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Intervention of Prof. Dr. Selami Xhepa at the April 2022 Balkans Leadership Conference

Some issues related to economic growth and sustainable development from a regional perspective

There has hardly been any good news around the world since 2020 with the lockdown due to the pandemic of Covid 19 and now with the war in our continent. Serious challenges are putting the working of the systems at test, from health care and education to social safety nets and emergency or crisis management systems. All society and economic structures are badly affected by the unpredictable or, rather, unbelievable developments we are experiencing. Although they may seem to be events of short-term duration and we all wish they are solved quickly, the potential they have in the long-term to transform political, economic, and social landscape are enormous. But let me first talk a little bit about the past accomplishments we were able to achieve, as well as the weakness of our systems.

  1. Despite some slight differences between countries, our economies have grown larger in the last decade, particularly [compared to the period] prior to the great recession of 2008 and later with the pandemic of Covid 19. Our economies are now much more integrated; we trade and exchange with each other and the volumes are growing fast. A common institutional framework is already in place and a lot of regional cooperation takes place within such structures. The interruptions of the supply chains during the pandemic and restrictions imposed now due to sanctions proved that regional cooperation is of paramount importance and that our countries are serious in their commitment to foster and deepen the regional approach to economic and social development.
  2. Empirical evidence shows that the periods of dynamic growth supported by reforms paid off. Some economic convergence in terms of income per capita has happened, but success has been short-term and limited. In particular, during the period 2000-2008, the region demonstrated improved macroeconomic performance: accelerated GDP growth, low inflation rates, high rates of trade and investment activity and implementation of many structural reforms.
  3. The Balkan economies continue to suffer sluggish economic growth, especially after the strong shocks of the financial crisis, pandemic and now with the war. Therefore, these countries have been unable to close the gap in terms of income per capita with the developed economies of our continent, and even episodes of enlarging gaps instead of closing gaps have been identified. By the end of 2020, the incomes per capita in terms of PPP were between 30% to 42% of the average income of the EU-27, with the lowest rates for Albania and the highest for Serbia and Montenegro. Income inequality has increased and convergence in per capita GDP has run at a slow annual rate. When comparing performance among new EU members and the Western Balkans, there is clearly a strong difference between these two groups, indicating that EU membership has induced faster economic growth and economic convergence.
  4. The current economic policies are severely constrained due to the increased fiscal imbalances on one hand, and inefficiencies of monetary policy on the other. Especially, Albania is characterized by very high debt levels compared to the groups of countries at the same level of income. At the current juncture, new debt would have been of critical importance to mitigate the serious risks due to strong price hikes on commodities and critical supplies, which are threating macroeconomic stability and wiping out household incomes, especially those of the low-income families. The social climate is getting worse, due to widening income disparities and increased poverty levels.
  5. In addition to the increased macroeconomic vulnerabilities, the structural weaknesses remained unaddressed. When we compare our Balkan region with the Baltic countries or new members of the EU from the CEE, our region is less developed and less competitive, with higher unemployment rates, especially among the young, lower productivity and lower levels of industrialization. FDI has also mostly been oriented towards services, such as finance and telecommunications, but less on the manufacturing sector. The business environment remains unfavorable to foreign investors. The sophistication of firms and innovation capacity of the economy is weak.
  6. This background of the socio-economic conditions in our region, highlights the need for major policy reforms and institutional innovations. Productivity is the elixir of higher growth rates and should be the key concern for policy makers. Being a complex and multidimensional phenomenon related to education, technology levels, policy and institutional variables, productivity enhancing measures require well-coordinated efforts on the part of local institutions, but also measures at the regional level, particularly in areas related to strengthening physical and digital infrastructure connections, but also in labor market related aspects of education and skills formation, research, and innovation, etc. Some kind of new industrial policy with concrete support mechanisms and policies should be designed. Reindustrialization is vital to move our countries into higher value-added industries and integrate them in the global production chains. It may also be the only way to create decent jobs, high paid jobs for labor and create incentives for improving the living conditions of families.
  7. I believe that the development model should also be readjusted to create a more cohesive society by narrowing the large inequalities and fighting poverty. Serious considerations should be given to the way in which the results of economic growth are distributed. There is a large public perception, but also strong empirical evidence, that the system is biased towards capital. Better sharing of incomes between labor and capital can be not only socially desirable, as it creates a better living environment, but it is also economically beneficial. The current social structure of large segments of the population living on low-income levels depresses the purchasing power in the economy and lowers the economic activity in general. This low income-low growth equilibrium is damaging the long-term economic development perspectives. From this perspective, the taxation system accounting rules should be reviewed to create a balanced tax burden for labor and capital and close the gaps in accounting regulations which create opportunities to divert profits and pay taxes. Also, the social safety net should be modernized to offer better opportunities for the temporary unemployed and those in need.

Dear friends,

The realities we are facing now are formidable. The risks we face have the potential to deteriorate the situation in the coming months, but also they can be a transformative power if they are worked on diligently. EU integration can serve as an engine for reforms and create the momentum needed for our countries to make a great leap from the current status quo. Maintaining the spirit of regional cooperation is also vital to create a healthy climate for our countries to thrive.

 

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