Balkan competitiveness

Whilst two recently published reports on reform and competitiveness demonstrate progress by several Western Balkan countries, further structural reforms are required to mitigate the impact of the global economic downturn.

By Ian Bancroft

Though two reports focusing on reform and competitiveness – published by the World Bank and the World Economic Forum, respectively – have demonstrated the progress made by several countries of the Western Balkans, further structural reforms are required in order to mitigate the impact of the global economic crisis. Whilst exposing the economic vulnerability of the region, however, the economic downturn could also create the necessary political space and economic imperatives to undertake often difficult and disputed reforms. How each country contends with the social opposition unleashed will go a large way to determining the extent to which such positive momentum is successfully exploited.

A recent World Bank report, entitled ‘Doing Business 2010: Reforming through Difficult Times’, showed how all the countries of the Western Balkans had improved their business environments in ten key categories – starting and closing a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders and enforcing contracts. The Former Yugoslav Republic of Macedonia (32nd position, versus 69th last year) ranks as the region’s best reformer, followed by Montenegro (71st), Albania (82nd), Serbia (88th), Croatia (103rd) , Kosovo (113th) and Bosnia and Herzegovina (116th).

In the World Economic Forum’s recently-published ‘Global Competitiveness Report 2009-2010’, meanwhile, Montenegro (62nd place) ranked highest of the Western Balkans countries, followed by Croatia (72nd), the Former Yugoslav Republic of Macedonia (84th), Serbia (93rd), Albania (96th), with Bosnia and Herzegovina languishing in 109th place. In Bosnia and Herzegovina, the top-five most problematic factors for doing business were government instability/coups, policy instability, inefficient government bureaucracy, tax rates and corruption; compared with a top-five of corruption, policy instability, access to financing, inefficient government bureaucracy and inflation in Serbia.

The report ranks a country’s competitiveness against a host of indicators divided into twelve pillars, with three broad categories – ‘Basic Requirements’ (institutions, infrastructure, macroeconomic stability, health and primary education), ‘Efficiency Enhancers’ (higher education and training, goods market efficiency, labour market efficiency, financial market sophistication, technological readiness and market size) and ‘Innovation and Sophistication Factors (business sophistication and innovation).

With both Serbia and Bosnia and Herzegovina having already secured stand-by agreements with the IMF, with countries such as Macedonia, Montenegro and Albania choosing to borrow instead from commercial sources, there is an urgent need to rationalise public administrations and expenditures in order to meet the conditions attached. Serbia, for instance, is expected to have to cut almost one-fifth of its 70,000 public sector employees in order to satisfy the IMF. For Bosnia and Herzegovina, however, facing a general election in autumn 2010 that is likely to fuel further political instability, the reform environment remains unfavourable and questions remain over whether or not it will be able to secure future tranches of IMF assistance.

With most of the region’s economies expected to contract in 2009, and positive economic growth not expected to return until the second half of 2010, implementing structural reforms, particularly those aimed at reducing administrative burdens and barriers, is of ever greater importance. Whether the global economic crisis will prove to be a catalyst for reform, as previous crises elsewhere have proven to be, will depend in large on how country’s respective political systems, particularly those of Serbia and Bosnia and Herzegovina, contend with the social forces unleashed by rising unemployment and state cutbacks. Successfully undertaking key structural reforms, however, will leave the Western Balkans well placed to exploit an expected return to growth in the latter half of 2010.