Western Balkans: the balance of 15 years chasing Europe

The Old Bridge in Mostar. (CC By NC ND jaime silva)

What disconcerts people living in the region today is not the fact that they have to cohabitate in multinational countries, but unsatisfactory living conditions: low wages, high unemployment, poverty. In Kosovo 34% of residents live for up to $2 a day.

In July this year Bosnia and Herzegovina celebrated the 20th anniversary of Srebrenica massacre, which is considered to be the symbol of inter-communal violence based on race and religion. Continuing conflicts in the peninsula gave rhythm to the political course of Europe in the 90s. of the last century. The last war took place in 2001 in Macedonia.

It was a short conflict, which cannot be compared to the earlier tragic events in Bosnia and Herzegovina or Kosovo. Ethnic tensions that were the direct cause of all the Balkan wars at the end of the last century, are controlled today, hence that they don’t explode into another bloody conflict.

What disconcerts people living in the region today is not the fact that they have to cohabitate in multinational countries, but unsatisfactory living conditions: low wages, high unemployment, poverty. For example, in Kosovo 34 percent of residents live for up to $2 a day. Can that be changed?

Early this year the International Monetary Fund published a report whose authors analyze the economy in the region in the last 15 years and attempt to draw conclusions for the future. The analysis encompasses six countries that once belonged to the Yugoslavia (Macedonia, Serbia, Croatia, Bosnia and Herzegovina, Montenegro, Serbia);

Slovenia was not included since it stands out very significantly from other states in the region. What is more, this is the only post-Yugoslavian state in the European Union (from 2004). Due to its geographical location, Albania has also been covered by the report. Let us analyze how the states have been doing since the beginning of 21st century and, most of all – how they coped with the crisis, which is believed to have started in 2008. Is it possible that one day economic problems the region needs to face today will go down in history – just like genocide and bombing from the beginning of the 90s.?

Favorable balance

The IMF analysts believe that the Western Balkans used their 15 years properly when it comes to building a framework for further economic development, but the most significant – and often the most painful reforms are still ahead of them. To name just a few tasks to be performed in upcoming years: organizing public finances, the reform of the labor market (inter alia by reducing the role of trade unions and the creation of policies to meet the needs of today’s globalized market), reducing disparities between the rich and the poor, creating modern and efficient supervisory institutions over financial and insurance markets.

The states should also intensify steps to bring them closer to the European Union and this applies especially those goverments that present themselves as EU-oriented. Some of them are already advanced and successful in this process. Take Macedonia as an example: it met all the criteria and could join the EU together with Croatia in 2013, but its accession was blocked by Greece (the two countries are in dispute over the name “Republic of Macedonia”, which is, in Greece’s view, unjustified as Macedonia is a name of one of Greek regions so Greece has historical right to it and as such mustn’t be used by any other state. A compromise is the use of name FYR Macedonia, but Greece continues to prevent Macedonia from participating in global organizations) It is impossible to predict when the dispute is going to be settled.

Montenegro started accession negotiations in 2012. So far it has closed two negotiation chapters (Science and Research and Education and Culture), and also opened next ten chapters, including the Judiciary and the Basic Law and Justice, Freedom and Security.

Among the countries that have expressed interest in joining the EU, it is small and poor Montenegro that is most advanced in the process. What poses as a real threat to the successful continuation is Prime Minister Milo Djukanovic, who “rules the country as if it was his family business” (such a charge was brought against him by The European Commission in October 2014.). Serbia is far less advanced, because it is only on the so-called screening phase. This is just the first, opening stage which is to scrutinize all 35 areas of negotiation. Nevertheless, it still hopes to join the Union in 2020.

Uneven crisis

All the countries in the region could have achieved better results if it was not for the global crisis the beginning of which dates back to September 2008. However, while western and central European countries began to feel its impact at that time, in the Balkans it became noticeable only in the middle 2009. What’s more, the first phase of the crisis was less severe there than in other parts of the continent. How to explain this phenomenon?

The Balkans were protected from recession by what has been previously believed to be defects and weaknesses: lack of strong ties with Western economies and allocating internal production to the domestic market. Since foreign capital didn’t go to the Balkans before the crisis erupted, after 2008 the region didn’t need to struggle the effect of money outflow. For example, Romania benefited much from the foreign capital inflow before 2008 and was then far more affected by the crisis.

What’s more, because of underdevelopment of the financial sector, Balkan banks were not involved in the market operations on stock markets in Western Europe and the US. Region also didn’t experience the credit boom since housing mortgage was not commonplace.

Last factor worth mentioning is that the region was not strongly attached to the Eurozone and so Eurozone problems affected it very little. “Very little” does not mean there were no problems at all: it needs to be remembered that the Balkans benefited very much from different programs – both special aid schemes and investments.

When European institution faced serious problems, the money transferred to the Balkans diminished significantly. The outflow of dedicated aid programs was visible not earlier than in 2009, as it has been said before: the region started to feel the slowdown relatively late, but the fact that the problems began later does not mean that they were resolved quicker and easier. Just on the contrary: crisis has not only hampered development in all these countries, but also sharpened already existing problems.

