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FEATURE STORY

Emphasizing Reform to Strengthen Fragile Recovery in South East Europe

June 18, 2013

STORY HIGHLIGHTS
  • Six countries in South East Europe are coming out of a double dip recession and are expected to grow by 1.7 percent collectively.
  • The latest Regular Economic Report analyzes the economic forecast for the region over 2013 and offers insight on reforms for maintaining and increasing growth.
  • Three areas of reform which can help this region: continued fiscal consolidation, improvements in the business climate, and addressing the skills gap.



Following a double-dip recession in the South East Europe (SEE) region in 2012, which saw a contraction of growth of about 0.6 percent, the six countries in this region – Albania, Bosnia and Herzegovina, Kosovo, the Former Yugoslav Republic (FYR) of Macedonia, Montenegro, and Serbia – are now expected to grow at a rate of 1.7 percent in 2013. Although fragile, this growth is nonetheless positive for the region, with Kosovo experiencing growth above 3 percent and Serbia – the region’s largest economy – expected to grow by 2 percent, marking an upswing for growth throughout the region and setting the stage for continued growth in 2014 and beyond.

The question remains of how to maintain and help strengthen this growth and ensure that these countries do not follow the economic trend of the recent past by slipping back into recession. With sluggish credit recovery in the region, continued deleveraging, and the Eurozone likely to remain in recession throughout 2013, strong recovery in the short term remains elusive and concerns about how to sustain this growth remain high. A high unemployment rate of nearly 23% in the region and youth unemployment rates of more than 50% in FYR Macedonia and Serbia are also deterring prospects of further growth. Jobs are not being created fast enough to absorb new entrants into the labor force.

 

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The previous RER emphasized a need for these countries to reform in a number of structural areas. There is now a need to redouble these efforts by looking at the business environment - removing barriers and improving things like construction permits – and addressing the skills gap. Close Quotes

Abebe Adugna
Lead Economist, World Bank

Analysts and experts at the World Bank Group are working with policy makers and are engaged in a broad policy dialogue with stakeholders in the region to help tackle these difficult questions. As part of this effort, the latest South East Europe Regular Economic Report (SEE RER) was released on June 18. This report analyzes the current economic environment in this region and examines a number of potential areas of reform. Among those reforms which can have a particular impact on economic growth in the region, according to the report, are continued fiscal consolidation, improvements in the business climate in each of these six countries, and addressing the ongoing skills mismatch.

“The previous RER emphasized a need for these countries to reform in a number of structural areas,” says Abebe Adugna, Lead Economist in the World Bank’s Europe and Central Asia region and co-author of the report, “there is now a need to redouble these efforts by looking at the business environment - removing barriers and improving things like construction permits – and addressing the skills gap.” 

According to the previous RER, released in December 2012, low growth, increased borrowing, and ongoing financial and social vulnerabilities made the region particularly susceptible to ongoing economic shocks. As with that report, this latest RER examines ongoing fiscal reforms which can help address these vulnerabilities and improve the financial sector in all six countries in the region. All of these countries have made considerable progress on financial sector reforms over the last two years, but more needs to be done. Comprehensive measures - which can help reduce the high levels of non-performing loans in the region - need to be prioritized. Banking sector reforms which emphasize increased coordination with European Union regulators are necessary components for reform, as is an enhancement of deposit insurance protection. Additionally, a refinement of comprehensive crisis management frameworks – which can prepare authorizers in the region for a variety of adverse scenarios – will help buffer these countries against ongoing economic shocks in the region.

Countries in the SEE region can also enhance the impact created by these fiscal reforms by supplementing them with reforms in the business climate. The report notes that a less burdensome regulatory environment can help firms in this region significantly improve employment and profitability. These economic improvements can be further bolstered by greater competition, access to higher-quality infrastructure, and increased efficiency of the courts in these countries. By reducing barriers for business creation and improving the overall business climate in the region, these countries can lay a solid foundation for increased employment and growth in the long term.

Finally, by coupling these reforms geared toward improvements in the short term with those which can address longer-term structural problems, countries in SEE can help ensure the overall sustainability of growth in the region. Paramount among these long term reforms is the need to address the ongoing skills gap in the region.

“Over the long term the region is going to face a significant demographic challenge,” notes Adugna, “there needs to be a new emphasis on skills – ensuring that participants in the labor force are well matched to the needs of the market. In order to do that, these countries should prioritize education, training, and life-long learning.”  

The report shows that improving employability in the region will require the six countries to improve the quality of their education systems. Because education and training systems in the region are not adapting to shifts in labor demands, skills gaps are beginning to limit the employability of both younger and older workers. This is a particular problem in Kosovo and Albania, where more than 70 percent of the firms in those countries consider an overall lack of skills among employees to be a constraint to growth. By developing systems which offer the necessary skills required by new jobs – through an emphasis of analytical skills over memorization – these countries can begin meeting the shifting demands of the current and future labor market. These improvements can be reinforced by a system which offers continuing education and adult learning opportunities.

Albania, Bosnia and Herzegovina, Kosovo, the FYR Macedonia, Montenegro, and Serbia have now emerged from a double dip recession and are now preparing for economic growth in 2013 and into 2014. Breaking the recent trend of growth followed by decline is crucial for long term economic recovery in the region. By prioritizing reform  policy makers can go far in ensuring that this cycle is broken, setting the stage for a robust growth of incomes, employment, and opportunities in the Western Balkans.