Ivailo Izvorski

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The Western Balkans Accelerating Convergence to
Europe (Or Escaping the Middle-Income Trap?)

• Ivailo Izvorski
• The World Bank

November, 2007
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Outline

• Output growth and convergence
• Three key issues
• Will SEE grow older before getting rich?
• Will SEE open up more to trade, FDI and
  knowledge?
• Will the capacity to absorb the knowledge be
  there?
• A reform agenda

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Western Balkans Selected Indicators
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Real GDP growth has been robust, if unspectacular

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compared with other countries (2000-06 average,
)
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Open economies grow faster
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What is open (Sachs and Warner)

• Effective protection rates less than 40
• Have quotas on less than 40 imports
• Have no currency controls/black markets
• No export marketing boards
• Not socialist
• Is convergence assured?

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Exports crucial for small countries, but still
low relative to GDP
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Exports are largely for low-skilled products and
natural resources, while wages are rather high

• CI Capital-intensive
• SI Skill-intensive

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Other concerns on exports

• Trade preferences eroding
• Productivity growth through labor shedding is
  coming to an end in some countries
• Wage pressures, high contribution rates
• Service exports
• Producer networks?

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FDI crucial for exports and growth

• Small countries, size matters
• Openness?
• Why not invest in Slovakia or Turkey?
• Stock FDI (2005)
• Western Balkans (17 m pop) 11 billion
• Croatia (4.5m pop) 12.5 billion
• Slovakia (5.4 m pop) 15.3 billion

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SEE Integration (Trade)

• Market segmentation
• CEFTA 2006
• A lot remains to be done
• border frictions CEFTA cumulation of rules of
  origin extension into Pan-Euro-Med cumulation
  regional cooperation in services, possibly EU MFN
  rates
• Benefits
• more competition in the supply of goods and
  services, higher FDI (single market), and more
  intra-regional supply chains

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SEE Integration (Labor)

• Will need an agreement on movement of skilled
  labor
• Can start bilaterally
• Mutual recognition of professional qualifications
  and educational institutions
• Temporary worker agreements
• Return migration programs can help in skill
  formation

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Human capital

• Strengthening human capital is key
• Long lags, poor education outcomes
• Skills constraint in BEEPS 2005
• High reservation wages remittances?
• Productivity improvements critical to outgrow
  relatively high wages cuts in labor taxes

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Summary and outstanding agenda

• Substantial progress, but still lagging central
  Europe and other emerging markets
• How to boost convergence (escape the trap)?
• Population structure, openness, education quality
  are not external variables policy has a role
• The agenda

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1. Core agenda

• Ease political uncertainty and instability
• Domestic and regional
• Enhance macroeconomic stability
• Monetary and fiscal prudence
• Reform the business environment
• Improve governance
• Revamp government spending
• Pro-growth contribution rates outcomes

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2. Open up, strengthen integration

• Openness is crucial
• Small countries market size matters for FDI
• WTO accession (BH, Serbia, Montenegro)
• Non-tariff barriers and barriers to investment
• Regional and EU integration

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3. Boost human capital

• Education delays in reform have been harmful
• Labor markets and continued education
• Regional labor markets
• Labor taxes and reforms of social insurance

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4. Wisely improve infrastructure

• Liberalize, reform, invest wisely Ireland
• Broad policy issues need to be addressed
• Fiscal space, prioritization, private sector,
  transparency
• Energy
• So far, a constraint only in Albania and Kosovo
• But pre-empt bottlenecks
• Regional approach, ECSEE
• Telecoms liberalization needed, and better
  before privatization