Fifteen years after the wars that devastated and divided the former Yugoslavia, the countries of the western Balkans are facing a different kind of challenge: the risk of permanent marginalisation as part of Europe’s “super-periphery”, a zone of stagnation beyond EU’s troubled southern rim. That has been one of the under-reported consequences of an economic crisis that has simultaneously derailed the region’s efforts to catch up with the rest of Europe while sapping the EU’s enthusiasm to admit new member states. It is the reason why all seven Prime Ministers from the region are gathering in London today for an economic development conference hosted by the European Bank for Reconstruction and Development.
A defining feature of transition economies is their ability to achieve growth rates that put them on a convergence path with the highest income countries. That is what the countries of Central and Eastern Europe managed to achieve in the years before and after EU accession. Judged by this measure the economic transition of the western Balkans has stalled with a double-dip recession, inadequate investment flows and unemployment running at around a quarter of the adult population. Growth is just beginning to return, but at levels that effectively amount to stagnation. Without a return to a higher growth path, the countries of the region will remain stuck at less than a third of the EU’s average wealth per capita.
It should be acknowledged that the nations of the western Balkans face significant economic difficulties that are not of their own making. Their relative distance from the EU’s largest and wealthiest markets and their proximity to Greece mean that they have felt the impact of Europe’s economic crisis more than most. But as a paper published by the London School of Economics last year found, there is a specific “western Balkans effect” that inhibits inward investment and retards economic development. This is the result of serious deficiencies in politics and governance that the leaders meeting in London need to address.
The first aim should be to reduce the political risk factors involved in doing business in the region. The Balkan wars are a fading memory, but there has been little in the way of real reconciliation. The different ethnic communities of Bosnia-Herzegovina continue to live separate lives. Serbia has normalised relations with Kosovo, but refuses to recognise it. Even Greece’s unresolved objection to the description of FYROM as Macedonia disfigures the politics of the region. As long these dividing lines and enmities remain frozen, investment will look like a risk.
One legacy of this political division has been to limit the scope of regional economic integration, raising costs and reducing opportunities for potential investors. Despite laudable initiatives like the Regional Co-operation Council and the Central European Free Trade Agreement, good intentions are not always matched by delivery and trade between countries in the region is far lower than it should be. Efforts to promote reconciliation and deeper economic linkages should go hand in hand, helping to convince investors that renewed conflict is unlikely.
The second issue that needs to be addressed is the absence of strong, market supporting institutions, like clean government and independent courts, needed to uphold the rule of law and protect property rights. Problems like corruption and the lack of judicial independence are responsible for a business climate that, according to international indices, falls far short of European standards. The political elites are viewed as predatory, using legal and administrative tools to intimidate businesses and secure financial and political favours.
Some efforts have been made to address these problems. But too often reform is superficial, introducing new laws and procedures without any change of underlying behaviour. For example, the European Parliament expressed concern about provisions in Serbia’s criminal code that give the authorities broad scope to criminalise commercial activities that are considered perfectly normal in any functioning market economy. Serbia revised its code and then reopened all of its existing cases under the new Article 234. An estimated 1,500 business people are currently under investigation (including Serbia’s second wealthiest entrepreneur, Miroslav Miskovic) often for doing little more than making a profit.
This creates real policy problems for the EU. Faced with its own internal pressures and economic difficulties, it needs to export the European model of governance, rather than import more problems from the western Balkans. Further enlargement will not therefore happen quickly or easily to a region with mass unemployment and limited economic prospects. But the EU cannot afford a wait and see approach that creates the risk of economic divergence and renewed instability across the western Balkans. It needs to redouble efforts to promote lasting change and real economic convergence
The traditional legalistic process in which the terms of accession are laid out and the member states are expected to demonstrate compliance on their own initiative won’t work any more. Getting countries of the region up to European standards will require a much more intensive form of supervision and a willingness by the EU to be firmer and more interventionist in dealing with the most serious deficiencies. But the political will to do that unless the region’s leaders first show that they mean business. That should be the message coming out of today’s meeting.
David Clark is the founder and editor of Shifting Grounds, and served as special adviser to Robin Cook at the Foreign Office from 1997 to 2001