Setting the Stage for Stability and Progress in Southeast Europe

Politically, the eight Southeast European countries have been less stable than those countries in Central Europe and the Baltics which are on track for EU Accession in 2004. The former countries have achieved generally poorer economic performance since 1990, and their economic reforms have also progressed more slowly. With this background, this paper notes that economic development is fundamentally about raising living standards, and that this most often occurs through job creation, accompanied by social policy measures to alleviate the most extreme poverty. In the longer term, of course, investment - both in basic infrastructure and in directly productive assets (buildings, equipment and the like) - is vital for sustained growth. Since investment is often supported by a sound financial system, we also discuss the region’s nascent banking systems and financial markets. All countries belonging to the SEE region have to be considered small, open economies. Their future prosperity will be found through integration with the wider world economy, including especially their immediate neighbours and the EU. Hence the trading environment in which the SEE countries operate is a critical feature of their economic progress - with both political and economic dimensions. We also refer to other international flows such as aid and FDI, sketching the factors likely to influence these. Why have reforms in the SEE region not proceeded faster than they have, and what constraints does the reform process face? These are very difficult questions, but I shall attempt to pinpoint the most important constraints, before concluding the paper by outlining possible ways forward. The last part also highlights a few issues of a more general nature that currently impede the region’s economic progress, focusing on: investment and growth, trade, micro-level institutional reforms, and financial market development.