southeast europe competitiveness report 2006

World Economic ForumGeneva, Switzerland 2006

The Southeast EuropeCompetitiveness 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 RegionalCompetitiveness Report 2006 is published bythe World Economic Forum and is the result ofa collaboration between the World EconomicForum and the Regional Economic Forum forSoutheast Europe. This Report is a special proj-ect within the framework of the GlobalCompetitiveness 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

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 thisreport do not in all cases refer to a territorialentity that is a state as understood by interna-tional law and practice. The term covers well-defined, geographically self-contained economicareas that may not be states but for which statistical data are maintained on a separate and independent basis.

Copyright © 2006by the World Economic Forum

All rights reserved. No reproduction, copy ortransmission of this publication may be madewithout written permission.


Preface vby Klaus Schwab

PART 1

Measuring Southeast Europe’s Competitiveness: Paving the Way for a Prosperous Future in Europe .................................................1

I. Introduction..........................................................................3

II. The starting point for the countries of Southeast Europe .................................................................5

Albania .......................................................................................5Bosnia and Herzegovina ............................................................6Bulgaria .....................................................................................7Croatia........................................................................................8Macedonia, FYR.......................................................................10Romania ...................................................................................11Serbia and Montenegro ...........................................................12Slovenia....................................................................................13

III. The competitiveness of Southeast Europe in recent years .......................................................15

IV. Benchmarking Southeast Europe’s present competitive performance ......................................20

V. Measuring the current competitive landscape in Southeast Europe: The Global Competitiveness Index.....................................23

VI. Policy recommendations....................................................35

VII. Conclusions........................................................................37

PART 2

Country Profiles......................................................................39

How country profiles work.........................................................41

Albania .....................................................................................44Bosnia and Herzegovina ..........................................................48Bulgaria ...................................................................................52Croatia......................................................................................56Macedonia, FYR.......................................................................60Romania ...................................................................................64Serbia and Montenegro ...........................................................68Slovenia....................................................................................72

Partner Institutes 77

Acknowledgement 78

Contents


PrefaceKLAUS SCHWAB

Executive Chairman, World Economic Forum

The countries of Southeastern Europe have faced numer-ous challenges since the fall of the Berlin Wall and the dis-solution of Yugoslavia 15 years ago.The serious issues withwhich the region has had to cope in making the transitionfrom centrally-planned to market-based economic systemshave been compounded by ethnic strife and civil unrest,conflicts which have added significantly to the costs ofthese fundamental changes.

However, recent years have seen substantial progressin Southeast Europe. Many countries in the region havebeen tackling the reforms necessary for accession to theEuropean Union very seriously. As a result, dramaticchanges have occurred, included the freeing up of mar-kets, the transformation of political structures, and thedevelopment of new institutions. Indeed, the progressmade in bringing about a solid foundation of macroeco-nomic stability and implementing ambitious structuralreforms has been sufficiently impressive, that several coun-tries are now at the threshold of membership in the EU,with one country, Slovenia, having already joined in May2004.

However, the reform process has much farther to go.Although the region has made strides in implementingreforms, the results have been mixed, and vary widelyamong countries. Difficult social and political conditionsprevail, and many obstacles to growth remain.Aware ofthe importance of the successful integration of SoutheastEurope into the global economy, the World EconomicForum is proud to present the first edition of TheSoutheast Europe Competitiveness Report.As a supplement toour Global Competitiveness Report 2005–2006, this newReport places the challenges facing the counties in the SEEregion in an international context, and highlights theprogress these countries have made in establishing soundbusiness environments, and supporting private sector eco-nomic activity. More important, the Report identifies themain obstacles to improved growth performance andenhanced international competitiveness.Through in-depthanalyses of regional trends and detailed country profilesfor the countries in the region, the Report is intended toserve as a guide to policymakers and business executivesalike.

My appreciation goes to Augusto Lopez-Claros,Director of the World Economic Forum’s GlobalCompetitiveness Programme, under whose guidance thisReport is published, and to his able team.Together withThe Global Competitiveness Report, and special reports onother regions and topics, the Southeast Europe

Competitiveness Report is part of a family of research studiesthat mirror the increasing integration of the world economy.

Finally, we extend special thanks to the RegionalEconomic Forum for Southeast Europe for its support inthis worthwhile venture.We hope that this Report will begiven wide distribution, and that its contents will be seenas a contribution to the debate on the various policies,which the authorities in these countries should follow, asthey pursue full integration with, and membership in, theEU.The World Economic Forum supports this strategyand stands ready to assist these countries in their laudableefforts to modernize their economies and narrow incomelevels with respect to the rest of Europe. In this spirit, weview this Report as the first in a series of follow-up studies,focused on the challenges confronting the SoutheastEurope region as a whole.

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Measuring Southeast Europe’sCompetitiveness: Paving theWay for a Prosperous Future in EuropePrepared by a team headed by the Director of the Global

Competitiveness Programme, including:

JENNIFER BLANKE, MARGARETA DRZENIEK,

IRENE MIA and SAADIA ZAHIDI

I. IntroductionThe past decade has been a difficult one for SoutheastEurope (SEE). Political and military conflicts, combinedwith the challenging transition from centrally planned tomarket economies, have taken a heavy toll on the region’seconomic performance and on the living conditions of itsinhabitants.Although very much at the geographic centerof Europe, conflict and instability have aggravated thewide existing disparity in income between SEE countriesand much of the rest of Europe, as shown in Figure 1.1

However, much progress has been made over the pastfew years to stabilize the region and to restart a sustainablegrowth path. Following the end of regional conflicts in theBalkans, governments are now focusing on reforms aimedat macroeconomic stabilization and structural transforma-tion. Institutions are getting stronger, investment is recov-ering, and regional trade is increasing. Nevertheless, withhigh levels of unemployment and the legacy of a decadeof military conflict in much of the region, a great dealremains to be achieved for these countries to becometruly competitive economically and fully integrated notonly with the rest of Europe, but with the global economy.

In some sense, the SEE countries find themselvestoday at a crossroads not unlike the crossroads that facedthe countries of Central and Eastern Europe at the end of the 1980s and the beginning of the 1990s.The end ofthe Cold War and the emergence of democratic forms ofgovernance, coupled with the decision to nurture thedevelopment of the institutions and practices of a marketeconomy, posed fundamental challenges to the govern-ments of the region. How were they to ensure a smoothand peaceful transition to democracy, and at the same timeunleash a process of economic reforms designed to elimi-nate the distortions and rigidities of the central planningera and modernize their economies and institutions?

In retrospect, it is evident that a key component ofthe successful transition of the Central and EasternEuropean countries to the market was their early decisionto seek membership in the European Union (EU), a goalthat received strong political support among EU members.

Accession negotiations and the need to fulfill themany policy and institutional requirements implicit in theacquis communautaire provided a well-defined frameworkfor macroeconomic discipline and structural reform.Governments in Central and Eastern Europe increasinglyfound themselves assessing policies according to whetherthose policies would accelerate or slow down the processof their EU integration.The EU membership drive—broadly supported within civil societies in all of the acces-sion countries—galvanized the political classes and focusedtheir energies on a single, overwhelmingly important,strategic objective: to become members of an enlargedEuropean Union. Regardless of the challenges these coun-tries faced as they strove to achieve the income levels ofthe more prosperous members, there can be no doubt that

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the process itself, which culminated in May of 2004 withtheir accession to the European Union, has been aresounding success.2

The governments of the SEE countries are now seek-ing to replicate the successful strategy used by the tencountries that acceded to the European Union in May2004, and they are implementing the economic, structural,and institutional reforms necessary to adapt their economiesto the demands of EU membership.These countries arevery much part of the European geographic and historicallandscape.Thus, their eventual membership in the EU isgenerally seen as beyond doubt.The only question is howsoon and under what circumstances will they be able tojoin? A key component of their strategy will be sustainedreform.To this end, they will have to develop trackingmechanisms to allow the governments and the businesscommunity to assess their progress over time in buildingmodern, flexible economies that are able to withstand thecompetitive pressures of other countries, particularly thosealready operating in an enlarged European Union.

The World Economic Forum will be able to assistthese countries in this process in the following ways:first, by assessing the starting point for each, by identifyingthe strengths and weaknesses that characterize theirmacroeconomic and institutional environments, and,more broadly, the many other factors that determine eachcountry’s underlying level of competitiveness; second, byproviding a periodic review of progress made, making itpossible to measure the distance still to be traveled by eachcountry to reach EU levels of development and competi-tiveness. (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 ofindicators.)

Competitive economies are those able to increase theliving standards of their citizens.This first edition of TheSoutheast Europe Competitiveness Report assesses the state ofcompetitiveness of the countries in the region. It includesa detailed analysis of the specific issues or problem areason which each country must focus in order to strengthenits national competitiveness. Only by addressing a widerange of functions critical to economic performance will these countries be able to join the ranks of the morecompetitive economies in Europe.

The Report assesses the competitiveness of eight countries from Southeast Europe:Albania, Bosnia andHerzegovina, Bulgaria, Croatia, Former Yugoslav Republicof Macedonia, Romania, Serbia and Montenegro, andSlovenia.These countries are covered by the 2005Executive Opinion Survey (Survey), which is carried outannually by the World Economic Forum and is the sourceof many of the data on which our analysis is based.

Section II provides a summary analysis of each coun-try’s starting point for purposes of this study.The SEEregion is heterogeneous in nature. Each country has followed a particular development path during the pastdecade, and each of the eight economies discussed in thisReport has come to a different starting point in 2005.Whatmacroeconomic and structural reforms have they accom-plished over the past decade, within the constraints of theirparticular environments? What are some of the remainingchallenges? This section will provide a benchmark for themore detailed discussions on competitiveness to follow.

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

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

12,000

10,000

8,000

6,000

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Bulgaria

Hungary

Romania


Section III presents the results of the main tool,the Growth Competitiveness Index, used by the WorldEconomic Forum during the period 2001–2005 to assessnational competitiveness.This section presents a historicalperspective on the evolution of competitiveness in theSEE region.All eight countries except Albania have been included in at least two publications of the WorldEconomic Forum’s Global Competitiveness Report, in somecases since 2001.

Section IV describes how we benchmark SoutheastEurope’s present competitiveness in comparison with theperformance of a number of other countries and regionalgroupings. Here we present several indicators that allowthe reader to see the SEE countries in a regional andinternational context.

Section V broadens the analysis of section III by fram-ing the discussion of competitiveness in the context of therecently developed Global Competitiveness Index, whichincludes a number of factors not previously considered inthe Forum’s competitiveness work. Sections III and V thuscomplement each other, presenting mutually reinforcingvisions of competitiveness in the SEE countries and illus-trating the broad range of factors that can be brought tobear in measuring it.

Section VI includes policy recommendations for thecountries of the SEE region, based on our competitivenessresearch.

Section VII presents our principal conclusions.Following this chapter are the competitiveness profiles

of each country in the SEE region, identifying specificstrengths and weaknesses, and offering the reader anopportunity to see how the eight SEE countries are per-forming vis-à-vis each other by comparing and contrastingthe different areas driving their levels of competitiveness.

II. The starting point for the countries of Southeast Europe

AlbaniaUnder Enver Hoxha’s 40-year iron rule,Albania experi-enced the most extreme form of isolation and self-inflictedautarky a country can endure. Obsessed with Tito’sunconcealed desire to annex the country to Yugoslavia,he suppressed all foreign trade and private sector activities(including private farming) in favor of forced industrializa-tion and self-sufficiency. He also quashed any form ofpolitical, social, economic, or cultural internal opposition,plunging Albania into oppression, backwardness, andpoverty.

As a consequence,Albania began its transition in 1991as one of the least developed post-communist countries.And after nearly 15 years of sustained gross domesticproduct (GDP) growth and the adoption of sound macro-economic policies,Albania remains among the poorestcountries in Europe, with a GDP per capita at purchasingpower parity that—at US$4,937 in 2004—is the lowest inthe region, bar Serbia and Montenegro. Moreover, morethan 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 perhapsnot surprising that emigration has been extremely high.According to the International Office of Migration, since1990 almost 1.1 million Albanians left the country forGreece, Italy, and the United States.

Indeed, the legacy of Hoxha’s regime has been a significant burden as well as a challenge for the nascentdemocracy on its thorny path to economic and politicalreform. In this regard, three different phases can be highlighted from 1991 to the present.

The initial 1991–1995 phase saw the newly electedauthorities break away from central planning and isolationistforeign policies, turning instead to international institutionsand Western countries for financial support and advice.This period saw the adoption of sound macroeconomicreforms, including the privatization of the farming sector,the elimination of price controls, and the liberalization ofthe trade and currency exchange system. Such policies ledto remarkable results: inflation was brought down fromtriple to single digits, and the external current accountdeficit was reduced from almost 40 percent to 6.5 percentof GDP.At the same time, the private sector began to generate a full 75 percent of GDP. During the 1993–1996period, rates of growth were as high as 10 percent per yearand living standards rose substantially.The year 1992 alsorepresented a major political milestone, with an extensiveelectoral victory of the Democratic Party (DPA), whoseleader, Sali Berisha, became the first democratically electedpresident of Albania.

Nevertheless,Albania’s inexperience with the workingsof a free market economy, coupled with a still-vulnerablefinancial sector and weak public institutions (including therule 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, whichcaused widespread anger toward the government and evencame close to triggering a civil war.This period thus saw asharp drop in economic activity and tax revenues, a 40percent depreciation of the lek, and soaring inflation.

The seriousness of the situation prompted Berisha tocall for new elections, which were held among widespreadviolence in the summer of 1997 and brought back topower the Socialist Party (SPA), led by Fatos Nano.Thismarked the beginning of the third phase, which is still inprogress.

Against an appalling economic background, the fresh-ly elected SPA government rapidly defined and embarkedon 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 restoredmacroeconomic stability, bringing inflation back down tomanageable levels.

The 2000–2004 period saw a real GDP growth rateof 6 to 7 percent (with the exception of 2002, when the

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growth rate dropped to 4 percent as a consequence offloods and serious energy shortages). Moreover, the SPAgovernment adopted an agenda of structural reforms.These reforms included the liquidation of the pyramidschemes, the strengthening of tax and customs administra-tion, the improvement of public expenditure management,and the acceleration of privatizations (including state-ownedbanks) in order to strengthen the private sector.A newconstitution was also adopted in 1998 guaranteeing, atleast on paper, the respect of the rule of law and the protection of fundamental human rights.

Another feature of this phase was the government’sstrong emphasis on external relations.Albania joined the World Trade Organization (WTO) in 2000, begannegotiations with the European Union in 2002 for aStabilisation and Association Agreement and significantlystrengthened its links with the United States in view ofjoining the North Atlantic Treaty Organisation (NATO) at a later stage. Over the transition years, the EuropeanUnion has become Albania’s main trading partner, withItaly purchasing almost 75 percent of its exports andGreece and Germany purchasing a combined 15 percentof its exports; jointly Italy, Greece, and Germany havebeen supplying 70 percent of its imports.

Albania has come a long way since its initial phase in1991–1995, and its macroeconomic performance has beenextraordinary.Yet, in order to sustain growth and lift moreof its citizens out of poverty, a handful of problematic areasand worrying trends remain. One problematic area is theeconomy’s concentration in the textile and footwareindustries. Since the communist-forced industrializationperiod, industry has decreased its share of the GDP from40 to 20 percent in 2004, with two-thirds of total exportrevenues presently generated by clothing and shoes manu-facturers.These are often subcontractors for Italian or EUfirms that import semi-finished goods and re-export thefinal products. Such a heavy reliance on mature and lowvalue-added sectors poses non-negligible risks for theeconomy. Moreover, the services sector in Albania is muchsmaller than in any of the other post-communist coun-tries, confirming Albania’s less-advanced development andtransition.

With regard to other obstacles to competitiveness,corruption, organized crime, lack of transparency, andpolitical instability continue to be significant problems forAlbania, requiring serious attention.These areas generatehindrances for doing business in the country and alsodeter foreign investors from bringing in the capital andtechnology so needed to update Albania’s productivestructure.Albania’s foreign direct investment (FDI) stock is one of the lowest in Eastern Europe, despite Albania’sevident comparative advantages in terms of labor cost andproximity to the European Union. On a hopeful note, theDPA coalition eventually took office in September 2005,and proclaimed the fight against corruption and organizedcrime to be the top priority of the government’s 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 HerzegovinaBosnia and Herzegovina (BiH) has faced formidable chal-lenges and undergone many changes over the past decade.The BiH authorities have had to cope with an extremelychallenging environment characterized by the economicand social devastation of civil war, continuing tensionsamong ethnic groups, and the weakness of the centralstate.Also presenting a complicated challenge are thethorny relations and power-sharing arrangements of itstwo composite “entities,” the Republika Srpska (RS) andthe Federation of BiH (the Federation), and the complexi-ties of massive international involvement.

The strengthening of the central state, as envisagedand set as a goal in the Dayton Accords, has often beenboycotted by the three dominant nationalist parties: theParty of Democratic Action, or SDA; the SerbianDemocratic Party, or SDS; and the Croatian DemocraticUnion, or HDZ BiH.This has caused the internationalcommunity—represented by the Office of the HighRepresentative (OHR)—to increase its involvement since1998, turning BiH into a de facto UN protectorate andfurther weakening the ability of the country’s central institutions to shape the political agenda.

However, the OHR has recently announced its inten-tion to progressively disengage from BiH. Some institution-al reforms have been carried out as a result of combinedexternal pressure and the internal shift of power to moremoderate forces.Alongside these reforms, the secessionisttensions and ethnic conflicts have been partially appeasedby the implementation, since 2000, of the ConstitutionalCourt 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 administra-tion and unified army have been established.The responsi-bility for indirect taxation has been transferred from thetwo entities to the central state, and significant progress has been achieved in establishing a unified customs admin-istration (paving the way to the adoption of a single 17percent and EU standard-structure VAT from end 2005) as well as rationalizing the administrative and judiciary system.

Aside from this complex political setting, BiH’sauthorities have had to deal with massive social disruptionand human and health costs, not to mention the severedamage to the production sector caused by the civil war.This can be seen in a number of areas, including thecountry’s low life expectancy and birth rates, low employ-ment rates (41.1 percent in December 2002 according to the IMF), and the deep de-industrialization processexperienced by BiH after the war, when the share ofindustry in the economy declined from 50 percent ofGDP in late 1980s to 30 percent in 2002.Against thisbackdrop, economic policy has focused on achieving

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macroeconomic stability, notably on adopting sound andmutually reinforcing monetary and fiscal policies.

Regarding monetary policy, the convertible marka(KM) was introduced in 1998 under a currency board sys-tem.This system first fixed the currency at parity with theDM, then to the euro. In the same spirit, reform of thebanking system gave the central bank control over thebanks of the two entities. In 2003, in an attempt to curbthe expansion of consumer credit—following the entry offoreign banks in the internal market—the BiH authoritieschanged the definition and level of the central bank’sreserve ratio, lowered the remuneration rate of excessreserves, and tightened regulations on foreign currencyexposure for banks.As a consequence of these policies,inflation has been kept very low since 1998: even after thesharp rise in tobacco and transportation prices in early2005, the figures of retail price inflation in April 2005were still rather low, amounting to 1.4 percent for theFederation, and to 3.5 percent for the RS (which remainsstrongly influenced by economic trends in Serbia andMontenegro).

