Economic theory and international experience show us that small countries get richer when they are deeply integrated into the global economy. Economic integration can facilitate access to a broader consumer base, a larger pool of skilled workers, additional sources of financing and new technologies. A larger market, with a level playing field in which all companies can compete, can shake up sclerotic industries monopolized by closely-knit local political and business elites, as well as by encourage innovation. In other words, economic integration can create an environment for existing firms to grow, become more productive or exit the market, and for new firms to emerge and succeed or fail quickly and cheaply. cost.
This is particularly important for the small Western Balkan economies (Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro and Serbia), which remain below the income levels achieved by other economies of similar size, but generally more open. As shown in Figure 1 below, among small countries in Europe and Central Asia, high per capita income is closely correlated with trade openness. As population increases, the link between trade openness and high per capita income weakens. However, even for an economy the size of Serbia, following the path of developing open economies like Hungary, Belgium and the Czech Republic is a promising option.
Figure 1: Among small countries in Europe and Central Asia, high per capita income is closely correlated with trade openness
Source: World Development Indicators 2017; Economies of Europe and Central Asia (ECA) with population less than 12 million; excluding Luxembourg; income is measured as GDP per capita, PPP (in constant 2011 international dollars)
Although the six Western Balkan economies have made major progress toward opening their economies since the fall of the Iron Curtain, they still lag behind their regional peers. Generally, as small economies join the ranks of high-income countries, exports increase until they reach 100% of national income or more. However, in the Western Balkans, the average ratio of exports of goods and services to GDP is around 40% in 2017 (compared to around 25% in 2000 and 30% in 2010). This figure is still lower than the levels achieved by Latvia (around 60 percent), Cyprus (around 65 percent) and Estonia (around 80 percent), countries with similar populations but which have achieved per capita income significantly higher over the past two decades.
What is holding back the Western Balkans? In part, these are factors inherited from the past, such as a relatively limited productive base that now needs to be maintained and conflicts that have affected regional trade. However, policies and institutions play a key role, and much can be done to improve them.
In 2017, recognizing the untapped potential of economic integration as a means of economic growth, the Western Balkans launched a joint initiative Multi-annual action plan (MAP) to develop a regional economic area (REA). This initiative promotes regional economic integration between the Western Balkan countries and aligns legal frameworks and regional infrastructure with the requirements of possible EU membership, in order to contribute to full integration into the value chains of the EU. The MAP covers four dimensions of economic integration: trade, investment, mobility and digital integration.
Progress has been made since the adoption of the MAPand it is crucial that Western Balkan countries continue its decisive implementation. In addition to modernizing physical infrastructure and aligning customs tariffs, non-tariff barriers to trade must be removed.— including simplified border crossing procedures. National investment frameworks must be aligned providing seamless access to a regional market with reduced barriers to investor entry, better investor protection, streamlined policies to attract investors and, perhaps most importantly, better positioning of the region for integration into global supply chains. To make the Western Balkans a more attractive value proposition for highly skilled workers, key initiatives include simplifying mobility for researchers; mutual recognition of professional qualifications, such as those of doctors, dentists, architects and engineers, and mutual recognition of academic qualifications. Combined with national education reforms, these measures can help close the regional skills gap and help workers move to places with the highest job creation potential. Finally, the Western Balkans can seize the opportunities created by the digital revolution. This will include the elimination of regional roaming charges, a unified approach to digital security and data protection, the promotion of digital skills and affordable and accessible broadband.
The stakes are high, but economic integration could be key to improving living standards to which the Western Balkans aspire. Per capita income in the Western Balkans is still only 28 percent of that in Germany; At current growth rates, it will take the region five decades to reach Germany’s current standard of living. New opportunities are needed to accelerate growth, which means overcoming small and fragmented national markets. With a shared vision to ensure macroeconomic stability, pursue bold reforms across borders and strengthen economic integration, the Western Balkans have a chance to accelerate growth, improve living standards and reap the benefits of the new global economy.
