & H Romania Moldova Albania
36
49 52 56
60 62 63
68 69 72 73 76 78 85
0 10 20 30 40 50 60 70 80 90
Slovenia Croatia Poland Czech Rep. Hungary Serbia Bosnia & Herzegovina Slovakia FYR Macedonia Turkey Romania Bulgaria Moldova Albania
in terms of dealing with licenses, which require an aver-age of 24 procedures and nearly one year to acquire.
Albania also has no practice for closing a business, and so is ranked at the bottom of the standings in this re-gard. Bosnia and Herzegovina presents a mixed picture, ranked 13th in the world in terms of ease to access to credit, but 150th for both starting a business and deal-ing with licenses. Croatia scored better overall but was weak in terms of the difficulties encountered in employ-ing workers (139th) and, once again, dealemploy-ing with licens-es (162nd). The top rated countrilicens-es in the area are the two new EU members, Bulgaria and Romania.427
While demands for bribes may deter foreign investment and promote capital flight, the domestic business that remain may feel compelled to operate off the books or withdraw into the informal sector. In these instances, the perception of the value of state regulation has become less than its price. As highlighted in Section 1 above, much of the economic activity of this region is off the books. Businesses that opt out of formal registration do incur a significant loss, however. They cannot avail themselves of the benefits of legitimacy, such as ac-cess to the dispute resolution mechanisms of the state.
Different mechanisms of calculating the size of the in-formal economy produce different results, but they all agree that it comprises a large share of total production in these countries.
The shadow economy is often supported by organised crime, which is frequently linked with political struc-tures.428 And all this economic activity is untaxed, further undermining state capacity to deal with the problem.
Despite these concerns, investment in South East Eu-rope remains strong. While net FDI fell rapidly in the EU-25 countries between 2000 and 2004, the opposite was true in most of South East Europe, suggesting that these countries are actually becoming more attractive to foreign investors. Given that much of the privatisation process is complete, this money probably represents the drive to get in at the ground floor in a region that will eventually become part of the EU. Long term prospects appear to be outweighing expressed concerns about crime and corruption.
Share of respondents who felt the courts Figure 101:
were a major constraint on investment
Source: World Bank 2005
Rank (out of 178) in overall ease Figure 102:
of doing business
Source: World Bank 2007
Net foreign direct investment and Figure 103:
official development assistance inflows as a share of GDP in 2003
Source: UNDP, HDR 2005 5
8 11 12
14
18 20 21 23
25 27 27 28 33
0 5 10 15 20 25 30 35
Hungary Slovenia Czech Republic Turkey Serbia Bulgaria Moldova Romania Bosnia & Herzegovina Slovakia Poland FYR Macedonia Croatia Albania
%
35 46 48
74 75 81 86 92 97 101105108 136
178
0 20 40 60 80 100 120 140 160 180 200
South Africa Bulgaria Romania Poland FYR Macedonia Montenegro Serbia Moldova Croatia Sri Lanka Bosnia & Herzegovina Nigeria Albania DRCongo
0 1 2 3 4 5 6 7 8 9
FYR Macedonia Albania Bosnia & Herzegovina Serbia & Montenegro Romania Bulgaria Croatia
%
FDI ODA
103 The impact of crime on social, economic and political progress
6515
Direct investment in 2005 and 2006 Map 6:
Source: UNECE430 For those countries which received the post-conflict re-construction aid, the amount of grants has now sharply declined, which has an important effect on economies of countries like Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Serbia, and Montenegro. In 2003, however, in all these countries, except Serbia and Montenegro, foreign assistance still outweighed FDI. It is expected that the foreign assist-ance will continue to decrease, whereas the FDI is hoped to increase.429
Direct investment in the last two years has been even more impressive, with every country for which data are available showing significant gains.
Partly as a result of this investment, recent GDP growth rates are generally markedly higher in South East Eu-rope than in the EU-25. In 2004, countries from the region experienced growth rates of between four and nine percent. Admittedly, most countries are starting off a very low base, many are still recovering from wartime losses, and the flow of aid to the region remains high.
The countries of South East Europe together account for the equivalent of just 3.8% of the EU-25’s GDP per cap-ita in 2004. In the region, Croatia has the highest GDP per capita, valued at just over one quarter of the EU-25 average. In many countries, recent growth is modest in comparison to the levels of the development problems confronted. But growth is occurring at a rapid rate, and it appears that fear of crime and corruption are not arrest-ing development.
For example, Albania was long the poorest country in Europe. Even today, Albania’s GDP per capita repre-sents only 8% of the EU average. While the economic situation remains grim, real annual GDP growth was about 6% in 2005. If crime and corruption were not is-sues, growth would likely be much stronger.
Similarly, during the years of war, GDP in Bosnia and Herzegovina fell by 80%. The country is estimated to have lost US$ 100 billion during the war, and total out-put is currently at 60% of pre-war levels.431 An estimated 20% of Bosnia and Herzegovina’s citizens live below the poverty line, and a further 30% are highly vulnerable to Regional inflow of FDI in millions of US$,
Figure 104:
1997-2004
Source: UNECE
GDP per capita, 1995-2004 Figure 105:
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
EUR
Bulgaria Croatia
Romania Turkey
Albania Bosnia & Herzegovina FYR Macedonia Serbia & Montenegro Kosovo (Serbia)
1997 1998 1999 2000 2001 2002 2003 2004
poverty. Still, the economy grew over 5% in 2005.
Only in Kosovo (Serbia) does the economy remain stagnant. Kosovo (Serbia) has the highest unemploy-ment rate in South East Europe. The average salary is just 200 euros per month. There is 50% unemployment, higher among youth, women, and rural people. Accord-ing to the Ministry of Finance and Economy, households in Kosovo (Serbia) receive more money from remittanc-es than from work. More than half of the people live in poverty, and 30% live just above poverty line.
But economic growth alone does not necessarily trans-late into a better life for all. In many countries experienc-ing rapid growth in this region (exceptexperienc-ing Croatia), real wages have remained stagnant. Apparently, the benefits of this growth are being experienced by a limited portion of the population. Given that this elite is small and their finances obscure, this has not yet manifested itself in the kind of broad social inequality discernable in income distribution statistics.
Finally, South East Europe has a long way to go to reach the economic level of West Europe – at present growth rates, achieving this goal will take over 50 years. It has been suggested that the key to truly impressive growth rates, such as China’s, is not foreign investment at all, but domestic savings. While most of the countries of the region have higher per capita incomes than China, do-mestic savings rates are much lower. This could be due to generalised institutional distrust, and could hurt long term growth prospects if local people do not develop confidence in their own economies.432