Croatia’s economy under Milanović: recession and policy response

Milanović’s government in Croatia has entered its final year. Its decision to continue with the previous government’s policy of fiscal consolidation has overshadowed the initial aim to boost investment – to dismal consequences, argues LSEE’s Will Bartlett. The only hope is that “growth resumes in the EU, and that this will lift the Croatian economy along with it”

The performance of politically connected firms in South East Europe: state capture or business capture?

This paper investigates the effects of the political connectedness of private sector firms in South East Europe on their business performance. This question is relevant to contemporary ideas about the importance of “state capture” in the region, and the paper provides a new perspective on the nature and consequences of this phenomenon. On the basis of evidence from empirical survey data as well as case study evidence, the paper concludes that political connections tend to undermine the business performance of the connected firms, with a potential negative impact on the economic development of the countries concerned. It is argued that this process is better described as “business capture” rather than “state capture”. The terminology is important as it indicates the directions in which policy might be directed to effectively manage this issue and improve the competitiveness of economies in the region. The average overall negative effect on business performance measured by employment growth is substantial but is found to be statistically significant only the services sector and in countries of the Western Balkans. The EU member states of the region appear to be relatively immune from the negative effects of business capture

Shut out? South East Europe and the EU’s new industrial policy

This paper explores the potential role of industrial policy to stimulate post-crisis recovery in South East Europe (SEE). Policy reactions in the region have focused on fiscal consolidation and austerity, while the design of active industrial policies to improve competitiveness has been less in evidence. The paper reviews the experience of industrial policies in the EU and shows how these policies have evolved from vertical to horizontal approaches, and how the latter versions of policy have been transferred to the accession states in SEE. The paper reviews the evolution of industrial policies in eight countries of the region and the impact of these policies on industrial production. It argues that the horizontal industrial policies that have been imposed on SEE countries through conditionality embodied in the EU accession process have left their economies vulnerable to adverse spillovers from the eurozone crisis. It concludes with an assessment of the relevance of industrial policies to economic recovery, and questions whether SEE has been ‘shut out’ of the ‘fresh’ vertical industrial policy that has been adopted by the EU in recent years

Interdependence between Core and Peripheries of the European Economy: Secular Stagnation and Growth in the Western Balkans. LEQS Discussion Paper No. 104/2016 February 2016

European countries are economically dependent upon each other. This paper therefore embeds the analysis of the Western Balkan countries within a wider perspective of the European economy as a whole. It combines a simple Core-Periphery model with an underconsumption model to provide a convincing explanation of the emergence of secular stagnation, the dependency relationships between the European economies, and the spillover effects of Eurozone crisis to the Western Balkans. Due to tendencies to under-consumption, the Core countries have been vulnerable to secular stagnation and in order to overcome this tendency within the Eurozone they are dependent on export revenues from the peripheries to sustain their economic growth. This has led to high trade and current account deficits during the boom and placed the peripheries in a highly vulnerable position during the recession period. Financialisation of the European economy has emerged as a response to the tendency towards secular stagnation, as the provision of consumer credit has stimulated demand and temporarily overcome under-consumption tendencies. The paper argues that continuing austerity as a method to create internal devaluation is unlikely to succeed as a means to extricate the periphery countries from the crisis. Given the dependencies of the European economies upon one another, a possibly better way out of the current period of low growth and stagnation would be a coordinated fiscal expansion to stimulate domestic and Europewide demand

Vocational education’s weakness in the Balkans is hampering labour markets and perpetuating social exclusion

Education systems in the Balkans are highly selective: best performing students gain entry into gymnasia, while others attend vocational education training (VET) schools. Children of VET-educated parents are likely to follow in their genitors’ footsteps. High rates of vocational enrolment, furthermore, are not matched by effectiveness in skill formation. A large research project by LSE researchers, whose overview has been recently published by the European Training Foundation, suggests that allocating more resources, improving teacher training and updating curricula are key measures to allow for a change of tide. Will Bartlett and Claire Gordon summarise the findings

Barriers to cross-border trade in intermediate goods within regional value chains in the CEFTA region

