The Western Balkans Economic Progress and Problems by Garth Armstrong Senior Economic Adviser Europe and Central Asia Dept, DFID

In the last 8 years the region has faced: Post-war physical and institutional reconstruction. The break-up of many Yugoslav corporations. Partial transition to a market economy. Some attempts to address a range of poverty alleviation/development challenges.

Physical & Institutional Reconstruction Large volumes of aid employed to rehabilitate and/or reconstruct losses of physical infrastructure – transport, energy etc – largely completed by 2003. Institutional reconstruction and rehabilitation much more problematic, as: - commonly undertaken alongside attempts at reform; - commonly involved economic services, business regulation, taxation, etc; - faced with substantial loss of critical manpower.

Break-up of SFRY Corporations Had been a number of large successful socially-owned corporations, often conglomerates of related enterprises. Most were broken up as SFRY fell apart in 1990s. Commonly constituent scattered parts were not viable in isolation and difficult to either privatise or successfully restructure.

Transition to Market Economies Albania had an unusual Maoist economy which went through various traumatic events in the 1990s as it underwent transition – process far from complete. SFRY – state and social ownership - very mixed experience with privatisation; - many enterprises left stranded; - unclear how best to complete the transition process. Business environment unfriendly to enterprise - high taxation/social security charges; - overregulation by inherited bureaucracy; - large grey/black economies. Opportunities to export largely not taken up. - despite duty free entry into the EU since 2000; - despite a network of FTAs with other countries in the region since 2003 Very limited FDI. - largely linked to low-hanging fruit available through privatisation; - political instability undoubtedly a factor. Heavily “underbanked” - despite successful privatisation of banking systems, largely to foreign investors; - major IMF concern is common CADs fuelled by privatised foreign banks bringing in and lending funds.

Development Challenges By European standards Serbia, Bosnia, Kosovo and Albania all have very low pc incomes in the $1,000-$2,000 range. There is widespread shallow absolute poverty, particularly in rural Kosovo and rural Bosnia, and rural Albania. There are commonly very high levels of formal unemployment, while the most critical manpower has too often emmigrated. Formal enterprises face very high levels of taxation and social security charges on labour. Public services are commonly very cost/ineffective, and welfare services not focussed on the most needy. All except Albania face a debt sustainability problem and, as members of the Paris Club, will face problems borrowing what they need for critical infrastructure investment. There is a challenge in improving the business climate for both FDI and domestic investment because of regulatory bureaucracy, corruption, and long-standing political instability.

Movement Toward EU Accession Accession is promised, but no date offered. There is a ladder of processes to move through – Stabilisation & Association Agreements, and annual European Partnerships with linked Action Plans. There is an attempt to move toward the “Copenhagen Criteria”- basically the structure and institutions required to operate a market economy. There is a strong focus by DG Elarg on the pursuit of the acquis, employing EC aid to support this, and with the belief that accession will “solve” the region’s poverty/development problems. Concern about lack of EC attention to development as an element of accession. But some real brick walls ahead – e.g. Bosnia where a full state bureaucracy is required to progress accession but cannot be afforded without an unlikely compensatory shrinking of existing Entity bureaucracies.

But What to do About All These Problems ? Accept that the principal game in town is accession. Ensure that the critical physical and institutional issues are identified and adequately addressed. Ensure that macro-economic and fiscal stability is maintained, despite the withdrawal of the IMF as an active player – Kosovo excepted. Improve fiscal management – the efficiency of service provision, capital budgeting, focus of social expenditure, etc. Improve labour mobility – many “employed” but not working but others “unemployed” but working in the grey economy – legislation that ties in workers – high social security charges for employees that encourages grey activity. Improve the competitiveness in the EU by changing existing Rules of Origin on Balkan trade – e.g with diagonal accumulation. Facilitate the large volume of transition still required in industry, not just with privatisation.