Economic Performance in South- East European Transition Countries After the Fall of Communism
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Tahir Mahmutefendic
Tahir Mahmutefendic was born in Tuzla, Yugoslavia, now Bosnia and Herzegovina. In 1959 his family moved to Sarajevo, where he finished his education in 1978, gaining a first class honours from the Faculty of Economics at the University of Sarajevo, where he subsequently worked as a lecturer in Political Economics and Finance. In 1987 he earned a Master of Philosophy degree in International Economics from Belgrade University and in 1996 a PhD degree from the same university. Tahir Mahmutefendic published six books and tens of articles and book reviews. Currently he is a professor of Economics at Sarajevo School of Science and Technology and a private university in Vitez/Travnik. Tahir Mahmutefendic was a youth chess champion of Bosnia and Herzegovina in 1975 and is a Bosnian chess master. He speaks eight languages.
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- Rating: 5 out of 5 stars5/5A comprehensive analysis of economic performance in the Balkans transition countries after the fall of communism. The best part is objective and balanced approach to advantages and disadvantages of the capitalist and communist system.
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Economic Performance in South- East European Transition Countries After the Fall of Communism - Tahir Mahmutefendic
Copyright © 2014 by Tahir Mahmutefendic.
Library of Congress Control Number: 2013923718
ISBN: Hardcover 978-1-4931-3965-1
Softcover 978-1-4931-3966-8
Ebook 978-1-4931-3967-5
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Rev. date: 01/08/2013
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CONTENTS
Acknowledgments
List of Tables
List of Abbreviations
Preface
Introduction
Chapter 1 – Economic Performance In South-East European Countries 2001-2003
Chapter 2 – Macroeconomic Dynamics In The South East European Transition Economies In 2004
Chapter 3 – Intra-Regional And Inter-Regional Trade In South-East European Transition Economies
Chapter 4 – Economic Performance In South-East European Transition Countries In 2005
Chapter 5 – Economic Performance In South-East European Transition Countries In 2006
Chapter 6 – Economic Performance In South East European Transition Countries In 2007
Chapter 7 – The Economic Performance Of South East European Transition Countries In 2008
Chapter 8 – Recession In 2009 And Its Impact On – The See Transition Countries
Chapter 9 – The Recovery In South-East European Transition Countries In 2010?
Chapter 10 – The Impact Of Transition On Welfare And Distribution Of Income In South-East European Countries
Chapter 11 – Conclusion
Bibliography
Appendix 1
Appendix 2
Appendix 3
Endnotes
Dedicated
To Ekbal and Moenes
ACKNOWLEDGMENTS
I owe a debt of gratitude to the following individuals:
Dr Eric Beckett Weaver, Editor in Chief of the South Slav Journal
Nemanja Marcetic, Honorary President of the South Slav Journal and former editor in Chief of The South Slav Journal
Pat Taylor, former Deputy Editor in Chief of The South Slav Journal
Edward Alexander, translator from Bosnian/Croatian/Serbian to English
Miro Ivanovic, ICT manager at CISCO
Finally, I owe my gratitude to those to whom this book is dedicated
LIST OF TABLES
Table 1—Economic Growth in the Balkan Countries in 2004
Table 2—Foreign Direct Investment in the Balkan Countries in 2004
Table 3—Unemployment Rates in the Balkan Countries in 2004
Table 4—Inflation Rate Measured by Consumer Price Index
in the Balkan Countries in 2004
Table 5—Balance of Payments in the Balkan Countries in 2004
Table 6—External Debt in the Balkan Countries in 2004
Table 7—Share of Trade in GDP, 2002 (%)
Table 8—Percentage of exports and imports to other
SEE countries, 2002
Table 9—Share of the EU in SEE exports and imports (% 2002)
Table 10—Growth of the world output in 2007
Table 11—Selected economic indicators 2009/2010
Table 12—Growth and composition of credit and currency
composition of loans, by country, March 2009
Table 13—Percentage of the population in South-East European
transition countries living in absolute poverty using international poverty standards
Table 14—The economic situation is better today than in 1989
(Per cent of respondents)
Table 15—Relative Levels of GDP per Capita
LIST OF ABBREVIATIONS
