Launch of a World Bank Report.
The countries of the South East Europe (SEE6) region exited from recession in the first half of 2013, led by improved export performance, according to the latest World Bank South East Europe Regular Economic Report. Average growth of real income of the six countries rebounded from negative 0.7 percent in 2012 to 1.8 percent (year-on-year) in the first half of 2013, due to the nascent recovery in the Eurozone. Favorable weather conditions supported a strong contribution of agricultural output to economic growth and helped weaken inflationary pressures. The report notes on the downside, that domestic demand remained depressed across the region, reflecting high unemployment, sluggish growth of household incomes and credit, and a difficult investment climate. Beyond these short-term factors, a slowdown in productivity growth and rising unit labor costs adversely affected economic growth, lowering competitiveness and demand for labor. With depressed demand, uncertain export prospects, and significant external risks, the SEE6 short-term outlook remains frail.
Beyond this difficult short-term horizon, how can SEE6 raise their longer-term growth prospects? The report stresses that while maintaining macroeconomic stability remains a top policy priority, structural reforms will have to be pursued with vigor. The nascent export-led growth of 2013 is a positive development, but sustaining it will be a challenge. In addition to the need to improve their fiscal positions, reduce public debts, and strengthen banking systems, SEE6 face significant structural challenges in improving productivity and competitiveness, including in the areas of the investment climate, the labor market, and the public sector.
Overcoming these challenges is possible. A similar structural transformation challenge has been successfully met by the Baltics, Poland, the Czech Republic, and Slovakia, among other countries. They began their transition two decades ago under unfavorable conditions and now enjoy dynamic, open, and export-oriented economies with large FDI and associated transfer of technology and know-how. With the recent progress of candidate countries Montenegro and Serbia, and the agreement between Serbia and Kosovo presaging greater stability and security, the perception of the regional investor risk may decline gradually over time. Croatia’s accession to the European Union, the opening of the accession process of Serbia, and the progress made by Montenegro, as well as recent political changes in the region, may provide a renewed impetus for reforms. The time to use that opportunity is now.
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