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Speeches & Transcripts August 30, 2017

Remarks by Cyril Muller at the Informal Meeting of Western Balkan Prime Ministers

Honorable Prime Ministers, Commissioner Hahn, and Distinguished Participants,

Let me begin by thanking Prime Minister Rama for organizing this event. It is a testament to your commitment to the regional economic integration agenda and illustrates a renewed spirit of collaboration in the Western Balkans. 

Opening this discussion, I would like to talk briefly about the need to converge faster in an uncertain global context and three key factors for catching up -  macroeconomic stability, structural reforms, and regional economic integration.

The Western Balkans have been facing a daunting external environment. Fluctuating EU and global growth, diminished capital and trade flows, and volatile commodity prices have posed macro-financial challenges.

The Western Balkans pathway to prosperity hinges on shifting from inward-looking to outward-looking development policies.

Before the global financial crisis, Western Balkan countries grew faster than EU countries, allowing per capita income to rise from 20 percent of the EU average to 30 percent. After the crisis, however, growth stagnated, and convergence stalled. By contrast, early accession countries caught up with the rest of the EU even faster after the crisis.

Today, we are seeing growth recover in the Western Balkans, and there are early signs that the composition of growth has been shifting more towards private investment and exports. This is a positive sign, but deeper transformation is needed to ensure faster growth.

How can the Western Balkans catch up? There are three mutually-reinforcing factors that would help countries converge faster to the EU living standards. The first is ensuring macroeconomic sustainability. The second is accelerating the pace of structural reforms to make the economies more competitive and attractive for investment. And the third is deepening regional economic integration.

Macroeconomic sustainability is a pre-condition for growth and integration. It guards against shocks, reduces uncertainty for investors and consumers, and, thereby, promotes trade, investment, and capital market development.

Having weathered the global financial crisis, there is a common need to consolidate public finances, enhance the quality and equity of public spending, and strengthen transparency and budget management to prioritize spending and evaluate results ex-post.  On the revenue side, more effective tax collection accompanied by a reduction of labor taxes would reduce disincentives to hire people.

Reform momentum also needs to be maintained to make the economies more competitive and attractive for investors. Much work has been done to liberalize prices, trade, foreign exchange management, and on privatization. But for the Western Balkans to benefit from a global recovery, the region has to address structural inefficiencies.

Institutional quality remains a top priority, including strengthening property rights, judicial efficiency, and contract enforcement. Harmonizing investment policies across the region can help attract and retain investments, without having a “race to the bottom”. The Investment Pillar of the Multi-Annual Action Plan specifies measures in this regard, and speeding up their implementation will help boost productivity and create jobs. Furthermore, stronger anti-monopoly policies can help deter cartel behavior. Finally, it is essential to improve the efficiency of the state, including restructuring SOEs.

Accelerating growth also entails deepening regional economic integration. Integration can increase competition, expose countries to frontier technologies, and help achieve economies of scale.

Important steps are being taken to integrate into the EU and world markets, particularly in trade and finance. But there is still ample room for improvement. Notably, only three of the six countries are currently WTO members, and the quality of trade logistics lags behind middle-income countries globally. In the area of finance, domestic financial markets currently do not offer the necessary diversification of investment opportunities. Developing financial products like regional indexes and investment funds would help link savers with companies. These efforts would also pave the way for the development of a regional capital market.

With a shared vision to ensure macroeconomic stability, implement bold reforms, and enhance economic integration, the Western Balkans could accelerate growth and improve living standards. This is the path to higher and sustained growth.

Leaders in the Western Balkans increasingly understand that building strong, prosperous societies will require sustained commitment and collaboration at the highest levels. The World Bank will support you in pushing forward your reform agendas. For example, we aim to support efforts to facilitate cross-border movement of goods and services through a Regional Trade and Transport Project.

These are fast moving times with rapid technological advances such as seamless border posts, real-time infrastructure monitoring, and driverless vehicles. Western Balkan countries have the opportunity to harness the benefits of this technological revolution by modernizing their institutions to generate quality jobs. This will encourage the talented youth to stay in the country and contribute to achieving faster and more inclusive growth.

Strong country ownership, renewed motivation, and early results would be good news for the citizens of the Western Balkans. The stakes are high, but so is the spirit of collaboration emerging in the Western Balkans.

Thank you.