While the rest of the CEE was either rapidly moving towards a democratic capitalist model, or languishing in post-communist malaise, but a least with new political and economic freedom, much of the Western Balkans plunged into war in which 140,000 people died and economies were devastated.
Outbreaks of armed conflict continued until 2001, with an ethnic-Albanian insurgency in the barren Sar Mountains of Macedonia, and fears of further convulsions remain until this day.
Yugoslavia’s republics already had very different levels of economic development at the outbreak of war, and it was the misfortune of Bosnia, one of the poorest, to be at the epicentre of the bloodiest conflict of all. Slovenia, the richest of the republics, broke free from Yugoslavia in a ten-day war.
“Since 1995, ex-Yugoslav countries have undergone a major transition from a central-planning system to market economy,” says Kreso Vugrincic, an analyst at InterCapital Securities, a Zagreb-based regional financial services outfit. “This road has been paved with many obstacles that ultimately led to economic stagnation and recession in the last several years, triggered by the European debt crisis which hurt both local and foreign demand.”
Bosnia, Kosovo and Serbia have found it the most difficult to recover from the legacy of conflict, for different reasons. But transition is arguably incomplete in all countries in the region, with the state often retaining control of a number of major enterprises, and structural and administrative reform still work in progress. To an extent, this is due to a widespread attachment to the Titoist model, a theoretically more liberal form of communism including “self-management” of workplaces.
Many ex-Yugoslav countries are also burdened by corruption and cronyism that became established through war profiteering, and has proved difficult to uproot.
Economic development has also been set back by the global economic crisis and the continued travails of the eurozone, though in some countries the crunch may force governments into long-awaited reform.
“The countries of the former Yugoslavia recovered quite rapidly after the end of the war, but not all have achieved their pre-war level even today,” says Dr William Bartlett, senior research fellow in the political economy of South East Europe at the London School of Economics. “The relative inequality between the former Republics of Yugoslavia has widened even further than when Yugoslavia was federal state.”
Slovenia returned to its 1990 GDP level in 1996 and Macedonia in 2007, for example. However, Serbia’s real GDP per capita is still around 90% of 1990 levels, Dr Bartlett says. Slovenia is by a large margin the wealthiest of the ex-Yugoslav countries. Taking its level of real GDP per capita in 2013 as 100, Croatia stands at 57; Montenegro, 26; Serbia 22; Macedonia, 19; Bosnia and Herzegovina, 18; and Kosovo 16.
Post-war recovery suffered a setback in the late 1990s as a wave of financial crises struck the region, including the collapse of the politically-linked Dubrovacka Banka in Croatia, the Macedonian savings bank TAT, and pyramid schemes in Serbia. Serbia then fought a war in 1998-99 over Kosovo, culminating in a 78-day NATO bombing campaign.
From 2000 to 2008, the countries in the region generally enjoyed growth levels from the respectable to the impressive, benefitting from investor enthusiasm for emerging markets, FDI into local industries, and recovering domestic demand. International banks, particularly from Austria, Italy and Greece, moved in to the region’s markets, and by 2006 dominated all but Slovenia’s, helping drive credit growth.
The economic crisis hit the Western Balkans in late 2008 and the first half of 2009. These structurally fragile economies with heavy dependence on the eurozone for trade and investment have been badly shaken. Their banks have been among the losers: non-performing loans reached 19% in Serbia in 2012 (up from 11% pre-crisis), 18% in Montenegro, 14% in Bosnia 14% in Croatia and 10% in Macedonia, says Dr Bartlett. Some say that the real level may be higher.
Unemployment has risen, reaching 15.8% in Croatia, 19.6% in Montenegro, 23.9% in Serbia, 28.6% in Bosnia by 2012. Youth unemployment is even higher – an astonishing 63.1% in Bosnia.
These figures are also testament to the inflexibility of labour markets across the former Yugoslavia. All too often, jobs are public-sector sinecures. In countries like Serbia and Bosnia, many of the bright young people who do not go abroad get jobs in Western-funded civil society organisations: useful perhaps, but not economically productive.
Looking at each country in turn, Slovenia appears a relative success story. It has even managed to weather a serious banking crisis, in which its banks (particularly big state-owned lenders) racked up €7.8bn in bad loans, requiring a €4.8bn capital injection. Slovenia managed this (thus far) without resort to the IMF and EU and the strictures that they would impose. Its export-oriented economy has rebounded well, despite the eurozone slowdown, and a snap parliamentary election, partly thanks to EU-funded infrastructure spending – it grew at a seasonally-adjusted 3.1% in Q3 2014. But Erste Group forecasts that this will slip back to 1.5% for full-year 2015, as corporate deleveraging continues. The victory of a left-leaning prime minister in Miro Cerar has put a question mark over the privatisation of a dozen-plus sizeable companies.
To the south, on paper Croatia has endured the most difficult few years, with no meaningful GDP growth since 2008. Growth is not expected to return until 2016, and then at just 0.5%, say Erste. The government faces a general election by early that year, making it even more averse to labour-market reform and privatisation. The conservative opposition appears scarcely more willing to liberalise the economy. Nonetheless, investors continue to lap up Croatian bonds. One bright spot is tourism, which generates more than 10% of GDP – but it remains heavily seasonal and sector leaders complain that little is being done to build higher-value niches.
