Southeast Europe Competitiveness Report 2006

World Economic Forum Geneva, Switzerland 2006
The Southeast Europe Competitiveness Report 2006
Augusto Lopez-Claros, World Economic Forum Klaus Schwab, World Economic Forum Jennifer Blanke, World Economic Forum
The Southeast Europe Competitiveness Report 2006 2006 World Economic Forum
The Southeast Europe Regional Competitiveness Report 2006 is published by the World Economic Forum and is the result of a collaboration between the World Economic Forum and the Regional Economic Forum for Southeast Europe. This Report is a special project within the framework of the Global Competitiveness Programme.
Professor Klaus Schwab Executive Chairman Dr Augusto Lopez-Claros Director Jennifer Blanke Simone Droz Margareta Drzeniek Thierry Geiger Kerry Jaggi Emma Loades Irene Mia Justina Roberts Saadia Zahidi
Copyright 2006 by the World Economic Forum All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission.
A special thank you to AmadeaEditing for excellent copyediting and to Ha Nguyen for her superb graphic design and layout. The terms country and nation as used in this report do not in all cases refer to a territorial entity that is a state as understood by international law and practice. The term covers welldefined, geographically self-contained economic areas that may not be states but for which statistical data are maintained on a separate and independent basis.
Contents
Preface
by Klaus Schwab
PART 2
Country Profiles......................................................................39
How country profiles work.........................................................41
PART 1
Measuring Southeast Europes Competitiveness: Paving the Way for a Prosperous Future in Europe .................................................1
I. II. Introduction..........................................................................3 The starting point for the countries of Southeast Europe .................................................................5
Albania .......................................................................................5 Bosnia and Herzegovina ............................................................6 Bulgaria .....................................................................................7 Croatia........................................................................................8 Macedonia, FYR.......................................................................10 Romania ...................................................................................11 Serbia and Montenegro ...........................................................12 Slovenia....................................................................................13
Albania .....................................................................................44 Bosnia and Herzegovina ..........................................................48 Bulgaria ...................................................................................52 Croatia......................................................................................56 Macedonia, FYR.......................................................................60 Romania ...................................................................................64 Serbia and Montenegro ...........................................................68 Slovenia....................................................................................72
Partner Institutes Acknowledgement
77 78
III. The competitiveness of Southeast Europe in recent years .......................................................15 IV. Benchmarking Southeast Europes present competitive performance ......................................20 Measuring the current competitive landscape in Southeast Europe: The Global Competitiveness Index.....................................23
V.
VI. Policy recommendations....................................................35 VII. Conclusions........................................................................37
Preface
KLAUS SCHWAB Executive Chairman, World Economic Forum
The countries of Southeastern Europe have faced numerous challenges since the fall of the Berlin Wall and the dissolution of Yugoslavia 15 years ago.The serious issues with which the region has had to cope in making the transition from centrally-planned to market-based economic systems have been compounded by ethnic strife and civil unrest, conflicts which have added significantly to the costs of these fundamental changes. However, recent years have seen substantial progress in Southeast Europe. Many countries in the region have been tackling the reforms necessary for accession to the European Union very seriously. As a result, dramatic changes have occurred, included the freeing up of markets, the transformation of political structures, and the development of new institutions. Indeed, the progress made in bringing about a solid foundation of macroeconomic stability and implementing ambitious structural reforms has been sufficiently impressive, that several countries are now at the threshold of membership in the EU, with one country, Slovenia, having already joined in May 2004. However, the reform process has much farther to go. Although the region has made strides in implementing reforms, the results have been mixed, and vary widely among countries. Difficult social and political conditions prevail, and many obstacles to growth remain. Aware of the importance of the successful integration of Southeast Europe into the global economy, the World Economic Forum is proud to present the first edition of The Southeast Europe Competitiveness Report. As a supplement to our Global Competitiveness Report 20052006, this new Report places the challenges facing the counties in the SEE region in an international context, and highlights the progress these countries have made in establishing sound business environments, and supporting private sector economic activity. More important, the Report identifies the main obstacles to improved growth performance and enhanced international competitiveness.Through in-depth analyses of regional trends and detailed country profiles for the countries in the region, the Report is intended to serve as a guide to policymakers and business executives alike. My appreciation goes to Augusto Lopez-Claros, Director of the World Economic Forums Global Competitiveness Programme, under whose guidance this Report is published, and to his able team.Together with The Global Competitiveness Report, and special reports on other regions and topics, the Southeast Europe
Competitiveness Report is part of a family of research studies that mirror the increasing integration of the world economy. Finally, we extend special thanks to the Regional Economic Forum for Southeast Europe for its support in this worthwhile venture.We hope that this Report will be given wide distribution, and that its contents will be seen as a contribution to the debate on the various policies, which the authorities in these countries should follow, as they pursue full integration with, and membership in, the EU.The World Economic Forum supports this strategy and stands ready to assist these countries in their laudable efforts to modernize their economies and narrow income levels with respect to the rest of Europe. In this spirit, we view this Report as the first in a series of follow-up studies, focused on the challenges confronting the Southeast Europe region as a whole. v
Part 1: Measuring Southeast Europes Competitiveness
Measuring Southeast Europes Competitiveness: Paving the Way for a Prosperous Future in Europe
Prepared by a team headed by the Director of the Global Competitiveness Programme, including: JENNIFER BLANKE, MARGARETA DRZENIEK, IRENE MIA and SAADIA ZAHIDI
I. Introduction The past decade has been a difficult one for Southeast Europe (SEE). Political and military conflicts, combined with the challenging transition from centrally planned to market economies, have taken a heavy toll on the regions economic performance and on the living conditions of its inhabitants. Although very much at the geographic center of Europe, conflict and instability have aggravated the wide existing disparity in income between SEE countries and much of the rest of Europe, as shown in Figure 1.1 However, much progress has been made over the past few years to stabilize the region and to restart a sustainable growth path. Following the end of regional conflicts in the Balkans, governments are now focusing on reforms aimed at macroeconomic stabilization and structural transformation. Institutions are getting stronger, investment is recovering, and regional trade is increasing. Nevertheless, with high levels of unemployment and the legacy of a decade of military conflict in much of the region, a great deal remains to be achieved for these countries to become truly competitive economically and fully integrated not only with the rest of Europe, but with the global economy. In some sense, the SEE countries find themselves today at a crossroads not unlike the crossroads that faced the countries of Central and Eastern Europe at the end of the 1980s and the beginning of the 1990s.The end of the Cold War and the emergence of democratic forms of governance, coupled with the decision to nurture the development of the institutions and practices of a market economy, posed fundamental challenges to the governments of the region. How were they to ensure a smooth and peaceful transition to democracy, and at the same time unleash a process of economic reforms designed to eliminate the distortions and rigidities of the central planning era and modernize their economies and institutions? In retrospect, it is evident that a key component of the successful transition of the Central and Eastern European countries to the market was their early decision to seek membership in the European Union (EU), a goal that received strong political support among EU members. Accession negotiations and the need to fulfill the many policy and institutional requirements implicit in the acquis communautaire provided a well-defined framework for macroeconomic discipline and structural reform. Governments in Central and Eastern Europe increasingly found themselves assessing policies according to whether those policies would accelerate or slow down the process of their EU integration.The EU membership drive broadly supported within civil societies in all of the accession countriesgalvanized the political classes and focused their energies on a single, overwhelmingly important, strategic objective: to become members of an enlarged European Union. Regardless of the challenges these countries faced as they strove to achieve the income levels of the more prosperous members, there can be no doubt that
Measuring Southeast Europes Competitiveness
Figure 1. Gross domestic product per capita, current prices ($US)
12,000
10,000
8,000
Bulgaria
6,000
Hungary Romania
4,000
2,000
0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Source: IMF, World Economic Outlook Database. September 2005.
the process itself, which culminated in May of 2004 with their accession to the European Union, has been a resounding success.2 The governments of the SEE countries are now seeking to replicate the successful strategy used by the ten countries that acceded to the European Union in May 2004, and they are implementing the economic, structural, and institutional reforms necessary to adapt their economies to the demands of EU membership.These countries are very much part of the European geographic and historical landscape.Thus, their eventual membership in the EU is generally seen as beyond doubt.The only question is how soon and under what circumstances will they be able to join? A key component of their strategy will be sustained reform.To this end, they will have to develop tracking mechanisms to allow the governments and the business community to assess their progress over time in building modern, flexible economies that are able to withstand the competitive pressures of other countries, particularly those already operating in an enlarged European Union. The World Economic Forum will be able to assist these countries in this process in the following ways: first, by assessing the starting point for each, by identifying the strengths and weaknesses that characterize their macroeconomic and institutional environments, and, more broadly, the many other factors that determine each countrys underlying level of competitiveness; second, by providing a periodic review of progress made, making it possible to measure the distance still to be traveled by each country to reach EU levels of development and competitiveness. (In the case of Slovenia, already an EU member, the study will allow an examination of the speed of
convergence with the EU average, over a broad range of indicators.) Competitive economies are those able to increase the living standards of their citizens.This first edition of The Southeast Europe Competitiveness Report assesses the state of competitiveness of the countries in the region. It includes a detailed analysis of the specific issues or problem areas on which each country must focus in order to strengthen its national competitiveness. Only by addressing a wide range of functions critical to economic performance will these countries be able to join the ranks of the more competitive economies in Europe. The Report assesses the competitiveness of eight countries from Southeast Europe: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Former Yugoslav Republic of Macedonia, Romania, Serbia and Montenegro, and Slovenia.These countries are covered by the 2005 Executive Opinion Survey (Survey), which is carried out annually by the World Economic Forum and is the source of many of the data on which our analysis is based. Section II provides a summary analysis of each countrys starting point for purposes of this study.The SEE region is heterogeneous in nature. Each country has followed a particular development path during the past decade, and each of the eight economies discussed in this Report has come to a different starting point in 2005.What macroeconomic and structural reforms have they accomplished over the past decade, within the constraints of their particular environments? What are some of the remaining challenges? This section will provide a benchmark for the more detailed discussions on competitiveness to follow.
Section III presents the results of the main tool, the Growth Competitiveness Index, used by the World Economic Forum during the period 20012005 to assess national competitiveness.This section presents a historical perspective on the evolution of competitiveness in the SEE region. All eight countries except Albania have been included in at least two publications of the World Economic Forums Global Competitiveness Report, in some cases since 2001. Section IV describes how we benchmark Southeast Europes present competitiveness in comparison with the performance of a number of other countries and regional groupings. Here we present several indicators that allow the reader to see the SEE countries in a regional and international context. Section V broadens the analysis of section III by framing the discussion of competitiveness in the context of the recently developed Global Competitiveness Index, which includes a number of factors not previously considered in the Forums competitiveness work. Sections III and V thus complement each other, presenting mutually reinforcing visions of competitiveness in the SEE countries and illustrating the broad range of factors that can be brought to bear in measuring it. Section VI includes policy recommendations for the countries of the SEE region, based on our competitiveness research. Section VII presents our principal conclusions. Following this chapter are the competitiveness profiles of each country in the SEE region, identifying specific strengths and weaknesses, and offering the reader an opportunity to see how the eight SEE countries are performing vis--vis each other by comparing and contrasting the different areas driving their levels of competitiveness.
II. The starting point for the countries of Southeast Europe

Albania
Under Enver Hoxhas 40-year iron rule, Albania experienced the most extreme form of isolation and self-inflicted autarky a country can endure. Obsessed with Titos unconcealed desire to annex the country to Yugoslavia, he suppressed all foreign trade and private sector activities (including private farming) in favor of forced industrialization and self-sufficiency. He also quashed any form of political, social, economic, or cultural internal opposition, plunging Albania into oppression, backwardness, and poverty. As a consequence, Albania began its transition in 1991 as one of the least developed post-communist countries. And after nearly 15 years of sustained gross domestic product (GDP) growth and the adoption of sound macroeconomic policies, Albania remains among the poorest countries in Europe, with a GDP per capita at purchasing power parity thatat US$4,937 in 2004is the lowest in the region, bar Serbia and Montenegro. Moreover, more than 25 percent of Albanians are living below the poverty
line, and rates of unemployment were as high as 14.4 percent at the end of 2004. In this context it is perhaps not surprising that emigration has been extremely high. According to the International Office of Migration, since 1990 almost 1.1 million Albanians left the country for Greece, Italy, and the United States. Indeed, the legacy of Hoxhas regime has been a significant burden as well as a challenge for the nascent democracy on its thorny path to economic and political reform. In this regard, three different phases can be highlighted from 1991 to the present. The initial 19911995 phase saw the newly elected authorities break away from central planning and isolationist foreign policies, turning instead to international institutions and Western countries for financial support and advice. This period saw the adoption of sound macroeconomic reforms, including the privatization of the farming sector, the elimination of price controls, and the liberalization of the trade and currency exchange system. Such policies led to remarkable results: inflation was brought down from triple to single digits, and the external current account deficit was reduced from almost 40 percent to 6.5 percent of GDP. At the same time, the private sector began to generate a full 75 percent of GDP. During the 19931996 period, rates of growth were as high as 10 percent per year and living standards rose substantially.The year 1992 also represented a major political milestone, with an extensive electoral victory of the Democratic Party (DPA), whose leader, Sali Berisha, became the first democratically elected president of Albania. Nevertheless, Albanias inexperience with the workings of a free market economy, coupled with a still-vulnerable financial sector and weak public institutions (including the rule of law and transparency), set the basis for the second, rather less successful phase extending from 1996 to 1997. This phase was characterized by the rise of pyramid investment schemes and their subsequent collapse, which caused widespread anger toward the government and even came close to triggering a civil war.This period thus saw a sharp drop in economic activity and tax revenues, a 40 percent depreciation of the lek, and soaring inflation. The seriousness of the situation prompted Berisha to call for new elections, which were held among widespread violence in the summer of 1997 and brought back to power the Socialist Party (SPA), led by Fatos Nano.This marked the beginning of the third phase, which is still in progress. Against an appalling economic background, the freshly elected SPA government rapidly defined and embarked on a strategy to put Albania back on the track of recovery, backed by an International Monetary Fund (IMF) emergency package and a World Bank rehabilitation credit. Prudent macroeconomic policies rapidly restored macroeconomic stability, bringing inflation back down to manageable levels. The 20002004 period saw a real GDP growth rate of 6 to 7 percent (with the exception of 2002, when the
growth rate dropped to 4 percent as a consequence of floods and serious energy shortages). Moreover, the SPA government adopted an agenda of structural reforms. These reforms included the liquidation of the pyramid schemes, the strengthening of tax and customs administration, the improvement of public expenditure management, and the acceleration of privatizations (including state-owned banks) in order to strengthen the private sector. A new constitution was also adopted in 1998 guaranteeing, at least on paper, the respect of the rule of law and the protection of fundamental human rights. Another feature of this phase was the governments strong emphasis on external relations. Albania joined the World Trade Organization (WTO) in 2000, began negotiations with the European Union in 2002 for a Stabilisation and Association Agreement and significantly strengthened its links with the United States in view of joining the North Atlantic Treaty Organisation (NATO) at a later stage. Over the transition years, the European Union has become Albanias main trading partner, with Italy purchasing almost 75 percent of its exports and Greece and Germany purchasing a combined 15 percent of its exports; jointly Italy, Greece, and Germany have been supplying 70 percent of its imports. Albania has come a long way since its initial phase in 19911995, and its macroeconomic performance has been extraordinary.Yet, in order to sustain growth and lift more of its citizens out of poverty, a handful of problematic areas and worrying trends remain. One problematic area is the economys concentration in the textile and footware industries. Since the communist-forced industrialization period, industry has decreased its share of the GDP from 40 to 20 percent in 2004, with two-thirds of total export revenues presently generated by clothing and shoes manufacturers.These are often subcontractors for Italian or EU firms that import semi-finished goods and re-export the final products. Such a heavy reliance on mature and low value-added sectors poses non-negligible risks for the economy. Moreover, the services sector in Albania is much smaller than in any of the other post-communist countries, confirming Albanias less-advanced development and transition. With regard to other obstacles to competitiveness, corruption, organized crime, lack of transparency, and political instability continue to be significant problems for Albania, requiring serious attention.These areas generate hindrances for doing business in the country and also deter foreign investors from bringing in the capital and technology so needed to update Albanias productive structure. Albanias foreign direct investment (FDI) stock is one of the lowest in Eastern Europe, despite Albanias evident comparative advantages in terms of labor cost and proximity to the European Union. On a hopeful note, the DPA coalition eventually took office in September 2005, and proclaimed the fight against corruption and organized crime to be the top priority of the governments first 100 days in office. A special taskforce, headed by President
Berisha himself, has been put in place to draft a new anticorruption and crime strategy.
Bosnia and Herzegovina
Bosnia and Herzegovina (BiH) has faced formidable challenges and undergone many changes over the past decade. The BiH authorities have had to cope with an extremely challenging environment characterized by the economic and social devastation of civil war, continuing tensions among ethnic groups, and the weakness of the central state. Also presenting a complicated challenge are the thorny relations and power-sharing arrangements of its two composite entities, the Republika Srpska (RS) and the Federation of BiH (the Federation), and the complexities of massive international involvement. The strengthening of the central state, as envisaged and set as a goal in the Dayton Accords, has often been boycotted by the three dominant nationalist parties: the Party of Democratic Action, or SDA; the Serbian Democratic Party, or SDS; and the Croatian Democratic Union, or HDZ BiH.This has caused the international communityrepresented by the Office of the High Representative (OHR)to increase its involvement since 1998, turning BiH into a de facto UN protectorate and further weakening the ability of the countrys central institutions to shape the political agenda. However, the OHR has recently announced its intention to progressively disengage from BiH. Some institutional reforms have been carried out as a result of combined external pressure and the internal shift of power to more moderate forces. Alongside these reforms, the secessionist tensions and ethnic conflicts have been partially appeased by the implementation, since 2000, of the Constitutional Court decision to define Croats, Muslims, and Serbs as constitutive peoples, to be represented in both entities. As a result of these reforms, a state border administration and unified army have been established.The responsibility for indirect taxation has been transferred from the two entities to the central state, and significant progress has been achieved in establishing a unified customs administration (paving the way to the adoption of a single 17 percent and EU standard-structure VAT from end 2005) as well as rationalizing the administrative and judiciary system. Aside from this complex political setting, BiHs authorities have had to deal with massive social disruption and human and health costs, not to mention the severe damage to the production sector caused by the civil war. This can be seen in a number of areas, including the countrys low life expectancy and birth rates, low employment rates (41.1 percent in December 2002 according to the IMF), and the deep de-industrialization process experienced by BiH after the war, when the share of industry in the economy declined from 50 percent of GDP in late 1980s to 30 percent in 2002. Against this backdrop, economic policy has focused on achieving
macroeconomic stability, notably on adopting sound and mutually reinforcing monetary and fiscal policies. Regarding monetary policy, the convertible marka (KM) was introduced in 1998 under a currency board system.This system first fixed the currency at parity with the DM, then to the euro. In the same spirit, reform of the banking system gave the central bank control over the banks of the two entities. In 2003, in an attempt to curb the expansion of consumer creditfollowing the entry of foreign banks in the internal marketthe BiH authorities changed the definition and level of the central banks reserve ratio, lowered the remuneration rate of excess reserves, and tightened regulations on foreign currency exposure for banks. As a consequence of these policies, inflation has been kept very low since 1998: even after the sharp rise in tobacco and transportation prices in early 2005, the figures of retail price inflation in April 2005 were still rather low, amounting to 1.4 percent for the Federation, and to 3.5 percent for the RS (which remains strongly influenced by economic trends in Serbia and Montenegro). In its fiscal policy, BiH has come a long way from the precarious budget situation of the early post-war years, when the country had the highest current spending in all of Europe. Both entities have worked to consolidate their fiscal systems, and have succeeded in rationalizing and trimming expenditures. The foreign debt BiH inherited from the former Yugoslavia has been brought under control by the partial write-off of the debt by the London and Paris Club in 1998, and by a significant discount and a favorable rescheduling of the debt with suppliers and trade creditors. Domestic debtcomposed mainly of frozen foreign currency deposits, war damage claims, and arrears to government suppliersremains a cause of concern. An agreement under which the government should pay claims with a combination of long-term bonds and cash was reached early in 2004. These encouraging steps are even more significant when one considers the decline in external assistance and the importance of ensuring that the overall demands of public expenditure financing are increasingly met by domestic public revenues. On a negative note, the BiH current account has been persistently in deficit25.6 percent and 24.1 percent of GDP respectively in 2004 and 2005, according to IMFs estimatesreflecting large trade deficits.These deficits have been brought about by poorly structured and insufficiently diversified exports, coupled with a heavy reliance on imports of consumer goods. Even if the trend has been partially corrected by a constant decline of trade deficits in recent years, it remains worrisome, as it could undermine the countrys painfully achieved macroeconomic stability. Moreover, much remains to be done within the business environment to strengthen local companies and attract much-needed foreign investment and capital flows. As of 2002, BiH authorities have paid increasing attention
to the improvement of the business climate. Key reforms aimed at reducing and rationalizing taxes, harmonizing and liberalizing the specific regulations of the two entities on labor, services and goods mobility, and lowering the cost of entry for new companiesare expected to be implemented shortly. Further, the process of privatization and enterprise restructuring has been reactivated, barriers to investment have been reduced, and centralized VAT and customs regimes created. So far the privatization process has had mixed results: it has been relatively successful for small- to medium-sized enterprises, but much less successful for the larger strategic ones because of inefficiency, the unwillingness to sell them, and a general lack of interest on the part of investors. However, under international pressure, the privatization of larger enterprises was relaunched in 2003 and 2004, leading to the successful conclusion of several privatization deals.Thanks to this process, foreign investment inflows have been gaining strength since 2003, mainly in the manufacturing and banking sectors. As the political and economic situation in BiH gradually improves and OHR involvement declines, the European Unionits largest export market and donor during and after the waris bound to assume a more significant role in maintaining political stability and in fostering economic growth. Not only have armed EU forces taken over from the NATO-led mission in December 2004, but the European Union also agreed to consider entering into a Stabilisation and Association Agreement with BiH, conditional on the countrys making significant progress on 16 priority political and economic reforms. In addition to calling for its cooperation with the International Criminal Tribunal on Former Yugoslavia (ICTY), its adoption of a unified multi-ethnic police force, and reform of administrative and judicial systems and trade liberalization, the agenda stresses the importance of sustained reform of the business sector, highlighting the key importance of private investment for its growth and competitiveness as international assistance decreases. The feasibility study conducted by the EU Commission in 2004 to assess the readiness of BiH for the Stabilisation and Association Agreement concluded that only limited progress has been achieved so far and that other significant steps must be taken before negotiations can be opened. It is worth mentioning that the agreement reached by the national entities in October 2005 to establish a unified national police forcea major step toward dissolving ethnic tension in BiHis expected to trigger new talks with the European Union on greater integration.
Bulgaria
A satellite of the Soviet Union during the Cold War, democratic opposition was not tolerated in Bulgaria at that time, and agriculture and industry were completely nationalized. After 1989 and the fall of the Berlin Wall, democratic changes were initiated, culminating in the first multi-party elections since World War II. Although this was
followed by a period of social upheaval, a new constitution was adopted in 1991; Bulgarias first democratic parliamentary elections were held that same year. Bulgarians had the opportunity to directly elect their president for the first time in 1992.The countrys transition from communism was marked by profound social and economic unrest, resulting in the well-known financial crisis of late 1996 and early 1997. Prime Minister Ivan Kostov initiated a series of reforms in 1997, which greatly helped to stabilize Bulgarias economy and modernize the country. Elections in 2001 brought a new government and president: Bulgarias ex-king Simeon Saxe-Coburg-Gotha, who returned to Bulgaria, became the first former monarch in post-communist Eastern Europe to become prime minister. As with many other communist countries, a variety of largely artificial industriessteel, heavy chemicals, electronics, information technology, and armaments, none of which were suited to competition in a post-communist environmentwere superimposed on Bulgarias traditional, functioning agricultural sector.The output of these industries declined sharply in the early to mid 1990s, seriously jeopardizing the well-being of the most vulnerable groups in the country. As might have been predicted, the result was widespread poverty. In July 1997in the wake of a sharp contraction of GDP, the collapse of the banking sector, and a major foreign exchange crisisBulgaria adopted a currency board agreement to stabilize the currency.This initiative is seen by many as having played a central role in buttressing the credibility of government macroeconomic policies and, in particular, as demonstrating a commitment to price stability. International financial institutions and development partners lent support for the comprehensive economic reforms that were being wisely adopted by the government.Wide-ranging reforms followed, which included liberalizing trade and prices; restoring the social sector; restructuring institutions in the financial, business, agricultural, and energy sectors; and jettisoning state-owned enterprises.These reforms, in combination with the adoption of the currency board, transformed Bulgarias economy, lowered inflation and attracted investors. According to the IMF, by 2003, Bulgarias GDP per capita was only 78 percent of its level in 1989, the year in which the country had embarked on its democratic reforms. However, since the onset of the 1997 reform program, continued progress toward long-term macroeconomic stability has resulted in economic growth sustained at more than 4 percent per year (4.9 percent in 2002, 4.3 percent in 2003, 5.6 percent in 2004); in low inflation; and in an increase in FDI to US$1.4 billion, or 7 percent of GDP. The European Union gave Bulgarias economy a favorable assessment, and in 2003 declared it to be a fully functioning market economy. In 2003, the government embarked on a program to deal with the severe social problems facing vulnerable and marginalized groups. Bulgarias macroeconomic policies and reform initiatives are receiving strong support from all political parties, who are united behind the drive for the
countrys accession to the European Union. In preparation for EU membership, Bulgaria successfully completed EU negotiations in June 2004, signed an accession agreement in April 2005, and joined NATO in May 2004. Significant problems remain, however, despite recent economic growth, and Bulgaria has yet to make good on a number of the stipulations cited by the European Union. Per capita incomes remain at about 28 percent of the EU average, and living standards are dangerously low. Despite the countrys progress in tackling poverty, with rates falling by two thirds from 1997 levels, the World Bank has most recently reported a poverty level of 12.8 percentstill more than double the pre-crisis level of 1995. And although living standards improved steadily over the past few years, these improvements have not been evenly spread across the population.The governments active involvement in job creation has begun to show some results as unemployment levels go down. As a result of the first phase of Bulgarias structural reforms, the private sector share of GDP reached 64 percent in 2004.The banking system is now fully privatized. Current government reforms are building on the gains of the past five years, and are strategically focused on reducing poverty, encouraging private investment, increasing productivity, and sustaining growth. New social sector reforms emphasize developing human capital (targeting high long-term unemployment and entrenched poverty) as a complement to investments made in physical capital. In addition, Bulgaria is required to control corruption and organized crime and to reform its environmental rules and competition policies if it is to join the European Union on January 1, 2007.
Croatia
Before the dissolution of Yugoslavia, Croatia was the second most prosperous and industrialized of the former Yugoslav Republics (just after Slovenia), with per capita output about one third higher than the Yugoslav average. But the economy sustained massive damage as a result of the breakup of Yugoslavia and the difficult situation following Croatias declaration of independence in 1991.The loss of Croatias former markets in Yugoslavia and the cost of the conflict caused an estimated 40 percent fall in Croatias real GDP between 1989 and 1993, according to the European Bank for Reconstruction and Development (EBRD). By October 1993, inflation had reached an unsustainable 38 percent per month. However, by 1997, GDP had recovered to 76 percent of the 1989 level.Through effective macroeconomic stabilization policies, inflation had been reduced to manageable levels.The main force propelling post-war growth was gross fixed investment.This surged by 38 percent in 1996 and 26 percent in 1997 because of reconstruction activity, such as the rebuilding of houses and damaged infrastructure. Still, economic reform moved very slowly during the late 1990s, and in 1998 real GDP declined in the final quarter by 4.4 percent, the first time it had fallen since 1994. Croatia emerged from this recession in 2000; since
Box 1. Regional processes for policy reform in Southeast Europe
The need for economic policy reforms in Southeast Europe is well understood both within and outside the region. This has prompted the creation of a number of processes aimed at helping the countries to move ahead with reforms. These processes have been initiated by members of the international community such as the European Union, the United States, and Russia, as well as international organizations such as the Organisation of Economic Co-operation and Development (OECD)all eager to ensure political and economic stability in the region. The European Union is the body with perhaps the greatest interest in the economic and political stability of Southeast Europe. Not only are these countries on its doorstep, but they also share the goal of one day joining the club, of which Slovenia is already a member. Following the end of the war in Kosovo, in May 1999 the European Commission set out its vision for the development of the SEE region. The process, which is explicitly linked to EU accession, includes a mixture of trade concessions, economic and financial assistance (through the CARDS Programme) and contractual relationships (Stabilisation and Association Agreements or SAAs). The approach was designed to motivate these countries to carry out reforms as a prerequisite for joining the European Union, reforms that included the establishment of a dependable rule of law, democratic and stable institutions, and a free economy. As explained by the EU, The conclusion of Stabilisation and Association Agreements represents the signatories commitment to complete over a transition period a formal association with the EU. Such an association has a high political value. It is based on the gradual implementation of a free trade area, and of reforms designed to achieve the adoption of EU standards, with the aim of moving closer to the EU. Through a free trade area with the EU and the associated disciplines (competition and state aid rules, intellectual property, etc.) and benefits (e.g. rights of establishment), this process will allow the economies of the region to begin to integrate with the EU. Effective implementation of the Stabilisation and Association Agreements is a prerequisite for any further assessment by the EU of the countrys prospects of accession. 1 Table 3 in the text provides details on the present relationship of each Southeast Europe country with the European Union. The European Union is not the only international actor that is interested in the stability of the SEE region. Other internationally inspired vehicles for change include the Stability Pact for Southeast Europe and the Southeast European Cooperative Initiative. Specific policies that must be carried to ensure regional stability have been outlined through the Stability Pact, launched a month after the Stabilisation and Association Process, in June 1999,2 at a meeting that included the European Union, the Balkan states, the United States, Russia, and representatives of international organizations. The economic component within the Stability Pact is called the Southeast Europe
Compact for Reform, Investment, Integrity and Growth (the Investment Compact). It is a project led by the OECD, aimed at improving the regions economic and business environment. It sets out the commitments of countries in the regionAlbania, Bosnia and Herzegovina, Bulgaria, Croatia, Former Republic of Macedonia, Moldova, Romania, Serbia and Montenegroto lay the structural policy foundations for sustainable growth and reform so as to create a robust market economy and encourage private investment. 3 The Investment Compact thus sets out a number of commitments to policy reform aimed at improving the functioning of the economies of the countries of the SEE region. As mentioned above, all countries in the region are a party to the compact except for Slovenia, which stands apart because of the relatively better overall quality of its economic and political environment. Although the specific commitments vary from country to country, the general emphasis is on the importance of improving institutional and business environments and the functioning of markets. The Stability Pact has also been coupled with Western aid directed toward helping the countries fulfill all of the articulated obligations. Another organization with similar goals is the Southeast European Cooperative Initiative (SECI), initially proposed by the United States and launched in December of 1996. The objective of this initiative is to enhance stability and cooperation among the participating countries by encouraging co-operative and transboundary solutions to shared economic and environmental problems and facilitating their integration into European structures. This process regroups a larger number of countries than those included in the two processes discussed above, including Slovenia, Greece, Hungary, Moldova, and Turkey. The goal of SECI is to promote and facilitate cooperation and communication among the governments of the region. SECI identifies problems and solutions, but does not implement the suggested projects directly, and it is not an assistance program. SECI cooperates closely with the Organization for Security and Cooperation in Europe (OSCE) and the United Nations Economic Commission for Europe (UNECE).
Notes
1 The European Commission provides information on the Stabilisation and Association process online at http://europa.eu.int/comm/enlargement/intro/sap.htm 2 The Stability Pact was set up by the European Union in June 1999 to replace the previous, reactive crisis intervention policy in South Eastern Europe with a comprehensive, long-term conflict prevention strategy. The guiding principle behind the pact is that Conflict prevention and peace building can be successful only if they start, in parallel, in three key sectors: the creation of a secure environment, the promotion of sustainable democratic systems, and the promotion of economic and social well being. Progress in all three sectors is necessary for sustainable peace and democracy. Information on the Pact can be found online at http://www.stabilitypact.org 3 This description of the investment compact can be found online at http://www.investmentcompact.org
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that time, much progress has been made.The presidential elections in January 2000 ushered in a new government, which is committed to economic reform.The new government has carried out many structural reforms, enacting market reform and building institutions. Specific public sector reforms carried out in recent years include pension reform, with the establishment in January 2002 of a multi-pillar system that introduced compulsory and voluntary components to complement the state-funded pensions. Health reforms have also been carried out since 2001, which include a reduction in the duration of sick leave, modifications to the co-payment system, different primary care models, and improved hospital management practices. In June 2003 a number of labor market reforms were also introduced to improve flexibility in the labor market and restrict entitlement to unemployment benefits.These reforms included shorter severance periods and lower severance pay, although opposition from trade unions resulted in a watering down of the original provisions. The continuing growth of the economy since 1999 can be attributed to increased investment, as private businesses and public enterprises have initiated capital expenditure projects. In particular, tourism, which performed poorly throughout the 1990s, recovered well by 2001, providing a much-needed boost to the Croatian economy. Foreign investment is gradually returning, as confidence in the countrys economic stability returns. In particular, Western aid and investmentespecially in the tourist and oil industriesas well as remittances from a large number of expatriate Croats, is helping to restore the economy. The World Bank, the IMF, and the EBRD have also been active in the country. Croatias economy grew by an estimated 4.3 percent in 2003, by 3.8 percent in 2004, and by 3.4 percent in 2005. By early 2003, the country had made sufficient progress to enable it to formally apply for EU membership, becoming an official candidate country in June 2004.3 With the goal of EU accession clearly in sight, recent progress has been made in opening the country to global markets through memberships in the WTO and the Central European Free Trade Association (CEFTA), through stronger cooperation with its neighbors, and by signing a Stabilisation and Association Agreement with the European Uniona prerequisite to entering into accession negotiations. The accession process highlights the reforms yet to be achieved. Despite notable progress and efforts by the government, the practice of coalition politics and resistance from unions and the public have slowed the achievement of many reforms.There is a clear opportunity through the Stabilisation and Association Agreement to deepen reform efforts and foster growth through EU integration. However, in order to bring laws, institutions, and policies in line with the acquis communautaire, Croatia has a tough road ahead to achieve more progressive laws, stable institutions, more efficient labor and financial markets, better
infrastructure, greater macroeconomic and social stability, and a more favorable business climate.
Macedonia, FYR
In September of 1991, Macedonia declared its independence from Yugoslavia and became the only former republic to secede peacefully. At that time Macedonia was the least developed of the Yugoslav republics, producing only 5 percent of the total federal output. International recognition of the country was initially held up because of Greek fears that the countrys name implied territorial ambitions over the northern Greek region of Macedonia.The country finally became a member of the UN in 1993, using the provisional name Former Yugoslav Republic of Macedonia (FYROM). Greece lifted its two-year trade blockade only after the two countries signed an accord in 1995. In the years that followed independence, Macedonia was spared the violence that existed elsewhere in the Balkans following the break-up of Yugoslavia in the early 1990s. But despite the relative calm, the country still faced formidable economic challenges posed by both the transition to a market economy and the difficult regional situation.The collapse of Yugoslavia ended transfer payments from the central Yugoslav government, and also deprived the country of key protected markets. Because it was highly integrated with the economic system of the former Yugoslavia, the Macedonian manufacturing industry suffered more than most other sectors during the economic downturn that followed independence. More generally, an absence of working physical infrastructure, UN sanctions against Serbia and Montenegrostill one of its largest marketsslow growth in domestic demand, erratic foreign investment and financial assistance, and the Greek economic embargo hindered the countrys economic growth until 1996. Despite these difficulties, the government demonstrated good macroeconomic management during this period, bringing down the hyperinflation it had inherited from the former Yugoslavia from the four digit figures of 1992 to just 2.3 percent in 1996.The countrys de facto exchange rate peg to the DM, along with sound fiscal management lowered the government budget deficit and debt to much more sustainable levels. Macedonia then experienced a brief period of economic expansion, with GDP growth increasing each year, from 1.2 percent in 1996 to 4.5 percent in 2000.The budget was nearly in balance between 1996 and 1999, and even showed a surplus in 2000. In terms of structural reforms, important progress was made in reforming the financial sector and in trade liberalization, although restructuring the banking sector proved more elusive than initially anticipated.The government fell behind on several other restructuring projects, such as privatizing or liquidating large loss-making companies, introducing the VAT, and reducing the state administration, the latter beginning only in late 2000.
However, after five years of steady growth and a full decade of independence, the leaderships commitment to economic reform, free trade, and regional integration was seriously undermined by the ethnic Albanian insurgency of 2001. Fighting continued for six months before the rebels and the Macedonian government finally signed a peace agreement. In 2001 the economy shrank by 4.5 percent because of decreased trade, intermittent border closures, increased deficit spending on security needs, and investor uncertaintyalthough even in these difficult circumstances, inflation still remained relatively low at 5.3 percent. Since this time the economy has begun to recover, returning to positive growth in 2002 of 0.9 percent, and rising to 3.5 percent in 2003 and 2.4 percent in 2004. Inflation was also brought back down to very low levels, standing at 1.2 percent in 2003, and even becoming negative in 2004 at 0.3 percent. Despite recent achievements it is important to note that, as measured by purchasing power parity, Macedonias GDP per capita today is not significantly higher than it was prior to independence in 1989. Unemployment continues to be a significant social and economic challenge for the country: it was estimated at 37.2 percent of the workforce in 2004, and the number of people employed has been halved since 1990. In 2002 and 2003, the government had to rely on international financial assistance to secure its main macroeconomic objectives. Although concerns stemming from the 2001 conflict linger, Macedonias political and security situation has stabilized, allowing the government to refocus energies on domestic reforms under IMF and World Bank supervision. The governments progress on structural economic reforms slowed in 2004, as Macedonia faced a series of challenges: the death of President Trajkovski, which resulted in early presidential elections; a contentious debate over the Framework Agreement that ended the 2001 conflict; and a referendum on municipal boundaries in November 2004, which did not pass. Industrial output fell during the first half of 2004, forcing a downward revision in annual GDP growth estimates from 4 to 2.4 percent. However, the new government remains committed to the reform process. The country passed a progressive trade companies law, which, combined with tax and investment incentives, should ease impediments to foreign investment. Fiscal consolidation, low inflation, and a fall in interest rates indicate good potential for an eventual recovery of the economy. Political and security normalization, macroeconomic stability, and fiscal discipline are providing a foundation for higher growth rates.The Macedonian government is striving to attract foreign investment, increase employment, and reduce poverty. It has pledged to undertake measures to maintain fiscal discipline and reduce interest rates even further. Developing the small and medium-size enterprise (SME) sector and intensifying structural reforms are also high on the governments list of priorities.The recently adopted Law on Labor Relations, which eliminates many
of the economys labor-related burdens, is expected to have a significant impact on foreign investment and overall growth. A number of important judicial reforms are also underway. Macedonia has increasingly opened itself to international trade, with a total trade-to-GDP ratio of 79.5 percent.The importance of trade with the European Union has increased since the country signed a Stabilisation and Association Agreement with the EU in November 2000. The country also signed a number of regional trade agreements with its neighbors in 2002 and 2003. On the global level, Macedonia officially joined the WTO in April 2003, making it the third former Yugoslav republicafter Slovenia and Croatiato do so. Macedonia formally applied for EU membership in March 2004, and was formally granted candidate status in December 2005.
Romania
It was with the fall of Ceaucescu, after the December 1989 coup, that Romania was freed from communist control. Elections followed soon after, in May 1990. Because the country was on the verge of collapse after 40 years of central planning, with its emphasis on heavy industry and inefficient infrastructure projects, Romanias transition during the next ten years was extremely painful. Because of the urgent need to control the social consequences of the collapse and placate numerous vested interests, the Romanian government was hesitant to impose tight fiscal constraints and privatize its huge lossmaking enterprises. Negative growth came in the late 1990s, bringing even deeper poverty in its wake, as the government attempted to impose macroeconomic stability without the requisite structural support. In fact,World Bank figures indicate that the poverty rate doubled between 1996 and 1999. This situation forced the Romanian government to implement more solid macroeconomic policies and to adopt tighter fiscal discipline, complementary monetary policies, and a number of significant structural reforms. As a result, financial discipline in the enterprise sector increased, placing public finances and the financial system on a better footing. GDP growth has been stronger since 2000, reaching 8.3 percent in 2004. Inflation fell from 40 percent in 2001 to 11.9 percent in 2004. Interest rates continued to decline, the fiscal deficit was brought under better control, foreign exchange reserves soared, and the external balance was kept to a sustainable level. Rising private investment facilitated more vigorous export growth, and was assisted by an initial competitive depreciation of the currency. According to the World Bank, Romania has become more attractive to international investors as a result of better sovereign ratings and improved access to international capital markets. However, if Romania is to meet its planned 2007 deadline for joining the European Union, even these recent positive advances are not sufficient. Much deeper reform and restructuring of the economy is urgently
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needed. Romanias population of upward of 22 million makes it the second largest country in Central and Eastern Europe, larger in population than the majority of the current EU25. In addition, Romania is ranked 64th out of a total of 177 countries on the Human Development Index, the lowest HDI rank of the candidates for EU accession. Despite Romanias rich potential for agriculture, forestry, and fisheries, its infrastructure is inadequate to support the economy, much less to develop it, as it is undermined by the long years of socialist collectivization and industrialization. As a result, more than 20 percent of the population still lives below the national poverty line, with a majority of impoverished people in rural areas. In order to tap the countrys real potential, deeper structural reform will be essential for Romania to have a thriving and competitive market economy, one that is capable of eradicating poverty, and, in the long term, that is capable of withstanding the challenging aftermath of EU integration. Other areas of concern remain in Romania.With 1.4 beneficiaries to every contributor, the Romanian pension system is in deep trouble, requiring deeper reform to ensure its sustainability. In view of this, the countrys poor social services and decreasing and aging population represent a severe strain on its still weak economy. For members of the younger generation, access to meaningful, modern education is lacking. Romania will also need to make significant efforts to protect its minority population as part of the conditions to join the European Union in 2007. After the collapse in 1989, the private sector was further hobbled in its development because reforms were adopted slowly and haltingly, with economically unsustainable state-owned farms still draining the bankrupt public purse. Finally, although energy sector reforms have been impressive, they are burdened with heavy payment arrears. The government continues to subsidize the power sector, contributing to the countrys fiscal imbalance. In 2004, the European Parliament stated that Romanias accession in 2007 would be conditional upon its successful resolution of other serious problems, such as corruption, the lack of judicial independence, harassment of the media, and rampant police brutality. In fixing the terms for Romanias accession in 2007, the European Union included a safeguard to delay entry by one year, should these conditions not be met.This threat to delay Romanias entry date has served to increase pressure on the country to make good on its promises of reform.
Serbia and Montenegro
Following a decade of war and international isolation under the Milosevic regime, Serbia and Montenegro was the last country in the region to embark on the stormy sea of economic transition, and it did so only after the political changes that took place in 2000.The 1990s were a decade of decline for the country that left a daunting economic and human legacy, characterized by a collapsed economy, fragile institutions, and increased vulnerability. In 1993, hyperinflationone of the severest cases in the
worldwas acute. Foreign trade volumes had fallen, with exports in 2000 down by 61 percent and imports down by 31 percent from 1989 levels. Debt climbed to unsustainable levels: foreign debt of around US$12.2 billion represented 136 percent of GDP in 2000.The financial sector was in a state of ruin, with capital largely obsolete after years of disinvestment.To make matters worse, the 1999 Kosovo war had devastated large parts of the transport infrastructure. In 2003, Serbia and Montenegros prevailing separatist tendencies resulted in the formation of a loose Union consisting of the two republics, with the option of separating, if confirmed by a referendum that is to take place in 2006. A separation appears to be likely but its impact on the economy is not expected to be large, as the two republics run separate economic policies with only certain areas to be coordinated at the Union level.This has led to distinct economic developments in the two republics. A specific case is Kosovo, which, although part of the Serbian territory, is administered by the UN. Since 2000, major steps toward stabilization and reform of the economy have been taken within a short period of time, yet much remains to be done. After the fairly low real GDP growth of 2.7 percent in 2003, the economy grew by approximately 7.2 percent in 2004. After the breakdown of the Milosevic regime, considerable progress was made in increasing the transparency of government accounts and fiscal policy in Serbia. Overall, with increased revenues from privatization, fiscal discipline has increased greatly over the past few years.To maintain this level of fiscal discipline in the future, the government will have to further reduce subsidies and streamline public employment, at the same time containing the growth in social transfers.This will be particularly important, as inflows of privatization revenues are expected to slow downwith increasingly less attractive enterprises in the pipeline.To strengthen the revenue base, the Serbian government introduced VAT in January 2005. A further step toward broadening the tax base would be formalizing the large gray economy as the still-outstanding restructuring of companies and important public investments will place an additional burden on the budget. Montenegros public finances remain under pressure and will require stronger consolidation. In spite of some initial problems, the introduction of the VAT in April 2003, contributed to an increase in budget revenues.Yet, the state budgets in both republics still rely heavily on foreign financing and the support of the international community. Hyperinflation dominated the war years in both republics, but tight monetary policy, supported by fiscal and wage restraint, has supported greater price stability in recent years. Serbia brought inflation down from 91 percent in 2001 to single-digit figures in 2004, but let it go back up to 17.5 percent in July 2005 because it used exchange rate policy to control the rising trade deficit. Montenegro unilaterally introduced the DM (and later the
euro) as its currency in 1999, and inflation dropped to 4.3 percent in 2004. The large and rising current account deficit (29 percent of GDP in 2004) reflects weak exports that are the consequence of supply side weaknesses and a rising internal demand.The liberalization measures adopted in 2000 resulted in a huge increase in imports, mainly of consumer goods and energy. Because of prevailing structural weaknesses and an unfavorable external environment, exports came into the picture slowly, dominated by products with low value added. Overall, for its size, the country still trades relatively littlein 2003 trade amounted to only 48 percent of GDP. In recent years, the current account deficit has been mainly covered by grants and loans from bilateral donors and international financial institutions, as well as the quite substantial inflows of foreign direct investment resulting from the privatization of large tobacco companies. Unemployment continues to persist as a structural problem, affecting more than 15 percent of the workforce, according to the International Labour Organization (ILO). In the area of enterprise reforms, further improvements in the business environment and continued privatization remain priorities, building on commendable early progress in both areas. In fact, the World Banks Doing Business in 2005 shows Serbia and Montenegro to be the worlds leading reformer in the area of business environment. According to the World Bank report, starting a business became much easier and steps toward making the labor markets more flexible have been made. Nevertheless, the countrys business environment still ranks below the average in the region. In privatization, progress has been uneven: small-scale privatization proceeded steadily during the past years in Serbia, but large-scale privatization stalled. In Montenegro, which was less affected by the war, a massive program succeeded in privatizing 65 percent of state-owned companies by mid 2005. However, some of the largest conglomerates still await restructuring in both republics, and the social consequences of waiting will certainly strain state budgets and increase unemployment. In the financial sector, both republics have embarked on reform. In Serbia, the institutional framework has been strengthened by tightening regulatory and supervisory control over the local banking system, although large parts of the banking sector are still in need of further restructuring. In Montenegro, the situation looks different, as banks have been successfully privatized, are liquid, and comply with capital requirements. Overall, due to its recent troubled history, Serbia and Montenegro has fallen behind other countries in the region in terms of economic development. Although the governments of both republics are stressing their commitment to fostering economic growth and attracting FDI, the political climate is not wholehearted about continuing unpopular reforms.There is general frustration with the
reform process, given the slow increase in the standard of living. It is crucial that structural reform such as privatization and restructuring continue if the economy is to stay on its current growth path. In this respect, with the opening of negotiations of the Stability and Association Agreements with the European Union in October 2005, a first step toward EU membership was taken.The prospect of becoming an EU member could help mobilize political support for further painful reforms, as there is broad consensus in favor of EU accession throughout the country.
Slovenia
A recent IMF report on Slovenia characterizes it as being among the most successful transition economies of Central and Eastern Europe. It goes on to say that it has a functioning market economy, a stable macroeconomic environment with sustainable growth, the highest standard of living and investment rating among transition countries, and has made significant progress toward convergence with the EU. The Slovenian government has implemented a fairly consistent economic policy during the last several years. Despite a challenging external environment, the economy has witnessed strong growth, a broadly balanced budget, single-digit inflation, and a strong external position. Against the backdrop of sharp output contraction at the onset of the transition, economic growth in the range of 4 to 5 percent per year was a particularly welcome developmentespecially given the governments explicit policy goal of achieving broad convergence with average EU income levels within a reasonable timeframe. Notwithstanding these achievements, Slovenia has significant problem areas.These include the need for continuing to accelerate growth, for completing ambitious structural reforms, and for further upgrading the quality of its policies and institutions to bring the country in line with the more competitive economies elsewhere in Europe and the world. The authorities are aware of the importance of maintaining a credibly stable macroeconomic framework.They have made considerable progress on the structural front, proceeding with privatization, trade liberalization, and improvements in the social safety net as well as laying out a legal and regulatory system that fosters increased domestic and foreign investment. Slovenia has held to a prudent fiscal policy as a pillar for macroeconomic stability, avoiding the revenue collapse that has plagued other transition economies in the region without resorting to one-off expenditure cuts, with their attendant disruptions and distortions to resource allocation. The approach followed has been broad-based and has involved increasing tax rates, eliminating tax exemptions, introducing amendments to existing tax legislation, and, more generally, adopting a number of supportive tax administration measures. Further tax reform is envisaged to diminish high labor costshigh contributions for health
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care and social securityand increase the tax burden on capital, for example, by introducing taxes on capital gains and on real estate. Slovenia has shown readiness to adopt supplementary revenue measures beyond those envisaged in the annual budget.The government has laid down predictable budgetary procedures, a reasonably clear legal framework, and has operated within the limits provided by the budget laws. A two-year budget framework first introduced in 1999 encouraged the authorities to begin formulating medium-term fiscal policy, a key development in a region where fiscal imbalances have often undermined the ability of governments to respond to pressing social needs such as education, public health, and public investment for infrastructureall of which are critical to enhancing the countrys competitiveness. Consistent with the above approach to fiscal management, Slovenia has a relatively low level of public indebtedness. At 29 percent of GDP in 2004, the stock of general government public debt is not high by European standards, has an adequate maturity and term structure, and imposes no undue constraints on fiscal policy. Slovenia has dealt with weaknesses in the banking system by substantially strengthening the regulatory capabilities of the central bankwith the aim of improving the prudential environmentand dealing with problems of individual banks on a case-by-case basis. Reforms in the financial sector have figured prominently in the governments agenda in the last several years and have included a number of elements. A banking law, adopted in 1999, which provided for the introduction of a deposit insurance scheme, was the first of these reforms, opening the domestic banking system to foreign participation and harmonizing the regulatory environment for banks with EU directives. Second, the country successfully implemented the EU Association Agreement, which created the legal basis for the entry of foreign banks into the local banking system and eliminated other restrictions on FDI and on the foreign ownership of domestic enterprises. A Securities Law, also adopted in 1999, regulates the securities market under a newly established supervisory authority. More recently the government has consolidated the banking systemwhich was overcrowded, with several dozen banks and savings and loan institutionsand privatized some of the largest state banks, encouraging the development of small and medium-sized enterprises.These have proven to be the main engines of growth and job creation. As in other transition economies, the level of total financial intermediation in Slovenia remains low.Total banking sector loans to the private sector at the end of 2003 stood at some 40 percent of GDP, suggesting that the scope for deepening and expanding the financial sector remains large. Social expenditures in Slovenia are among the highest in the region, equivalent to some 17 to 18 percent of GDP in 2003well above the EU15 average, which is closer to 14 to 15 percent of GDP. However, the share of
social in total expenditure has risen rapidly in recent years, expanding the number of benefits and other social transfers; many of these are not means-tested and are thus potentially inefficient. Demographic trends in recent years have put pressure on the pension and health systems. Partly to address some of these problems, the government took steps to reform the pension system, passing a law creating a supplementary insurance scheme to provide sizable annual expenditure savings and to ensure the viability of the system for at least the next five years.The measures approved included an increased retirement age for women, reductions in the replacement rate, and minimum state pensions.These reforms put Slovenia ahead of some of its more developed neighbors among the EU15, which are also struggling with the problems associated with the aging of their populations. The authorities have implemented a cautious public sector wage policy, balancing the need for fiscal restraint with maintaining an adequate degree of private sector competitiveness, and improving the efficiency of public sector employment. More generally, a fairly centralized wage bargaining process, coupled with restraint shown by the labor unions, has kept wage growth below productivity growth. A remaining issue is whether, wage moderation notwithstanding, there are features of the labor market that might make it unduly rigid.The IMF notes that Slovenias employment protection legislation is more restrictive than legislation in other countries in the European Union, particularly its rules for layoffs and sick leave, and suggests that, given relatively high structural unemployment, some easing of these restrictions might be advisable.The government has begun to experiment with active labor market policies, including training programs, job subsidies, and other measures benefiting workers particularly affected by the restructuring of traditional industrial sectors. Looking to hasten the pace of reform ahead of EU entry in 2004, the authorities approved key legislation that, inter alia, allows for privatization in power generation and distribution in the energy sector, opens the way for private ownership of the telecom operator, eases court procedures in bankruptcy cases, facilitates further privatization of port and other maritime facilities, and significantly reduces the weight of administered prices in the economy. Notwithstanding the impressive progress made during the past decade, Slovenia still faces a daunting policy agenda if it is to narrow the gap in per capita income with respect to the EU average. Having met the key Maastricht criteria, Slovenia should be among the first of the new accession countries to adopt the euro, a decision likely to have far-reaching implications for the countrys business community. By strengthening financial links with the rest of Europe it will contribute to a reduction in interest rates while decreasing currency risk.
III. The competitiveness of Southeast Europe in recent years Having established the starting points for each of the eight countries covered by this Report, we now turn to an analysis of specific competitiveness trends in the region over the past five years.
Recent competitiveness trends: The Growth Competitiveness Index
A historical perspective of competitiveness in Southeast Europe
The Growth Competitiveness Index has been featured in the annual Global Competitiveness Report of the World Economic Forum since 2001, and provides a number of years of comparable results.4 We have recently also developed our new Global Competitiveness Index, which offers an even richer comparative assessment of national competitiveness.This first edition of The Southeast Europe Competitiveness Report will use the results of both indexes: the Growth Competitiveness Index (Growth CI) will provide a historical context for benchmarking the economies of this region; the Global Competitiveness Index (Global CI) will provide a broader comparative analysis, based on our latest research, which we discuss in section V. The Growth CI gauges the ability of the worlds economies to attain sustained economic growth over the medium to long term. It is composed of three pillars, all of which are widely accepted as being critical to economic growth: the quality of a given countrys macroeconomic environment, the state of its public institutions, and the level of its technological readiness and innovative capacity. A combination of hard data (i.e., publicly available information, such as university enrollment rates, the size of the budget deficit, or the number of cell telephone users, etc.), along with soft data from the Forums Executive Opinion Survey is used to construct the Index.The Survey data are particularly valuable since they provide textured qualitative data on concepts that are difficult to measure but are, nevertheless, critically important. Examples of Survey data are the independence of the judiciary, the prevalence of bribery in public/private transactions, and perceptions of waste in the use of public resources. The basic structure of the Growth CI, outlined below,5 is divided into various subindexes as follows:
Macroeconomic Environment Index
The principal advantage of the Growth CI is its ability to provide a data series that allows for comparisons across time for most SEE countries.This allows us to analyze major trends in the competitiveness of each of the economies, using the information accumulated over the last five years. The number of countries covered by the Executive Opinion Survey has varied from year to year, and some of the eight countries of the Southeast European region were added only within the last four years. However, with the exception of Albaniawhich was added in 2005there is a minimum of two years worth of data available for each country.Three countries have been covered for all five years (Bulgaria, Romania, and Slovenia), one has been covered for four years (Croatia), two for three years (Macedonia, and Serbia and Montenegro), and one for two years (Bosnia and Herzegovina).This allows for some historical perspective and displays potential trends in the competitiveness paths of seven out of eight Southeast European economies.Table 1 provides a matrix identifying the coverage of each of the seven economies over the past five years. We now turn to an analysis of individual country performances over the years available, indicating trends and the relative competitive advantages and disadvantages of each nation where possible. Figure 2 displays the evolution of Growth CI scores between 2001 and 2005;Table 2 provides historical time-series data on the Growth CI, its indexes and subindexes. Greater detail on individual variables is available (through historical country profiles), from the World Economic Forum upon request.7 Slovenia stands out clearly among the regions economies.The Growth CI consistently shows Slovenia as the highest-ranking country in the SEE region, far outstripping its neighbors in competitiveness.
Table 1. Inclusion of Southeast European countries in the Growth Competitiveness Index 20012005
Country Albania Bosnia and Herzegovina Bulgaria Croatia Macedonia Romania Serbia and Montenegro Slovenia 2001 2002 2003 2004 X X X X X X X 2005 X X X X X X X X
Macroeconomic stability subindex Government waste subindex Country credit rating

