NATO Parliamentary Assembly
HomeDOCUMENTSCommittee Reports2011 Spring Session084 ESCEW 11 E - THE BALKAN ECONOMIES: REGIONAL ROADBLOCKS, EUROPEAN DISTRACTIONS AND GLOBAL CRISIS

084 ESCEW 11 E - THE BALKAN ECONOMIES: REGIONAL ROADBLOCKS, EUROPEAN DISTRACTIONS AND GLOBAL CRISIS

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DRAFT REPORT BY JOHN SEWEL (UNITED KINGDOM)
RAPPORTEUR*

I.  INTRODUCTION 
II.  GROWTH, UNEMPLOYMENT, REMITTANCES, BALANCE OF PAYMENTS AND BUDGETS 
III.  THE EUROPEAN DIMENSION 
IV.  A SNAPSHOT OF NATIONAL CONDITIONS 
V.  ALBANIA 
VI.  BOSNIA AND HERZEGOVINA 
VII.  CROATIA 
VIII.  THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA 
IX.  KOSOVO 
X.  MONTENEGRO 
XI.  SERBIA 
XII.  TENTATIVE CONCLUSIONS 
BIBLIOGRAPHY 

 

 


 

I.               INTRODUCTION

1.  Over the past two years, this Committee has taken a particularly hard look at the global financial and economic crisis in order to explore its impact both on NATO member governments and the broader strategic environment in which its members operate.  This has been the most severe global economic crisis in the post-war era, and in many areas the recovery remains fragile.  Indeed, what began as a banking crisis and evolved into a severe global recession has now triggered a serious debt and fiscal crisis which has fomented grave uncertainties on both sides of the Atlantic.  These matters are clearly dominating domestic politics in NATO and EU member countries, and deflecting attention away from conditions in countries lying outside the “membership space”. 

2.  This is certainly the case for the Western Balkans, which were the object of central NATO concern over the course of the 1990s after a series of wars killed over 100,000 people.  That region’s problems remain formidable, and the ultimate outcome of their political and economic transition is of direct interest to the West. The Western Balkans now must cope with a global economic downturn that has struck their economies in a particularly harsh fashion. These countries lack the reserves, social safety nets, access to credit and financial leverage of many other European countries and so have had fewer options to cope with crisis.  With many people already living in economically precarious circumstances, a crisis of this proportion invariably pushes many into poverty. Finally they are politically fragile so the crisis has threatened basic political stability in several countries.

3.  Although Western Balkan states are extraordinarily heterogeneous, they are confronted by a range of common challenges that condition political life throughout the region. Each is in the midst of four different and daunting transformations: a post-communist transition; a post-conflict reconstruction; social, economic and political modernization requiring the mobilization of civil society and the state in radically new ways for the region; and finally each is working toward full integration in Euro‑Atlantic institutions. Although these are often considered complementary process, they are nonetheless difficult to implement simultaneously; all the more so for under-developed states that emerged out of a communist order and those which must build state institutions from scratch. Undergoing just one of these transformations, would, in itself, pose a serious challenge. Undergoing all four simultaneously is extraordinarily taxing, and it is not surprising that doing so has not been a smooth and easy process, although in terms of economic growth over the past decade the general trend for most of the region has been positive.

4.  The economic, social and political profile of the Western Balkans is distinct from most emerging economies.  Most of the region’s countries have universal primary education, high literacy rates, reasonably well developed transportation links and public health systems, and reasonably efficient agricultural systems. More importantly, their populations are rapidly aging, and because of high unemployment rates several Balkan countries are exporting both skilled and unskilled labour while importing capital. Their challenge is thus not so much to develop in the classical sense as to redevelop in a manner that puts scarce and long misallocated factors of production to far more efficient use (Slay). They must also develop a physical and human capital base that is appropriate for flourishing in a global market rather than in a centrally planned economy. This requires capital reallocation and in many important ways a cultural shift. Change is underway throughout the region but the process is slow and uneven, particularly in those countries most beset by political paralysis and corruption (Slay).

5.  There is an educational dimension to the challenge as well. Transforming the region’s secondary university systems so that they are preparing young people to flourish in a global order is an expensive undertaking. This is already a key challenge for many Western countries, but all the more so for those with very scarce resources, communist legacies, and even insufficient human capital to carry out educational change. The old education systems in the Western Balkans strongly emphasized vocational training and industrial engineering. A decade of war and instability delayed the reform of these institutions, and in countries like Serbia a generation was essentially lost because of this failure (Arandarenko).

6.  Unlike more developed countries, the countries of the Balkans lack fiscal reserves and access to the kind of credit that their Western counterparts enjoy. The global economic crisis has thus struck hard at the real economy, and as a result, most of the countries of the region have undergone a recession—some deeper than others. The problem is that conditions prior to the crisis, although clearly improving, were nonetheless difficult. Unemployment throughout much of the region was very high, while rapid and sustained growth had long been seen as essential to driving down joblessness.  Social safety nets throughout the region are not particularly robust and are a target for reform.  But again, undertaking such fundamental systemic transformations become far more difficult during a downturn, particularly as the risk of political backlash mounts.

7.  As suggested above, the Western Balkans bears a far more burdensome transition legacy than does Central Europe. The former Yugoslav state had papered over but never reconciled fundamental ethnic and sectarian schisms. The ensuing Balkan wars exacted a huge toll on all sides, for which the people of the region are still paying a very high price.  It is now recognized in EU circles that Europe ’s reluctance to mobilize its power and resources for the sake of peace in the region in the early 1990s was very much part of that tragic narrative. In the wake of these terrible wars, great strides were made to provide remedies. Years after NATO had intervened to halt violence in Bosnia and later in Kosovo, the EU’s Thessaloniki Summit finally endorsed the goal of integrating the Western Balkans into the European family of nations.  Seven years later, the countries of the region are now on the path to eventual accession to the EU, although they are positioned in a staggered fashion. At the same time, membership aspirations have become a common organizing principle for the region’s governments and a force for reconciliation among them.  In many, but not all respects, the lessons of the 1990s have been learned and internalized in Europe and in the region.

