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.
Mr. Nadeem Ilahi, Mrs. Armine Khachatryan, William Lindquist, Ms. Nhu Nguyen, Ms. Faezeh Raei, and Jesmin Rahman
In the past 25 years, exports have contributed strongly to growth and economic convergence in many small open economies. However, the Western Balkan (WB) region, consisting of small emerging market economies, has not fully availed itself of this driver of growth and convergence. A lack of openness, reliance on low value products, and weak competitiveness largely explain the insignificant role of trade and exports in the region’s economic performance. This paper focuses on how the countries in the WB could lift exports through stronger integration with global value chains (GVCs) and broadening of services exports.
The experience of countries that joined the European Union in or after 2004 shows that participation in GVCs can help small economies accelerate export and income growth. WB countries are not well integrated into Europe’s vibrant GVCs. Trade within the region is also limited—it tends to be bilateral and not cluster-like. Our analysis shows that by improving infrastructure and labor skills and adopting trade policies that ensure investor protection and harmonize regulations and legal provisions, the region can greatly enhance its engagement with GVCs.
Services exports are an increasingly important part of global trade, and they offer an untapped source of growth. The magnitude of services exports from the WB region compares favorably with that of peers in Europe, particularly in travel services where several of these countries have a revealed comparative advantage. But there is significant room for growth in tourism exports and an untapped potential in business and information technology services exports that these countries can materialize through policy efforts that increase openness and enhance connectivity and labor skills. Serbia offers a good example of how decisive efforts, including education policies to ensure a sustained supply of skilled labor, can help information technology services exports to take off.
The paper analyzes the export performance and external competitiveness in FYR Macedonia. It describes the trends in the account balance, external vulnerabilities, and different approaches to estimate the equilibrium real exchange rate; and reviews economic growth experience and prospects and reveals areas of weakness. It also discusses many different factors responsible for Macedonia's high unemployment rate and examines the main factors behind the low level of intermediation.
IMF staff are projecting a resumption of growth in southeast Europe in 2000. GDP for the region is estimated to have contracted slightly in 1999, in part because of the Kosovo crisis but more so because of underlying macroeconomic and structural problems in the two largest economies, Romania and Croatia. Nevertheless, generally prudent macroeconomic management in most countries has provided a stable environment in which economic growth should rebound quite strongly in 2000 (see upper table). On average, Romania and Croatia are projected to continue to grow more slowly than the smaller countries in the region, but for both countries, growth is projected to firm during the year. In all countries, the sustainability of growth will depend on further progress in addressing macroeconomic imbalances and implementing structural reforms.
Inflation in Southeastern European (SEE) countries has been comparable with euro area inflation, partly owing to on the one hand, high initial price levels. On the other hand, the exchange rate regime is of paramount importance, including the inflation-targeting regime pursued in Albania. The analysis also explores additional heterogeneity between SEE and other regions. Two fiscal rules—a debt rule and an expenditure rule with a debt brake—are discussed in the context of Albania’s current economic outlook. Both rules will contribute toward enhancing fiscal sustainability in Albania.
The paper reviews key macroeconomic challenges with EU accession in Southeastern Europe (SEE). Most of the countries in the region are years away from EU accession and need substantial progress to meet the key macroeconomic criteria-the establishment of a functioning market economy and macroeconomic stability. The former calls for further structural reforms. While macroeconomic stability is essential throughout the EU accession process, the importance of specific outcomes increases in the last stage of accession, when countries face decisions to apply for entry into the ERM2 and the Maastricht criteria (Bulgaria and Romania). The main challenges with establishing macroeconomic stability in other countries are related to sustainability of their monetary frameworks, risks from rapid financial deepening, and further fiscal consolidation to support growth and stabilization. Most of the SEE countries have room to lower public spending and increase the share of pro-growth spending.
Emerging Europe has undergone a major economic transformation over the past 25 years. Most countries experienced initial drops in output during transition, followed by recovery in the second half of the 1990s. The path of transition in the Western Balkans has however been particularly uneven. The effects of transition also seem to have been more traumatic and persistent in the Western Balkans, and nostalgia for the past appears to be more prevalent here than in other former communist regions. Such dissatisfaction has important implications for the political economy of further reforms. This paper aims to inform policy by complementing the analysis of standard macro-level measures of inequality and poverty with a household-level analysis of subjective perceptions of poverty. We find that many more people appear to feel poor than are classified as such using purely income-based measures. Uncertainty, in particular related to expectations of future income and vulnerability to shocks, appears to be a key driver behind this discrepancy.
Francesco Spadafora, Mr. Emidio Cocozza, and Mr. Andrea Colabella
This paper analyzes the impact of the global crisis on six South-Eastern European countries. The main objective is to compare macro-financial conditions and policies in the run-up to the crisis as well as to compare the policy responses to it, so as to highlight, inter alia, possible country-specific constraints. While sharing a common pre-crisis pattern of strong capital inflows and robust growth, a key difference in the conduct of macroeconomicpolicies is that some countries adopted expansionary (and procyclical) fiscal policies. These moves exacerbated external vulnerabilities and compromised the ability to discretionarily use the fiscal instrument in acountercyclical fashion.