Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for International Economic Studies Balkan Endgame and Economic.

Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute for International Economic Studies

www.wiiw.ac.at

Balkan Endgame and Economic

Transformation

Vladimir Gligorov

2

Contents

> The game

> International actors

> Emerging economic region

> EU prospects

3

The game

> The choice was:

> to democratize and negotiate a proper federal

structure, or

> take control over the party and the army and either– centralise Serbia and then Yugoslavia, or

– integrate Serbian lands.

4

International environment

> American authority,

> European Union conditional promise of integration,

> regional normalization, and

> UN cooperation.

5

Economic transformation

> Relatively fast and sustained growth based on growth of productivity, i.e.,

on increased efficiency and not on growth of employment.

> High and sustained inflow of foreign investment due to relatively fast

decrease of risks due to political stability, institutional change and the

prospect of EU integration.

> Delayed restructuring of the public sector and recurrent fiscal problems.

6

Balkan specifics

> Slow reindustrialization

> High external imbalances

> Distorted labour market

7

Balkan specifics

> Macroeconomic stability not really a problem, at least

when it comes to inflation

> Exchange rate stability not a problem

> Fiscal prudence

9

Annual GDP growth rateschange in % against preceding year

-6-4

-20

24

68

10

2000 2001 2002 2003 2004 2005

AL BA MK CS NMS-5

-6-4

-202

46

810

1997 1998 1999 2000 2001 2002 2003 2004 2005

BG RO HR NMS-5

10

2004 2005 2006 2007

wiiw forecast

Bulgaria 5.6 5.5 5.3 5

Croatia 3.8 3.9 3.7 3.8

Romania 8.4 4.1 4.5 4.5

Turkey 8.9 5.8 6 6

Albania 6.7 5.5 5.5 6

Bosnia and Herzegovina 6.0 6.5 6 6

Macedonia 4.1 3.6 4 4

Montenegro 3.7 4.0 5 5

Serbia 9.3 6.5 5 4

GDPreal change in % against previous year

11

0

20

40

60

80

100

120

140

160

180

200

BG RO HR AL MK CS NMS-5

2001 2005

Industrial production in South Eastern Europe (1990 = 100)

12

Gross industrial production in NMS-5 and SEEC year on year, growth in %, 3-month moving average

-10

-5

0

5

10

15

20

25

Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06

CZ HU PL SK SI

-10

-5

0

5

10

15

20

25

Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06

BG RO HR MK Serbia

13

Labour productivity in industry in

SEEC and NMS-5, 1990 = 100

0

50

100

150

200

250

300

BG RO HR MK CS NMS-5

2000 2005

Note: CS data 2005 Serbia only.

14

Exports per capita in NMS-5 and SEEC

in EUR (goods trade only)

0500

10001500

20002500

30003500

4000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

AL BA MK Serbia Montenegro NMS-5

0500

10001500

20002500

30003500

4000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

BG RO HR NMS-5

15

FDI stock per capita in NMS-5 and SEEC 1990-2005, EUR

0

500

1000

1500

2000

2500

3000

3500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

AL BA MK Serbia Montenegro NMS-5

0

500

1000

1500

2000

2500

3000

3500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

BG RO HR NMS-5

16

FDI, exports and balances

> FDI increasing but not dramatically

> Exports growing

> Level low

> Deficits high

> Comparative advantages in labor or resource intensive sectors

17

FDI stock per capita in NMS-5 and SEEC EUR

0

1000

2000

3000

4000

5000

6000

Czech Republic Hungary Poland Slovakia Slovenia

2000 2001 2002 2003 2004 2005

0

500

1000

1500

2000

2500

3000

Albania Bosnia &Herzegovina

Bulgaria Croatia Macedonia Romania Serbia Montenegro

2000 2001 2002 2003 2004 2005

18

-20

-10

0

10

20

30

40

50

I Q 0

3

I-II Q

03

I-III

Q 03

I-IV Q

03

I Q 0

4

I-II Q

04

I-III

Q 04

I-IV Q

04

I Q 0

5

I-II Q

05

I-III

Q 05

I-IV Q

05

AL BA BG HR MK RO Serbia

Foreign trade: Exports cumulated period, annual change in % 27.3.06

AL, BA: Data refer to bolance of payment statistic.

19

-20

-10

0

10

20

30

40

I Q 0

3

I-II Q

03

I-III

Q 03

I-IV Q

03

I Q 0

4

I-II Q

04

I-III

Q 04

I-IV Q

04

I Q 0

5

I-II Q

05

I-III

Q 05

I-IV Q

05

AL BA BG HR MK RO Serbia

Foreign trade: Imports cumulated period, annual change in % 27.3.06

AL, BA: Data refer to bolance of payment statistic.