In its fiscal policy, BiH has come a long way from theprecarious budget situation of the early post-war years,when the country had the highest current spending in allof Europe. Both entities have worked to consolidate theirfiscal systems, and have succeeded in rationalizing andtrimming expenditures.

The foreign debt BiH inherited from the formerYugoslavia has been brought under control by the partialwrite-off of the debt by the London and Paris Club in1998, and by a significant discount and a favorable resched-uling of the debt with suppliers and trade creditors.Domestic debt—composed mainly of frozen foreign currency deposits, war damage claims, and arrears to government suppliers—remains a cause of concern.Anagreement under which the government should pay claimswith a combination of long-term bonds and cash wasreached early in 2004.

These encouraging steps are even more significantwhen one considers the decline in external assistance andthe importance of ensuring that the overall demands ofpublic expenditure financing are increasingly met bydomestic public revenues.

On a negative note, the BiH current account has beenpersistently in deficit—25.6 percent and 24.1 percent ofGDP respectively in 2004 and 2005, according to IMF’sestimates—reflecting large trade deficits.These deficitshave been brought about by poorly structured and insuffi-ciently diversified exports, coupled with a heavy relianceon imports of consumer goods. Even if the trend has beenpartially corrected by a constant decline of trade deficits inrecent years, it remains worrisome, as it could underminethe country’s painfully achieved macroeconomic stability.

Moreover, much remains to be done within the busi-ness environment to strengthen local companies andattract 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, harmonizingand liberalizing the specific regulations of the two entitieson labor, services and goods mobility, and lowering thecost of entry for new companies—are expected to beimplemented shortly.

Further, the process of privatization and enterpriserestructuring has been reactivated, barriers to investmenthave been reduced, and centralized VAT and customsregimes created. So far the privatization process has hadmixed results: it has been relatively successful for small- tomedium-sized enterprises, but much less successful for thelarger “strategic” ones because of inefficiency, the unwill-ingness to sell them, and a general lack of interest on thepart of investors. However, under international pressure,the privatization of larger enterprises was relaunched in2003 and 2004, leading to the successful conclusion ofseveral privatization deals.Thanks to this process, foreigninvestment inflows have been gaining strength since 2003,mainly in the manufacturing and banking sectors.

As the political and economic situation in BiH gradu-ally improves and OHR involvement declines, the EuropeanUnion—its largest export market and donor during andafter the war—is bound to assume a more significant rolein maintaining political stability and in fostering economicgrowth. Not only have armed EU forces taken over fromthe NATO-led mission in December 2004, but theEuropean Union also agreed to consider entering into aStabilisation and Association Agreement with BiH, condi-tional on the country’s making significant progress on 16priority political and economic reforms. In addition tocalling for its cooperation with the International CriminalTribunal on Former Yugoslavia (ICTY), its adoption of aunified multi-ethnic police force, and reform of adminis-trative and judicial systems and trade liberalization, theagenda stresses the importance of sustained reform of thebusiness sector, highlighting the key importance of privateinvestment for its growth and competitiveness as interna-tional assistance decreases.

The feasibility study conducted by the EUCommission in 2004 to assess the readiness of BiH for theStabilisation and Association Agreement concluded thatonly limited progress has been achieved so far and thatother significant steps must be taken before negotiationscan be opened. It is worth mentioning that the agreementreached by the national entities in October 2005 to estab-lish a unified national police force—a major step towarddissolving ethnic tension in BiH—is expected to triggernew talks with the European Union on greater integration.

BulgariaA satellite of the Soviet Union during the Cold War, dem-ocratic opposition was not tolerated in Bulgaria at thattime, and agriculture and industry were completelynationalized.After 1989 and the fall of the Berlin Wall,democratic changes were initiated, culminating in the firstmulti-party elections since World War II.Although this was

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followed by a period of social upheaval, a new constitutionwas adopted in 1991; Bulgaria’s first democratic parliamen-tary elections were held that same year. Bulgarians had theopportunity to directly elect their president for the firsttime in 1992.The country’s transition from communismwas marked by profound social and economic unrest,resulting in the well-known financial crisis of late 1996and early 1997. Prime Minister Ivan Kostov initiated aseries of reforms in 1997, which greatly helped to stabilizeBulgaria’s economy and modernize the country. Electionsin 2001 brought a new government and president:Bulgaria’s ex-king Simeon Saxe-Coburg-Gotha, whoreturned to Bulgaria, became the first former monarch inpost-communist Eastern Europe to become prime minister.

As with many other communist countries, a variety of largely artificial industries—steel, heavy chemicals,electronics, information technology, and armaments, noneof which were suited to competition in a post-communistenvironment—were superimposed on Bulgaria’s traditional,functioning agricultural sector.The output of these indus-tries declined sharply in the early to mid 1990s, seriouslyjeopardizing the well-being of the most vulnerable groupsin the country.As might have been predicted, the resultwas widespread poverty. In July 1997—in the wake of asharp contraction of GDP, the collapse of the banking sec-tor, and a major foreign exchange crisis—Bulgaria adopteda currency board agreement to stabilize the currency.Thisinitiative is seen by many as having played a central role inbuttressing the credibility of government macroeconomicpolicies and, in particular, as demonstrating a commitmentto price stability. International financial institutions anddevelopment partners lent support for the comprehensiveeconomic reforms that were being wisely adopted by thegovernment.Wide-ranging reforms followed, whichincluded liberalizing trade and prices; restoring the socialsector; restructuring institutions in the financial, business,agricultural, and energy sectors; and jettisoning state-ownedenterprises.These reforms, in combination with the adoption of the currency board, transformed Bulgaria’seconomy, lowered inflation and attracted investors.

According to the IMF, by 2003, Bulgaria’s GDP percapita was only 78 percent of its level in 1989, the year inwhich the country had embarked on its democratic reforms.However, since the onset of the 1997 reform program,continued progress toward long-term macroeconomic sta-bility has resulted in economic growth sustained at morethan 4 percent per year (4.9 percent in 2002, 4.3 percentin 2003, 5.6 percent in 2004); in low inflation; and in anincrease in FDI —to US$1.4 billion, or 7 percent of GDP.The European Union gave Bulgaria’s economy a favorableassessment, and in 2003 declared it to be a “fully function-ing market economy.”

In 2003, the government embarked on a program todeal with the severe social problems facing vulnerable andmarginalized groups. Bulgaria’s macroeconomic policiesand reform initiatives are receiving strong support from allpolitical parties, who are united behind the drive for the

country’s accession to the European Union. In preparationfor EU membership, Bulgaria successfully completed EUnegotiations in June 2004, signed an accession agreementin April 2005, and joined NATO in May 2004.

Significant problems remain, however, despite recenteconomic growth, and Bulgaria has yet to make good on anumber of the stipulations cited by the European Union.Per capita incomes remain at about 28 percent of the EUaverage, and living standards are dangerously low. Despitethe country’s progress in tackling poverty, with rates fallingby two thirds from 1997 levels, the World Bank has mostrecently reported a poverty level of 12.8 percent—stillmore than double the pre-crisis level of 1995.Andalthough living standards improved steadily over the pastfew years, these improvements have not been evenlyspread across the population.The government’s activeinvolvement in job creation has begun to show someresults as unemployment levels go down.As a result of thefirst phase of Bulgaria’s structural reforms, the private sec-tor share of GDP reached 64 percent in 2004.The bank-ing system is now fully privatized. Current governmentreforms are building on the gains of the past five years, andare strategically focused on reducing poverty, encouragingprivate investment, increasing productivity, and sustaininggrowth. New social sector reforms emphasize developinghuman capital (targeting high long-term unemploymentand entrenched poverty) as a complement to investmentsmade in physical capital. In addition, Bulgaria is requiredto control corruption and organized crime and to reformits environmental rules and competition policies if it is tojoin the European Union on January 1, 2007.

CroatiaBefore the dissolution of Yugoslavia, Croatia was the sec-ond most prosperous and industrialized of the formerYugoslav Republics (just after Slovenia), with per capitaoutput about one third higher than the Yugoslav average.But the economy sustained massive damage as a result ofthe breakup of Yugoslavia and the difficult situation fol-lowing Croatia’s declaration of independence in 1991.Theloss of Croatia’s former markets in Yugoslavia and the costof the conflict caused an estimated 40 percent fall inCroatia’s real GDP between 1989 and 1993, according tothe European Bank for Reconstruction and Development(EBRD). By October 1993, inflation had reached anunsustainable 38 percent per month.

However, by 1997, GDP had recovered to 76 percentof the 1989 level.Through effective macroeconomic stabi-lization policies, inflation had been reduced to manageablelevels.The main force propelling post-war growth wasgross fixed investment.This surged by 38 percent in 1996and 26 percent in 1997 because of reconstruction activity,such as the rebuilding of houses and damaged infrastructure.

Still, economic reform moved very slowly during thelate 1990s, and in 1998 real GDP declined in the finalquarter by 4.4 percent, the first time it had fallen since1994. Croatia emerged from this recession in 2000; since

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Box 1. Regional processes for policy reform in Southeast Europe

The need for economic policy reforms in Southeast Europeis well understood both within and outside the region. Thishas prompted the creation of a number of processesaimed at helping the countries to move ahead withreforms. These processes have been initiated by membersof the international community such as the EuropeanUnion, the United States, and Russia, as well as interna-tional organizations such as the Organisation of EconomicCo-operation and Development (OECD)—all eager toensure political and economic stability in the region.

The European Union is the body with perhaps thegreatest interest in the economic and political stability ofSoutheast Europe. Not only are these countries on itsdoorstep, but they also share the goal of one day joiningthe club, of which Slovenia is already a member. Followingthe end of the war in Kosovo, in May 1999 the EuropeanCommission set out its vision for the development of theSEE region. The process, which is explicitly linked to EUaccession, includes a mixture of trade concessions, eco-nomic and financial assistance (through the CARDSProgramme) and contractual relationships (Stabilisation andAssociation Agreements or SAAs). The approach wasdesigned to motivate these countries to carry out reformsas a prerequisite for joining the European Union, reformsthat included the establishment of a dependable rule oflaw, democratic and stable institutions, and a free economy.

As explained by the EU, “The conclusion ofStabilisation and Association Agreements represents thesignatories’ commitment to complete over a transitionperiod a formal association with the EU. Such an associa-tion has a high political value. It is based on the gradualimplementation of a free trade area, and of reformsdesigned to achieve the adoption of EU standards, withthe aim of moving closer to the EU.… Through a free tradearea with the EU and the associated disciplines (competi-tion and state aid rules, intellectual property, etc.) and ben-efits (e.g. rights of establishment), this process will allowthe economies of the region to begin to integrate with theEU.… Effective implementation of the Stabilisation andAssociation Agreements is a prerequisite for any furtherassessment by the EU of the country’s prospects ofaccession.”1 Table 3 in the text provides details on thepresent relationship of each Southeast Europe countrywith the European Union.

The European Union is not the only international actorthat is interested in the stability of the SEE region. Otherinternationally inspired vehicles for change include theStability Pact for Southeast Europe and the SoutheastEuropean Cooperative Initiative. Specific policies that mustbe carried to ensure regional stability have been outlinedthrough the Stability Pact, launched a month after theStabilisation and Association Process, in June 1999,2 at ameeting that included the European Union, the Balkanstates, the United States, Russia, and representatives ofinternational organizations. The economic component with-in the Stability Pact is called the Southeast Europe

Compact for Reform, Investment, Integrity and Growth(the “Investment Compact”). It is a project led by theOECD, aimed at “improving the region’s economic andbusiness environment. It sets out the commitments ofcountries in the region—Albania, Bosnia and Herzegovina,Bulgaria, Croatia, Former Republic of Macedonia, Moldova,Romania, Serbia and Montenegro—to lay the structuralpolicy foundations for sustainable growth and reform so asto create a robust market economy and encourage privateinvestment.”3

The Investment Compact thus sets out a number ofcommitments to policy reform aimed at improving thefunctioning of the economies of the countries of the SEEregion. As mentioned above, all countries in the region area party to the compact except for Slovenia, which standsapart because of the relatively better overall quality of itseconomic and political environment. Although the specificcommitments vary from country to country, the generalemphasis is on the importance of improving institutionaland business environments and the functioning of markets. The Stability Pact has also been coupled withWestern aid directed toward helping the countries fulfill all of the articulated obligations.

Another organization with similar goals is theSoutheast European Cooperative Initiative (SECI), initiallyproposed by the United States and launched in Decemberof 1996. The objective of this initiative is to enhance stabil-ity and cooperation among the participating countries byencouraging “co-operative and transboundary solutions toshared economic and environmental problems” and facili-tating their integration into European structures. Thisprocess regroups a larger number of countries than thoseincluded in the two processes discussed above, includingSlovenia, Greece, Hungary, Moldova, and Turkey. The goalof SECI is to promote and facilitate cooperation and com-munication among the governments of the region. SECIidentifies problems and solutions, but does not implementthe suggested projects directly, and it is not an assistanceprogram. SECI cooperates closely with the Organizationfor Security and Cooperation in Europe (OSCE) and theUnited Nations Economic Commission for Europe (UNECE).

Notes1 The European Commission provides information on the Stabilisation

and Association process online athttp://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 inSouth Eastern Europe with a comprehensive, long-term conflictprevention strategy.” The guiding principle behind the pact is that“Conflict prevention and peace building can be successful only ifthey start, in parallel, in three key sectors: the creation of asecure environment, the promotion of sustainable democraticsystems, and the promotion of economic and social well being.Progress in all three sectors is necessary for sustainable peaceand democracy.” Information on the Pact can be found online athttp://www.stabilitypact.org

3 This description of the investment compact can be found online athttp://www.investmentcompact.org


that time, much progress has been made.The presidentialelections in January 2000 ushered in a new government,which is committed to economic reform.The new gov-ernment has carried out many structural reforms, enactingmarket reform and building institutions.

Specific public sector reforms carried out in recentyears include pension reform, with the establishment inJanuary 2002 of a multi-pillar system that introducedcompulsory and voluntary components to complementthe state-funded pensions. Health reforms have also beencarried out since 2001, which include a reduction in theduration of sick leave, modifications to the co-paymentsystem, different primary care models, and improved hos-pital management practices. In June 2003 a number oflabor market reforms were also introduced to improveflexibility in the labor market and restrict entitlement tounemployment benefits.These reforms included shorterseverance periods and lower severance pay, although oppo-sition from trade unions resulted in a watering down ofthe original provisions.

The continuing growth of the economy since 1999can be attributed to increased investment, as private busi-nesses and public enterprises have initiated capital expen-diture projects. In particular, tourism, which performedpoorly 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 country’s economic stability returns. In particular,Western aid and investment—especially in the tourist andoil industries—as well as remittances from a large numberof expatriate Croats, is helping to restore the economy.The World Bank, the IMF, and the EBRD have also beenactive in the country. Croatia’s 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 countryhad made sufficient progress to enable it to formally applyfor EU membership, becoming an official “candidatecountry” in June 2004.3

With the goal of EU accession clearly in sight, recentprogress has been made in opening the country to globalmarkets through memberships in the WTO and theCentral European Free Trade Association (CEFTA),through stronger cooperation with its neighbors, and bysigning a Stabilisation and Association Agreement with theEuropean Union—a prerequisite to entering into acces-sion negotiations.

The accession process highlights the reforms yet to beachieved. Despite notable progress and efforts by the gov-ernment, the practice of coalition politics and resistancefrom unions and the public have slowed the achievementof many reforms.There is a clear opportunity through theStabilisation and Association Agreement to deepen reformefforts and foster growth through EU integration.However, in order to bring laws, institutions, and policiesin line with the acquis communautaire, Croatia has a toughroad ahead to achieve more progressive laws, stable institu-tions, more efficient labor and financial markets, better

infrastructure, greater macroeconomic and social stability,and a more favorable business climate.

Macedonia, FYRIn September of 1991, Macedonia declared its independ-ence from Yugoslavia and became the only former republicto secede peacefully.At that time Macedonia was the leastdeveloped of the Yugoslav republics, producing only 5 per-cent of the total federal output. International recognitionof the country was initially held up because of Greek fearsthat the country’s name implied territorial ambitions overthe northern Greek region of Macedonia.The countryfinally became a member of the UN in 1993, using theprovisional name “Former Yugoslav Republic ofMacedonia” (FYROM). Greece lifted its two-year tradeblockade only after the two countries signed an accord in1995.

In the years that followed independence, Macedoniawas spared the violence that existed elsewhere in theBalkans following the break-up of Yugoslavia in the early1990s. But despite the relative calm, the country still facedformidable economic challenges posed by both the transi-tion to a market economy and the difficult regional situa-tion.The collapse of Yugoslavia ended transfer paymentsfrom the central Yugoslav government, and also deprivedthe country of key protected markets. Because it was high-ly integrated with the economic system of the formerYugoslavia, the Macedonian manufacturing industry suf-fered more than most other sectors during the economicdownturn that followed independence. More generally, anabsence of working physical infrastructure, UN sanctionsagainst Serbia and Montenegro—still one of its largestmarkets—slow growth in domestic demand, erratic foreigninvestment and financial assistance, and the Greek eco-nomic embargo hindered the country’s economic growthuntil 1996.

Despite these difficulties, the government demonstrat-ed good macroeconomic management during this period,bringing down the hyperinflation it had inherited fromthe former Yugoslavia from the four digit figures of 1992to just 2.3 percent in 1996.The country’s de factoexchange rate peg to the DM, along with sound fiscalmanagement lowered the government budget deficit anddebt to much more sustainable levels. Macedonia thenexperienced a brief period of economic expansion, withGDP growth increasing each year, from 1.2 percent in1996 to 4.5 percent in 2000.The budget was nearly in bal-ance between 1996 and 1999, and even showed a surplusin 2000. In terms of structural reforms, important progresswas made in reforming the financial sector and in tradeliberalization, although restructuring the banking sectorproved more elusive than initially anticipated.The govern-ment fell behind on several other restructuring projects,such as privatizing or liquidating large loss-making compa-nies, introducing the VAT, and reducing the state adminis-tration, the latter beginning only in late 2000.

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However, after five years of steady growth and a fulldecade of independence, the leadership’s commitment toeconomic reform, free trade, and regional integration wasseriously undermined by the ethnic Albanian insurgencyof 2001. Fighting continued for six months before therebels and the Macedonian government finally signed apeace agreement. In 2001 the economy shrank by 4.5 per-cent because of decreased trade, intermittent border clo-sures, increased deficit spending on security needs, andinvestor uncertainty—although even in these difficult cir-cumstances, inflation still remained relatively low at 5.3percent. Since this time the economy has begun to recov-er, 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 nega-tive in 2004 at –0.3 percent.

Despite recent achievements it is important to notethat, as measured by purchasing power parity, Macedonia’sGDP per capita today is not significantly higher than itwas prior to independence in 1989. Unemployment con-tinues to be a significant social and economic challengefor the country: it was estimated at 37.2 percent of theworkforce in 2004, and the number of people employedhas been halved since 1990. In 2002 and 2003, the gov-ernment had to rely on international financial assistance tosecure its main macroeconomic objectives.

