Western Balkans to take up to 180 years to catch up with the EU

Western Balkans to take up to 180 years to catch up with the EU
By Clare Nuttall in Bucharest February 27, 2018

It could take the Western Balkans six (WB6) countries almost two centuries to achieve full convergence with average EU living standards, a new report from the European Bank for Reconstruction and Development (EBRD) finds. 

Looking at average growth rates since the global financial crisis, it would take until 2200 for the six aspiring EU members to catch up with the bloc, where current average GDP even in the 11 CEE member states is twice as high as in the Balkans, while in the most advanced West European economies it is four times as high.

Even the most optimistic scenario outlined in the report (based on the faster pre-crisis growth rates) has the six aspiring EU members achieving convergence no sooner than 2053, while the baseline scenario — based on the average growth rates for 2001-2016 — forecasts the region will converge by 2078. 

Whether it takes decades or centuries for the six countries — Albania, Bosnia & Herzegovina, Kosovo, Macedonia, Montenegro and Serbia — to fully converge with average EU living standards will depend on how fast governments address the challenges that hamper the region from developing its full potential, the EBRD report says. “Full convergence will require a major and sustained boost to productivity and investment, but the conditions for such a boost are not yet in place.”

EBRD economists identify low productivity as the fundamental problem holding back economic development in the Western Balkans. “This reflects years of under-investment, weak institutions and a difficult business environment,” says the report, which brings together a broad range of research from the EBRD and other international institutions. 

They cite the last EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) which showed a substantial labour productivity gap between the Western Balkans countries and the CEE EU member states; on average aggregated firm level labour productivity in Western Balkans companies is about 60% of the level in the CEE member states. 

The disparity is somewhat greater in manufacturing, where productivity in the WB6 is just 55% of that in EU members from the region, although both Bosnia and Serbia are a little more advanced than their neighbours, both having strong industrial bases. In the services sector, productivity is around 70% of the level in the CEE member states. 

Aside from the continuing fallout of a decade of war and later economic upheavals, the report identifies corporate over-indebtedness and market concentration as obstacles to boosting productivity. It also cites a survey of firm owners and senior managers that shows competition from the informal sector is a problem, especially for small businesses, with other hindering factors including cumbersome tax administrations and limited access to finance. The weak rule of law is an enduring problem across the region. 

Along with poor transport infrastructure, these kinds of administrative hurdles also keep investment and trade below their potential; the Western Balkans countries again lag their CEE peers in terms of openness to trade and as a result are not well integrated into European supply chains. 

There are some positive signs; despite their persistent political differences, the authors say that “encouraging progress has been made in the past two decades in terms of regional cooperation”. This has the dual benefits of increasing regional stability, and giving an economic boost from higher levels of intra-regional flows of people, goods, services and capital, enhanced competitiveness and a better image as an investment destination. 

But still, the authors say, “it is clear that countries in the Western Balkans fall short of being considered well-functioning, sustainable market economies,” and the pace of reform needs to be stepped up. 

“Countries in the region are a long way from embracing a sustainable market economy, defined as one that is competitive, well-governed, green, inclusive, resilient and integrated,” says the report. “Comprehensive reforms are needed to promote a dynamic, vibrant private sector, backed by strong investment flows, both domestic and foreign. The state must play an important growth-enabling role by providing the rule of law, a stable macroeconomic environment and clear rules of the game for businesses.”