While the collapse of communism 25 years ago marked the start of the transition to market economics for all Emerging Europe, the economic transformation of the Western Balkans really got going only after the conflicts that ravaged the region in the 1990s, the IMF says in its report published on Tuesday.
The IMF puts Croatia, Bosnia and Herzegovina, Serbia, Montenegro, Kosovo, Macedonia and Albania in the Western Balkan group of countries, while 15 'old' EU member countries plus Malta and Cyprus are put in the category of advanced EU countries, and the remaining 10 EU countries in the Emerging Europe group.
The transformation process in the Western Balkans lost momentum in the mid-2000s, due in part to reform fatigue and encroaching vested interests. For some time, though, ample liquidity and unsustainable capital inflows provided temporary fixes. Then the 2008 financial crisis hit hard, and exposed many structural vulnerabilities, says the report.
That is the reason why Western Balkan countries lag behind other Emerging Europe states in terms of economic transformation and income levels, which account for one-third of income levels in developed EU economies.
A clear proof of the weakness of the region's economic model are extremely high unemployment rates, which in many countries have remained above 20% even during the peak period of pre-crisis upturn, according to the document.
In the post-crisis years, the Balkans had a lackluster performance, with "the incomplete reform process... holding back convergence to income levels of richer EU economies," despite the weak external environment.
Faster growth alone may not be sufficient, Western Balkan countries also have to create new jobs to reverse labour market weaknesses which are the reason why many of them are lagging behind richer countries, the IMF says.
It concludes that the main priority for the countries in the region is to continue with deep structural reforms, including the privatisation of the remaining state-owned and public companies, and dealing with the problem of competitiveness to make the private sector the key generator of growth.
The IMF also recommends abolishing legislative practices that hinder employment growth and distort the situation in the labour market.
It recalls that the main preconditions of lasting growth are safeguarding macroeconomic stability and low inflation, reducing fiscal deficits and public debt and investing in export sectors, as well as reducing non-performing loans and developing the non-banking financial market.
The IMF report notes that in Croatia, as in the other countries, reforms should be carried out in ten areas. The priorities are policy transparency, cutting unnecessary state spending, protection of minority stakeholders, the impact of business rules on foreign direct investments and the cost of agricultural policies.
The situation is slightly better but reforms are still required as regards alleviating the pressure of government regulations, distribution of foreign ownership, misuse of public funds and the public's trust in politicians.
The IMF report also points to the need to work additionally on reforms in the area of property rights.