Public Institutions Index
X X X X
X X
Contracts and law subindex Corruption subindex

Technology Index
X X X X X X
Source: The Global Competitiveness Report, various years
Innovation subindex6 Information and communications technology subindex (ICT) Technology transfer subindex
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Figure 2. Evolution of the Growth Competitiveness Index for Southeast European economies, 20012005
5 4.8 4.6 4.4 4.2 Score 4.0 3.8 3.6 3.4 3.2 3.0 2001 2002 2003 2004 2005
Albania Bosnia and Herzegovenia Bulgaria Croatia Macedonia, FYR Romania Serbia and Montenegro Slovenia
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It would seem that Slovenia is well positioned for growth in the medium to long term, having shown a consistently strong performance over the four years assessed, with ranks varying between 28 and 33 over that period. Slovenias score has remained stable, with just a slight decline in the overall score between 2004 and 2005. Although Slovenias overall steady performance has been derived from relatively good scores on all three indexes, there have certainly been a number of variations on particular subindexes. Slovenias overall performance in technology has remained strong throughout the five years, but showed a marked deterioration in the technology transfer subindex, which was accompanied by an improvement in the area of innovation. It would therefore seem that Slovenia is gradually making the transition toward increased innovation, and reducing its dependence on technology transfers. It may, however, be prudent during this phase for the country to continue to adopt new technologies from the core innovating economies, alongside its own increased efforts to innovate. Slovenias performance in the area of Public Institutions Index is mixed. Although the corruption subindex indicates improvement over the period, in what appears to have been a concentrated effort to attack corruption before joining the European Union, Slovenias ranking on the contracts and law subindex deteriorated from 36 in 2001 to 48 in 2005. In particular, the judiciary in the country is seen as significantly and increasingly less independent from undue influence, while property rightsa prevailing problem in the regionare not seen as sufficiently protected.
Yet another area where improvements could be made is the relations between government and the private sector and, more specifically, the neutrality that should characterize those relations.This is a serious problem in many countries of the world, where arms length relationships with all agents in the private sector are frequently the exception rather than the rule, with governments often playing favorites. Lack of even-handedness on the part of the government may manifest itself in many ways from granting fiscal privileges and tax exemptions to firms closely connected to members of the government to the way in which public procurement contracts are awarded. The effects of these actions are always detrimental for a countrys competitiveness. It will be important for Slovenia to tackle these issues if it is to maintain or improve its current level of competitiveness. As noted earlier with regard to the macroeconomic environment, Slovenia has met with considerable success in laying a foundation of stability. Its overall rank in this area is, by a significant margin, the highest in the region, although there is scope for further progress if the focus broadens to include the whole of the European Union. Improvements in the efficiency of the use of government resources could boost Slovenias competitiveness ranks.The World Economic Forum has tried to capture this concept in a variety of ways over the years, and in our latest attempt, in 2005, Slovenia was assigned a fairly low score (and correspondingly low rank), reflecting concerns in the countrys business community about inefficiencies in government spending. Slovenia does not do tangibly worse than other countries in the SEE region, but this itself is
Table 2. Rankings and scores of Southeast European countries on the Growth Competitiveness Index, 20012005
Bulgaria 2004 2005 60 3.8 54 4.4 83 2.6 54 3.8 56 4.4 91 2.9 30 5.8 59 3.8 46 2.5 47 4.1 48 2.9 37 4.0 39 4.5 42 4.5 40 3.2 63 3.4 67 3.4 70 2.3 59 4.0 54 3.2 50 2.5 50 2.2 48 2.4 49 2.4 48 2.5 63 2.1 72 2.0 77 2.1 53 2.5 54 2.2 56 2.3 54 3.7 61 3.3 43 4.0 41 4.3 46 4.2 51 3.5 70 3.5 76 3.3 91 2.7 47 4.3 55 3.6 55 3.9 47 4.1 58 2.3 48 4.1 38 5.6 45 4.8 54 4.7 61 4.7 65 4.7 86 3.7 87 4.0 82 4.2 64 3.8 67 3.8 90 3.6 71 4.4 71 4.4 49 3.5 54 2.4 50 2.7 103 2.9 60 3.3 81 3.1 89 3.0 80 3.3 96 2.5 96 2.8 111 2.7 39 4.3 65 3.0 83 3.0 74 3.5 85 3.3 77 3.2 74 4.0 66 3.7 62 2.1 55 3.7 62 4.2 57 4.0 67 3.9 76 3.9 73 4.0 93 3.1 92 3.4 96 3.5 52 4.1 67 3.4 86 3.3 74 3.9 78 3.8 77 3.6 85 3.6 83 3.1 84 4.1 75 3.3 68 2.1 64 3.4 56 4.0 49 3.4 49 3.6 51 4.0 55 4.1 83 1.8 84 2.2 81 2.4 66 1.9 66 2.4 66 2.6 61 3.3 61 3.7 93 1.5 96 1.7 98 2.0 69 4.1 92 3.1 55 5.0 68 3.1 61 2.4 64 2.4 89 2.7 77 1.5 59 2.8 80 2.6 74 2.8 79 2.3 67 2.8 84 2.7 46 3.5 6 6.2 96 1.9 65 2.9 90 2.6 56 2.9 59 3.0 108 2.3 60 2.6 27 4.6 30 4.9 36 4.5 31 5.3 30 5.2 27 3.8 28 5.5 51 4.6 41 4.3 51 4.2 60 4.3 90 4.1 67 3.9 66 4.2 46 4.6 56 3.6 71 3.3 81 3.6 89 3.9 83 4.1 86 3.5 102 3.2 101 3.8 32 4.4 35 4.4 68 2.2 26 4.9 23 5.3 26 4.8 26 5.8 25 4.6 24 3.3 26 5.1 53 4.2 31 3.7 29 5.0 35 5.1 43 4.4 32 5.8 24 4.7 23 3.5 26 5.3 62 4.0 70 3.4 55 3.7 59 3.8 68 3.8 80 3.0 77 3.4 75 3.6 67 3.1 58 3.8 81 2.9 71 3.5 73 3.7 87 2.8 102 2.8 111 3.0 39 4.0 50 4.0 37 4.3 2002 2003 2004 2005 2003 2004 2005 2001 2002 2003 2004 2005 2003 2004 2005 2001 Croatia Macedonia, FYR Serbia and Montenegro Romania Slovenia 2002 2003 2004 2005 39 4.3 48 4.4 63 2.9 27 5.3 31 5.3 47 4.4 23 6.2 26 4.7 23 3.4 26 5.3 35 4.6 35 4.8 62 3.2 27 5.6 35 5.1 48 4.3 25 6.0 32 4.1 23 3.6 27 4.1
2004 2005 73 3.2 76 3.7 86 2.3 57 3.0 62 4.1 92 2.7 35 5.5 63 3.7 43 2.6 49 3.9
2001 2002 2003
Macroeconomic Environment Index
Rank Score
85 3.2
91 3.2
69 3.1
75 3.2
Macroeconomic stability subindex
Rank Score
61 4.3
70 4.3
59 3.5
68 3.6
Government waste subindex
Rank Score
91 2.3
110 2.1
55 3.0
61 2.7
Country credit rating
Rank Score
91 1.9
89 2.2
58 2.4
56 2.9
Public Institutions Index
Rank Score
78 3.8
86 3.7
51 4.1
47 4.3
Contracts and law subindex
Rank Score
80 3.1
101 3.0
64 3.0
67 2.9
Corruption subindex
Rank Score
66 4.5
74 4.4
34 5.1
27 5.7
Technology Index
Rank Score
82 3.2
99 2.6
50 4.3
56 3.5
Innovation subindex
Rank Score
85 1.8
82 2.0
39 3.2
39 2.6
Information and communication technology subindex 67 3.8 64 3.7 102 104 117 80 102 104 117 102 59 4.0 58 3.8 58 3.8 53 4.0 61 3.9 62 3.7 81 3.2 84 3.3 104 62 3.9 58 4.1 35 4.5 43 4.6 48 4.3 56 4.2 59 4.2 70 3.5 82 3.5 85 3.3 117
Rank Score
68 3.4
76 2.2
50 4.5
44 3.6
Technology transfer
Rank Score
76 3.4
84 3.3
24 4.5
50 3.8
12 5.4 56 3.8 75
34 4.6 66 3.6 80
38 4.7 75 3.4 102
24 4.8 63 3.9 104
20 5.0 67 3.7 117
60 4.1 77 3.4 102
69 3.5 89 3.2 104
48 4.4 80 3.4 117
14 5.2 31 4.7 75
38 4.5 28 4.6 80
51 4.4 31 4.7 102
46 4.4 33 4.7 104
54 4.2 32 4.6 117
Growth Competitiveness Index
Rank Score
81 3.4
95 3.2
59 3.8
62 3.7
Total number of countries
104
117
75
80
17
18
surprising, given the countrys stage of development and perceptibly better performance in most other areas.8 The Growth CI places Bulgaria in the second tier of Southeast European countries, together with Romania and Croatia. Bulgaria was ranked 58th in the Growth CI in 2001, dropping to 64th place by 2003. However, since 2004, Bulgarias overall ranking has improved, moving back to 58th in 2005, despite the inclusion in the index of a number of new countries that entered above Bulgaria. It is likely that this is the result of a significant last push as Bulgaria prepares to join the European Union, and may indicate a general upward trend in the countrys level of competitiveness. On average, Bulgarias best scores (and ranks) were in its public institutions, but not by a large margin. It is interesting to note that while Bulgaria performs generally well with regard to corruptionplacing the country second in the region behind the leader, Sloveniaits overall performance on the Public Institutions Index is pulled down by its scores on the contracts and law subindex, where its ranking has declined, most dramatically between 2002 and 2005.Within this subindex, Bulgaria has shown evident deterioration on all four components: judicial independence, property rights, favoritism in the decisions of government officials, and the business costs associated with organized crime. It is not typical for a country to display such a large gap between the quality of the environment underlying contracts and law, on the one hand, and the incidence of corruption in transactions between the public and the private sector, on the other. However, Bulgaria has shown that it has the institutional capacity to tackle bribes and other forms of corruption, and will now have to improve other key elements of the regulatory and judicial environment. The quality of Bulgarias macroeconomic environment has improved over the last several years, showing in its score (4.0) and rank (62) in 2005.This has mainly reflected sustained improvements in the performance on several macro variables. In particular, the budget deficit has narrowed and even moved into surplus in 2004, and interest rate spreads in the financial sector have continued to shrink.This in turn has led to changesfor the better in the perception of the short-term economic outlook within the business community, against the background of easier access to credit by the enterprise sector. Bulgarias performance on the Technology Index has been mixed. Particular strengths are the level of tertiary education in the innovation subindex and the number of telephone lines in the ICT subindex. Particular disadvantages appear to be factors such as the level of technological sophistication within the innovation subindex, where it has retained a static score of about 2.6a significant deterioration in rank as other countries have made progress. In addition, compared with other countries, Bulgaria has shown a significant deterioration on government-related issues such as government prioritization of ICT and government success in ICT promotion.With the exception of
these highlights, Bulgaria generally displays ranks between 40 and 70 on measures of technology, putting it far below the regional leader, Slovenia. For a country experiencing such recent political turmoil, Croatia entered the Growth CI at a relatively high level in 2002, ranking 58th, four places ahead of Bulgaria. This was followed by a leap of five places in 2003, when Croatia ranked 53rd, before falling back to 61st and 62nd places in 2004 and 2005, respectively. Although the time period is too short to predict a longer trend in the countrys competitiveness, it is clear that if Croatias performance remains steady, it will soon be overtaken by the more dynamic economies in the region: Bulgaria already surpassed Croatia in 2004, taking second position in the region (see Figure 2), while Romania received a very similar score. Although Croatias scores on each of the three subindexes have remained fairly consistent, it has shown a gradual deterioration in rank on all three indexes over the last four years as other countries have improved their competitiveness.The most marked deterioration has been in the area of public institutions, where Croatia started out at 57th in 2001 but fell to 76th place in 2004, before improving slightly to 73rd place by 2005.This is particularly troubling, as it is unlikely that the country will be able to fulfill EU accession requirements without the strong and stable institutions in place to implement the required policies and reforms. Over the years Croatia saw a significant deterioration on those indicators that capture elements of contracts and law, falling from 60th place in 2001 to 89th place in 2004. And, although this years progress back up to 80th place might herald a movement back in the right direction, many weaknesses remain. Particular areas requiring attention are the countrys judicial independence, property rights, and favoritism in the decisions of government officials, all of which add to business costs and undermine the quality of a countrys business environment. Corruption levels appear to have remained largely static according to the scores received on the corruption subindex, but Croatias ranks on this category have fallen perceptibly. Clearly, although Croatia has not worsened relative to its own history, it is lagging further and further behind as other nations make progress. As noted earlier, these weaknesses reflect serious concerns on the part of the business community about key elements of the institutional environment, and they could jeopardize Croatias timely accession to the EU. Croatia has shown a steady and significant deterioration on the macroeconomic stability subindex, falling from 41st place in 2002 to 90th in 2005. Although inflation has been brought under control, the budget deficit is seemingly stuck at over 5 percent of GDP. Access to credit has tightened, and the mood in the business community, as reflected in an indicator of short-term recession expectations, is unusually somber.This adds to earlier concerns about Croatias business environment, since it appears that it has
become increasingly difficult for existing businesses to not only function (because of deteriorating property rights and poor contract enforcement that result from a weak judicial system), but also to obtain funding to expand their activities. In addition, it is clear that Croatia will have a harder time attracting foreign businesses in such conditions, again highlighting the gap in relation to the European Union and the urgent need to reverse this negative trend. The only area in which Croatia has not seen significant deterioration is in technology readiness and usage, although even there the general trend has been slightly downward. A number of specific variables stand out for strong negative trends: these are government prioritization of ICT and government success in ICT promotion, as well as technological sophistication and firm-level technology absorption, which are driving the countrys innovative capacity. Although Croatias overall rankings on the Technology Index have remained stable, the deterioration in these four crucial variables highlights the vulnerabilities in the future of technological usage and readiness in Croatia. As shown in Figure 2, Romania has shown the greatest volatility on the Growth CI score during this four-year time period, starting out with a score of 3.8 in 2001, followed by two years of a significant decline, and then rising back to 3.7 by 2005. As in the case of Bulgaria, recent improvement in the countrys competitiveness might be due to efforts on the part of the Romanian authorities to try to make the tentative 2007 EU accession date a reality. This is likely to have been the case in 2004, when both Romania and Bulgaria witnessed other economies of Eastern Europe acceding to the European Union, providing a further motivation to implement improvements and reforms. However, the country still has a long way to go. Although it may be encouraging for Romania and Bulgaria (along with Croatia) to note that they are at least on par with Poland (the lowest-ranking EU25 nation in the 2005 Growth CI), it should be recalled that this is mainly a result of a deterioration in Polands performance rather than an impressive catch-up feat by the three SEE countries. Romanias performance on the Technology Index has remained the steadiest out of the three indexes of the Growth CI, as was the general trend in Southeast Europe. Within this index, Romania scored (and ranked) best on the technology transfer subindex, ranking 20th in 2005. In particular, Romania appears to be using FDI as a significant means of obtaining new technologies. Finally, on the innovation subindex, Romania has shown an evident deterioration, performing particularly poorly on factors such as technological sophistication, company spending on research and development, and university/industry research collaboration. If Romania is to increase or even maintain its present level of technological competitiveness, it will have to focus on these longer-term aspects in the near future.
Romanias general trend on the public institutions subindex in the first three years was downward, followed by a marked improvement in 2004, which remained rather steady in 2005. In particular, Romanias rank on the contracts and law subindex showed the most dramatic negative shift, plummeting from 39 in 2001 to 83 in 2003.The corruption subindex rank also deteriorated, falling from 64th place in 2001 to 90th in 2003.This has the same implications for Romania as for Bulgaria: implementing the reforms necessary for accession to the European Union in 2007 will be a difficult task in an inefficient, corrupt, and weak institutional environment. In this context, the improvement on corruption between 2003 and 2005 is encouraging, but it is imperative that further progress be made. Romanias scores and ranks on the Macroeconomic Environment Index have generally followed the same U-shaped pattern found in other parts of the Growth CI: a mediocre starting position in 2001, a significant decline in 2002 and 2003, and finally an improvement in 2004 and 2005. On the negative side, inflation in Romania, while improving from 45.7 percent in 2001 to 11.9 percent in 2004, still puts the country at 107th place out of 117 economies. At a time when inflation rates are coming down quickly everywherelast year witnessed the lowest international inflation rate in the post-War periodthe recent deceleration in the consumer price index seen in Romania has not been good enough, and further progress will have to be made in the period ahead of EU entry. There is evidence that further progress could be made to improve resource allocation in the financial sector: the difference between lending and deposit rates remains unusually high, suggesting the existence of rigidities in the financial sector. Macedonia was included in the Growth CI for the first time in 2003, providing three years of data for comparison. First, it is important to note that, although Macedonia fell from 81st to 85th place between 2003 and 2005, this was mainly because of the addition of new countries coming onto the index above Macedonia, and not a reflection of Macedonias own performance. Macedonia has in fact increased its Growth CI score from 3.2 to 3.3. Macedonias Macroeconomic Environment score has improved, from 3.0 to 3.6, resulting in a rise in rank from 80 to 75.This was mainly driven by reduced inflation, the ability of the government to move from a fiscal deficit to a surplus (from 4.8 percent of GDP in 2002 to +0.4 percent of GDP in 2004) and an increase in the national savings rate (from 8.4 percent to 16 percent), although this still remains quite low. Concerning the quality of its public institutions, Macedonias ranks are rather poor and have shown almost no improvement. In particular, the business costs associated with organized crime (which resulted in 114th place in 2005), property rights, and judicial independence have all
19
20
been significant problems in all three years, as is the prevalence of bribery in economic transactions. Serbia and Montenegro, like Macedonia, was added to the index in 2003. It entered with a rank of 77 and fell to 89th place in 2004 before moving up to 80th place in 2005.The most significant deterioration over the three years has been in the countrys macroeconomic environment, where the country fell from 87th place in 2003 to 111th place in 2005.This was the result of increased pessimism within the business community concerning the countrys economic outlook and a significant reduction in the national savings ratefrom 9.9 percent to a negative savings rate of 1.0 percent. On a positive note, between 2003 and 2004 the public sector deficit was greatly reduced, and access to credit for business development has also improved over the past year. Serbia and Montenegros contracts and law scores, while generally better than on the Macroeconomic Environment Index, have also shown a marked deterioration. In particular, there is a perception that favoritism in the decisions of government officials has become a significant problem. Property rights are not sufficiently protected and the judiciary is not seen to be sufficiently independent in meting out justice. Only with regard to the costs of organized crime for business has there been a marginal improvement over the three years, although these costs still remain very high. And although the country performs best in the area of technology, here again there has been deterioration between 2003 and 2005. Specifically, although the country seems to have improved at adopting technologies from abroad through technology transfer, there has been a perceived deterioration in the countrys ability to harness the new information and communication technologies. Bosnia and Herzegovina has been included in the Growth CI since 2004. Although two years is a relatively short time, it is still possible to discern patterns in the countrys scores and ranks. As Table 2 shows, the country has fallen in rank, from 81 in 2004 to 95 in 2005.This overall decline can be traced to a clear deterioration in all areas covered by the Index. Bosnia and Herzegovina has fallen somewhat in the Macroeconomic Environment Index, where particular weaknesses are a very low national savings rate and strong pessimism within the business community about the short-term economic outlook, both of which placed the country a very low 114th out of 117 countries in 2005. Bosnia and Herzegovina also suffers from weaknesses in its ability to harness new technologies, and in particular it would seem that the countrys ability to adopt new technologies developed abroad through technology transfer is becoming increasingly difficult. However the greatest weakening since last year is in the area of contracts and law, where the country fell from 80th place in 2004 to 101st in 2005. Particular weaknesses are the costs of organized crime for business, a lack of independence on the part of the judiciary, and insufficient protection of property rights that places the country 113th out of 117
countries.These are all areas that will require serious attention if the country is to fulfill the requirements for eventual accession to the European Union.
IV. Benchmarking Southeast Europes present competitive performance The EU expansion in May 2004 included several countries from Central and Eastern Europe, bringing the SEE region to the European Unions doorstep. At present, Slovenia is the only country within the SEE region that is already an EU member. Candidate countries include Bulgaria and Romania (scheduled to join in 2007) and Croatia (tentatively scheduled to join in 2009), and Macedonia, which gained candidate status in December 2005. Meanwhile, Albania, Bosnia and Herzegovina, and Serbia and Montenegros relations with the European Union are presently being guided by its Stabilisation and Association process.9 Table 3 summarizes the current relationship of each of the eight countries to the European Union. In this context, the level of EU performance provides a benchmark for the level of competitiveness required of these countries to contribute effectively to the overall economic performance of the European Union. Given the importance of the European Union as a benchmark for the region, in the analysis that follows we provide a comparison with the average performance of the EU25 in order to assess how the SEE countries compare with the present level of competitiveness of the European Union as a whole. Since most of the ten new accession countries are from Central and Eastern Europe and have a lower level of competitiveness than the previous 15member EU, we show the average performance of both the EU25 and the previous EU15.This provides a more stringent benchmark and shows the level of competitiveness of the region prior to the May 2004 accession by the new member countries. In addition to the regional averages, and to allow for more detailed comparisons, we also show the performance of selected European countries of a size or level of development comparable to those of the SEE countries. In addition, we provide two regional comparisons from outside of Europe: Latin America and the East Asian Newly Industrializing Countries (NICs: Hong Kong, Singapore, and Taiwan). Latin America provides a comparison with the performance of another developing economy region that includes a number of similarly small, proximate countries, many of which have faced political and economic crises over the past decade.This gives a picture of how the SEE countries compare with a region facing some of the same stabilization and structural reform challenges.The performance of the East Asian NICs offers an additional comparison with small open economies that have managed, through persistently good economic policies, to lift their citizens from poverty to prosperity in the span of only a few decades.
Table 3. Relations of Southeast Europe countries with the European Union

Country Albania Status of relationship with the EU Participates in the Stabilisation and Association process, which should eventually result in the conclusion of a Stabilization and Association Agreement (SAA). Benefits from autonomous trade preferences, national and regional financial assistance under the Community Assistance for Reconstruction, Development and Stabilisation (CARDS). A feasibility study for a SAA was published by the Commission in November 2003. The feasibility study identified 16 priority reforms that had to be implemented before the Commission would recommend an SAA. In October 2005 the Commission recommended to the Council the opening of negotiations, initiating the process of SAA negotiations. Benefits of EU Assistance under CARDS program. Applied for EU membership in December 1995. Considered as an acceding State following the signature of the Accession Treaty in April 2005. Should join the EU in January 2007, provided the membership criteria are met. Of particular interest are the implementation of structural reforms, notably of its judiciary and public administration. In April/May 2006 the Commission will review the situation, and may at that time recommend the postponement of accession by one year. SAA signed in October 2001. Applied for EU membership in February 2003. Became an official candidate country in June 2004. In December 2004, the European Council decided that negotiations for accession to the EU should be opened with Croatia provided that there was full cooperation with the UN International Criminal Tribunal for the former Yugoslavia (ICTY). In October 2005, Croatia was found by the ICTY to be cooperating, opening the way for accession negotiations to begin. SAA signed with the EU in April 2001. Applied for EU membership in March 2004, and in December 2005, formally granted candidate status, although no date was set for the opening of negotiations. Benefits of EU Assistance under CARDS program. Considered as an "acceding State" since the signature of the Accession Treaty in April 2005. Should become a member in January 2007, although this date appears ambitious. The Commission is monitoring the implementation of structural reforms, and in April/May 2006 it will review the situation, and may at that time recommend the postponement of accession by one year. Since June 2003, Serbia and Montenegro is officially considered as a potential candidate country for EU accession. In April 2005, the Commission concluded that Serbia and Montenegro is "sufficiently prepared to negotiate an SAA with the EU" and negotiations were then opened in October 2005. Benefits of EU Assistance under CARDS program. EU member country since May 2004.
Bulgaria
Croatia
Macedonia, FYR
Romania
Slovenia
Finally, although we do not provide data on all 117 countries covered by the Global Competitiveness Report 20052006, we present rankings for the SEE countries out of the entire sample of 117 countries.This facilitates the most comprehensive comparison, as it allows evaluation of the performance of the SEE countries against a sample covering over 98 percent of world gross domestic product (GDP). Table 4 shows the per capita GDP for the countries of the SEE region, measured at purchasing power parity, going back to 1975 or the most recent available date.The table shows that the average per capita GDP of Romania in 1975 (US$2,350)the only income available for the region for that yearwas equal to approximately 40 percent of the average income of the EU15 countries (US$5,851), and on a par with the Latin America average and that of the East Asian NICs. However, by 2004, the average per
capita GDP of the EU15 was four times higher than that of Romanias per capita GDP, and nearly three and a half times higher than the SEE average. Most strikingly, the NICswhich were quite poor in 1975, with an average per person income only slightly above that of Romaniahad joined the ranks of the worlds wealthy countries, with per capita income three and a half times higher than that of Romania, and more than three times higher than the SEE average.The NICs demonstrate what can be achieved in a relatively short period, given the political will and sound, sustained economic policies. As we will see in the next section, these countries are now among the most competitive in the world. Table 5 measures the standing of the SEE countries on a number of economic and social indicators.The first column shows that unemployment has become an urgent economic and social problem for many of the countries in
21
Table 4. Gross Domestic product per capita, measured at Purchasing Power Parity since 1975 (in US$)
Country/Region Albania Bosnia and Herzegovina Bulgaria Croatia Macedonia, FYR Romania Serbia and Montenegro Slovenia SEE Average EU15* of which: Greece Ireland Portugal EU25** of which: Czech Republic Estonia Hungary Latvia Lithuania Poland Latin America*** East Asian NICs**** 1975 2,350 2,350 5,851 4,829 3,435 3,422 5,150 3,366 2,695 2,503 2,709 1980 1,944 2,904 4,605 3,151 9,283 7,742 5,841 5,857 8,350 5,535 4,429 3,487 5,699 1985 2,272 3,921 6,077 4,090 11,644 9,030 8,051 7,207 10,411 7,333 5,954 3,676 7,907 1990 2,601 5,797 7,133 4,610 6,219 5,272 16,730 11,464 12,687 11,176 13,978 7,957 9,517 8,487 8,349 5,684 4,330 13,558 1995 2,674 5,704 6,016 4,314 6,569 13,254 6,422 20,512 13,415 17,921 13,812 16,237 12,530 6,542 9,638 5,057 5,618 6,824 5,402 19,682 2000 3,641 5,710 8,091 5,070 6,540 17,333 7,731 25,743 16,501 29,866 17,290 20,502 13,991 10,066 12,279 7,062 7,278 9,051 6,240 23,778 2004 4,937 5,504 8,500 11,568 7,237 7,641 4,858 20,306 8,819 30,637 20,362 37,663 19,038 23,561 18,357 15,217 15,546 11,845 12,919 12,244 6,481 27,657
22
* The EU15 includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom. ** The EU25 includes the EU15 plus the following ten countries which joined the EU in May 2004: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia. *** The group of Latin American countries includes: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela. **** The Newly Industrialized Countries (NICs) of East Asia include Hong Kong, Singapore and Taiwan. Sources: International Comparison Program (ICP) of The World Bank; IMF World Economic Outlook Database, April 2005; Economist Intelligence Unit; and authors calculations
Table 5. Selected economic and social indicators for Southeast Europe

