Cross-border trade, investment levels and regional integration in South East Europe (SEE) remain below potential, reflecting persistent problems with the business environment, market fragmentation, and low-quality infrastructure. The SEE region in this report includes two clusters: a) EU SEE countries (Croatia, Bulgaria, Greece, Romania, and Slovenia); and b) Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia). During the online panel discussion Unlocking the growth potential: regional economic corridors in South East Europe, which took place on 16 May 2024, four distinguished experts from both academia and the investment community discussed the potential benefits of deeper regional integration in the context of European integration with a particular focus on three growth drivers: energy, digital infrastructure, and transportation. The panel of experts included Sue Barrett (EBRD), Dr Will Bartlett (LSE), Professor Slavo Radosevic (UCL) and Matteo Rivellini (EIB). The moderator and chair of the discussion were Professor Anthony Bartzokas (NKUA, LSE and UNU-MERIT) and Professor Vassilis Monastiriotis (LSE) respectively.
Growth and convergence
Convergence in the Western Balkans, but also in the wider SEE region, is still below potential and the puzzle we have addressed is what needs to be done in the coming years for this to change. The perspective we have taken is to consider success and failure at the sectoral level, beyond aggregate trends and closer to the real economy.
Graph 1: Growth drivers: Investment and Savings (2000-22)
To set the scene, we focus on the overall SEE region. We have noticed that even though the savings rate as percentage of GDP has been gradually increasing, the investment momentum is still lagging (graph 1). When it comes to GDP convergence (graph 2), the whole SEE region (with the notable exception of Greece during its crisis years) has been converging to the EU average in the last two decades; however, and despite the Western Balkans gradual improvement, GDP per capita in this cluster remains below 50% of the EU average. Progress in the EU SEE cluster is also far from linear in the last 15 years and after the financial crisis.
Graph 2: GDP convergence trends, 2000-22
The Western Balkan economies essentially follow the EU-27 growth path due to high levels of trade integration, migration and inward FDI. In general, the Western Balkan-6 growth rates are about 1.5pp above the EU-27 one with more prosperous countries and more advanced towards EU integration catching up faster (graph 3). But even within the Western Balkan-6 group there is divergence, with economies catching-up at a different pace.
Graph 3: Real GDP growth 2012-2023, WB6 & EU27 (%)
Graph presented by Dr Will Bartlett during the panel discussion
During his presentation, Professor Radosevic argued that none of the factors of endogenous growth in SEE (population – income distribution, science and innovation, financial sector, and government) seem to be a powerful driver of growth that could set change in other factors in motion. These endogenous factors were either not individually strong or were not complementing each other. He further supported the argument that the SEE should be seen as a peripheral region. Such regions according to economic history are dependent on their interactions with the core (in this case the EU). For this reason, it matters both how actors from core economies behave in relation to peripheries, and how local elites from the peripheries handle the trajectory of economic integration. EU integration can drive growth for some time, but it will not lead to convergence unless combinations of favourable endogenous drivers of growth reinforce each other.
Slide presented by Prof Slavo Radosevic during the panel discussion
Benefiting from the “Assessment of Transition Qualities” database produced by the EBRD, we have taken a more qualitative approach to find the bottlenecks of economic progress in the region. EBRD’s six transition qualities consist of competitive, well-governed, green, inclusive, resilient, and integrated. Overall, significant shortcomings in governance hinder the competitive performance of the whole region with the “well-governed” quality having the lowest score among all, while there is also an interesting disconnect between integration and competitive performance. In a more granular qualitative approach (graph 4), we have seen progress in transition qualities and GDP growth after the crisis and a strong correlation between the two variables.
Graph 4: GDP index vs Transition index
Focusing on digitalization, we notice limited opportunities of ICT infrastructure utilisation in terms of access and leveraging and a significant gap between more advanced EU member states and the SEE region. Trade restrictiveness in the region remains an important problem for digital services. Regarding energy markets fragmentation, closing the substantial gap between EU-SEE member states and the Western Balkans remains a considerable challenge, whereas transport infrastructure is also lagging behind, although convergence is more visible with investment opportunities in trade facilitation and logistics. Through our analysis, we have also showed that obstacles for investment are severe mostly in cross-border projects. At the same time, we notice that the region has been exporting more in the last two decades. Access to EU markets has led to a significant increase of exports to EU countries; however, there is limited intra-regional integration in SEE and slow progress when it comes to exports to the rest of world (graph 5).
Graph 5: Regional Trade Flows
In the panel session, it was highlighted that SEE consists of small open economies for which export orientation is the only long-term way to grow and upgrade technologically. Due to the proximity to Central European cluster, the manufacturing sector in SEE is gradually integrating in existing assembly platforms, although there are large variations of specialisation within the region. The policy recommendation that was put forward for the EU is to foster growth in the Western Balkans with macro strategies, looking at it from a political economy perspective.
