1. Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies www.wiiw.ac.at Vladimir Gligorov Economic Outlook and Challenges for the Region

2.  wiiw 2 Real Economy  GDP and industrial production growth still strong, but risks to decline significant  Risks to yet another interrupted industrialization  Labour market problems great  External balance at risk  Relative prices to adjust  Inflation a problem if currencies depreciate

3.  wiiw 3 Key Risks  Decline of availability of foreign credit and investment  Export decline

4.  wiiw 4 Outlook for the SEE countries GDP, real change in % against previous year Source: wiiw (Oct 2008); forecasts: wiiw 20062007200820092010 Forecast Croatia 4.85.63.5 34 Macedonia4.05.1555 Turkey6.94.62.024 Albania5.55.65.86.06.1 Bosnia & Herzegovina6.76.04.045 Montenegro8.67.0555 Serbia5.77.5444

5.  wiiw 5 GDP growth rates, 2005-2010 year-on-year, growth in % Source: wiiw Annual Database incorporating national statistics.

6.  wiiw 6

7. 7 Industry growth rates, 2005-2010 year-on-year, growth in % Source: wiiw Annual Database incorporating national statistics.

8.  wiiw 8 Industry & GDP growth differential, 2005-2010 year-on-year, growth difference in percentage points Source: wiiw Annual Database incorporating national statistics.

9.  wiiw 9 Employment, 2000-2007 LFS - employed persons, th, avg., annual change in % Source: wiiw Annual Database incorporating national statistics. Remark: AL, BA registration data.

10.  wiiw 10 Unemployment, 2000-2007 LFS - unemployed persons, th, avg., annual change in % Source: wiiw Annual Database incorporating national statistics. Remark: AL, BA registration data.

11.  wiiw 11 Drivers of GDP growth, 2000-2010 contributions of main components to GDP growth, in % Note: *Net exports including change in stocks and statistical discrepancies. Source: wiiw Annual Database incorporating national statistics, forecasts: wiiw. Final consumption expenditureGross capital formationNet exports*GDP, right scale

12.  wiiw 12 Source: wiiw Monthly Database. Real appreciation*, 2004-2008 EUR per NCU, PPI-deflated, in % against January 2004 * Increasing line indicates appreciation.

13.  wiiw 13 Source: wiiw Monthly Database. Serbia: Exchange rates, consumer prices and wages 2004-2008, year-on-year growth in % * Increasing line indicates appreciation.

14.  wiiw 14 Serbia: Exchange rates, consumer prices and wages, 2004-2008 year-on-year growth in % Croatia: Exchange rates, consumer prices and wages, 2004-2008 year-on-year growth in % * Positive values indicate real appreciation. Source: wiiw Database incorporating national statistics.

15.  wiiw 15 Slovenia: Exchange rates, consumer prices and wages, 2004-2008 year-on-year growth in % Macedonia: Exchange rates, consumer prices and wages, 2004-2008 year-on-year growth in % * Positive values indicate real appreciation. Source: wiiw Database incorporating national statistics.

16.  wiiw 16 Bulgaria: Exchange rates, consumer prices and wages, 2004-2008 year-on-year growth in % Romania: Exchange rates, consumer prices and wages, 2004-2008 year-on-year growth in % * Positive values indicate real appreciation. Source: wiiw Database incorporating national statistics.

17.  wiiw 17 Exports and FDI  Exports growing after year 2000  FDI growing after 2000  Similar to early experience of the Central European countries

18.  wiiw 18 Figure 4 Trade deficit and current account, 2002-2007 in % of GDP Source: wiiw Annual Database incorporating national statistics.

19.  wiiw 19 Exports in NMS and SEE, 1990-2006 1990=100 NMS-5: CZ, HU, PL, SK, SI

20.  wiiw 20 Exports in NMS and SEE, 2000-2006 2000=100 NMS-5: CZ, HU, PL, SK, SI

21.  wiiw 21 FDI stock, per capita, in NMS and SEEC, 1998-2006, EUR NMS-5: CZ, HU, PL, SK, SI SEEC-6: HR, MK, RS, ME AL, BA

22.  wiiw 22 FDI stock, per capita, in NMS and SEEC, 1998-2006, EUR NMS-5: CZ, HU, PL, SK, SI

23.  wiiw 23 Trade specialization  Mostly low skilled and labour intensive goods are exported to the EU  Not necessarily reflecting the human capital endowment in the Balkan economies

