1. Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at The Balkans: Turning the Corner Vladimir Gligorov

2.  wiiw 2 Three Topics  Growth and imbalances  Regional trade liberalization  Political risks

3.  wiiw 3 Gross domestic product real change in % against preceding year Source: wiiw

4.  wiiw 4 Quarterly GDP, 2004-2006 real change in % against preceding year Source: wiiw Database Some deceleration in the second half due to monetary policy nervousness, but short term prospects are for improvement

5.  wiiw 5 Imbalances: real and imagined  Inflation should not present a problem, partly because fiscal balances should not present too much of a problem  Serbia as an exception when it comes to wage inflation

6.  wiiw 6 Consumer price inflation, 2004-2006 year-on-year growth in % Source: wiiw Database Serbia and Turkey still facing challenges

7.  wiiw 7 Consumer price inflation, 2004-2006 year-on-year growth in % Source: wiiw Database Serbia and Turkey still facing challenges

8.  wiiw 8 Imbalances: real and imagined Trade and current account deficits can be sustainable because  Exports are continuing to grow  Remittances are increasing  Savings seem to be increasing too

9.  wiiw 9 Current account, 2000-2006 in % of GDP Source: wiiw Database Current account deficits worsening

10.  wiiw 10 Current account, 2000-2006 in % of GDP Source: wiiw Database Current account deficits worsening

11.  wiiw 11 Trade deficit, 2000-2006 in % of GDP Source: wiiw Database Trade deficits continue to be very large

12.  wiiw 12 Trade deficit, 2000-2006 in % of GDP Source: wiiw Database Trade deficits continue to be very large

13.  wiiw 13 Future trade balance based on export and import average 2003-05 growth in Bosnia and Herzegovina -6.599 -6.514 -7.060 -5.711 -5.551 -5.253 -4.782 -4.097 -3.145 -1.866 -185 1.986 -30.000 -20.000 -10.000 0 10.000 20.000 30.000 200320042005200620072008200920102011201220132014 Goods and services Millions of BAM TB Export Imports Source: Central Bank BiH

14.  wiiw 14 Ratio between gross wages and GDP per capita (log scale), 2004 Source: wiiw

15.  wiiw 15 Imbalances: real and imagined  Though the external balances may be sustainable, foreign debt development may present problems due to mostly fixed exchange rate regimes  Comparison with Turkey  It is not clear, however, what is the level of debt tolerance for these countries  Croatia as an example

16.  wiiw 16 Share of total foreign debt in GDP, 2000-2006 in % Source: wiiw Database Foreign debt mostly stable, except in Croatia

17.  wiiw 17 Share of total foreign debt in GDP, 2000-2006 in % Source: wiiw Database Foreign debt mostly stable, except in Croatia

18.  wiiw 18 Share of private foreign debt in total foreign debt, 2000-2006 in per cent Source: wiiw Database Private foreign debt continues to grow

19.  wiiw 19 Share of private foreign debt in total foreign debt, 2000-2006 in per cent Source: wiiw Database Private foreign debt continues to grow

20.  wiiw 20 Imbalances: real and imagined  Credit growth, or rather the speed of growth, has raised concerns  Was Schumpeter right?  Or, should poor country be poor in terms of credit too?

21.  wiiw 21 Fear of Bubbles  What are bubbles?  Interests and prices out of step with each other  Monetary policy response mostly risk averse  An example of Albania (perhaps)

22.  wiiw 22 M1, Narrow money in % of GDP Source: wiiw Database

23.  wiiw 23 M1, Narrow money in % of GDP Source: wiiw Database

24.  wiiw 24 Broad Money in % of GDP Source: wiiw Database

25.  wiiw 25 Broad Money in % of GDP Source: wiiw Database

26.  wiiw 26 Real appreciation*, 2004-2006 EUR per NCU, CPI-deflated, year-on-year growth in % Source: wiiw Database * Increasing line indicates real appreciation.

27.  wiiw 27 Real appreciation*, 2004-2006 EUR per NCU, CPI-deflated, year-on-year growth in % Source: wiiw Database * Increasing line indicates real appreciation.