Percentage of the population below the national poverty line, 2004 or most recent year available
Country
Unemployment rate, 2004
Life expectancy at birth, 2003
Government debt as a percentage of GDP, 2004
Aid as a percentage of GNI, 2003
FDI inflows as a percentage of GDP, 2004
Albania Bosnia and Herzegovina Bulgaria Croatia Macedonia, FYR Romania Serbia and Montenegro Slovenia
14.4 N/A 12.0 14.0 37.2 8.0 15.2 6.1
25.4 18.0 12.8 11.0 30.2 21.5 10.0 N/A
72.0 73.0 72.0 75.0 72.0 71.0 73.0 77.0
55.3 58.0 41.1 57.3 26.4 21.4 80.0 29.1
5.4 7.4 2.1 0.4 5.0 1.1 6.4 0.2
5.7 6.0 10.4 3.2 3.2 7.3 4.0 1.6
Sources: ILO LABORSTA Online; World Bank Country Briefs; WHO World Health Report 2005; IMF Country Reports; IMF World Economic Outlook Database, April 2005; World Bank World Development Indicators 2005; UNCTAD World Investment Report 2005
the SEE region. Only two countries, Romania and Slovenia, have unemployment rates lower than 10 percent, and Macedonias rate exceeds 35 percent. High rates of unemployment erode a governments ability to provide services funded by taxes, and also have major consequences for poverty and inequality. The second column in Table 5 shows the percentage of the population living below the national poverty line in each country. Not surprisingly, poverty rates are quite high in the region.With the exception of Slovenia, all countries have poverty rates of at least 10 percent; somesuch as Macedonia, where the rate exceeds 30 percentare much higher.The high poverty rates are echoed by the relatively low life expectancy in the region, by European standards, as shown in the third column. For the most part, life expectancy is well below 75 years of age, with the exceptions of Slovenia (77 years) and Croatia (75 years). By comparison, most of the EU15 countries have a life expectancy approaching 80 years. Clearly, raising the living standards in the region must remain a priority. The fourth column shows government debt as a percentage of GDP.We see that although some of the countries have manageable levels of debt, such as Romania, Macedonia and Slovenia, others have extremely high debt ratios. Four countries in particularAlbania, Croatia, Bosnia and Herzegovina and, most strikingly, Serbia and Montenegrohave such high levels of debt that it is difficult for them to properly allocate resources or ensure the investment spending necessary for improving competitiveness and raising living standards.When governments are forced to allocate such a relatively large share of current expenditures to debt service, their ability to allocate much-needed resources to education, public health, and infrastructure is seriously handicapped.This, in turn, undermines their competitive positions. The last two columns show that capital has been flowing into the region in the form of aid and FDI, albeit unevenly. FDI inflows are particularly important, as a source of non-debt capital and as vehicles for technology transfer and know-how. FDI has been a key ingredient of structural transformation in Central and Eastern Europe, and it is expected to play a similar role in the SEE countries. FDI inflows in relation to GDP in 2004 compare well, on average, with the level of inflows seen in Central and Eastern Europe during the past decade.
Then, in order to place the competitive performances of the SEE countries in an international context, we compare them with the performances of the four other regional country groupings described in the section above: those of the EU15, the EU25, Latin America, and the East Asian NICs. Over the years, the World Economic Forum has integrated the latest thinking on competitiveness into its analysis; the new Global Competitiveness Index (Global CI) reflects state-of-the-art competitiveness research.10 The Global CI is the most comprehensive competitiveness index to date, as it measures the macro- and microeconomic drivers of productivity across a large number of countries. In this sense, it has built on the strengths of the Growth CI discussed in the previous section, but is significantly broader in scope.The Global CI makes it possible to assess the competitiveness of the SEE countries across an even wider range of categories than were considered in the past, measuring the set of institutions, policies and factors that set the sustainable current and medium term levels of economic prosperity. We have learned from our years of research on competitiveness that its measurement is a complex undertaking. One cannot simply pinpoint one or two areas as being critical for growth and prosperity. In this light, the Global CI, with its nine distinct pillars, captures the idea that many different elements matter for competitiveness: 1. 2. 3. 4. 5. 6. 7. 8. 9. Institutions Infrastructures Macroeconomy Health and primary education Higher education and training Market efficiency (goods, labor, financial) Technological readiness Business sophistication Innovation
V. Measuring the current competitive landscape in Southeast Europe: The Global Competitiveness Index In this section, we shall show in greater detail the competitiveness profiles of each country in the SEE region according to the new Global Competitiveness Index.The goal here is to identify the specific areas on which governments should focus in order to improve national competitiveness. We shall illustrate how these eight SEE countries are performing vis--vis each other by comparing and contrasting the different areas driving their levels of competitiveness.
Each of these pillars plays a critical role in driving national competitiveness. The quality of the institutional framework in which businesses operate is critical to the efficient functioning of the economy, and to the vitality and health of businesses. Strong public institutions ensure that property rights are protected, that the court system is free from undue influence, that government policies are established in an efficient and transparent manner, and that businesses are not hindered by high levels of corruption. Private institutions must also play their part, with firms that function ethically and that are accountable and transparent to the public. Without quality physical infrastructure it is of course impossible to ensure the efficient functioning of the economy. Efficient modes of transport for goods, people, and servicessuch as good-quality railroads, ports, and air transportare vitally important, as are an electricity supply free of interruption and a solid telecommunications network.
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The importance of macroeconomic stability for competitiveness is well known. It is impossible for businesses to make informed decisions when inflation is spiralling out of control, or when large government budget deficits lead to the misallocation of resources and drive up the cost of capital.When the repayment of government debt is devouring a major portion of a countrys resources, those resources cannot be allocated effectively. Often, where debt servicing costs are high, governments have to curtail public investment or, worse, vital spending on education and public health. In extreme cases, governance is turned into emergency cash management as authorities try to avert debt default; they then have little or no time for policy formulation and reform on which sound competitiveness strategies are based. In order for a country to be competitive, it must have high-quality human capital, which can be separated into two categories: health and primary education and higher education and training.The first category concerns the minimum requirements needed for workers to function properly when performing basic tasks. It can be measured by the overall health of the workforce and the quality and adequacy of primary education.The second category is necessary for more sophisticated business processes, as measured by the quantity of secondary and tertiary education, the quality of the educational system, and the availability of specialized training for the workforce. The efficiency with which the various factor markets in the economy function is critical for its underlying productivity and competitiveness, as it ensures the proper allocation of economic factors to their best use.Three vital types of market efficiency are measured in the Global CI: goods markets, labor markets, and financial markets. Goods market efficiency ensures that products and services are most efficiently traded in the economy.To ensure the best possible environment for the exchange of goods, there must be a minimum of impediments to business activity through government intervention, such as distortionary or burdensome taxes and misallocation of resources; healthy market competition should drive business productivity. Productivity and competitiveness are also propelled by labor market efficiency. Labor markets must be sufficiently flexible to be able to shift workers from one economic activity to another quickly, and to allow for wage fluctuations without social disruption. Further, efficient labor markets ensure a clear relationship between worker incentives and their efforts. Financial market efficiency means that financial resources are allocated most effectively in the economy. Sophisticated financial markets must make capital available for business investment from such sources as credit from a sound banking sector, well regulated securities exchanges, or venture capital. Technological readiness indicates the extent to which a country can harness existing technologies to enhance the productivity of its industries.This differs from technological innovationit is not necessary to invent the telephone or the Internet in order to capitalize on their productivity-
enhancing qualities. Rather, it means that firms in competitive countries are aggressive in integrating existing and new technologies into their production processes. The business sophistication of firms is critical for productivity at the top end of the global value chain, and is driven by the quantity and quality of local suppliers, welldeveloped production processes, and the extent to which companies in a country are turning out the most sophisticated products. Finally, innovation is critical, especially for those countries that have moved very close to the technology frontier. As well as making the maximum use of existing technologies, countries must have the necessary framework to ensure that they are at the forefront of innovation in products and processes.This requires sufficient business investment in research and development, high-quality scientific research institutions, collaboration in research between universities and industry, and protection of intellectual property. As was the case for the Growth Competitiveness Index discussed earlier, the nine pillars are measured using both hard data and data from the Executive Opinion Survey. More details on the specific data included to measure each pillar are available from the World Economic Forum upon request.11 The Global CI is also innovative in taking into account differing levels of country development.What is important for improving the competitiveness of a country at one stage of development will be less important for a country in another stage.What presently drives productivity in the United States is necessarily different from what drives it in Croatia. In other words, economic development progresses in stages.Thus, the model separates countries into three specific stages: factor-driven, efficiency-driven, and innovation-driven. In the factor-driven stage (stage 1), countries compete based on low prices.They sell commodities or simple products, taking advantage of such factors as low-cost labor and inexpensive natural resources. At this stage of development, the basic ingredients of competitiveness include strong institutions, adequate infrastructure, a stable macroeconomic environment, and sufficient health and primary education levels. As countries move into stage 2, the efficiency-driven stage, it is important for them to develop more efficient production practices. Product quality rather than low price drives competitiveness at this stage, which depends more on efficient goods, labor and financial markets, education and training programs that prepare the workforce for more streamlined production (higher education and training), access to the latest technologies (technological readiness), and large markets that allow companies to exploit economies of scale. In the third innovation-driven stage, countries can no longer compete just by being efficient. Now companies must compete through innovation, producing new and different goods, using the most sophisticated production processes.
Figure 3. The nine pillars of competitiveness
1. 2. 3. 4.
Institutions Infrastructure Macroeconomy Health and primary education
Basic requirements
Key for factor-driven economies
Efficiency enhancers
Key for efficiency-driven economies
5. Higher education and training 6. Market efficiency (goods, labor, financial) 7. Technological readiness Innovation and sophistication factors
8. Business sophistication 9. Innovation
Key for innovation-driven economies
Source: The Global Competitiveness Report 20052006
So, although all nine pillars matter to a certain extent for all countries, the importance of each one depends on a countrys particular stage of development.To take this into account, the pillars are organized into three subindexes, each critical to one particular stage of development.The basic requirements subindex groups those pillars most critical for countries in the factor-driven stage.The efficiency enhancers subindex includes those pillars critical for countries in the efficiency-driven stage. And the innovation and sophistication factors subindex includes all pillars critical to countries in the innovation-driven stage.The three subindexes are composed as follows:
Basic requirements subindex (Stage 1: factor-driven)
Institutions (pillar 1) Infrastructure (pillar 2) Macroeconomy (pillar 3) Health and primary education (pillar 4)
Efficiency enhancers subindex (Stage 2: efficiency-driven)
Higher education and training (pillar 5) Market efficiency (pillar 6) Technological readiness (pillar 7)
Innovation and sophistication factors subindex (Stage 3: innovation-driven)
words, the index places more weight on those pillars that are most important at a given stage of a countrys development. Figure 3 shows how the nine pillars relate to each stage of development. Countries are separated into stages as follows.The factor-driven stage includes countries that have GDP per capita below US$2,000.The efficiency-driven stage includes countries with per capita income between US$3,000 and US$9,000.The innovation-driven stage includes countries with GDP per capita higher than US$17,000.12 Countries falling in between these categories are considered to be in transition between stages. For these countries, the weights change smoothly as a country develops, reflecting the smooth transition from one stage of development to another. By introducing this type of transition between stages into the modelthat is, by placing increasingly more weight on those areas that are becoming more important for the countrys competitiveness as the country developsthe Global CI can gradually penalize those countries that are not preparing for the next stage.
Table 6. Weighting of subindexes, based on stages of development

Stage Factor-driven Efficiency-driven Innovation-driven Basic requirements 50% 40% 30% Efficiency enhancers 40% 50% 40% Innovation and sophistication factors 10% 10% 30%
Business sophistication (pillar 8) Innovation (pillar 9) The Global CI implements the concept of developmental stages by weighting each of the subindexes differently, depending on the stage of a given countryin other
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The specific weights given to each of the subindexes for countries in the different stages of development are shown in Table 6.The table shows that for countries at the factor-driven stage, most weight is placed on basic requirements (50 percent), considerable weight is placed on efficiency enhancers (40 percent), and only 10 percent is placed on innovation and sophistication factors. For countries at the factor-driven stage, the weights between basic requirements and efficiency enhancers are reversed, and very little weight is placed on innovation factors. Finally, for the countries at the innovation-driven stage, some weight is still placed on the two first subindexes, but substantially more weight is on the innovation and sophistication factors subindex. The economic diversity of the SEE countries becomes apparent in their classification into the three stages of development, as summarized in Table 7.The table shows that one country, Bosnia and Herzegovina, is in stage 1.Three countries, Albania, Macedonia, and Serbia and Montenegro are in transition between stages 1 and 2. Three countries, Bulgaria, Croatia, and Romania are in stage 2. And one country, Slovenia, is already in transition between stages 2 and 3.The diversity of developmental stage indicates the different pillars on which each of the countries should be focusing. It also means that the region contains countries that can act as examples for the others to follow. Table 8 presents the rankings and scores of the countries in Southeast Europe on the overall Global CI, as well as on each of the three component subindexes.The first column shows the overall score on the Global CI; the second column shows the rank among the eight SEE countries covered in this Report; the third column shows the rank among the 117 countries covered in The Global Competitiveness Report 20052006.13 The last three columns show the scores on the three subindexes of the Global CI (basic requirements, efficiency enhancers, and innovation and sophistication factors). All scores are on a scale from 1 to 7, with higher scores demonstrating stronger performance. The overall regional average is shown at the bottom of the list of SEE countries.This is followed by the data for the four country groupings we are using for comparison (the EU15, the EU25, the East Asian NICs, and Latin America), as well as data on selected European countries. Thus, the table provides a sense of how countries in Southeast Europe are faring vis--vis each other as well as how they compare with other regions and countries. Table 8 shows that Slovenia, the only country in the region that is already an EU member, tops the regional ranking with an overall score of 4.62. Slovenia receives a particularly high score on basic requirements. And while its scores in efficiency enhancers and innovation factors are considerably lower than its scores on basic requirements, they are still significantly higher than the SEE regional average.
Bulgaria and Croatia hold the next two places in the regional ranking, followed by Romania and Macedonia. These four countries have scores that are significantly lower than Slovenia on all three subindexes. At the bottom of the list are Serbia and Montenegro, Bosnia and Herzegovina, and Albania. Again, compared with the other countries of the region, these last three perform significantly worse in all areas, most strikingly on basic requirements. It is not surprising that among the countries in the lowest places in the regional ranking are countries that have been ravaged by civil wars over the past decade.This demonstrates the effects of conflict on national competitiveness. As history has shown, it is virtually impossible to build economic prosperity for the citizens of a country at war. Not surprisingly, the table shows that, on average, as compared with the other regions, Southeast Europe, with its overall Global CI score of 3.89, is significantly less competitive than both the EU15 (average score of 5.19) or the EU25 (average score of 4.93). However, these overall averages mask differences at the country level. On average, the SEE region performs not much worse than Greece (score of 4.28), the least competitive member of the present EU25. Slovenia is more competitive than a number of its fellow EU25 members, including Greece and Portugal, as well as all of the new accession countries from Eastern and northern Europe, with the exceptions of Estonia and the Czech Republic. It is also interesting to observe from the table that the SEE region (average score 3.89) is slightly more competitive than Latin America (average score 3.84), mainly attributable to strengths in the area of efficiency enhancers. The East Asian NICs provide a tougher developing country benchmark, as these are highly competitive countries.The NICs outperform all of the SEE countries in all categories. In fact, as shown in Table 8, the NICs are now significantly more competitive than the average performance of the EU15. As already mentioned above, this demonstrates what good policies can do over a sustained period of time to improve the competitiveness of small, open economies. What is driving the competitiveness of each of the SEE countries? Although Table 8 provides a basic overview of how each of the countries in the region is performing, it is necessary to explore the specific factors driving competitiveness in each of these countries to understand what must be done to increase their economic performance. Tables 9, 10, and 11 provide the details behind the competitiveness rankings and scores summarized in Table 8. These three tables show the performance of each country or region in each subindex, as well as in all of the pillars composing the particular subindex.This section will look in detail at the competitive performance of each of the countries in Southeast Europe, as measured by each of the three subindexes of the Global CI. Slovenia is by far the most economically and politically sophisticated country in the SEE region.This becomes clear when comparing the countrys level of competitiveness
Table 7. Classification of countries into stages of development

Stage of Development Stage 1 (factor-driven) SEE countries in this stage Bosnia and Herzegovina, Other countries in this stage China, Egypt, Georgia, India, Kenya, Nigeria, Philippines, Ukraine Ecuador, Kazakhstan,Thailand, Tunisia Important areas for competitiveness Basic requirements (critical) and efficiency enhancers (very important) Basic requirements and efficiency enhancers (both very important) Basic requirements (very important) and efficiency enhancers (critical)
Transition from stage 1 to stage 2 Stage 2 (efficiency-driven)
Albania, Macedonia, Serbia and Montenegro Bulgaria, Croatia, Romania
Argentina, Botswana, Chile, Estonia, Latvia, Lithuania, Mexico, Poland, Russian Federation, Slovak Republic, Turkey Korea, Malta, Portugal, Taiwan
Transition from stage 2 to stage 3 Stage 3 (innovation-driven)
Slovenia
Same as above, but innovation factors become increasingly important All three areas: basic requirements, efficiency enhancers and innovation factors
Austria, Finland, Hong Kong, Japan, Singapore, United States
Table 8. Ranking and scores of SEE countries in the overall Global Competitiveness Index (Global CI)
Final Index
Country/group Score Rank (among SEE countries) Rank (out of 117 countries) Basic requirements
Subindexes
Efficiency enhancers Innovation factors
Slovenia Bulgaria Croatia Romania Macedonia, FYR Serbia and Montenegro Bosnia and Herzegovina Albania SEE Average EU15 of which: Greece Ireland Portugal EU25 of which: Czech Republic Estonia Hungary Latvia Lithuania Poland Slovak Republic East Asian NICs Latin America
4.62 4.04 4.01 3.98 3.84 3.67 3.58 3.40 3.89 5.19 4.28 5.22 4.60 4.93 4.76 5.03 4.50 4.46 4.51 4.38 4.48 5.51 3.84
1 2 3 4 5 6 7 8
30 61 64 67 75 85 88 100 47 21 31 29 26 35 39 34 43 36
5.14 4.54 4.46 4.32 4.42 3.98 4.06 3.91 4.35 5.57 4.84 5.52 5.29 5.31 5.03 5.30 4.68 4.84 4.84 4.60 4.74 5.88 4.35
4.52 3.78 3.75 3.84 3.32 3.43 3.14 3.02 3.60 5.04 4.19 5.23 4.47 4.80 4.64 5.00 4.50 4.33 4.36 4.30 4.40 5.50 3.43
4.20 3.39 3.54 3.37 3.31 3.19 2.97 2.64 3.33 5.01 3.84 4.91 4.04 4.58 4.44 4.05 3.98 3.57 3.94 3.87 3.88 5.16 3.34
Source: The Global Competitiveness Report 20052006 and authors calculations
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Table 9. Ranking and scores of SEE countries in the basic requirements subindex
Basic requirements subindex
Country/group Score Rank (among SEE countries) Rank (out of 117 countries) Insitutions
Component pillars
Infrastructure Macroeconomy Health and primary education
Slovenia Bulgaria Croatia Macedonia, FYR Romania Bosnia and Herzegovina Serbia and Montenegro Albania SEE Average EU15 of which: Greece Ireland Portugal EU25 of which: Czech Republic Estonia Hungary Latvia Lithuania Poland Slovak Republic East Asian NICs
5.14 4.54 4.46 4.42 4.32 4.06 3.98 3.91 4.35 5.57 4.84 5.52 5.29 5.31 5.03 5.30 4.68 4.84 4.84 4.60 4.74 5.88 4.35
1 2 3 4 5 6 7 8
32 58 67 69 76 87 92 96 42 22 30 37 29 49 41 43 57 47
4.13 3.12 3.44 3.06 3.32 2.94 3.12 2.94 3.26 5.04 4.19 5.27 4.86 4.66 3.83 4.58 4.19 3.92 3.80 3.61 3.84 5.33 3.24
4.69 3.61 3.67 2.93 3.43 2.40 2.50 1.77 3.12 5.50 4.49 4.58 4.88 5.01 4.82 4.59 4.02 4.19 4.09 3.80 3.91 5.97 3.06
4.84 4.65 4.10 5.14 3.88 4.54 3.64 4.10 4.36 4.81 3.74 5.31 4.53 4.68 4.59 5.24 3.64 4.91 4.78 4.14 4.35 5.42 4.37
6.92 6.80 6.62 6.56 6.64 6.36 6.67 6.83 6.68 6.94 6.94 6.93 6.90 6.88 6.90 6.81 6.85 6.35 6.68 6.83 6.86 6.79 6.73
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Latin America
with others in the region. In assessing Slovenias competitiveness, situated developmentally between stages 2 and 3, all factors are significant for its competitiveness, as shown in Table 7. Table 8 shows Slovenia performing particularly well in the area of basic requirements.Table 9 provides details on what is driving this strong score: Slovenia outperforms all of the other SEE countries in all pillars of this subindex. Slovenia has an impressive score of 6.92 on health and basic education, due to the countrys healthy workforce and the high percentage of Slovenian children attending primary school. Slovenias score on health and primary education is very close to the EU15 average (6.94) and slightly above the EU25 average (6.88).This is an area in which Slovenia even outperforms the East Asian NICs (average score only 6.79). In other words, Slovenias health and primary education is world class. Slovenias macroeconomic environment is measured as being relatively stable (score 4.84), although we do note that the country is outperformed in the region by Macedonia. Slovenias strengths are a relatively high national savings rate (over 26 percent) and government debt that is not overly burdensome for the economy. In fact, Slovenia outperforms both the EU15 and the EU25 averages in terms of overall macroeconomic stability, despite some weaknesses such as the governments propensity to run budget government deficits.
However, Slovenias institutions are quite weak (score 4.13). Slovenia has insufficient protection of property rights, a judiciary not seen to be independent of political influences, and government officials who often favor well-connected firms and individuals and who are seen as spending taxpayers money wastefully. Further, the corporate ethics of Slovenias firms are not assessed as being among the worlds best. Slovenia must work to improve the quality of its public and private institutions if it is to increase its competitiveness. Table 10 provides details on the component pillars of the efficiency enhancers subindex. As mentioned above, although the factors in this subindex are among the most critical to Slovenias overall competitiveness, the country does not score particularly well in this area. One of the countrys few comparative assets is in higher education and training (score 5.08). Slovenia has high enrollment rates in secondary school and in tertiary education, as well as relatively high-quality schools by regional standards (although less so than most EU members). And with regard to technological readiness, while Slovenia has quite high cell phone and Internet penetration rates, other weaknesses abound. Among these weaknesses are low personal computer use and apparent difficulties in harnessing technologies developed abroad through sources such as foreign direct investment.
Table 10. Ranking and scores of SEE countries in the efficiency enhancers subindex
Efficiency enhancers subindex
Country/group Score Rank (among SEE countries) Rank (out of 117 countries) Higher education and training
Component pillars
Market efficiency Technological readiness
Slovenia Romania Bulgaria Croatia Serbia and Montenegro Macedonia, FYR Bosnia and Herzegovina Albania SEE Average EU15 of which: Greece Ireland Portugal EU25 of which: Czech Republic Estonia Hungary Latvia Lithuania Poland Slovak Republic East Asian NICs Latin America
4.52 3.84 3.78 3.75 3.43 3.32 3.14 3.02 3.60 5.04 4.19 5.23 4.47 4.80 4.64 5.00 4.50 4.33 4.36 4.30 4.40 5.50 3.43
1 2 3 4 5 6 7 8
29 55 59 60 75 81 91 95 42 14 32 28 24 30 37 35 38 34
5.08 4.33 4.30 4.10 4.00 3.91 3.57 3.19 4.06 5.33 4.78 5.40 4.61 5.12 4.96 5.18 4.79 4.87 5.02 4.92 4.47 5.38 3.61
4.11 3.87 3.84 3.85 3.46 3.47 3.53 3.43 3.69 4.86 4.21 5.08 4.57 4.66 4.40 4.78 4.54 4.21 4.38 4.33 4.42 5.48 3.72
4.38 3.32 3.18 3.31 2.84 2.58 2.33 2.44 3.05 4.91 3.59 5.20 4.21 4.64 4.56 5.04 4.17 3.91 3.69 3.65 4.29 5.63 2.97
Table 11. Ranking and scores of SEE countries in the innovation factors subindex
Innovation factors subindex
Country/group Score Rank (among SEE countries) Rank (out of 117 countries)
Component pillars
Business sophistication Innovation
Slovenia Croatia Bulgaria Romania Macedonia, FYR Serbia and Montenegro Bosnia and Herzegovina Albania SEE Average EU15 of which: Greece Ireland Portugal EU25 of which: Czech Republic Estonia Hungary Latvia Lithuania Poland Slovak Republic East Asian NICs Latin America
4.20 3.54 3.39 3.37 3.31 3.19 2.97 2.64 3.33 5.01 3.84 4.91 4.04 4.58 4.44 4.05 3.98 3.57 3.94 3.87 3.88 5.16 3.34
1 2 3 4 5 6 7 8
31 65 74 76 81 85 98 112 47 19 35 27 34 39 62 40 45 43
4.74 3.98 3.76 3.76 3.67 3.41 3.36 3.14 3.73 5.47 4.32 5.39 4.33 5.07 4.92 4.51 4.28 4.16 4.55 4.34 4.35 5.41 3.86
3.65 3.10 3.01 2.98 2.94 2.96 2.59 2.14 2.92 4.55 3.36 4.44 3.75 4.09 3.95 3.59 3.69 2.99 3.34 3.40 3.40 4.92 2.82
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However, the greatest weaknesses in this area are the countrys inefficient markets, particularly goods and labor markets. Slovenia lacks competition in the local market, imposes burdensome regulations, complicates hiring and firing for companies, andas is the case in many other countrieshas confrontational labor-employer relations. And although Slovenia outperforms the other SEE countries in this area, in comparison with the other EU accession countries, it has significantly less efficient labor, goods, and financial markets. Slovenia must work to improve the efficiency of its markets to boost its competitiveness in the future. Overall, in the efficiency enhancers subindex, Slovenia only comes close to the EU25 in one area: higher education and training. And, unlike the scores in health and basic education, the quality of Slovenias more advanced education and training is seen as significantly lower in quality than that of the NICs, which receive a much higher score of 5.38. Finally,Table 11 provides the details of Slovenias performance in the area of innovation and sophistication factors. As Slovenia is in transition between developmental stages 2 and 3, the country should be improving its performance in this area, in preparation for the transition into the stage 3.Table 11 shows that there is still much work to be done to make Slovenia truly competitive in the future. Slovenia scores higher in business sophistication (4.74) than in innovation (3.65). In terms of business sophistication, relative strengthssuch as reasonably good quality local suppliers and companies that are moving up the value chainare mitigated by production processes that are not yet highly sophisticated and an unwillingness of managers to delegate authority. In innovation, although companies do seem to be developing a capacity for formal research and pioneering their own products, the lack of skilled engineers and insufficient spending on research and development is holding the country back. Further, there is little cooperation between universities and the private sector in R&D. However, although Slovenia does not perform extremely well in this area, the table shows that its overall performance in this subindex, as well as in the two pillars of business sophistication and innovation, is significantly higher than the scores of all of the other countries in the region. Further, on both these measures, Slovenia performs very well compared with the new accession countries to the EU and the members of the EU15 shown in the table, outperforming all of them with the exception of the Czech Republic and Ireland in business sophistication, and the Czech Republic, Hungary, Ireland, and Portugal in innovation. The table also shows that Slovenia significantly outperforms Latin America in both business sophistication and innovation. However, the higher performance of the NICs once again provides an idea of the level needed if the country is to join the league of the most competitive economies.The average performance of the NICs is
significantly higher than Slovenias performance across the board. In summary, although there remain a number of areas on which the Slovenian authorities should concentrate in order to improve the countrys competitiveness, Slovenias success in having joined the European Union and its progress on many different fronts make it an example for the rest of the region to keep in their sights. Bulgaria has not done as well as Slovenia since moving to a more market-based economy. And although Bulgaria is the second most competitive country in the SEE region, as measured by the Global CI, the gap in competitive performance between Slovenia and Bulgaria is large. Bulgaria is in stage 2, where efficiency enhancers as well as basic requirements are critical to the countrys overall competitiveness. In Table 9, we see that Bulgaria benefits from high-quality health and basic education and a stable macroeconomic environment. Bulgaria follows only Slovenia in these two areas, due to a healthy workforce, a high primary education enrollment rate, and a government that is running a budget surplus. However, Bulgaria receives quite low marks for its institutions and physical infrastructure. Our research shows that property rights in Bulgaria are not sufficiently protected, nor is its judiciary independent from political influence. Business leaders also indicate that corruption is a serious problem in the country. Bulgarias inadequate air transport poses a particularly serious problem, ranking 98 out of 117 countries. Bulgaria also gets very low marks with regard to the security of businesses in the country. Common crime and violence, as well as organized crime, impose a heavy burden on Bulgarian businesses. In fact, the problem of organized crime in the country is among the worlds worst (ranking a low 110 out of 117 countries). Business leaders feel that the police cannot be relied on to protect them from criminals (ranking 93), making security in Bulgaria a high priority for attention by the authorities if they wish to create an environment more conducive to economic growth and competitiveness. In this context, it is not surprising that this area has been particularly highlighted as a weakness that, unless improved, could postpone Bulgarias timely entry into the European Union. Despite these difficulties, Bulgaria scores higher on almost all pillars in this area than most other countries in the region except Slovenia. Bulgaria also outperforms Latin America on three of the four pillars of the subindex: physical infrastructure, macroeconomy, and health and basic education, and its scores come very close to the EU25 average in macroeconomy and health and primary education. As mentioned earlier, efficiency enhancers are very important for achieving economic competitiveness at Bulgarias stage of development.Table 10 shows that, in terms of efficiency, Bulgaria suffers from weaknesses across the board, especially its lack of technological readiness (score 3.18), with Bulgarian firms apparently not showing
particular interest in absorbing new technologies. Bulgarias markets are also highly inefficient, most particularly the market for goods and services, placing it 80th out of 117 countries.Taxation has a distortionary effect on work and investment decisions, there is a lack of competition in the local market, and Bulgaria also has to contend with the problem of talented people leaving the country for opportunities abroad. Finally, although Bulgaria is ranked third in the region with regard to innovation factors (Table 11), behind Slovenia and Croatia, many weaknesses remain. Of the two pillars in this subindex, Bulgaria suffers particularly from a lack of innovation, necessitating better protection of intellectual property rights and a greater focus by business and the academic community on research and development. However, since strength in innovation is less critical for Bulgaria in its present stage of economic development, the authorities should focus on improving the issues related to basic requirements and efficiency enhancers, particularly the security of its businesses and citizens. Croatia, ranked third, is now in stage 2 of development. This means that, as for Bulgaria, efficiency enhancers are critical to the countrys competitiveness and basic requirements remain very important. However,Table 9 shows that Croatia still does not score particularly well on the latter. Although health and basic education is the countrys greatest strength in this area, its score of 6.62 is the third lowest in this pillar among the SEE countries, ahead of only Bosnia and Herzegovina, and Macedonia. In terms of the overall health of the workforce, Croatia fared no worse than most other countries in the region; in particular it has a very low HIV prevalence rate. However, its primary school enrollment rate, estimated at 97 percent, is lower than that of most other SEE countries.14 In fact, this places Croatia in 95th out of 117 countries covered by the Global CI index on this indicator. Similarly, Croatia has the third to lowest score in the region in terms of macroeconomic stability. Although the government has done a good job of holding inflation to a low 2.1 percent, there are other macro weaknesses: the government suffers from a budget deficit of 5 percent of GDP and the national savings rate of 25.3 percent is simply not high enough to ensure sufficient capital for investment in the economy. Government debt, at more than 57 percent of GDP, is an additional drain on the budget (on a positive note, however, this has been coming down in recent years).The difference between lending and borrowing rates is quite high at almost 10 percent, pointing to inefficiencies in the allocation of capital through the banking sector and a high cost of capital for business. Croatias physical infrastructure, while better than most countries in the region, is also an impediment to the countrys competitiveness. Railroads, ports, and air transport are of poor quality, making the movement of goods and services difficult.The quality of these modes of transportation should be brought in line with that of the countrys roads, which have seen significant improvements in recent
years following important modernization projects.The countrys institutions leave much to be desired, with a judiciary seen to be among the least independent in the world, property rights not sufficiently protected, government spending perceived by the business community as highly wasteful, and a low level of public trust in their politicians. Organized crime has also become an onerous problem. Table 10 shows Croatias performance in the area of efficiency enhancers, the most critical for the countrys competitiveness at this stage, and it is uniformly lackluster. Markets are extremely inefficient, particularly goods and labor markets.Taxes provide a disincentive to work and invest, and competition in the local market is somewhat limited, accompanied by lax antitrust policy.The countrys labor markets are characterized by highly confrontational labor-employer relations, pay is not strongly related to worker productivity, and this environment is accompanied by an important brain drain problem. Financial markets are also rather inefficient, with poor access to capital (through bank loans and especially through venture capital). Although Croatia slightly outperforms Poland in a few areas, this provides a disappointingly low benchmark and highlights the urgent need for the country to focus on improving the functioning of the markets. Finally,Table 11 shows that although Croatia figures among the top two countries of the region on this subindex, its performance is still quite weak, both in business sophistication and innovation. Production processes continue to be labor intensive and relatively unsophisticated. Companies do not spend heavily on R&D, intellectual property is not sufficiently protected, and there are not enough scientists and engineers to carry out research. Since Croatia is already in stage 2 and moving toward stage 3, better performance in these areas could be expected.Thus, as well as focusing on improving infrastructure, human resources, and the other areas mentioned earlier, Croatia should also be looking at ways to improve the countrys business environment and making its firms more innovative. Romania, the largest of the Balkan countries, faces a number of challenges in its drive toward higher levels of economic development and greater prosperity for its citizens.Tables 9, 10, and 11 provide details on the elements driving Romanias overall score. Since Romania is classified as being in the second stage of development, basic requirements and particularly efficiency enhancers are extremely important for the countrys overall competitiveness score. Table 9 shows how Romania is faring with basic requirements. Like other countries in the region, Romania performs best in the area of health and primary education (score 6.64), mainly because of a relatively high primary enrollment rate. However, the overall health of the workforce is a matter of concernin particular the relatively high prevalence of tuberculosis in the population, which has a non-negligible cost for business. Romanias
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macroeconomic environment is also an area for concern. For example, the economy still suffers from high inflation (almost 12 percent), which distorts decision making by businesses and consumers.The relatively low national savings rate (17 percent) does not provide sufficient national resources for investment. Romanias poor-quality institutions (score 3.32) and the poor state of the countrys physical infrastructure (score 3.43) are also worrisome. Romanias judiciary is not free from political influence, property rights are not well protected, government policymaking is not transparent, and government officials show favoritism to well-connected firms and individuals in deciding upon policies and contracts.With regard to physical infrastructure, Romanias electricity supply is plagued by interruptions and voltage fluctuations, creating uncertainty for business and slowing production; low telephone penetration rates make communication more difficult throughout the country. We do note that Romania outperforms Hungary in the area of macroeconomy, and Latvia in health and primary education. However, although it outperforms these individual EU25 countries in particular areas, the countrys scores on all four pillars are significantly lower than those of the EU25 average. Given that Romanias goal is to join the European Union in just a few years, this is especially troubling. Turning to Table 10, we see that Romania is ranked second in the region with regard to efficiency enhancers, although the gap with Slovenias performance is very large.With regard to market efficiency, Romanias financial markets are relatively more efficient than those in the other SEE countries; put another way, Romanias financial markets, while less inefficient than those of its neighbors, are still unsophisticated and unable to provide Romanian companies with access to financing for projects and investments. Labor markets are also slightly less inefficient than in most other countries in the region, although they are still plagued by a number of problems, including cumbersome regulations concerning the hiring and firing of workers, uncooperative labor-employer relations, and a tendency for Romanias companies to hire relatives rather than professional managers. With regard to technological readiness, although the country scores better than most countries in the region, it still lags well behind Slovenia and all of the EU25 countries shown in the table. In particular, penetration rates of Internet and communication technologies remain very low in the region, and the perception exists that the laws governing these new productivity-enhancing technologies are not sufficiently developed. More generally, Romania scores well below the EU25 average across all of the efficiency enhancer pillars.This indicates that much needs to be done to increase the efficiency of the Romanian economy to prepare for EU entry. In comparison with the other countries shown in the table, it is of interest to note, however, that Romania outperforms Latin America across all pillars of this subindex.
Table 11 shows that Romania does not perform well in either business sophistication (score 3.76) or innovation (score 2.98). Although these scores are higher than most countries in the region, the gap with Slovenias performance is wide, indicating a large difference in the comparative performance of these countries. Further, Romanias scores are significantly below the EU25 average, and below all of the accession countries shown. However, since Romania is still in the second stage of development, these areas are less a cause for concern at present. In deciding where to focus attention, Romania should work on improving its shortcomings in basic requirements and efficiency enhancers to improve its ability to ensure sustainable levels of economic prosperity for its citizens. Macedonia is presently between stages 1 and 2, when basic requirements and efficiency enhancers are critical for competitiveness.Table 9 shows that on measures of basic requirements, Macedonia excels in a few areas, but it is held back by serious weaknesses in others. Macedonias greatest comparative strength in the region is the quality of its macroeconomic environment.The government has managed to move from a deficit situation to a small budget surplus in 2004, inflation has been brought down to very low levels, and a manageable level of government debt at 26.4 percent of GDP. Nonetheless, its inadequate national savings rate of 15.9 percent limits companies in obtaining sufficient investment capital, requiring attention. Although Macedonia scores best in health and primary education (score 6.56), we do note that it has the second to lowest score in the region in this area, because of the health of the workforce and a primary enrollment rate that is lower than most countries in the region. Macedonia has a lower score than all of the individual EU25 countries shown in the table, with the exception of Latvia. Macedonia receives extremely low scores on the other three pillars of the subindex.The countrys institutions were rated third worst in the region (score 3.06), followed only by Albania and Bosnia and Herzegovina. In particular, its judiciary is among the least independent in the world (ranked 104 out of 117 countries), property rights are not well protected (ranked 102), and the diversion of public funds due to corruption is common.The corporate ethics of Macedonias firms are considered to be among the worlds worst, ranking 107th out of 117 countries. The state of the countrys physical infrastructure, with a score of 2.93, is also holding back Macedonias competitiveness. Ports and air transport are highly inefficient, and the country suffers from poor-quality electricity supply. Perhaps most troubling is the fact that Macedonia is assessed as having the worst security of its businesses and citizensit is rated as having the 107th most insecure environment out of the 117 countries, followed only by countries such as Bangladesh, Colombia, and Kenya.The low rating in this area is linked to the very high cost to business of crime, violence, and the threat of terrorism, and the fact the police are not trusted to provide protection from criminals. Clearly much work needs to be done
to improve Macedonias performance in these basic areas if the country is to become competitive. Table 10 shows Macedonias performance in the area of efficiency enhancers, scoring very poorly in all pillars measured. Like the markets in other SEE countries, Macedonias labor and financial markets are seen as inefficient, characterized by confrontational worker-employer relations, and one of the worst brain drain rates in the world (it is ranked 109th out of 117 countries). Companies have difficulty raising capital in a poorly functioning banking system. Macedonia has the worst performance in the region for goods market efficiency, bar Albania, with excessive taxes on businesses, an uncompetitive local market, and a highly ineffective antitrust policy. Macedonia also lags behind in terms of technological readiness, with the third to lowest score in the region (2.58). It is evident from this picture that the government must concentrate on these areas in order to improve the countrys overall competitiveness. Finally,Table 11 shows Macedonia with poor performances in both pillars of the innovation factors subindex. The countrys poor performance on business sophistication (score 3.67) is linked to factors such as the low quality of local suppliers, the use of labor-intensive methods in production processes, and the unwillingness of management to delegate authority to subordinates.The low score in innovation (2.94) stems from the absence of scientific research institutions, low company spending on R&D, and insufficient intellectual property protection. However, these low scores, while informative, should not be of great immediate concern. Given Macedonias stage of development there is much opportunity ahead to unleash its productive potential and increase its competitiveness through improvements in the more critical areas of basic requirements and efficiency enhancers mentioned above. Serbia and Montenegro is in transition between stages 1 and 2, with basic requirements and efficiency enhancers all very important for improving the economys productivity and competitiveness.Table 9 shows it with the second to lowest overall score of the region in basic requirements (3.98), driven by weaknesses in all areas, including its institutions, (score 3.12) characterized by a judiciary not yet free of political influence, insufficient property rights, very low public trust in politicians, and extremely burdensome government administrative requirements.The countrys physical infrastructure (score 2.50) is clearly insufficient to drive national productivity and competitiveness, with a particularly inadequate rail, port, and air transport infrastructure, as well as a low-quality electricity supply. The country has one of the lowest scores in health and primary education. Serbia and Montenegro has the second highest infant mortality rate in the region and a primary enrollment rate that is lower than most other countries in the region.The country also has the highest HIV prevalence rate in the region, 0.2 percent of the population aged 15 to 49.
Most strikingly, Serbia and Montenegros score is the lowest in the region with regard to the macroeconomic environment (3.64).The countrys government has been running fiscal deficits, inflation remains high (9.5 percent), and the economy is burdened with an extravagant national debt (80 percent of GDP, an unfortunate legacy from the former regime of the Federal Republic of Yugoslavia), and the second to lowest national savings rate of all 117 countries, at 1 percent of GDP, followed only by East Timor. In such circumstances, it is extremely difficult for the countrys economy to thrive. In Table 10, we see that Serbia and Montenegros performance in the efficiency enhancers is also quite weak, with low scores in all pillars assessed.The country received a middling score with regard to higher education and training (4.0), with secondary and tertiary enrollment rates that are not particularly high in an educational system that is not assessed as serving the needs of a competitive economy. Further, staff training by companies is almost nonexistent. Markets are among the most inefficient in the region. Serbia and Montenegros goods markets are plagued by limited competition in the local market, inefficient antitrust policy, and ineffective business dispute settlement laws, all of which are costly for business.The countrys labor markets receive the worst scores in the region, placing the country a very low 104 out of 117 countries, with confrontational labor-employer relations, the promotion of friends and relatives rather than qualified managers, and a large outflux of the most talented individuals to other countries. And with regard to financial markets, loans and venture capital are difficult for firms to access and the banking system is perceived to be among the least sound of all 117 countries (ranked 103rd). In other words, the countrys various markets are not presently doing a very good job of allocating resources to best use. In Table 11, we see that Serbia and Montenegro ranks sixth in the region in the innovation factors subindex. In terms of business sophistication, the low score of 3.41 is attributable to a concentration in low-value added goods, produced with labor-intensive methods and previous generations of process technology. Not only are the countrys production processes highly inefficient, but innovation is weak (score 2.96), with low company spending on R&D and inadequate intellectual property protection. However, given the countrys stage of development, these weaknesses are not the greatest concern. Serbia and Montenegro should put its greatest effort into improving the more basic problems related to market efficiency and the overall institutional environment, as discussed above. Bosnia and Herzegovina is classified as being in stage 1, which means that basic requirements are critical for competitiveness and that efficiency enhancers are also very important.Table 9 shows that there is much room for improvement in basic requirements, with the country in third to last place in this area, after Serbia and Montenegro and Albania.
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While most countries in Southeast Europe benefit from high-quality health and basic education, Bosnia and Herzegovinas performance in these areas is weaker than all the others.. Comparative weaknesses include a gross primary school enrollment ratio that is the lowest in the region, giving it a rank of 102nd out of 117 countries. For a European country, the workforce suffers from a high rate of tuberculosis prevalence (55 cases per 100,000 inhabitants). With regard to the macroeconomy, some clear strengthssuch as very low inflation and a debt-to-GDP ratio that has been getting smaller and more manageable in recent yearsare mitigated by an extremely low national savings rate (4.6 percent) and government spending that has recently moved back into deficit. As with many other countries in the region, security is a serious problem in Bosnia and Herzegovina. Our research indicates that crime and violence represent heavy costs for businesses, with police services unable to protect business from criminals; indeed, only six countries in the larger 117-country sample Bangladesh, Guatemala, Guyana, Nigeria, Paraguay, and Venezuela, receive poorer scores in this area. Finally, Bosnia and Herzegovina receives among the lowest scores in the region in two critical areas: the quality of its public and private institutions (score 2.94) and of its physical infrastructure (score 2.40). As is the case elsewhere in Southeast Europe, the judiciary is far from independent, and property rights are the least well protected in the entire region (in fact, only four countries in the larger sample get lower marks on property rights: Chad, East Timor, Paraguay, and Venezuela). Public trust in politicians is among the lowest in the world, with government spending seen as extremely wasteful. As might be expected given the recent war, the countrys air, rail, and port transport are in deplorable condition, with air transport deemed to be third to worst of all 117 countries covered by the Global CI, only Cameroon and Chad having more infrequent and inefficient air transport.The electricity supply is plagued by frequent interruptions. Table 10 shows Bosnia and Herzegovina coming in second to last the region in the area of efficiency enhancers, with an overall score of 3.14.The countrys higher education and training is held back by a low secondary school enrollment rate (the lowest in Southeast Europe) and schools that are not meeting the needs of a competitive economy. Bosnia and Herzegovina also lacks scientists and engineers, and there is almost no staff training by companies. With regard to labor market efficiency, workeremployer relations are highly confrontational, with workers pay unrelated to productivity. Bosnia and Herzegovina also has a number of weaknesses in the functioning of its goods and financial markets, where the problems stem from very low competition in the local market and administrative hurdles for starting a business in the country.The country also has one of the least efficient financial
markets in the world, with relatively unsound banks and access to capital for investment very difficult to obtain. Most strikingly, Bosnia and Herzegovinas technological readiness lags behind all other countries in the region, and indeed, most of the world. It has low penetration rates of new technologies such as Internet, and its companies are among the least aggressive in the world in absorbing technologies from abroad. Finally, Bosnia and Herzegovina gets the second to lowest scores in the region in business sophistication (3.36) and innovation (2.59). In fact, in this subindex the country ranks a low 98 out of 117 countries, putting it on a par with Benin, Ecuador, and Malawi. In innovation, the country receives the worst score on intellectual property protection except for four countries: Chad, Bolivia, Guyana and Paraguay. However, these weaknesses should not take attention away from basic requirements and efficiency enhancers, areas far more important for improving the countrys competitiveness and productivity at its present stage of development. Albania, one of the very poorest countries of the SEE region, is also shown to be the least competitive of the eight countries in the Global CI (and ranked 100th in the full sample of 117 countries). Albania is classified to be between stages of development 1 and 2, which means that both basic requirements and efficiency enhancers are key drivers of the countrys competitiveness. With regard to elements in the basic requirements subindex,Table 9 shows that Albania has the lowest score of all countries in the region.This is despite the fact that Albania has the second highest score for health and primary education (6.83), coming just behind Slovenia in this category. Albanias high score here is attributable to having the second highest primary school enrollment rate in the region (after Slovenia), and a healthy population by international standards (e.g., relatively low levels of communicable diseases, and low infant mortality rate). However, although health and primary education remain relative strengths for the country, there remain a preponderance of other weaknesses that pull down the countrys overall score.The countrys macroeconomic environment, although not the worst in the region, does suffer from a number of problems.The country has been running budget deficits (4.9 percent of GDP in 2004) while carrying a relatively heavy debt burden (although, on a positive note, both of these have been on a downward trend over the past few years).The countrys national savings rate is also extremely low (17.2 percent), placing the country in 85th place out of 117 countries in this area. An even more worrisome factor is the state of Albanias public institutions, assessed as being among the worst in the region, along with those of Bosnia and Herzegovnia. As in most other countries in Southeast Europe, property rights are not sufficiently protected. Corruption and the diversion of public funds is an extremely prevalent and costly problem in the country
(Albania ranks 109th on this factor).The government is also seen as practicing extreme favoritism in deciding upon policies and contracts (placing the country 111th). It is therefore not surprising that there is an extremely low level of trust in the financial honesty of politicians (placing the country 101st, along with countries such as Bangladesh, Chad, and Sri Lanka). Although all of these factors are highly problematic, Albanias most striking weakness in this area is linked to the quality of the countrys physical infrastructure. Albanias score of 1.77 is far below that of any other country in the region, highlighting the gap between countries in the region. In fact, the overall infrastructure quality is assessed as being the second to worst in the world, followed only by Chad out of all 117 countries covered in the Global Competitiveness Report. Railroads and other forms of transportation infrastructure are highly underdeveloped, the electricity supply is plagued by interruptions, and the telephone line penetration rate is by far the lowest in all of Europe.Without at least a minimum of basic infrastructure in place it is clear that it is very difficult for the economy to function efficiently, to say the least. Improving the basic infrastructure and the functioning of the countrys institutions would seem critical priority areas for Albania in improving its overall competitiveness in the years to come. Turning to the efficiency enhancers subindex, once again we see in Table 10 that Albania is the worst performer of all SEE countries in this subindex, which also includes a number of factors that are presently critical to the countrys competitiveness. A first point to note is that, although Albania scores quite well with regard to basic education, as discussed above, when it comes to higher education and training, the country trails far behind all other countries in the region. Albanias tertiary enrollment rate of 16.2 percent places the country 84th overall, significantly lower than all other SEE countries (compare this, for example, with Bosnia and Herzegovinas 24.7 percent). The educational system as a whole is assessed as being the worst in the region in terms of meeting the needs of a competitive economy, and Albanian companies are assessed as investing so little in staff training as to place Albania 111th in this area. Overall it is clear that much needs to be done to improve the more advanced skill building related to higher education and training in Albania. With regard to the functioning of markets, again Albania receives low scores. Goods markets are the least efficient in the region with their highly distortionary taxes, inefficient dispute settlement laws, and little competition in the local market, placing the country a low 109 by international comparison. Even less efficient are Albanias financial markets, with access to financing extremely difficult in the country (through bank loans, the stock market, and venture capital...), placing Albania 114th overall, with hardly any countries having more inefficient financial markets.
The single somewhat bright star is the flexibility of Albanias labor markets, which are in fact assessed as being by far the most efficient in the region (ranked 43rd) more efficient than many labor markets in EU countries. This is due to less confrontational relations between employers and workers, greater flexibility in hiring and firing workers, and greater flexibility in wage setting in the country. So overall Albania scores quite well in labor markets. However, it has one of the biggest brain drain problems in the world, which places the country 115th out of 117 countries, followed only by Guyana and Zimbabwe. Finally, turning to Table 11, and Albanias performance with regard to Innovation Factors, again the country lags behind the others in the region, ranking a very low 112th in this subindex out of 117 countries. Further, the gap between Albanias performance and that of other countries in the region is quite large, particularly with regard to the innovation pillar (where Albania ranks an abysmal 115th). Albania does not benefit from the existence of scientific research institutions (ranked 116), companies do not invest in research and development (ranked 109), and there is the lowest level of collaboration between businesses and universities in research and development activity (ranked 117th). In other words, Albania is one of the least innovative countries covered in our research. However, although this might be something to keep in mind once the country moves to higher stages of development, it first needs to get from here to there. At present, to ensure a more sustainable development of the economy, Albania would be wise to focus on some of the more basic issues already mentioned above, such as improving the institutional environment, beefing up the countrys physical infrastructure, improving higher education and training, and so on.
VI. Policy recommendations The previous sections have presented a wealth of information regarding the competitiveness of the countries of the SEE region. But what does all this mean from a policy perspective? From the detailed analysis based on the Global Competitiveness Index, it is, in fact, possible to identify specific areas on which the authorities should focus their attention at present. This section summarizes the most critical areas recommended for urgent attention by the authorities in each of the eight countries, given their current stages of development, in order to improve their level of competitiveness. The best modes of implementing these changes lie outside the scope of this document. Instead, these suggestions should be taken in the context of the many detailed recommendations provided by other organizations engaged in the region such as the EU, the IMF, the World Bank, and the EBRD. Here, we have made an effort to indicate some of the reforms that should be the priority in the short term.
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Albania Continuing to shrink the high debt ratio and budget deficit, and implementing incentives to increase the very low national savings rate; Strengthening the countrys institutions, with a particular focus on property rights; Tackling corruption; Increasing the transparency and accountability of the public sector in order to gain the trust of the public in their political representatives and ensure proper management of national financial resources; Investing in the countrys transport, energy, and communications infrastructure; Increasing higher education enrollment rates and improving the overall quality of the educational system and its responsiveness to the changing needs of the economy; Simplifying the tax system; Increasing market competition; Improving the efficiency of financial markets, for better capital allocation for investment. Bosnia and Herzegovina Improving the countrys human capital base, by increasing primary, secondary, and tertiary school enrollment rates, and upgrading the quality of the educational system; Addressing persistent macroeconomic instabilities, focusing on continuing to shrink the high debt ratio and implementing incentives to increase the very low national savings rate; Reforming and improving police services so that crime and violence, including organized crime in the country, can be controlled and reduced; Strengthening the countrys institutions, with a particular focus on property rights and judicial independence; Increasing the transparency and accountability of the public sector in order to gain the trust of the public in their political representatives and ensure proper management of national financial resources; Improving and rebuilding the countrys infrastructure; Increasing market competition and simplifying administrative requirements for business creation; Reforming the financial market, with a particular focus on strengthening the banking sector. Bulgaria Strengthening the countrys institutions, with a focus on improving the enforcement of property rights and judicial independence; Improving the openness and transparency of the public sector; Tackling corruption and organized crime; Improving security, particularly the protection of businesses and individuals from common crime and violence; Increasing market competition.
Croatia Increasing primary school enrollment; Fiscal reform aimed at reining in public spending, and cutting public debt; implementing incentives to increase national savings; Decreasing the incidence of organized crime; Implementing infrastructure projects to improve the quality of transport; Strengthening institutions, particularly the protection of property rights and judicial independence, and increasing transparency; Simplifying administrative requirements for business; Increasing market competition; Developing financial markets. Macedonia Implementing measures to increase the national savings rate; Strengthening public institutions, in particular judicial independence and property rights; Decreasing corruption; Adopting measures to improve corporate governance and ethics; Undertaking projects to modernize physical infrastructure, particularly roads, transport and energy; Developing an effective strategy to improve the insecure physical environment and to protect businesses and individuals from crime and violence; Stemming the brain drain with incentives to keep the best and the brightest in the country; Increasing market competition; Implementing tax reform to lower the tax burden on business. Romania Formulating and implementing monetary policy to lower inflation; Taking measures to increase the national savings rate; Strengthening institutions and increasing government transparency; strengthening property rights and the independence of the judiciary, and reducing government favoritism in policymaking; Modernizing infrastructure, particularly telecommunications and energy sectors; Increasing the flexibility of labor markets, especially the hiring and firing of workers; Measures to increase the adoption of new technologies, such as ICTs, to improve the economys productive potential. Serbia and Montenegro Strengthening institutions, especially property rights and judicial independence; Increasing transparency and accountability of the public sector; Improving infrastructure, particularly the transport and energy sectors;
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Increasing school enrollment and improving the responsiveness of the educational system to the needs to a competitive economy; Adopting measures to ensure macroeconomic stabilization, including fiscal restraint to lower the government budget deficit and decrease the debt burden; Implementing monetary policy to lower inflation and increase the national savings rate; Increasing market competition; Modernizing and improving financial markets and strengthening the banking system. Slovenia Strengthening institutions by improving property rights and judicial independence, and by reducing government favoritism; Improving corporate ethics; Reducing red tape for business; Increasing market competition; Increasing the flexibility of labor markets, especially the hiring and firing of workers; Providing incentives for the private sector to carry out more R&D; Improving collaboration between universities and industry in R&D; Promoting industrial clusters. In summary, although specific priorities vary from country to country, all share a number of areas requiring improvement, including the need to strengthen infrastructure and modernize financial markets. More generally, in view of the goal of EU accession, a top priority for all will be to improve links with the rest of Europe and take ownership of the goals contained in the Lisbon Agenda: to make the European Union the most competitive economy in the world.This commitment not only provides a credible framework for the continued implementation of their own sound macroeconomic and structural policies, but presents an opportunity for the SEE countries to work cooperatively on regional projects to strengthen the competitiveness of the entire region.
VII. Conclusions This chapter has explored the competitiveness of eight countries from Southeast Europe: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Former Yugoslav Republic of Macedonia, Romania, Serbia and Montenegro, and Slovenia.We have assessed the performance of these countries over recent years in order to identify competitive trends, carry out in-depth analysis, and benchmark their performance against a number of other relevant countries and regions. Our research has shown that there are many differences among SEE countries in terms of competitive potential. Slovenia stands apart for having achieved a relatively high level of competitiveness, which has been well sustained in
recent years.Thus it is not surprising that, in May 2004, Slovenia was the first country from the region to accede to the European Union. Among other SEE countries, such as Bulgaria, Croatia, and Romania, competitive performance is much more mixed.These countries must continue their efforts to carry out reforms, making it possible for them to realize their goal of membership in the European Union. Finally, some SEE countries, which have experienced much turbulence in recent years, such as Bosnia and Herzegovina, and Serbia and Montenegro, are assessed as being extremely uncompetitive according to our research. They are joined at the bottom of the ranking by Albania, another country that has had considerable difficulties in making the transition to a more market-based economy. Much remains to be done to bring these countries to the average competitive level of the region, with a view to eventually achieving EU performance standards. However, despite their diversity, our research has also shown that the countries of Southeast Europe share certain features in their competitive environments. On the one hand, they have common weaknesses in the quality of public institutions, particularly inadequate protection of property rights and the lack of an independent judiciary. These areas require immediate attention in order to move Southeast Europe into the league of the more competitive countries of Europe. On the other hand, most of the SEE countries excel in the quality of health and primary education and relatively high macroeconomic stability.With regard to the macroeconomic environment, the achievements made since the difficult starting points of a decade ago demonstrate how much can be achieved in a relatively short time, given sufficiently strong political will and wise policies.The success that most of these countries have had in laying a foundation of macroeconomic stability is to be highly commended without it, many of the structural and institutional reforms that are necessary to ensure eventual EU accession would be difficult indeed to implement. More importantly, these early stabilization successes show that the political leadership in the region, the business community, and organizations of civil society are ready to make the sacrifices that will be necessary to modernize their respective economies, ahead of full integration into the European Union. Overall, despite the many remaining challenges, and in view of the strong efforts for reform already underway, with the unwavering support of the international community, we are optimistic about the potential for the future competitiveness of the region. If the countries of Southeast Europe continue on their present reform paths, they will surely follow in the footsteps of their neighbors from Central and Eastern Europe, joining the European Union and the ranks of the more competitive countries in Europe.The World Economic Forum stands ready to support this process by periodically updating and deepening the analysis contained in this first Report, with the aim of offering it as a benchmarking and tracking tool for policy reform and implementation in the region.
37
Notes
1 The three countries shown in this figure have been chosen largely because of the availability of time-series data for an extended period of time. No equivalent time series exists for most other countries in the SEE region. 2 The ten countries that joined the European Union in 2004 are Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovenia, and the Slovak Republic. 3 The October 2005 finding by the UN International Criminal Tribunal for the former Yugoslavia (ICTY) that Croatia has been fully cooperating with the tribunal removed the final obstacle for accession negotiations to begin. 4 The Growth Competitiveness Index was developed in collaboration with Professors Jeffrey Sachs and John McArthur, and was first introduced in The Global Competitiveness Report 20012002. 5 A detailed breakdown of the construction of the Growth Competitiveness Index is available upon request from the World Economic Forum, at gcp@weforum.org. 6 The Growth Competitiveness Index separates economies into two groups: the core economies (those for which technological innovation is critical for growth), and non-core economies (countries which can still grow by adopting technologies developed abroad). The separation between core and non-core economies is made by taking account of the number of registered US utility patents for innovation each country has per capita in the most recent year. A threshold of 15 patents per million people was chosen to separate the countries into the two groups, with those registering more than 15 patents part of the core group, and all others non-core. 7 Send requests to gcp@weforum.org. 8 The apparent improvement in this area in 2003 is probably due to a change in the way the variable is measured, rather than a difference in actual performance. 9 For more information on this process see Box 1. 10 The World Economic Forum has worked with Professor Xavier Sala-iMartin and Elsa Artadi to develop the Global Competitiveness Index. For more details on the Index, see chapter 1.3 of The Global Competitiveness Report 20042005 and chapter 1.1 in The Global Competitiveness Report 20052006. 11 Send requests to gcp@weforum.org. 12 We have used income levels as the separating criterion for the stages on the basis of the following reasoning: Factor-driven economies are those that compete in low prices. We proxy low wages with low income levels, which is why we assign countries with 2003 income per capita below US$2000 to this group (Sala-i-Martin and Artadi 2004, p.72). The same reasoning applies to countries in stages 2 and 3: rising GDP per capita proxies for wages that are rising, pulling countries into higher stages of development, where they must compete based on more complex factors. 13 For further information on the full 117-country dataset, see The Global Competitiveness Report 20052006. 14 Ninety-seven percent would seem a very high enrollment rate. However, Croatias low score is attributable to the fact that the gross enrollment rate is calculated as the ratio of total enrollment, regardless of age, to the population of the age group that officially responds to the primary education level. This means that for a large majority of countries, gross primary enrollment rates actually exceed 100 percent.
. 2004b. The Stabilisation and Association Process for South East Europe: Third Annual Report. Brussels: COM(2004) 202/2 final. March. . 2004c. Croatia: Opinion on the Application of Croatia for Membership of the European Union. Brussels. April. . 2004d. Bosnia and Hercegovina: Stabilisation and Association Report 2004. Brussels. . 2004e. Serbia and Montenego: Stabilisation and Association Report. Brussels. Dombey, D. 2003. EU envoys agree entry terms with Romania. Financial Times. 10 December. Economist Intelligence Unit. 2004. Various country profiles and country reports. European Bank for Reconstruction and Development (EBRD). 2004a. Spotlight on South-Eastern Europe: an Overview of Private Sector Activity and Investment. London: European Bank for Reconstruction and Development. . 2004b. Strategy for the Former Yugoslav Republic of Macedonia. London: European Bank for Reconstruction and Development. International Monetary Fund. 2002. Public Information Notice No.02/56. May. . 2004a. World Economic Outlook Database. September. . 2004b. Country Report No.04/114. . 2004c. Bosnia and Herzegovina: Poverty Reduction Strategy Paper, Mid-term Development Strategy. April. . 2004d. Joint Staff Assessment of the Poverty Reduction Strategy Paper. February. , 2004e. Albania- Fourth Review under the 3 year arrangement under the Poverty Reduction and Growth Facility. July. . 2005a. Country Report No. 05/233. . 2005b. Country Report No. 05/199 . 2005c. Albania- 2004 article IV Consultation. March. . 2005d. Public Information Notice No.05/30. March. . 2005c. World Economic Outlook Database, September 2005 Sala-i-Martin, X. and E. Artadi. 2004. The Global Competitiveness Index. The Global Competitiveness Report 20042005. Hampshire: Palgrave MacMillan for the World Economic Forum. Traynor, I. 2005. Serbs Bow to Pressure for Single Bosnian Police Force. The Guardian, Oct. 7. World Bank. 2001. Bulgaria: The Dual Challenge of Transition and Accession. Washington, DC. ISBN No. 0821349627. . 2003. Croatia Country Economic Memorandum: A Strategy for Growth through European Integration. Washington, D.C. . 2004a. Various country briefs. Available online. . 2004b. Doing Business in 2005: Removing Obstacles to Growth. Washington, DC: World Bank, International Finance Corporation, and Oxford University Press. . 2005. Doing Business in 2006: Creating Jobs. Washington, DC: World Bank and International Finance Corporation. World Economic Forum. 2001. The Global Competitiveness Report 20012002. New York: Oxford University Press.
38
References
Blanke, J. and A. Lopez-Claros. 2004. The Growth Competitiveness Index: Assessing Countries Potential for Sustained Economic Growth. The Global Competitiveness Report 20042005. Hampshire: Palgrave MacMillan for the World Economic Forum. Central Bank of Montenegro website, available online at http://www.cbmn.org/indexE.htm. Commission of the European Communities. 2004a. The Western Balkans in Transition. DG for Economic and Financial Affairs European Economy Occasional Paper No.5. January.
. 2002. The Global Competitiveness Report 20022003. New York: Oxford University Press. . 2003. The Global Competitiveness Report 20032004. New York: Oxford University Press. . 2004. The Global Competitiveness Report 20042005. Hampshire: Palgrave Macmillan. . 2005. The Global Competitiveness Report 20052006.
Part 2: Country Profiles
How country profiles work
Albania
Key Indicators
Total population in millions, 2004 ......................................................3.2 Total GDP in billions of US dollars, 2004 ...........................................7.6 GDP per capita (PPP) in US dollars, 2004......................................4,937 Real growth in GDP (%), 2004 ..........................................................5.9 Growth of output (average annual percent growth) 1990-2003 ........4.6 Agriculture......................................................................................3.6 Industry ..........................................................................................2.0 Manufacturing ................................................................................n/a Services .........................................................................................7.4
Human Development Indicators