8.  The road to membership, however, is rocky, and only Croatia seems close to achieving the basic qualifications to that end.  The others face daunting challenges which have been made all the more daunting due to the global economic crisis and internal problems within the EU. These include the debt crisis, problems of governance and corruption in several new member states, and enlargement fatigue among some EU governments and their publics. Leading parties in Germany and the Netherlands, for example have recently called for an indefinite halt to enlargement after Croatia ’s expected accession sometime over the next three years (EIU). Governance and corruption problems across the West Balkans, ongoing ethnic tensions particularly in Kosovo and Bosnia and Herzegovina (BiH), unsatisfactory levels of media freedom, weak state institutions, the persistence of pre-modern clan structures that undermine modern notions of citizenship and a true sense of the state among ruling elites, structural rigidities, corruption and pervasive organized crime are all militating against the rapid integration of this region into the European Union. These shortcomings remain a source of concern in Euro-Atlantic circles. 

9.  Finally, much work still needs to be done to sort out the wartime legacy. This is particularly evident in BiH and in Kosovo.  In both cases, large minorities have refused to reconcile themselves to the states in which they are settled, thus challenging the fundamental legitimacy of those states.  Serbia itself has adamantly rejected the secession of Kosovo, and as long as this is the case, that country will not meet the core Copenhagen criteria of enjoying fixed borders and good neighbourly relations.  Adding to this particular problem is the fact that not all EU members have recognized Kosovo.  For their part, the leaders of the Republika Srpska seem intent on undermining the federal institutions of BiH and have publicly and repeatedly challenged that state’s legitimacy. Indeed, political leaders from all three large ethnic communities in that country seem intent on fostering inter-community suspicion rather than reconciliation and continue to use latent and deeply-held ethnic fears to mobilize political support. 

10.  The very structure of certain states is part of the legitimacy problem. In the eyes of many outside observers, the constitutional structure put together at Dayton for the purpose of ending an appalling war now seems entirely unworkable as a framework for building a functioning and legitimate state and thus totally unsuitable for moving BiH towards EU accession. These deficiencies make reconciliation all the more difficult. One of the features that distinguish at least several Western Balkan candidate countries from Central European countries like Hungary and Poland is that these countries are still in the process of fundamental nation building. Croatia and Serbia are two partial exceptions.  Nation building itself is an historic undertaking and most European countries have had centuries to develop their national identities, political cultures and institutional structures.  The Western Balkans, however, are on a far tighter schedule.  Although the Euro-Atlantic Community is providing a great deal of support and encouragement, such highly complex and multifarious processes cannot simply be imposed from above or from beyond.  These countries must now also contend with grave economic uncertainties, some of which are subjecting core EU Programmes, including enlargement, monetary union and the Maastricht criteria for public deficit and debt levels, to renewed scrutiny.  Hence the potential barriers to full Western Balkan participation in the life of Europe remain formidable and the target at which these countries are aiming may, itself, be a moving one.

 

II.      GROWTH, UNEMPLOYMENT, REMITTANCES, BALANCE OF PAYMENTS AND BUDGETS 

11.  In Central and Eastern Europe, the process of abandoning Communist models of economic organization invariably precipitated serious recession. Because capital and labour were so fundamentally misallocated in centrally planned economies, the process of reallocating resources generally triggered deep recessions. This was the inevitable cost of moving toward more efficient allocative models. Of course, the Balkan wars and economic sanctions delayed and then distorted this vital phase of transition.  In economies dominated by war lords and subject to international sanction, for example, criminal groups and cronies of the political establishment, rather than genuine entrepreneurs, managed to seize the means of production and gain a stranglehold on trade routes and commerce.  The economic toll on the region was extraordinarily high not only due to the legacy of criminal engagement in national economic life, but also because transition itself was delayed.   

12.  Despite this very tragic start to the transition process, prior to the explosion of the global financial and economic crisis in 2008, most Western Balkan economies were enjoying relatively strong growth rates of between 5 and 7%. Between 2005 and 2007 the average annual growth rate for all the Balkan countries was higher than that of the EU. Montenegro was the region leader, growing at about 10% per annum in that period. In 2008 when a number of EU countries began to slip into recession, the Western Balkans growth continued, although at a slightly lower level approaching 5% as compared to an EU average of 0.7% (Lessenski). The delayed arrival of the crisis simply reflected the fact that the region is not deeply integrated in global financial markets and its banks were not engaged in the kind of practices that first triggered the crisis in the West.   Eventually and indeed, unavoidably the crisis did strike the region and its impact has been particularly harsh. The crisis transmission mechanism, however, was not the banking and financial system as such, but rather the serious decline in export markets in Europe, the precipitous fall in remittance payments – or those wages and savings repatriated by West Balkan émigré communities living in Europe – and the collapse of foreign direct investment, which has under‑girded recent growth and development in the region.

13.  Only in 2009 did the full force of the global crisis strike the West Balkans.  All countries in the region returned to growth in 2010 except for Croatia. The region’s economic recovery is expected to strengthen in 2011.

 

 

2006

2007

2008

2009

2010

2011

(expected)

Albania

5.5

5.9

7.7

3.3

3.1

3.7

Bosnia

6.1

6.1

5.7

-3.1

0.8

2.1

Croatia

4.7

5.5

2.4

-5.8

-1.3

1.7

Macedonia

4.3

5.9

4.8

-0.8

1

2.4

Montenegro

8.6

10.7

6.9

-5.7

0.5

2.5

Serbia

5.2

6.9

5.5

-3

1.6

3

 

 

 

 

 

 

(EIU)

14.  It is highly unlike that the region will return to growth rates achieved in the run-up to the crisis. This is bad news as these economies generally need robust growth to converge with their European neighbours and fulfil the rising expectations of their people.  In fact, they could lose ground and this is particularly problematic for the more fragile countries in the region.