Although concerns stemming from the 2001 conflictlinger, Macedonia’s political and security situation has sta-bilized, allowing the government to refocus energies ondomestic reforms under IMF and World Bank supervision.The government’s progress on structural economicreforms slowed in 2004, as Macedonia faced a series ofchallenges: the death of President Trajkovski, which result-ed in early presidential elections; a contentious debate overthe Framework Agreement that ended the 2001 conflict;and a referendum on municipal boundaries in November2004, which did not pass. Industrial output fell during thefirst half of 2004, forcing a downward revision in annualGDP growth estimates from 4 to 2.4 percent. However,the new government remains committed to the reformprocess.

The country passed a progressive trade companies law,which, combined with tax and investment incentives,should ease impediments to foreign investment. Fiscal con-solidation, low inflation, and a fall in interest rates indicategood potential for an eventual recovery of the economy.Political and security normalization, macroeconomic sta-bility, and fiscal discipline are providing a foundation forhigher growth rates.The Macedonian government is striv-ing to attract foreign investment, increase employment,and reduce poverty. It has pledged to undertake measuresto maintain fiscal discipline and reduce interest rates evenfurther. Developing the small and medium-size enterprise(SME) sector and intensifying structural reforms are alsohigh on the government’s list of priorities.The recentlyadopted Law on Labor Relations, which eliminates many

of the economy’s labor-related burdens, is expected tohave a significant impact on foreign investment and overallgrowth.A number of important judicial reforms are alsounderway.

Macedonia has increasingly opened itself to interna-tional trade, with a total trade-to-GDP ratio of 79.5 per-cent.The importance of trade with the European Unionhas increased since the country signed a Stabilisation andAssociation Agreement with the EU in November 2000.The country also signed a number of regional trade agree-ments with its neighbors in 2002 and 2003. On the globallevel, Macedonia officially joined the WTO in April 2003,making it the third former Yugoslav republic—afterSlovenia and Croatia—to do so. Macedonia formallyapplied for EU membership in March 2004, and was for-mally granted candidate status in December 2005.

RomaniaIt was with the fall of Ceaucescu, after the December1989 coup, that Romania was freed from communist con-trol. Elections followed soon after, in May 1990. Becausethe country was on the verge of collapse after 40 years ofcentral planning, with its emphasis on heavy industry andinefficient infrastructure projects, Romania’s transitionduring the next ten years was extremely painful.

Because of the urgent need to control the social con-sequences of the collapse and placate numerous vestedinterests, the Romanian government was hesitant toimpose tight fiscal constraints and privatize its huge loss-making enterprises. Negative growth came in the late1990s, bringing even deeper poverty in its wake, as thegovernment attempted to impose macroeconomic stabilitywithout the requisite structural support. In fact,WorldBank figures indicate that the poverty rate doubledbetween 1996 and 1999.

This situation forced the Romanian government toimplement more solid macroeconomic policies and toadopt tighter fiscal discipline, complementary monetarypolicies, and a number of significant structural reforms.Asa result, financial discipline in the enterprise sectorincreased, placing public finances and the financial systemon a better footing. GDP growth has been stronger since2000, reaching 8.3 percent in 2004. Inflation fell from 40percent in 2001 to 11.9 percent in 2004. Interest ratescontinued to decline, the fiscal deficit was brought underbetter control, foreign exchange reserves soared, and theexternal balance was kept to a sustainable level. Rising pri-vate investment facilitated more vigorous export growth,and was assisted by an initial competitive depreciation ofthe currency.According to the World Bank, Romania hasbecome more attractive to international investors as aresult of better sovereign ratings and improved access tointernational capital markets.

However, if Romania is to meet its planned 2007deadline for joining the European Union, even theserecent positive advances are not sufficient. Much deeperreform and restructuring of the economy is urgently

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needed. Romania’s population of upward of 22 millionmakes it the second largest country in Central and EasternEurope, larger in population than the majority of the cur-rent EU25. In addition, Romania is ranked 64th out of atotal of 177 countries on the Human Development Index,the lowest HDI rank of the candidates for EU accession.Despite Romania’s rich potential for agriculture, forestry,and fisheries, its infrastructure is inadequate to support theeconomy, much less to develop it, as it is undermined bythe long years of socialist collectivization and industrializa-tion.As a result, more than 20 percent of the populationstill lives below the national poverty line, with a majorityof impoverished people in rural areas. In order to tap thecountry’s real potential, deeper structural reform will beessential for Romania to have a thriving and competitivemarket economy, one that is capable of eradicating pover-ty, and, in the long term, that is capable of withstandingthe challenging aftermath of EU integration.

Other areas of concern remain in Romania.With 1.4beneficiaries to every contributor, the Romanian pensionsystem is in deep trouble, requiring deeper reform toensure its sustainability. In view of this, the country’s poorsocial services and decreasing and aging population repre-sent a severe strain on its still weak economy. For membersof the younger generation, access to meaningful, moderneducation is lacking. Romania will also need to make sig-nificant efforts to protect its minority population as part ofthe conditions to join the European Union in 2007.

After the collapse in 1989, the private sector was fur-ther hobbled in its development because reforms wereadopted slowly and haltingly, with economically unsustain-able state-owned farms still draining the bankrupt publicpurse. Finally, although energy sector reforms have beenimpressive, they are burdened with heavy payment arrears.The government continues to subsidize the power sector,contributing to the country’s fiscal imbalance.

In 2004, the European Parliament stated thatRomania’s accession in 2007 would be conditional uponits successful resolution of other serious problems, such ascorruption, the lack of judicial independence, harassmentof the media, and rampant police brutality. In fixing theterms for Romania’s accession in 2007, the EuropeanUnion included a safeguard to delay entry by one year,should these conditions not be met.This threat to delayRomania’s entry date has served to increase pressure onthe country to make good on its promises of reform.

Serbia and MontenegroFollowing a decade of war and international isolationunder the Milosevic regime, Serbia and Montenegro wasthe last country in the region to embark on the stormy seaof economic transition, and it did so only after the politi-cal changes that took place in 2000.The 1990s were adecade of decline for the country that left a daunting eco-nomic and human legacy, characterized by a collapsedeconomy, fragile institutions, and increased vulnerability. In1993, hyperinflation—one of the severest cases in the

world—was acute. Foreign trade volumes had fallen, withexports in 2000 down by 61 percent and imports down by31 percent from 1989 levels. Debt climbed to unsustain-able levels: foreign debt of around US$12.2 billion repre-sented 136 percent of GDP in 2000.The financial sectorwas in a state of ruin, with capital largely obsolete afteryears of disinvestment.To make matters worse, the 1999Kosovo war had devastated large parts of the transportinfrastructure.

In 2003, Serbia and Montenegro’s prevailing separatisttendencies resulted in the formation of a loose Unionconsisting of the two republics, with the option of separat-ing, if confirmed by a referendum that is to take place in2006.A separation appears to be likely but its impact onthe economy is not expected to be large, as the tworepublics run separate economic policies with only certainareas to be coordinated at the Union level.This has led todistinct economic developments in the two republics.Aspecific case is Kosovo, which, although part of the Serbianterritory, is administered by the UN.

Since 2000, major steps toward stabilization andreform of the economy have been taken within a shortperiod of time, yet much remains to be done.After thefairly low real GDP growth of 2.7 percent in 2003, theeconomy grew by approximately 7.2 percent in 2004.

After the breakdown of the Milosevic regime, consid-erable progress was made in increasing the transparency ofgovernment accounts and fiscal policy in Serbia. Overall,with increased revenues from privatization, fiscal disciplinehas increased greatly over the past few years.To maintainthis level of fiscal discipline in the future, the governmentwill have to further reduce subsidies and streamline publicemployment, at the same time containing the growth insocial transfers.This will be particularly important, asinflows of privatization revenues are expected to slowdown—with increasingly less attractive enterprises in thepipeline.To strengthen the revenue base, the Serbian gov-ernment introduced VAT in January 2005.A further steptoward broadening the tax base would be formalizing thelarge gray economy as the still-outstanding restructuringof companies and important public investments will placean additional burden on the budget.

Montenegro’s public finances remain under pressureand will require stronger consolidation. In spite of someinitial problems, the introduction of the VAT in April2003, 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 internationalcommunity.

Hyperinflation dominated the war years in bothrepublics, but tight monetary policy, supported by fiscaland wage restraint, has supported greater price stability in recent years. Serbia brought inflation down from 91percent in 2001 to single-digit figures in 2004, but let itgo back up to 17.5 percent in July 2005 because it usedexchange rate policy to control the rising trade deficit.Montenegro unilaterally introduced the DM (and later the

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euro) as its currency in 1999, and inflation dropped to 4.3percent in 2004.

The large and rising current account deficit (29 per-cent of GDP in 2004) reflects weak exports that are theconsequence of supply side weaknesses and a rising inter-nal demand.The liberalization measures adopted in 2000resulted in a huge increase in imports, mainly of consumergoods and energy. Because of prevailing structural weak-nesses and an unfavorable external environment, exportscame into the picture slowly, dominated by products withlow value added. Overall, for its size, the country stilltrades relatively little—in 2003 trade amounted to only 48 percent of GDP. In recent years, the current accountdeficit has been mainly covered by grants and loans frombilateral donors and international financial institutions, aswell as the quite substantial inflows of foreign directinvestment resulting from the privatization of large tobac-co companies.

Unemployment continues to persist as a structuralproblem, affecting more than 15 percent of the workforce,according to the International Labour Organization (ILO).

In the area of enterprise reforms, further improvementsin the business environment and continued privatizationremain priorities, building on commendable early progressin both areas. In fact, the World Bank’s Doing Business in2005 shows Serbia and Montenegro to be the world’sleading reformer in the area of business environment.According to the World Bank report, starting a businessbecame much easier and steps toward making the labormarkets more flexible have been made. Nevertheless, thecountry’s business environment still ranks below the aver-age in the region.

In privatization, progress has been uneven: small-scaleprivatization proceeded steadily during the past years inSerbia, but large-scale privatization stalled. In Montenegro,which was less affected by the war, a massive program suc-ceeded in privatizing 65 percent of state-owned compa-nies by mid 2005. However, some of the largest conglom-erates still await restructuring in both republics, and thesocial consequences of waiting will certainly strain statebudgets and increase unemployment.

In the financial sector, both republics have embarkedon reform. In Serbia, the institutional framework has beenstrengthened by tightening regulatory and supervisorycontrol over the local banking system, although large partsof the banking sector are still in need of further restructur-ing. In Montenegro, the situation looks different, as bankshave been successfully privatized, are liquid, and complywith capital requirements.

Overall, due to its recent troubled history, Serbia andMontenegro has fallen behind other countries in theregion in terms of economic development.Although thegovernments of both republics are stressing their commit-ment to fostering economic growth and attracting FDI,the political climate is not wholehearted about continuingunpopular 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 privatizationand restructuring continue if the economy is to stay on itscurrent growth path. In this respect, with the opening ofnegotiations of the Stability and Association Agreementswith the European Union in October 2005, a first steptoward EU membership was taken.The prospect ofbecoming an EU member could help mobilize politicalsupport for further painful reforms, as there is broad con-sensus in favor of EU accession throughout the country.

SloveniaA recent IMF report on Slovenia characterizes it as being“among the most successful transition economies ofCentral and Eastern Europe.” It goes on to say that “it hasa functioning market economy, a stable macroeconomicenvironment with sustainable growth, the highest standardof living and investment rating among transition countries,and has made significant progress toward convergencewith the EU.”

The Slovenian government has implemented a fairlyconsistent economic policy during the last several years.Despite a challenging external environment, the economyhas witnessed strong growth, a broadly balanced budget,single-digit inflation, and a strong external position.Against the backdrop of sharp output contraction at theonset of the transition, economic growth in the range of 4to 5 percent per year was a particularly welcome develop-ment—especially given the government’s explicit policygoal of achieving broad convergence with average EUincome levels within a reasonable timeframe.Notwithstanding these achievements, Slovenia has signifi-cant problem areas.These include the need for continuingto accelerate growth, for completing ambitious structuralreforms, and for further upgrading the quality of its poli-cies and institutions to bring the country in line with themore competitive economies elsewhere in Europe and theworld.

The authorities are aware of the importance of main-taining a credibly stable macroeconomic framework.Theyhave made considerable progress on the structural front,proceeding with privatization, trade liberalization, andimprovements in the social safety net as well as laying outa legal and regulatory system that fosters increased domes-tic and foreign investment.

Slovenia has held to a prudent fiscal policy as a pillarfor macroeconomic stability, avoiding the revenue collapsethat has plagued other transition economies in the regionwithout resorting to one-off expenditure cuts, with theirattendant disruptions and distortions to resource allocation.The approach followed has been broad-based and hasinvolved increasing tax rates, eliminating tax exemptions,introducing amendments to existing tax legislation, and,more generally, adopting a number of supportive taxadministration measures. Further tax reform is envisaged todiminish high labor costs—high contributions for health

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care and social security—and increase the tax burden oncapital, for example, by introducing taxes on capital gainsand on real estate.

Slovenia has shown readiness to adopt supplementaryrevenue measures beyond those envisaged in the annualbudget.The government has laid down predictable budg-etary procedures, a reasonably clear legal framework, andhas operated within the limits provided by the budgetlaws.A two-year budget framework first introduced in1999 encouraged the authorities to begin formulatingmedium-term fiscal policy, a key development in a regionwhere fiscal imbalances have often undermined the abilityof governments to respond to pressing social needs such aseducation, public health, and public investment for infra-structure—all of which are critical to enhancing the coun-try’s competitiveness. Consistent with the above approachto fiscal management, Slovenia has a relatively low level ofpublic indebtedness.At 29 percent of GDP in 2004, thestock of general government public debt is not high byEuropean standards, has an adequate maturity and termstructure, and imposes no undue constraints on fiscal policy.

Slovenia has dealt with weaknesses in the banking sys-tem by substantially strengthening the regulatory capabili-ties of the central bank—with the aim of improving theprudential environment—and dealing with problems ofindividual banks on a case-by-case basis. Reforms in thefinancial sector have figured prominently in the govern-ment’s agenda in the last several years and have included anumber of elements.A banking law, adopted in 1999,which provided for the introduction of a deposit insurancescheme, was the first of these reforms, opening the domes-tic banking system to foreign participation and harmonizingthe regulatory environment for banks with EU directives.Second, the country successfully implemented the EUAssociation Agreement, which created the legal basis forthe entry of foreign banks into the local banking systemand eliminated other restrictions on FDI and on the foreignownership of domestic enterprises.A Securities Law, alsoadopted in 1999, regulates the securities market under anewly established supervisory authority.

More recently the government has consolidated thebanking system—which was overcrowded, with severaldozen banks and savings and loan institutions—and priva-tized some of the largest state banks, encouraging thedevelopment of small and medium-sized enterprises.Thesehave proven to be the main engines of growth and jobcreation.

As in other transition economies, the level of totalfinancial intermediation in Slovenia remains low.Totalbanking sector loans to the private sector at the end of2003 stood at some 40 percent of GDP, suggesting that thescope for deepening and expanding the financial sectorremains large.

Social expenditures in Slovenia are among the highestin the region, equivalent to some 17 to 18 percent ofGDP in 2003—well above the EU15 average, which iscloser 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 trans-fers; many of these are not means-tested and are thuspotentially inefficient. Demographic trends in recent yearshave put pressure on the pension and health systems.Partly to address some of these problems, the governmenttook steps to reform the pension system, passing a law cre-ating a supplementary insurance scheme to provide sizableannual expenditure savings and to ensure the viability ofthe system for at least the next five years.The measuresapproved included an increased retirement age for women,reductions in the replacement rate, and minimum statepensions.These reforms put Slovenia ahead of some of itsmore developed neighbors among the EU15, which arealso struggling with the problems associated with theaging of their populations.

The authorities have implemented a cautious publicsector wage policy, balancing the need for fiscal restraintwith maintaining an adequate degree of private sectorcompetitiveness, and improving the efficiency of publicsector employment. More generally, a fairly centralizedwage bargaining process, coupled with restraint shown bythe labor unions, has kept wage growth below productivitygrowth.

A remaining issue is whether, wage moderationnotwithstanding, there are features of the labor market thatmight make it unduly rigid.The IMF notes that Slovenia’semployment protection legislation is more restrictive thanlegislation in other countries in the European Union, par-ticularly its rules for layoffs and sick leave, and suggeststhat, given relatively high structural unemployment, someeasing of these restrictions might be advisable.The govern-ment has begun to experiment with active labor marketpolicies, including training programs, job subsidies, andother measures benefiting workers particularly affected bythe restructuring of traditional industrial sectors.

Looking to hasten the pace of reform ahead of EUentry in 2004, the authorities approved key legislationthat, inter alia, allows for privatization in power generationand distribution in the energy sector, opens the way forprivate ownership of the telecom operator, eases courtprocedures in bankruptcy cases, facilitates further privatiza-tion of port and other maritime facilities, and significantlyreduces the weight of administered prices in the economy.Notwithstanding the impressive progress made during thepast decade, Slovenia still faces a daunting policy agenda ifit is to narrow the gap in per capita income with respectto the EU average.

Having met the key Maastricht criteria, Sloveniashould be among the first of the new accession countriesto adopt the euro, a decision likely to have far-reachingimplications for the country’s business community. Bystrengthening financial links with the rest of Europe it willcontribute to a reduction in interest rates while decreasingcurrency risk.

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III. The competitiveness of Southeast Europe in recentyearsHaving established the starting points for each of the eightcountries covered by this Report, we now turn to an analy-sis of specific competitiveness trends in the region over thepast five years.

Recent competitiveness trends: The Growth CompetitivenessIndexThe Growth Competitiveness Index has been featured inthe annual Global Competitiveness Report of the WorldEconomic Forum since 2001, and provides a number ofyears of comparable results.4 We have recently also devel-oped our new Global Competitiveness Index, which offersan even richer comparative assessment of national compet-itiveness.This first edition of The Southeast EuropeCompetitiveness Report will use the results of both indexes:the Growth Competitiveness Index (Growth CI) will pro-vide a historical context for benchmarking the economiesof this region; the Global Competitiveness Index (GlobalCI) will provide a broader comparative analysis, based onour latest research, which we discuss in section V.

The Growth CI gauges the ability of the world’seconomies to attain sustained economic growth over themedium to long term. It is composed of three pillars, all ofwhich are widely accepted as being critical to economicgrowth: the quality of a given country’s macroeconomicenvironment, the state of its public institutions, and thelevel of its technological readiness and innovative capacity.A combination of hard data (i.e., publicly available infor-mation, such as university enrollment rates, the size of thebudget deficit, or the number of cell telephone users, etc.),along with “soft” data from the Forum’s Executive OpinionSurvey is used to construct the Index.The Survey data areparticularly valuable since they provide textured qualitativedata on concepts that are difficult to measure but are, nev-ertheless, critically important. Examples of Survey data arethe independence of the judiciary, the prevalence ofbribery in public/private transactions, and perceptions ofwaste in the use of public resources.

The basic structure of the Growth CI, outlinedbelow,5 is divided into various subindexes as follows:

Macroeconomic Environment Index• Macroeconomic stability subindex• Government waste subindex• Country credit rating

Public Institutions Index• Contracts and law subindex • Corruption subindex

Technology Index• Innovation subindex6

• Information and communications technologysubindex (ICT)

• Technology transfer subindex

A historical perspective of competitiveness in SoutheastEuropeThe principal advantage of the Growth CI is its ability toprovide a data series that allows for comparisons acrosstime for most SEE countries.This allows us to analyzemajor trends in the competitiveness of each of theeconomies, using the information accumulated over thelast five years.