24.  wiiw 24 Technology-driven industries, as % of total manufacturing exports to the EU NMS-5: CZ, HU, PL, SK, SI

25.  wiiw 25 Labour-intensive industries, as % of total manufacturing exports to the EU NMS-5: CZ, HU, PL, SK, SI

26.  wiiw 26 Low-skill industries, as % of total manufacturing exports to the EU NMS-5: CZ, HU, PL, SK, SI

27.  wiiw 27 Financial Challanges  High demand of foreign capital  Banking sector problems

28.  wiiw 28

29.  wiiw 29

30.  wiiw 30 Summary statistics of the variables, 2003

31.  wiiw 31 EPL index, employment, unemployment in the SEE and peer countries (1) - employment rate, (2) - unemployment rate, in per cent respectively. Sources: see above.

32.  wiiw 32 Correlations among the variables employed

33.  wiiw 33 Regression results: male employment and unemployment Note: ***, **, * denote significance at 1%, 5%, 10% respectively. Robust standard errors. Male working-age population Dependent variable: employment rate coeff. (s.e.) coeff. (s.e.) EPL– regular 1.7980 (1.2803) 1.6592 (1.2800) EPL- temporary -0.5072 (1.0239) 0.2148 (1.1719) EPL– collective -0.9441 (1.0780) -0.5996 (1.0182) rule of law 3.1313 (2.2130) EU-15 -5.2852 ** (2.4698) -6.2409 ** (2.6136) NMS -15.3866 *** (3.0695) -12.6224 *** (3.7339) SEE -23.2276 *** (3.9131) -18.5651 *** (5.3708) Constant 78.9444 *** (2.9346) 72.8433 *** (4.9864) Adj. R² 0.70 0.71 Dependent variable: unemployment rate coeff. (s.e.) coeff. (s.e.) coeff. (s.e.) EPL– regular -0.6081 (0.8619) -0.5562 (0.8583) 0.0875 (0.7242) EPL- temporary -0.7577 (0.8291) -1.0276 (0.9678) -1.4286 * (0.8508) EPL– collective 1.2984 (1.0022) 1.1696 (1.0057) 1.5911 * (0.8240) rule of law -1.1703 (1.5780) -1.8565 (1.1815) EU-15 1.2160 (1.4939) 1.5732 (1.6677) NMS 4.4879 * (2.5878) 3.4547 (3.0890) SEE 15.4469 *** (4.3080) 13.7042 *** (4.7399) 11.5723 ** (4.9150) Constant 3.9852 (2.6427) 6.2655 (4.1674) 6.5953 * (3.2859) Adj. R² 0.47 0.46 0.50

34.  wiiw 34 Regression results: female employment and unemployment

35.  wiiw 35 Difference in average annual labour productivity growth and real wage growth

36.  wiiw 36 Difference in average annual labour productivity growth and real wage growth, ctd. Albania, 2004-2006 Croatia, 2004-2006 Notes: Albania: Hotels and Restaurants (H) not included in Other services.

37.  wiiw 37 Macedonia, 2004-2006 Montenegro, 2004-2006 Serbia, 2004-2006 ctd.

38.  wiiw 38 Cumulative responses to one unit shocks

39.  wiiw 39 Risk factors and sustainability issues, by country

40.  wiiw 40 Predicted effects of a change in EPL on male unemployment

41.  wiiw 41 Predicted effects of a change in EPL on female employment

42.  wiiw 42 SEE EU accession forecast SAA Negotiations EU Euro Croatia 2005 2011 2013 Macedonia 2004 2008 2013 2015 Turkey. 2005 2015-2020 after 2020 Albania 2006 2009 by 2015 by 2017 Bosnia and Herzegovina 2008 2009 by 2015 by 2017 Kosovo 2009 2011 after 2015 since 2002 Montenegro 2007 2009 by 2015 since 2002 Serbia 2008 2009 after 2015 after 2017

43.  wiiw 43 Medium-Term Economic Outlook for the SEE countries - conclusion  Growth dip 2008 & 2009, growth increase 2010  Growth driver: domestic demand (remittances & credit boom)  Reindustrialization & employment/export increase  Stable competitive performance (except TR & RS)  Weak net export position  Certain impact of global growth slowdown  Serbia’s unbalanced growth path regional risk  EU accession prospects improving (except TR)