15.  Of course, raw growth numbers only give a crude picture of economic conditions in each of these countries. Other numbers are perhaps of even greater social and political consequence. Unemployment figures are particularly important in this regard as the Western Balkan countries have poorly funded and generally inadequate social safety nets including unemployment support and public health care systems.  High unemployment not only imposes burdens on struggling families and breeds political discontent, it can also push economic activity into the grey and black markets and exacerbate inter-ethnic relations.  Modernizing the institutional framework that governs a national economy becomes all the more difficult when a significant portion of the national economy has “gone underground”.  In fact, the jobless rate was already high in the period of growth prior to the crisis.  In the former Yugoslav Republic of Macedonia [1]nearly one-third of the work force is currently unemployed. The number is 25% and 50% for BiH and Kosovo respectively.  About 17% of the work force is unemployed in Croatia and Serbia. (Lessenski).

16.  Emigration is a critical safety valve for the unemployed in the West Balkans as well as a source of vital foreign exchange.  Yet, migrants are frequently the first to lose their jobs when crisis strikes.  Unemployment rates have jumped in Western Europe and the level of job creation coming out of a financial sector induced recession is not expected to return the EU quickly to the status quo ante (OECD Briefing 2011). This has implications for the Western Balkans as it will only add to the unemployment roles in the region and reduce essential remittance payments which are a crucial source of foreign exchange. In 2008 remittance constituted 14.8% of BiH’s GDP, 12.2% of Albania ’s, 11.1% of Serbia ’s but only 2.3% of Croatia ’s and 4.3% of the Former Yugoslav Republic of Macedonia. (Lessenski)   The downside is that this has also left the region particularly vulnerable to downturns in European economies. More than 600,000 Albanians have been working in Greece, and their repatriated earnings have been an important component of that country’s GDP.  In 2009, remittance payments fell from US$ 141,496 million in 2008 to US$1,275 million in Albania, and US$ 2,735 million to US$ 2,210 million in BiH. (Lessenski)   

17.  Virtually all of the Western Balkan countries were running balance of payments deficits prior to the crisis and doing so at rates higher than the EU average.  Payments deficits are quite normal for emerging countries in the midst of strong growth spurts and are frequently driven by strong inflows of investment, capital goods and equipment. As the European prospects for the region brightened and as trade restrictions in the region were lifted, the availability of financial capital to the region increased. Significant capital inflows have helped finance those deficits, which in several cases were substantial.  In 2008 the trade deficit as a percentage of GDP stood at 32.9% in Albania, 38.4% in BiH, 22.9% in Croatia, 27.7% in Macedonia, 67.4% in Montenegro, and 21.9% in Serbia (EIU) These deficits substantially exceeded EU averages but it is important to note that these economies were also growing faster than Europe and importing substantial levels of goods and capital.

18.  Foreign direct investment (FDI) to the Western Balkans had risen substantially prior to the economic crisis.  In 2007, for example foreign direct investment in Montenegro stood at 20.8% of GDP as compared to 6% for Albania, 13.5% for BiH, 8.2% for Croatia, 8.5% for Macedonia, 4.4% for Serbia and 12.6% for Kosovo. The crisis has considerably slowed the influx of investment into the region although FDI in 2009 rose in both Albania to 7.6% of GDP and 29.5% in Montenegro (Lessenski).   While the deepening relationship with the EU, including the signing of Stabilization and Association Agreements (S&A), has helped galvanize foreign investment and credit flows into the region, corruption, political instability and the ubiquity of organized crime have rendered the investment climate less predictable and thus riskier than it would be were these problems properly tackled. The World Bank has given the region a moderately business friendly rating and notes that these factors as well as outstanding judicial problems continue to act as a break on the region’s development. It is worth noting that in the period 2003 and 2008, Romania and Bulgaria attracted substantially higher inflows of investment capital in comparison with the Western Balkans, reflecting, in part, their more propitious prospects for European accession. (Cutrini et. Al.)

19.  The crisis has also exacted a toll on government budgets throughout the region. Slowing growth has lowered government tax receipts while welfare and unemployment payments have risen, compelling governments to go to capital markets to make up short-falls.  Debt levels have accordingly risen. In 2009 debt levels as a percentage of GDP in the region stood at: Albania 59.40, Croatia 47.40, BiH, 43, the Former Yugoslav Republic of Macedonia 25.5, Montenegro 38 and Serbia 37. (CIA Factbook)   In several cases, the IMF has provided emergency credits to shore up government balances and defend exchange rates. Serbia and Croatia have seen an important increase in foreign debt and their profiles in this regard are similar to that of new member states.  Overall debt levels are also driven by rising public debt in both countries. (Gligorov and Landesmann)

20.  The general fiscal and debt crisis in the Euro area, particularly among several more vulnerable EU member countries, has compelled the Commission and national governments to re‑examine the assumptions behind monetary integration and the conditions candidate countries must fulfil in order to reassure current members that they are prepared to participate fully in the life of the Union. The Commission will seek to ensure that incoming states are properly structured and willing to conform to these higher standards. This, of course, will raise the bar for prospective members and further complicate the enlargement process for these states.  There is a sense in some EU member governments, and perhaps an even more acute sense among many citizens that there are limitations on how much “solidarity” Europe can show for countries that are not able to keep their budgets and debts under control. This concern could well fit into a broader “enlargement fatigue”.   Some European governments seem increasingly reluctant to enlarge their Union further given the problems governing the existing union (Daborowski et. al.) It is worth noting that most Western Balkan countries have generally done a good job on the budgetary front, although sometimes with resources that have only been temporarily available. Even the region’s low performers, Kosovo and BiH, enjoyed budgetary surpluses prior to the economic crisis, and the region as a whole had deficit levels below the EU 27 average – 6.8% of GDP.