AD—Aggregate Demand
AVNOJ—The Antifascist Council of National Liberation
BiH—Bosnia and Herzegovina
C—Consumption
CDO—Collateral Debt Obligation
CEBS—Central European and Baltic States
CEFTA—Central European Free Trade Area
COMECON—The Council for Mutual Economic Assistance
CPI—Consumer Price Index
CPF—Croatian Privatization Fund
EC—The European Commission
EBRD—The European Bank for Reconstruction and Development
ECB—The European Central Bank
EFTA—The European Free Trade Area
EIB—The European Investment Bank
EU—The European Union
ERM—Exchange Rate Mechanism
FBIH—Federation of Bosnia and Herzegovina
FDI—Foreign Direct Investment
FI—Foreign Investment
FTA—Free Trade Agreement
FRY—The Federal Republic of Yugoslavia
FYR Macedonia—The Former Yugoslav Republic of Macedonia
G—Government Expenditure
GDP—Gross Domestic Product
I—Investment
ICT—Information and Communication Technologies
ILO—The International Labour Organization
IMF—The International Monetary Fund
IPO—Initial Public Offerings
K—Multiplier
M—Imports
Mb—Monetary Base
MCI—Monetary Conditions Index
MPC—Marginal Propensity to Consume
Ms—Money Supply
NAFTA—The North American Free Trade Area
NASDAQ—North American Stocks, Dividends and Quarterly
NATO—The North Atlantic Treaty Organization
OECD—The Organization for Economic Co-operation
OPEC—The Organization of Petroleum Exporting Countries
OPT—Optimal Purchasing Technique
PTA—Preferential Trade Agreement
R—Monetary Reserve Ratio
RPI—Retail Price Index
RS—Republika Srpska
SEE—South East Europe
SEEREM—South East European regional Electricity Market
SWF—Sovereign Wealth Fund
T-Bills—Treasury Bills
UK—United Kingdom
US—United States
USA—United States of America
VAT—Value Added Tax
WTO—World Trade Organization
X—Exports
PREFACE
South East Europe is another name for the Balkans. The Balkans is a Turkish word meaning a mountain covered in forest. The region comprises the former Yugoslavia, Romania, Bulgaria, Greece, Albania and the European part of Turkey. The Balkans is one of the three peninsulas in Southern Europe. Unlike the other two, the Iberian and the Apennine, which are religiously and culturally homogeneous, the Balkans have always been a crossroads of civilisations and a mosaic of different religions, cultures, nations and ethnicities. This has been the cause of bloody conflicts throughout history. In addition the Balkans have always been the poorest region in Europe, with the possible exception of the 1960s, during which a successful economic development placed Greece and Yugoslavia near the bottom of the list of developed countries.
The Balkans were deeply divided in the aftermath of the Second World War. The regions heterogeneity was four-fold. The countries of the Balkan Peninsula had different internal political system, external political links and associations, different economic systems and different patterns of economic links with the rest of the world.
1. Greece and Turkey were mainly capitalist countries and parliamentary democracies and with multi-party political systems, which were on two occasions interrupted by military dictatorships. The other four countries, namely Albania, Bulgaria, Romania and Yugoslavia were communist countries with one-party system.
2. From the point of view of external politics the Balkans were even more divided. Greece and Turkey were members of NATO. Romania and Bulgaria were members of the Warsaw Pact. Yugoslavia was a non-aligned country, whilst Albania did not belong to any pact or association of countries. It had intensive links with the Soviet Union until 1961 and, after this point with China.
3. Greece and Turkey were market economies with their governments playing a large role in their economies, Bulgaria and Romania were centrally planned economies. Yugoslavia was a semi-market economy, containing elements of both the systems.
4. Greece and Turkey were the members of OECD and had the most intensive economic links with capitalist countries. Romania and Bulgaria were the members of COMECON and had the most intensive economic relationships with the other communist countries. Yugoslavia was the most open communist country with intensive economic links to both East European and West European countries, especially the Soviet Union, West Germany and Italy. Albania was a closed country with a negligible level of economic relations with the rest of the world.
