Max Brändle and Michael Weichert (Eds.) A New Economic Agenda for Southeast Europe June 2018 Max Brändle and Michael Weichert (Eds.) A New Economic Agenda for Southeast Europe Zagreb 2018 Contents A New Economic Agenda for Southeast Europe: Policy Recommendations 5 Jens Bastian and Max Brändle Towards A Sustainable Economic Growth and Development in the Western Balkans 13 Milica Uvalić and Vladimir Cvijanović The Experiences of the Visegrad Economies with the FDI Dependent Competition State Model 35 Zoltán Pogátsa A Coherent Growth Policy Agenda for Bulgaria 49 Gancho Todorov Ganchev A Coherent Growth Policy for Croatia 65 Josip Tica A Coherent Growth Policy for Serbia 81 Jurij Bajec Slovenia – Towards a Coherent Growth Policy 91 Milan Martin Cvikl and Anton Rop A Coherent Growth Policy for Macedonia 107 Dragan Tevdovski About the Authors 119 A New Economic Agenda for Southeast Europe Policy Recommendations Jens Bastian and Max Brändle 1. Introduction One important point of the project was that there is no ’one size fits all’-solution for the economic and 1.1 The New Economic Agenda Working Group social challenges of the countries in Southeast Eu- rope, there is not one medicine that is the panacea This volume is based on the work and discussions for all problems of the region. We rather started of a working group that has gathered with the as- from the insight, that the usual medicine of neo-lib- sistance of Friedrich-Ebert-Stiftung. Its aim was to eral economic policy measures did not deliver the describe the economic challenges and solutions intended results in the respective countries. towards more sustainable, qualitative and inclusive Therefore, we decided to dig deeper empiri- growth for Southeast Europe. The development gap cally and recalibrate the conceptual emphasis. Five towards Central Eastern Europe as well as towards county studies with a focus on Bulgaria, Croatia, the EU average remains huge. In order to bridge Macedonia, Serbia and Slovenia, as well as two re- this gap, the Wester Balkans need to make better gional studies, one for Southeast Europe and the and more differentiated use of foreign direct invest- other on Central Eastern Europe, have been written ments, the EU has to devise its funds for the region in the process; these studies are published together in a more targeted and sustainable way, the govern- with this paper in book form by Friedrich-Ebert- ments of the region have to develop industrial poli- Stiftung. This paper is not a manifesto of the New cies for their respective countries as well as for the Economic Agenda-working group; it rather presents region as a whole, and, finally, the instruments of key findings, points out policy recommendations monetary and fiscal policy have to be revised. and wants to have an impact on the debate about This paper presents central insights of our de- European integration of Southeast Europe. It does liberations and provides concluding policy recom- not necessarily reflect the opinion of all the indi- mendations which are based on the discussion this vidual experts and authors involved in the project. working group, a circle of economists, sociologists, The Friedrich-Ebert-Stiftung would like to and political scientists from Southeast Europe and thank all the experts who have contributed to this Germany. This working group has met on several process: Franz-Lothar Altmann, Mihail Arandaren- occasions since the end of 2015 until the spring of ko, Jurij Bajec, Jens Bastian, Max Brändle, Vladimir 2018 in Zagreb, Skopje, Ljubljana, Bucharest and Cvijanovic, Milan Cvikl, Gancho Ganchev, Vladimir Sofia on the invitation of Friedrich-Ebert-Stiftung. Gligorov, Velibor Mačkić, Jože Mencinger, Jelica 5 Jens Bastian and Max Brändle Minic, Paul Stubbs, Dusan Reljic, Zoltan Pogatsa, 1.3 Breaking the Power of Patronage Networks Anton Rop, Dragan Tevdovski, Josip Tica, Milica Uvalic, Michael Weichert, and Nenad Zakosek. After years of democratic stagnation in the Western Balkans, the new Macedonian government that took office in May 2017 constituted the first democratic 1.2 Sustainable, Qualitative and Inclusive transfer of power in the region after four years. It Growth for Southeast Europe also represents a break with the success of auto- cratic rule. The Macedonian moment stands out and Various countries in Southeast Europe are cur- has the opportunity of setting an example. The sub- rently witnessing their fastest economic expansion sequent improvement of the Bulgarian-Macedonian for nine years. Romania grew 8.8 per cent year on relations further nourishes this hope. New ideas, year in the third quarter of 2017, primarily based on progressive leadership and genuine vistas for coun- increased government spending on pensions and tries in the region need to come forward as a change rising public sector salaries which stoked a boom in of political culture in the Western Balkans. Without private consumption. Serbia’s economy is project- doubt, the transfers of power focus not only on in- ed to grow by three per cent in 2017. The economic dividuals and their ability