After the collapse of socialist regimes in the early 1990s, ensuing conflicts in the region caused major disruptions, and income per capita fell. The pace of recovery was uneven in the second half of the 1990s: some countries such as Bosnia and Herzegovina and Croatia experienced a sharp turnaround in growth, while others such as Serbia and Albania faced high growth volatility. By the end of the decade, however, real GDP per capita in the region had recovered to its pre-1990 level, despite another recession around the turn of the century, when output in Albania, Montenegro, and Serbia shrank by over 10 percent in a single year.
This chapter reviews macroeconomic developments in the Western Balkans over the past 15 years. The countries of the region underwent substantial changes as they made the transition toward a more market-oriented model. In terms of the external environment, the period is dominated by two events: the introduction of the euro in 1999, and the financial crisis that swept across the globe starting in 2007. The euro brought further integration of capital markets in advanced EU economies; the global financial crisis interrupted capital flows significantly. For the Western Balkans, which had substantial capital needs, both events were very significant.
In the years since 2000, transition and transformation in the Western Balkans have been particularly significant in the banking sector. These banking systems have undergone significant financial deepening, more so than did those of the New Member States at the same stage of economic transition. In the run-up to the global financial crisis, the banking systems of the Western Balkans relied less on fast-moving wholesale funding than did the New Member States (with the exception of Montenegro), which suggests that a significant part of the precrisis credit expansion in these countries was perhaps part of a long-term trend of financial deepening. But financial development in the Western Balkans over this period has also been uneven. While banking sectors have developed rapidly, growth of nonbank financial services has been lackluster, with equity, pension, and insurance markets remaining shallow and corporate debt markets largely nonexistent, even today.
Until recently, Croatia's economic performance was the envy of many countries in transition: a successful stabilization effort in late 1993 was followed by virtual price stability and real GDP growth of 6 percent a year during 1994–97. Monetary tightening, the weak economy, and a drying-up of repatriated foreign savings exposed the underlying insolvency of a group of rapidly growing banks. Executive Directors emphasized that the task of restoring fiscal balance could not be accomplished without redressing the finances of the pension and health care systems.
Croatia’s annual GDP growth accelerated to 4–5 percent, per capita incomes advanced further toward the EU average, and unemployment declined to the lowest levels since Croatia’s independence. The staff report for Croatia’s 2009 Article IV Consultation is also described. Rapid credit growth led to a significant debt build-up and prevalent foreign currency borrowing aggravated balance sheet vulnerabilities, and booming domestic demand led to surging trade deficits, moderated only partially by strong tourism earnings.
Crisis Stalls Globalization: Reshaping the World Economy" examines the multiple facets of the recession-from the impact on individual economies to the effect on the global payments imbalances that were partially at the root of the crisis-and offers a variety of suggestions for supporting a recovery and averting future crises. Several IMF studies shed light on the depth of the crisis-including a survey of the sharp drop in trade finance, along with quantitative findings about the direct and indirect costs of the financial turbulence-and debate what is to be done from several angles, including the redesign of the regulatory framework and ways to plug large data gaps to prevent future crises and aid in the creation of early warning systems. Opinion pieces discuss the shifting boundaries between the state and markets, the agenda for financial sector reform, and the governance of global financial markets. The issue also includes a historical perspective to see when restructuring the global financial architecture actually succeeds. "People in Economics" profiles Nouriel Roubini; "Back to Basics" looks at what makes a recession; and "Data Spotlight" examines Latin America's debt.