Towards higher productivity in the Western Balkans

EBRD research paper analyses region’s EU convergence challenges

The six Western Balkans countries have strong economic potential for catch-up growth and convergence, but they must do more to improve their economic performance, the EBRD says in a Diagnostic report published today as the Bank hosts its third Western Balkans Investment Summit in London.

Encouraging progress on regional cooperation in the past two decades is helping the six countries – Albania, Bosnia and Herzegovina, FYR Macedonia, Kosovo, Montenegro and Serbia – progress towards eventual EU membership.

However, they face a major convergence challenge in relation to the EU, the study says. According to the EBRD analysis it will take decades, even under optimistic scenarios, for the region to catch up with average EU standards of living. Full EU convergence will require states to implement a determined and comprehensive reform agenda towards boosting productivity and investment.

Low productivity is identified in the paper as the fundamental problem holding back the region’s economic development, reflecting years of underinvestment, weak institutions and a difficult business environment. The biggest challenges persist in the areas of competitiveness and good governance. Institutions are often weak and the still-heavy state presence in certain industries is preventing the private sector – the main contributor to economic output – from reaching its full potential.

The report says that private sector productivity across the Western Balkans is at just 60 per cent of EU levels overall, with manufacturing at only 55 per cent of EU productivity levels and services on average at 70 per cent.

Among the constraints on productivity and growth identified in the paper are corporate over-indebtedness, a low level of youth inclusion, unfair competition from the informal sector, corruption, cumbersome tax administration, problems with electricity and limited access to finance. These leave a European area – whose 20 million people are surrounded by EU countries – with an average GDP per capita of just a quarter of the level in the richest EU members in western Europe.

Peter Sanfey, EBRD Deputy Director for Country Economics and Policy, said: “Our research demonstrates the issues that need to be addressed. But it is also important to see that these are challenges, not insurmountable obstacles. They show the need for the implementation of a comprehensive and wide-ranging reform programme.”

To close the prosperity gap, reforms aimed at building sustainable market economies must be intensified. The EBRD paper calls for measures to promote a dynamic and vibrant private sector, backed up by strong domestic and foreign investment flows, and says “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.”

The EBRD is a leading institutional investor in the Western Balkans. To date, the Bank’s investments in the six countries of the region are over €10 billion, in some 600 operations. In addition, the EBRD is also active in policy engagement to create the foundations for sustainable growth.