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bne April 2019 Cover story I 31
out from being credible alternatives to Central Europe at least for the foresee- able future. The biggest problem is their small size.
The most populous country in the region, Serbia, has only 7mn inhabit- ants; Montenegro has a population of just over 620,000. This means they are unable to offer the scale of labour pool to attract investors in large numbers. And this is unlikely to change as the Western Balkans for the most part suf- fers from the same low birth rates and high emigration as the CEE countries. From this point of view there would
be a better case to enter Ukraine, with its 44mn-strong population, but the politics are so unstable that rather than FDI flowing into Ukraine, millions of Ukrainians have been flowing out to look for work, taking up vacant positions in Poland and other Central European countries.
Secondly, these are not just small but also highly fragmented markets. Supply chains that once spanned Yugoslavia were severed with the breakup of the federation in the 1990s. Infrastructure, if not destroyed in the wars, no longer made sense when borders were redrawn, and deteriorated. Despite ongoing investments into roads and railways in the region, most financed by either EU infrastructure funds or Chinese loans, the transportation links are far worse than those in Central Europe.
Then there are the administrative barri- ers, again unlike in CEE, where countries have been part of the EU common market for 15 years now. Serbia’s Vucic has been pushing a proposal to create a Western Balkans common market by removing
barriers to cross-border trade within the region, which as well as benefitting local exporters and importers would encour- age FDI – Vucic claimed in 2018 this would double the current level of FDI and bring in at least $8bn-9bn of investments a year. However, while the concept has support from some top EU officials, there is less enthusiasm within the region.
“There has been a lot of talk about a com- mon market for the Western Balkans, but little action,” Koneska tells bne IntelliNews. “Politicians see little benefit or politi-
cal capital from the idea, which is often described as a ‘mini Yugoslavia’. What they are trying to achieve is to join the big EU market, not to create a free market for the region, so it’s not seen as a priority among governments in the region.”
It’s also at the mercy of complex region- al politics, and looks like an even further off prospect since Kosovo slapped 100% import tariffs on goods from Serbia and Bosnia in a politically motivated move in late 2018. Despite external pressure, the tariffs remain in place with a damaging impact on trade.
Migrate or automate
But probably the biggest problem for
the Western Balkans countries when it comes to attracting inward investment, is that there isn’t a solid case to claim the region is better value than CEE when productivity is taken into account.
A report released by the World Bank
and wiiw in March points out that while wages and labour costs are significantly lower in the Western Balkans than in the EU – with no clear convergence in recent years – “When compared to productiv- ity, the apparent labour cost advantage
of the Western Balkans countries disap- pears and the two most direct EU com- petitors, Bulgaria and Romania, seem significantly more competitive.”
This means that while there are success stories from the region – notably Fiat in Serbia – the Western Balkans can’t be viewed as a viable alternative to Central Europe in the near future. The answer to this problem is to invest into its people, but this is a very long-term project. There is also the chance to invest into infrastructure and technologies that could allow them to catch up faster, following in the footsteps of other tiny countries that have become champions in specific areas such as Estonia (population 1.3mn) in the digital economy or Slovakia (population 2mn) in automation.
But in the meantime, companies are starting to respond to the CEE labour squeeze by investing into automation. How successful they are will likely deter- mine whether CEE becomes a higher value location, or if companies choose to look east for lower costs.
“The big companies, mostly controlled from Germany or Austria, have a decision to make,” said Grieveson in the wiiw webinar. “They can go further east or further south where there is more labour, but I think countries
in [Central Europe], especially the Visegrad countries and Slovenia, have big advantages – proximity to western markets, infrastructure, and even though these may be deteriorating, better institutions. Our sense is that foreign companies will mostly stay in the region and automate, but there’s definitely a risk that they don’t.”
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