 

III.          THE EUROPEAN DIMENSION

21.  Prior to the explosion of the global financial and economic crisis in 2008, the economies of the Western Balkans generally showed signs of improvement and made impressive progress in forging closer bonds with the EU and NATO. The EU has now signed or is on the verge of signing S&A (Stabilization and Association Agreements) with most Western Balkan countries.   Croatia put itself on the fast track to European integration through dedicated reform, serious economic and institutional progress and a new-found willingness to co-operate with the International Criminal Tribunal for the former Yugoslavia (ICTY). The Serbian government, which after the fall of Milosevic announced its accession ambitions, has also taken steps to deal directly with the criminal legacy of the Milosevic regime in the face of very harsh resistance of political extremists and shadowy criminal networks. 

22.  Having peacefully won its independence from Serbia in 2006, Montenegro also moved quickly to establish its European qualifications.  It attracted a huge influx of foreign investment in the process. These funds triggered an economic boom in that republic which endured until 2009. The Former Yugoslav Republic of Macedonia would likely have been admitted to NATO along with Albania and Croatia in 2010, had it and Greece managed to settle an extremely frustrating (at least for the international community) dispute over use of the name Macedonia. Albania too enjoyed a fairly robust growth rate and was admitted to NATO in 2009. 

23.  But critical problems in the region persist and these are clouding the prospects for European accession over the near to middle term. The government of BiH has been utterly paralyzed politically due to ever decreasing co-operation among the leaders of the three largest ethnic groups. The constitution of that country has been inadequate to the task of encouraging reconciliation, co-operation and decent governance. Kosovo too remains fundamentally polarized along ethnic lines, and its neighbour, Serbia, refuses to recognize its sovereign status. In BiH and Kosovo internal divisions pose fundamental challenges to the legitimacy and viability of the state.  In both countries, the central state is extraordinarily weak and, at times, bordering on dysfunctional.  The entire region remains beset by corruption, organized crime, political fiefdoms that militate against genuine democratic dialogue between political leaders and civil society, and creaky and often overstocked civil service structures where political connections rather than merit are the basis for hiring and promotion.

24.  As suggested above, the Western Balkans remain highly dependent on recovery in Europe, where the region conducts most of its commercial trade.  Recovery is also highly dependent on each government’s capacity to advance political, institutional and economic reform. Europe is providing models and rules of the game, but it cannot provide the time, participate in the essential domestic dialogues and forge from outside the attributes of patience and tolerance that will be needed for these countries to modernize fully. Those are the responsibilities of the region’s leaders and their people.   That said, of course Europe is extraordinarily important to the region’s transformation. It is a key generator of incentives. Its markets and credit are vital to the region, its standard of living and democratic peace are worthy of emulation, and it offers a model of peaceful integration that could help bury the legacy of internecine strife, violence and impoverishment that have characterized the Western Balkans’ recent history. 

25.  Although the trade partners for each country in the region vary somewhat in terms of relative order of importance, Germany, Italy, Austria and Slovenia are generally the region’s most important trading partners.  But intra-regional trade is also increasing. Thus in 2009 while 27.43% of Croatian exports went to Italy, 18.54% went to BiH.  Although Germany purchased 15.23% of Serbia ’s exports in 2009, BiH purchased 17.76% and Montenegro 14.63% (Lessenski). Western Balkan countries thus hold a shared stake in each other’s success, despite the rhetoric to the contrary sometimes proffered by the region’s ultra-nationalists.  This is good news as it provides a genuine foundation for reconciliation and a very healthy context for European integration.

26.  Lastly but importantly, it must be recognized that the prospects for the entire region’s integration into the EU have grown more remote in the midst of the global economic crisis. Concerns in EU countries about accepting members that are not convincingly aligned to European norms and standards in political, institutional and economic terms has raised the stakes for the region. The economic crisis in several EU countries as well as signs of deeply embedded corruption in others has fed into these sentiments and is being instrumentalized by those opposed to further enlargement.

 

IV.         A SNAPSHOT OF NATIONAL CONDITIONS

27.  As noted earlier in this report, it is misleading to speak only in generalities about the Western Balkans. Indeed the region is very diverse even though most of it, Albania excepted, once lay within the boundaries of the old Yugoslavian state. Many of these differences are real.  Some are imagined, but pervasive nationalist myth making has rendered them widely accepted and politically consequential. These distinctions, real and perceived, invoke historical, cultural, linguistic, orthographic, political, economic, social and anthropological factors.  Collectively they point to a narrative lending weight to the notion that these countries are unique and indeed, in many ways they are. For this reason, any study of economic conditions in the region needs to include an analysis of specific national conditions.

 

V.            ALBANIA

28.  Albania, of course, is unique in the region because it was not part of the Yugoslav federation. Its experience during the Cold War was one of harsh totalitarianism and utter isolation – a legacy that continues to exact a heavy toll on the Albanian people who have worked diligently to transcend that difficult legacy.  Albanian society has had no modern democratic tradition to draw on to guide its transition, and its post-Communist experience has, at various times, been characterized by political instability, insecurity, and economic collapse as well as some progress in building state institutions. The absence of a liberal democratic tradition is a factor in the persistent prominence of traditional clan networks in organizing national political and economic life – a phenomenon which can complicate building loyalties around a modern state. 

29.  The country has made progress over the past decade and this was acknowledged when it joined NATO in 2009. But the road to EU accession is proving more challenging. The country is beset by social instability, an enduring political crisis, a low level of technology, institutional inefficiency and environmental problems. The persistence of criminal gangs involved in serious crimes like people trafficking and drug smuggling remains a serious concern. An ongoing political crisis, which has triggered violent street demonstrations is distracting political elites from dealing with critical structural problems. The EU, US and OSCE Ambassadors in Tirana recently felt compelled to call for calm in the wake of violent street demonstrations against the government and an escalation of rhetoric between government and opposition parties. The Socialist party continues to challenge the legitimacy of recent presidential elections and demonstrations this past January resulted in three deaths. A government inquiry, criticized by the EU, has sought to demonstrate that the unrest represented a failed coup d’état.  An OSCE/ODIHR report on last year’s elections noted the progress the country has made on voter registration and the legal structures of elections, but nonetheless stated that the country is not meeting internationally recognized election standards. (Balkan Insight June 29, 2010) Albania ’s political reform process has indeed been slow and fitful, and over the course of a number of elections, international monitors have expressed their concerns about voting procedures marred by fraud and violence and perpetual challenges to the legitimacy of results, including opposition boycotts of the political process and the parliament itself. Unfortunately, this very same drama is repeating itself.

30.  The EU has signed an S&A agreement with Albania, which receives funds through the Instrument for Pre-Accession Assistance (IPA). The EU, however, continues to express deep concerns about the political situation there. It is putting off membership talks due to Albania ’s ongoing problems with the rule of law and what it sees as a sub-standard effort to combat organized crime and corruption (Brunwasser).  The EU Council has called for more constructive dialogue between political parties and stakeholders and an acceleration of reform. 

31.  In recent years, Albania ’s economy has shown signs of dynamism. From 2004-2008 it grew by 6% per year while inflation remained low. Yet its per capita income is still only 25% of the EU average. (Stojkovski) The economy itself is essentially premised on remittance payments largely from Italy, Greece, Germany and Switzerland, investment in construction particularly along the coast, tourism, pre-accession programmes sponsored by the EU, and natural resource extraction and agriculture.  All have suffered as a result of the European recession

32.  Electoral problems are only one dimension of a set of challenges related to civil liberties; media freedom, institutional efficiency, corruption and organized crime are also of great concern. These are all challenges that Albania must address and their seriousness is reflected in the Freedom House 2010 reports which characterized Albania as only “partially free“. Transparency International has also suggested that corruption in Albania is pervasive and that weak property rights undermine an economic climate that has generally improved over the past two decades. The EU has communicated to the country that it must advance judicial reform and make further progress in the fight against corruption and organized crime. But none of these issues are likely to be seriously addressed if the political situation is not improved and if there is no genuine dialogue and a modicum of co-operation between opposition and government parties. This may be Albania ’s greatest challenge.

 

VI.         BOSNIA AND HERZEGOVINA

33.  BiH bears the heaviest war burden of any country in the region. Over 100,000 Bosnians were killed or vanished during that conflict, roughly 50% of the country’s inhabitants were driven from their home, and damage to infrastructure continues to cost the national economy. The Dayton Peace Accords marked the end of the war but have also institutionalized the country’s profound ethnic and sectarian divisions. That settlement created a Byzantine governm, ent structure with two autonomous entities, the Rebublika Srpska and the Federation of BiH, each administering a wide array of governing institutions. The central state is weak and incoherent. Competing layers of government not only undermine effective decision making, they also facilitate corruption and discourage reconciliation, which in any case, is actively resisted by leading political figures in the country. Smaller minorities are effectively excluded from the system, and this has been ruled a violation of European human rights law. (Hirsch) With 14 governments, three parliaments and myriad municipal administrations and courts, the system is effectively riddled with veto points where policy can be blocked. This gravely complicates efforts to move forward on reforms needed to lay the foundations for EU membership. A recent European Court of Human Rights ruling suggests that the Constitution expressly denie, s representation of smaller minorit, y groups and thus violates basic European human ri, gh, ts law. The Constitution has also bequeathed the country a highly inefficient governmental structure which seems to perpetuate ethnic hostilities rather than foster reconciliation.

34.  Ultimate authority still rests with the UN’s Office of the High Representative, a position created in Dayton to ensure implementation of those agreements. This has become something of a Catch 22 as such a deep limitation on national sovereignty can discourage responsible politics. Yet irresponsible and often xenophobic politics perpetuate the need for a High Commissioner in a country that some analysts still see as a tinder box. The political stand-off among the three largest sectarian groups and the related institutional crisis is militating against economic development and integration with the rest of Europe.

35.  Corruption is also a very serious impediment to economic development and BiH ranks 99th of 180 countries surveyed in the Transparency Corruption Perception Index (Transparency Int. CPI). Civil service hiring is premised on cronyism and ethnicity and the level of professionalism and capacity is low, further undermining public faith in government institutions. A history of war time smuggling and organized crime is a plague on the national economy and gravely undermines governance. Fighting organized crime is virtually impossible given the incoherence of state institutions, the fragmentation of law enforcement, and the protections to criminal groups afforded by a state penetrated in places by organized crime.

36.  In 2007 BiH was experiencing strong GDP growth of 6.1% a year and FDI inflows equivalent to 13.5% of GDP. By the following year both growth fell and FDI to 5.7% of GDP (EIU).  Finally  in 2009 growth fell to -3.3% and in 2010 it rose by a slight 0.5%. Although the current account deficit has been cut in half due to precipitously falling imports, financing even that short fall has proven difficult as credit sources dry up.  The country has moved from a fiscal balance to a sharp deficit (approaching 30% of GDP) in that same time period. A stand by IMF loan of euro 1.2 billion is helping to cover the short fall, although its terms call on the government to cut social spending. This has led to mass protests. In the long run it is unlikely that the state will be able to meet expensive social obligations like veterans payments which are a real burden on public finance. This is a socially explosive issue (Ralcehv, BiH).

37.  That two-thirds of BiH citizens support the country’s integration in Europe is a one positive sign in an otherwise rather bleak outlook. The relationship with the EU deepened last year, and the European Commission recently eliminated visa requirements for short term travel – a move that should provide a much needed outlet for the country’s young people in particular. But the prospects for European accession remain very remote because of persistent political and institutional problems, chronic corruption and because Europe cannot move forward if BiH is unable to manage its very serious problems.

