Foreign investment in the more productive sectors of the region’s economy may be put at risk by skills shortages driven by high levels of migration.

With their minds focused on trying to mitigate the damage wrought by coronavirus, Western Balkans leaders will be hoping the pandemic will not aggravate an emigration crisis that threatens to undermine the fragile economies of this south-east corner of Europe.

The European Union is providing €3.3 bn to help the Western Balkans overcome the ravages of Covid-19, yet it is governance shortcomings that have over the years prompted an exodus of people from North Macedonia, Kosovo, Albania, Serbia, Montenegro and Bosnia. Migration has creating serious labour and skills shortages that could discourage employment-generating foreign direct investment, especially in the more productive sectors of the economy.

While prior to the pandemic unemployment in the region had reached an all-time low in most countries – though still over 10% in Serbia and Albania and 25% in Kosovo – a report by the Vienna Institute for International Economic Studies and the World Bank assessed rather ironically that, apart from job creation, emigration was key to the reduction.

Based on Labour Force Survey data, the study said, the overall working-age population of Western Balkan countries dropped by about 762,000, or 6%, since 2012. The European Council on Foreign Relations, citing Eurostat sources, says 230,000 people left in search of employment in 2019 alone, most from Bosnia and Kosovo. Alarmingly high numbers of Western Balkans citizens are now living abroad.

The former Yugoslavia was a source of labour for more advanced European countries, particularly Germany, long before the Balkan wars of the 90s, but the conflict and the region’s lack of political and economic progress expedited the process. Limited job opportunities, widespread corruption, democratic deficits, nationalism and stuttering efforts to meet EU accession requirements have all contributed to outmigration; the demographic consequences of, which have been compounded by low fertility rates, resulting in a shrinking, ageing population.

A brain drain of young, educated and skilled people is one of the most concerning features of the emigration wave – data suggests they are over-represented among migrants. The Vienna Institute study said that of European countries, those of the Western Balkans are facing the highest risk of brain drain. It regards its youth as especially vulnerable, particularly the highly educated.

Crucially, the trend robs countries of the human capital critical for the value-added industries they need to promote growth and break away from the perception of the region as primarily a destination for low-cost manufacturing.

The study said a recent survey of exporting firms across the Western Balkans found some 70% experiencing skill shortages, which they ranked as their top constraint. Apart from Serbia, which has built an IT hub in Belgrade, the information technology and services sector is said to be one of the industries that has been most affected by skill losses across the region. And even Serbia is reported to remain more vulnerable to the trend than new EU member states such as Estonia and Slovenia.

Yet the region’s proximity to European markets, improvements in the business environment, decent transport infrastructure and lower costs have to some degree compensated for the human resource challenges. In recent years, the Western Balkans has been attracting growing amounts of foreign direct investment. The FT’s fDi Markets shows it drew 147 greenfield FDI projects in 2018, the highest number of investments for six years. The incoming funds added up to nearly $10bn, with Serbia, the largest country in the region, accounted for 70% of the projects.

But migration could potentially put a break on inbound funds if investors worry that they won’t be able to find suitable or sufficient workers for their plants and joint ventures. Tim Judah, the Economist’s Balkans correspondent, and author of a recent demographic study of the Balkans, says there are already signs of the latter.

He recounts one interview with an economist in North Macedonia who said that some overseas investors entering the country have complained that promises of labour force availability failed to materialise. Although Marko Cadez, president of the Chamber of Commerce and Industry of Serbia, insists that in recent years there have not been any cases of foreign companies declining to come to the region or giving up investments due to labour shortages.

Nonetheless, a recent World Bank report on the region said current investment levels are too low to sustain growth over the long term, noting that a substantial share of FDI has gone into non-tradable sectors such as real estate and retailing, which do not contribute directly to exports. The Vienna Institute study pointed out that the stock of FDI is concentrated in less productive sectors compared to the EU’s newer member states. It said high quality and skilled labour, critical for export growth and Global Value Chain integration, are lacking in the Western Balkans. Serbia’s ICT sector is a notable exception.

As with other less developed parts of the world, the loss of workers and their skills is compensated to some extent through remittances. As of 2018, the latter were estimated to represent more than 8% of GDP across the Western Balkans, except for North Macedonia, and rose to 16% in Kosovo. These figures may grow in the coming years. It has become easier for people from the region to work in the EU, as some destination countries, themselves hit by labour shortages, increase residence permit provision. Germany has just extended a special work visa for citizens of Western Balkans countries to 2023.

Remittances, however, will be of little consolation to leaders of Western Balkan states if the exodus of workers continues, undermining plans to develop their economies. They will need to work hard to build up their education systems to ensure they can provide the skills investors want and introduce the reforms that will eventually gain them EU accession.

The economic effects associated with being in the bloc, argues Judah, initially led to a surge in emigration in Balkan neighbours Bulgaria and Romania but in the last few years international investment has made a huge difference with thousands now returning to their countries. These are good omens for the Western Balkans, but worryingly for the region, EU membership still seems a very long way off.

Yigal Chazan is the head of content at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CIS region.