The number of countries covered by the ExecutiveOpinion Survey has varied from year to year, and some ofthe eight countries of the Southeast European region wereadded only within the last four years. However, with theexception of Albania—which was added in 2005—there isa minimum of two years’ worth of data available for eachcountry.Three countries have been covered for all fiveyears (Bulgaria, Romania, and Slovenia), one has beencovered for four years (Croatia), two for three years(Macedonia, and Serbia and Montenegro), and one fortwo years (Bosnia and Herzegovina).This allows for somehistorical perspective and displays potential trends in thecompetitiveness paths of seven out of eight SoutheastEuropean economies.Table 1 provides a matrix identifyingthe coverage of each of the seven economies over the pastfive years.

We now turn to an analysis of individual country performances over the years available, indicating trends andthe relative competitive advantages and disadvantages ofeach nation where possible. Figure 2 displays the evolutionof 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 individualvariables is available (through historical country profiles),from the World Economic Forum upon request.7

Slovenia stands out clearly among the region’seconomies.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 theGrowth Competitiveness Index 2001–2005

Country 2001 2002 2003 2004 2005

Albania XBosnia and Herzegovina X XBulgaria X X X X XCroatia X X X XMacedonia X X XRomania X X X X XSerbia and Montenegro X X XSlovenia X X X X X

Source: The Global Competitiveness Report, various years

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It would seem that Slovenia is well positioned forgrowth in the medium to long term, having shown a con-sistently strong performance over the four years assessed,with ranks varying between 28 and 33 over that period.Slovenia’s score has remained stable, with just a slightdecline in the overall score between 2004 and 2005.Although Slovenia’s overall steady performance has beenderived from relatively good scores on all three indexes,there have certainly been a number of variations on par-ticular subindexes.

Slovenia’s overall performance in technology hasremained strong throughout the five years, but showed amarked deterioration in the technology transfer subindex,which was accompanied by an improvement in the area ofinnovation. It would therefore seem that Slovenia is gradu-ally making the transition toward increased innovation, andreducing its dependence on technology transfers. It may,however, be prudent during this phase for the country tocontinue to adopt new technologies from the core inno-vating economies, alongside its own increased efforts toinnovate.

Slovenia’s performance in the area of PublicInstitutions Index is mixed.Although the corruptionsubindex indicates improvement over the period, in whatappears to have been a concentrated effort to attack cor-ruption before joining the European Union, Slovenia’sranking on the contracts and law subindex deterioratedfrom 36 in 2001 to 48 in 2005. In particular, the judiciaryin the country is seen as significantly and increasingly lessindependent from undue influence, while propertyrights—a prevailing problem in the region—are not seenas sufficiently protected.

Yet another area where improvements could be madeis the relations between government and the private sectorand, more specifically, the neutrality that should character-ize those relations.This is a serious problem in manycountries of the world, where arm’s length relationshipswith all agents in the private sector are frequently theexception rather than the rule, with governments often“playing favorites.” Lack of even-handedness on the partof the government may manifest itself in many ways—from granting fiscal privileges and tax exemptions to firmsclosely connected to members of the government to theway in which public procurement contracts are awarded.The effects of these actions are always detrimental for acountry’s competitiveness. It will be important for Sloveniato tackle these issues if it is to maintain or improve its cur-rent level of competitiveness.

As noted earlier with regard to the macroeconomicenvironment, Slovenia has met with considerable successin laying a foundation of stability. Its overall rank in thisarea is, by a significant margin, the highest in the region,although there is scope for further progress if the focusbroadens to include the whole of the European Union.Improvements in the efficiency of the use of governmentresources could boost Slovenia’s competitiveness ranks.TheWorld Economic Forum has tried to capture this conceptin a variety of ways over the years, and in our latestattempt, in 2005, Slovenia was assigned a fairly low score(and correspondingly low rank), reflecting concerns in thecountry’s business community about inefficiencies in gov-ernment spending. Slovenia does not do tangibly worsethan other countries in the SEE region, but this itself is

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Figure 2. Evolution of the Growth Competitiveness Index for Southeast European economies, 2001–2005

Source: The Global Competitiveness Report, various years

Scor

e

5

4.8

4.6

4.4

4.2

4.0

3.8

3.6

3.4

3.2

3.0

Albania

Bosnia andHerzegovenia

Bulgaria

Croatia

Macedonia, FYR

Romania

Serbia andMontenegro

Slovenia

2001 2002 2003 2004 2005


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Tabl

e 2.

Ran

king

s an

d sc

ores

of S

outh

east

Eur

opea

n co

untr

ies

on th

e G

row

th C

ompe

titiv

enes

s In

dex,

200

1–20

05

2004

2005

2001

2002

2003

2004

2005

2002

2003

2004

2005

2003

2004

2005

2001

2002

2003

2004

2005

2003

2004

2005

2001

2002

2003

2004

2005

Mac

roec

onom

ic

Ran

k85

9169

7573

6062

7055

5968

8077

7567

5881

7173

8710

211

139

5037

3935

Envi

ronm

ent I

ndex

Sco

re3.

23.

23.

13.

23.

23.

84.

03.

43.

73.

83.

83.

03.

43.

63.

13.

82.

93.

53.

72.

82.

83.

04.

04.

04.

34.

34.

6

Mac

roec

onom

ic s

tabi

lity

Rank

6170

5968

7654

5141

5160

9067

6646

5671

8189

8386

102

101

3235

5348

35su

bind

exSc

ore

4.3

4.3

3.5

3.6

3.7

4.4

4.6

4.3

4.2

4.3

4.1

3.9

4.2

4.6

3.6

3.3

3.6

3.9

4.1

3.5

3.2

3.8

4.4

4.4

4.2

4.4

4.8

Gov

ernm

ent w

aste

Ra

nk91

110

5561

8683

8977

5980

7479

6784

466

9665

9056

5910

860

6831

6362

subi

ndex

Scor

e2.

32.

13.

02.

72.

32.

62.

71.

52.

82.

62.

82.

32.

82.

73.

56.

21.

92.

92.

62.

93.

02.

32.

62.

23.

72.

93.

2

Coun

try

cred

it ra

ting

Rank

9189

5856

5754

5649

4951

5583

8481

6666

6661

6193

9698

2726

2927

27Sc

ore

1.9

2.2

2.4

2.9

3.0

3.8

4.0

3.4

3.6

4.0

4.1

1.8

2.2

2.4

1.9

2.4

2.6

3.3

3.7

1.5

1.7

2.0

4.6

4.9

5.0

5.3

5.6

Pub

lic

Inst

itut

ions

Inde

xR

ank

7886

5147

6256

6257

6776

7393

9296

5267

8674

7877

8569

3023

3531

35S

core

3.8

3.7

4.1

4.3

4.1

4.4

4.2

4.0

3.9

3.9

4.0

3.1

3.4

3.5

4.1

3.4

3.3

3.9

3.8

3.6

3.6

4.1

4.9

5.3

5.1

5.3

5.1

Cont

ract

s an

d la

w

Rank

8010

164

6792

9110

360

8189

8096

9611

139

6583

7485

7783

9236

2643

4748

subi

ndex

Scor

e3.

13.

03.

02.

92.

72.

92.

93.

33.

13.

03.

32.

52.

82.

74.

33.

03.

03.

53.

33.

23.

13.

14.

54.

84.

44.

44.

3

Corr

uptio

n su

bind

exRa

nk66

7434

2735

3038

4554

6165

8687

8264

6790

7171

7484

5531

2632

2325

Scor

e4.

54.

45.

15.

75.

55.

85.

64.

84.

74.

74.

73.

74.

04.

23.

83.

83.

64.

44.

44.

04.

15.

05.

35.

85.

86.

26.

0

Tech

nolo

gy In

dex

Ran

k82

9950

5663

5961

4341

4651

7076

9147

5555

4749

6675

6830

2524

2632

Sco

re3.

22.

64.

33.

53.

73.

83.

34.

04.

34.

23.

53.

53.

32.

74.

33.

63.

94.

13.

53.

73.

33.

15.

24.

64.

74.

74.

1

Inno

vatio

n su

bind

exRa

nk85

8239

3943

4650

5048

4948

6372

7753

5456

5854

6268

6127

2423

2323

Scor

e1.

82.

03.

22.

62.

62.

52.

52.

22.

42.

42.

52.

12.

02.

12.

52.

22.

32.

32.

42.

12.

12.

43.

83.

33.

53.

43.

6

Info

rmat

ion

and

Ra

nk68

7650

4449

4748

3739

4240

6367

7059

5454

4850

5564

6428

2626

2627

com

mun

icat

ion

Scor

e3.

42.

24.

53.

63.

94.

12.

94.

04.

54.

53.

23.

43.

42.

34.

03.

23.

74.

12.

73.

73.

42.

45.

55.

15.

35.

34.

1te

chno

logy

sub

inde

x

Tech

nolo

gy tr

ansf

erRa

nk76

8424

5067

6258

3543

4856

5970

8212

3438

2420

6069

4814

3851

4654

Scor

e3.

43.

34.

53.

83.

83.

94.

14.

54.

64.

34.

24.

23.

53.

55.

44.

64.

74.

85.

04.

13.

54.

45.

24.

54.

44.

44.

2

Gro

wth

Com

peti

tive

ness

R

ank

8195

5962

6459

5858

5361

6281

8485

5666

7563

6777

8980

3128

3133

32In

dex

Sco

re3.

43.

23.

83.

73.

74.

03.

83.

84.

03.

93.

73.

23.

33.

33.

83.

63.

43.

93.

73.

43.

23.

44.

74.

64.

74.

74.

6

Tota

l num

ber

of c

ount

ries

104

117

7580

102

104

117

8010

210

411

710

210

411

775

8010

210

411

710

210

411

775

8010

210

411

7

Sour

ce: T

he G

loba

l Com

petit

iven

ess

Repo

rt, v

ario

us y

ears

Bul

gari

aB

osni

a an

d H

erze

govi

naCr

oatia

Mac

edon

ia, F

YRRo

man

iaSe

rbia

and

Mon

tene

gro

Slov

enia


surprising, given the country’s stage of development andperceptibly better performance in most other areas.8

The Growth CI places Bulgaria in the second tier ofSoutheast European countries, together with Romania andCroatia. Bulgaria was ranked 58th in the Growth CI in2001, dropping to 64th place by 2003. However, since2004, Bulgaria’s overall ranking has improved, movingback to 58th in 2005, despite the inclusion in the index ofa number of new countries that entered above Bulgaria. Itis likely that this is the result of a significant last push asBulgaria prepares to join the European Union, and mayindicate a general upward trend in the country’s level ofcompetitiveness. On average, Bulgaria’s best scores (andranks) were in its public institutions, but not by a largemargin.

It is interesting to note that while Bulgaria performsgenerally well with regard to corruption—placing thecountry second in the region behind the leader,Slovenia—its overall performance on the PublicInstitutions Index is pulled down by its scores on the con-tracts and law subindex, where its ranking has declined,most dramatically between 2002 and 2005.Within thissubindex, Bulgaria has shown evident deterioration on allfour components: judicial independence, property rights,favoritism in the decisions of government officials, and thebusiness costs associated with organized crime. It is nottypical for a country to display such a large gap betweenthe quality of the environment underlying contracts andlaw, on the one hand, and the incidence of corruption intransactions between the public and the private sector, onthe other. However, Bulgaria has shown that it has theinstitutional capacity to tackle bribes and other forms ofcorruption, and will now have to improve other key ele-ments of the regulatory and judicial environment.

The quality of Bulgaria’s macroeconomic environ-ment has improved over the last several years, showing inits score (4.0) and rank (62) in 2005.This has mainlyreflected sustained improvements in the performance onseveral macro variables. In particular, the budget deficit hasnarrowed and even moved into surplus in 2004, and inter-est rate spreads in the financial sector have continued toshrink.This in turn has led to changes—for the better—in the perception of the short-term economic outlookwithin the business community, against the background ofeasier access to credit by the enterprise sector.

Bulgaria’s performance on the Technology Index hasbeen mixed. Particular strengths are the level of tertiaryeducation in the innovation subindex and the number oftelephone lines in the ICT subindex. Particular disadvan-tages appear to be factors such as the level of technologicalsophistication within the innovation subindex, where ithas retained a static score of about 2.6—a significant dete-rioration in rank as other countries have made progress. Inaddition, compared with other countries, Bulgaria hasshown a significant deterioration on government-relatedissues such as government prioritization of ICT and gov-ernment success in ICT promotion.With the exception of

these highlights, Bulgaria generally displays ranks between40 and 70 on measures of technology, putting it far belowthe regional leader, Slovenia.

For a country experiencing such recent political tur-moil, Croatia entered the Growth CI at a relatively highlevel in 2002, ranking 58th, four places ahead of Bulgaria.This was followed by a leap of five places in 2003, whenCroatia ranked 53rd, before falling back to 61st and 62ndplaces in 2004 and 2005, respectively.Although the timeperiod is too short to predict a longer trend in the country’scompetitiveness, it is clear that if Croatia’s performanceremains steady, it will soon be overtaken by the moredynamic economies in the region: Bulgaria already sur-passed Croatia in 2004, taking second position in theregion (see Figure 2), while Romania received a very similar score.

Although Croatia’s scores on each of the threesubindexes have remained fairly consistent, it has shown agradual deterioration in rank on all three indexes over thelast four years as other countries have improved their com-petitiveness.The most marked deterioration has been inthe area of public institutions, where Croatia started out at57th in 2001 but fell to 76th place in 2004, beforeimproving slightly to 73rd place by 2005.This is particu-larly troubling, as it is unlikely that the country will beable to fulfill EU accession requirements without thestrong and stable institutions in place to implement therequired policies and reforms.

Over the years Croatia saw a significant deteriorationon those indicators that capture elements of contracts andlaw, falling from 60th place in 2001 to 89th place in 2004.And, although this year’s progress back up to 80th placemight herald a movement back in the right direction,many weaknesses remain. Particular areas requiring attentionare the country’s judicial independence, property rights,and favoritism in the decisions of government officials, allof which add to business costs and undermine the qualityof a country’s business environment. Corruption levelsappear to have remained largely static according to thescores received on the corruption subindex, but Croatia’sranks 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 othernations make progress.As noted earlier, these weaknessesreflect serious concerns on the part of the business com-munity about key elements of the institutional environ-ment, and they could jeopardize Croatia’s timely accessionto the EU.

Croatia has shown a steady and significant deteriorationon the macroeconomic stability subindex, falling from 41stplace in 2002 to 90th in 2005.Although inflation has beenbrought under control, the budget deficit is seeminglystuck at over 5 percent of GDP.Access to credit has tight-ened, and the mood in the business community, as reflectedin an indicator of short-term recession expectations, isunusually somber.This adds to earlier concerns aboutCroatia’s business environment, since it appears that it has

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become increasingly difficult for existing businesses to notonly function (because of deteriorating property rights andpoor contract enforcement that result from a weak judicialsystem), but also to obtain funding to expand their activi-ties. In addition, it is clear that Croatia will have a hardertime attracting foreign businesses in such conditions, againhighlighting the gap in relation to the European Unionand the urgent need to reverse this negative trend.

The only area in which Croatia has not seen signifi-cant deterioration is in technology readiness and usage,although even there the general trend has been slightlydownward.A number of specific variables stand out forstrong negative trends: these are government prioritizationof ICT and government success in ICT promotion, as wellas technological sophistication and firm-level technologyabsorption, which are driving the country’s innovativecapacity.Although Croatia’s overall rankings on theTechnology Index have remained stable, the deteriorationin these four crucial variables highlights the vulnerabilitiesin the future of technological usage and readiness inCroatia.

As shown in Figure 2, Romania has shown the great-est volatility on the Growth CI score during this four-yeartime period, starting out with a score of 3.8 in 2001, fol-lowed by two years of a significant decline, and then risingback to 3.7 by 2005.As in the case of Bulgaria, recentimprovement in the country’s competitiveness might bedue to efforts on the part of the Romanian authorities totry to make the tentative 2007 EU accession date a reality.This is likely to have been the case in 2004, when bothRomania and Bulgaria witnessed other economies ofEastern Europe acceding to the European Union, provid-ing a further motivation to implement improvements andreforms.

However, the country still has a long way to go.Although it may be encouraging for Romania andBulgaria (along with Croatia) to note that they are at leaston par with Poland (the lowest-ranking EU25 nation inthe 2005 Growth CI), it should be recalled that this ismainly a result of a deterioration in Poland’s performancerather than an impressive catch-up feat by the three SEEcountries.

Romania’s performance on the Technology Index hasremained the steadiest out of the three indexes of theGrowth CI, as was the general trend in Southeast Europe.Within this index, Romania scored (and ranked) best onthe technology transfer subindex, ranking 20th in 2005. Inparticular, Romania appears to be using FDI as a signifi-cant means of obtaining new technologies. Finally, on theinnovation subindex, Romania has shown an evident dete-rioration, performing particularly poorly on factors such astechnological sophistication, company spending on researchand development, and university/industry research collab-oration. If Romania is to increase or even maintain itspresent level of technological competitiveness, it will haveto focus on these longer-term aspects in the near future.

Romania’s general trend on the public institutionssubindex in the first three years was downward, followedby a marked improvement in 2004, which remained rathersteady in 2005. In particular, Romania’s rank on the con-tracts and law subindex showed the most dramatic nega-tive shift, plummeting from 39 in 2001 to 83 in 2003.Thecorruption subindex rank also deteriorated, falling from64th place in 2001 to 90th in 2003.This has the sameimplications for Romania as for Bulgaria: implementingthe reforms necessary for accession to the EuropeanUnion in 2007 will be a difficult task in an inefficient,corrupt, and weak institutional environment. In this con-text, the improvement on corruption between 2003 and2005 is encouraging, but it is imperative that furtherprogress be made.

Romania’s scores and ranks on the MacroeconomicEnvironment 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 declinein 2002 and 2003, and finally an improvement in 2004and 2005. On the negative side, inflation in Romania,while improving from 45.7 percent in 2001 to 11.9 per-cent in 2004, still puts the country at 107th place out of117 economies.At a time when inflation rates are comingdown quickly everywhere—last year witnessed the lowestinternational inflation rate in the post-War period—therecent deceleration in the consumer price index seen inRomania has not been good enough, and further progresswill have to be made in the period ahead of EU entry.There is evidence that further progress could be made toimprove resource allocation in the financial sector: the dif-ference between lending and deposit rates remains unusu-ally high, suggesting the existence of rigidities in thefinancial sector.

Macedonia was included in the Growth CI for the first time in 2003, providing three years of data forcomparison. First, it is important to note that, althoughMacedonia fell from 81st to 85th place between 2003 and 2005, this was mainly because of the addition of newcountries coming onto the index above Macedonia, andnot a reflection of Macedonia’s own performance.Macedonia has in fact increased its Growth CI score from 3.2 to 3.3.

