Governments across the Western Balkans will likely skirt deep and painful reforms and settle for slow economic recovery, despite much recent talk of a “new growth model” to overhaul their economies and lure investment.

The need for a new economic agenda in a region that exports mainly energy, metals and food and that has remained on the sidelines of mainstream Europe was driven home last week in unusually blunt remarks by the U.S. ambassador to Croatia.

“Changing the economic model is the most urgent priority facing Croatia today,” James Foley told an economic conference in Zagreb. “I do not mean to diminish the importance of Croatia joining the European Union … but nothing can be more important … than developing a productive economic model.”

Investors see potential in the Balkans because of a plethora of planned infrastructure or energy projects, but are put off by red tape, corruption and a lack of legal security.

“Recently, a potential U.S. investor with literally hundreds of millions to invest in Croatia’s tourism sector left the country after waiting five years for an answer from the government on a land lease issue,” Foley said.

All the Western Balkans countries except Albania were part of communist Yugoslavia, which disintegrated in the 1990s in ethnic wars that crippled the economy and kept investors away, until reformers came to power in Croatia and Serbia in 2000.

Now the fast growth of the 2000s, based on state investments and consumption and financed largely by foreign lending, is over. Production and export, new technologies and an investor-friendly environment are the new buzzwords — but analysts are sceptical.

“The whole region chronically suffers from a lack of export capacities,” said Hrvoje Stojic, an analyst at Hypo Group Alpe Adria. “Growth will come only with key reforms — welfare, pension, tax, labour — but changes will be slow.”

Croatia hopes to join the European Union in 2012, well before its eastern neighbours. Analysts say the government has identified all necessary reforms but is unlikely to implement them.

“They don’t have political will or the guts to enforce reforms. Instead, they will keep muddling through and it is similar across the region,” said a senior Western financial official with extensive knowledge of the Balkans.

SERBIA LEADS IN REFORMS

Despite slow reform across the region, governments are likely to manage to foot huge public spending bills in the next two years but later may face steeper borrowing costs unless investors see progress.

“In the short term, these countries have reasonably good financing/funding stories on the budget side. Over the longer term, though, the question is how the region is going to grow with much less foreign direct investment, credit and investment,” said Timothy Ash of the Royal Bank of Scotland.

“A sea change is required in terms of structural reforms… These are long-term issues, but demand progress now. The countries that address them sooner will benefit.”

However, few politicians have seriously advanced reformist agendas. As a result, the Balkans lags behind ex-communist peers in central Europe, which have reformed their economies, attracted investment and boosted exports.

ELECTION SHADOWS SERBIA’S REFORMS

Serbia, the biggest market with more than seven million people, last month endorsed a 10-year growth plan, proposing to increase fixed investments, reduce state spending, raise the share of exports and narrow the current account deficit.

Analysts in Serbia are sceptical, particularly as parliamentary elections due in early 2012 are already shaping the agenda and preventing dramatic reform.

“Substantial reforms would require cuts so deep that it would be too difficult to cope with, hence we will continue to exist within the realm of controlled chaos,” said Miroslav Zdravkovic of Belgrade’s Economics Institute.

Serbia froze public sector wages and pensions in 2009, under an International Monetary Fund programme. It has also allowed its dinar currency to devalue almost 30 percent to the euro in the past two years. Nine-month exports this year have risen 13 percent.

Yet most Balkan neighbours strive to keep their exchange rates stable even as exporters prefer weaker local currencies.

Instead, there is talk of ‘internal depreciation’ to bring input costs down, which means keeping a lid on salaries and restructuring the public sector — a risky strategy in countries where unemployment and relative costs of living are already high.

Gradual privatisation of socialist-era companies and slow fiscal consolidation are on the agenda, as is regional cooperation, which should bring more cross-border investments and create a bigger market.

“The Balkans has either to converge towards the EU with small and fragmented economies competing with each other … or embrace a model gaining from the economies of scale,” Albania’s central bank governor Ardian Fullani said in September.

By By Zoran Radosavljevic
(Reporting by Balkan bureaus, Writing by Zoran Radosavljevic, Editing by Adam Tanner/Ruth Pitchford)
REUTERS
December 2, 2010

• A Permanent Economic Emergency