Western Balkans economies in 2018, right things from the start

A bigger number of Balkan countries have sustained the economic stabilization and gone on to complete a modernization driving sustained, inclusive growth. Albania, Serbia and Macedonia now are at the point where they have a chance to follow this route more than other countries. That will require broadening and deepening the reform agenda.

We all know the answer for the dilemmas involves strengthening private sector-led economic activity and enhancing openness to be able to invest more, export more and create more jobs.

The European economy is improving as trade and investment show strength. These elements are benefiting most countries, including Balkan countries. The favorable external environment provides a good window of opportunity for all the region countries to undertake reforms, because of the yet weak economies non using the full capacities of their countries.

In 2017, the Balkan economy was impacted from low productivity, not enough investments, unstable inflation, and generally growing public debt, all this it is at risk of instability. Although, growth, jobs, and relatively low inflation helped to reduce poverty in the Western Balkans. Labor force participation increased in most countries, as more people entered the labor market and found jobs. Over 80 percent of new jobs were in services, mostly retail and wholesale trade, supported by growth in consumption. Although unemployment fell in most countries in 2017, it still ranges from 13.4 percent in Albania to 30.4 percent in Kosovo. Poverty continued to fall despite rising food and energy prices.

Serbia and Bosnia and Herzegovina recorded surpluses in 2017, but in the rest of the region, deficits continued, driven by the high amount of recurrent spending, often on poorly targeted social benefits and subsidies. Albania, Montenegro, and Kosovo are now working to revive growth-enhancing capital investment. Careful financial, public investment, and budgetary management will help ensure that fiscal risks associated with investments are minimized, which should relieve pressures on medium-term debt sustainability.

Many economies have experienced a marked downturn in private and public investment in recent years. The experiences of other countries show that it is not easy to maintain stabilization efforts, if not a country does not emphasize the role of productive growth and of benefits for all citizens. In many countries, stabilization without deeper reforms leads to fatigue, complacency and opposition from vested interests that undermine momentum. 

In Albania, there are several immediate reasons to press ahead with reform. Public finances certainly are on a firmer track, but public debt remains very high. A strong effort is needed both to consolidate and to make room for spending in key areas such as infrastructure, health and education. Delays in following through on the reform of energy could again leave the budget at risk.

The biggest challenge, employing the youth, is also the biggest opportunity.  If the country can tap the potential of the young people, by bringing unemployment and labor force participation to the level of many other emerging market countries, their absorption into the economy could boost growth into the range of 5 to 6 percent. That would be a transformation.  It would mean improving living standards for large segments of the population.

Is that possible? 

We have to know some more good experiences from Balkan countries in order to give some reasonable answers. 

First, some good progress it has happened in some Balkan countries.  Their histories could hold lessons relevant to Albania and other Balkan countries. Let’s have a look to Serbia, a frontier country for Albania. Serbia emerged from a deep political, social and economic crisis in 1999 needing to break free of old fashion manner central government’s control of its sprawling economy. Reforms ended government monopolies and empowered the private sector, shifted resources and decision making to local authorities, and promoted market-oriented economic policies. Actually, the economy has become more and more dynamic and has grown steadily.

Second country experience for us is from Macedonia. In latest years Macedonia took a set of decisive actions aimed at lifting productivity growth. The energy sector, it was opened up, and oligopoly control in telecommunications and finance was replaced by freer competition. Energy diversification is going on, and telecommunications costs have plummeted, with widespread benefits.  They also set out to draw people out of informality and into the mainstream economy, through labor reforms that allow more flexible hiring arrangements. The result was the creation of over 200 thousand jobs in the last 4 years. Employment in the informal sector has fallen as the rate of formal employment growth.

Third in the row it is Kosovo. The main characteristic of the Kosovo it is reducing bureaucratic inefficiency and corruption in services that is believed to be linked with informal bribes.  Kosovo is now working to revive growth-enhancing capital investment. Careful financial, public investment, and budgetary management is helping the country to ensure that fiscal risks associated with investments are minimized, which should relieve pressures on medium-term debt sustainability.

What should be estimated from this panorama?

First, a business climate in which the rules of the game are simple, transparent and respected, in which small businesses can grow into medium-sized and even large companies.

Second, greater regulatory certainty to encourage investment and competition.

Third, not so much presence of the public sector in the economy, especially in business and commerce, to clear away room for the growth of the private sector and to relieve entrepreneurs from the unwinnable match up of competing with the public sector.

Forth, enough labor market flexibility to allow young people to find jobs.

Fifth, reduction of non-tariff barriers and protections for domestic industries so that companies can become part of the global supply chain and can expand to capture a bigger share of the global marketplace.

Finally, an economic system built on fairness and free of corruption.

It’s simple.

It's enough to do the right things from the beginning of reforms.