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FEATURE STORY

From Recession to Reform: The Western Balkans and the Impacts of a Double Dip Recession

December 18, 2012

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Zeljko Bogetic Explains Double Dip Recession in the Western Balkans.

STORY HIGHLIGHTS
  • The Western Balkan countries are in a "double dip" recession with massive unemployment and major downside risks.
  • Unemployment is above 25 percent in four of the six countries in the Western Balkans.
  • Governments need to redouble their efforts in reducing fiscal deficits and public debt and advance structural reforms leading to greater productivity and competitiveness.

Although it has been more than three years since the global financial crisis first struck, economies around the world continue to struggle toward recovery.  Among those hardest hit by this ongoing crisis have been the six countries in the Western Balkans – Albania, Bosnia and Herzegovina, Kosovo, the Former Yugoslav Republic of Macedonia, Montenegro, and Serbia.  A new South East Europe Regular Economic Report, launched on December 18, 2012 showcases the economic impact this crisis is having on the region and highlights the need for these six countries to use this opportunity to improve their investment climates and reduce public debt, while simultaneously eliminating payment arrears in the public sector - which will help improve financial discipline in the overall economy of each country. 

Perhaps no other region in Europe is experiencing greater economic shocks than the Western Balkans, which continues to battle a decline in economic output and an increase in unemployment.  Following two years of fragile recovery, wherein real economic growth rose to around 2 percent in both 2010 and 2011, the region is now struggling with a “double dip” recession – with this limited growth bookended by periods of decline in real economic growth.  A severe winter and shrinking demand has now forced the region into another recession, leading to declines in output and sharp increases in unemployment. 

Whereas few countries worldwide have unemployment rates above 25 percent, four of the six countries in the Western Balkans are now suffering from rates above this figure.  Both Serbia and Bosnia and Herzegovina now have unemployment rates higher than 25 percent and the Former Yugoslav Republic of Macedonia has a rate of about 31 percent.  Kosovo leads the region, with 45 percent of its workforce currently out of work. While remittances from abroad, informal employment, and social safety nets all provide a cushion against the recession and high unemployment, the region’s central challenge remains reigniting robust growth in job creation.

Although these countries saw limited growth after 2008, they have never fully recovered from the crisis” says lead author of the South East Europe Regular Economic Report Zeljko Bogetic, lead economist and coordinator for economic policy for Western Balkans at the World Bank. “There remains a problem with mismatched skills in the region – there is a large part of the labor force being trained for the public sector while demand for labor in the private sector remains unmet and sluggish.  There needs to be an improvement in skill provision, as well as improved labor regulations to help with this imbalance.” 

Extreme weather conditions in the region over the last year have also added to the region’s problems, hampering agricultural production and increasing pressure on food prices in the six countries.  Last winter brought record low temperatures and drought and many factories were forced to shut down for weeks on end and transport and trade disrupted because of unusually cold temperatures.  Drought conditions also meant hydropower shortages and insufficient energy production in the region, highlighting the persisting, large energy infrastructure gap.  Summer did little to improve this situation, leading to a severe drought which saw an increase of 40 percent in the price of maize.    

Despite these economic impacts, however, the report notes that some positive economic trends have emerged in the region. Most of these countries are making progress in improving their business environment, as evidenced by the latest Doing Business report.  For example, FYR Macedonia is ranked number 23 in the world (out of 185 countries) in the quality of its business environment.  These countries have also strengthened their financial sectors.  Although the recession has highlighted several vulnerabilities which require further reform – especially the high ratio of non-performing loans – external investors are nonetheless taking notice of the emerging opportunities in the region, especially in the automotive industry.  Recent Foreign Direct Investment (FDI) by Fiat in the region has resulted in that company opening a large factory in Serbia.  The first of three planned production lines is now up and running and is expected to produce 30,000 cars by the end of 2012.  This production is expected to to expand to 150,000 in 2013.  These economic developments are being coupled with FDI for auto parts manufacturing in the Former Yugoslav Republic of Macedonia.  Furthermore, foreign investors from middle-income countries such as Turkey, Russia, China, and Azerbaijan are increasing their presence in the Western Balkans – a trend which may spur a “second wave” of privatization in the region.

 

Open Quotes

FDI in the region is extremely important from the viewpoint of growth, jobs, know-how, and technological upgrading, so it’s great to see some large scale FDIs returning to the region. Simply put, countries must become more productive, export-oriented, and competitive, and one way of doing this is to attract highly productive, export-oriented, competitive companies from abroad. Close Quotes

Zeljko Bogetic
Lead Economist

In order to build on these types of successes and expand them to a regional level, the report argues that more intensive policy reform will be needed in order to reduce public debt and accelerate structural reforms, leading to improvements in productivity, exports, and competitiveness throughout all of the countries in the Western Balkans.  Low growth and increased borrowing by governments in the six countries, as well as remaining financial and social vulnerabilities, have left the region acutely susceptible to the ongoing economic shocks of this crisis.  Without significant further improvements in public sector governance, overall investment climate, and labor markets, chances of a speedy economic recovery in the region are low. 

External support for accelerated reforms is also crucial in the fight to improve the economic outlook in the region.  In November 2012, the European Investment Bank, the European Bank for Reconstruction and Development, and the World Bank announced €30 billion in financing for Central and South East European countries over the next two years – money which could help ease the transition to a more sustained growth in the medium term throughout the region. 

In the meantime, governments in the region are being encouraged to use this crisis as an opportunity to accelerate the implementation of reform policies which can increase fiscal consolidation efforts and improve the overall investment climate in the Western Balkans.  These reforms, coupled with strategic engagement by the international community, can help ensure better growth prospects and improved standards of living.