Macedonia’s Macroeconomic Environment score hasimproved, from 3.0 to 3.6, resulting in a rise in rank from80 to 75.This was mainly driven by reduced inflation, theability of the government to move from a fiscal deficit to asurplus (from –4.8 percent of GDP in 2002 to +0.4 percentof GDP in 2004) and an increase in the national savingsrate (from 8.4 percent to 16 percent), although this stillremains quite low.

Concerning the quality of its public institutions,Macedonia’s ranks are rather poor and have shown almostno improvement. In particular, the business costs associatedwith organized crime (which resulted in 114th place in2005), property rights, and judicial independence have all

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been significant problems in all three years, as is the preva-lence of bribery in economic transactions.

Serbia and Montenegro, like Macedonia, was added tothe index in 2003. It entered with a rank of 77 and fell to89th place in 2004 before moving up to 80th place in2005.The most significant deterioration over the threeyears has been in the country’s macroeconomic environ-ment, where the country fell from 87th place in 2003 to 111th place in 2005.This was the result of increasedpessimism within the business community concerning thecountry’s economic outlook and a significant reduction inthe national savings rate—from 9.9 percent to a negativesavings rate of –1.0 percent. On a positive note, between2003 and 2004 the public sector deficit was greatlyreduced, and access to credit for business development hasalso improved over the past year.

Serbia and Montenegro’s contracts and law scores,while generally better than on the MacroeconomicEnvironment Index, have also shown a marked deteriora-tion. In particular, there is a perception that favoritism inthe decisions of government officials has become a signifi-cant problem. Property rights are not sufficiently protectedand the judiciary is not seen to be sufficiently independentin meting out justice. Only with regard to the costs oforganized crime for business has there been a marginalimprovement over the three years, although these costs stillremain very high.And although the country performs bestin the area of technology, here again there has been deteri-oration between 2003 and 2005. Specifically, although thecountry seems to have improved at adopting technologiesfrom abroad through technology transfer, there has been aperceived deterioration in the country’s ability to harnessthe new information and communication technologies.

Bosnia and Herzegovina has been included in theGrowth CI since 2004.Although two years is a relativelyshort time, it is still possible to discern patterns in thecountry’s scores and ranks.As Table 2 shows, the countryhas fallen in rank, from 81 in 2004 to 95 in 2005.Thisoverall decline can be traced to a clear deterioration in allareas covered by the Index. Bosnia and Herzegovina hasfallen somewhat in the Macroeconomic EnvironmentIndex, where particular weaknesses are a very low nationalsavings rate and strong pessimism within the businesscommunity about the short-term economic outlook, bothof which placed the country a very low 114th out of 117countries in 2005.

Bosnia and Herzegovina also suffers from weaknessesin its ability to harness new technologies, and in particularit would seem that the country’s ability to adopt newtechnologies developed abroad through technology trans-fer is becoming increasingly difficult. However the greatestweakening since last year is in the area of contracts andlaw, where the country fell from 80th place in 2004 to101st in 2005. Particular weaknesses are the costs oforganized crime for business, a lack of independence onthe part of the judiciary, and insufficient protection ofproperty rights that places the country 113th out of 117

countries.These are all areas that will require seriousattention if the country is to fulfill the requirements foreventual accession to the European Union.

IV. Benchmarking Southeast Europe’s present competitiveperformanceThe EU expansion in May 2004 included several countriesfrom Central and Eastern Europe, bringing the SEE regionto the European Union’s doorstep.At present, Slovenia isthe only country within the SEE region that is already anEU member. Candidate countries include Bulgaria andRomania (scheduled to join in 2007) and Croatia (tenta-tively scheduled to join in 2009), and Macedonia, whichgained candidate status in December 2005. Meanwhile,Albania, Bosnia and Herzegovina, and Serbia andMontenegro’s relations with the European Union arepresently being guided by its Stabilisation and Associationprocess.9 Table 3 summarizes the current relationship ofeach of the eight countries to the European Union. In thiscontext, the level of EU performance provides a bench-mark for the level of competitiveness required of thesecountries to contribute effectively to the overall economicperformance of the European Union.

Given the importance of the European Union as abenchmark for the region, in the analysis that follows weprovide a comparison with the average performance of theEU25 in order to assess how the SEE countries comparewith the present level of competitiveness of the EuropeanUnion as a whole. Since most of the ten new accessioncountries are from Central and Eastern Europe and have a lower level of competitiveness than the previous 15-member EU, we show the average performance of boththe EU25 and the previous EU15.This provides a morestringent benchmark and shows the level of competitivenessof the region prior to the May 2004 accession by the newmember countries. In addition to the regional averages,and to allow for more detailed comparisons, we also showthe performance of selected European countries of a sizeor level of development comparable to those of the SEEcountries.

In addition, we provide two regional comparisonsfrom outside of Europe: Latin America and the East AsianNewly Industrializing Countries (NICs: Hong Kong,Singapore, and Taiwan). Latin America provides a compari-son with the performance of another developing economyregion that includes a number of similarly small, proximatecountries, many of which have faced political and economiccrises over the past decade.This gives a picture of how theSEE countries compare with a region facing some of thesame stabilization and structural reform challenges.Theperformance of the East Asian NICs offers an additionalcomparison with small open economies that have managed,through persistently good economic policies, to lift theircitizens from poverty to prosperity in the span of only afew decades.

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Finally, although we do not provide data on all 117countries covered by the Global Competitiveness Report2005–2006, we present rankings for the SEE countries outof the entire sample of 117 countries.This facilitates themost comprehensive comparison, as it allows evaluation of the performance of the SEE countries against a samplecovering over 98 percent of world gross domestic product(GDP).

Table 4 shows the per capita GDP for the countriesof the SEE region, measured at purchasing power parity,going back to 1975 or the most recent available date.Thetable shows that the average per capita GDP of Romaniain 1975 (US$2,350)—the only income available for theregion for that year—was equal to approximately 40 percentof the average income of the EU15 countries (US$5,851),and on a par with the Latin America average and that ofthe East Asian NICs. However, by 2004, the average per

capita GDP of the EU15 was four times higher than thatof Romania’s per capita GDP, and nearly three and a halftimes higher than the SEE average.

Most strikingly, the NICs—which were quite poor in1975, with an average per person income only slightlyabove that of Romania—had joined the ranks of the world’swealthy countries, with per capita income three and a halftimes higher than that of Romania, and more than threetimes higher than the SEE average.The NICs demonstratewhat can be achieved in a relatively short period, giventhe political will and sound, sustained economic policies.As we will see in the next section, these countries are nowamong the most competitive in the world.

Table 5 measures the standing of the SEE countrieson a number of economic and social indicators.The firstcolumn shows that unemployment has become an urgenteconomic and social problem for many of the countries in

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

Country Status of relationship with the EU

Albania Participates in the Stabilisation and Association process, which should eventually result in theconclusion of a Stabilization and Association Agreement (SAA). Benefits from autonomous tradepreferences, national and regional financial assistance under the Community Assistance forReconstruction, Development and Stabilisation (CARDS).

Bosnia and Herzegovina A feasibility study for a SAA was published by the Commission in November 2003. The feasibilitystudy 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 openingof negotiations, initiating the process of SAA negotiations. Benefits of EU Assistance underCARDS program.

Bulgaria Applied for EU membership in December 1995. Considered as an “acceding State” following thesignature of the Accession Treaty in April 2005. Should join the EU in January 2007, provided themembership 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 reviewthe situation, and may at that time recommend the postponement of accession by one year.

Croatia SAA signed in October 2001. Applied for EU membership in February 2003. Became an officialcandidate 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.

Macedonia, FYR SAA signed with the EU in April 2001. Applied for EU membership in March 2004, and inDecember 2005, formally granted candidate status, although no date was set for the opening of negotiations. Benefits of EU Assistance under CARDS program.

Romania 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. TheCommission 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.

Serbia and Montenegro 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 Montenegrois "sufficiently prepared to negotiate an SAA with the EU" and negotiations were then opened in October 2005. Benefits of EU Assistance under CARDS program.

Slovenia EU member country since May 2004.


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Table 5. Selected economic and social indicators for Southeast Europe

Country

Albania 14.4 25.4 72.0 55.3 5.4 5.7Bosnia and Herzegovina N/A 18.0 73.0 58.0 7.4 6.0Bulgaria 12.0 12.8 72.0 41.1 2.1 10.4Croatia 14.0 11.0 75.0 57.3 0.4 3.2Macedonia, FYR 37.2 30.2 72.0 26.4 5.0 3.2Romania 8.0 21.5 71.0 21.4 1.1 7.3Serbia and Montenegro 15.2 10.0 73.0 80.0 6.4 4.0Slovenia 6.1 N/A 77.0 29.1 0.2 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

Unemployment rate, 2004

Percentage of the population below thenational poverty line,2004 or most recent

year availableLife 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

Table 4. Gross Domestic product per capita, measured at Purchasing Power Parity since 1975 (in US$)

Country/Region 1975 1980 1985 1990 1995 2000 2004

Albania — 1,944 2,272 2,601 2,674 3,641 4,937Bosnia and Herzegovina — — — — — — 5,504Bulgaria — 2,904 3,921 5,797 5,704 5,710 8,500Croatia — — — 7,133 6,016 8,091 11,568Macedonia, FYR — — — 4,610 4,314 5,070 7,237Romania 2,350 4,605 6,077 6,219 6,569 6,540 7,641Serbia and Montenegro — — — — — — 4,858Slovenia — — — — 13,254 17,333 20,306SEE Average 2,350 3,151 4,090 5,272 6,422 7,731 8,819

EU15* 5,851 9,283 11,644 16,730 20,512 25,743 30,637of which:

Greece 4,829 7,742 9,030 11,464 13,415 16,501 20,362Ireland 3,435 5,841 8,051 12,687 17,921 29,866 37,663Portugal 3,422 5,857 7,207 11,176 13,812 17,290 19,038

EU25** 5,150 8,350 10,411 13,978 16,237 20,502 23,561of which:

Czech Republic — — — — 12,530 13,991 18,357Estonia — — — 7,957 6,542 10,066 15,217Hungary 3,366 5,535 7,333 9,517 9,638 12,279 15,546Latvia 2,695 4,429 5,954 8,487 5,057 7,062 11,845Lithuania — — — 8,349 5,618 7,278 12,919Poland — — — 5,684 6,824 9,051 12,244

Latin America*** 2,503 3,487 3,676 4,330 5,402 6,240 6,481

East Asian NICs**** 2,709 5,699 7,907 13,558 19,682 23,778 27,657

* The EU15 includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the UnitedKingdom.

** 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


the SEE region. Only two countries, Romania andSlovenia, have unemployment rates lower than 10 percent,and Macedonia’s rate exceeds 35 percent. High rates ofunemployment erode a government’s ability to provideservices funded by taxes, and also have major consequencesfor poverty and inequality.

The second column in Table 5 shows the percentageof the population living below the national poverty line ineach country. Not surprisingly, poverty rates are quite highin the region.With the exception of Slovenia, all countrieshave poverty rates of at least 10 percent; some—such asMacedonia, where the rate exceeds 30 percent—are muchhigher.The high poverty rates are echoed by the relativelylow life expectancy in the region, by European standards,as shown in the third column. For the most part, lifeexpectancy is well below 75 years of age, with the excep-tions of Slovenia (77 years) and Croatia (75 years). Bycomparison, most of the EU15 countries have a lifeexpectancy approaching 80 years. Clearly, raising the livingstandards in the region must remain a priority.

The fourth column shows government debt as a percentage of GDP.We see that although some of thecountries have manageable levels of debt, such asRomania, Macedonia and Slovenia, others have extremelyhigh debt ratios. Four countries in particular—Albania,Croatia, Bosnia and Herzegovina and, most strikingly,Serbia and Montenegro—have such high levels of debtthat it is difficult for them to properly allocate resources orensure the investment spending necessary for improvingcompetitiveness and raising living standards.When govern-ments are forced to allocate such a relatively large share ofcurrent expenditures to debt service, their ability to allocatemuch-needed resources to education, public health, andinfrastructure is seriously handicapped.This, in turn,undermines their competitive positions.

The last two columns show that capital has beenflowing into the region in the form of aid and FDI, albeitunevenly. FDI inflows are particularly important, as asource of non-debt capital and as vehicles for technologytransfer and know-how. FDI has been a key ingredient ofstructural transformation in Central and Eastern Europe,and it is expected to play a similar role in the SEE coun-tries. FDI inflows in relation to GDP in 2004 comparewell, on average, with the level of inflows seen in Centraland Eastern Europe during the past decade.

V. Measuring the current competitive landscape inSoutheast Europe: The Global Competitiveness IndexIn this section, we shall show in greater detail the compet-itiveness profiles of each country in the SEE region accord-ing to the new Global Competitiveness Index.The goalhere is to identify the specific areas on which governmentsshould focus in order to improve national competitiveness.We shall illustrate how these eight SEE countries are per-forming vis-à-vis each other by comparing and contrastingthe different areas driving their levels of competitiveness.

Then, in order to place the competitive performances ofthe SEE countries in an international context, we comparethem with the performances of the four other regionalcountry groupings described in the section above: those ofthe EU15, the EU25, Latin America, and the East AsianNICs.

Over the years, the World Economic Forum has integrated the latest thinking on competitiveness into itsanalysis; the new Global Competitiveness Index (GlobalCI) reflects state-of-the-art competitiveness research.10

The Global CI is the most comprehensive competitivenessindex to date, as it measures the macro- and microeconomicdrivers of productivity across a large number of countries.In this sense, it has built on the strengths of the GrowthCI discussed in the previous section, but is significantlybroader in scope.The Global CI makes it possible to assessthe competitiveness of the SEE countries across an evenwider range of categories than were considered in thepast, measuring “the set of institutions, policies and factorsthat set the sustainable current and medium term levels ofeconomic prosperity.”

We have learned from our years of research on com-petitiveness that its measurement is a complex undertaking.One cannot simply pinpoint one or two areas as beingcritical for growth and prosperity. In this light, the GlobalCI, with its nine distinct “pillars,” captures the idea thatmany different elements matter for competitiveness:

1. Institutions2. Infrastructures3. Macroeconomy4. Health and primary education5. Higher education and training6. Market efficiency (goods, labor, financial)7. Technological readiness8. Business sophistication9. Innovation

Each of these pillars plays a critical role in driving nationalcompetitiveness.

The quality of the institutional framework in whichbusinesses operate is critical to the efficient functioning ofthe economy, and to the vitality and health of businesses.Strong public institutions ensure that property rights areprotected, that the court system is free from undue influ-ence, that government policies are established in an effi-cient and transparent manner, and that businesses are nothindered by high levels of corruption. Private institutionsmust also play their part, with firms that function ethicallyand that are accountable and transparent to the public.

Without quality physical infrastructure it is of courseimpossible to ensure the efficient functioning of the economy. Efficient modes of transport for goods, people,and services—such as good-quality railroads, ports, and air transport—are vitally important, as are an electricitysupply free of interruption and a solid telecommunicationsnetwork.

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The importance of macroeconomic stability for com-petitiveness is well known. It is impossible for businesses tomake informed decisions when inflation is spiralling out ofcontrol, or when large government budget deficits lead tothe misallocation of resources and drive up the cost ofcapital.When the repayment of government debt isdevouring a major portion of a country’s resources, thoseresources cannot be allocated effectively. Often, wheredebt servicing costs are high, governments have to curtailpublic investment or, worse, vital spending on educationand public health. In extreme cases, governance is turnedinto emergency cash management as authorities try toavert debt default; they then have little or no time for pol-icy formulation and reform on which sound competitive-ness strategies are based.

In order for a country to be competitive, it must havehigh-quality human capital, which can be separated intotwo categories: health and primary education and highereducation and training.The first category concerns theminimum requirements needed for workers to functionproperly when performing basic tasks. It can be measuredby the overall health of the workforce and the quality andadequacy of primary education.The second category isnecessary for more sophisticated business processes, asmeasured by the quantity of secondary and tertiary education, the quality of the educational system, and theavailability of specialized training for the workforce.

The efficiency with which the various factor marketsin the economy function is critical for its underlying productivity and competitiveness, as it ensures the properallocation of economic factors to their best use.Three vitaltypes of market efficiency are measured in the Global CI:goods markets, labor markets, and financial markets. Goodsmarket efficiency ensures that products and services aremost efficiently traded in the economy.To ensure the bestpossible environment for the exchange of goods, theremust be a minimum of impediments to business activitythrough government intervention, such as distortionary orburdensome taxes and misallocation of resources; healthymarket competition should drive business productivity.Productivity and competitiveness are also propelled bylabor market efficiency. Labor markets must be sufficientlyflexible to be able to shift workers from one economicactivity to another quickly, and to allow for wage fluctua-tions without social disruption. Further, efficient labormarkets ensure a clear relationship between worker incen-tives and their efforts. Financial market efficiency meansthat financial resources are allocated most effectively in theeconomy. Sophisticated financial markets must make capitalavailable for business investment from such sources as cred-it from a sound banking sector, well regulated securitiesexchanges, or venture capital.

Technological readiness indicates the extent to which acountry can harness existing technologies to enhance theproductivity of its industries.This differs from technologicalinnovation—it is not necessary to invent the telephone orthe Internet in order to capitalize on their productivity-

enhancing qualities. Rather, it means that firms in compet-itive countries are aggressive in integrating existing andnew technologies into their production processes.

The business sophistication of firms is critical for pro-ductivity at the top end of the global value chain, and isdriven by the quantity and quality of local suppliers, well-developed production processes, and the extent to whichcompanies in a country are turning out the most sophisti-cated products.

Finally, innovation is critical, especially for those coun-tries that have moved very close to the technology frontier.As well as making the maximum use of existing technolo-gies, countries must have the necessary framework to ensurethat they are at the forefront of innovation in products andprocesses.This requires sufficient business investment inresearch and development, high-quality scientific researchinstitutions, collaboration in research between universitiesand industry, and protection of intellectual property.

As was the case for the Growth CompetitivenessIndex discussed earlier, the nine pillars are measured usingboth “hard” data and data from the Executive OpinionSurvey. More details on the specific data included to meas-ure each pillar are available from the World EconomicForum upon request.11

The Global CI is also innovative in taking intoaccount differing levels of country development.What isimportant for improving the competitiveness of a countryat one stage of development will be less important for acountry in another stage.What presently drives productivi-ty in the United States is necessarily different from whatdrives it in Croatia. In other words, economic developmentprogresses in stages.Thus, the model separates countriesinto three specific stages: factor-driven, efficiency-driven,and innovation-driven.

In the factor-driven stage (stage 1), countries competebased on low prices.They sell commodities or simpleproducts, taking advantage of such factors as low-costlabor and inexpensive natural resources.At this stage ofdevelopment, the basic ingredients of competitivenessinclude strong institutions, adequate infrastructure, a stablemacroeconomic environment, and sufficient health andprimary education levels.

As countries move into stage 2, the efficiency-drivenstage, it is important for them to develop more efficientproduction practices. Product quality rather than low pricedrives competitiveness at this stage, which depends moreon efficient goods, labor and financial markets, educationand training programs that prepare the workforce for morestreamlined production (higher education and training),access to the latest technologies (technological readiness),and large markets that allow companies to exploiteconomies of scale.

In the third innovation-driven stage, countries can nolonger compete just by being efficient. Now companiesmust compete through innovation, producing new anddifferent goods, using the most sophisticated productionprocesses.