 

VII.       CROATIA

38.  In terms of its economic and institutional development, Croatia has advanced further than the Western Balkan states. At the time of writing, it has closed 25 of 33 chapters in accession negotiations with the EU.   Paradoxically, although elites remain deeply committed to joining the EU, the public has shown increasing scepticism, particularly in the wake of the crisis in several Euro member states. One Gallup survey in July 2010 suggested that 43% of Croats oppose joining the EU and only 38% support the idea. These sentiments set Croatia apart from other countries in the region and suggest a need for public discussion about the benefits and costs of membership. (EIU)

39.  Croatia has achieved a high degree of institutional development compared the rest of the region.  Its economy has made impressive gains, and the government has responded with agility to the global financial and economic crisis by keeping its budget on sustainable foundations. This helped put it on the road to recovery by the second quarter of 2010.  The government has also undertaken important initiatives to confront the legacy of the war including the decision to co-operate with the ICTY in the arrest of Ante Gotovina, the Croatian General indicted for war crimes.   Although there have been complications on the road to European accession, including hesitations about co-operating with the ICTY and border disputes with its neighbours, Croatia moved quickly into the Euro-Atlantic orbit and joined NATO in April 2009.  It recently settled a dispute with Slovenia over a maritime border, a dispute that was holding up EU accession talks, and an EU appointed arbitration board is now working to settle several outstanding land border disputes.

40.  Croatia has performed well in building a more open and democratic society. Freedom House rates Croatia as a “free” society and has upgraded its assessment of political rights there, giving it a top score of 1 on a scale of 1 to 7. This is due, in part, to rapidly improving treatment of the Serbian and Roma minorities.  Corruption continues to be a problem, and, as is the case in several countries which suffered through the wars of the 1990s, there appear to be very unhealthy ties among elements in the state security sector, business and politics. Several assassinations have been purportedly linked to these shadowy networks (Freedom House). The EU is calling for continued judicial and administrative reform and wants the fight against corruption advanced. Croatia was ranked 66 out of 180 countries surveyed in Transparency International’s 2010 Corruption Perceptions Index, the highest of any Western Balkan country.

41.  The economic crisis has slowed growth in Croatia, but its institutions and reform agenda appear to have weathered the storm. The economy was hit by a fall in export demand, lower rates of FDI and tighter credit conditions. Demand for imports fell more than the fall of exports, due in part to strong fiscal measures to contain the budget deficit, and this has actually led to an improvement on the trade balance.  Government emergency actions in 2009 helped maintain liquidity in the economy while prudent monetary management has helped narrow spreads on bond issues.

 

VIII.    THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA 

42.  Although the Former Yugoslav Republic of Macedonia was not directly caught up in the Balkan wars of the 1990’s, those conflicts have had a strong impact on the country. Armed violence did briefly break out in 2001 between members of the minority Albanian community and the majority Macedonians, but the international response was swift and a peace arrangement was quickly brokered. Indeed, the Former Yugoslav Republic of Macedonia ’s greatest achievement perhaps has been to avoid wide-spread violence among its ethnic communities in a region which tragically failed to show such restraint. Although tensions between the Macedonian majority and Albanian minority communities persist, the Ohrid Framework Agreement was signed to manage these relations and hasten Albanian integration into the life of the state and economy. While there have been important improvements, ethnic tensions persist. Freedom House categorizes the country as partly free and cites corruption, a politicized media with political leaders owning television stations, harassment of some religious groups, and human rights problems in prison as among the reasons for this less than stellar rating. The public administration system has not been substantially reformed, hiring is a politicized and opaque process and corruption is wide spread.  (Stojkovski)  The European Commission, however, has cited some recent progress in addressing several of these concerns but has also criticized hiring procedures, patronage and general party influence over what should be a politically neutral and meritocratic civil service.

43.  The Former Yugoslav Republic of Macedonia has also had a bitter dispute with Greece over the use of the name Macedonia, and this has held up its accession to NATO. As in much of the region, there are serious problems with organized crime, which has penetrated some sectors of the state and parts of the old enterprise structures. (Stojkovski) The country’s relations with both Kosovo and Albania remain complex because of ties between those countries and the Former Yugoslav Republic of Macedonia ’s minority Albanian community. There is clearly room for improved relations in the neighbourhood and a serious effort to ease concerns about each other’s motives and intentions. Finally, the economic crisis has put the Macedonian economy into mild recession, and this gives the 31% of its work force currently on the unemployment rolls few job prospects (EIU). Over the long run, serious political and institutional reform and deeper integration with Europe will be the key to addressing this particular problem.

 

IX.         KOSOVO

44.  Kosovo has had to cope with the fundamental challenge of building state institutions from scratch. The state also confronts consistent challenges to its legitimacy launched by the Serbian state and from a sizeable Serbian minority. The International Court of Justice, acting at the request of the UN’s General Assembly, has recently reaffirmed the country’s legal status as a sovereign nation, ruling that its February 2008 declaration of independence did not violate international law. Since the court handed down that ruling, there has been an effort to move Serbia and Kosovo toward a kind of practical reconciliation, but the fundamental problems between the two persist. Many of Kosovo’s most serious economic problems arise from the very apparent deficiencies in its institutional structure and political culture both of which are partly the product of decades of political marginalization, occupation and finally war.  A recent Council of Europe Report authored by the Swiss parliamentarian Dick Marty has charged that senior Kosovo officials, possibly including Prime Minister Hashim Thaci, were involved in organized criminal activities including human organ trafficking during the war. The Legal Affairs and Human Rights Committee of the Council’s Parliamentary Assembly unanimously approved that report on 16 December 2010 and in January 2011, the entire Assembly called for a full investigation of the affair.  The government of Kosovo has dismissed the report as a Serbian-Russian conspiracy to destabilize the country (The Guardian). A slew of new allegations have been made in recent months describing KLA intelligence service involvement in political assassinations, and their direct responsibility for illegal organ trafficking and the murder of hundreds of prisoners. These allegations are consistent with similar claims made by Carla del Ponti, the former Chief Prosecutor of the ICTY. These are now to be investigated by the EU Rule of Law Mission in Kosovo (EULEX). (Human Rights Watch) In May 2010 EULEX Prosecutor Johannes van Vreeswijk announced another investigation of eight ministers for corruption and organized crime links. In addition, the EU has now charged that Kosovo has no viable crime reduction strategy in place and, for example, lacks a witness protection law, which makes investigation of high level crime virtually impossible.

