How to Improve Economic Policy-Making in Western Balkans?

Lessons from the Global Economic Crisis

March 2012 | #21

by: Mr. Renzo Daviddi⁽¹⁾, Ms Naida Čaršimamović Vukotić⁽²⁾, Ms Irina Smirnov^(2)
(1)European Union Delegation to Bosnia and Herzegovina, ⁽²⁾PhD Candidate
pp: 25
ISSN: 2038-632X

Abstract

Pre-crisis high growth rates of the Western Balkans were fuelled by domestic demand financed through capital inflows from abroad. This, coupled with low domestic savings, increased vulnerability to the external shocks that followed.

Four main external transmission mechanisms relayed economic crisis to the region: global-scale exports collapse, reduction in remittances, reduced foreign bank lending, and sharp decline in foreign direct investments. Western Balkans public sector failed to provide an adequate response to the crisis. In absence of timely expenditure restructuring and consolidation reforms, most countries failed to adapt to a sharp revenue decline, resulting in deterioration of fiscal positions. There was no capacity for fiscal stimulus packages comparable to those of developed economies. Inability to adequately address the sharp revenue decline translated to most of these countries reverting to extensive borrowing. Although some of the financing was provided in support to public sector reforms, most of these reforms have been delayed. In addition, the failure to consolidate expenditures has, besides the reduction of public sector capital spending, crowded-out already insufficient private sector investments.

Main lessons for the future policy-making in the Western Balkans are as follows:

1. growth agendas need to be revisited to include: focus on the supply side of economy, improvements to total factor productivity through capital deepening, boosting domestic saving and attracting foreign financing for tradable and exporting sectors, as well as fiscal consolidation and increased effectiveness and efficiency of public sector;
2. productive investments need to be stimulated through investment climate improvement and encouraging investments into export-oriented and import-substituting sectors;;
3. infrastructure investments are needed;
4. productivity-enhancing investments need to be coupled with a skilled workforce (requiring investment in human capital, research and development, and education systems) , paid in line with its productivity; and;
5. inappropriate budgetary policies require immediate attention of the policy makers through definition of clear country-wide national priorities and freeing up fiscal space for capital expenditures conducive to private sector investments by reduction of current expenditures.

This should be supported by reinforced medium-term budget planning processes, documents and institutions, as well as by establishment of close monitoring of expenditure developments

Keywords

Western Balkans, economic crisis, policy-making, growth agenda, investment, fiscal policy

Table of contents

About PECOB’s people
Abstract
Keywords
Introduction*
1. How did the Western Balkans countries enter the crisis?
2. Economic crisis and policy (non-) response
3. Economic policy-making: what should be done differently?
3.1. Growth agendas need to be revisited.
3.2. Attracting and stimulating productive investments
3.3. Infrastructure investments
3.4. Productivity-enhancing investments
3.5. Inappropriate budgetary policies
4. Instead of a conclusion
References
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About the authors

Dr. Renzo Daviddi took up the position of the Deputy Head of the Delegation of the European Union to Bosnia and Herzegovina on 15 March 2011. He arrived at this position after having served for about four years as Head of the European Commission Liaison Office in Kosovo. He is not new to Bosnia and Herzegovina, having been previously posted in Sarajevo as the Head of Political and Economic Section of the EC Delegation. Before joining the European External Action Service, Dr. Daviddi held several positions within the Directorate General for Economic and Financial Affairs of the European Commission.

Dr. Daviddi has an extensive knowledge on the economic and political realities of countries in transition, and most notably of the Western Balkans. He has also a wide-ranging knowledge of Community policies and the functioning of the Union, especially EU enlargement. His previous academic career (at the European University Institute, at Bocconi University in Milan and European Institute of Public Administration in Maastricht) was mostly focused on international economic and financial matters and transition issues. He has published several articles and edited four books on transition economics and EU enlargement matters.

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Naida Čaršimamović Vukotić is Economic and Finance Expert on the EC-financed Project Horizontal Support to Coordination with International Financial Institutions in the Western Balkans and Turkey. Her recent research includes Assessment of Impact of Austerity Measures on National Investment Programmes in the Western Balkans and she is currently writing her PhD thesis titled “Essays on Effects of Fiscal Policy on Economic Activity”.

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Irina Smirnov is Economic Adviser with the European Union Delegation in Bosnia and Herzegovina. She is currently working on her PhD thesis titled “How far is Western Balkans from Real Economic Integration with the European Union?”

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