How the Western Balkans Can Catch Up

Abstract

Countries in the Western Balkans – Albania, Bosnia and Herzegovina, FYR Macedonia, Kosovo, Montenegro and Serbia – all aspire to membership of the European Union, but they face a major convergence challenge in terms of living standards. The main reason behind this prosperity gap lies in the failure over the years of Western Balkans countries to be competitive, meaning that they lack the appropriate factors and institutions needed for high levels of long-term productivity. The key issue is whether the Western Balkans countries can narrow the gap in the coming decade and, if so, what do they need to do to achieve this. The vital requirement for catching up with the rest of the European Union is a boost to investment in the region. The Western Balkans have a number of attractive features for investors. The long-term EU perspective is a major plus and a unique quality of the region compared with other emerging markets, as it helps to anchor market-oriented reforms and European standards. Strong macroeconomic stability, strategic geographic location, diverse economies, favourable tax regimes and low unit labour costs, combined with a relatively well-educated population, are common attributes throughout the region. Looking ahead, sources of growth include trade integration, within the region and with the rest of the world, exploitation of the region’s energy resources, improvement of the transport infrastructure and technological innovation. However, long-term challenges remain, such as the possibility of a slowdown in reforms, risks posed by financial instability, adverse demographic trends and climate change. But provided governments in the region remain committed to reforms and regional cooperation, these challenges can be mitigated, if not overcome.