20

Trade balance (commodities) in % of GDP

in SEEC and NMS-5 2005customs statics

-40

-35

-30

-25

-20

-15

-10

-5

0

5

BG HR RO AL BA MK Serbia Mont. NMS-5

Note: Montenegro Data refer to 2003

21

Current account in % of GDP

in NMS-5 and SEEC 2005

-20

-15

-10

-5

0

5

BG RO HR AL BA MK Serbia Mont. NMS-5

22

Private transfers in SEE % GDP

-4

0

4

8

12

16

BG RO HR AL MK Montenegro

2004

23

0

200

400

600

800

1000

1200

BG RO HR MK SerbiaMont. CZ HU PL SK SI

2000 2005

Average monthly gross wages in industry, EUR

(ER), in SEEC and NMS-5

Note: RO net wages, Serbia data 2000 refer to 2001, Montenegro 2005 data refer to 2003

24

Labor market

> Employment low

> Unemployment high

> Shadow economy significant

25

Employment in NMS-5 and SEEC 1990 = 100

707580859095

100105110115

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

BG RO HR AL MK CS NMS-5

6065707580859095

100105110115

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

BG RO HR AL NMS-5

1996=100

27

Unemployment Rates, 2000, 2005in % of labour force, average, LFS

0

5

10

15

20

25

30

35

40

45

50

BG RO HR AL BA MK Serbia Mont. NMS-5

2000 2005

Note: Albania, registration data, end of period

28

Policy responses

> Fiscal policy prudent

> Monetary policy the main instrument

> Credit controls not the proper instrument

29

-20

-15

-10

-5

0

5

2000 2001 2002 2003 2004 2005

AL BA BG HR MK RO Serbia Mont. TR

General government budget% of GDP 27.3.06

Montenegro: Central budget.

30

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007

AL BA BG HR MK RO Serbia Mont. TR

Consumer price inflation, 2000-2007change in % against preceeding year 27.3.06

31

2004 2005 2006 2007

Prognose

Bulgarien 6.1 5.0 8 5

Rumänien 11.9 9.0 8.5 8.0

Kroatien 2.1 3.3 3.5 3

Mazedonien -0.4 0.5 3 3

Türkei 8.6 8.2 9.0 6.0

Albanien 3.0 2.4 2.5 2

Bosnien und Herzegowina 0.7 2.9 6 4

Montenegro 2.4 2.3 3 3

Serbien 11.4 16.2 15 15

VerbraucherpreiseVeränderungen gegen das Vorjahr in %

Quelle: wiiw-Jahresdatenbank, Prognosen: wiiw, Juli 2006.

32

Current account and gross external debtin % of GDP

-40

-20

0

20

40

60

80

100

AL BA BG HR MK RO Serbia Mont. TR

2004 2005 2004 2005

Current account Gross external debt

27.3.06

33

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005

AL BA BG HR MK RO Serbia TR

Share of total foreign debt in GDP, 2000-2005in % 27.3.06

34

Anteil der privaten an der gesamten

Auslandsverschuldung, 2000-2006in %

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 III 2006

BG RO HR MK Serbien TR

Quelle: Nationalbank des jeweiligen Landes.

35

-20-15

-10-50

510

I Q03 II Q03 III Q03 IV Q03 I Q04 II Q04 III Q04 IV Q04 I Q05 II Q05 III Q05 IV Q05 I Q06

BG HR MK AL BiH

Reale Wechselkurse, 2003-2006 (EUR per NCU, VPI-deflationiert, Veränderung gegenüber Vorjahr)

-20

-10

0

10

20

I Q03 II Q03 III Q03 IV Q03 I Q04 II Q04 III Q04 IV Q04 I Q05 II Q05 III Q05 IV Q05 I Q06

RO Serbien

Anmerkung: Ansteigende Linie bedeutet reale Aufwertung.Quelle: wiiw-Monatsdatenbank, nationale Statistiken.

37

Bank credit to the private sector, 2002-04

Sources: IMF, International Financial Statistics; national data; BIS estimates.

3738

28

1820

16

1012

53

2

34

13

0

50

100

150

200

250

300

CS RO BG TR AL HU BA HR SI MK PL SK CZ EUR

0

5

10

15

20

25

30

35

40

45

Nominal growth (cumulative, in percent) (lhs) Real growth (compound rate, % per year) (rhs)

38

Bank credit to the private sector, 2000-04 (increase in percent of GDP, annual average)

6.0 6.05.1

3.62.7

1.90.9 0.9 0.6

0.1

-3.1 -3.2

3.9

4.3

-5.0

0.0

5.0

BG TR HR RO HU BA SI EUR AL PL MK CS CZ SK

Sources: National data; BIS estimates.

39

Real growth of credit, 2003-04(cumulative growth rate, in percent)

BGRO BA CS

AL SITR

HU MKHR CZ

PL SK-15

5

25

45

65

85 Enterprises

ROCS

BG AL TR

MKHU

BA SK CZHR SI PL

0

50

100

150

200

250

300 Households

Source: National data; BIS estimates.

40

Source: IMF; BIS estimates.

