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Wiener Institut für
Internationale
Wirtschaftsvergleiche
The Vienna Institute for
International Economic
Studies
The Balkans: Turning the Corner
Vladimir Gligorov
www.wiiw.ac.at
2
Three Topics
 Growth and imbalances
 Regional trade liberalization
 Political risks
wiiw
3
Gross domestic product
real change in % against preceding year
2005
2006
Croatia
Macedonia
Turkey
4.3
3.8
7.4
4.5
3.2
5.0
4.4
4
5.5
4.4
4
6.5
Albania
Bosnia and Herzegovina
Montenegro
Serbia
5.6
5.5
4.3
6.2
4.8
5.3
4.5
5.8
5
5.7
5
5
5.5
5.5
5
5
Source: wiiw
2007
2008
forecast
wiiw
4
Quarterly GDP, 2004-2006
real change in % against preceding year
Some deceleration in the second half due to monetary policy
nervousness, but short term prospects are for improvement
HR
MK
TR
RS
16
14
12
10
8
6
4
2
0
Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06
Source: wiiw Database
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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
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6
Consumer price inflation, 2004-2006
year-on-year growth in %
Serbia and Turkey still facing challenges
HR
MK
TR
14
12
10
8
6
4
2
0
-2
-4
Jan-04
Jul-04
Source: wiiw Database
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
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Consumer price inflation, 2004-2006
year-on-year growth in %
Serbia and Turkey still facing challenges
AL
BA
ME
RS
20
15
10
5
0
-5
Jan-04
Jul-04
Source: wiiw Database
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
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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
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Current account, 2000-2006
in % of GDP
Current account deficits worsening
HR
MK
TR
4
2
0
-2
-4
-6
-8
-10
-12
2000
Source: wiiw Database
2001
2002
2003
2004
2005
2006
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Current account, 2000-2006
in % of GDP
Current account deficits worsening
AL
BA
ME
RS
0
-5
-10
-15
-20
-25
2000
Source: wiiw Database
2001
2002
2003
2004
2005
2006
wiiw
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Trade deficit, 2000-2006
in % of GDP
Trade deficits continue to be very large
HR
MK
TR
0
-5
-10
-15
-20
-25
-30
2000
Source: wiiw Database
2001
2002
2003
2004
2005
2006
wiiw
12
Trade deficit, 2000-2006
in % of GDP
Trade deficits continue to be very large
AL
BA
ME
RS
0
-10
-20
-30
-40
-50
-60
2000
Source: wiiw Database
2001
2002
2003
2004
2005
2006
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Future trade balance
based on export and import average 2003-05 growth in
Bosnia and Herzegovina
30.000
Millions of BAM
20.000
10.000
1.986
0
-10.000
-4.097 -3.145
-6.599 -6.514 -7.060 -5.711 -5.551 -5.253 -4.782
-1.866
-185
TB
Export
Imports
-20.000
-30.000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Goods and services
Source: Central Bank BiH
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Ratio between gross wages and GDP
per capita (log scale), 2004
5
Switzerland
5
Germ any United Kingdom
Norway
EU (15 countries)
Denm ark
Belgium Netherlands
Euro area
Lu xem bourg
Finland
Swe den
France
Cyprus
Spain
Greece
Gro ss Wa ge (log sca le )
5
4
4
Por tug al
4
Slo venia
Malta
Croatia
Hunga ry
4
Macedonia
BiH
4
Slovakia
Polan d
Czech Rep ublic
Latvia
Montenegro
Serbia
3
Rom ania
3
Bulgaria
3
3
3
3
4
4
4
4
4
5
5
5
GDP per c apita ( lo g scale)
Source: wiiw
wiiw
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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
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Share of total foreign debt in GDP, 2000-2006
in %
Foreign debt mostly stable, except in Croatia
HR
MK
TR
100
80
60
40
20
0
2000
Source: wiiw Database
2001
2002
2003
2004
2005
2006
wiiw
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Share of total foreign debt in GDP, 2000-2006
in %
Foreign debt mostly stable, except in Croatia
AL
BA
ME
RS
120
100
80
60
40
20
0
2000
Source: wiiw Database
2001
2002
2003
2004
2005
2006
wiiw
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Share of private foreign debt in total foreign debt, 2000-2006
in per cent
Private foreign debt continues to grow
HR
MK
TR
80
70
60
50
40
30
20
10
0
2000
Source: wiiw Database
2001
2002
2003
2004
2005
2006
wiiw
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Share of private foreign debt in total foreign debt, 2000-2006
in per cent
Private foreign debt continues to grow
RS
60
50
40
30
20
10
0
2000
Source: wiiw Database
2001
2002
2003
2004
2005
2006
wiiw
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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?
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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)
wiiw
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M1, Narrow money
in % of GDP
MK
HR
25
20
15
10
5
0
1999
Source: wiiw Database
2000
2001
2002
2003
2004
2005
2006
wiiw
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M1, Narrow money
in % of GDP
AL
BA
RS
30
25
20
15
10
5
0
1999
Source: wiiw Database
2000
2001
2002
2003
2004
2005
2006
wiiw
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Broad Money
in % of GDP
AL
BA
RS
80
70
60
50
40
30
20
10
0
1999
Source: wiiw Database
2000
2001
2002
2003
2004
2005
2006
wiiw
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Broad Money
in % of GDP
HR
MK
80
70
60
50
40
30
20
10
0
1999
Source: wiiw Database
2000
2001
2002
2003
2004
2005
2006
wiiw
26
Real appreciation*, 2004-2006
EUR per NCU, CPI-deflated, year-on-year growth in %
HR
MK
TR
20
15
10
5
0
-5
-10
-15
I Q 04 II Q 04 III Q 04 IV Q 04 I Q 05 II Q 05 III Q 05 IV Q 05 I Q 06 II Q 06 III Q 06 IV Q 06
* Increasing line indicates real appreciation.