Gross primary enrollment (percent of relevant age group), 2003 .103.5 Gross secondary enrollment (percent of relevant age group), 200381.1 Gross tertiary enrollment (percent of relevant age group), 2003 ....16.2 Adult literacy rate age 15 and above (%), 2003 ..............................98.7 Life expectancy at birth, 2003 .........................................................72.0 HIV prevalence rate for population aged 15 to 49, in percent, 2003 0.1 Public expenditure on health (as percent of GDP), 2002 ..................2.4
Infrastructure and Technology Diffusion Indicators

Paved roads (percent of total roads)................................................39.0 Main telephone lines per 100 inhabitants, 2003 ...............................8.3 Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..35.8 Personal computers per 100 inhabitants, 2002.................................1.2 Internet users per 10,000 inhabitants, 2003 ...................................97.6
42
Inflation (annual percent change), 2004 ............................................2.9 Government surplus/deficit (as percent of GDP), 2004...................4.9 Gross fixed capital formation (as percent of GDP), 2005 ..................n/a National savings rate, 2004 .............................................................17.2 Interest rate spread, 2004 .................................................................5.2 Real effective exchange rate*, 2004...............................................13.1 Exports of goods and services (as percent of GDP), 2004 .............16.8 Imports of goods and services (as percent of GDP), 2004 .............36.0 Current account balance (as percent of GDP), 2004 .......................4.4 Gross official reserves in months of imports, 2004 ..........................4.1 Government debt as a percentage of GDP, 2004 ...........................55.3 Total unemployment (ILO definition, %), 2003 ...............................15.2 Gini index** .....................................................................................0.28
This section includes four-page country profiles for the eight countries covered in this Report. Each profile summarizes important data for a country. It displays major economic, financial, social, and trade data from published sources and from the World Economic Forums Executive Opinion Survey (EOS). Country profiles are laid out as follows: the first page presents basic indicators for the country in order to give a general overview of its present situation in terms of economic and social development; the second page includes charts presenting key growth, investment and trade data; the third and fourth pages present selected data for each individual economy from the World Bank and from the World Economic Forums Global Competitiveness Index.
* 2004 period average, CPI based, trade-weighted real effective exchange rate (2003 = 100). Values greater (less) than 100 indicate appreciation (depreciation) ** The Gini Index is a number between 0 and 1 that is a measure of inequality, with lower (higher) values representing less (more) inequality. Sources: UNFPA State of World Population 2004; IMF World Economic Outlook Database, September 2005; IMF International Financial Statistics, November 2005; Economist Intelligence Unit; IMF Country Reports; International Trade Commission; IMF World Economic Outlook, Winter 2005 (published version); ILO LABORSTA online, October 2005; World Bank World Development Indicators 2005; UNESCO Institute for Statistics; UNDP Human Development Report 2005; WHO The World Health Report 2005; WHO Report on the global AIDS epidemic, 2004; US Agency for International Development; ITU World Telecommunications Indicators 2004
Page 1
Key Indicators, Human Development Indicators and Infrastructure and Technology Diffusion Indicators
1
These three sections present recent data aimed at providing a sense of (1) the size and structure of the economy, and the stability of the macroeconomic environment; (2) the state of social development, including literacy rates and life expectancy; and (3) the extent to which infrastructure and technology is developed within the country in question.The primary data sources used are: UNFPA State of World Population 2004; IMF World Economic Outlook Database, September 2005; IMF International Financial Statistics, November 2005; Economist Intelligence Unit; IMF Country Reports; International Trade Commission; IMF World Economic Outlook,Winter 2005 (published version); ILO LABORSTA Online, October 2005;World Bank World Development Indicators 2005; UNESCO Institute for Statistics; UNDP Human Development Report 2005;WHO The World Health Report 2005;WHO Report on the global AIDS epidemic, 2004; US Agency for International Development; ITU World Telecommunications Indicators 2004.
Country Profiles
41
FDI Inward and Outward Stock and Flow, 2000 and 2004
US$ (millions)
2,000
Country Profiles
2
1,500
Page 2
2
3 2000 3 2004
1,000
500
Source: UNCTAD World Investment Report 2005
0
FDI inward stock FDI outward stock FDI inflows FDI outlfows
Merchandise Exports by Main Destination, 2004

3 3 3 3 3 EU-15 Turkey Macedonia, FYR US Other
< 1% 2% 1%
3
6%
The chart at the top of the page provides a comparison of foreign direct investment inward and outward stocks and flows for two years, 2000 and 2004.The data source is the UNCTAD World Investment Report 2005.
3
43
90%
Source: UN Comtrade Database, October 2005
Real GDP Growth, 19922005

15 12 9 6
Percent
4
3 0 3 6 9
The second chart provides information on the main destinations of each countrys exports, with each export destination shown as a percentage of total exports.The source is the UN Comtrade Database, October 2005.
4
Source: World Economic Outlook Database, IMF, September 2005
12
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Government Debt and Surplus/ Deficit as Percentages of GDP

Government debt
5
35 30 0.0
Government surplus/deficit
3 :
Government debt as a percentage of GDP Government surplus/deficit as a percentage of GDP
25 20
0.5
1.0 15 10 5 1.5
The third chart presents annual real GDP growth rates since 1992.These data were obtained from the World Economic Outlook Database, IMF, September 2005.
5
Source: Publicly available IMF Country Staff Reports and Appendices
0
1998 1999 2000 2001 2002 2003 2004
2.0
Government Debt and Surplus/Deficit as Percentages of GDP
The chart at the bottom of the page presents data on government debt, as well as on the government budget balance (surplus/deficit) between 1998 and 2004.These data were obtained from IMF Country Staff Reports and Appendices. 42
Page 3
Country Profiles
Competitiveness Rankings
Rank out of 104 countries Rank among SEE countries
Global Competitiveness Index..........................................................100................................8

Basic Requirements.....................................................................................................96 ......................................8
Institutions.................................................................................................107 ................................8 Infrastructure.............................................................................................116 ................................8 Macroeconomy ...........................................................................................85 ................................5 Health and Primary Education .....................................................................36 ................................2
Efficiency Enhancers...................................................................................................95 ......................................8

Higher education and training .....................................................................93 ................................8 Market efficiency.......................................................................................100 ................................8 Technological readiness ..............................................................................98 ................................7
Innovation Factors......................................................................................................112 ......................................8

Business sophistication.............................................................................107 ................................8 Innovation..................................................................................................115 ................................8
Source: World Economic Forum Global Competitiveness Report 20052006
Starting a Business
12 10 Number of procedures 35 Time (days) 8 6 4 2 5 0 0 30 25 20 15 10 45 40 Cost (percent of income per capita) 35 30 25 20 15 10 5 0
The table at the top of the page presents the Global Competitiveness Index Rankings for the eight countries covered in this Report. Rankings are shown out of the 117 countries covered in The Global Competitiveness Report 2005-2006, as well as out of the eight countries covered in this Report.
7
3 EU-15 3 Albania 44 3 SEE Average
Starting a Business
Source: World Bank, Doing Business in 2006: Creating Jobs
The Most Problematic Factors for Doing Business

FACTOR
Inefficient bureaucracy....................................... Policy instability.................................................... Corruption .............................................................. Crime and theft ..................................................... Access to financing ............................................. Tax regulations...................................................... Government instability/coups ............................ Poor work ethic .................................................... Inadequately educated workforce.................... Tax rates................................................................. Inadequate infrastructure................................... Restrictive labour regulations............................ Foreign currency regulations............................. Inflation .................................................................. 0 5 10 15 20 25 30
The chart in the middle of the page provides an indication of the ease with which a business can be started in each country, compared with both the SEE and the EU-15 averages. It shows (1) the number of procedures required (2) The number of days required, and (3) the cost of setting up a business.The data source is the World Bank, Doing Business in 2006: Creating Jobs.
8
Percent of responses
Note: From a list of 14 factors, respondents were asked to select the five most problematic for doing business in their country and to rank them between 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings. Source: World Economic Forum Executive Opinion Survey (2005)
The chart at the bottom of the page summarizes those factors seen by CEOs and top executives as the most problematic for doing business in their country.The information is drawn from a question in the Executive Opinion Survey 2005 in which respondents were presented with 14 different factors and asked to rank from 1 to 5 those they considered the most problematic.The responses were tabulated and weighted according to the rank assigned by the respondents.
National Competitiveness Balance Sheet

NOTABLE COMPETITIVE ADVANTAGES Rank/117 NOTABLE COMPETITIVE DISADVANTAGES
Rank/117
Country Profiles
9
Institutions
6.16 8.21 6.08 6.24 6.15 6.14 8.04 6.06 6.01 6.26 6.03 8.16 6.07 8.23 2.02 5.04 5.01 5.05 5.03 2.15 2.14 2.16 2.17 8.11 8.15 7.09 Organized crime ............................................................110 Protection of minority shareholders interests..............110 Favoritism in decisions of government officials............101 Diversion of public funds ..............................................100 Business costs of crime and violence ............................95 Reliability of police services ............................................93 Ethical behavior of firms .................................................92 Wastefulness of government spending ..........................89 Judicial independence.....................................................88 Public trust of politicians .................................................87 Property rights.................................................................85 Efficacy of corporate boards ...........................................81 Burden of government regulation ...................................77 Strength of auditing and accounting standards ..............67 Business costs of terrorism ............................................63
Page 4
9
Infrastructure
5.08 5.02 2.13 2.20 4.13 4.14 4.12 4.10 4.03 4.16 4.01 4.17 2.19 2.18 8.17 8.18 7.11 8.20 4.09 2.05 7.10 Telephone lines, 2003 .....................................................33 Railroad infrastructure development ...............................38
Macroeconomy
Government surplus/deficit, 2004...................................16 Government debt, 2004 ..................................................41
Health and primary education

Malaria prevalence ............................................................1 HIV prevalence ..................................................................5 Tuberculosis prevalence ..................................................48 Infant mortality ................................................................49
Higher education and training

Quality of math and science education...........................20 Secondary enrollment .....................................................30 Quality of the educational system ..................................42 Tertiary enrollment ..........................................................43
Infrastructure
Air transport infrastructure quality ..................................98 Overall infrastructure quality ...........................................83 Quality of electricity supply .............................................71 Port infrastructure quality................................................60
Market Efficiency
Imports, 2004..................................................................20 Exports, 2004 ..................................................................26 Hiring and firing practices ...............................................28 Flexibility of wage determination ....................................33 Time required to start a business, 2005 .........................39 Pay and productivity ........................................................41 Private Sector Employment of Women ..........................44 Ease of access to loans ..................................................47 Number of procedures required to start a business, 2005 ...........................................................49
Macroeconomy
Real effective exchange rate, 2004 ..............................114 National savings rate, 2004 .............................................89 Inflation, 2004 .................................................................78 Interest rate spread, 2004...............................................62

Extent of staff training ....................................................89 Quality of management schools .....................................84 Local availability of specialized research and training services ............................................................56
Technological readiness
3.18 3.19 3.15 3.09 Cellular telephones, 2003................................................44 Internet users, 2003........................................................45 Laws relating to ICT ........................................................46
45
Innovation
Availability of scientists and engineers ...........................31

4.15 4.05 4.04 4.06 4.11 2.12 4.08 8.22 8.14 2.03 6.02 7.01 6.11 7.02 2.08 8.19 2.04 2.09 2.06 3.02 3.01 3.04 3.21 8.12 8.01 8.08 8.06 8.05 7.06 8.02 7.05 6.04 Primary enrollment ..........................................................74 Medium term business impact of tuberculosis ..............70 Medium term business impact of malaria .....................68 Medium term business impact of HIV/AIDS...................58 Life expectancy ...............................................................51
Market Efficiency
Agricultural policy costs ................................................115 Brain drain .....................................................................110 Foreign ownership restrictions......................................103 Reliance on professional management.........................102 Financial market sophistication .......................................98 Efficiency of legal framework .........................................97 Intensity of local competition ..........................................94 Extent and effect of taxation...........................................89 Effectiveness of antitrust policy......................................88 Local equity market access.............................................86 Cooperation in labor-employer relations..........................84 Soundness of banks........................................................69 Prevalence of trade barriers ............................................57 Venture capital availability ...............................................51
Firm-level technology absorption ..................................100 Technological readiness ..................................................90 FDI and technology transfer............................................65 Personal computers, 2003 ..............................................64
Business sophistication
Willingness to delegate authority....................................96 Nature of competitive advantage ....................................92 Control of international distribution .................................85 Extent of marketing.........................................................84 Production process sophistication ..................................81 Local supplier quality.......................................................74 Value chain presence ......................................................67 Local supplier quantity ....................................................65
Innovation
Intellectual property protection .......................................90
This page forms a country competitiveness balance sheet, providing detailed information on the relative strengths and weaknesses of each economy.The balance sheet shows the variables included in the calculation of the Global Competitiveness Index, organized under the different specific issue areas, such as infrastructure, macroeconomic stability and business sophistication.The rankings for each variable are given out of the entire group of 117 countries included in The Global Competitiveness Report 20052006. The decision rule for selecting variables as advantages or disadvantages is based on the methodology used for the 117-country sample employed in The Global Competitiveness Report. For top-ranked countries in the Global CI, variables ranked between 1 and 10 are considered an advantage. For those countries ranked from 11 to 50 overall in the Global CI, variables ranked better than the countrys own rank are considered to be advantages. For those countries with an overall Global CI rank worse than 50, any variables ranked equal to or better than 50 are considered as advantages.
43
Country Profiles: Albania
Albania
Key Indicators
Total population in millions, 2004 ......................................................3.2 Total GDP in billions of US dollars, 2004 ...........................................7.6 GDP per capita (PPP) in US dollars, 2004......................................4,937 Real growth in GDP (%), 2004 ..........................................................5.9 Growth of output (average annual percent growth) 19902003 .......4.6 Agriculture......................................................................................3.6 Industry ..........................................................................................2.0 Manufacturing ............................................................................n/a Services .........................................................................................7.4 Inflation (annual percent change), 2004 ............................................2.9 Government surplus/deficit (as percent of GDP), 2004...................4.9 Gross fixed capital formation (as percent of GDP), 2005 ..................n/a National savings rate, 2004 .............................................................17.2 Interest rate spread, 2004 .................................................................5.2 Real effective exchange rate*, 2004.............................................113.1 Exports of goods and services (as percent of GDP), 2004 .............16.8 Imports of goods and services (as percent of GDP), 2004 .............36.0 Current account balance (as percent of GDP), 2004 .......................4.4 Gross official reserves in months of imports, 2004 ..........................4.1 Government debt as a percentage of GDP, 2004 ...........................55.3 Total unemployment (ILO definition, %), 2004 ...............................14.4 Gini index** .....................................................................................0.28

Gross primary enrollment (percent of relevant age group), 2003...............................................................................103.5 Gross secondary enrollment (percent of relevant age group), 2003.................................................................................81.1 Gross tertiary enrollment (percent of relevant age group), 2003.................................................................................16.2 Adult literacy rate age 15 and above (%), 2003 ..............................98.7 Life expectancy at birth, 2003 .........................................................72.0 HIV prevalence rate for population aged 15 to 49, in percent, 2003.............................................................................0.1 Public expenditure on health (as percent of GDP), 2002 ..................2.4
44

Paved roads (percent of total roads)................................................39.0 Main telephone lines per 100 inhabitants, 2003 ...............................8.3 Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..35.8 Personal computers per 100 inhabitants, 2002.................................1.2 Internet users per 10,000 inhabitants, 2003 ...................................97.6
* Real effective exchange rate 2004 relative to the 1997-2003 average. Values greater (less) than 100 indicate appreciation (depreciation) ** The Gini Index is a number between 0 and 1 that is a measure of inequality, with lower (higher) values representing less (more) inequality. Sources: UNFPA State of World Population 2004; IMF World Economic Outlook Database, September 2005; IMF International Financial Statistics, November 2005; Economist Intelligence Unit; IMF Country Reports; International Trade Commission; IMF World Economic Outlook, Winter 2005 (published version); ILO LABORSTA online, October 2005; World Bank World Development Indicators 2005; UNESCO Institute for Statistics; UNDP Human Development Report 2005; WHO The World Health Report 2005; WHO Report on the global AIDS epidemic, 2004; US Agency for International Development; ITU World Telecommunications Indicators 2004
US$ (millions)
2,000
I 2000 I 2004
1,500
1,000
500
0

I I I I I EU-15 Turkey Macedonia, FYR US Other
< 1% 2% 1%
6%
90%

15 12 9 6
Percent
3 0 3 6 9
12
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Government debt
73 69 65
0 2 4 6
I N
61 8 57 10 12
1998 1999 2000 2001 2002 2003 2004
53
45
Global Competitiveness Index..........................................................100................................8


Higher education and training .....................................................................93 ................................8 Market efficiency.......................................................................................100 ................................8 Technological readiness ..............................................................................98 ................................7
Innovation Factors......................................................................................................112 ......................................8

Business sophistication.............................................................................107 ................................8 Innovation..................................................................................................115 ................................8
Starting a Business, 2005

12 10 Number of procedures 35 Time (days) 8 6 4 2 5 0 0 30 25 20 15 10 45 40 Cost (percent of income per capita) 35 30 25 20 15 10 5 0
I EU-15 I Albania 46 I SEE Average

FACTOR
Corruption .............................................................. Inadequate supply of infrastructure ................. Inefficient government bureaucracy ................ Poor work ethic in national labor force ........... Tax regulations...................................................... Access to financing ............................................. Policy instability.................................................... Inadequately educated workforce.................... Tax rates................................................................. Crime and theft ..................................................... Government instability/coups ............................ Foreign currency regulations............................. Inflation .................................................................. Restrictive labor regulations .............................. 0 5 10 15 20 25 30

NOTABLE COMPETITIVE ADVANTAGES Rank/117 NOTABLE COMPETITIVE DISADVANTAGES Rank/117

4.13 4.14 4.12 4.10 4.06 4.05 2.16 8.17 8.18 8.20 4.09 8.19 Malaria prevalence ............................................................1 HIV prevalence ..................................................................5 Tuberculosis prevalence ..................................................33 Infant mortality ................................................................38 Medium term business impact of HIV/AIDS...................41 Medium term business impact of tuberculosis ..............50 6.08 6.24 6.16 8.21 6.26 6.03 8.23 2.02 6.06 8.04 6.14 6.07 6.15 8.16 6.01 5.01 5.05 5.04 5.02 5.03 5.08 2.15 2.13 2.14 2.20 2.17 4.15 4.04 4.11 7.09 8.15 8.11 4.01 4.17 4.16 4.03 2.08 7.02 4.08 2.03 2.05 2.18 7.01 6.02 8.14 8.22 2.04 2.06 2.09 2.12 2.19 6.11 7.11 7.10
Institutions
Favoritism in decisions of government officials............111 Diversion of public funds ..............................................109 Organized crime ............................................................108 Protection of minority shareholders interests..............102 Public trust of politicians ...............................................101 Property rights...............................................................100 Strength of auditing and accounting standards ............100 Business costs of terrorism ............................................96 Wastefulness of government spending ..........................95 Ethical behavior of firms .................................................94 Reliability of police services ............................................92 Burden of government regulation ...................................88 Business costs of crime and violence ............................85 Efficacy of corporate boards ...........................................84 Judicial independence.....................................................82
Macroeconomy
Inflation, 2004 .................................................................45
Market Efficiency
Hiring and firing practices ...............................................16 Flexibility of wage determination ....................................26 Pay and productivity ........................................................29 Private Sector Employment of Women ..........................30 Cooperation in labor-employer relations..........................40
Infrastructure
Overall infrastructure quality .........................................116 Quality of electricity supply ...........................................115 Air transport infrastructure quality ................................114 Railroad infrastructure development .............................109 Port infrastructure quality..............................................105 Telephone lines, 2003 .....................................................80
Macroeconomy
Real effective exchange rate, 2004 ..............................110 Government surplus/deficit, 2004.................................100 National savings rate, 2004 .............................................85 Government debt, 2004 ..................................................61 Interest rate spread, 2004...............................................54

Primary enrollment ..........................................................56 Medium term business impact of malaria .....................51 Life expectancy ...............................................................51

Local availability of specialized research and training services ..........................................................116 Quality of management schools ...................................112 Extent of staff training ..................................................111 Quality of the educational system ..................................90 Tertiary enrollment ..........................................................84 Secondary enrollment .....................................................70 Quality of math and science education...........................56
(Disadvantages contd. from bottom of right column)