Growth trajectories and the EU
The EU strategy for growth in the Western Balkans has changed over time from an emphasis on institutional reforms to a new emphasis on infrastructure investment. The presenters argued that this is part due to perceived competition from “new actors” such as China and its Belt and Road Initiative, and its increasing investments in the region. This change in approach can be traced in the so-called “Berlin Process” that was initiated in 2014. Since then, industrial policies have been oriented to attracting foreign direct investment (FDI) with low corporate profit tax rates, and investment and employment subsidies. However, Western Balkan economies have been essentially competing for foreign investment rather than adopting a regional approach. This means that growth trajectories differ in the region with at least two distinct growth models, one based on a service economy and the other on a manufacturing economy (graph 6). The latter relies heavily on subsidy based FDI attraction policies, the former on tourism and labour export. Notable recent trends are Serbia’s success in attracting manufacturing FDI (and to a much lesser extent in North Macedonia), alongside continuing migration of skilled and semi-skilled labour from the other countries of the region to the EU (and some even to Serbia) making remittance income a key factor in their development (and tourism revenue in Montenegro). Hence it has been argued that we need to reconsider the “one size fits all” approach to economic growth for the region.
Graph 6: Exports/GDP (%) goods trade vs services trade
Graph presented by Dr Will Bartlett during the panel discussion
With its various policies, including the Economic and Investment Plan in 2020 and Western Balkans Investment Framework (WBIF), the European Commission (EC) has made a significant policy shift in its support for the Western Balkans towards more infrastructure investments. The latest stage of this process is the New Growth Plan for the Western Balkans that was adopted by the EC in November 2023. The Growth Plan has the potential to double the size of the Western Balkan economies within the next decade. It incentivises the Western Balkans’ preparations for EU membership and the need to accelerate reforms, by bringing forward some of its benefits, which will directly benefit the citizens of the region. It involves a €6 billion Reform and Growth Facility for the Western Balkans for 2024-2027, combining grants and concessional loans. The plan aims to accelerate socio-economic convergence and comprises of four Pillars (access to the Single Market, boosting economic integration within the Western Balkans, accelerating fundamental reforms to unlock economic growth potential, and increased financial assistance for 2024-2027). The Plan introduces a strong focus on reform driven investment, in the sense that if a country proceeds with reforms, which are necessary especially in terms of the Common Regional Market, it will unlock more funding.
Slide presented by Matteo Rivellini (EIB) during the panel discussion
The multilateral Banks’ role and views
Both multilateral institutions, EBRD and EIB, are demand-driven, looking at investment opportunities that are aligned with the priorities set by the EU and the country authorities. The SEE region is of high importance for the EBRD. The Bank has invested around €50bn in the SEE region (cumulative investment) with over 60% of this amount in the SEE – EU member states. Of this investment around a third has been in the infrastructure sector (transport, energy, and digital infrastructure) with transport receiving the largest share. Investment in the transport sector is higher in the Western Balkans compared to the EU SEE region (where there is low additionality of EBRD finance since EU accession). Looking closer at the infrastructure investment levels that the EBRD has done by sector and by country, we notice an even distribution in the energy sector between the EU member states and the Western Balkans. To a large extent, this is driven by investments in the renewable energy and upgrading of transmission and distribution networks. When it comes to digital infrastructure, the EBRD has invested three times more in the EU SEE region compared to the Western Balkans, where there is more to do in the coming years. Regarding the WBIF, in 2009, the EBRD was one of the main architects of the framework, alongside the European Commission and the EIB. The WBIF pools and coordinates various sources of finance to blend loans with grants for priority infrastructure projects the Western Balkans. Investments from WBIF have also benefitted from technical assistance, with around €200mn in the transport sector alone.
Slide presented by Sue Barrett (EBRD) during the panel discussion
The EIB is present in all sectors with a diversified portfolio and is now focusing on four areas: connectivity, green transition, digital transition, and SME sector. A special focus has been given also on the New Growth Plan for the Western Balkans. The EIB is the guardian of the EU’s mantra which is “openness and transparency” when it comes to assessing investments. From this perspective openness means investors across the globe if procurement and technical standards have been respected.
Slide presented by Matteo Rivellini (EIB) during the panel discussion
Challenges in the Western Balkans
The main challenges for the Western Balkans region are around the slow pace of reforms, the weak institutional capacity, the socio-economic environment (e.g. brain drain, economic informality of the region), the lack of technical expertise, low connectivity, and climate change. With respect to the risk profile of the Western Balkan risks in the region have been declining in the last 20 years. However, the recent turmoil (e.g. in Kosovo or Bosnia and Herzegovina) and the potential lack of political stability may affect private investors’ decisions, with the actual ratio of FDI to GDP in the region being flat in recent years.
Slide presented by Matteo Rivellini (EIB) during the panel discussion
Slide presented by Sue Barrett (EBRD) during the panel discussion
* The authors are writing in a personal capacity.
*This post reflects the conclusions drawn from the presentations and debate of the LSE online panel discussion which took place on 16 May 2024. The panel of experts included Sue Barrett (EBRD), Dr Will Bartlett (LSE), Professor Slavo Radosevic (UCL) and Matteo Rivellini (EIB). The moderator and chair of the discussion were Professor Anthony Bartzokas (LSE, NKUA and UNU-MERIT) and Professor Vassilis Monastiriotis (LSE) respectively.For more information please visit the event page.
Note: This article gives the views of the author, not the position of Greece@LSE, the Hellenic Observatory or the London School of Economics.
