Europe and Central Asia - Western Balkan Integration and the EU: An Agenda for Trade and Growth

Health Sector Review Note, Vol. 1

The last decade, especially the last five years, has been relatively good for the Western Balkan countries. Growth has accelerated in most countries in the last few years, as recovery from conflicts and disturbances takes root. Within the Western Balkans, fYR Macedonia and Croatia are candidate countries for EU accession, while the others are potential candidates at different stages of the pre-accession process.

However, Western Balkan countries now need to improve and then sustain their past growth performance, amidst concerns about sustainability and the need to avoid a possible “middle-income trap.” With still-high poverty rates and EU aspirations, countries in the region need to accelerate their growth rates and sustain them. However, this is made more difficult because much of the easier part of transition-driven growth has already been achieved. The report suggests some actions for policy-makers to consider.

1. Motivation and Macroeconomic Context

Many countries in Western Balkans have witnessed significant growth since the mid-1990s. However, these countries are now challenged to keep the growth and improve it. This is now harder than in the past. Sustainable future growth should now be more export-driven and focus more on trade integration with the European Union.

2. Trade Trends and Pattern and Labor Competitiveness

Trade flows of the South East Europe (SEE) countries have steadily grown, despite disruptions from regional conflicts and sanctions. However, overall trade patterns in the region need to improve to promote the sustainable growth of exports. High labor costs in the region mean that lower-wage countries can undercut the SEE countries. Skill acquisition is clearly an urgent need.

3. Deepening Integration

For small countries of Western Balkans, sustainable economic growth should be driven by exports. The benefits of deeper integration and creation of a single economic space in Western Balkans, will include fostered competition, larger markets and economies of scale and increased foreign direct investment.

4. Services as an Engine of Growth: The Regional Dimension of Trade in Services

Services play an increasingly important role in the development of an economy. Liberalization of trade in services could be become a powerful driver for growth in SEE. In many cases, an appropriate regulatory framework with safeguards and regional coordination will also help attract private investment in services.

5. Attracting Private Investment

Foreign Direct Investment (FDI) could be considered the centerpiece of efforts to maintain and accelerate the growth of exports and thereby the economic growth. The SEE countries also need to improve the quality and quantity of human skills in order to prepare for faster and more export-oriented growth and for the demands of increasingly privatized economies.

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Western Balkan Integration and the EU: An Agenda for Trade and Growth