The COVID-19 pandemic poses a huge additional challenge for the region. While the region has managed an effective response overall, a return to more stringent measures is possible and the economic fallout has been severe. As the countercyclical imperative will necessitate large-scale public spending, strategic questions become more urgent than ever to ensure that resources are well spent. Because a large amount of resources will be used, missed opportunities will be much more costly than they would be otherwise. The shared strategic opportunities and challenges presented in this report are intended as a contribution to making recovery spending as strategically effective as possible.

The nine strategic priorities suggested here emerge as key levers for future development that are highly relevant for all economies in the region. The potential for peer learning and benefits from regional approaches in these areas is significant.

Further integration into the European Union (EU) is the overarching priority for all economies in the region and a core driver of reforms. The process towards integration with the EU has been an important driver of democratisation, peace and institution building in the Western Balkans and continues to provide the region with large financial and technical support for its development and regional integration. As such it serves as the backdrop and frame for the following development priorities.

Education and competences for economic transformation are the top priorities for all economies in the region. While economic structures vary significantly, finding new sources of productivity growth and engines for future transformation is an urgent task for all. Good jobs are scarce, and young people continue to leave. Boosting youth and workforce competences can unlock new opportunities to overcome these trends. The more unfavourable the economy’s current wage-to-productivity ratio is, the more this task becomes urgent; Kosovo tops this table, but the challenges are similar for all economies. Strategies for competences and the future transformation of the economy must combine education with practical training, investment promotion and proactive creation of partnerships with firms, academia and more. Digitalisation, which is currently receiving a boost from the COVID-19 crisis, must be a key element of any competence strategy.

Social cohesion presents both an opportunity and a significant challenge for all societies in the region. Underperforming labour markets leave many without attractive opportunities and strain citizens’ ability to support each other. At the same time, the lack of formal labour market participation renders the mostly contribution-based social protection systems unsustainable and under-dimensioned. Large inequalities between sub-regions and between ethnic groups add to the complexity. Local governments should be on the frontlines in addressing this challenge but, in most places, lack the capabilities in terms of organisation, incentives and funding. Strengthening social cohesion and resilience will require social protection reform, effective service delivery and supportive labour market institutions.

Energy and air pollution are complex challenges and significant obstacles to future economic development and well-being. Coal accounts for large to huge shares of energy supply across Western Balkan economies, except for Albania, which relies almost exclusively on hydropower. Many coal power plants are old and need decommissioning or significant investments to ensure reliable electricity supply. At the same time, coal, particularly when burned with old technology, is a driver of climate change and causes significant air pollution, which is the region’s foremost environmental burden. Given the current product space of most of the region, attainable opportunities could exist in energy-intensive metals and machines. However, this would only be possible with a more sustainable and reliable energy supply. Meanwhile, a cleaner environment, especially in the major urban centres, is a top desire of residents and would be crucial to making the region an attractive place to live, invest and return to.

Digitalisation is an unstoppable global trend that can offer the region important opportunities for transforming education, the economy and governments. The COVID-19 pandemic, with its global shift to teleworking and digitalised services, has accelerated digitalisation. At a time when resilience requires the ability to keep an economy going while imposing physical distance between people, digitalisation is essential. Beyond the pandemic, digitalisation has the potential to become a building block of more competitive and productive economies in the region. Given the strong tradition of engineering and mathematics education and young populations eager to connect to the world, a push for digital competences has potential. Done right, bolstering digital skills could also help alleviate unfavourable wage-to-productivity ratios. The biggest potential of digitalisation might be in transforming governments and public service delivery. Inefficient government structures and lack of capacity for service delivery, especially at the local level, have been identified as major constraints to development in all initial assessments. Better governance and services were also among the top dimensions in all future visions.

Migration and brain drain present considerable challenges for all societies in the region; making more of diasporas, on the other hand, holds opportunity. Emigration and remittances have been defining features in most of the region over the last decade. They help take the pressure off underperforming labour markets and supply many households with additional income, significantly contributing to poverty reduction and improvements in living standards. They also deprive the region of young talents, potentially contributing to the lack of economic innovation and transformation. Public services, especially medical care, also suffer as qualified people leave. The emotional cost to those who remain is considerable and might fuel resentment towards the European project in the long run. Yet, past migration holds significant potential in the form of a large diaspora in the more advanced economies of Europe and North America. Elsewhere in the world, diasporas have been important sources of investment and know-how, suggesting that more can be made of these links through investment programmes, sponsorships and incentives for return migration.

Women face particular obstacles to full participation in societies in the region. Across economies, women’s low participation in paid work due to full-time household chores, lack of child and elderly care services and cultural norms that encourage traditional division of labour is striking. This is in contrast to many post-communist societies, which traditionally have comparatively high levels of female labour market participation. While the current poor labour market conditions and high unemployment pose challenges for both men and women, and increased female participation could not easily be absorbed, things can change. If economies seize the opportunities laid out in this report and the initial assessments, demand for qualified labour, including female labour, will increase dramatically.

Land management and registration of property rights pose significant challenges in most economies, with deleterious consequences for rural development, revenue generation and the environment. The multiple changes in legal and political regimes in the last century have left most economies with significant numbers of overlapping land claims. These stem from both formal regime change and the fact that traditional – from today’s perspective informal – means of land transfer have been used where formal channels were not sufficiently present or accessible. In addition to registration problems, cadastres are not complete everywhere and are at times incoherently organised. As a result, often property cannot be used as collateral to access financing, and much of farming is hampered by small plots, as growth through purchase of land is blocked. Yet, sustainable agricultural techniques often require larger plot sizes to generate sufficient returns, and the current small-plot structure incentivises intensive practices with heavy environmental tolls in the form of overuse of water and pesticides.

A focus on local governments, their implementation capacities, funding and incentives can help identify important opportunities for future development. Local governments are key in implementation and delivery but often do not play their role. Local governments provide many services, such as education, health care, social assistance and water and waste services. Many municipalities have sizeable staff and spend the large majority of their budgets on salaries. However, benchmarking shows that the services delivered are not in line with what is spent on their delivery. Political patronage often plays an outsized role in hiring at the local level, and in some economies, the incentive structure, set by how local governments receive their funding from the centre, leads to further surplus hiring, as opposed to smart investments in performance. While the structure of multi-level government organisation varies, all economies struggle in some way with delivery at the local level. Learning from each other and from what has been done elsewhere in the world could point the way to new opportunities and solutions.

The high pace of production and the quality of legal texts and strategies across the region are impressive. Yet translation into practice often remains slow. State structures tend to be overly complex. Numerous ministries and agencies and unclear lines of accountability delay decisions and cost time and resources. Frequent political changes and insufficient protection against undue influence are other sources of delay and impediments. At the same time citizens place the rule of law, good governance and effective policy making very high in their visions of a good future. Coming together around the objectives of effective public delivery and implementation in a context of good governance can lead to paths towards new opportunities for development and enable achievements across the strategic priorities listed here.