Political and economic fragmentation is at the same time one of the causes and consequence of backwardness. The collapse of communism was viewed by some as a golden opportunity to integrate the region and turn it into a prosperous part of Europe. The introduction of parliamentary democracy, multi-party systems and free elections politically unified the region. Transition from centrally planned economy and in the case of Yugoslavia from a semi-market economy to a market economy had, amongst others the aim of removing the differences in economic systems which existed between the region’s countries. Various initiatives such as the Stabilisation and Association Pact and bilateral trade agreements were supposed to beef up the weak relations which existed between the region’s countries. The possibility of European Union and the NATO membership was supposed to act as a carrot, the aim of which was to integrate the Balkans into the wider European economic and political frameworks through dynamic economic expansion.
The international community supported transition in the Balkans by providing political, technical and financial aid. Individual countries, the European Union and international financial institutions gave tens of billions of dollars with the aim of stabilizing and integrating the Balkans and turning it into a prosperous European region.
It has been more than two decades since the beginning of the transition. This seems to be a sufficiently long period to analyse and assess the transition’s achievements.
This book has eleven chapters. The first one analyses economic performance in South-East European countries during the period of 2001-2003. There were two reasons why this has been treated as a single period Firstly, this was the beginning of economic transition for the whole region in which the dynamics of internal factors prevailed and the transitional countries of South East Europe were only marginally affected by the external environment. Secondly, data and sources for this period can be scarce and sometimes contradictory in nature (this might, however, be the case for the later period, albeit to a lesser extent).
The second chapter deals with macroeconomic dynamics in SEE transition countries in 2004.
The third chapter follows the patterns of intra-regional and inter-regional trade in SEE transition countries.
The chapters four to seven analyse economic performance in SEE transition countries from 2005 to 2008, a period of un-interrupted prosperity.
Chapters eight and nine deal with the recession in the world economy in 2009 and its impact on SEE transition countries and the fragile recovery which followed in 2010.
The chapter ten analyses the impact of transition on welfare and distribution of income in SEE transition countries. It ends with a subjective assessment of the transition. This links to the last chapter entitled ‘The Results of Transition are disappointing-Was Communism altogether Bad? The last chapter calls for a more balanced assessment of the two economic and political systems.
The South-East European transition region comprises most of the former Yugoslavia, namely Bosnia and Herzegovina, Macedonia, Montenegro and Serbia Romania, Bulgaria and Albania. Although part of Slovenia’s territory belongs to the Balkans historically, culturally and according to its level of development the country belongs to Central Europe. To a lesser extent, the same applies to Croatia as well. However, Croatia shares some characteristics with South-East Europe. This is why Croatia is sometimes classified as a Central European and sometimes as a South-East European country.
In 1992, Serbia and Montenegro declared a new state The Federal Republic of Yugoslavia. The state remained under this name until 2002, when it was transformed into a loose union called Serbia and Montenegro in which Serbia retained the dinar as its currency whilst Montenegro unilaterally introduced the euro. In 2006 Montenegro seceded and became an independent state. This is why, until 2006 there were seven countries and after 2006 eight countries South-East Europe; Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Montenegro, Romania and Serbia.
INTRODUCTION
At the end of the 1980’s, the economies of communist countries were in a dismal condition. The major problems stemmed from the following:
• Large, inefficient, subsidised state-owned enterprises
• An illiquid banking sector due to financing inefficient state-owned enterprises
• Huge fiscal deficits due to subsidies and soft budget constraints
• A distorted price structure which led to the misallocation of resources
• Shortages of some goods and surpluses of other which were of a low quality and a narrow choice
• A black market which offered goods which were in shortages at exorbitant prices
• Excess employment/artificial full employment which added to the inefficiency of state-owned enterprises
Out of all of the communist countries, Yugoslavia was in the best condition. This was due to the following factors:
• A semi-market self-management economy with a high level of industrial democracy
• Various types of pluralism non-existent in the other communist countries
• By far the largest private sector which accounted for about 25% of the Social product
• Open borders, which enabled its citizens to travel abroad and become familiar with practices in the West
• A great number of citizens who worked in Western European countries, providing remittances, which helped to reduce the balance of payments deficit and increased the standard of living
• The highest standard of living in Eastern Europe
• A constitution which did not forbid the formation of political organisations. Therefore, only minor adjustments in the constitution and changes in law were required to introduce a multiparty system instead of a complete legal overhaul
It was expected that the transition to a market economy would be easiest for Yugoslavia. It was also expected that Yugoslavia would be the first country to join the European Union. Unfortunately, the violent break-up of the country put Yugoslavia behind almost all of the other communist countries in the transition process.
