Development Policies​

The pillar comprehends a myriad of policies that aim at improvement in economic welfare through higher real GDP, but also through enhancing other economic indicators, such as improved literacy, better infrastructure, reduced poverty and improved healthcare standards. Hence, in WEBecon, when we say ‘development policies’, we rather refer to a set of structural reforms – either in the short or in the long run – whose attainment will improve the economic structure for the benefit of the citizens’ standard of living and companies’ competitiveness.

Defined this way, the pillar is intrinsically connected with what we do int he other two pillars: the economic growth, industrial structure and EU integration support the other development policies; while labor market is inevitably and closely related with the social policies which we treat in this pillar.

Poverty and inequality saw improvements in the Western Balkans in the last decade. GDP growth, strengthened job creation and rising wages, as well as reformed social policies contributed to such outcomes, despite some setback has been inflicted by the recent crises. According to the World Bank’s estimates, the poverty rate in the region (combined) has been as high as 23.3% in 2017 and declined to 14.8% in 2021, through threatened by the indirect effects that the Western Balkans’ economies will suffer from the Russian invasion onto Ukraine in early 2022. Particularly the social policies aimed to shield the poorest contributed to improvements in the income distribution for as large as five percentage points in Gini over the last decade, despite some countries as North Macedonia observed double larger declines.

Rising global energy and food prices, combined with the unfolding war in Ukraine, present important risks for the Western Balkans, threatening such large social gains to be easily wiped out, particularly relevant for the poor which spend disproportionally larger share of their consumption basket on food. Many of the WB-6, though not all, Serbia being a notable exclusion, rely on imports of energy and food, which heavily exposes them to the volatility in the global markets. Serbia stands out as the wheat exporter in the region, which may place some of the WB-6, notable those a part of the Open Balkan Initiative, into a favorable position. Food insecurity challenges are predominantly linked to accessibility and affordability, but extreme weather conditions combined with lack of fertilizer supplies (from Russia) and persistent logistical constraints could easily turn it into a crisis in availability, making the outlook for the most vulnerable even bleaker. In addition to energy and fertilizers, prices significantly increased for seeds, feeds and pesticides which could lead to lower input use and hence lower yields potentially compromised quality in the next cropping seasons, as well as squeezed the margins of crop and livestock producers, preventing full post-Covid-19 recovery and productivity-enhancing initiatives.

But, the mounting energy insecurities perplexed with the necessity of the Western Balkan countries to speed up their green agendas. While WEBecon does not treat the green agenda from the perspective of its environmental considerations, it is more that focused to consider its economic causes and consequences. Rising electricity prices, in particular, propelled the need to engage all domestic production capacities, largely based on fossil fuels and infrastructurally outdated, but also spurred the investment in renewable energy sources, also through the expansion of the financial envelope from public, private and bended sources of green financing.

When discussing countries’ economic development, it is indispensable to observe what governments do. WEBecon focusses on two lines of thought in this regard. The first is how government design fiscal policies, particularly how they spend people’s money to respond to their needs. The second is how governments work to improve the business environment to be conducive for businesses. In these two broad themes, WEBecon focusses at a couple of points discussed below.

Western Balkan countries, in general, are on the downside in the share of the government revenues in GDP. For example, when it comes to tax revenues, their share in GDP ranges from 17% in North Macedonia to 24% in Serbia, still far below the EU-27 average of 41%. Low tax rates, particularly income tax rates, deficiencies in the public finance management and inefficiencies in tax revenue collection, manifested through the large informal economies, are to be blamed for such outcomes.

This prevents that fiscal spending is elevated at the level that satisfies the demanding needs of the WB-6 economies of robust structural reforms, despite spending itself suffers inefficiencies. State aid is a notable example, which WEBecon treats in this pillar. All WB-6 run various schemes of state aid – or subsidies – part of which have pure social components, like subsidies on wages, on large minimum wage increases and so on. Another part of the state aid – mainly the one aimed at companies’ and agricultural production competitiveness, is frequently insufficiently well targeted or suffers problems in its design, including inconsistencies with the EU Acquis rules, rendering its effectiveness lacking or insufficient. These aspects are of core WEBecon interest.

Finally, the business environment has been improving in all WB-6 countries – in some cases more than in others, but WB-6 marked notable improvements in particular areas of the business eco-system enhancement, despite progress has been frequently undermined through setbacks in enforcement. All WB-6, to a different degree though, have been quite successful in attracting foreign direct investment in the last decade, despite being criticized for their generous subsidy packages and the ‘race to the bottom’ policies. On the other side of the spectrum, a variety of reforms improved the environment for the growth of the small and medium-sized enterprises, which actually comprise the core of the WB-6 economies, despite key issues like the access to finance, quality labor force and lately, the soaring energy prices, remain core to their competitiveness enhancement.

This variety of issues depicts the framework of WEBecon’s thematic pillar ‘Development policies’. Actually, as development policies are a rather wide area in terms of sub-topics, the priorities of WEBecon over time within this pillar may be subject to permanent reconsideration, depending on the current development, particularly the current crisis’ unfolding, as well as the priorities of the governments and the other development players.