The unresolved problem of joblessness

None of the countries in the region tackled successfully problems with unemployment, even though in a number of other fields they managed to achieve ambitious goals in the last 15 years. This “success list” includes creating a framework for the development of private property and framework for foreign companies to invest. But there is also “a shame list”: despite the fact that in the period between 2000 and 2008 GDP per capita increased by 40 per cent (the average for the whole region), social inequality was constantly deepening which is a clear evidence that these were mainly people belonging to a different kinds of privileged groups who took advantage of the economic growth.

People who were poor before economy started to grow, still belong to underprivileged groups. It is a sad paradox that even when GDP was growing steadily, unemployment level in most countries was around 20 per cent.

Infographics DG
Infographics DG

Other countries in the transition period also faced high unemployment (take Baltic states as an example), but managed to stabilize it on an acceptable level. Does situation in the Balkans differ so much that they can’t reduce unemployment level to the EU average? Indeed, to some extent circumstances in the Balkans are different.

The IMF experts emphasize that the Balkan states began to unify with the system of the European economy relatively quickly and did not manage in time to find a place for themselves in these markets. It took the Balkans much more time to introduce necessary market reforms and when they were ready to introduce the foreign capital, international investors were no longer interested as they had already opened their branches in other European countries. Central Europeans were in a similar situation – they also started implementing reforms late (at the beginning of the 90s.). The difference was that from that moment they were all very much pro-Western and put a lot of effort into creating tailor-made business conditions for foreign investors.

Since it is so hard to get a decent job in the Balkans, people are looking for it abroad. Paradoxically, the least enthusiastic about emigration are those who have it the easiest to move away – Croats who can legally take up employment in any EU country. Recent data show only 1 percent of citizens considers going abroad to work.

At the opposite extreme are the Kosovars who -in recent months – have been trying to cross borders illegally as often as in critical 1999, when bombings were on. Since many of them now travel with Syrian and Sub-saharan immigrants, it’s hard to say the number of illegal frontier crossings. But take March this year as an example – in two days only Serbian police officers arrested 300 Kosovars who tried to get into Hungary. These people flee from hard life conditions (40 percent of Kosovars live in poverty) and unemployment, which reaches almost 35 percent.

Work to be done

Whether the Balkans catch up with the rapidly developing European economies or continue to be their “poor cousins” depends largely on the determination of governments themselves. The European Union is interested in strengthening the role of the Balkans, but, as the example of Croatia clearly shows, does not intend to lead any country by the hand and solve their internal problems. Former EU Commissioner for Enlargement and European Neighbourhood Policy Štefan Füle pointed out five key areas the region should mainly focus on. These are:

  1. strengthening of physical capital – to support the development of transport, energy, improving energy efficiency
  2. human capital – this may include measures supporting education, vocational training, research and innovation;
  3. better industrial structures – this may include better access to finance and smart specialisation;
  4. good business environment – this may include micro-economic measures for more efficient functioning of companies in line with state aid rules and cutting the red tape in different sectors of economy;
  5. trade integration – this may include measures to support export promotion and to attract foreign direct investment

It looks like a starting point to a very complex reforms. Their success depends not only on the determination of the national governments and the correct implementation of projects, but also the general economic situation in the future. The region has the potential (big market where there is still a place for many new business activities as many economic areas remain undeveloped, demographic structure consists mainly of young people – opposed to the EU states in Kosovo, for example, there are four teenagers for every 60-year-old man), but finds it difficult to translate it into a real advantage.

The Balkans have not successfully coped with the various remnants of the past – industrial infrastructure is not completely rebuilt, some war criminals got away with their felonies and are protected by the local institutions. This is a real problem in completing integration with Brussels as the EU expects all war criminals to face responsibility for their actions during sequential military conflicts.

Infographics DG
Infographics DG

The authors of the above-mentioned the IMF report draw attention to another threat – continuing deflation. It can strike in the region in two ways – the danger can be caused by low inflation in the EU countries that are major trading partners of Balkan countries, as well as the inability to overcome deflation at home.

“Given the level of public debt and loans which failed to be repaid in time, the prolonged period of low inflation or deflation will be ruinous for the economy” – the report says.

Out of the countries studied, only Montenegro can boast about its achievements in combating excessively low inflation in recent years (in February 2015 it was 0.6 percent). “Although these are low food and fuel prices that are responsible for low inflation, core inflation is falling regularly as well. Even in Albania and Serbia, despite their smooth system for the exchange rate, inflation is below the expected level, “- the report says.

The report lacks, unfortunately, recommendations for the region. Since the Balkans depend heavily on stronger western economies, they are not able to tackle low inflation themselves. At the same time we need to remember it was high inflation that has so far caused more problems than the low one.

Two decade ago Federal Republic of Yugoslavia, the heir to the Socialist Federal Republic of Yugoslavia, faced an extreme hyperinflation which lasted from April 1992 to January 1994. It was 65 percent a day, giving Yugoslavia the second place in the infamous ranking of the world’s longest inflation examples. Having that in mind, we don’t see deflation as such a risk. As a side note: Federal Republic of Yugoslavia existed for 11 years only, in 2003 it was replaced by Serbia and Montenegro (and this state endured just for 3 years). Despite current difficulties, Serbia seems to be in quite a comfortable situation as this time its future statehood is not endangered.

 

 

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