The Balkans: Turning the Corner

1. The Balkans: Turning the Corner Vladimir Gligorov

2. Three Topics Growth and imbalances Regional trade liberalization Political risks

3. Gross domestic productreal change in % against preceding year Source: wiiw

4. Quarterly GDP, 2004-2006real change in % against preceding year Some deceleration in the second half due to monetary policy nervousness, but short term prospects are for improvement Source: wiiw Database

5. Imbalances: real and imagined Inflation should not present a problem, partly because fiscal balances should not present too much of a problem Serbia as an exception when it comes to wage inflation

6. Consumer price inflation, 2004-2006year-on-year growth in % Serbia and Turkey still facing challenges Source: wiiw Database

7. Consumer price inflation, 2004-2006year-on-year growth in % Serbia and Turkey still facing challenges Source: wiiw Database

8. Imbalances: real and imagined Trade and current account deficits can be sustainable because Exports are continuing to grow Remittances are increasing Savings seem to be increasing too

9. Current account, 2000-2006in % of GDP • Current account deficits worsening Source: wiiw Database

10. Current account, 2000-2006in % of GDP • Current account deficits worsening Source: wiiw Database

11. Trade deficit, 2000-2006in % of GDP • Trade deficits continue to be very large Source: wiiw Database

12. Trade deficit, 2000-2006in % of GDP • Trade deficits continue to be very large Source: wiiw Database

13. Future trade balance based on export and import average 2003-05 growth in Bosnia and Herzegovina 30.000 20.000 10.000 TB 1.986 Export 0 Millions of BAM -185 Imports -1.866 -3.145 -4.097 -4.782 -5.253 -5.551 -5.711 -6.599 -6.514 -7.060 -10.000 -20.000 -30.000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Goods and services Source: Central Bank BiH

14. Ratio between gross wages and GDPper capita (log scale), 2004 Source: wiiw

15. Imbalances: real and imagined Though the external balances may be sustainable, foreign debt development may present problems due to mostly fixed exchange rate regimes Comparison with Turkey It is not clear, however, what is the level of debt tolerance for these countries Croatia as an example

16. Share of total foreign debt in GDP, 2000-2006in % • Foreign debt mostly stable, except in Croatia Source: wiiw Database

17. Share of total foreign debt in GDP, 2000-2006in % • Foreign debt mostly stable, except in Croatia Source: wiiw Database

18. Share of private foreign debt in total foreign debt, 2000-2006in per cent • Private foreign debt continues to grow Source: wiiw Database

19. Share of private foreign debt in total foreign debt, 2000-2006in per cent • Private foreign debt continues to grow Source: wiiw Database

20. Imbalances: real and imagined Credit growth, or rather the speed of growth, has raised concerns Was Schumpeter right? Or, should poor country be poor in terms of credit too?

21. Fear of Bubbles What are bubbles? Interests and prices out of step with each other Monetary policy response mostly risk averse An example of Albania (perhaps)

22. M1, Narrow moneyin % of GDP Source: wiiw Database

23. M1, Narrow moneyin % of GDP Source: wiiw Database

24. Broad Moneyin % of GDP Source: wiiw Database

25. Broad Moneyin % of GDP Source: wiiw Database

26. Real appreciation*, 2004-2006EUR per NCU, CPI-deflated, year-on-year growth in % * Increasing line indicates real appreciation. Source: wiiw Database

27. Real appreciation*, 2004-2006EUR per NCU, CPI-deflated, year-on-year growth in % * Increasing line indicates real appreciation. Source: wiiw Database

28. Imbalances: real and imagined Imbalances in the labour market are real Private employment is still too scarce Serbia as an example Macedonia as an example Albania and Kosovo and the issue of migration

29. GDP, employment, productivity 2000-20062000 = 100 With approximately five years delay, developments similar to those in the NMS Candidates countries (HR, MK, TR) Source: wiiw Database

30. GDP, employment, productivity 2000-20062000 = 100 With approximately five years delay, developments similar to those in the NMS Potential candidate countries (AL, BA, ME, RS) Source: wiiw Database

31. Growth prospects Over the medium run growth should accelerate to above 5%, regional average Investment should take over from consumption Exports should continue to grow by double digits

32. Structural Reforms: Issues • Low taxes? • Regulation and deregulation • Competition policy • Labour markets

33. Regional Trade Issues Integration and specialization

34. Topics • SEE export shares by sectors and labour skills content • Revealed Comparative Advantage status and development of top 5 SEE export sectors • ... relative to the SEE region, NMS-10 and EU-25 • Tentative conclusions

35. SEE export shares 2005, by sector (manufacturing sectors by skills) Source: wiiw

36. Change of SEE export shares 2000-2005 in percentage points, by sector (manuf. by skills) AL BA BG HR MK MD RO CS Source: wiiw

37. SEE Export shares • Main exports still from low skills industries • Recent development shows a change from low to medium skills industry exports • General skills upgrading

38. RCA within SEE & EU-25 region, 2005top 5 sectors (manufacturing by skills) Source: wiiw

39. RCA within SEE & EU-25 regionrecent increases, top 5 sectors (manuf. by skills) Source: wiiw

40. RCA within SEE & EU-25 region • Main specialisation in low skills industry, agriculture/forestry/fishing and mining export sectors • Development in recent years: a bit less specialisation in low skills industry exports and more in medium skills • … comparable to the overall export shares picture

41. RCA within SEE & NMS-10 region, 2005 top 5 sectors (manufacturing by skills) Source: wiiw

42. RCA within SEE & NMS-10 region recent increases, top 5 sectors (manuf. by skills) Source: wiiw

43. RCA within SEE & NMS-10 region • Main specialisation in low skills industry and mining export sectors • Development in recent years: a bit less specialisation in mining exports and more in medium skills white collar industry exports • Compared to other transition countries more specialisation in natural resources but first signs of upper medium skills catching up

44. Revealed Comparative Advantage in SEE, 2005 top 5 sectors (manufacturing by skills) Source: wiiw

45. Revealed Comparative Advantage in SEErecent increases, top 5 sectors (man. by skills) Source: wiiw

46. Revealed Comparative Advantage in SEE • Main specialisation in low skills industry, mining and medium skills white collar export sectors • Development in recent years: much less specialisation in mining and low skills exports and more in medium skills white collar and even high skills industry exports • There is a regional diversification in trade specialisation and labour skills allowing for improved labour skill content in exports

47. Tentative Conclusions • Recent development of export shares and RCA’s suggest a general skills upgrading in SEE export industries • Stronger SEE regional diversification in trade specialisation and labour skills might hint at first structural effects of the regional Free Trade Agreements in recent years

48. Political Risks Kosovo Bosnia and Herzegovina EU integration prospects

49. Kosovo and the Other Political Risks • Kosovo’s new status to be decided in the next couple of months • The aim is regional and international normalization • EU to take over key responsibilities • Constitutional reform in Bosnia and Herzegovina moving forward rather slowly • Democratization still not complete

50. EU integration • SAA agreements signed with Montenegro and perhaps with Bosnia and Herzegovina later this year • SAA with Serbia also possible this year • Speed up of the process possible in the first half of 2008 (Slovenian presidency)