28.  wiiw 28 Imbalances: real and imagined  Imbalances in the labour market are real  Private employment is still too scarce  Serbia as an example  Macedonia as an example  Albania and Kosovo and the issue of migration

29.  wiiw 29 GDP, employment, productivity 2000-2006 2000 = 100 Source: wiiw Database With approximately five years delay, developments similar to those in the NMS Candidates countries (HR, MK, TR)

30.  wiiw 30 GDP, employment, productivity 2000-2006 2000 = 100 Source: wiiw Database With approximately five years delay, developments similar to those in the NMS Potential candidate countries (AL, BA, ME, RS)

31.  wiiw 31 Growth prospects  Over the medium run growth should accelerate to above 5%, regional average  Investment should take over from consumption  Exports should continue to grow by double digits

32.  wiiw 32 Structural Reforms: Issues  Low taxes?  Regulation and deregulation  Competition policy  Labour markets

33. Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at Regional Trade Issues Integration and specialization

34.  wiiw 34 Topics  SEE export shares by sectors and labour skills content  Revealed Comparative Advantage status and development of top 5 SEE export sectors ... relative to the SEE region, NMS-10 and EU-25  Tentative conclusions

35.  wiiw 35 SEE export shares 2005, by sector (manufacturing sectors by skills) Source: wiiw

36.  wiiw 36 Change of SEE export shares 2000-2005 in percentage points, by sector (manuf. by skills) Source: wiiw ALBABGHRMKMDROCS

37.  wiiw 37 SEE Export shares  Main exports still from low skills industries  Recent development shows a change from low to medium skills industry exports  General skills upgrading

38.  wiiw 38 RCA within SEE & EU-25 region, 2005 top 5 sectors (manufacturing by skills) Source: wiiw

39.  wiiw 39 RCA within SEE & EU-25 region recent increases, top 5 sectors (manuf. by skills) Source: wiiw

40.  wiiw 40 RCA within SEE & EU-25 region  Main specialisation in low skills industry, agriculture/forestry/fishing and mining export sectors  Development in recent years: a bit less specialisation in low skills industry exports and more in medium skills  … comparable to the overall export shares picture

41.  wiiw 41 RCA within SEE & NMS-10 region, 2005 top 5 sectors (manufacturing by skills) Source: wiiw

42.  wiiw 42 RCA within SEE & NMS-10 region recent increases, top 5 sectors (manuf. by skills) Source: wiiw

43.  wiiw 43 RCA within SEE & NMS-10 region  Main specialisation in low skills industry and mining export sectors  Development in recent years: a bit less specialisation in mining exports and more in medium skills white collar industry exports  Compared to other transition countries more specialisation in natural resources but first signs of upper medium skills catching up

44.  wiiw 44 Revealed Comparative Advantage in SEE, 2005 top 5 sectors (manufacturing by skills) Source: wiiw

45.  wiiw 45 Revealed Comparative Advantage in SEE recent increases, top 5 sectors (man. by skills) Source: wiiw

46.  wiiw 46 Revealed Comparative Advantage in SEE  Main specialisation in low skills industry, mining and medium skills white collar export sectors  Development in recent years: much less specialisation in mining and low skills exports and more in medium skills white collar and even high skills industry exports  There is a regional diversification in trade specialisation and labour skills allowing for improved labour skill content in exports

47.  wiiw 47 Tentative Conclusions  Recent development of export shares and RCA’s suggest a general skills upgrading in SEE export industries  Stronger SEE regional diversification in trade specialisation and labour skills might hint at first structural effects of the regional Free Trade Agreements in recent years

48.  wiiw 48 Political Risks  Kosovo  Bosnia and Herzegovina  EU integration prospects

49.  wiiw 49 Kosovo and the Other Political Risks  Kosovo’s new status to be decided in the next couple of months  The aim is regional and international normalization  EU to take over key responsibilities  Constitutional reform in Bosnia and Herzegovina moving forward rather slowly  Democratization still not complete

50.  wiiw 50 EU integration  SAA agreements signed with Montenegro and perhaps with Bosnia and Herzegovina later this year  SAA with Serbia also possible this year  Speed up of the process possible in the first half of 2008 (Slovenian presidency)