Competition in South Eastern Europe

Developing and strengthening institutions that engender vigorous inter-enterprise competition is essential to improving the investment climate and accelerating sustainable growth in South Eastern Europe (SEE). Along with key institutional reforms in three areas-greater financial transparency, accountability, and protection of property rights; more effective mechanisms to settle commercial disputes; and improved access of businesses to better quality and efficiently priced infrastructure services1-a more competitive business environment in SEE will help capitalize on the economic reform progress made to date and further enhance peace and stability in the region.

The European Union's trade-opening measures of 2001 have helped improve South Eastern European firms' access to Western European markets, and intraregional trade liberalization is also high on the policy agendas of South Eastern European authorities (World Bank 2003). However, in the absence of institutional reforms that propagate robust "behindthe-border" competition within and among countries in the region-by facilitating the entry of new firms, restructuring of noncompetitive businesses, and reorganizing or liquidating commercially nonviable firms that take up "economic space"-such trade opportunities will not be effectively realized.2

As discussed in chapter 1, most South Eastern European countries have chronically high rates of unemployment and low rates of job creation, which reflect and exacerbate the persistently high poverty rates in the region. The experience of many other transition economies is that institutional reforms that enhance enterprise competition-even reforms that provide opportunities for credible threats of entry by new competitors-discipline inefficient businesses to restructure and improve performance. Although there may be short-term social costs from greater enterprise competition and restructuring, particularly if social safety nets are inadequately developed,3 there is abundant evidence that, in the medium term, increased business rivalry and the presence of new entrants, including small and mediumsize enterprises (SMEs), are the main engines of job creation, growth, and prosperity.

This chapter assesses the incentives and constraints on competition in the eight South Eastern European countries (SEE8) that are the focus of this study and recommends policies for reform. In developing policy recommendations, the study relies on both at the aggregated level-through firm-level quantitative surveys (the two European Bank for Reconstruction and Development [EBRD]-World Bank Business Environment and Enterprise Performance Surveys, BEEPS1 of 1999 and BEEPS2 of 2002)-and at a disaggregated level-focusing on certain industry sectors through the 40 qualitative business case studies developed in the field. The chapter illuminates salient cross-country differences in the nature of competition across the eight economies and shows how South Eastern European firms both respond to and shape these differences. The chapter also highlights the evolution of cross-country changes in enterprise competition over time, focusing on changes between 1998/99 and 2002 (the two periods covered by BEEPS1 and BEEPS2). The aspirations of the South Eastern European authorities and investors (both domestic and foreign) necessitate progress beyond such narrow issues as administrative barriers to firm registration and licensing. To that end, the chapter focuses on the fundamental determinants of competition. A thorough diagnosis of basic market institutions and their effect on competition is essential for the design of "second generation" medium-term structural policy reforms.

In brief, our analysis concludes that many industrial firms in SEE are, in differing degrees, effectively immune to robust competitive market forces, not only because of administrative impediments, but also, more importantly, because of more entrenched institutional and structural ones. These impediments are especially found at the local level, where in many sectors horizontal and vertical market power is possessed by incumbent firms, some of which enjoy protection from both appreciable barriers to exit as well as high barriers to entry by new rivals. There is an apparent trend, however, that over the period under examination, competitive pressures within individual countries and the region as a whole are modestly increasing. The competition may be due to economywide structural reforms, including those in competition policy, and because of greater exposure of SEE8 firms to the international marketplace. Still, progress is considerably uneven among the countries, necessitating an extensive and ambitious set of reforms.

With respect to policy recommendations, we conclude that certain competition-enhancing reforms will apply to all the SEE8. However, given the economic (and political and social) heterogeneity of the SEE8, i...

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