NOTABLE COMPETITIVE DISADVANTAGES Rank/117
3.15 3.01 3.02 3.19 3.21 3.04 3.18 7.06 7.05 8.02 8.06 8.12 8.05 8.01 8.08 3.07 3.08 8.03 3.05 6.04 3.06 3.09 3.17 Laws relating to ICT ......................................................110 Technological readiness ................................................109 Firm-level technology absorption ..................................103 Internet users, 2003......................................................101 Personal computers, 2003 ..............................................95 FDI and technology transfer............................................91 Cellular telephones, 2003................................................53
Market Efficiency
Local equity market access...........................................117 Effectiveness of antitrust policy....................................116 Brain drain .....................................................................115 Financial market sophistication .....................................109 Ease of access to loans ................................................107 Exports, 2004 ................................................................106 Intensity of local competition ........................................102 Efficiency of legal framework .......................................101 Reliance on professional management...........................94 Foreign ownership restrictions........................................89 Soundness of banks........................................................80 Venture capital availability ...............................................77 Prevalence of trade barriers ............................................72 Agricultural policy costs ..................................................71 Imports, 2004..................................................................71 Extent and effect of taxation...........................................71 Time required to start a business, 2005 .........................68 Number of procedures required to start a business, 2005 ...........................................................61
Local supplier quality.....................................................115 Local supplier quantity ..................................................110 Value chain presence ....................................................107 Extent of marketing.........................................................95 Willingness to delegate authority....................................93 Production process sophistication ..................................85 Nature of competitive advantage ....................................56 Control of international distribution .................................54
Innovation
University/industry research collaboration ....................117 Government procurement of advanced technology products ......................................................................117 Capacity for innovation..................................................117 Quality of scientific research institutions ......................116 Intellectual property protection .....................................112 Company spending on research and development ......109 Availability of scientists and engineers ...........................84 Utility patents, 2004 ........................................................81
< < < (Contd. in bottom of left column)
47
Country Profiles: Bosnia and Herzegovina

Key Indicators
Total population in millions, 2004 ......................................................4.2 Total GDP in billions of US dollars, 2004 ...........................................8.3 GDP per capita (PPP) in US dollars, 2004......................................5,504 Real growth in GDP (%), 2004 ..........................................................5.7 Growth of output (average annual percent growth) 19902003 .......n/a Agriculture......................................................................................n/a Industry ..........................................................................................n/a Manufacturing ............................................................................n/a Services..........................................................................................n/a Inflation (annual percent change), 2004 ............................................0.4 Government surplus/deficit (as percent of GDP), 2004...................0.7 Gross fixed capital formation (as percent of GDP), 2005 ..................n/a National savings rate, 2004 ...............................................................4.6 Interest rate spread, 2004 .................................................................6.6 Real effective exchange rate*, 2004...............................................98.3 Exports of goods and services (as percent of GDP), 2003 .............23.7 Imports of goods and services (as percent of GDP), 2003 .............79.1 Current account balance (as percent of GDP), 2004 .....................25.6 Gross official reserves in months of imports, 2004 ..........................6.1 Government debt as a percentage of GDP, 2004 ...........................58.0 Total unemployment (ILO definition, %), 2004..................................n/a Gini index** .....................................................................................0.26

Gross primary enrollment (percent of relevant age group), 2003.................................................................................93.8 Gross secondary enrollment (percent of relevant age group), 2003.................................................................................73.2 Gross tertiary enrollment (percent of relevant age group), 2003.................................................................................24.7 Adult literacy rate age 15 and above (%), 2003 ..............................94.6 Life expectancy at birth, 2003 .........................................................73.0 HIV prevalence rate for population aged 15 to 49, in percent, 2003.............................................................................0.1 Public expenditure on health (as percent of GDP), 2002 ..................4.6
48

Paved roads (percent of total roads)................................................52.3 Main telephone lines per 100 inhabitants, 2003 .............................24.5 Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..27.4 Personal computers per 100 inhabitants, 2004.................................6.0 Internet users per 10,000 inhabitants, 2003 .................................391.4
US$ (millions)
2,000
I 2000 I 2004
1,500
1,000
500
0

I I I I I I EU-15 Croatia Serbia and Montenegro Slovenia Hungary Other
4%
14%
38% 8%
16%
20%

80 70 60 50
Percent
40 30 20 10 0
10
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Government debt
120 100
2
0 2 4 6 8 10
1998 1999 2000 2001 2002 2003 2004
I N
80 60 40 20
49
Global Competitiveness Index............................................................88................................7


Higher education and training .....................................................................81 ................................7 Market efficiency.........................................................................................91 ................................5 Technological readiness ............................................................................105 ................................8
Innovation Factors........................................................................................................98 ......................................7

Business sophistication...............................................................................94 ................................7 Innovation..................................................................................................101 ................................7

12 10 Number of procedures 8 6 4 2 0 60 Cost (percent of income per capita) 50 40 30 20 10 0 45 40 35 30 25 20 15 10 5 0
I EU-15 50 I Bosnia and Herzegovina I SEE Average

FACTOR
Inefficient government bureaucracy ................ Policy instability.................................................... Corruption .............................................................. Tax regulations...................................................... Access to financing ............................................. Crime and theft ..................................................... Tax rates................................................................. Poor work ethic in national labor force ........... Government instability/coups ............................ Inadequately educated workforce.................... Inadequate supply of infrastructure ................. Restrictive labor regulations .............................. Foreign currency regulations............................. Inflation .................................................................. 0 5 10 15 20 25 30
Time (days)

Institutions
2.02 5.08 2.16 2.13 4.13 4.14 4.06 4.04 4.11 2.19 8.18 Business costs of terrorism ............................................45
Institutions
6.07 6.03 6.14 6.06 8.04 8.16 8.21 6.15 6.16 6.26 8.23 6.08 6.01 6.24 5.03 5.04 5.01 5.02 5.05 2.14 2.17 2.20 2.15 4.15 4.05 4.12 4.10 8.11 7.09 8.15 4.16 4.17 4.01 4.03 Rank/117 2.12 6.02 7.02 4.08 2.03 2.18 4.09 8.14 6.11 2.08 8.22 7.01 8.19 2.04 7.11 2.06 7.10 2.09 8.20 8.17 2.05 Burden of government regulation .................................117 Property rights...............................................................113 Reliability of police services ..........................................111 Wastefulness of government spending ........................110 Ethical behavior of firms ...............................................104 Efficacy of corporate boards .........................................104 Protection of minority shareholders interests................98 Business costs of crime and violence ............................94 Organized crime ..............................................................91 Public trust of politicians .................................................91 Strength of auditing and accounting standards ..............91 Favoritism in decisions of government officials..............84 Judicial independence.....................................................83 Diversion of public funds ................................................62
Infrastructure
Telephone lines, 2003 .....................................................49
Macroeconomy
Inflation, 2004 .................................................................11 Government surplus/deficit, 2004...................................34

Malaria prevalence ............................................................1 HIV prevalence ..................................................................5 Medium term business impact of HIV/AIDS...................37 Medium term business impact of malaria .....................46 Life expectancy ...............................................................46
Market Efficiency
Imports, 2004..................................................................13 Flexibility of wage determination ....................................19
Infrastructure
Port infrastructure quality..............................................115 Air transport infrastructure quality ................................115 Overall infrastructure quality .........................................111 Railroad infrastructure development ...............................95 Quality of electricity supply .............................................70
Macroeconomy
National savings rate, 2004 ...........................................114 Interest rate spread, 2004...............................................70 Government debt, 2004 ..................................................66 Real effective exchange rate, 2004 ................................61

Primary enrollment ........................................................102 Medium term business impact of tuberculosis ..............57 Tuberculosis prevalence ..................................................57 Infant mortality ................................................................54

Extent of staff training ....................................................93 Local availability of specialized research and training services ............................................................92 Quality of management schools .....................................88 Secondary enrollment .....................................................79 Tertiary enrollment ..........................................................69 Quality of the educational system ..................................59 Quality of math and science education...........................53

NOTABLE COMPETITIVE DISADVANTAGES
Market Efficiency
Agricultural policy costs ................................................116 Efficiency of legal framework .......................................109 Effectiveness of antitrust policy....................................109 Brain drain .....................................................................103 Financial market sophistication .....................................102 Exports, 2004 ..................................................................99 Private Sector Employment of Women ..........................99 Reliance on professional management...........................99 Extent and effect of taxation...........................................98 Local equity market access.............................................91 Foreign ownership restrictions........................................87 Intensity of local competition ..........................................86 Cooperation in labor-employer relations..........................85 Soundness of banks........................................................82 Time required to start a business, 2005 .........................78 Venture capital availability ...............................................75 Number of procedures required to start a business, 2005 ...........................................................74 Prevalence of trade barriers ............................................67 Pay and productivity ........................................................66 Hiring and firing practices ...............................................65 Ease of access to loans ..................................................52
3.02 3.04 3.15 3.01 3.19 3.21 3.18 8.06 7.05 8.12 8.01 8.05 7.06 8.02 8.08 6.04 3.08 3.06 3.05 3.09 3.17 3.07 8.03 Firm-level technology absorption ..................................114 FDI and technology transfer..........................................114 Laws relating to ICT ......................................................105 Technological readiness ................................................102 Internet users, 2003........................................................82 Personal computers, 2003 ..............................................60 Cellular telephones, 2003................................................59
Extent of marketing.......................................................106 Local supplier quantity ....................................................99 Willingness to delegate authority....................................97 Nature of competitive advantage ....................................93 Production process sophistication ..................................92 Local supplier quality.......................................................91 Value chain presence ......................................................85 Control of international distribution .................................73
Innovation
Intellectual property protection .....................................113 Government procurement of advanced technology products ......................................................................110 Company spending on research and development ......105 Quality of scientific research institutions ......................101 Availability of scientists and engineers ...........................83 Utility patents, 2004 ........................................................81 University/industry research collaboration ......................76 Capacity for innovation....................................................64
51
Country Profiles: Bulgaria
Bulgaria
Key Indicators
Total population in millions, 2004 ......................................................7.8 Total GDP in billions of US dollars, 2004 .........................................23.8 GDP per capita (PPP) in US dollars, 2004......................................8,500 Real growth in GDP (%), 2004 ..........................................................5.6 Growth of output (average annual percent growth) 19902003 .....0.2 Agriculture......................................................................................2.9 Industry ........................................................................................2.5 Manufacturing ............................................................................n/a Services........................................................................................2.7 Inflation (annual percent change), 2004 ............................................6.1 Government surplus/deficit (as percent of GDP), 2004 ....................1.8 Gross fixed capital formation (as percent of GDP), 2005................23.6 National savings rate, 2004 .............................................................16.0 Interest rate spread, 2004 .................................................................5.8 Real effective exchange rate*, 2004.............................................121.1 Exports of goods and services (as percent of GDP), 2004 .............58.4 Imports of goods and services (as percent of GDP), 2004 .............68.7 Current account balance (as percent of GDP), 2004 .......................7.5 Gross official reserves in months of imports, 2003 ..........................5.1 Government debt as a percentage of GDP, 2004 ...........................41.1 Total unemployment (ILO definition, %), 2004 ...............................12.0 Gini index** .....................................................................................0.32

Gross primary enrollment (percent of relevant age group), 2003...............................................................................100.3 Gross secondary enrollment (percent of relevant age group), 2003.................................................................................98.4 Gross tertiary enrollment (percent of relevant age group), 2003.................................................................................39.0 Adult literacy rate age 15 and above (%), 2003 ..............................98.2 Life expectancy at birth, 2003 .........................................................72.0 HIV prevalence rate for population aged 15 to 49, in percent, 2003.............................................................................0.1 Public expenditure on health (as percent of GDP), 2002 ..................4.4
52

Paved roads (percent of total roads)................................................92.0 Main telephone lines per 100 inhabitants, 2003 .............................38.0 Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..46.6 Personal computers per 100 inhabitants, 2002.................................5.2 Internet users per 10,000 inhabitants, 2003 ..............................2,058.4
US$ (millions)
8,000 7,000 6,000
I 2000 I 2004
5,000 4,000 3,000 2,000 1,000 0
1,000

25%
I I I I I I
EU-15 Turkey US Romania Serbia and Montenegro Other
54% 3% 4% 4% 10%

6 4 2 0
Percent
2 4 6 8 10
12
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Government debt
100 80 60 40 20
2.0
1.5 1.0 0.5 0.0 0.5 1.0 1.5

1998 1999 2000 2001 2002 2003 2004
I N
53

Institutions...................................................................................................95 ................................5 Infrastructure...............................................................................................59 ................................3 Macroeconomy ...........................................................................................47 ................................3 Health and Primary Education .....................................................................42 ................................3

Higher education and training .....................................................................45 ................................3 Market efficiency.........................................................................................78 ................................4 Technological readiness ..............................................................................58 ................................4

Business sophistication...............................................................................79 ................................4 Innovation....................................................................................................72 ................................3

12 10 Number of procedures 8 6 4 2 0 40 Cost (percent of income per capita) 35 30 Time (days) 25 20 15 10 5 0 18 16 14 12 10 8 6 4 2 0
I EU-15 I Bulgaria 54 I SEE Average

FACTOR
Inefficient government bureaucracy ................ Access to financing ............................................. Corruption .............................................................. Tax regulations...................................................... Inadequate supply of infrastructure ................. Tax rates................................................................. Restrictive labor regulations .............................. Crime and theft ..................................................... Policy instability.................................................... Government instability/coups ............................ Poor work ethic in national labor force ........... Inadequately educated workforce.................... Inflation .................................................................. Foreign currency regulations............................. 0 5 10 15 20 25 30

Infrastructure
5.08 5.02 2.13 2.20 4.13 4.14 4.12 4.10 4.03 4.16 4.01 4.17 2.19 2.18 8.17 8.18 7.11 8.20 4.09 2.05 7.10 Telephone lines, 2003 .....................................................33 Railroad infrastructure development ...............................38 6.16 8.21 6.08 6.24 6.15 6.14 8.04 6.06 6.01 6.26 6.03 8.16 6.07 8.23 2.02 5.04 5.01 5.05 5.03 2.15 2.14 2.16 2.17 8.11 8.15 7.09
Institutions
Organized crime ............................................................110 Protection of minority shareholders interests..............110 Favoritism in decisions of government officials............101 Diversion of public funds ..............................................100 Business costs of crime and violence ............................95 Reliability of police services ............................................93 Ethical behavior of firms .................................................92 Wastefulness of government spending ..........................89 Judicial independence.....................................................88 Public trust of politicians .................................................87 Property rights.................................................................85 Efficacy of corporate boards ...........................................81 Burden of government regulation ...................................77 Strength of auditing and accounting standards ..............67 Business costs of terrorism ............................................63
Macroeconomy
Government surplus/deficit, 2004...................................16 Government debt, 2004 ..................................................41

Malaria prevalence ............................................................1 HIV prevalence ..................................................................5 Tuberculosis prevalence ..................................................48 Infant mortality ................................................................49

Quality of math and science education...........................20 Secondary enrollment .....................................................30 Quality of the educational system ..................................42 Tertiary enrollment ..........................................................43
Infrastructure
Air transport infrastructure quality ..................................98 Overall infrastructure quality ...........................................83 Quality of electricity supply .............................................71 Port infrastructure quality................................................60
Market Efficiency
Imports, 2004..................................................................20 Exports, 2004 ..................................................................26 Hiring and firing practices ...............................................28 Flexibility of wage determination ....................................33 Time required to start a business, 2005 .........................39 Pay and productivity ........................................................41 Private Sector Employment of Women ..........................44 Ease of access to loans ..................................................47 Number of procedures required to start a business, 2005 ...........................................................49
Macroeconomy
Real effective exchange rate, 2004 ..............................114 National savings rate, 2004 .............................................89 Inflation, 2004 .................................................................78 Interest rate spread, 2004...............................................62

Extent of staff training ....................................................89 Quality of management schools .....................................84 Local availability of specialized research and training services ............................................................56
3.18 3.19 3.15 3.09 Cellular telephones, 2003................................................44 Internet users, 2003........................................................45 Laws relating to ICT ........................................................46
Innovation

4.15 4.05 4.04 4.06 4.11 2.12 4.08 8.22 8.14 2.03 6.02 7.01 6.11 7.02 2.08 8.19 2.04 2.09 2.06 3.02 3.01 3.04 3.21 Primary enrollment ..........................................................74 Medium term business impact of tuberculosis ..............70 Medium term business impact of malaria .....................68 Medium term business impact of HIV/AIDS...................58 Life expectancy ...............................................................51
Market Efficiency
Agricultural policy costs ................................................115 Brain drain .....................................................................110 Foreign ownership restrictions......................................103 Reliance on professional management.........................102 Financial market sophistication .......................................98 Efficiency of legal framework .........................................97 Intensity of local competition ..........................................94 Extent and effect of taxation...........................................89 Effectiveness of antitrust policy......................................88 Local equity market access.............................................86 Cooperation in labor-employer relations..........................84 Soundness of banks........................................................69 Prevalence of trade barriers ............................................57 Venture capital availability ...............................................51
Firm-level technology absorption ..................................100 Technological readiness ..................................................90 FDI and technology transfer............................................65 Personal computers, 2003 ..............................................64

8.12 8.01 8.08 8.06 8.05 7.06 8.02 7.05 Willingness to delegate authority....................................96 Nature of competitive advantage ....................................92 Control of international distribution .................................85 Extent of marketing.........................................................84 Production process sophistication ..................................81 Local supplier quality.......................................................74 Value chain presence ......................................................67 Local supplier quantity ....................................................65
Innovation
6.04 3.07 3.08 3.06 8.03 3.17 3.05 Intellectual property protection .......................................90 University/industry research collaboration ......................86 Government procurement of advanced technology products ........................................................................84 Company spending on research and development ........79 Capacity for innovation....................................................76 Utility patents, 2004 ........................................................54 Quality of scientific research institutions ........................53
55
Country Profiles: Croatia
Croatia
Key Indicators
Total population in millions, 2004 ......................................................4.4 Total GDP in billions of US dollars, 2004 .........................................34.3 GDP per capita (PPP) in US dollars, 2004....................................11,568 Real growth in GDP (%), 2004 ..........................................................3.8 Growth of output (average annual percent growth) 19902003 .......1.7 Agriculture....................................................................................2.0 Industry ........................................................................................0.4 Manufacturing ..........................................................................0.8 Services .........................................................................................3.0 Inflation (annual percent change), 2004 ............................................2.1 Government surplus/deficit (as percent of GDP), 2004...................5.0 Gross fixed capital formation (as percent of GDP), 2005................29.5 National savings rate, 2004 .............................................................25.3 Interest rate spread, 2004 .................................................................9.9 Real effective exchange rate*, 2004.............................................102.7 Exports of goods and services (as percent of GDP), 2004 .............47.5 Imports of goods and services (as percent of GDP), 2004 .............55.7 Current account balance (as percent of GDP), 2004 .......................4.8 Gross official reserves in months of imports, 2004 ..........................4.8 Government debt as a percentage of GDP, 2004 ...........................57.3 Total unemployment (ILO definition, %), 2004 ...............................14.0 Gini index** .....................................................................................0.29

56

Paved roads (percent of total roads)................................................84.6 Main telephone lines per 100 inhabitants, 2003 .............................38.9 Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..58.4 Personal computers per 100 inhabitants, 2002...............................17.4 Internet users per 10,000 inhabitants, 2003 ..............................2,318.2
US$ (millions)
15,000
12,000
I 2000 I 2004
9,000
6,000 3,000
0

20%
I I I I I I
EU-15 Bosnia and Herzegovina Slovenia Serbia and Montenegro Liberia Other
3% 4% 7% 52%
14%

8 6 4 2
Percent
0 2 4 6 8 10
12
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Government debt
70 60
0 2
I N
50 40 30 20 8 10 4 6
0
1998 1999 2000 2001 2002 2003 2004
10
57




12 10 Number of procedures 8 6 4 2 0 10 50 Cost (percent of income per capita) 18 16 14 12 10 8 6 4 2 0
I EU-15 I Croatia 58 I SEE Average
40 Time (days)
30
20

FACTOR
Inefficient government bureaucracy ................ Corruption .............................................................. Access to financing ............................................. Tax regulations...................................................... Inadequately educated workforce.................... Tax rates................................................................. Poor work ethic in national labor force ........... Inadequate supply of infrastructure ................. Restrictive labor regulations .............................. Policy instability.................................................... Crime and theft ..................................................... Government instability/coups ............................ Inflation .................................................................. Foreign currency regulations............................. 0 5 10 15 20 25 30

Institutions
2.02 6.24 5.08 2.16 2.14 4.13 4.14 4.06 4.05 4.10 4.04 4.11 4.12 4.03 4.17 7.09 4.16 2.18 2.19 3.21 3.18 3.19 8.01 3.17 Business costs of terrorism ............................................16 Diversion of public funds ................................................49 6.07 8.21 6.03 6.16 8.16 8.04 6.08 6.01 6.06 6.26 6.14 8.23 6.15 5.04 5.03 5.02 5.01 5.05 2.13 2.17 2.15 2.20 4.15 8.15 8.11 4.01 2.12 2.06 8.19 7.02 8.22 6.02 6.11 8.20 2.08 2.03 7.10 4.08 4.09 7.11 7.01 8.14 2.05 8.17 8.18 2.04 2.09 3.04 3.02 3.01 3.15 7.05 8.05 8.12 8.06 7.06 8.02 8.08
Institutions
Burden of government regulation ...................................97 Protection of minority shareholders interests................95 Property rights.................................................................86 Organized crime ..............................................................85 Efficacy of corporate boards ...........................................83 Ethical behavior of firms .................................................79 Favoritism in decisions of government officials..............77 Judicial independence.....................................................76 Wastefulness of government spending ..........................74 Public trust of politicians .................................................73 Reliability of police services ............................................71 Strength of auditing and accounting standards ..............70 Business costs of crime and violence ............................58
Infrastructure
Telephone lines, 2003 .....................................................32
Macroeconomy
Inflation, 2004 .................................................................30 National savings rate, 2004 .............................................32

Malaria prevalence ............................................................1 HIV prevalence ..................................................................5 Medium term business impact of HIV/AIDS...................16 Medium term business impact of tuberculosis ..............26 Infant mortality ................................................................26 Medium term business impact of malaria .....................31 Life expectancy ...............................................................35 Tuberculosis prevalence ..................................................48
Infrastructure
Air transport infrastructure quality ..................................80 Port infrastructure quality................................................78 Railroad infrastructure development ...............................61 Overall infrastructure quality ...........................................57 Quality of electricity supply .............................................53

Quality of math and science education...........................37 Tertiary enrollment ..........................................................42 Local availability of specialized research and training services ............................................................48 Secondary enrollment .....................................................49
Macroeconomy
Government surplus/deficit, 2004.................................103 Interest rate spread, 2004...............................................87 Real effective exchange rate, 2004 ................................80 Government debt, 2004 ..................................................64
Market Efficiency
Exports, 2004 ..................................................................38 Imports, 2004..................................................................38

Primary enrollment ..........................................................95
Personal computers, 2003 ..............................................35 Cellular telephones, 2003................................................38 Internet users, 2003........................................................40

Quality of management schools .....................................92 Extent of staff training ....................................................83 Quality of the educational system ..................................71
Nature of competitive advantage ....................................40
Market Efficiency
Agricultural policy costs ................................................112 Venture capital availability ...............................................98 Cooperation in labor-employer relations..........................97 Effectiveness of antitrust policy......................................86 Foreign ownership restrictions........................................83 Efficiency of legal framework .........................................79 Extent and effect of taxation...........................................78 Pay and productivity ........................................................78 Local equity market access.............................................75 Financial market sophistication .......................................74 Number of procedures required to start a business, 2005 ...........................................................74 Brain drain .......................................................................73 Private Sector Employment of Women ..........................73 Time required to start a business, 2005 .........................72 Intensity of local competition ..........................................67 Reliance on professional management...........................65 Ease of access to loans ..................................................56 Hiring and firing practices ...............................................56 Flexibility of wage determination ....................................55 Soundness of banks........................................................54 Prevalence of trade barriers ............................................53
Innovation
Utility patents, 2004 ........................................................33

FDI and technology transfer..........................................109 Firm-level technology absorption ....................................94 Technological readiness ..................................................87 Laws relating to ICT ........................................................57
Innovation
3.06 3.08 6.04 8.03 3.09 3.05 3.07 Company spending on research and development ........78 Government procurement of advanced technology products ........................................................................69 Intellectual property protection .......................................67 Capacity for innovation....................................................66 Availability of scientists and engineers ...........................62 Quality of scientific research institutions ........................60 University/industry research collaboration ......................59
Local supplier quantity ....................................................76 Production process sophistication ..................................74 Willingness to delegate authority....................................72 Extent of marketing.........................................................69 Local supplier quality.......................................................62 Value chain presence ......................................................59 Control of international distribution .................................55
59
Country Profiles: Macedonia, FYR
Macedonia, FYR
Key Indicators
Total population in millions, 2004 ......................................................2.1 Total GDP in billions of US dollars, 2004 ...........................................4.7 GDP per capita (PPP) in US dollars, 2004......................................7,237 Real growth in GDP (%), 2004 ..........................................................2.4 Growth of output (average annual percent growth) 19902003 .....0.1 Agriculture....................................................................................0.5 Industry ........................................................................................1.5 Manufacturing ..........................................................................3.2 Services .........................................................................................1.3 Inflation (annual percent change), 2004...........................................0.3 Government surplus/deficit (as percent of GDP), 2004 ....................0.4 Gross fixed capital formation (as percent of GDP), 2005 ..................n/a National savings rate, 2004 .............................................................15.9 Interest rate spread, 2004 .................................................................5.9 Real effective exchange rate*, 2004...............................................96.0 Exports of goods and services (as percent of GDP), 2004 .............39.5 Imports of goods and services (as percent of GDP), 2004 .............64.2 Current account balance (as percent of GDP), 2004 .......................8.2 Gross official reserves in months of imports, 2003 ..........................4.0 Government debt as a percentage of GDP, 2004 ...........................26.4 Total unemployment (ILO definition, %), 2004 ...............................37.2 Gini index** .....................................................................................0.28

60

US$ (millions)
1,200 1,000
I 2000 I 2004
800 600 400 200
0

3%
13%
I I I I I I
EU-15 Serbia and Montenegro Croatia US Turkey Other
4% 5% 54%
21%

5 4 3 2 1 0 1 2 3 4 5 6 7 8
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Government debt
Percent
70 60
4
2 0 2
I N
50 40 30 20 10
4 6 8
1998 1999 2000 2001 2002 2003 2004
61

Institutions.................................................................................................100 ................................6 Infrastructure...............................................................................................79 ................................5 Macroeconomy ...........................................................................................22 ................................1 Health and Primary Education .....................................................................72 ................................7



14 12 40 Number of procedures 10 Time (days) 8 6 4 10 2 0 0 30 50 Cost (percent of income per capita) 18 16 14 12 10 8 6 4 2 0
I EU-15 I Macedonia, FYR 62 I SEE Average
20

FACTOR
Inefficient government bureaucracy ................ Corruption .............................................................. Access to financing ............................................. Tax rates................................................................. Tax regulations...................................................... Policy instability.................................................... Poor work ethic in national labor force ........... Crime and theft ..................................................... Inadequately educated workforce.................... Government instability/coups ............................ Inadequate supply of infrastructure ................. Restrictive labor regulations .............................. Inflation .................................................................. Foreign currency regulations............................. 0 5 10 15 20 25 30


4.13 4.14 4.12 4.10 4.01 4.03 5.08 3.09 2.16 2.20 2.13 2.19 8.18 2.06 Malaria prevalence ............................................................1 HIV prevalence ..................................................................5 Tuberculosis prevalence ..................................................41 Infant mortality ................................................................49 6.16 2.02 8.04 6.01 6.03 6.15 8.16 6.26 6.06 8.21 6.08 6.07 6.24 8.23 6.14 5.03 5.04 5.01 5.05 5.02 2.14 2.17 2.15 4.15 4.04 4.05 4.06 4.11 7.09 8.11 8.15 4.17 4.16
Institutions
Organized crime ............................................................114 Business costs of terrorism ..........................................111 Ethical behavior of firms ...............................................107 Judicial independence...................................................104 Property rights...............................................................102 Business costs of crime and violence ............................96 Efficacy of corporate boards ...........................................93 Public trust of politicians .................................................89 Wastefulness of government spending ..........................84 Protection of minority shareholders interests................81 Favoritism in decisions of government officials..............76 Burden of government regulation ...................................72 Diversion of public funds ................................................71 Strength of auditing and accounting standards ..............71 Reliability of police services ............................................67

Quality of the educational system ..................................46 Quality of math and science education...........................50
Infrastructure
Telephone lines, 2003 .....................................................47
Innovation
Macroeconomy
Inflation, 2004 ...................................................................5 Government debt, 2004 ..................................................20 Government surplus/deficit, 2004...................................28
Infrastructure
Port infrastructure quality..............................................103 Air transport infrastructure quality ................................100 Overall infrastructure quality ...........................................81 Quality of electricity supply .............................................68 Railroad infrastructure development ...............................64
Market Efficiency
Imports, 2004..................................................................25 Flexibility of wage determination ....................................40 Venture capital availability ...............................................42
Macroeconomy
National savings rate, 2004 .............................................90 Interest rate spread, 2004...............................................65 Real effective exchange rate, 2004 ................................57

