European Politics and Institutions

Balkans Forum

Prospects and policies for growth in the Balkans: The role of human capital

17 November 2011

The GDP of Balkan countries grew significantly until 2009 but growth fell sharply once a real estate bubble had burst and the region had begun to feel the effects of the eurozone crisis, said Ronald Hood, lead economist for the Western Balkans at the World Bank.

Balkan countries feel the effects of the EU crisis in terms of falling trade and foreign direct investment, as well as a lack of access to finance, he said.

The Balkans’ trade with the EU is large: much of it is with Italy and Germany. Export performance has moved sharply in tandem with the EU economy in recent years: economic developments in the Balkans swing with those of the EU, Hood explained.

“Finance may be a critical issue going forward. External debt has grown. Sluggish growth in the EU is likely to be reflected in the region. There’s a lack of finance available from banks, many of which are European,” he said.

Credit growth in South-East Europe fell sharply in 2009 and it remains below pre-crisis levels. Moreover, foreign banks hold much of the region’s assets. Half of these institutions are Greek or Italian and together their claims represent a large proportion of the Balkans’ GDP.

Hood outlined the main vulnerabilities of SEE6 economies:

  • Large fiscal deficits as a percentage of GDP. “They’re not as large as in the CEEC 10, but access to finance can still be a problem.”
  • Overall current account deficit as a percentage of GDP is higher than in the CEEC 10.
  • Trade openness as a percentage of GDP brings with it an element of vulnerability linked to the global economy. “The patterns are similar to in the CEEC 10.”
  • Public debt as a percentage of GDP is “quite high” in Albania, Serbia and Montenegro.
  • Foreign funding of banks as a percentage of GDP is high, with Serbia and Bosnia and Herzegovina (BiH) particularly vulnerable.

Deeper integration with the EU is still the region’s best policy for long-term growth. But structural reforms are needed too, Hood concluded.

“DG Enlargement’s role is to help governments in the region to assume their responsibilities towards EU accession,” not least with aligning to EU law, said Yngve Engström, head of unit for regional programmes in the European Commission’s enlargement department.

“Economic growth is a key ingredient of institutional strength, which in turn roots out fraud and corruption and is therefore crucial for enlargement,” Engström said.

“Human capital development will be of essential importance but the region is facing major problems,” he warned.

“We have clear evidence that low labour costs and commodity exports are still the major focus: that’s a problem. There are also gaps between the skills demands of the market and the education coming out of schools,” he said.

“We should focus much more in future on education and vocational training, because unemployment is a massive problem,” Engström concluded, expressing his desire to work more closely with the World Bank in this regard.

Closing the gap between the demand for skills and their supply in the region will be a long process, warned Lidija Topić, adviser to the Regional Cooperation Council.

Among the key challenges facing the Western Balkans are finding a new model of growth, addressing the slow pace of reform, boosting the area’s low innovation capacity and the need for the region to reposition itself in European constellations, Topić said.

She expressed hope that the EU’s ‘Europe 2020’ strategy would act as an anchor for reform in the Balkans too, because enlargement countries were invited to organise their work according to its goals.

“Deep integration with the EU will continue to drive economic growth in the region, while providing an anchor for political and structural reform,” Topić predicted.

“It’s hard to be optimistic at the moment and we won’t return to a pre-crisis situation. Increased divergence between eurozone countries is here to stay and low growth is permanent. The financial sector will continue to be in trouble,” warned Fabian Zuleeg, chief economist at the European Policy Centre.

The economic environment is making the EU more inward-looking. “Croatia will slip in but there’ll be no quick EU accession for other countries,” Zuleeg predicted.

“This means that the future EU will look very different to prospective members,” he said.

Despite their small size, the economies of South-East Europe are very open, so the crisis in the EU will have an impact on the region, Zuleeg warned.

He advised South-East European countries “to keep their own houses in order and develop more domestic sources of investment”.

“Reduce export dependency by boosting domestic consumption. But there’s no alternative to trade with the EU, so that must still be the focus,” he added.

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