Moving east, in March 2014, Serbia voted for Aleksandar Vucic’s Progressive Party in a landslide, giving the former ultra-nationalist a mandate for radical reform. Mr Vucic insists he is determined to push forward with EU accession negotiations, after Serbia’s candidacy was accepted in January 2014. The government also promises progress in 2015 on the privatisation of more than 500 companies (some of which are not considered economically viable) and to cut the budget deficit – at 7.1% in 2014, Europe’s largest. But analysts and investors remain sceptical.
Serbia’s strengths include its location, favourable trade ties with Russia and Turkey as well as the EU, and government support for investors. It has had some success in attracting investment in ICT and automotive manufacturing and has potential in agriculture. A controversial 2013 deal with Etihad has seen the national airline overhauled and established as a serious competitor on routes in the CEE; more investment from the UAE may be forthcoming in agriculture and defence. But Serbia has still attracted few of the big-ticket FDI projects like Fiat’s €1bn overhaul of a plant in Central Serbia.
Montenegro was in a “State Union” with Serbia since 2006, but has since pulled ahead in per-head income terms. Presided over by Milo Djukanovic, as president, prime minister or behind-the-scenes powerbroker since 1992, the country has benefitted from its booming tourism sector (one of the world’s fastest-growing) and real estate investments on the coast. The country is keen to shake off its reputation as a smugglers’ paradise, as is Mr Djukanovic, who has been accused of heading a wartime cigarette smuggling ring.
Macedonia is championed by the World Bank’s Doing Business 2015 report as having the region’s best business environment, ranking an impressive 30th internationally. The IMF expects Macedonia to clock up a striking 3.4% GDP growth this year and 3.6% next; it would be on the road to EU accession were it not for Greece’s recalcitrance over the country’s name. Infrastructure projects should help the country leverage its position at the centre of the Balkans. Nonetheless, not all is rosy: Prime Minister Nikola Gruevski is accused of Viktor Orban-style heavy-handedness with the media, and the impressive growth figures hide more prosaic truths, says Dr Bartlett.
“This strategy has succeeded in attracting a number of foreign investors and several thousands of jobs have been created, enough to put a dent into the unemployment figures, which had fallen further to 29% by 2013,” he tells the Central European Financial Observer. “However, the jobs created are mainly low paid, low skill jobs. The zero profit tax regime has meant that the new FDI businesses contribute little to the public revenues and so public services are not improving.”
To the north, Kosovo is putting in a similarly impressive growth performance – 3.5% this year and next, according to forecasts from the EBRD. The territory’s mineral reserves should bode well for investment, if not the environment. Kosovo unilaterally declared independence from Serbia in 2008, but remains unrecognised by Belgrade, the UN, and five EU member states. Corruption and organised crime remain real concerns, though a new grand-coalition government installed in December 2014 may steady the ship and continue normalisation of relations with Serbia.
Bosnia is the country that most obviously bears the scars of war, physically, socially and indeed constitutionally. Next year marks the 20th anniversary of the Dayton Peace Accords which brought the conflict to an end, and which has become a de-facto constitution, dividing the country into two “entities”, one predominantly Muslim and Croat, one ethnic-Serb. This arrangement not only perpetuates division, but leads to regular political deadlock (not helped by several other layers of government). A British-German initiative launched in November 2014 aims to unfreeze progress on economic reform – but making real inroads will involve upsetting the elite that has made hay over the past decade and a half. The economy may still grow at a reasonable 2.7% next year, says the EBRD, and there is potential in energy and tourism. But unemployment and disillusionment will be hard to budge.
Some observers assert that the former Yugoslavia is growing closer together again, drawn by practicality as much as common history and in most cases a common language. The launch in 2006 of a trade deal known as CEFT2006 (excluding EU member Slovenia, and since 2013 Croatia) may have had some impact on intra-regional trade. However, most markets remain heavily reliant on the eurozone. Some are pivoting towards China, Russia and the Middle East for investment, but EU membership still remains a highly desirable goal for these countries.
“Gradual inclusion of regional countries to the EU should substantially benefit the free flow of goods and services, as well as human capital,” says Mr Vugrincic. “In addition, effective absorption of EU funds could also help these countries to rise above their long-lasting economic troubles and complete much-needed infrastructure investments. Nevertheless, an important prerequisite for any of this is a firm battle against corruption and red tape coupled with downsizing of the overinflated public sector and strong engagement of the private sector, especially SMEs.”
Andrew MacDowall is an independent Belgrade-based correspondent and analyst focusing on Central and South-Eastern Europe. He writes regularly for the Financial Times, and has also been published by the Guardian, Telegraph, Independent, CS Monitor and Business New Europe, amongst others. He is also the Central and Eastern Europe correspondent for CS Monitor’s Monitor Global Outlook service, and has lived and worked in the region since 2006.