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So, although all nine pillars matter to a certain extentfor all countries, the importance of each one depends on acountry’s particular stage of development.To take this intoaccount, the pillars are organized into three subindexes,each critical to one particular stage of development.Thebasic requirements subindex groups those pillars most criti-cal for countries in the factor-driven stage.The efficiencyenhancers subindex includes those pillars critical for coun-tries in the efficiency-driven stage.And the innovation andsophistication factors subindex includes all pillars critical tocountries in the innovation-driven stage.The threesubindexes 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)• Business sophistication (pillar 8)• Innovation (pillar 9)

The Global CI implements the concept of developmentalstages by weighting each of the subindexes differently,depending on the stage of a given country—in other

words, the index places more weight on those pillars thatare most important at a given stage of a country’s develop-ment. Figure 3 shows how the nine pillars relate to eachstage of development.

Countries are separated into stages as follows.The fac-tor-driven stage includes countries that have GDP percapita below US$2,000.The efficiency-driven stageincludes countries with per capita income betweenUS$3,000 and US$9,000.The innovation-driven stageincludes countries with GDP per capita higher thanUS$17,000.12

Countries falling in between these categories are considered to be “in transition” between stages. For thesecountries, the weights change smoothly as a country devel-ops, reflecting the smooth transition from one stage ofdevelopment to another. By introducing this type of transi-tion between stages into the model—that is, by placingincreasingly more weight on those areas that are becomingmore important for the country’s competitiveness as thecountry develops—the Global CI can gradually “penalize”those countries that are not preparing for the next stage.

Table 6. Weighting of subindexes, based on stages ofdevelopment

Innovation and Basic Efficiency sophistication

Stage requirements enhancers factors

Factor-driven 50% 40% 10%Efficiency-driven 40% 50% 10%Innovation-driven 30% 40% 30%

Source: The Global Competitiveness Report 2005–2006

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Figure 3. The nine pillars of competitiveness


Basic requirements

Key for factor-driveneconomies

Efficiency enhancers

Key for efficiency-driveneconomies

Innovation and sophistication factors

Key for innovation-driveneconomies

1. Institutions2. Infrastructure3. Macroeconomy4. Health and primary education

5. Higher education and training6. Market efficiency (goods,

labor, financial)7. Technological readiness

8. Business sophistication9. Innovation


The specific weights given to each of the subindexesfor countries in the different stages of development areshown in Table 6.The table shows that for countries at the factor-driven stage, most weight is placed on basicrequirements (50 percent), considerable weight is placedon efficiency enhancers (40 percent), and only 10 percentis placed on innovation and sophistication factors. Forcountries at the factor-driven stage, the weights betweenbasic 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, butsubstantially more weight is on the innovation and sophis-tication factors subindex.

The economic diversity of the SEE countriesbecomes apparent in their classification into the threestages of development, as summarized in Table 7.The tableshows that one country, Bosnia and Herzegovina, is instage 1.Three countries,Albania, Macedonia, and Serbiaand Montenegro are in transition between stages 1 and 2.Three countries, Bulgaria, Croatia, and Romania are instage 2.And one country, Slovenia, is already in transitionbetween stages 2 and 3.The diversity of developmentalstage indicates the different pillars on which each of thecountries should be focusing. It also means that the regioncontains countries that can act as examples for the othersto follow.

Table 8 presents the rankings and scores of the coun-tries in Southeast Europe on the overall Global CI, as wellas on each of the three component subindexes.The firstcolumn shows the overall score on the Global CI; the sec-ond column shows the rank among the eight SEE countriescovered in this Report; the third column shows the rankamong the 117 countries covered in The GlobalCompetitiveness Report 2005–2006.13 The last threecolumns show the scores on the three subindexes of theGlobal CI (basic requirements, efficiency enhancers, andinnovation and sophistication factors).All scores are on ascale from 1 to 7, with higher scores demonstratingstronger performance.

The overall regional average is shown at the bottomof the list of SEE countries.This is followed by the datafor the four country groupings we are using for compari-son (the EU15, the EU25, the East Asian NICs, and LatinAmerica), as well as data on selected European countries.Thus, the table provides a sense of how countries inSoutheast Europe are faring vis-à-vis each other as well ashow they compare with other regions and countries.

Table 8 shows that Slovenia, the only country in theregion that is already an EU member, tops the regionalranking with an overall score of 4.62. Slovenia receives aparticularly high score on basic requirements.And whileits scores in efficiency enhancers and innovation factors areconsiderably lower than its scores on basic requirements,they are still significantly higher than the SEE regionalaverage.

Bulgaria and Croatia hold the next two places in theregional ranking, followed by Romania and Macedonia.These four countries have scores that are significantly lowerthan Slovenia on all three subindexes.At the bottom of thelist are Serbia and Montenegro, Bosnia and Herzegovina,and Albania.Again, compared with the other countries ofthe region, these last three perform significantly worse inall areas, most strikingly on basic requirements. It is notsurprising that among the countries in the lowest places inthe regional ranking are countries that have been ravagedby civil wars over the past decade.This demonstrates theeffects of conflict on national competitiveness.As historyhas shown, it is virtually impossible to build economicprosperity for the citizens of a country at war.

Not surprisingly, the table shows that, on average, ascompared with the other regions, Southeast Europe, withits overall Global CI score of 3.89, is significantly lesscompetitive than both the EU15 (average score of 5.19) orthe EU25 (average score of 4.93). However, these overallaverages 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 presentEU25. Slovenia is more competitive than a number of itsfellow EU25 members, including Greece and Portugal, aswell as all of the new accession countries from Eastern andnorthern Europe, with the exceptions of Estonia and theCzech Republic.

It is also interesting to observe from the table that theSEE region (average score 3.89) is slightly more competi-tive than Latin America (average score 3.84), mainly attrib-utable to strengths in the area of efficiency enhancers.

The East Asian NICs provide a tougher developingcountry benchmark, as these are highly competitive coun-tries.The NICs outperform all of the SEE countries in allcategories. In fact, as shown in Table 8, the NICs are nowsignificantly more competitive than the average perform-ance of the EU15.As already mentioned above, thisdemonstrates what good policies can do over a sustainedperiod of time to improve the competitiveness of small,open economies.

What is driving the competitiveness of each of theSEE countries? Although Table 8 provides a basic overviewof how each of the countries in the region is performing,it is necessary to explore the specific factors driving com-petitiveness in each of these countries to understand whatmust be done to increase their economic performance.Tables 9, 10, and 11 provide the details behind the com-petitiveness rankings and scores summarized in Table 8.These three tables show the performance of each countryor region in each subindex, as well as in all of the pillarscomposing the particular subindex.This section will lookin detail at the competitive performance of each of thecountries in Southeast Europe, as measured by each of thethree subindexes of the Global CI.

Slovenia is by far the most economically and politicallysophisticated country in the SEE region.This becomesclear when comparing the country’s level of competitiveness

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Table 7. Classification of countries into stages of development

Stage of Development SEE countries in this stage Other countries in this stage Important areas for competitiveness

Stage 1 (factor-driven) Bosnia and Herzegovina, China, Egypt, Georgia, India, Kenya, Basic requirements (critical) and Nigeria, Philippines, Ukraine efficiency enhancers (very important)

Transition from stage 1 Albania, Macedonia, Ecuador, Kazakhstan,Thailand, Tunisia Basic requirements and efficiencyto stage 2 Serbia and Montenegro enhancers (both very important)

Stage 2 (efficiency-driven) Bulgaria, Croatia, Romania Argentina, Botswana, Chile, Estonia, Basic requirements (very important) Latvia, Lithuania, Mexico, Poland, and efficiency enhancers (critical)Russian Federation, Slovak Republic, Turkey

Transition from stage 2 Slovenia Korea, Malta, Portugal, Taiwan Same as above, but innovation factors to stage 3 become increasingly important

Stage 3 (innovation-driven) — Austria, Finland, Hong Kong, Japan, All three areas: basic requirements, Singapore, United States efficiency enhancers and innovation

factors


Table 8. Ranking and scores of SEE countries in the overall Global Competitiveness Index (Global CI)

Rank (among Rank (out of Basic Efficiency InnovationCountry/group Score SEE countries) 117 countries) requirements enhancers factors

Slovenia 4.62 1 30 5.14 4.52 4.20Bulgaria 4.04 2 61 4.54 3.78 3.39Croatia 4.01 3 64 4.46 3.75 3.54Romania 3.98 4 67 4.32 3.84 3.37Macedonia, FYR 3.84 5 75 4.42 3.32 3.31Serbia and Montenegro 3.67 6 85 3.98 3.43 3.19Bosnia and Herzegovina 3.58 7 88 4.06 3.14 2.97Albania 3.40 8 100 3.91 3.02 2.64SEE Average 3.89 — — 4.35 3.60 3.33

EU15 5.19 — — 5.57 5.04 5.01of which:

Greece 4.28 — 47 4.84 4.19 3.84Ireland 5.22 — 21 5.52 5.23 4.91Portugal 4.60 — 31 5.29 4.47 4.04

EU25 4.93 — — 5.31 4.80 4.58of which:

Czech Republic 4.76 — 29 5.03 4.64 4.44Estonia 5.03 — 26 5.30 5.00 4.05Hungary 4.50 — 35 4.68 4.50 3.98Latvia 4.46 — 39 4.84 4.33 3.57Lithuania 4.51 — 34 4.84 4.36 3.94Poland 4.38 — 43 4.60 4.30 3.87Slovak Republic 4.48 — 36 4.74 4.40 3.88

East Asian NICs 5.51 — — 5.88 5.50 5.16

Latin America 3.84 — — 4.35 3.43 3.34

Source: The Global Competitiveness Report 2005–2006 and authors’ calculations

Final Index Subindexes


with others in the region. In assessing Slovenia’s competi-tiveness, situated developmentally between stages 2 and 3,all factors are significant for its competitiveness, as shownin Table 7. Table 8 shows Slovenia performing particularlywell in the area of basic requirements.Table 9 providesdetails on what is driving this strong score: Slovenia out-performs all of the other SEE countries in all pillars of thissubindex. Slovenia has an impressive score of 6.92 onhealth and basic education, due to the country’s healthyworkforce and the high percentage of Slovenian childrenattending primary school. Slovenia’s score on health andprimary education is very close to the EU15 average(6.94) and slightly above the EU25 average (6.88).This isan area in which Slovenia even outperforms the East AsianNICs (average score only 6.79). In other words, Slovenia’shealth and primary education is world class.

Slovenia’s macroeconomic environment is measured as being relatively stable (score 4.84), although we do note that the country is outperformed in the region byMacedonia. Slovenia’s strengths are a relatively highnational savings rate (over 26 percent) and governmentdebt that is not overly burdensome for the economy. Infact, Slovenia outperforms both the EU15 and the EU25averages in terms of overall macroeconomic stability,despite some weaknesses such as the government’s propen-sity to run budget government deficits.

However, Slovenia’s institutions are quite weak (score4.13). Slovenia has insufficient protection of propertyrights, a judiciary not seen to be independent of politicalinfluences, and government officials who often favor well-connected firms and individuals and who are seen asspending taxpayers’ money wastefully. Further, the corporateethics of Slovenia’s firms are not assessed as being amongthe world’s best. Slovenia must work to improve the qualityof its public and private institutions if it is to increase itscompetitiveness.

Table 10 provides details on the component pillars ofthe efficiency enhancers subindex.As mentioned above,although the factors in this subindex are among the mostcritical to Slovenia’s overall competitiveness, the countrydoes not score particularly well in this area. One of thecountry’s few comparative assets is in higher education andtraining (score 5.08). Slovenia has high enrollment rates insecondary school and in tertiary education, as well as rela-tively high-quality schools by regional standards (althoughless so than most EU members).And with regard to tech-nological readiness, while Slovenia has quite high cell phoneand Internet penetration rates, other weaknesses abound.Among these weaknesses are low personal computer useand apparent difficulties in harnessing technologies developed abroad through sources such as foreign directinvestment.

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Basic requirements subindex Component pillars

Table 9. Ranking and scores of SEE countries in the basic requirements subindex

Rank (among Rank (out of Health and Country/group Score SEE countries) 117 countries) Insitutions Infrastructure Macroeconomy primary education

Slovenia 5.14 1 32 4.13 4.69 4.84 6.92Bulgaria 4.54 2 58 3.12 3.61 4.65 6.80Croatia 4.46 3 67 3.44 3.67 4.10 6.62Macedonia, FYR 4.42 4 69 3.06 2.93 5.14 6.56Romania 4.32 5 76 3.32 3.43 3.88 6.64Bosnia and Herzegovina 4.06 6 87 2.94 2.40 4.54 6.36Serbia and Montenegro 3.98 7 92 3.12 2.50 3.64 6.67Albania 3.91 8 96 2.94 1.77 4.10 6.83SEE Average 4.35 — — 3.26 3.12 4.36 6.68

EU15 5.57 — — 5.04 5.50 4.81 6.94of which:

Greece 4.84 — 42 4.19 4.49 3.74 6.94Ireland 5.52 — 22 5.27 4.58 5.31 6.93Portugal 5.29 — 30 4.86 4.88 4.53 6.90

EU25 5.31 — — 4.66 5.01 4.68 6.88of which:

Czech Republic 5.03 — 37 3.83 4.82 4.59 6.90Estonia 5.30 — 29 4.58 4.59 5.24 6.81Hungary 4.68 — 49 4.19 4.02 3.64 6.85Latvia 4.84 — 41 3.92 4.19 4.91 6.35Lithuania 4.84 — 43 3.80 4.09 4.78 6.68Poland 4.60 — 57 3.61 3.80 4.14 6.83Slovak Republic 4.74 — 47 3.84 3.91 4.35 6.86

East Asian NICs 5.88 — — 5.33 5.97 5.42 6.79

Latin America 4.35 — — 3.24 3.06 4.37 6.73



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Table 10. Ranking and scores of SEE countries in the efficiency enhancers subindex

Rank (among Rank (out of Higher education Market TechnologicalCountry/group Score SEE countries) 117 countries) and training efficiency readiness

Slovenia 4.52 1 29 5.08 4.11 4.38Romania 3.84 2 55 4.33 3.87 3.32Bulgaria 3.78 3 59 4.30 3.84 3.18Croatia 3.75 4 60 4.10 3.85 3.31Serbia and Montenegro 3.43 5 75 4.00 3.46 2.84Macedonia, FYR 3.32 6 81 3.91 3.47 2.58Bosnia and Herzegovina 3.14 7 91 3.57 3.53 2.33Albania 3.02 8 95 3.19 3.43 2.44SEE Average 3.60 — — 4.06 3.69 3.05

EU15 5.04 — — 5.33 4.86 4.91of which:

Greece 4.19 — 42 4.78 4.21 3.59Ireland 5.23 — 14 5.40 5.08 5.20Portugal 4.47 — 32 4.61 4.57 4.21

EU25 4.80 — — 5.12 4.66 4.64of which:

Czech Republic 4.64 — 28 4.96 4.40 4.56Estonia 5.00 — 24 5.18 4.78 5.04Hungary 4.50 — 30 4.79 4.54 4.17Latvia 4.33 — 37 4.87 4.21 3.91Lithuania 4.36 — 35 5.02 4.38 3.69Poland 4.30 — 38 4.92 4.33 3.65Slovak Republic 4.40 — 34 4.47 4.42 4.29

East Asian NICs 5.50 — — 5.38 5.48 5.63

Latin America 3.43 — — 3.61 3.72 2.97


Efficiency enhancers subindex Component pillars

Innovation factors subindex Component pillars

Table 11. Ranking and scores of SEE countries in the innovation factors subindex

Rank (among Rank (out of BusinessCountry/group Score SEE countries) 117 countries) sophistication Innovation

Slovenia 4.20 1 31 4.74 3.65Croatia 3.54 2 65 3.98 3.10Bulgaria 3.39 3 74 3.76 3.01Romania 3.37 4 76 3.76 2.98Macedonia, FYR 3.31 5 81 3.67 2.94Serbia and Montenegro 3.19 6 85 3.41 2.96Bosnia and Herzegovina 2.97 7 98 3.36 2.59Albania 2.64 8 112 3.14 2.14SEE Average 3.33 — — 3.73 2.92

EU15 5.01 — — 5.47 4.55of which:

Greece 3.84 — 47 4.32 3.36Ireland 4.91 — 19 5.39 4.44Portugal 4.04 — 35 4.33 3.75

EU25 4.58 — — 5.07 4.09of which:

Czech Republic 4.44 — 27 4.92 3.95Estonia 4.05 — 34 4.51 3.59Hungary 3.98 — 39 4.28 3.69Latvia 3.57 — 62 4.16 2.99Lithuania 3.94 — 40 4.55 3.34Poland 3.87 — 45 4.34 3.40Slovak Republic 3.88 — 43 4.35 3.40

East Asian NICs 5.16 — — 5.41 4.92

Latin America 3.34 — — 3.86 2.82



However, the greatest weaknesses in this area are thecountry’s inefficient markets, particularly goods and labormarkets. Slovenia lacks competition in the local market,imposes burdensome regulations, complicates hiring andfiring for companies, and—as is the case in many othercountries—has confrontational labor-employer relations.And although Slovenia outperforms the other SEE countries in this area, in comparison with the other EUaccession countries, it has significantly less efficient labor,goods, and financial markets. Slovenia must work toimprove the efficiency of its markets to boost its competi-tiveness in the future.

Overall, in the efficiency enhancers subindex, Sloveniaonly comes close to the EU25 in one area: higher educa-tion and training.And, unlike the scores in health andbasic education, the quality of Slovenia’s more advancededucation and training is seen as significantly lower inquality than that of the NICs, which receive a much higher score of 5.38.

Finally,Table 11 provides the details of Slovenia’s performance in the area of innovation and sophisticationfactors.As Slovenia is in transition between developmentalstages 2 and 3, the country should be improving its per-formance in this area, in preparation for the transition intothe stage 3.Table 11 shows that there is still much work tobe 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 sophistica-tion, relative strengths—such as reasonably good qualitylocal suppliers and companies that are moving up thevalue chain—are mitigated by production processes thatare not yet highly sophisticated and an unwillingness ofmanagers to delegate authority. In innovation, althoughcompanies do seem to be developing a capacity for formalresearch and pioneering their own products, the lack ofskilled engineers and insufficient spending on research anddevelopment is holding the country back. Further, there islittle cooperation between universities and the private sec-tor in R&D.

However, although Slovenia does not performextremely well in this area, the table shows that its overallperformance in this subindex, as well as in the two pillarsof business sophistication and innovation, is significantlyhigher than the scores of all of the other countries in theregion. Further, on both these measures, Slovenia performsvery well compared with the new accession countries tothe EU and the members of the EU15 shown in the table,outperforming all of them with the exception of theCzech Republic and Ireland in business sophistication, andthe Czech Republic, Hungary, Ireland, and Portugal ininnovation.

The table also shows that Slovenia significantly out-performs Latin America in both business sophisticationand innovation. However, the higher performance of theNICs once again provides an idea of the level needed ifthe country is to join the league of the most competitiveeconomies.The average performance of the NICs is

significantly higher than Slovenia’s performance across theboard.

In summary, although there remain a number of areason which the Slovenian authorities should concentrate inorder to improve the country’s competitiveness, Slovenia’ssuccess in having joined the European Union and itsprogress on many different fronts make it an example forthe rest of the region to keep in their sights.