45.  It is not the purpose here to explore these highly controversial allegations here. Yet, that they are being taken very seriously in diplomatic and legal channels is emblematic of the dire challenges Kosovo confronts: it suffers a high level of corruption, is beset by organized crime, continues to be saddled by serious problems in its administrative and judicial systems and remains highly segregated along ethnic lines.  Loyalty to the state is further eroded by the prevalence of clan leadership structures which block the full blossoming of civil society – an essential component of any viable democracy. The EU has identified these as matters that must be addressed before it further expands ties to the country. (European Commission 14/10/09)

46.  Some improvements have nonetheless been registered. The most recent Freedom House report has raised Kosovo’s political rights rating from six to five, its civil liberties rating from five to four, and its status has moved from “Not Free” to “Partly Free” due both to municipal elections that were generally deemed to be in compliance with international standards, and greater recognition of minority rights. But overall the human rights situation is not up to standard while the stand off between the Albanian majority and the Serbian minority along the Ibar River remains frozen. 

47.  The economic situation in Kosovo remains dire. As of 2009 it had received 25 times more international aid per capita than Afghanistan, but this assistance has failed to genuinely galvanize the national economy or to help create an institutional structure that, in turn might facilitate economic take off.  Kosovo remains the poorest country in Europe, with an unemployment rate approaching 40%. (Bardos) According to the IMF average per capita income stands at euro 1,726 or 6.9% of the EU 27 average.  The economy itself is based on three very weak pillars: EU donations, remittance payments from the Albanian Diaspora, and mining, which is a highly undercapitalized industry. The presence of EULEX and KFOR also injects foreign currency into an otherwise moribund economy but this is hardly a foundation for future growth. (Stojkovski)  Perhaps the most telling indicator of its economic weakness is the 45.9% unemployment rate which only drives citizens into the black and grey market or abroad. The level of unemployed 15‑24 year olds was 73% in 2009 which suggests that a “lost generation” is being created. (Collaku)

48.  In short the real economic story of Kosovo lies in the ongoing weaknesses of its institutions, the failure of its governing elite to breach the ethnic divide, the twin problems of corruption and organized crime and the poor relations with Serbia and sometimes difficult relations with the Former Yugoslav Republic of Macedonia. Its weak economy cannot be expected to take off and its European ambitions will never be fulfilled until these issues are squarely addressed. (Ralchev)

 

X.            MONTENEGRO

49.  Montenegro has only enjoyed full sovereignty since its secession from Serbia in 2006. It had prepared for that moment by pursuing an ever more independent economic policy. Years before formal secession, it had adopted first the Deutsch Mark and then the Euro as its official currency and lowered barriers to trade. From that moment it essentially cast its lot with Europe. Since gaining independence, its economy has taken off due to its openness and the huge flow of foreign investment into the country’s coastal regions. There are concerns, however, that growth premised on real estate markets is not sustainable and eventually the conditions will have to be laid to build a more competitive national economic structure. This will require political and institutional reform, the full establishment of the rule of law, judicial reform and measures to counter organized crime and corruption which are serious challenges to the country’s long-term political and economic health. The black market in Montenegro in areas like cigarette smuggling is significant, and there are claims that its participants have included very high ranking officials

50.  Montenegro has signed a Stabilization and Association agreement with the EU as well as an interim agreement on trade and a visa facilitation agreement. The Commission, however, has stated that further deepening of the relationship will hinge on political reform and more progress in the fight against organized crime and corruption. The state sector is overstaffed, inefficient and subject to bribery. Montenegro received a score of 3.7 from Transparency International’s 2010 Corruption Perception Index which ranks it 69th in the world – behind Croatia but ahead of the other countries in the region. (TI) 

51.  The economy has been among the fastest growing in the world in recent years. Growth is largely driven by high levels of FDI, mass privatization as well as the fairly liberal economic environment.   Foreign investment has helped finance high levels of imports and consumption but this condition is not likely to persist as only so much money can be poured into beach front property. In the longer term Montenegro has the potential to suffer painful adjustments that result from the collapse of property markets. Lending to the private sector has slowed considerably in the midst of the crisis and growth fell from 6.9% in 2008 to -5.7% in 2009. (Stojkovski)  It returned to slow growth of 0.5% in 2010. (EIU)

 

XI.         SERBIA

52.  Although Serbia clearly suffered from the leading role the government of Slobodan Milosovic played in fomenting the Balkan wars of the 1990s, it has subsequently emerged from its isolation and has made progress on a number of fronts. Relations with Brussels and Washington have improved markedly.  A major barrier to deepening ties with Europe was lowered when Radovan Karadžić was turned over to the ICTY in 2008, although Ratko Mladic, who has been indicted for war crimes, remains at large. Serbia has also taken a number of measures to improve relations with minority groups including the decision to accord autonomy to the region of Vojvodina. The government and the majority of the Serbian people are dedicated to one day joining the EU and an Stabilization and Association agreement was signed with it in 2008 and is now in final stages of ratification. Some nationalist forces oppose that agreement including the former President Vojislav Kostunica, arguing that it could complicate the Serbian goal of re-establishing sovereign authority over Kosovo.

