Growth is strengthening and broadening across Europe, driven by buoyant domestic demand (Figure 1.1). Following a pickup in economic activity in the second half of 2016, the European economy accelerated further in the first half of 2017, with growth outcomes surprising on the upside in most countries.
The countries of Central, Eastern, and Southeastern Europe (CESEE) have made major progress in raising living standards over the past two and a half decades. This progress was supported by a radical transformation of their economies and institutions. Using case studies and empirical analysis, this chapter explores the role of internal and external factors, particularly accession to the European Union (EU), in supporting reforms to strengthen the effectiveness of the judiciary. The findings suggest that, beyond initial conditions, an enabling environment for judicial reforms was created by factors and policies that (1) improved the distribution of resources and opportunities, (2) upgraded rules and procedures to recruit and train civil servants, and (3) increased transparency and accountability. The European Union and the Council of Europe (CoE) acted as strong external anchors in catalyzing reforms. However, there were also some reversals of reforms, and the sustainability of reforms appears to depend mainly on domestic factors. These findings might offer insights in particular for countries aiming to join the European Union, but also for others seeking to improve the effectiveness of their judiciary.
Income convergence in the Western Balkans has stalled at low levels.1 Measured in purchasing-power-parity (PPP) terms, income levels in the region today are less than 30 percent what they are in the euro area (Figure 3.1). Equally noteworthy, the ratio has not changed since 2008. This is in sharp contrast to the experience of the New Member States of the European Union (EU), where relative incomes have continued to grow strongly since the global financial crisis and are now at nearly two-thirds those of the euro area. There are many reasons for this disappointing performance,2 including an unfinished transition, exemplified in some countries by a large swath of inefficient state-owned enterprises; shortcomings in the rule of law and the business environment; limited human capital, exacerbated in some countries by significant emigration of qualified human resources, or “brain drain”; and scant and poor-quality public infrastructure. While acknowledging these issues, this chapter focuses on another important plank for the region’s development: the health of its banking sectors. Implicit is the assumption that, even if reforms in the other areas bring about high-quality bankable projects, their potential, and with it overall economic growth, will not be fully realized if banks are not in a good position to fund them.
This Selected Issues paper for Bosnia and Herzegovina (BiH) reports that GDP per capita in BiH is similar to that in neighboring Balkan countries. BiH risks are falling behind rather than catching up with other transition economies in terms of its economic development. This could delay the process of convergence to and integration with the European Union, including its ambitions to eventually adopt the euro. Accelerated structural reforms and macroeconomic stability remain key to achieving higher and sustained growth rates.
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.
This report highlights Bosnia and Herzegovina's Request for Stand-By Arrangement (SBA). The authorities have requested a 15-month SBA in the amount of SDR 67.6 million (40 percentof quota) for June 2002–September 2003. Private investment and FDI remain mired in concerns over political risks, the hostile business environment, and infrastructure bottlenecks. Fixed investment outside government,construction, and reconstruction is low—perhaps 10 percent of GDP, and construction is slowing as aid inflowsare curtailed. Significant fiscal consolidation appears to have been achieved in 2001 and fiscal structures have been strengthened.
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.