Primary enrollment ..........................................................96 Medium term business impact of malaria .....................84 Medium term business impact of tuberculosis ..............81 Medium term business impact of HIV/AIDS...................71 Life expectancy ...............................................................51
63

Local availability of specialized research and training services ............................................................77 Extent of staff training ....................................................74 Quality of management schools .....................................71 Tertiary enrollment ..........................................................65 Secondary enrollment .....................................................61

NOTABLE COMPETITIVE DISADVANTAGES Rank/117 4.08 8.14 7.01 6.02 8.22 2.04 8.19 7.02 6.11 2.03 2.05 2.09 7.10 8.17 2.08 4.09 2.12 7.11 8.20 2.18
Market Efficiency
Brain drain .....................................................................109 Reliance on professional management.........................109 Intensity of local competition ........................................106 Efficiency of legal framework .......................................105 Foreign ownership restrictions......................................105 Soundness of banks......................................................102 Cooperation in labor-employer relations........................102 Effectiveness of antitrust policy......................................99 Extent and effect of taxation...........................................97 Financial market sophistication .......................................90 Ease of access to loans ..................................................90 Prevalence of trade barriers ............................................84 Number of procedures required to start a business, 2005 ...........................................................84 Hiring and firing practices ...............................................84 Local equity market access.............................................79 Private Sector Employment of Women ..........................79 Agricultural policy costs ..................................................72 Time required to start a business, 2005 .........................70 Pay and productivity ........................................................64 Exports, 2004 ..................................................................63
3.02 3.01 3.04 3.15 3.19 3.21 3.18 8.01 8.06 8.05 7.05 7.06 8.02 8.12 8.08 6.04 3.06 3.05 3.17 3.07 3.08 8.03 Firm-level technology absorption ..................................110 Technological readiness ................................................107 FDI and technology transfer..........................................106 Laws relating to ICT ........................................................81 Internet users, 2003........................................................71 Personal computers, 2003 ..............................................61 Cellular telephones, 2003................................................51
Nature of competitive advantage ....................................98 Extent of marketing.........................................................91 Production process sophistication ..................................88 Local supplier quantity ....................................................85 Local supplier quality.......................................................77 Value chain presence ......................................................72 Willingness to delegate authority....................................67 Control of international distribution .................................66
Innovation
Intellectual property protection .......................................99 Company spending on research and development ........85 Quality of scientific research institutions ........................83 Utility patents, 2004 ........................................................81 University/industry research collaboration ......................77 Government procurement of advanced technology products ........................................................................67 Capacity for innovation....................................................56
Country Profiles: Romania
Romania
Key Indicators
Total population in millions, 2004 ....................................................22.3 Total GDP in billions of US dollars, 2004 .........................................71.3 GDP per capita (PPP) in US dollars, 2004......................................7,641 Real growth in GDP (%), 2004 ..........................................................8.3 Growth of output (average annual percent growth) 19902003 .......0.1 Agriculture....................................................................................1.1 Industry ..........................................................................................0.1 Manufacturing ............................................................................n/a Services .........................................................................................1.2 Inflation (annual percent change), 2004 ..........................................11.9 Government surplus/deficit (as percent of GDP), 2004...................1.1 Gross fixed capital formation (as percent of GDP), 2005................23.9 National savings rate, 2004 .............................................................17.0 Interest rate spread, 2004 ...............................................................14.5 Real effective exchange rate*, 2004.............................................109.8 Exports of goods and services (as percent of GDP), 2004 .............37.2 Imports of goods and services (as percent of GDP), 2004 .............46.0 Current account balance (as percent of GDP), 2004 .......................7.5 Gross official reserves in months of imports, 2003 ..........................3.3 Government debt as a percentage of GDP, 2004 ...........................21.4 Total unemployment (ILO definition, %), 2004 .................................8.0 Gini index** .....................................................................................0.30

64

Paved roads (percent of total roads)................................................50.4 Main telephone lines per 100 inhabitants, 2003 .............................19.9 Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..32.4 Personal computers per 100 inhabitants, 2003.................................9.7 Internet users per 10,000 inhabitants, 2003 ..............................1,840.5
US$ (millions)
20,000
15,000
I 2000 I 2004
10,000 5,000
5,000

I I I I I I EU-15 Turkey Hungary US Bulgaria Other
2% 3% 4%
19%
65%
7%

10 8 6 4
Percent
2 0 2 4 6 8
10
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Government debt
35 30
0 1 2 3
I N
25 20 15 10 5
4 5 6
1998 1999 2000 2001 2002 2003 2004
65




I EU-15 I Romania 66 I SEE Average

FACTOR
Corruption .............................................................. Tax regulations...................................................... Tax rates................................................................. Access to financing ............................................. Inefficient government bureaucracy ................ Policy instability.................................................... Inadequate supply of infrastructure ................. Poor work ethic in national labor force ........... Inflation .................................................................. Inadequately educated workforce.................... Restrictive labor regulations .............................. Foreign currency regulations............................. Crime and theft ..................................................... Government instability/coups ............................ 0 5 10 15 20 25 30

Institutions
2.02 6.07 5.02 2.20 2.13 4.13 4.14 4.04 4.03 4.01 7.09 4.17 7.10 8.20 7.11 8.18 2.19 3.04 3.19 8.12 3.09 Business costs of terrorism ............................................43 Burden of government regulation ...................................50 6.15 6.14 8.23 6.26 6.03 6.16 8.16 6.01 8.04 6.06 6.08 6.24 8.21 5.03 5.08 5.05 5.04 5.01 2.14 2.15 2.17 2.16 4.06 4.11 4.10 4.05 4.15 4.12 4.16 8.11 8.15 4.09 8.14 2.05 2.18 2.09 2.06 2.08 2.04 2.03 7.01 7.02 6.02 8.22 8.17 6.11 2.12 4.08 8.19 3.21 3.18 3.15 3.02 3.01
Institutions
Business costs of crime and violence ............................74 Reliability of police services ............................................75 Strength of auditing and accounting standards ..............75 Public trust of politicians .................................................76 Property rights.................................................................78 Organized crime ..............................................................80 Efficacy of corporate boards ...........................................80 Judicial independence.....................................................86 Ethical behavior of firms .................................................89 Wastefulness of government spending ..........................90 Favoritism in decisions of government officials..............93 Diversion of public funds ................................................93 Protection of minority shareholders interests................94
Infrastructure
Railroad infrastructure development ...............................46
Macroeconomy
Government debt, 2004 ..................................................16 Government surplus/deficit, 2004...................................37

Malaria prevalence ............................................................1 HIV prevalence ..................................................................5 Medium term business impact of malaria .....................47

Quality of math and science education.............................8 Quality of the educational system ..................................41 Local availability of specialized research and training services ............................................................41 Tertiary enrollment ..........................................................50
Infrastructure
Port infrastructure quality................................................54 Telephone lines, 2003 .....................................................59 Quality of electricity supply .............................................73 Air transport infrastructure quality ..................................79 Overall infrastructure quality ...........................................84
Market Efficiency
Number of procedures required to start a business, 2005 ...........................................................10 Pay and productivity ........................................................23 Time required to start a business, 2005 .........................32 Flexibility of wage determination ....................................34 Imports, 2004..................................................................47
Macroeconomy
National savings rate, 2004 .............................................86 Real effective exchange rate, 2004 ..............................104 Interest rate spread, 2004.............................................106 Inflation, 2004 ...............................................................107

Medium term business impact of HIV/AIDS...................53 Life expectancy ...............................................................60 Infant mortality ................................................................63 Medium term business impact of tuberculosis ..............66 Primary enrollment ..........................................................86 Tuberculosis prevalence ..................................................88 Secondary enrollment .....................................................62 Extent of staff training ....................................................65 Quality of management schools .....................................66
FDI and technology transfer............................................12 Internet users, 2003........................................................48
67
Willingness to delegate authority....................................46
Innovation
Market Efficiency
Private Sector Employment of Women ..........................51 Reliance on professional management...........................64 Ease of access to loans ..................................................66 Exports, 2004 ..................................................................67 Prevalence of trade barriers ............................................70 Venture capital availability ...............................................73 Local equity market access.............................................74 Soundness of banks........................................................75 Financial market sophistication .......................................76 Intensity of local competition ..........................................78 Effectiveness of antitrust policy......................................78 Efficiency of legal framework .........................................85 Foreign ownership restrictions........................................86 Hiring and firing practices ...............................................88 Extent and effect of taxation...........................................94 Agricultural policy costs ................................................103 Brain drain .....................................................................108 Cooperation in labor-employer relations........................117

8.02 8.08 8.06 8.05 7.05 7.06 8.01 3.17 8.03 3.08 3.06 6.04 3.05 3.07 Value chain presence ......................................................63 Control of international distribution .................................63 Extent of marketing.........................................................68 Production process sophistication ..................................70 Local supplier quantity ....................................................82 Local supplier quality.......................................................84 Nature of competitive advantage ..................................109
Personal computers, 2003 ..............................................51 Cellular telephones, 2003................................................55 Laws relating to ICT ........................................................65 Firm-level technology absorption ....................................69 Technological readiness ..................................................73
Innovation
Utility patents, 2004 ........................................................53 Capacity for innovation....................................................70 Government procurement of advanced technology products ........................................................................71 Company spending on research and development ........72 Intellectual property protection .......................................77 Quality of scientific research institutions ........................87 University/industry research collaboration ......................93
Country Profiles: Serbia and Montenegro

Key Indicators
Total population in millions, 2004 ....................................................10.5 Total GDP in billions of US dollars, 2004 .........................................24.0 GDP per capita (PPP) in US dollars, 2004......................................4,858 Real growth in GDP (%), 2004 ..........................................................7.2 Growth of output (average annual percent growth) 19902003 .......1.4 Agriculture......................................................................................n/a Industry ..........................................................................................n/a Manufacturing ............................................................................n/a Services..........................................................................................n/a Inflation (annual percent change), 2004 ............................................9.5 Government surplus/deficit (as percent of GDP), 2004...................0.3 Gross fixed capital formation (as percent of GDP), 2005 ..................n/a National savings rate, 2004..............................................................1.0 Interest rate spread, 2004 ...............................................................12.8 Real effective exchange rate*, 2004.............................................100.7 Exports of goods and services (as percent of GDP), 2004 .............13.8 Imports of goods and services (as percent of GDP), 2004 .............27.0 Current account balance (as percent of GDP), 2004 .....................13.1 Gross official reserves in months of imports, 2003 ..........................n/a Government debt as a percentage of GDP, 2004 ...........................80.0 Total unemployment (ILO definition, %), 2003 ...............................15.2 Gini index** .......................................................................................n/a

Gross primary enrollment (percent of relevant age group), 2003.................................................................................98.0 Gross secondary enrollment (percent of relevant age group), 2003.................................................................................88.7 Gross tertiary enrollment (percent of relevant age group), 2003.................................................................................36.0 Adult literacy rate age 15 and above (%), 2003 ................................n/a Life expectancy at birth, 2003 .........................................................73.0 HIV prevalence rate for population aged 15 to 49, in percent, 2003.............................................................................0.2 Public expenditure on health (as percent of GDP), 2002 ..................5.1
68

US$ (millions)
4,000 3,500
I 2000 I 2004
3,000 2,500 2,000 1,500 1,000 500
0

24%
I I I I I I
EU-15 Bosnia and Herzegovina Macedonia, FYR Switzerland Russian Federation Other
40% 4%
8%
9%
15%

10 5 0
Percent
5 10 15
20
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Government debt
140 120
0 1 2 3 4 5
2000 2001 2002 2003 2004 Government surplus/deficit
I N
100 80 60 40 20
69

Institutions...................................................................................................93 ................................4 Infrastructure...............................................................................................97 ................................6 Macroeconomy .........................................................................................106 ................................8 Health and Primary Education .....................................................................58 ................................4



I EU-15 70 I Serbia and Montenegro I SEE Average

FACTOR
Policy instability.................................................... Inefficient government bureaucracy ................ Access to financing ............................................. Corruption .............................................................. Poor work ethic in national labor force ........... Inadequate supply of infrastructure ................. Tax regulations...................................................... Government instability/coups ............................ Inflation .................................................................. Inadequately educated workforce.................... Tax rates................................................................. Crime and theft ..................................................... Restrictive labor regulations .............................. Foreign currency regulations............................. 0 5 10 15 20 25 30

Institutions
6.15 5.08 2.13 4.13 4.04 4.06 4.05 4.12 4.11 4.14 4.03 4.17 3.04 3.09 3.08 Business costs of crime and violence ............................48
Institutions
6.07 8.21 6.06 8.16 6.03 6.08 6.26 6.01 6.24 8.23 6.14 6.16 8.04 2.02 5.01 5.04 5.03 5.05 5.02 2.14 2.16 2.17 2.20 2.15 4.15 4.10 8.11 8.15 4.01 7.09 4.16 2.18 4.08 8.14 8.19 2.03 2.04 7.02 2.19 4.09 8.22 6.02 8.20 7.01 2.06 2.08 2.05 7.11 8.18 7.10 2.12 6.11 8.17 2.09 Burden of government regulation .................................116 Protection of minority shareholders interests..............114 Wastefulness of government spending ........................108 Efficacy of corporate boards .........................................108 Property rights...............................................................103 Favoritism in decisions of government officials..............95 Public trust of politicians .................................................92 Judicial independence.....................................................91 Diversion of public funds ................................................84 Strength of auditing and accounting standards ..............82 Reliability of police services ............................................81 Organized crime ..............................................................67 Ethical behavior of firms .................................................58 Business costs of terrorism ............................................54
Infrastructure
Telephone lines, 2003 .....................................................50
Macroeconomy
Government surplus/deficit, 2004...................................31

Malaria prevalence ............................................................1 Medium term business impact of malaria .....................21 Medium term business impact of HIV/AIDS...................25 Medium term business impact of tuberculosis ..............35 Tuberculosis prevalence ..................................................45 Life expectancy ...............................................................46 HIV prevalence ................................................................47

Quality of math and science education...........................28 Tertiary enrollment ..........................................................48
Infrastructure
Overall infrastructure quality .........................................115 Air transport infrastructure quality ................................110 Port infrastructure quality..............................................101 Quality of electricity supply .............................................89 Railroad infrastructure development ...............................80
FDI and technology transfer............................................10
Innovation
Availability of scientists and engineers ...........................46 Government procurement of advanced technology products ........................................................................50
Macroeconomy
National savings rate, 2004 ...........................................116 Inflation, 2004 ...............................................................101 Interest rate spread, 2004...............................................99 Government debt, 2004 ..................................................94 Real effective exchange rate, 2004 ................................70

Primary enrollment ..........................................................90 Infant mortality ................................................................52
71

Extent of staff training ..................................................108 Quality of management schools .....................................79 Quality of the educational system ..................................66 Local availability of specialized research and training services ............................................................63 Secondary enrollment .....................................................53
Market Efficiency
Exports, 2004 ................................................................113 Brain drain .....................................................................113 Reliance on professional management.........................112 Cooperation in labor-employer relations........................111 Financial market sophistication .....................................105 Soundness of banks......................................................103 Effectiveness of antitrust policy....................................103 Imports, 2004..................................................................97 Private Sector Employment of Women ..........................97 Foreign ownership restrictions........................................96 Efficiency of legal framework .........................................88 Pay and productivity ........................................................88 Intensity of local competition ..........................................82 Venture capital availability ...............................................78 Local equity market access.............................................78 Ease of access to loans ..................................................76 Time required to start a business, 2005 .........................75 Flexibility of wage determination ....................................69 Number of procedures required to start a business, 2005 ...........................................................61 Agricultural policy costs ..................................................55 Extent and effect of taxation...........................................54 Hiring and firing practices ...............................................53 Prevalence of trade barriers ............................................51

3.01 3.02 3.21 3.15 3.19 3.18 8.01 8.12 8.02 8.06 8.05 8.08 7.06 7.05 6.04 8.03 3.06 3.17 3.05 3.07 Technological readiness ................................................113 Firm-level technology absorption ..................................101 Personal computers, 2003 ..............................................82 Laws relating to ICT ........................................................73 Internet users, 2003........................................................65 Cellular telephones, 2003................................................54
Nature of competitive advantage ..................................108 Willingness to delegate authority..................................108 Value chain presence ....................................................104 Extent of marketing.......................................................102 Production process sophistication ..................................94 Control of international distribution .................................93 Local supplier quality.......................................................87 Local supplier quantity ....................................................84
Innovation
Intellectual property protection .....................................110 Capacity for innovation....................................................99 Company spending on research and development ........92 Utility patents, 2004 ........................................................81 Quality of scientific research institutions ........................61 University/industry research collaboration ......................51
Country Profiles: Slovenia
Slovenia
Key Indicators
Total population in millions, 2004 ......................................................2.0 Total GDP in billions of US dollars, 2004 .........................................32.2 GDP per capita (PPP) in US dollars, 2004....................................20,306 Real growth in GDP (%), 2004 ..........................................................4.6 Growth of output (average annual percent growth) 19902003 .......3.1 Agriculture....................................................................................0.9 Industry ..........................................................................................2.6 Manufacturing ............................................................................2.7 Services .........................................................................................3.4 Inflation (annual percent change), 2004 ............................................3.6 Government surplus/deficit (as percent of GDP), 2004...................1.9 Gross fixed capital formation (as percent of GDP), 2005................25.2 National savings rate, 2004 .............................................................26.1 Interest rate spread, 2004 .................................................................4.8 Real effective exchange rate*, 2004.............................................101.7 Exports of goods and services (as percent of GDP), 2004 .............59.9 Imports of goods and services (as percent of GDP), 2004 .............60.5 Current account balance (as percent of GDP), 2004 .......................0.9 Gross official reserves in months of imports, 2004 ..........................5.0 Government debt as a percentage of GDP, 2004 ...........................29.1 Total unemployment (ILO definition, %), 2004 .................................6.1 Gini index** .....................................................................................0.28

Gross primary enrollment (percent of relevant age group), 2003...............................................................................107.8 Gross secondary enrollment (percent of relevant age group), 2003...............................................................................109.4 Gross tertiary enrollment (percent of relevant age group), 2003.................................................................................68.4 Adult literacy rate age 15 and above (%), 2003 ..............................99.7 Life expectancy at birth, 2003 .........................................................77.0 HIV prevalence rate for population aged 15 to 49, in percent, 2003.............................................................................0.1 Public expenditure on health (as percent of GDP), 2002 ..................6.2
72

Paved roads (percent of total roads)..............................................100.0 Main telephone lines per 100 inhabitants, 2003 .............................40.7 Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..87.1 Personal computers per 100 inhabitants, 2003...............................32.5 Internet users per 10,000 inhabitants, 2003 ..............................4,006.0
US$ (millions)
5,000
4,000
I 2000 I 2004
3,000
2,000
1,000
0

22%
I I I I I I
EU-15 Croatia Bosnia and Herzegovina Serbia and Montenegro Russian Federation Other
3% 4% 4%
58%
9%

6 5 4 3 2 1 0 1 2 3 4 5 6
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Government debt
Percent
35 30
0.0
I N
25 20
0.5
1.0 15 10 5 1.5
0
1998 1999 2000 2001 2002 2003 2004
2.0
73




12 10 Number of procedures 8 6 4 2 0 60 Cost (percent of income per capita) 50 40 30 20 10 0 18 16 14 12 10 8 6 4 2 0
I EU-15 I Slovenia 74 I SEE Average

FACTOR
Tax regulations...................................................... Inefficient government bureaucracy ................ Tax rates................................................................. Restrictive labor regulations .............................. Access to financing ............................................. Inadequately educated workforce.................... Inflation .................................................................. Inadequate supply of infrastructure ................. Poor work ethic in national labor force ........... Corruption .............................................................. Policy instability.................................................... Crime and theft ..................................................... Foreign currency regulations............................. Government instability/coups ............................ 0 5 10 15 20 25 30
Time (days)

Institutions
2.02 5.03 2.20 2.14 4.13 4.14 4.10 4.06 4.04 4.05 4.11 4.12 4.17 4.16 7.09 Business costs of terrorism ............................................28
Institutions
6.07 6.06 8.21 8.16 6.01 6.08 6.03 6.16 6.26 6.14 8.23 8.04 6.24 6.15 5.04 5.01 5.02 5.05 5.08 2.15 2.16 2.13 2.17 4.15 4.03 4.01 8.11 8.15 8.17 6.11 8.22 7.11 2.12 8.18 4.09 2.08 8.19 2.03 2.04 2.06 6.02 7.01 7.10 8.14 4.08 7.02 8.20 2.05 3.04 3.02 3.01 3.15 7.05 8.06 7.06 8.12 8.05 Burden of government regulation ...................................79 Wastefulness of government spending ..........................62 Protection of minority shareholders interests................53 Efficacy of corporate boards ...........................................51 Judicial independence.....................................................50 Favoritism in decisions of government officials..............50 Property rights.................................................................49 Organized crime ..............................................................46 Public trust of politicians .................................................45 Reliability of police services ............................................44 Strength of auditing and accounting standards ..............43 Ethical behavior of firms .................................................42 Diversion of public funds ................................................39 Business costs of crime and violence ............................33
Infrastructure
Port infrastructure quality................................................28
Macroeconomy
Government debt, 2004 ..................................................24 National savings rate, 2004 .............................................28

Malaria prevalence ............................................................1 HIV prevalence ..................................................................5 Infant mortality ..................................................................6 Medium term business impact of HIV/AIDS...................18 Medium term business impact of malaria .....................23 Medium term business impact of tuberculosis ..............23 Life expectancy ...............................................................26 Tuberculosis prevalence ..................................................29
Infrastructure
Air transport infrastructure quality ..................................47 Overall infrastructure quality ...........................................35 Railroad infrastructure development ...............................33 Quality of electricity supply .............................................32 Telephone lines, 2003 .....................................................31

Tertiary enrollment ..........................................................13 Secondary enrollment .....................................................14 Local availability of specialized research and training services ............................................................28
Macroeconomy
Real effective exchange rate, 2004 ................................77 Inflation, 2004 .................................................................52 Government surplus/deficit, 2004...................................47 Interest rate spread, 2004...............................................47
Market Efficiency
2.09 2.18 2.19 3.18 3.19 3.21 8.02 8.01 8.08 8.03 3.17 Prevalence of trade barriers ............................................21 Exports, 2004 ..................................................................23 Imports, 2004..................................................................28
Cellular telephones, 2003................................................18 Internet users, 2003........................................................21 Personal computers, 2003 ..............................................24

Primary enrollment ..........................................................35

Quality of math and science education...........................41 Quality of the educational system ..................................38 Extent of staff training ....................................................35 Quality of management schools .....................................35
Value chain presence ......................................................21 Nature of competitive advantage ....................................24 Control of international distribution .................................24
Market Efficiency
Hiring and firing practices .............................................102 Extent and effect of taxation...........................................95 Foreign ownership restrictions........................................91 Time required to start a business, 2005 .........................83 Agricultural policy costs ..................................................82 Flexibility of wage determination ....................................78 Private Sector Employment of Women ..........................74 Local equity market access.............................................66 Cooperation in labor-employer relations..........................62 Financial market sophistication .......................................57 Soundness of banks........................................................56 Venture capital availability ...............................................50 Efficiency of legal framework .........................................50 Intensity of local competition ..........................................50 Number of procedures required to start a business, 2005 ...........................................................49 Reliance on professional management...........................48 Brain drain .......................................................................43 Effectiveness of antitrust policy......................................41 Pay and productivity ........................................................39 Ease of access to loans ..................................................30
Innovation
Capacity for innovation....................................................21 Utility patents, 2004 ........................................................26

FDI and technology transfer............................................99 Firm-level technology absorption ....................................60 Technological readiness ..................................................44 Laws relating to ICT ........................................................31
Innovation
3.09 3.08 3.05 3.07 3.06 6.04 Availability of scientists and engineers ...........................82 Government procurement of advanced technology products ........................................................................60 Quality of scientific research institutions ........................37 University/industry research collaboration ......................32 Company spending on research and development ........30 Intellectual property protection .......................................30
Local supplier quantity ....................................................50 Extent of marketing.........................................................44 Local supplier quality.......................................................35 Willingness to delegate authority....................................33 Production process sophistication ..................................31
75
Partner Institutes
The World Economic Forum would like to thank the following Partner Institutes of the Global Competitiveness Programme for their invaluable assistance in carrying out the Executive Opinion Survey 2005:
Albania Institute for Contemporary Studies (ISB) Artan Hoxha, Research Director Selami Xhepa, Research Manager, ACIT Program Juli Dhimitri, Researcher Bosnia and Hercegovina MIT CenterThe Faculty of Economics, Sarajevo University Professor Zlatko Lagumdzija Professor Bozidar Matic Dr Zeljko Sain Bulgaria Center for Economic Development Anelia Damianova, PhD, Senior Expert Croatia National Competitiveness Council Mira Lenardic, Secretary General Ruzica Simic, Advisor Macedonia, FYR National Entrepreneurship and Competitiveness Council (NECC) Svetozar Janevski, Co-chair of the NECC, Managing Director of Skopsko Brewery Stevce Jakimovski, Co-chair of the NECC, Minister of Economy Ana Nikovska, Advisor to the NECC, Macedonia Competitiveness Activity Romania Romanian Economic Society (SOREC) Professor Daniel Daianu, President Group of Applied Economics (GEA) Dragos Pislaru, Executive Director Dr Liviu Voinea, Research Director Diana Spiridon, Programme Coordinator Serbia and Montenegro USAID Serbia Enterprise Development Project Booz Allen Hamilton Andrew Vonnegut, Chief of Party Jelena Sevo, Deputy Chief of Party Slovenia Institute for Economic Research Professor Peter Stanovnik Dr Art Kovacic Dr Mateja Drnov ek, Faculty of Economics s
Partner Institutes
77
Acknowledgment
The World Economic Forum would like to thank the Regional Economic Forum for Southeast Europe for supporting the production of this Report.
78
The Regional Economic Forum for Southeast Europe (REF SEE) (www.ref-see.org) is a nongovernmental initiative that brings together leaders from business and academia as well as high officials from the following countries: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Romania, Serbia and Montenegro and Slovenia. Each of these countries, and their respective economies, either separately or jointly, face inevitable challenges on their path to European Union membershipgiven that they are both partners and competitors.The REF SEE provides an institutional framework and motivating environment for political and economic participants to gather once a year, where they share experiences and ideas related to the key short- and long-term plans for their countries, their economies and the citizens of the region. In accordance with this process, the idea of preparing this Report was put forward at the REF SEE meeting in 2003, and preliminary results were presented at the REF SEE meeting in 2004, both held in Cavtat, Croatia.The presentation of the Report itself will take place at the REF SEE meeting 2006. Home address: Revicon, Sarajevo, BiH.

Southeast Europe Competitiveness Report 2006

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World Economic Forum Geneva, Switzerland 2006

The Southeast Europe Competitiveness Report 2006

Partner Institutes Acknowledgement

VI. Policy recommendations....................................................35 VII. Conclusions........................................................................37

Part 1: Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Figure 1. Gross domestic product per capita, current prices ($US)

Source: IMF, World Economic Outlook Database. September 2005.

II. The starting point for the countries of Southeast Europe

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Box 1. Regional processes for policy reform in Southeast Europe

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

A historical perspective of competitiveness in Southeast Europe

Macroeconomic stability subindex Government waste subindex Country credit rating

Contracts and law subindex Corruption subindex

Source: The Global Competitiveness Report, various years

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Source: The Global Competitiveness Report, various years

Bosnia and Herzegovina

2001 2002 2003

Macroeconomic Environment Index

Macroeconomic stability subindex

Government waste subindex

Country credit rating

Public Institutions Index

Contracts and law subindex

38 4.7 75 3.4 102

24 4.8 63 3.9 104

20 5.0 67 3.7 117

60 4.1 77 3.4 102

69 3.5 89 3.2 104

48 4.4 80 3.4 117

51 4.4 31 4.7 102

46 4.4 33 4.7 104

54 4.2 32 4.6 117

Growth Competitiveness Index

Total number of countries

Source: The Global Competitiveness Report, various years

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Table 3. Relations of Southeast Europe countries with the European Union

Bosnia and Herzegovina

Serbia and Montenegro

Measuring Southeast Europes Competitiveness

Measuring Southeast Europes Competitiveness

Table 5. Selected economic and social indicators for Southeast Europe

Unemployment rate, 2004

Life expectancy at birth, 2003

Government debt as a percentage of GDP, 2004

Aid as a percentage of GNI, 2003

FDI inflows as a percentage of GDP, 2004