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Public Infrastructure in the Western Balkans: A Highway to Higher Income
February 8, 2018
Roadwork in Albania. Improvements of transportation, energy, and telecommunications networks could speed up the catching up of the Western Balkans with the European Union (photo: Arben Celi/Reuters/Newscom)
Western Balkan countries (Albania, Bosnia and Herzegovina, Kosovo, Former Yugoslav Republic of Macedonia, Montenegro, and Serbia) have underdeveloped transport, power, and telecoms networks, compared with the European Union (EU) average. Closing the public infrastructure gap will help the region catch up with Western European living standards. But where will the money come from? Increased financing will be needed both from domestic and foreign sources. Better planning and implementation of public investment projects is also a must, a recent report says.
Income convergence toward EU levels has slowed significantly in the Western Balkans since the global financial crisis. The region’s economic development is progressing slowly. If the countries are to close the gap in living standards with the EU, they will need to find a way to re-energize economic growth.
The IMF has identified the region’s missing core public infrastructure as a significant obstacle for higher economic growth. Better transportation, energy, and telecommunications networks would help Western Balkan countries raise productivity, integrate deeper into the bloodstream of global trade, and improve the region’s attractiveness for foreign investment. The analysis shows that a regionally coordinated public infrastructure push, coupled with better management of actual projects, could significantly increase per capita income. The long-term gain of real GDP per person could be as high as a 3-4 percentage points.
But catching up with the EU in infrastructure levels is hard: public investments require ample budget resources and strong institutional frameworks governing the selection, execution, and monitoring of projects. These two conditions are largely missing in the Western Balkans. Most countries in the region already have high levels of public debt, and some also have high budget deficits. The difficulty of tapping international capital markets constrains liquidity. Management of public investment is also weak.
Despite the obstacles, the potential gains of improving infrastructure clearly point to the need for Western Balkan countries to invest in modernizing their transport arteries and energy and telecom infrastructure. The IMF recommends the following actions:
