A New Growth Model in the Western Balkans

A New Growth Model in the Western Balkans? B Snoy, IFI Coordination Office Regional Cooperation Council Western Balkans and Europe 2020 – Supporting Convergence and Growth, Support to IFI Coordination in the Western Balkans and Turkey 31 March 2011 EU Funded Project implemented by 9/14/2021

Context o Review of latest thinking from EC, IFIs and Think Tanks regarding policy changes needed post-crisis o Contribute to the formulation of new growth strategies/agenda/initiatives and to development of new assistance programmes o Link with assessment of impact of austerity measures on investment programmes o Synopsis report available in April 2

Limitation of pre-crisis growth model o Unbalanced growth driven by domestic demand with high imports o Too much consumption (both public and private), too little domestic savings o Weakness and limited diversification of export sector o Investment excessively concentrated in construction activities o High size of government compared to countries at comparable per capita income level 3

Limitations of pre-crisis growth model o High dependence on foreign capital inflows o FDI concentrated on acquisition of privatised assets (primarily in the financial sector) with little greenfield investment o Low contribution of labour inputs to growth o Financial sector fragilities o Incomplete transition linked to incomplete reforms 4

Main themes for new growth agenda o From exogenous to endogenous growth (EC) o Recreating fiscal room for manœuvre (IMF) o Playing the global game of competitiveness (World Bank) o Invigorating trade, integration and export-led growth (EBRD) o Improving the business environment (EBRD & OECD) o Developing local currency finance and new instruments such as PPPs (EBRD & OECD) o Contribution of think tanks & academics 5

EC: From exogenous to endogenous growth o European Economy Occasional Paper 62, June 2010 o Need for a growth model less dependent on external capital inflows o Encourage flows that enhance the intrinsic competitiveness & productive capacity of economies o Moderate those which fuel domestic and external imbalances o Shift the composition of investment to tradable sector o Promote structural reforms that enhance domestic savings o Focus on completion of unfinished transition reform agenda, including labour market reform o Convergence with adoption of acquis communautaire 6

World Bank - Playing the global game of competitiveness o Shift of emphasis from demand to supply side o Prepare for a more competitive external environment o Skills, technology absorption, capacity, institution building & the overall business environment will become more important o The new markets to be conquered are those of the emerging countries 7

« Turmoil at Twenty » World Bank, 2010 • Infrastructure and labour skills emerged as binding constraints to growth & raised cost of weak institutions • Private investment crucial for opening infrastructure bottlenecks • Requires competitive trading regimes & predictable &credible regulatory frameworks • State has the important task of continually strengthening institutions that provide essential public goods (e. g. regulation, supervision and education) 8

« Western Balkan Integration and the EU » World Bank, 2008 o Deeper integration within CEFTA will bring benefits. Need for an agreement on services o Human capital development and return migration can help o Reduction in telecommunication costs and efficient transport are catalysts for development 9

« Investment matters » World Bank, 2009 • Investment rates are too low • ICT investment plays important role in improving the quality of overall investment • WBC trail in R&D spending & most of funding comes from the public sector • Improving the quality of public investment is key • Plan properly and implement public infrastructure projects in order to maximize the « crowding in » effect and avoid « crowding out » effect 10

Improving the business environment o Common denominator of policy advice given by EC, OECD and IFIs o Major business environment concerns: skills availability, infrastructure, tax administration, corruption and crime o Significance of transport as a business environment constraint o Need to enhance broadband internet penetration 11

Conclusions • The end of complacency: the transition agenda must be completed • Improving the business environment is the cornerstone of the post crisis agenda • New growth agenda is a revised and reinforced version of the old agenda of structural reforms. • « Europe 2020 can provide inspiration for a framework for smart, sustainable and inclusive growth » 12

Thank you for your attention! Support to IFI Coordination in the Western Balkans and Turkey EU Funded Project implemented by 9/14/2021