Source: wiiw Database
wiiw
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Real appreciation*, 2004-2006
EUR per NCU, CPI-deflated, year-on-year growth in %
AL
BA
RS
12
10
8
6
4
2
0
-2
-4
I Q 04 II Q 04 III Q 04 IV Q 04 I Q 05
* Increasing line indicates real appreciation.
Source: wiiw Database
II Q 05 III Q 05 IV Q 05 I Q 06
II Q 06 III Q 06 IV Q 06
wiiw
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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
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GDP, employment, productivity 2000-2006
2000 = 100
With approximately five years delay, developments similar to
those in the NMS
Employment, LFS
GDP
Productivity
Candidates countries (HR, MK, TR)
130
120
110
100
90
2000
Source: wiiw Database
2001
2002
2003
2004
2005
2006
wiiw
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GDP, employment, productivity 2000-2006
2000 = 100
With approximately five years delay, developments similar to
those in the NMS
Potential candidate countries (AL, BA, ME, RS)
150
Employment, reg.
GDP
Productivity
140
130
120
110
100
90
2000
Source: wiiw Database
2001
2002
2003
2004
2005
2006
wiiw
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
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Structural Reforms: Issues




Low taxes?
Regulation and deregulation
Competition policy
Labour markets
wiiw
Wiener Institut für
Internationale
Wirtschaftsvergleiche
The Vienna Institute for
International Economic
Studies
Regional Trade Issues
Integration and specialization
www.wiiw.ac.at
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
wiiw
35
SEE export shares 2005, by sector
(manufacturing sectors by skills)
100.0
High skill industries
80.0
Medium skill/white collar
60.0
Medium skill/blue collar
40.0
Low skill industries
20.0
Electricity
0.0
Mining
AL
BA
BG
HR
MK
MD
Export shares, 2005
Source: wiiw
RO
CS
Agriculture/Forestry/Fishing
wiiw
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Change of SEE export shares 2000-2005
in percentage points, by sector (manuf. by skills)
10.0
High skill industries
5.0
Medium skill/white collar
Medium skill/blue collar
0.0
Low skill industries
Electricity
-5.0
Mining
Agriculture/Forestry/Fishing
-10.0
AL
Source: wiiw
BA
BG HR
MK
MD
RO
CS
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
wiiw
38
RCA within SEE & EU-25 region, 2005
top 5 sectors (manufacturing by skills)
5
High skill industries
4
Medium skill/white collar
3
Medium skill/blue collar
2
Low skill industries
1
Electricity
0
Mining
AL
BA
BG
HR
MK
MD
Top 5 RCA 2005
Source: wiiw
RO
CS
Agriculture/Forestry/Fishing
wiiw
39
RCA within SEE & EU-25 region
recent increases, top 5 sectors (manuf. by skills)
5
High skill industries
4
Medium skill/white collar
3
Medium skill/blue collar
2
Low skill industries
1
Electricity
0
Mining
AL
BA
BG
HR
MK
MD
RO
CS
Agriculture/Forestry/Fishing
Top 5 RCA increase 2000/2001-2004/2005
Source: wiiw
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
wiiw
41
RCA within SEE & NMS-10 region, 2005
top 5 sectors (manufacturing by skills)
5
High skill industries
4
Medium skill/white collar
3
Medium skill/blue collar
2
Low skill industries
1
Electricity
0
Mining
AL
BA
BG
HR
MK
MD
Top 5 RCA 2005
Source: wiiw
RO
CS
Agriculture/Forestry/Fishing
wiiw
42
RCA within SEE & NMS-10 region
recent increases, top 5 sectors (manuf. by skills)
5
High skill industries
4
Medium skill/white collar
3
Medium skill/blue collar
2
Low skill industries
1
Electricity
0
Mining
AL
BA
BG
HR
MK
MD
RO
CS
Agriculture/Forestry/Fishing
Top 5 RCA increase 2000/2001-2004/2005
Source: wiiw
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
wiiw
44
Revealed Comparative Advantage in SEE, 2005
top 5 sectors (manufacturing by skills)
5
High skill industries
4
Medium skill/white collar
3
Medium skill/blue collar
2
Low skill industries
1
Electricity
0
AL
BA
BG
HR
MK
MD
Top 5 RCA 2005
Source: wiiw
RO
CS
Mining
Agriculture/Forestry/Fishing
wiiw
45
Revealed Comparative Advantage in SEE
recent increases, top 5 sectors (man. by skills)
5
High skill industries
4
Medium skill/white collar
3
Medium skill/blue collar
2
Low skill industries
1
Electricity
0
Mining
AL
BA
BG
HR
MK
MD
RO
CS
Top 5 RCA increase 2000/2001-2004/2005
Source: wiiw
Agriculture/Forestry/Fishing
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
wiiw
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
wiiw
48
Political Risks
 Kosovo
 Bosnia and Herzegovina
 EU integration prospects
wiiw
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
wiiw
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)
wiiw