The Balkans: The View from Brussels

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

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January 4, 2003

The denizens of the Balkan have always accused the Western media of ignorance, bias and worse. Reports from east Europe are often authored by fly-by-night freelancers with little or no acquaintance with the region. Even The Economist - usually a fount of objective erudition - blundered last week. It made a distinction between "wily" Albanian "rebels" and "moderate" Albanian "nationalists" in the ruling coalition. Alas, these two groups are one and the same: the "wily rebels" simply established a party and joined the government.

The European Commission - which maintains bloated and exorbitant missions in all the capitals of the Balkan - should be held to higher standards of reporting, though. Last month it published the second issue of "The West Balkan in Transition". Alas, it is informed not by facts but by the official party line of Brussels: all is well in the Balkan and it is largely thanks to us, the international community.

The report's numerical analyses are heavily warped by the curious inclusion of Croatia whose GDP per capita is three times the other countries'. Even with this distorting statistical influence, the regional picture is mixed. Inflation has undoubtedly been tamed - down from 36 percent in 2000 to 6 percent last year. But the trade deficit, up 25 percent on last year, is an ominous $10 billion, or an unsustainable one fifth of the region's combined gross domestic product.

About 70 percent of the shortfall is with the European Union and it has grown by a whopping 40 percent in the last 12 months. This gap is the outcome of the EU's protectionist policies. The Balkan's economic mainstays are agriculture, mining and textiles. The EU has erected an elaborate edifice of non-tariff barriers and production and export subsidies that make it inordinately difficult to penetrate its markets and render the prices of its own produce irresistible.

This debilitating and destabilizing trade discrimination is, of course, not mentioned anywhere in the report, though it sings the praises of utterly inadequate trade measures unilaterally adopted by the EU in 2000. The sad - and terrifying truth - is that the region survives on private remittances and handouts. The EU has done very little to alleviate this dependence by tackling its structural roots.

As assets depreciated in the dilapidated region, foreign direct investment (FDI) - mainly by Greeks, Germans, Slovenes and Austrians - has inevitably picked up, though surprisingly little. At $100 per capita, it is one of the lowest in the world.

The region's GDP is still well below 1991. The "growth" recorded since 1999 merely reflects a very gradual recovery from the devastation wrought on the region by the Unites States and its European allies in the Kosovo crisis. This, needless to add, also goes unmentioned.

The report's data are sometimes questionable. Consider Macedonia, for instance: its trade deficit last year was $800 million, or 24 percent of GDP - not 11.4 percent, as the report curiously stipulates. Foreign direct investment in 2001 was heavily skewed by the proceeds from the sale of the national telecom, most of which may not qualify as FDI at all. The figures for the inflation and budget deficits in 2002 are, in all probability, wrong. One could do better by simply surfing the Internet.

The report relies clubbily on information provided by the IMF - and openly espouses the controversial "Washington Consensus". Thus, it attributes "economic stability" (what is this?) and "price stability" to the use of "external anchors", namely exchange rate pegs.

Yet, there is a good reason to believe that rigid, multi-annual pegs have contributed to burgeoning trade deficits, the crumbling of the manufacturing sector, double digit unemployment (one third of the workforce in hapless Macedonia and twice that in Kosovo) and the region's dependence on foreign aid and credits. Macedonia's last devaluation was in 1997. Cumulative inflation since then has amounted to almost 20 percent, rendering the currency overvalued and the terms of trade hopelessly unfavorable.

At times, the report reads like outright propaganda. Trade ministers in the region would be astounded to learn that the numerous bilateral free trade agreements they have signed were sponsored by the much derided Stability Pact. The Stabilization and Association process, crow the authors, "considerably improved the political outlook in the region". Tell that to the Macedonians whose country was torn by a vicious civil war in 2001, after it has signed just such a agreement with the EU.

To say that donor funding "finances investments and supports reform" is to be unusually economical with the truth. Most of it is sucked by the recipient countries' insatiable balance of payments deficits and gaping budgetary chasms. Donor money encourages inefficiency and corruption, conspicuous consumption and imports. Luckily, international financial institutions, such as the IMF, are increasingly replacing such charity with credits conditioned on structural reforms.

The section of the report which deals with "fiscal consolidation" astonishingly ignores the informal sector of the region's economies. With the exception of Croatia, the "gray economy" is thought to equal at least one half the formal part. More than one tenth of the workforce are employed by underground enterprises.

International trade, tax revenues, internal investments and even FDI are all affected by the penumbral entrepreneurship of the black economy, comprised of both illicit businesses and tax evading but legitimate ones. It renders fiscal policy less potent than in other European countries.

Predictably, the report also fails to note the contradictory nature of Western economic prescriptions.

Thus, wage compression in the public sector - touted by the IMF and the World Bank - leads to a decrease in the remuneration of civil servants and, thus, encourages corruption. Yet, the very same multilateral institutions also exhort the countries of the Balkan to battle venality and cronyism. These goals are manifestly incompatible.

Contractionary austerity measures and enhanced tax collection reduce the purchasing power of the population and its ability to save and to invest. This is not conducive to the emergence of a private sector. It also hampers counter-cyclical intervention - whether planned or through automatic stabilizers - by the government. This demonetization is further aggravated by restrictive monetary policies, absence of foreign financing and investment and the pervasive dysfunction of all financial intermediaries and monetary transmission mechanisms.

The report ignores completely - at least on the regional level - crucial issues such as banking reform, inter-enterprise debt, competition policy, liberalization, deregulation, protection of minority shareholders and foreign investments, openness to foreign trade, research and development outlays, higher education, brain drain, intellectual property rights, or the quality of infrastructure. These matters determine the economic fate of emerging economies far more than their budget deficits. Yet, shockingly, they are nowhere to be found in the 62 pages of "The West Balkan in Transition".