The plight of the South- East European countries did not finish with the end of war in Croatia and Bosnia and Herzegovina in 1995. The wars of Yugoslav succession had their sequel in 1999 when NATO waged a 78-day war against Serbia. The war destroyed Serbia’s infrastructure and temporarily severed economic links between a several South- East European countries.
The other three countries also experienced severe difficulties during the 1990’s, fraught with political scandals in Bulgaria and Romania and a financial scandal in Albania linked to a pyramid scheme scam. Almost the whole decade was lost for most of the region. In the words of John Kenneth Galbraith, one strong and imperfect system was replaced by the absence of any system. As a result transition had a different path from the one experienced by Central European and Baltic States. While the former experienced a V-shape change in output (recession followed by recovery) the latter recorded a W-shape of change in economic performance (recession followed by recovery, followed by recession and finally recovery)
At the beginning of the 21st century, all of the South East- European countries embraced reforms aimed at transforming their countries to free market economies. These reforms went through three stages: market-enabling, market-deepening and market-sustaining. Market-enabling reforms are the easiest and quickest to implement. They include price, domestic and foreign trade liberalization and a privatization of small enterprises. Market-deepening reforms include the privatization of large companies and assets and the strengthening of banking and non-banking financial institutions such as leasing, pension and equity funds. Market-sustaining reforms are the most difficult to carry out. They involve governance and enterprise reforms, competition policy and infrastructure reform in five sectors—electricity, railways, roads, telecommunications, and water (including waste water). They also cover issues such as commercialization, tariff reforms, quality of the regulatory framework and involvement in the private sector.
With the first and second stages of the reform firmly in place and with the flow of aid and loans from the West, in a global environment of cyclical upturn in the world economy, the South East European countries experienced a vigorous and sustained growth from 2000 to 2008, before the recession in 2009. Transition to free market economy has so far produced positive and negative results.
Positive results are evident in the following:
• More dynamic growth than in Central European and Baltic States and the European Union. This has enabled some catching-up to take place, however there is still a huge difference in the level of development and many decades of successful economic development are needed in order to achieve a full real convergence
• A prudent monetary policy which was successful in tackling inflation and decreasing it to historically lowest levels
• Sound exchange rate policy, whether in the form of currency board, pegging currency to the euro, unilateral adoption of the euro or managed floating. This policy brought stability and in some cases the appreciation of the real exchange rate
• A prudent fiscal policy which brought government balances into range between moderate deficits and moderate surpluses. In this respect South-East European countries fare better than most of the other European countries
Negative results are most evident in the following:
• Large external imbalances which increase the vulnerability of South East European countries and their dependence on foreign sources of finances,
• Rising foreign debt which in some countries is approaching unsustainable levels
• High and persistent unemployment which in some countries reaches forty percent of the workforce
• A widening gap between rich and poor and a sharp increase in absolute poverty
It is these last two items which are the main cause for concern and the main reason for widespread dissatisfaction with the transition.
CHAPTER 1
ECONOMIC PERFORMANCE IN SOUTH-EAST EUROPEAN COUNTRIES 2001-2003
1. GLOBAL ECONOMIC PERFORMANCE
The new millennium began with the slowing down of the rate of growth of world output. The deterioration in the performance of the world economy started with a recession in the USA. The recession was caused mainly by three factors: the bubble bursting in the technological sector, corporate scandals combined with so called creative accounting and widespread deregulation especially in the banking sector.
• The technological sector, led by the telecommunications industry, was the main pillar of almost unprecedented prosperity in the American economy during 1990’s. In the course of less than a decade, it almost doubled its share in the economy and accounted for two thirds of new jobs and one third of new investments. ‘Irrational exuberance’, an expression coined by Alan Greenspan, the former chairman of the Federal Reserves, to describe faith in the infinite rise in share prices, led to overinvestment in telecommunications companies with big giants vying for a monopoly. The NASDAQ index, comprised mostly of shares in the technology sector, rose