Living standards in the Western Balkans remain significantly lower than those in the European Union, with a yawning gap that could take over seven decades to close if current trends persist, according to a report released by the European Bank for Reconstruction and Development (EBRD) on Tuesday.

The report finds a persistent challenge of low productivity stemming from historical under-investment, weak institutions, unfavourable demographics, and a challenging business environment.

"People in the Western Balkans are typically much poorer than their counterparts in the EU," said the report. 

According to the EBRD's analysis, the gross domestic product (GDP) per capita in the Western Balkans, adjusted for purchasing power parity (PPP), stands at less than half the EU average, with an average GDP per capita of $18,131 (€16,827) in 2021. There are significant region differences too, with the average GDP per capita in 2021 ranging from $13,240 in Kosovo to $22,787 in Montenegro.

Despite some progress in narrowing the gap over the past two decades, the pace of convergence has slowed notably since the global financial crisis of 2008-09.

“The region has come a long way in the last few decades but there is still a big gap with the EU,” said EBRD president Odile Renaud-Basso at the development bank’s annual Western Balkans Investment Summit in London on February 26. She described the findings of the report as “sobering”. 

The report says that achieving full convergence with EU living standards would require a significant acceleration in growth rates, with various scenarios suggesting timelines ranging from two to three decades under optimistic conditions to around 70 years under more pessimistic projections. Under the most optimistic scenario developed by the bank, this could be shortened to 40 years. 

"The fundamental problem facing Western Balkans economies is low productivity," said the EBRD report. 

“The region has had decades of under-investment, most noticeably in infrastructure and the energy sector. Businesses face day-to-day problems, such as corruption, informality and a lack of public-sector administrative capacity that are deeply entrenched and therefore difficult to reform. Most countries in this region have also seen falling populations since the 1990s as a result of declining birth rates and large emigration outflows.”

It pointed out that the gap in labour productivity between the EU-27 and the WB-6 has “barely changed” since 2001, and not at all since 2009. 

“Labour productivity has been stagnant in the region for the past decade, implying that economic growth has come from higher employment rather than greater efficiency in production,” according to EBRD research. 

“In several countries, the state still plays an outsize role in the economy, and productivity in [state-owned enterprises] SOEs is typically well below that of private companies. Most exports from the region are low in complexity and value added, although this is improving gradually in some countries. Meanwhile, SMEs face pervasive and long-standing problems in doing business, such as unfair competition from the informal sector (the number one obstacle in many business surveys), difficulties in accessing finance on reasonable terms, and barriers to international trade and integration.” 

While private investment is deemed crucial for driving economic growth, the report also stressed the importance of well-prioritised public investments in infrastructure, given their potential to stimulate growth and employment in the long term.

“Investment levels are comparable to those in the EU as a per cent of GDP but inadequate given the major needs of the region. Further private investment is needed for export-oriented firms and industries. The post-pandemic focus on geographic proximity and “near-shoring” could bring new opportunities for investors, provided the enabling conditions are in place,” said the report. 

The prospect of EU accession is highlighted as a potential catalyst for accelerating convergence, drawing parallels with the rapid progress seen in Central European countries that joined the EU in 2004.

The EBRD report detailed reforms the Western Balkans region must undertake, particularly in governance, competitiveness, and environmental sustainability, if they are to catch up with the bloc. 

It suggested a three-pronged approach focusing on better governance, enhanced openness to trade and investment, and green development as key avenues for fostering sustainable growth and narrowing the economic gap with the EU.

The EU's new Growth Plan for the Western Balkans, unveiled in November 2023, is seen as a potential driver for much-needed reforms, with conditionality tied to accessing enhanced funding envisioned under the plan.