Institutional Aspects of the South Eastern European Economy: Introduction, Trends, and Scope of the Study

Background

Accelerating growth and reducing poverty through the establishment of a stable, transparent, and uniform investment framework are key to restoring and consolidating peace and stability in South Eastern Europe (SEE). Low levels of domestic and foreign investment have constrained economic development in the region. Evidence from enterprise surveys and diagnostic studies, as well as from many anecdotal sources, shows that the cost of doing business in SEE is too high and discourages private investment.

South Eastern European countries and their development partners have recognized explicitly the importance of improving the investment framework in the region. All of the beneficiary members of the Stability Pact-which is a political declaration of commitment and a framework agreement on international cooperation among more than 40 partner countries and organizations-have committed to developing a shared strategy for stability and growth in SEE.1 As part of the Stability Pact, the countries of SEE intend to implement the Investment Compact, which includes important legislative and administrative commitments for advancing the region's economic and business environment.2 Improving the investment framework in SEE not only is important; it also is urgent for two reasons. First, the European Union (EU) has greatly expanded trade access to the single European market, both for the accession countries (Bulgaria and Romania) and for the five western Balkan states (Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, and Serbia and Montenegro) and Moldova. Simultaneously, liberalization of intraregional trade has gained new momentum with the signing of the Memorandum of Understanding on Trade Liberalization and Facilitation by Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Moldova, Serbia and Montenegro, and Romania. Only if investment increases substantially will it be possible to seize the opportunities created by these developments.

The second reason for urgency is the close association of high unemployment rates and insufficient job creation with high rates of persistent poverty throughout the region, which endangers social stability and could thus undermine the prospects for growth.

In the study that is the focus of this book, we analyze eight countries (the SEE8): Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Moldova, Romania, and Serbia and Montenegro.3 We cover the institutional impediments to investment and private sector development in the SEE8 and suggest policy reforms to ease these constraints. The premise of the study is that an institutional framework that is favorable for domestic and foreign investments is essential to achieve sustainable growth and alleviate poverty in the region.

In this chapter, we describe the recent economic trends in the SEE8 and their prospects for international and intraregional integration. We present our understanding of the role of the institutions and economic environment that affect enterprise development and growth in the SEE8 and describe the objectives, scope, and organization of the study.

Trends in the SEE8 Economies

Dynamics of Output by Sector

The recent progress in privatization and structural reforms in South Eastern Europe indicates that the region has recovered from the deep and lengthy recession of the 1990s. Most of the economies of the region have experienced relatively sustained growth, although in some cases that growth is still somewhat fragile, especially since the end of the Kosovo conflict in 1999 (see table 1.1).

[SEE TABLE 1.1 AT THE END OF THE DOCUMENT]

Most of the 1990s were characterized by dramatic collapses of output. The occasional periods of economic stability were backed by subsidies to the state-owned industrial sector, which increased fiscal and current account deficits, or by extensive borrowing from abroad. In 2001, the SEE8 had reached only 74 percent of its pretransition (1989) level o...

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