53.  Serbia inherited an essentially functioning state from the remnants of the former Yugoslavia; but its political parties have colonized parts of that apparatus and, in so doing, rendered it less effective and accountable. Corruption and organized crime remain a serious concern, and the links between elements of the security apparatus with organized criminals and some extremist elements is an ongoing concern. Serbia ’s public administration needs to be reformed and a greater distance must be established between it and political party bosses. A 2010 Transparency International study accorded Serbia a 3.5 rating on its 1-7 scale which places it 78th on its Corruption Perception Index, an improvement on previous scores. Worrying links among elements in the security sector, certain radical political groups and organized crime remain a serious concern both among democratic forces in Serbia and Serbia ’s European partners. These shadowy groups have undermined the fight against crime and corruption and intimidated democratic activists and journalists.

54.  Economic growth in Serbia rose to 6.9% in 2007 and was 5.5% in 2008. (Rachev)   Growth has been driven by an influx of investment capital and credit as well as remittances which, in turn, have propped up domestic demand and driven up current account deficits.  Growth began to slow toward the end of 2008 with export revenue and industrial production falling and then turned negative in early 2009. The value of the Dinar plummeted, and this worsened the country’s foreign currency denominated debt position and raised food and energy prices in domestic terms. The country’s relatively low level of savings and high level of social obligations have left it particularly vulnerable to the European and global downturn.  This, in turn, raises important questions about the sustainability of Serbia ’s social spending structure.  In January 2009 the government signed a stand-by agreement with the IMF, subsequently extended, which provided euro 2.9 billion to underwrite the state budget and support reform. (Stojanovic) Some political forces wanted to use that credit to bolster government wages but this was stoutly resisted by the head of the central bank. As a condition for accessing these credits, Serbia has promised to keep the budget deficit below 4.8% of GDP and cut a number of government jobs and salaries. In 2010 Serbia had an unemployment rate of 17%. (EIU) Experts suggest that Serbia needs to grow at 6% to lower unemployment, but the official forecast for 2011 growth is only 3%. (Barlovac)

 

XII.       TENTATIVE CONCLUSIONS

55.  The governments of the Western Balkans have made their accession to the EU a core organizing principle of political and economic life. With the exception of Croatia, the prospect for accession for these countries is fairly remote due to persistent institutional and political problems and enlargement fatigue in Europe itself. Ever closer ties between Europe and the region, however, are essential to the Balkan future.   Creative ways must be unearthed to deepen these ties and thus to provide strong support for regional transformation even if the prospects are remote for rapid accession.   Failure to bring this region fully into the life of Europe will condemn Europe to having to manage a region in crisis. Integration is a far superior option.

56.  Every effort must be made to ensure that the region enjoys market access and many other benefits of membership even before they have formally acceded to the Union. The EU must not be expected to lower standards for full membership and needs to drive a hard bargain, particularly on matters fundamental to its values including the need for fully viable democracies, inter-ethnic peace and reconciliation and low levels of systemic corruption. That said, much can be done to incentivize this region to adhere to the values of the Union and to learn the habits of participation in European life by, in fact, beginning that participation even before full membership is possible.

57.  Along these lines, the Euro-Atlantic community needs to focus on the corruption problem in the region. This is a poisonous practice that cannot be allowed to flourish, and strong incentives are needed to encourage these countries to cope with the problem.

58.  The introduction of visa free regimes is an important step and should help open these long closed societies to European influences which again will help foster conditions for deeper Euro‑Atlantic integration. Young people, particular, will benefit enormously from travel and more support is needed to allow them to study and even work in Europe. Progress is being made on this front. The expansion of the EU visa-free travel regime to all countries in the region except Kosovo sends a powerful message to the region and especially to its young people who have often felt hemmed in to their small corner of Europe. Visa free travel will open new vistas for them and make Europe and its core values more of a reality and less of a pipe dream.

59.  Montenegro and Serbia have taken important steps towards EU membership over the last year: Montenegro now has official candidate status, while Serbia has applied and submitted the questionnaire. Serious engagement from Brussels should follow. By bringing local law up to European standards, the accession process is helpful in and of itself. The region’s governments must be clear-eyed about their own still formidable problems and what is required to solve them.

60.  Improved governance and rule of law are not only required to move closer to Europe, but will serve the interests of all seven governments in the region. All have work to do on this front. Progress here will, by definition, also lead to progress in fighting highly corrosive corruption.  It will also be one component of a general effort to foster ever improving relations among ethnic groups.

61.  Organized crime and corruption thrive where institutions are weak and politics are polarized. The Euro-Atlantic community has helped build a security and diplomatic context for these countries to overcome these serious challenges. But the battle is not yet won. There are still fundamental issues that need to be solved so that the region can dedicate all of its energy to focus on the future rather than remain mired in its past:

  • The problem of Kosovo must be resolved in a way that can be acceptable to Kosovo and Serbia. Failure here will mean that the issue will remain a source of regional tension and border dispute, which, in turn, will reduce the prospects for Euro-Atlantic integration for both Serbia and Kosovo;
  • Serbia ’s own integration prospects will also be enhanced if it captures Ratko Mladic and turns him over to the Hague Tribunal;
  • The Macedonian name dispute must be settled in a fashion acceptable to both Skopje and Athens;
  • Bosnia-Herzegovina needs a functioning central government, and this will ultimately require a new constitution. But political leaders from all the communities there need to work with each other rather than negate the reality in which they live in order for this country to function properly;

62.  None of these are easily solved problems, and all have cast a shadow over the region for more than a decade. But the status quo is unsustainable. Certainly the threat of armed conflict in the region is much diminished, but longer term stability hinges on improved governance, Euro‑Atlantic integration and significantly improved inter-ethnic relations.

 

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[1]   Turkey recognises the Republic of Macedonia with its constitutional name.

 

 

*   Until this document has been approved by the Economics and Security Committee, it represents only the views of the Rapporteur.

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