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South East Europe Six: Growth, please!

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Just six months ago, in the previous South East Europe Regular Economic Report (SEE RER) covering the six Western Balkan countries of Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia (SEE6), we looked at the double-dip recession in this region, and structural policies needed for recovery.
Now, we are happy to report that recovery is, indeed, under way in each of these countries. In 2013, the SEE6 region is projected to grow 1.7 percent, thus ending the double-dip recession of 2012. Electricity, agriculture, and even some exports are helping with this rebound of output. Kosovo is leading the pack with a growth rate of 3.1 percent, with Serbia (which accounts for nearly half of the region’s GDP) expected to grow by 2 percent on the heels of increased FDI, exports, and a return to normal agricultural crops. (In 2012, by contrast, agricultural output in Serbia dropped 20 percent on account of a severe drought). Albania, FYR Macedonia, and Montenegro are all expected to grow by between 1.2-1.6 percent. Rounding out this group is Bosnia and Herzegovina – with expected growth of 0.5 percent.
So, are things finally looking up in the Balkans? Not exactly.

Figure 1: SEE6 Unemployment Rates, 2012


Source: LFS data and ILO. Kosovo’s tentative data suggest unemployment as high as 35 percent.

The Eurozone is still in recession. The above growth rates—though better than recession—are uninspiring and too weak to make a dent in the high unemployment. The magnitude of the challenge is illustrated by the unemployment figures, which stabilized above 20 percent after the crisis (Figure 1). In 2012, unemployment rates in the SEE6 remained close to their peak crisis levels (purple diamonds). The average for the region was about 22.8 percent in 2012, more than double the 11.2 percent average for EU11 countries.

In response to this crisis, SEE6 countries used different policies to mitigate the impact on jobs. All the SEE6 countries used fiscal stimulus, but FYR Macedonia and Montenegro also implemented policies to stimulate labor demand through limited wage subsidies (which often consisted of a reduction in social security contributions and were often targeted to specific firms or vulnerable groups), credit support, and some public works programs. FYR Macedonia and Montenegro also invested in skills and employment services.

But despite these efforts, the unemployment rate is not budging. So what more needs to be done?

Unfortunately, there is no easy fix. Key to reducing unemployment will be a more robust growth. To achieve it, countries will need to sustain smart fiscal adjustment and substantially improve their investment climates and competitiveness, and continue strengthening their financial systems to support recovery of saving, investment, and credit. Beyond that, more aggressive policy is needed on several fronts: fostering entrepreneurship and small business development; investing in skills; removing barriers to mobility and hiring of workers. Simply put, countries will need to work much harder at the large structural reform agenda to achieve “escape velocity” from this low-growth, high-unemployment path.


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