This paper investigates the barriers to the development of regional supply chains to support the growth of regional trade in the CEFTA region. The paper first identifies the way in which regional FTAs such as CEFTA may bring about structural change and tendencies to either convergence or divergence among partner economies. Tendencies to agglomeration of benefits in countries with strong manufacturing sectors are identified. In the case of CEFTA we show that Serbia (and to some extent North Macedonia and Bosnia and Herzegovina) has used its policy of subsidising FDI in the manufacturing sector by establishing a network of special economic zones (SEZs) to gain an advantage on the regional market through boosting its capacity for the production of manufactured goods for export. We argue that the tendency towards economic divergence within CEFTA that this creates could potentially be offset by developing regional value chains to supply inputs to multinational companies based in SEZs. However, there are many barriers to the development of such cross-border regional value chains. The paper presents some qualitative research findings that reveal the range of barriers to the development of regional value chains involving SMEs. It concludes with some reflections of how policy could be focused to best reduce the barriers to regional value chains, with the aim of harnessing the opportunities offered by CEFTA to reverse the process of divergence among partner economies

Attracting FDI to the Western Balkans: Special Economic Zones and Smart Specialisation Strategies

This paper investigates the role of Special Economic Zones (SEZs) in the Western Balkans in supporting industrial policy for economic development. It shows that Serbia and North Macedonia have both implemented policies to establish networks of SEZs that have attracted a relatively large amount of new foreign direct investment, mainly into the motorcar and components industries. Although many jobs have been created and some improvements in export competitiveness have occurred, there is no evidence of improvements in labour productivity or widespread technology spill-over to local economies. The import intensity of production is extremely high, implying little linkage to local economies. The qualitative interviews further reveal limited linkages between SEZ-based companies and local businesses, limited technology transfer, and a lack of appropriate skills among the workforce. In particular, there is insufficient capacity in the motorcar components supply chain. The paper concludes that governments have used SEZ policies as an alternative to regional and local development policies based on smart specialisation. In order to take advantage of the opportunity offered by SEZs, governments in the region should put more effort into developing local supply chains, aligning their policies towards SEZs and smart specialisation in order to leverage the advantages of an increased inflow of direct foreign investment for sustainable economic development in the future

Shut out? South East Europe and the EU’s New Industrial Policy. LEQS Discussion Paper No. 84/2014 December 2014

This paper explores the potential role of industrial policy to stimulate post-crisis recovery in South East Europe (SEE). Policy reactions in the region have focused on fiscal consolidation and austerity, while the design of active industrial policies to improve competitiveness has been less in evidence. The paper reviews the experience of industrial policies in the EU and shows how these policies have evolved from vertical to horizontal approaches, and how the latter versions of policy have been transferred to the accession states in SEE. The paper reviews the evolution of industrial policies in eight countries of the region and the impact of these policies on industrial production. It argues that the horizontal industrial policies that have been imposed on SEE countries through conditionality embodied in the EU accession process have left their economies vulnerable to adverse spillovers from the eurozone crisis. It concludes with an assessment of the relevance of industrial policies to economic recovery, and questions whether SEE has been ‘shut out’ of the ‘fresh’ vertical industrial policy that has been adopted by the EU in recent years

Baseline study - Western Balkans: 21st century schools programme

The countries of the Western Balkans (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia) have been in a process of transition to a market economy over the past 30 years that is in some respects still not yet complete, in part due to the interrupting effects of wars and conflicts, in part due to the delayed onset of transition that in some countries (e.g., Serbia) did not really get off the ground until the democratic turn began in 2000. The economic restructuring that the transition has involved has created a demand for new skills following the introduction of new technologies and new forms of business organisation. The need for the development of Information and Computer Technology (ICT) and coding skills among school pupils is recognised by all governments in the region in key strategic documents. However, the roll-out of coding, programming, informatics and ICT in primary schools varies from one country to another. The British Council 21st Century Schools Programme is a three-year programme to provide training to school leaders and teachers in the skills needed to improve the teaching practice using critical thinking and problem solving (CTPS) teaching methods and the application of IT skills, primarily coding and programming within the classroom using micro:bit hardware donated by the UK government. This Baseline Report presents the characteristics of the primary education systems in the Western Balkans prior to Programme implementation that are relevant to the baseline stage of the British Council 21st Century Schools Programme. The main aim of the Baseline Report is to establish the initial measurement of the evaluation indicators, outcomes and outputs as set out in the Programme Evaluation Plan. The Baseline Report also examines the basic assumptions of the Theory of Change (Logic Model) of the Programme, which identifies how Programme interventions are expected to bring about the various outputs and outcomes of the Programme. It therefore checks the assumptions on which the effective delivery of the Programme are based