It is disappointing that an organization of the caliber of the European Commission is unable to offer anything better than regurgitated formulas and half-baked observations lifted off IMF draft reports. The narrow focus on a few structural reforms and the analysis of a limited set of economic aspects is intellectually lazy and detrimental to a full-bodied comprehension of the region. Little wonder that more than a decade of such "insightful expertise" led to only mass poverty, rampant unemployment and inter-ethnic strife.

Written March 24, 2013

Croatia on the Verge of EU Accession

From our window in the iconic, art deco, recently renovated, and surprisingly affordable Hotel Regent Esplanade in Zagreb, Croatia’s increasingly chic capital city, my wife, Lidija, and I watch the swelling police presence centred on the august establishment’s regal entrance. Serb footballers are slated to arrive and confront their Croat counterparts in a historic match: benign echoes of the rabid and gory war that tore these neighbours apart two decades earlier. Croatia’s imminent accession to the European Union (EU) is supposed to erase these bitter memories and restore a sense of safety and stability to this beautiful country. Membership would confer no other immediate benefits as the ailing supranational club is preoccupied with one economic crisis after another.

Yet, to its visitor, Croatia presents a duality that is hard to reconcile. Figures like Cardinal Aloysius Stepinac, Zagreb’s pro-Ustashe Archbishop during the country’s Nazi-leaning period and Franjo Tudman, its controversial first President after it seceded from Yugoslavia are extolled and celebrated. Veterans of paramilitary police units which committed atrocities in Croatia and Bosnia-Herzegovina are venerated and installed in offices in centre town. In contrast, the city is an epitome of the best qualities of both old-fashioned Europe and its new, more youthful incarnation. Croat youngsters are largely apolitical and tech-savvy. Amidst a culinary big bang, a cultural-historical cornucopia, and a varied and cosmopolitan shopping experience, Zagreb is joining Dalmatia, Croatia’s breathtaking beachfront, as a tourist destination.

Luxury hotels like the immaculate and ornamental Esplanade are re-orienting themselves to cater to families, honeymooners, and even the occasional backpacker with differential pricing, special packages and offers, and a warm, and impeccably welcoming atmosphere. Corporate business still constitutes the bread and butter, though, as more than 90% of Croatia’s 11.5 million annual tourists (with c. 60 million nights) migrate to the sunny and sea-ridden islands to the east.

Albania, NATO member and EU aspirant

The imposing Italian-Fascist architecture of Tirana fails to mask the merry and, at times, ominous chaos that is Albania. Street hawkers huddle conspiratorially as they peddle smartphones and watches of dubious provenance while policemen idle, visibly bored with the hair-trigger traffic and the stinging drizzle. The city pulses vitally night and day: a sempiternal carnival of lights and sounds and smells in the throes of a construction frenzy gone amok. Still, poverty is evident and all-pervasive and the rule of Law is largely an empty slogan. Shady economic and political interests may have receded to the background, but they still control the levers of power. The roads, where they exist, are in a mind-boggling state of disrepair and it is not uncommon to come across posses of masked men in mysterious black uniforms manning checkpoints and roadblocks. The situation is rumoured to be different in the south where massive investments in tourism infrastructure are creating a new Riviera, replete with modern hotels and hospitality services.

Amidst this vortex, a new breed of intellectuals asserts itself: an unbridled explosion of music and prose and poetry. Speech is surprisingly free and daring. EU membership is perceived by this vanguard as a guarantee of a better future, not only economically, but politically as well: the local breed of unruly and often criminalized politicos can be tamed only by an external, unrelenting, impartial force, such as the European Commission.

Albanian hopes of importing from the outside values which Albanians seem to lack inherently, such as work ethic and respect for the Law, are bound to be frustrated. The very clannish, exclusionary, and patriarchal structure of this society needs to be dismantled before Albania joins the family of modern nations. It is a tall order, but not an impossible one.

Macedonia: Solipsism and Megalomania

It is common today to read state-sanctioned interviews in the tame and manhandled local media with crackpot “scholars” and “analysts” of domestic and foreign issue. These explain why Macedonia should not join the sick men of Europe, how the European social model is bound to fail, and why Macedonia’s alleged historical and cultural heritage is unsurpassed and unique. This is part of a growing trend of navel-gazing, cognitive dissonance, and compensatory megalomania that finds its ultimate expression in a wasteful and grandiose clutter of construction projects strewn across the congested and less-than-clean capital city of Skopje.

With NATO and EU accession blocked by a belligerent Greece, the future looks bleak. Apartment prices are declining, unemployment is stuck at an unsustainably high level, poverty is stark and widespread, foreign direct investment dried up, and the brain drain is rampant. Internecine political bickering brought the country to a virtual standstill. The government employs one quarter of the workforce and its budget amounts to more than half of the country’s GDP, one fifth of which consists of remittances from abroad and other unilateral transfers.

The Albanians of Macedonia want out, no longer content to let the ethnic Macedonians steer the ship of state. Violent clashes are a weekly occurrence. The international community is busy elsewhere and pays only lip service to Macedonia’s integration in the EU. Things are bound to get a lot worse before they get somewhat better.

The European Union wishes for an ever closer union between Macedonia and its neighbour Kosovo. Such integration would alleviate the latter’s inglorious isolation and provide a natural outlet for Macedonian products and the pent-up entrepreneurship of Albanians in western Macedonia. It would also counter Serbia’s disruptive influence. But this is a perilous strategy as it is often misinterpreted by the natives as a tacit nod and wink at their not-so-latent irredentism.

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