Convergence in the Western Balkans

18.03.2020
The fundamental objective of the EU since its inception has been reducing development disparities between regions. In doing so, particular emphasis was placed on rural areas, areas affected by industrial change and regions facing natural and demographic problems.
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(Stuart Chalmers, CC BY-NC)

(Stuart Chalmers, CC BY-NC)

Within the framework of cohesion policy for the period 2014-2020, the EU defines three key types of regions, namely less developed regions, transition regions, and developed regions. The countries of the Western Balkans, which are involved in European integration processes, are included in the group of the least developed areas, with the necessity to initiate development processes.

Convergence processes have always been pervading with deepening and expanding European economic integration. For the Western Balkan countries the full EU membership is their key long-term strategic goal. To achieve that this group needs to create conditions to define and implement comprehensive structural changes, thereby converging towards developed EU Member States.

The theory of convergence

The basis of convergence theories is that industrialized countries are becoming more and more similar despite their different positions in economic, political, and social terms. Developmental differences between countries arise from different inherited states, geophysical characteristics, ways of implementing certain policies, etc., which cause differentiated effects of the implementation of common or similar policies. It is necessary to reduce them which should increase the effectiveness of the policies implemented.

The subject of convergence is most often the real economy, as measured by economic growth indicators. However, convergence can also refer to different aspects of society and the economy such as the convergence of interest rates, education systems, and the convergence of information and communication technologies. Also, in modern business conditions, human capital is the most important factor in convergence. The achievement of structural convergence is largely conditioned by the existence of seven optimal currency area assumptions, which include the mobility of factors of production (labor), the similarity of inflation rates, the flexibility of prices and wages, trade openness and cross-border trade, interest rates, fiscal integration and alignment of business cycles.

Achieving structural convergence through the effects of the single (in the case of the EU Internal Market) market will result in positive effects in the form of an increase in the similarity of economic systems, which will be due to the effects of market instruments, such as competition policy, liberalization of the capital market, the exercise of other market freedoms, etc. Convergence is a complex and comprehensive process, with the primary aim of reducing and balancing developmental disparities between regions, with the ultimate goal of achieving economic growth, increasing productivity and improving living standards.

Contemporary economic developments and the challenges of European integration processes in the case of the Western Balkan countries pose new challenges, especially in the context of implementing new development paradigms based on contemporary sources of economic growth, to accelerate integration processes and achieve convergence and cohesion.

GDP growth

In the period 2008-2018, all Western Balkan countries experienced GDP growth per capita. According to the latest available data, Montenegro has the highest level of GDP per capita (USD8,761) and Serbia (USD7,234), while the lowest level is present in Kosovo (USD5,951). However, in comparison with the EU average, there are still considerable lags. Specifically, the EU average in 2018 was USD36,532, which is almost 6 times higher than the average in the Western Balkan countries. Furthermore, in the observed period, the Western Balkan countries grew at an average rate of 3.83 per cent per year, which is faster than the EU average (2 per cent). At the same time, Kosovo, Albania and Northern Macedonia have the highest average rates of economic growth, while economic growth is lowest in Bosnia and Herzegovina (BiH). This situation is in line with the basic assumptions of convergence theories, which point to faster growth in less developed countries.

Labor market

Observed countries, although some progress has been made compared to the beginning of the period, still face very high unemployment rates. According to this indicator, Kosovo (30.3 per cent) and Northern Macedonia (22.4 per cent) are on the leading position, while the situation is most favorable in Serbia (13.6 per cent) and Albania (13.7 per cent). The average unemployment rate in the observed countries is 26.9 per cent, which is almost four times higher than the EU average. Furthermore, an important indicator is the share of the employed population of 20-64 years. The highest employment rates in the Western Balkan countries are recorded by Albania (63.9 per cent), Serbia (63.1 per cent) and Montenegro (58.2 per cent), while the lowest in Kosovo (34.4). The average employment rate of the population 20-64 in these countries is 63.88 per cent, which is significantly below the EU average. Bearing in mind the EU target proclaimed in the 2020 strategy, which emphasizes the need to achieve an average employment rate of 20-64 year-olds of 75 per cent by 2020, it is evident that the observed countries must define and implement comprehensive labor market reforms to achieve progress and convergence.