to deliver. Breaking the growth forecast for Macedonia was 1.9 percent in power of patronage networks is essential as they 2017 and 3.2 percent for 2018. In Kosovo, annual constitute the main transmission channels between output growth reached 4.4 per cent in the third politics and citizens across the region. Thus, struc- quarter of 2017 and Bosnia and Herzegovina grew tural change in politics is about making government at 2.9 per cent. Montenegro grew at a robust 4.7 more transparent and accountable. The renewal of per cent while annual GDP in Albania was forecast democratic rule in various Balkan states remains a at 3.5 per cent. work in progress which will require joint efforts at Still, as impressive as the quarterly GDP num- the domestic level and EU mediation, social move- bers appear, the economic recovery is fragile, con- ments and protests as well as international efforts. strained to specific sectors, while unemployment remains high and a lending recovery by commercial banks has yet to expand from large enterprises to 1.4 Re-Energize the EU-Enlargement Process medium and small-sized businesses. After a pro- longed and difficult transition path from the late The European Commission presented a strategy 1980 until the economic crisis, the countries in paper in February 2018 which aims to jump-start Southeast Europe are not yet on a development the stalled EU-accession processes in the Western path which guarantees future socio-economic Balkans. EU enlargement has always been pro- prosperity. Limited competitiveness on world mar- moted as a driver of domestic reform capacity. The kets, jobless growth, increasing social problems roadmap of accession now includes a timetable for and the consequences of extreme deindustrializa- 2025 – in the best case – for front running countries tion remain key structural problems of the region. such as Serbia and Montenegro. This seems like a Furthermore, economic growth is by no means last chance for the EU to present a clear road-map a guarantee of social cohesion. Social protection for the European integration of the Western Bal- systems across Southeast Europe are fragile and kans. It has to be a clear objective of the EU to leave unable to offer an adequate safety net against risks no country behind. such as unemployment, disability and again, let The prospect of EU membership must not only alone be a springboard to social and economic rein- be a driver for domestic reform, but also for more tegration. Rather than just strive for increased eco- intensive regional cooperation, also in the areas of nomic growth, the countries of the region should research and development, energy, transport, ag- aim for a more balanced model of development and riculture and for a regional industrial policy. The implement redistributive policies that can combat initiative for a Regional Economic Area is a step in mounting social problems and secure decent living the right direction. A failure of this path towards EU standards. The good news is that growth is back in integration, or an excessively slow pace of enlarge- Southeast Europe. But this alone is not the solu- ment raises the question of geopolitical competi- tion to the economic and social challenges. What tion in the region with Russia, Turkey, China and the countries in Southeast Europe, and especially the Gulf Arabs as actors with their own interests in the Western Balkan EU candidate and association Southeast Europe. countries need is sustainable, qualitative and inclu- It is encouraging to see that the EU’s renewed sive growth. enlargement policy is now based on three pillars, 6 A New Economic Agenda for Southeast Europe namely public administration, the rule of law and sources, many countries in the region will see economic governance. The deterioration of demo- therein opportunities and choices, while tend- cratic standards and attacks on the independence ing to downgrade the perception of risks. It is of the judiciary in some countries of the Western important to see that the growing trade deficits Balkans cannot be further ignored by policy makers of countries in Southeast Europe with China and in Brussels. But unless the new Enlargement Strat- rising lending dependency from state-owned egy can contribute to enhance fragile economic Chinese policy banks for infrastructure projects growth and improve social progress in the region, do not necessarily constitute a ‘win-win’ combi- it risks being seen by many as yet another futile in- nation for all parties involved. Moreover, such stitutional exercise. a pivot towards Beijing must comply with rules and regulations that are based on the priorities of the European Union accession process for 2. Policy Recommendations for countries in the Western Balkans. Sustainable, Qualitative and Inclusive Growth 2.2 The Role of EU Funding and International 2.1 The Role of Foreign Direct Investment Financial Institutions (IFI) (FDI) in Supporting Sustained Growth Foreign Direct Investment can only be one source The economic recovery in Southeast Europe contin- of financing for Southeast Europe.