Book Review of the recently published book by Christopher Cviic and Peter Sanfey, Hurst &Co, London 2010.
This is a timely (“20 years after”), excellent and very remarkable book. It describes – in layman’s terms, without the usual jargon – the political and economic emergence of a success story. Chris Cviic is a former journalist and political advisor for the Southeast European Region at EBRD (1999-2007), Peter Sanfey the present EBRD lead economist for the region. They manage to give a short, but very insightful rendition of an – in their eyes – unrecognized success story. It is their enthusiastic optimism, mitigated to some extent by their sense of realism which manages to dispel some of the existing pre-judgments about the eternal effects of “Balkanization”. The countries they deal with are the successors to Yugoslavia, Albania, Bulgaria and Romania, i.e. those countries of the region which emerged from different shades of socialism after the fall of the Berlin Wall.
The authors describe in interesting selective detail the political developments during this challenging time and link it to the remarkable economic developments of a region which before the present crisis had some of the highest growth rates in the world. They (rightly) describe the “European perspective”, the aspiration of joining the European Union, as the major driver towards market-inspired reforms and eventual prosperity. They vividly portray the sometimes halting, sometimes active, frequently controversial attempts by the EU and its member countries to end, once and for all, “Balkanization” by tying the region strongly into the EU framework – and providing advice and (lots of) money to this effect. And they give a very important historical context of where this region comes from – which explains some of the idiosyncracies of this development.
It is the authors’ contention that the present crisis, while hitting the region hard, will not substantially change its capacity for growth. Consequently, they are not very explicit in where the growth model needs to be adapted. In this respect, the following considerations should apply:
– As the authors describe, much of the high pre-crisis growth was supported by abundant (I would say excessive) availability of relatively cheap credit, mainly coming from the “Western” parent banks which own a large part of the financial sector in the region. While these flows were based on over-optimistic credit ratings, it is very likely that the present risk aversion of foreign banks will persist, albeit less severe, for a long time to come. In some countries, e.g. Serbia, much of this credit growth was channelled towards personal consumption instead of production. Risk assessment will impliy that more of the future growth of the region will have to be financed by indigenous savings, thus putting extra demands on economic policy to promote savings – a difficult task in light of the high catching up needs in private consumption in the region. But lower credit growth may also be more sustainable than some of the excessive rates of the past.
– A second channel of growth was EU trade integration. Most countries of the region have focussed their exports to a large degree on EU countries. Given the dire growth prospects of the EU, this will have to be supplemented by more neighbourhood trade and trade with other regions. While the cold war integration was either COMECON-directed, or within one country, Yugoslavia, many of these “old” trade ties have been severed for political reasons, but may need to be re-established as “natural” complementarities. Some recent rapprochement efforts between ex-Yugoslav countries give rise to a slight optimism, but many of the transport infrastructure conduits have been cut and need to be re-established, also extending to Albania and other neighboring countries.
– Trade patterns with the EU have been reinforced by the integration of many firms of the region into EU-dominated value chains. While this is a positive development, the crisis showed that such a model contains also dangers which in the future need to be mitigated by further efforts of the countries to promote innovation and higher value-added productions, in order to better stratify their production portfolio and their competitiveness. In future, competitiveness will be less and less achieved by low wages, but more and more by higher value production and services.
– While the authors correctly point to the very significant role of remittances in financing not only consumption, but also small-scale business development, they fail to stress the massive loss of human capital through emigration. This brain drain is still continuing and needs to be addressed quickly. Programs to promote education, to induce emigrants to return, especially those in the professions and the highly skilled ones need to be developed, in order to be able to upgrade production and maintain public services.
– In short: the future growth model will need to rely less on outside drivers (financial integration, trade and value-chain integration and imported know-how through FDI and technology transfer), but more on local and regional sources. This reinforces the idea for stronger regional and neighbourhood cooperation. A “hub-and-spoke” model based alone on bilateral relations with the EU – the dominant model of the past – might not suffice.
While the integration of political and economic factors is admirably achieved by the authors, in my assessment they do not place sufficient importance on the ravages which the Yugoslav wars still play in the minds of many people in the region. It is an unfortunate fact that e.g. in Bosnia so much talk is about “who did what” and much less effort goes towards building the future. The unsettled refugee problems, the increasing ethnic-religious nationalist tendencies, the governance dysfunctionalities in Bosnia-Hercegovina – all these are tremendous stumbling blocks towards faster development. It is an unfortunate fact that the outside world – while having a strong interest in a stable Balkan region politically – does not “need” this region to invest in. Globalization has opened up the whole world for potential investors: lack of dynamism, backward-lookingness, endless political-bureaucratic procedures (viz. the damning reports of the “Doing Business” of the World Bank Group) –and the pervasive corruption by political and economic elites – all these weigh against most countries in the region as investment locations. While there is large potential, also these negative factors must be taken into account.
And there is the issue (recognized by the authors) of “reform fatigue”. We “Westerners” tend to forget that the present crisis for the people in the region is the second severe crisis within less than a generation: many countries lost around half of their GDP after the change; four countries (Bosnia, Macedonia, Montenegro, Serbia) still have not recovered their 1989 GDP. The frequent stop-and-go of reforms by the various governments has subjected the people to a perception of permanent, never-ending reform. Planning for the future is difficult, prospects uncertain, the drive towards emigration pervasive. Political bickering, strategy reversals after elections, political clientelism and favouritism – all these make populations weary and reform-tired. It is no surprise that more than half the persons surveyed in the Life-in-Transition Survey report that they are worse off than before. While data may show this not to be true, for necessary reform efforts it is the perception which counts. The increasing income inequality, the experience of wide-spread unemployment, low wages – all these account for an increasing impatience of the people.
It will require much political skill, will and effort in the region – and the support from the outside – to make Cviic’s and Sanfey’s optimism come true. Their book lays the groundwork for developing this optimism. It deserves to find wide readership.