Southeastern Europe is a region rich with opportunity and potential, but obstacles to private sector development such as a weak investment climate, lack of access to finance and insufficient investment and trade opportunities must be overcome to ensure its long-term prosperity, say economists at the EBRD.
A publication issued on www.ebrd.com provides an overview of private sector activity in the region and evaluates the prospects for catching up with the EU accession countries. According to the publication, southeastern Europe (SEE) is undergoing significant improvements. Reforms are proceeding steadily in most countries, economies are growing, and foreign investors are showing increasing interest.
Peter Sanfey, lead author and a senior economist at the EBRD, says that countries across SEE have made strong progress since the late 1990s. For a third straight year the region has outpaced Central Europe and the Baltic States (CEB) in macroeconomic growth, with real GDP increasing in 2003 by 4.3%, compared with 3.6% in the neighbouring region. Moreover, last year SEE attracted more than US$6bn in foreign direct investment, a record amount. Perhaps most importantly, countries in SEE are now cooperating with each other on a range of issues, for example, through bilateral free trade agreements and the creation of a regional electricity market by 2005. Such cooperation, Sanfey adds, fosters stability and makes the region as a whole more attractive for potential investors.
The publication warns, however, that countries in SEE still face significant challenges, which, if not addressed, could hinder future growth and prosperity. While the investment climate has improved, doing business in SEE remains difficult, especially for small and medium-sized enterprises (SMEs). Bureaucracy, regulations, the time and cost of setting up a new business, and a lack of access to finance are just some factors that prevent businesses from reaching their full potential and, in many cases, encourage them to operate in the untaxed “informal” economy. Countries must also do more to tackle corruption, which despite coming down in recent years, according to an EBRD/World Bank survey, is still widely prevalent. Tackling these challenges effectively is essential if countries wish to attract future foreign investment, especially investment into new, “greenfield” projects, Sanfey says.
The large informal sector in SEE, while helping alleviate poverty and unemployment for many, constitutes a significant loss of revenue for governments. It also provides unfair competition to those businesses that are registered. According to the publication, the thriving informal sector is associated with the difficulties of doing business in SEE. By addressing these issues, countries in the region can encourage more businesses to make the transition from the informal to the formal sector, benefiting both their budgets as well as promoting the growth of the private sector, thereby helping the region catch up even further with CEB.
More detailed macroeconomic information on the SEE countries, as well as the bank’s other countries of operations, can be found in the Transition Report Update, which can be requested from firstname.lastname@example.org.