With the identified unfavorable situation on the labor market, the population of these countries is also facing low levels of minimum wages. This situation results in unfavorable social phenomena, which are manifested primarily through widespread dissatisfaction with all segments of society and increased emigration, especially by young and educated people and increased levels of the population at risk of poverty and social exclusion. Available data on minimum wages indicate their increase in the observed period and it is evident that their level is the highest in Montenegro (EUR288.05), Northern Macedonia (EUR236.05) and Serbia (EUR253.10). If these data are compared with the EU Member States, it can be seen that the analyzed countries achieve minimum wage levels, which are higher than the levels in Bulgaria (EUR184.07) and Romania (EUR217.5), according to Eurostat data from 2019.

As noted above, the adverse labor market situation and low levels of minimum wages increase in the proportion of the population at risk of poverty and social exclusion. In the observed countries, the highest level of population at risk of poverty and social exclusion is present in Serbia (31.6 per cent), Montenegro (31.5 per cent) and Northern Macedonia (25.9 per cent). Such levels (except in Northern Macedonia) are well above the EU average, which stood at 22.4 per cent in 2017. When considering the standard of living, healthcare allocations should also be considered. Available data indicate that the highest levels were achieved in Bosnia and Herzegovina (9.23 per cent of GDP) and Serbia (9.14 per cent of GDP), which are slightly below the EU average (9.93 per cent of GDP). Other Western Balkan countries are at significantly lower levels.

The analysis of economic growth indicators, the labor market and standard of living has identified some positive developments. However, by comparing to EU development levels, which is a key strategic objective of this group of countries, it has been established that significant developmental differences are still present. The observed group of countries faces the challenge of overcoming the identified constraints. Such a situation requires orientation towards a group of so-called development indicators, which is also the focus of key European policies and strategies.

Education and productivity

Available data from European and national statistics indicate an increase in the level of investment in R&D over the observed period. However, these indicators are still at significantly low levels in the observed countries (especially in BiH). The exception is Serbia, which, with 0.93 per cent of GDP in R&D investment, achieves the highest level, but is significantly below the EU average (2.03 per cent of GDP). Investments in R&D should also be accompanied by appropriate levels of investment in education. Namely, relevant economic theorists emphasize the quality of human resources as one of the key preconditions for achieving convergence. Available data indicate relatively high values of this indicator in the observed countries, with Kosovo achieving the highest levels. Such values of the observed countries are achieved by levels well above the EU average (2.3 per cent of GDP in 2017). However, the sheer size of the investment is not enough to make progress and reduce development disparities. It should be focused on concrete goals and priorities, the realization of which will be manifested through positive economic and social effects.

Positive trends in the field of education are also evident in indicators of the population with completed tertiary education, which is increasing in the observed period. The highest values were recorded by Montenegro (34 per cent), Serbia (31.4 per cent) and Northern Macedonia (30.6 per cent). However, although some progress has been made, this indicator also shows a significant lag behind the EU average (40.7 per cent), which is one of the defined goals of Europe 2020. Increasing orientation towards investment in R&D, education and its products should consequently result in increased productivity. Available data indicate that the highest productivity growth was achieved by Montenegro, followed by BiHa and Albania. Other countries are reducing productivity.

When we look at the average of the whole period, the situation is even more negative. Only Albania, Montenegro and Kosovo have experienced productivity gains over the observed period, while in other countries they have experienced a fall. Also, looking at the average of all analyzed countries, it is evident that, despite increased investments in „modern sources” of economic growth, this group of countries achieves a decrease in productivity. This situation, as well as other challenges and constraints identified during this research, are the basis for defining and implementing complex structural changes that will trigger further convergence of this group of countries and support their further integration into the EU.

Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.


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