Bulgaria has not done as well as Slovenia since mov-ing to a more market-based economy.And althoughBulgaria is the second most competitive country in theSEE region, as measured by the Global CI, the gap incompetitive performance between Slovenia and Bulgaria islarge. Bulgaria is in stage 2, where efficiency enhancers aswell as basic requirements are critical to the country’soverall competitiveness. In Table 9, we see that Bulgariabenefits from high-quality health and basic education anda stable macroeconomic environment. Bulgaria followsonly Slovenia in these two areas, due to a healthy work-force, a high primary education enrollment rate, and agovernment that is running a budget surplus.

However, Bulgaria receives quite low marks for itsinstitutions and physical infrastructure. Our research showsthat property rights in Bulgaria are not sufficiently pro-tected, nor is its judiciary independent from political influ-ence. Business leaders also indicate that corruption is aserious problem in the country. Bulgaria’s inadequate airtransport poses a particularly serious problem, ranking 98out of 117 countries.

Bulgaria also gets very low marks with regard to thesecurity of businesses in the country. Common crime andviolence, as well as organized crime, impose a heavy bur-den on Bulgarian businesses. In fact, the problem oforganized crime in the country is among the world’sworst (ranking a low 110 out of 117 countries). Businessleaders feel that the police cannot be relied on to protectthem from criminals (ranking 93), making security inBulgaria a high priority for attention by the authorities ifthey wish to create an environment more conducive toeconomic growth and competitiveness. In this context, it isnot surprising that this area has been particularly high-lighted as a weakness that, unless improved, could post-pone Bulgaria’s timely entry into the European Union.

Despite these difficulties, Bulgaria scores higher onalmost all pillars in this area than most other countries inthe region except Slovenia. Bulgaria also outperformsLatin America on three of the four pillars of the subindex:physical infrastructure, macroeconomy, and health andbasic education, and its scores come very close to theEU25 average in macroeconomy and health and primaryeducation.

As mentioned earlier, efficiency enhancers are veryimportant for achieving economic competitiveness atBulgaria’s stage of development.Table 10 shows that, interms of efficiency, Bulgaria suffers from weaknesses acrossthe board, especially its lack of technological readiness(score 3.18), with Bulgarian firms apparently not showing

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particular interest in absorbing new technologies. Bulgaria’smarkets are also highly inefficient, most particularly themarket for goods and services, placing it 80th out of 117countries.Taxation has a distortionary effect on work andinvestment decisions, there is a lack of competition in thelocal market, and Bulgaria also has to contend with theproblem of talented people leaving the country for oppor-tunities abroad.

Finally, although Bulgaria is ranked third in the regionwith regard to innovation factors (Table 11), behindSlovenia and Croatia, many weaknesses remain. Of the twopillars in this subindex, Bulgaria suffers particularly from alack of innovation, necessitating better protection of intel-lectual property rights and a greater focus by business andthe academic community on research and development.However, since strength in innovation is less critical forBulgaria in its present stage of economic development, theauthorities should focus on improving the issues related tobasic requirements and efficiency enhancers, particularlythe security of its businesses and citizens.

Croatia, ranked third, is now in stage 2 of development.This means that, as for Bulgaria, efficiency enhancers arecritical to the country’s competitiveness and basic require-ments remain very important. However,Table 9 shows thatCroatia still does not score particularly well on the latter.Although health and basic education is the country’sgreatest strength in this area, its score of 6.62 is the thirdlowest in this pillar among the SEE countries, ahead ofonly Bosnia and Herzegovina, and Macedonia. In terms ofthe overall health of the workforce, Croatia fared no worsethan most other countries in the region; in particular ithas a very low HIV prevalence rate. However, its primaryschool enrollment rate, estimated at 97 percent, is lowerthan that of most other SEE countries.14 In fact, this placesCroatia in 95th out of 117 countries covered by theGlobal CI index on this indicator.

Similarly, Croatia has the third to lowest score in theregion in terms of macroeconomic stability.Although thegovernment has done a good job of holding inflation to alow 2.1 percent, there are other macro weaknesses: thegovernment suffers from a budget deficit of 5 percent ofGDP and the national savings rate of 25.3 percent is simplynot high enough to ensure sufficient capital for investmentin the economy. Government debt, at more than 57 percentof GDP, is an additional drain on the budget (on a positivenote, however, this has been coming down in recentyears).The difference between lending and borrowingrates is quite high at almost 10 percent, pointing to ineffi-ciencies in the allocation of capital through the bankingsector and a high cost of capital for business.

Croatia’s physical infrastructure, while better thanmost countries’ in the region, is also an impediment to thecountry’s competitiveness. Railroads, ports, and air transportare of poor quality, making the movement of goods andservices difficult.The quality of these modes of transporta-tion should be brought in line with that of the country’sroads, which have seen significant improvements in recent

years following important modernization projects.Thecountry’s institutions leave much to be desired, with ajudiciary seen to be among the least independent in theworld, property rights not sufficiently protected, govern-ment spending perceived by the business community ashighly wasteful, and a low level of public trust in theirpoliticians. Organized crime has also become an onerousproblem.

Table 10 shows Croatia’s performance in the area ofefficiency enhancers, the most critical for the country’scompetitiveness at this stage, and it is uniformly lackluster.Markets are extremely inefficient, particularly goods andlabor markets.Taxes provide a disincentive to work andinvest, and competition in the local market is somewhatlimited, accompanied by lax antitrust policy.The country’slabor markets are characterized by highly confrontationallabor-employer relations, pay is not strongly related toworker productivity, and this environment is accompaniedby an important brain drain problem. Financial markets arealso rather inefficient, with poor access to capital (throughbank loans and especially through venture capital).Although Croatia slightly outperforms Poland in a fewareas, this provides a disappointingly low benchmark andhighlights the urgent need for the country to focus onimproving the functioning of the markets.

Finally,Table 11 shows that although Croatia figuresamong the top two countries of the region on thissubindex, its performance is still quite weak, both in busi-ness sophistication and innovation. Production processescontinue to be labor intensive and relatively unsophisticat-ed. Companies do not spend heavily on R&D, intellectualproperty is not sufficiently protected, and there are notenough scientists and engineers to carry out research.Since Croatia is already in stage 2 and moving towardstage 3, better performance in these areas could be expect-ed.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 thecountry’s business environment and making its firms moreinnovative.

Romania, the largest of the Balkan countries, faces anumber of challenges in its drive toward higher levels ofeconomic development and greater prosperity for its citi-zens.Tables 9, 10, and 11 provide details on the elementsdriving Romania’s overall score. Since Romania is classi-fied as being in the second stage of development, basicrequirements and particularly efficiency enhancers areextremely important for the country’s overall competitive-ness score.

Table 9 shows how Romania is faring with basicrequirements. Like other countries in the region, Romaniaperforms best in the area of health and primary education(score 6.64), mainly because of a relatively high primaryenrollment rate. However, the overall health of the work-force is a matter of concern—in particular the relativelyhigh prevalence of tuberculosis in the population,which has a non-negligible cost for business. Romania’s

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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 bybusinesses and consumers.The relatively low national sav-ings rate (17 percent) does not provide sufficient nationalresources for investment.

Romania’s poor-quality institutions (score 3.32) andthe poor state of the country’s physical infrastructure(score 3.43) are also worrisome. Romania’s judiciary is notfree from political influence, property rights are not wellprotected, government policymaking is not transparent, andgovernment officials show favoritism to well-connectedfirms and individuals in deciding upon policies and con-tracts.With regard to physical infrastructure, Romania’selectricity supply is plagued by interruptions and voltagefluctuations, creating uncertainty for business and slowingproduction; low telephone penetration rates make com-munication more difficult throughout the country.

We do note that Romania outperforms Hungary inthe area of macroeconomy, and Latvia in health and pri-mary education. However, although it outperforms theseindividual EU25 countries in particular areas, the country’sscores on all four pillars are significantly lower than thoseof the EU25 average. Given that Romania’s goal is to jointhe European Union in just a few years, this is especiallytroubling.

Turning to Table 10, we see that Romania is rankedsecond in the region with regard to efficiency enhancers,although the gap with Slovenia’s performance is verylarge.With regard to market efficiency, Romania’s financialmarkets are relatively more efficient than those in theother SEE countries; put another way, Romania’s financialmarkets, while less inefficient than those of its neighbors, arestill unsophisticated and unable to provide Romaniancompanies with access to financing for projects and invest-ments. Labor markets are also slightly less inefficient thanin most other countries in the region, although they arestill plagued by a number of problems, including cumber-some regulations concerning the hiring and firing ofworkers, uncooperative labor-employer relations, and atendency for Romania’s companies to hire relatives ratherthan professional managers.

With regard to technological readiness, although thecountry scores better than most countries in the region, itstill lags well behind Slovenia and all of the EU25 countriesshown in the table. In particular, penetration rates ofInternet and communication technologies remain verylow in the region, and the perception exists that the lawsgoverning these new productivity-enhancing technologiesare not sufficiently developed. More generally, Romaniascores well below the EU25 average across all of the effi-ciency enhancer pillars.This indicates that much needs tobe done to increase the efficiency of the Romanian econ-omy to prepare for EU entry. In comparison with theother countries shown in the table, it is of interest to note,however, that Romania outperforms Latin America acrossall pillars of this subindex.

Table 11 shows that Romania does not perform wellin either business sophistication (score 3.76) or innovation(score 2.98).Although these scores are higher than mostcountries in the region, the gap with Slovenia’s performanceis wide, indicating a large difference in the comparativeperformance of these countries. Further, Romania’s scoresare significantly below the EU25 average, and below all ofthe accession countries shown. However, since Romania isstill in the second stage of development, these areas are lessa cause for concern at present. In deciding where to focusattention, Romania should work on improving its short-comings in basic requirements and efficiency enhancers toimprove its ability to ensure sustainable levels of economicprosperity for its citizens.

Macedonia is presently between stages 1 and 2, whenbasic requirements and efficiency enhancers are critical forcompetitiveness.Table 9 shows that on measures of basicrequirements, Macedonia excels in a few areas, but it isheld back by serious weaknesses in others. Macedonia’sgreatest comparative strength in the region is the qualityof its macroeconomic environment.The government hasmanaged to move from a deficit situation to a small budgetsurplus in 2004, inflation has been brought down to verylow levels, and a manageable level of government debt at26.4 percent of GDP. Nonetheless, its inadequate nationalsavings rate of 15.9 percent limits companies in obtainingsufficient investment capital, requiring attention.

Although Macedonia scores best in health and primaryeducation (score 6.56), we do note that it has the secondto lowest score in the region in this area, because of thehealth of the workforce and a primary enrollment rate thatis lower than most countries in the region. Macedonia hasa lower score than all of the individual EU25 countriesshown in the table, with the exception of Latvia.

Macedonia receives extremely low scores on the otherthree pillars of the subindex.The country’s institutionswere rated third worst in the region (score 3.06), followedonly 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 notwell protected (ranked 102), and the diversion of publicfunds due to corruption is common.The corporate ethicsof Macedonia’s firms are considered to be among theworld’s worst, ranking 107th out of 117 countries.

The state of the country’s physical infrastructure, witha score of 2.93, is also holding back Macedonia’s competi-tiveness. Ports and air transport are highly inefficient, andthe country suffers from poor-quality electricity supply.Perhaps most troubling is the fact that Macedonia isassessed as having the worst security of its businesses andcitizens—it is rated as having the 107th most insecureenvironment out of the 117 countries, followed only bycountries such as Bangladesh, Colombia, and Kenya.Thelow rating in this area is linked to the very high cost tobusiness of crime, violence, and the threat of terrorism,and the fact the police are not trusted to provide protec-tion from criminals. Clearly much work needs to be done

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to improve Macedonia’s performance in these basic areas ifthe country is to become competitive.

Table 10 shows Macedonia’s performance in the areaof efficiency enhancers, scoring very poorly in all pillarsmeasured. Like the markets in other SEE countries,Macedonia’s labor and financial markets are seen as ineffi-cient, characterized by confrontational worker-employerrelations, and one of the worst “brain drain” rates in theworld (it is ranked 109th out of 117 countries).Companies have difficulty raising capital in a poorly functioning banking system. Macedonia has the worst per-formance in the region for goods market efficiency, barAlbania, with excessive taxes on businesses, an uncompeti-tive local market, and a highly ineffective antitrust policy.Macedonia also lags behind in terms of technologicalreadiness, with the third to lowest score in the region(2.58). It is evident from this picture that the governmentmust concentrate on these areas in order to improve thecountry’s overall competitiveness.

Finally,Table 11 shows Macedonia with poor perform-ances in both pillars of the innovation factors subindex.The country’s poor performance on business sophistication(score 3.67) is linked to factors such as the low quality oflocal suppliers, the use of labor-intensive methods in pro-duction processes, and the unwillingness of managementto delegate authority to subordinates.The low score ininnovation (2.94) stems from the absence of scientificresearch institutions, low company spending on R&D, andinsufficient intellectual property protection. However,these low scores, while informative, should not be of great immediate concern. Given Macedonia’s stage ofdevelopment there is much opportunity ahead to unleashits productive potential and increase its competitivenessthrough improvements in the more critical areas of basicrequirements and efficiency enhancers mentioned above.

Serbia and Montenegro is in transition between stages1 and 2, with basic requirements and efficiency enhancersall very important for improving the economy’s productiv-ity and competitiveness.Table 9 shows it with the secondto lowest overall score of the region in basic requirements(3.98), driven by weaknesses in all areas, including its insti-tutions, (score 3.12) characterized by a judiciary not yetfree of political influence, insufficient property rights, verylow public trust in politicians, and extremely burdensomegovernment administrative requirements.The country’sphysical infrastructure (score 2.50) is clearly insufficient todrive national productivity and competitiveness, with aparticularly inadequate rail, port, and air transport infra-structure, as well as a low-quality electricity supply.

The country has one of the lowest scores in healthand primary education. Serbia and Montenegro has thesecond highest infant mortality rate in the region and aprimary enrollment rate that is lower than most othercountries in the region.The country also has the highestHIV prevalence rate in the region, 0.2 percent of the population aged 15 to 49.

Most strikingly, Serbia and Montenegro’s score is thelowest in the region with regard to the macroeconomicenvironment (3.64).The country’s government has beenrunning fiscal deficits, inflation remains high (9.5 percent),and the economy is burdened with an extravagant nationaldebt (80 percent of GDP, an unfortunate legacy from theformer regime of the Federal Republic of Yugoslavia), andthe second to lowest national savings rate of all 117 coun-tries, at –1 percent of GDP, followed only by East Timor.In such circumstances, it is extremely difficult for thecountry’s economy to thrive.

In Table 10, we see that Serbia and Montenegro’s per-formance in the efficiency enhancers is also quite weak,with low scores in all pillars assessed.The country receiveda middling score with regard to higher education andtraining (4.0), with secondary and tertiary enrollment ratesthat are not particularly high in an educational system thatis 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 Montenegro’s goods markets are plagued bylimited competition in the local market, inefficientantitrust policy, and ineffective business dispute settlementlaws, all of which are costly for business.The country’slabor markets receive the worst scores in the region, plac-ing the country a very low 104 out of 117 countries, withconfrontational labor-employer relations, the promotion offriends and relatives rather than qualified managers, and alarge outflux of the most talented individuals to othercountries.And with regard to financial markets, loans andventure capital are difficult for firms to access and thebanking system is perceived to be among the least soundof all 117 countries (ranked 103rd). In other words, thecountry’s various markets are not presently doing a verygood job of allocating resources to best use.

In Table 11, we see that Serbia and Montenegro rankssixth in the region in the innovation factors subindex. Interms of business sophistication, the low score of 3.41 isattributable to a concentration in low-value added goods,produced with labor-intensive methods and previous gen-erations of process technology. Not only are the country’sproduction processes highly inefficient, but innovation isweak (score 2.96), with low company spending on R&Dand inadequate intellectual property protection. However,given the country’s stage of development, these weaknessesare not the greatest concern. Serbia and Montenegroshould put its greatest effort into improving the morebasic problems related to market efficiency and the overallinstitutional environment, as discussed above.

Bosnia and Herzegovina is classified as being in stage1, which means that basic requirements are critical forcompetitiveness and that efficiency enhancers are also veryimportant.Table 9 shows that there is much room forimprovement in basic requirements, with the country inthird to last place in this area, after Serbia and Montenegroand Albania.

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While most countries in Southeast Europe benefitfrom high-quality health and basic education, Bosnia andHerzegovina’s performance in these areas is weaker thanall the others.. Comparative weaknesses include a grossprimary school enrollment ratio that is the lowest in theregion, giving it a rank of 102nd out of 117 countries. Fora European country, the workforce suffers from a high rateof tuberculosis prevalence (55 cases per 100,000 inhabitants).

With regard to the macroeconomy, some clearstrengths—such as very low inflation and a debt-to-GDPratio that has been getting smaller and more manageablein recent years—are mitigated by an extremely lownational savings rate (4.6 percent) and government spend-ing that has recently moved back into deficit.

As with many other countries in the region, securityis a serious problem in Bosnia and Herzegovina. Ourresearch indicates that crime and violence represent heavycosts for businesses, with police services unable to protectbusiness from criminals; indeed, only six countries in thelarger 117-country sample— Bangladesh, Guatemala,Guyana, Nigeria, Paraguay, and Venezuela, receive poorerscores in this area.

Finally, Bosnia and Herzegovina receives among thelowest scores in the region in two critical areas: the qualityof its public and private institutions (score 2.94) and of itsphysical infrastructure (score 2.40).As is the case elsewherein Southeast Europe, the judiciary is far from independent,and property rights are the least well protected in theentire region (in fact, only four countries in the largersample get lower marks on property rights: Chad, EastTimor, Paraguay, and Venezuela). Public trust in politiciansis among the lowest in the world, with government spend-ing seen as extremely wasteful.As might be expectedgiven the recent war, the country’s air, rail, and port trans-port are in deplorable condition, with air transportdeemed to be third to worst of all 117 countries coveredby the Global CI, only Cameroon and Chad having moreinfrequent and inefficient air transport.The electricity sup-ply is plagued by frequent interruptions.

Table 10 shows Bosnia and Herzegovina coming insecond to last the region in the area of efficiencyenhancers, with an overall score of 3.14.The country’shigher education and training is held back by a low sec-ondary school enrollment rate (the lowest in SoutheastEurope) and schools that are not meeting the needs of acompetitive economy. Bosnia and Herzegovina also lacksscientists and engineers, and there is almost no staff train-ing by companies.

With regard to labor market efficiency, worker-employer relations are highly confrontational, with work-ers’ pay unrelated to productivity. Bosnia and Herzegovinaalso has a number of weaknesses in the functioning of itsgoods and financial markets, where the problems stemfrom very low competition in the local market andadministrative hurdles for starting a business in the coun-try.The country also has one of the least efficient financial

markets in the world, with relatively unsound banks andaccess to capital for investment very difficult to obtain.

Most strikingly, Bosnia and Herzegovina’s technologi-cal readiness lags behind all other countries in the region,and indeed, most of the world. It has low penetration ratesof new technologies such as Internet, and its companiesare among the least aggressive in the world in absorbingtechnologies from abroad.

