Western Balkans Competitiveness Outlook 2024: Regional Profile

Executive summary

Despite the Western Balkans experiencing a robust post-pandemic recovery, marked by a GDP growth of 7.9% in 2021, further progress was subsequently hampered by the economic fallout of the Russian aggression against Ukraine. The region has grappled with economic slowdown and inflationary pressures, primarily driven by escalating food and energy prices that have disproportionately impacted lower-income households and energy-intensive sectors. Furthermore, the energy crisis has underscored the critical need to diversify the energy supply and accelerate the Western Balkans' transition towards a low-carbon and environmentally sustainable economy. Against this backdrop, a comprehensive economic reform agenda that charts a course towards sustainable, inclusive and resilient growth and improved living standards is paramount for the region. This report seeks to contribute to this endeavour.

The regional profile of the Western Balkans Competitiveness Outlook 2024 groups and presents findings from assessments of 15 policy dimensions across five broad policy clusters that are key to the region’s economic growth and convergence towards OECD and EU standards. It leverages the complementarities among different policy areas and provides a holistic and comprehensive approach to economic reform agendas. The five clusters comprising this report’s main chapters are 1) infrastructure and connectivity; 2) skills; 3) business environment; 4) digital transformation; and 5) greening. The new structure also closely resembles the economy-specific reform agendas requested by the Western Balkans to submit to the European Commission as part of the new Growth Plan, thus offering continuous guidance in the design and monitoring of these agendas across the region.

Key achievements

Since the last Competitiveness Outlook assessment in 2021, the Western Balkans (WB6) have made strides across the five policy clusters, with infrastructure and connectivity and digital transformation particularly standing out for their notable progress.

Efforts to address infrastructure gaps and improve regional connectivity have improved

Public investment in transport – boosted by EU financing – has accelerated, albeit mostly focusing on road infrastructure rather than other travel modes. Nevertheless, visible work is ongoing on building and rehabilitating railways, including train stations. Continuing to improve physical transport infrastructure, especially along the main connectivity corridors, remains essential, as this will be translated into important gains in connectivity for businesses and citizens. The region has continued to advance towards aligning its energy policies with the EU by transposing a significant share of the EU’s Third Energy Package, which has contributed to liberalising the markets for new entrants. Substantial progress has also been made in deploying organised markets for electricity in the region, providing a key step towards further regional energy market integration and enabling potential improvements in price competitiveness and supply security. Many economies have also rolled out auctions for solar, wind and hydro energy, and increased their total renewable energy capacities – total energy consumption from renewable sources stood at 26.8% in 2022, compared to 23% in the EU.

Digitalisation is increasingly being leveraged as a primary driver of economic growth

Digitalisation remains a key priority for the Western Balkan governments and is receiving further impetus through reform agenda measures. E-government national portals are continuously being upgraded with new services, functioning as a one-stop shop for e-government services and serving as a central access point for businesses and citizens. Broadband roll-out and access to fast broadband speeds are also progressing – in 2022, one-third of all connections were fibre. Additionally, many of the region’s economies have witnessed robust growth in the information and communication sector (ICT), with exports of ICT services increasing from 8.2% of total service exports in 2018 to 13.0% in 2022. The region’s economies are increasingly focusing on supporting small and medium-sized enterprises (SMEs) to adopt digital technologies, develop e-commerce and e-business, and engage in digital innovation.

Key priorities

By contrast, progress has been more muted in the skills, business environment and greening clusters. The following recommendations would help the region to address challenges and further promote economic growth and convergence towards the OECD and EU.

Revamp education systems and design policies to equip the population with the necessary skills for the future

Continuous brain drain coupled with skills gaps and mismatches cause labour shortages. Businesses in the Western Balkans have increasing concerns about labour shortages and report that finding skilled labour is challenging. Despite the increasing number of tertiary education and vocational education and training (VET) graduates, education systems are unable to supply the skills needed by businesses. Results from the 2022 Programme for International Student Assessment (PISA) reveal challenges in delivering quality education, with the majority of 15-year-olds (79%) in the Western Balkans assessed as low performers in at least one of the three tested subjects, compared to an OECD average of 45%. Fostering a conducive environment for talent retention and skill development is imperative for mitigating the adverse effects of brain drain and alleviating labour shortages in the long term.

Address barriers that distort the level playing field for businesses

Addressing barriers that distort the level playing field for businesses is crucial to promote trade and investment, and thereby facilitate economic growth. Progress has been limited in tackling the region’s large informal sector and combating corruption, both of which hinder the business environment and create unfair distortions to competition. Strengthening the implementation of anti-corruption and tax reform measures, as well as further advancing on digitalising public services, hold significant potential to spur economic transformation by reducing corruption and informality. Prioritising reforms of state-owned enterprises (SOEs) and improving their governance also remains essential for the region. The development of a robust corporate sector is hindered by the significant presence of inefficient SOEs in the economies. It is imperative to transform SOEs' management structures, eliminate political patronage and reduce fiscal risks.

Step up decarbonisation and conservation efforts to sustainably boost economic growth

Measures to mitigate climate change and ensure the sustainability of economic activities are scarce across the Western Balkans, leading to environmental and health concerns, most notably air pollution. The annual average concentrations of fine particulate matter (PM_2.5) is almost double EU levels (22.8 µg/m³ vs. 13.5 µg/m³, respectively), and is four times higher than World Health Organization recommended levels of 5 µg/m³. Meanwhile, economic sectors such as tourism, mining and agriculture persist in posing threats to biodiversity conservation and ecosystem health. Alongside combatting pollution and environmental degradation, the Western Balkans must retain private sector competitiveness in light of the EU’s Carbon Border Adjustment Mechanism, particularly as the EU is the region's largest trade partner, constituting close to 70% of its goods exports. Supporting the private sector's access to green finance and training, introducing carbon pricing, and developing supporting policies aimed at protecting vulnerable populations is essential to shift the WB6 economies towards increased sustainability.

Detailed insights into the Western Balkans’ performance across all the assessed policy dimensions, trends over time, or comparisons with other economies can be found in the economy profiles of the Western Balkans Competitiveness Outlook 2024, and the Western Balkans Competitiveness Data Hub.