Ivailo Izvorski

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The Western Balkans Accelerating Convergence to
Europe

• Ivailo Izvorski
• The World Bank

November, 2007
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Outline

• Recent developments
• Challenges
• The 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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Fiscal tightening has been impressive
Budget balance in percent of GDP (- deficit)
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but current account deficits have widened
substantially
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Merchandise exports have grown but remain low
relative to GDP
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Inflows of FDI have risen, but are short of
external deficits.
Data for 2006, in percent of GDP
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Prospects for longer-term growth abound

• Low exports and modest FDI scope for infusion of
  technology and management experience?
• Education issues
• Trade preferences eroding
• Service exports?
• Productivity growth through labor shedding is
  coming to an end in some countries

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Exports are crucial for growth in small
countries

• Wage rates out of line
• But the bulk of exports are labor-intensive and
  commodities
• Countries still not a substantial part of
  producer-driven supply chains
• China and India looming large

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Exports low-skills and natural resources, but
higher wages

• CI Capital-intensive
• SI Skill-intensive

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Participation in producer networks is low

• Share of manufactured exports (in parts and
  components, 1996 compared with 2005)
• SEE 6 to 11
• EU8 14 to 19
• Slovakia 13 to 21
• SEE is not yet a part of the production supply
  chain (except Romania and, partly Croatia)

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Quo Vadis SEE Integration (Trade)

• Sufficient? Necessary?
• Policies to reduce market segmentation
• CEFTA 2006
• A lot remains to be done
• border frictions CEFTA cumulation of rules of
  origin plan for 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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Quo Vadis SEE Integration(Labor)

• Will need an agreement on movement of skilled
  labor
• Can be done bilaterally to begin with
• Mutual recognition of professional qualifications
  and educational institutions
• Temporary worker agreements
• Return migration programs can help in skill
  formation
• Can/should Bulgaria and Romania join?

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Human capital is key

• Are wages high? Cannot attract investment geared
  to exploiting low-wage based exports.
• High reservation wages remittances?
• Productivity improvement critical to outgrow the
  relatively high wages, together with cuts in
  labor taxes
• Human capital needs major attention
• Long lags, poor education outcomes
• Skills constraint in BEEPS 2005

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Telecommunications high costs

• Limited competition
• Skype calls
• 16 cents/min to WB (excl Croatia) 6.8 c/m
  Bulgaria and Croatia 2.1c Estonia, western
  Europe, the US
• ECA 18 country study (2007) better telecom
  quality has the highest contribution to
  productivity (within infrastructure)
• Potential payoffs to better connectivity and
  reduced costs very high, especially looking to
  deeper integration and supply chains within SEE

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Summary and outstanding agenda

• Substantial progress and growth
• Still lagging central Europe and other emerging
  markets
• Eight broad areas need to be tackled
• Standard
• Pre-emptive

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1. Reduce political uncertainty and instability

• Key for growth, reform implementation and
  integration
• Key risks to potential investors
• Domestic political instability
• weak governments, lack of consensus on key
  directions
• Regional instability
• Kosovo final status, BH constitutional reforms,
  fYR Macedonia decentralization

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2. Sustain/enhance macroeconomic stability

• Globalization brings global risks
• Use exceptionally good times to reform
• Maintain fiscal prudence, restructure spending
• Keep appropriate monetary arrangements
• Enhance financial sector discipline

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3. Create conditions for private investment and
stronger growth

• Create a business enabling environment
• competition, hard budget constraints, labor
  reforms
• Advance privatization (transparent)
• Reduce labor taxes
• Remove infrastructure bottlenecks

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4. Restructure government spending

• Cut spending to allow for smaller governments and
  encourage formalization
• Pro-growth fiscal policy (revamp spending
  composition to areas conducive to growth)
• Improving the efficiency of spending and outcomes

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5. Improve governance and institutions

• Reduce state capture, fight corruption
• Enhance the rule of law
• Reform procurement, strengthen audit
• Reform corporate governance as well

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6. Strengthen regional and EU integration

• Countries are small market size matters for FDI
• WTO accession (BH, Serbia, Montenegro)
• Non-tariff barriers and barriers to investment
• SAA (BH and Serbia) and deeper EU integration

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7. Transport, energy, telecoms reform, invest
wisely, liberalize

• Broad policy issues need to be addressed
• Fiscal space, sustainability and prioritization
• PPP, concessions, competitive tenders
• Energy
• So far, a constraint only in Albania and Kosovo
• But pre-empt bottlenecks
• Regional approach, ECSEE
• Telecoms liberalization needed, and better
  before privatization

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8. Boost human capital

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