Commercial bank liabilities, 2002-04(annual pct change, quarterly average )

Time, savings and foreign currency deposits Foreign liabilities

-20

0

20

40

60

80

100

RO BG SK HR SI HU PL TR MK CZ

41

Capital controls

Quantitative restrictions Reserve requirements

Albania 10%

Bosnia and Herzegovina 15%

Bulgaria 23% per year increasing after the limit

Croatia 17 % to 55% (marginal)

Macedonia 10%

Montenegro 23%

Romania 35% to increase to 40%

Serbia 18% to 38% on foreign currency

42

Western Balkan free trade area

> Free trade area from January 1, 2007

> The area is small and the intra-regional trade is

segmented

> Distortions through different trade regimes with the EU

and the rest of the world

43

SEE trade: exports as % of total (2004)percentage point change in shares 2001-2004

of: ALB B&H BUL CRO MAC ROM S&M to:

Albania 0.1 -0.1 0.1 0.1 0.0 0.4

Bosnia & Herzegovina 0.0 -0.1 1.7 -0.1 0.0 4.6

Bulgaria 0.0 0.0 0.2 0.4 0.4 0.3

Croatia -0.2 8.2 0.4 2.2 0.6 2.1

Macedonia -0.3 -0.1 0.0 -0.2 -0.1 -2.1

Romania 0.0 -1.0 0.7 0.6 0.1 -2.4

Serbia & Montenegro 1.2 -3.1 -0.6 0.3 2.5 -0.4

EU-4* -6.5 3.4 -1.9 -2.5 -1.9 -1.4 0.4

SEE-7 0.8 4.1 0.3 2.7 5.3 0.5 2.9

Total change, USD bn 0.2 0.7 4.0 3.6 0.3 10.4 1.5

* EU-4 = Austria, Germany, Greece, Italy.

44

SEE trade: imports as % of total (2004)percentage point change in shares 2001-2004

* EU-4 = Austria, Germany, Greece, Italy.

of: ALB B&H BUL CRO MAC ROM S&M from:

Albania 0.0 0.0 0.0 0.0 0.0 0.1

Bosnia & Herzegovina 0.1 0.0 0.8 0.0 -0.1 0.1

Bulgaria -0.1 -0.1 0.2 3.3 0.0 -1.2

Croatia 0.3 3.9 0.2 0.8 0.2 0.0

Macedonia -0.3 -0.3 0.0 0.0 0.0 -4.1

Romania -0.1 0.0 0.0 0.9 0.0 -1.2

Serbia & Montenegro 0.6 3.5 0.0 0.4 2.1 -0.3

EU-4* -5.8 -1.1 4.0 -1.7 -1.9 -3.4 -1.0

SEE-7 0.4 7.0 0.2 2.2 6.2 -0.2 -6.4

Total change, USD bn 1.0 2.3 6.8 7.7 0.2 17.1 5.0

45

Exportanteile 2005 Veränderung der Anteile in Prozentpunkten, 2001-2005

von: ALB B&H BUL CRO MAC ROM S&M RUS

nach:

Albanien 0.1 -0.1 0.0 0.0 0.0 0.4 0.0

Bosnien und Herzegowina 0.0 -0.1 2.3 -0.3 0.1 5.0 0.0

Bulgarien 0.0 0.0 0.3 0.2 0.8 0.4 0.1

Kroatien -0.1 6.3 1.2 1.7 0.8 2.3 0.0

Mazedonien -0.3 -0.2 0.0 -0.2 0.4 -0.4 0.0

Rumänien 0.0 -0.1 1.0 0.8 0.0 -1.8 0.2

Serbien & Montenegro 1.2 -4.8 -0.6 1.2 -1.3 -0.3 0.4

Russland 0.1 -0.1 -0.4 -0.6 0.3 0.0 1.7

EU-4* -16.9 -5.9 -2.4 -4.6 8.3 -4.5 -2.7 -2.2

SOE-7 0.8 1.2 1.4 4.4 0.3 1.8 5.9 0.7

Gesamtveränderung, Mrd. USD 0.4 1.4 5.9 4.4 0.8 14.4 1.9 153.6

* EU-4 = AUT, GER, GRE, ITA.Quelle: IMF Direction of Trade Statistics.

47

Political challenges

> Unfinished process of disintegration

> Montenegro referendum

> Kosovo negotiations

> Bosnia and Herzegovina connection

> Regional integration

48

Stability

> Inflation speeding up

> Real exchange rates apreciating

> Policies mainly prudent

49

EU prospects

> The Hague Tribunal

> Stabilization and Association Agreement

> Democratization

> Threat of populism

50

SEE EU accession forecast

SAA Negotiations EU euro

Bulgaria

Romania

Croatia

Macedonia

Albania

Bosnia and Herzegovina

Serbia

Montenegro

Kosovo

1995 (EAA)

1995 (EAA)

2005

2004

2007

2007

2007

2007

2007

1999

1999

2005

2007

2010

2010

2010

2010

.......

2007

2007

2010

2012-2013

by 2015

by 2015

by 2015

by 2015

after 2015

2009

2012

2012

2015

by 2017

by 2017

by 2017

since 2002

since 2002