Finally, Bosnia and Herzegovina gets the second tolowest scores in the region in business sophistication (3.36)and innovation (2.59). In fact, in this subindex the countryranks a low 98 out of 117 countries, putting it on a parwith Benin, Ecuador, and Malawi. In innovation, thecountry receives the worst score on intellectual propertyprotection except for four countries: Chad, Bolivia,Guyana and Paraguay. However, these weaknesses shouldnot take attention away from basic requirements and effi-ciency enhancers, areas far more important for improvingthe country’s competitiveness and productivity at its presentstage of development.

Albania, one of the very poorest countries of the SEEregion, is also shown to be the least competitive of theeight countries in the Global CI (and ranked 100th in thefull sample of 117 countries).Albania is classified to bebetween stages of development 1 and 2, which means thatboth basic requirements and efficiency enhancers are keydrivers of the country’s competitiveness.

With regard to elements in the basic requirementssubindex,Table 9 shows that Albania has the lowest scoreof all countries in the region.This is despite the fact thatAlbania has the second highest score for health and pri-mary education (6.83), coming just behind Slovenia in thiscategory.Albania’s high score here is attributable to havingthe second highest primary school enrollment rate in theregion (after Slovenia), and a healthy population by inter-national standards (e.g., relatively low levels of communi-cable diseases, and low infant mortality rate).

However, although health and primary educationremain relative strengths for the country, there remain apreponderance of other weaknesses that pull down thecountry’s overall score.The country’s macroeconomicenvironment, although not the worst in the region, doessuffer from a number of problems.The country has beenrunning 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 downwardtrend over the past few years).The country’s national sav-ings rate is also extremely low (17.2 percent), placing thecountry in 85th place out of 117 countries in this area.

An even more worrisome factor is the state ofAlbania’s public institutions, assessed as being among theworst in the region, along with those of Bosnia andHerzegovnia.As in most other countries in SoutheastEurope, property rights are not sufficiently protected.Corruption and the diversion of public funds is anextremely prevalent and costly problem in the country

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(Albania ranks 109th on this factor).The government isalso seen as practicing extreme favoritism in decidingupon policies and contracts (placing the country 111th). Itis therefore not surprising that there is an extremely lowlevel of trust in the financial honesty of politicians (placingthe country 101st, along with countries such asBangladesh, Chad, and Sri Lanka).

Although all of these factors are highly problematic,Albania’s most striking weakness in this area is linked tothe quality of the country’s physical infrastructure.Albania’s score of 1.77 is far below that of any othercountry in the region, highlighting the gap between coun-tries in the region. In fact, the overall infrastructure qualityis assessed as being the second to worst in the world, fol-lowed only by Chad out of all 117 countries covered inthe Global Competitiveness Report. Railroads and otherforms of transportation infrastructure are highly underde-veloped, the electricity supply is plagued by interruptions,and the telephone line penetration rate is by far the lowestin all of Europe.Without at least a minimum of basicinfrastructure in place it is clear that it is very difficult forthe economy to function efficiently, to say the least.Improving the basic infrastructure and the functioning ofthe country’s institutions would seem critical priority areasfor Albania in improving its overall competitiveness in theyears to come.

Turning to the efficiency enhancers subindex, onceagain we see in Table 10 that Albania is the worst per-former of all SEE countries in this subindex, which alsoincludes a number of factors that are presently critical tothe country’s competitiveness.A first point to note is that,although Albania scores quite well with regard to basiceducation, as discussed above, when it comes to highereducation and training, the country trails far behind allother countries in the region.Albania’s tertiary enrollmentrate of 16.2 percent places the country 84th overall, signif-icantly lower than all other SEE countries (compare this,for example, with Bosnia and Herzegovina’s 24.7 percent).The educational system as a whole is assessed as being theworst in the region in terms of meeting the needs of acompetitive economy, and Albanian companies are assessedas investing so little in staff training as to place Albania111th in this area. Overall it is clear that much needs to bedone to improve the more advanced skill building relatedto higher education and training in Albania.

With regard to the functioning of markets, againAlbania receives low scores. Goods markets are the leastefficient in the region with their highly distortionarytaxes, inefficient dispute settlement laws, and little compe-tition in the local market, placing the country a low 109by international comparison. Even less efficient areAlbania’s financial markets, with access to financingextremely difficult in the country (through bank loans, thestock market, and venture capital...), placing Albania114th overall, with hardly any countries having more inef-ficient financial markets.

The single somewhat bright star is the flexibility ofAlbania’s labor markets, which are in fact assessed as beingby 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 betweenemployers and workers, greater flexibility in hiring and fir-ing workers, and greater flexibility in wage setting in thecountry. So overall Albania scores quite well in labor mar-kets. However, it has one of the biggest brain drain prob-lems in the world, which places the country 115th out of117 countries, followed only by Guyana and Zimbabwe.

Finally, turning to Table 11, and Albania’s performancewith regard to Innovation Factors, again the country lagsbehind the others in the region, ranking a very low 112thin this subindex out of 117 countries. Further, the gapbetween Albania’s performance and that of other countriesin the region is quite large, particularly with regard to theinnovation pillar (where Albania ranks an abysmal 115th).Albania does not benefit from the existence of scientificresearch institutions (ranked 116), companies do not investin research and development (ranked 109), and there is the lowest level of collaboration between businesses anduniversities in research and development activity (ranked117th). In other words,Albania is one of the least innovativecountries covered in our research. However, although thismight be something to keep in mind once the countrymoves to higher stages of development, it first needs to getfrom here to there.At present, to ensure a more sustainabledevelopment of the economy,Albania would be wise tofocus on some of the more basic issues already mentionedabove, such as improving the institutional environment,beefing up the country’s physical infrastructure, improvinghigher education and training, and so on.

VI. Policy recommendationsThe previous sections have presented a wealth of informa-tion regarding the competitiveness of the countries of theSEE region. But what does all this mean from a policyperspective? From the detailed analysis based on theGlobal Competitiveness Index, it is, in fact, possible toidentify specific areas on which the authorities shouldfocus their attention at present.

This section summarizes the most critical areas rec-ommended for urgent attention by the authorities in eachof the eight countries, given their current stages of devel-opment, in order to improve their level of competitiveness.The best modes of implementing these changes lie outsidethe scope of this document. Instead, these suggestions shouldbe taken in the context of the many detailed recommen-dations provided by other organizations engaged in theregion such as the EU, the IMF, the World Bank, and theEBRD. Here, we have made an effort to indicate some ofthe 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 thevery low national savings rate;

• Strengthening the country’s 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 publicin their political representatives and ensure propermanagement of national financial resources;

• Investing in the country’s transport, energy, and communications infrastructure;

• Increasing higher education enrollment rates andimproving 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 country’s human capital base, by

increasing primary, secondary, and tertiary schoolenrollment rates, and upgrading the quality of theeducational system;

• Addressing persistent macroeconomic instabilities,focusing on continuing to shrink the high debt ratioand implementing incentives to increase the very lownational savings rate;

• Reforming and improving police services so thatcrime and violence, including organized crime in thecountry, can be controlled and reduced;

• Strengthening the country’s institutions, with a particu-lar focus on property rights and judicial independence;

• Increasing the transparency and accountability of thepublic sector in order to gain the trust of the publicin their political representatives and ensure propermanagement of national financial resources;

• Improving and rebuilding the country’s 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 country’s institutions, with a focus

on improving the enforcement of property rights andjudicial 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 andviolence;

• Increasing market competition.

Croatia• Increasing primary school enrollment;• Fiscal reform aimed at reining in public spending, and

cutting public debt; implementing incentives toincrease 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, andincreasing 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 infra-

structure, 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 theindependence of the judiciary, and reducing govern-ment favoritism in policymaking;

• Modernizing infrastructure, particularly telecommuni-cations and energy sectors;

• Increasing the flexibility of labor markets, especiallythe hiring and firing of workers;

• Measures to increase the adoption of new technologies,such as ICTs, to improve the economy’s productivepotential.

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 theresponsiveness of the educational system to the needsto a competitive economy;

• Adopting measures to ensure macroeconomic stabi-lization, including fiscal restraint to lower the govern-ment budget deficit and decrease the debt burden;

• Implementing monetary policy to lower inflation andincrease 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 reducinggovernment 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 countryto country, all share a number of areas requiring improve-ment, including the need to strengthen infrastructure andmodernize financial markets. More generally, in view ofthe goal of EU accession, a top priority for all will be toimprove links with the rest of Europe and take ownershipof the goals contained in the Lisbon Agenda: to make theEuropean Union the most competitive economy in theworld.This commitment not only provides a credibleframework for the continued implementation of their ownsound macroeconomic and structural policies, but presentsan opportunity for the SEE countries to work coopera-tively on regional projects to strengthen the competitive-ness of the entire region.

VII. ConclusionsThis chapter has explored the competitiveness of eightcountries from Southeast Europe:Albania, Bosnia andHerzegovina, Bulgaria, Croatia, Former Yugoslav Republicof Macedonia, Romania, Serbia and Montenegro, andSlovenia.We have assessed the performance of these coun-tries over recent years in order to identify competitivetrends, carry out in-depth analysis, and benchmark theirperformance against a number of other relevant countriesand regions.

Our research has shown that there are many differencesamong SEE countries in terms of competitive potential.Slovenia stands apart for having achieved a relatively highlevel 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 accedeto the European Union.Among other SEE countries, suchas Bulgaria, Croatia, and Romania, competitive perform-ance is much more mixed.These countries must continuetheir efforts to carry out reforms, making it possible forthem to realize their goal of membership in the EuropeanUnion. Finally, some SEE countries, which have experi-enced much turbulence in recent years, such as Bosnia andHerzegovina, and Serbia and Montenegro, are assessed asbeing extremely uncompetitive according to our research.They are joined at the bottom of the ranking by Albania,another country that has had considerable difficulties inmaking the transition to a more market-based economy.Much remains to be done to bring these countries to theaverage competitive level of the region, with a view toeventually achieving EU performance standards.

However, despite their diversity, our research has alsoshown that the countries of Southeast Europe share certainfeatures in their competitive environments. On the onehand, they have common weaknesses in the quality ofpublic institutions, particularly inadequate protection ofproperty rights and the lack of an independent judiciary.These areas require immediate attention in order to moveSoutheast Europe into the league of the more competitivecountries of Europe.

On the other hand, most of the SEE countries excelin the quality of health and primary education and relativelyhigh macroeconomic stability.With regard to the macro-economic environment, the achievements made since thedifficult starting points of a decade ago demonstrate howmuch can be achieved in a relatively short time, given suf-ficiently strong political will and wise policies.The successthat most of these countries have had in laying a foundationof macroeconomic stability is to be highly commended—without it, many of the structural and institutional reformsthat are necessary to ensure eventual EU accession wouldbe difficult indeed to implement. More importantly, theseearly stabilization successes show that the political leader-ship in the region, the business community, and organiza-tions of civil society are ready to make the sacrifices thatwill be necessary to modernize their respective economies,ahead of full integration into the European Union.

Overall, despite the many remaining challenges, andin view of the strong efforts for reform already underway,with the unwavering support of the international commu-nity, we are optimistic about the potential for the futurecompetitiveness of the region. If the countries ofSoutheast Europe continue on their present reform paths,they will surely follow in the footsteps of their neighborsfrom Central and Eastern Europe, joining the EuropeanUnion and the ranks of the more competitive countries inEurope.The World Economic Forum stands ready to sup-port this process by periodically updating and deepeningthe analysis contained in this first Report, with the aim ofoffering it as a benchmarking and tracking tool for policyreform and implementation in the region.

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Notes1 The three countries shown in this figure have been chosen largely

because of the availability of time-series data for an extended periodof time. No equivalent time series exists for most other countries inthe 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 forthe former Yugoslavia (ICTY) that Croatia has been fully cooperatingwith the tribunal removed the final obstacle for accession negotia-tions to begin.

4 The Growth Competitiveness Index was developed in collaboration withProfessors Jeffrey Sachs and John McArthur, and was first intro-duced in The Global Competitiveness Report 2001–2002.

5 A detailed breakdown of the construction of the GrowthCompetitiveness Index is available upon request from the WorldEconomic Forum, at [email protected].

6 The Growth Competitiveness Index separates economies into twogroups: the core economies (those for which technological innova-tion is critical for growth), and non-core economies (countries whichcan still grow by adopting technologies developed abroad). The sepa-ration between core and non-core economies is made by takingaccount of the number of registered US utility patents for innovationeach country has per capita in the most recent year. A threshold of15 patents per million people was chosen to separate the countriesinto the two groups, with those registering more than 15 patentspart of the core group, and all others non-core.

7 Send requests to [email protected].

8 The apparent improvement in this area in 2003 is probably due to achange in the way the variable is measured, rather than a differencein actual performance.

9 For more information on this process see Box 1.

10 The World Economic Forum has worked with Professor Xavier Sala-i-Martin and Elsa Artadi to develop the Global Competitiveness Index.For more details on the Index, see chapter 1.3 of The GlobalCompetitiveness Report 2004–2005 and chapter 1.1 in The GlobalCompetitiveness Report 2005–2006.

11 Send requests to [email protected].

12 We have used income levels as the separating criterion for the stageson the basis of the following reasoning: “Factor-driven economiesare those that compete in low prices. We proxy low wages with lowincome levels, which is why we assign countries with 2003 incomeper capita below US$2000 to this group” (Sala-i-Martin and Artadi2004, p.72). The same reasoning applies to countries in stages 2 and3: rising GDP per capita proxies for wages that are rising, pullingcountries into higher stages of development, where they must com-pete based on more complex factors.

13 For further information on the full 117-country dataset, see The GlobalCompetitiveness Report 2005–2006.

14 Ninety-seven percent would seem a very high enrollment rate.However, Croatia’s low score is attributable to the fact that the grossenrollment rate is calculated as the ratio of total enrollment, regard-less of age, to the population of the age group that officiallyresponds to the primary education level. This means that for a largemajority of countries, gross primary enrollment rates actually exceed100 percent.

ReferencesBlanke, J. and A. Lopez-Claros. 2004. “The Growth Competitiveness

Index: Assessing Countries’ Potential for Sustained EconomicGrowth.” The Global Competitiveness Report 2004–2005.Hampshire: Palgrave MacMillan for the World Economic Forum.

Central Bank of Montenegro website, available online at http://www.cb-mn.org/indexE.htm.

Commission of the European Communities. 2004a. “The Western Balkansin Transition.” DG for Economic and Financial Affairs EuropeanEconomy Occasional Paper No.5. January.

———. 2004b. “The Stabilisation and Association Process for South EastEurope: Third Annual Report.” Brussels: COM(2004) 202/2 final.March.

———. 2004c. “Croatia: Opinion on the Application of Croatia forMembership of the European Union.” Brussels. April.

———. 2004d. Bosnia and Hercegovina: Stabilisation and AssociationReport 2004. Brussels.

———. 2004e. Serbia and Montenego: Stabilisation and AssociationReport. Brussels.

Dombey, D. 2003. “EU envoys agree entry terms with Romania.” FinancialTimes. 10 December.

Economist Intelligence Unit. 2004. Various country profiles and countryreports.

European Bank for Reconstruction and Development (EBRD). 2004a.“Spotlight on South-Eastern Europe: an Overview of Private SectorActivity and Investment.” London: European Bank for Reconstructionand 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 StrategyPaper. February.

———, 2004e. Albania- Fourth Review under the 3 year arrangementunder 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 2004–2005. Hampshire: PalgraveMacMillan 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 andAccession.” Washington, DC. ISBN No. 0821349627.

———. 2003. “Croatia Country Economic Memorandum: A Strategy forGrowth 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, andOxford University Press.

———. 2005. Doing Business in 2006: Creating Jobs. Washington, DC:World Bank and International Finance Corporation.

World Economic Forum. 2001. The Global Competitiveness Report2001–2002. New York: Oxford University Press.

———. 2002. The Global Competitiveness Report 2002–2003. New York:Oxford University Press.

———. 2003. The Global Competitiveness Report 2003–2004. New York:Oxford University Press.

———. 2004. The Global Competitiveness Report 2004–2005. Hampshire:Palgrave Macmillan.

———. 2005. The Global Competitiveness Report 2005–2006.

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This section includes four-page country profiles for theeight countries covered in this Report. Each profile sum-marizes important data for a country. It displays majoreconomic, financial, social, and trade data from publishedsources and from the World Economic Forum’s ExecutiveOpinion Survey (EOS). Country profiles are laid out asfollows: the first page presents basic indicators for thecountry in order to give a general overview of its presentsituation in terms of economic and social development;the second page includes charts presenting key growth,investment and trade data; the third and fourth pages pres-ent selected data for each individual economy from theWorld Bank and from the World Economic Forum’sGlobal Competitiveness Index.

Page 1

Key Indicators, Human Development Indicators andInfrastructure and Technology Diffusion IndicatorsThese three sections present recent data aimed at provid-ing 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 andlife expectancy; and (3) the extent to which infrastructureand technology is developed within the country in question.The primary data sources used are: UNFPAState of World Population 2004; IMF World Economic OutlookDatabase, September 2005; IMF International FinancialStatistics, November 2005; Economist Intelligence Unit;IMF Country Reports; International Trade Commission;IMF World Economic Outlook,Winter 2005 (published version); ILO LABORSTA Online, October 2005;WorldBank World Development Indicators 2005; UNESCOInstitute for Statistics; UNDP Human Development Report2005;WHO The World Health Report 2005;WHO Reporton the global AIDS epidemic, 2004; US Agency forInternational Development; ITU World TelecommunicationsIndicators 2004.

How country profiles work

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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

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

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

* 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

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FDI Inward and Outward Stock and Flow, 2000 and 2004The chart at the top of the page provides a comparison offoreign direct investment inward and outward stocks andflows for two years, 2000 and 2004.The data source is theUNCTAD World Investment Report 2005.

Merchandise Exports by Main Destination, 2004The second chart provides information on the main destinations of each country’s exports, with each exportdestination shown as a percentage of total exports.Thesource is the UN Comtrade Database, October 2005.

Real GDP Growth, 1992–2005The third chart presents annual real GDP growth ratessince 1992.These data were obtained from the WorldEconomic Outlook Database, IMF, September 2005.

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 budgetbalance (surplus/deficit) between 1998 and 2004.Thesedata were obtained from IMF Country Staff Reports andAppendices.

Page 3

Competitiveness RankingsThe table at the top of the page presents the GlobalCompetitiveness Index Rankings for the eight countriescovered in this Report. Rankings are shown out of the 117countries covered in The Global Competitiveness Report2005-2006, as well as out of the eight countries coveredin this Report.

Starting a BusinessThe chart in the middle of the page provides an indicationof the ease with which a business can be started in eachcountry, compared with both the SEE and the EU-15averages. It shows (1) the number of procedures required(2) The number of days required, and (3) the cost of set-ting up a business.The data source is the World Bank,Doing Business in 2006: Creating Jobs.

The Most Problematic Factors for Doing BusinessThe chart at the bottom of the page summarizes thosefactors seen by CEOs and top executives as the mostproblematic for doing business in their country.The infor-mation is drawn from a question in the ExecutiveOpinion Survey 2005 in which respondents were present-ed with 14 different factors and asked to rank from 1 to 5those they considered the most problematic.The responseswere tabulated and weighted according to the rankassigned by the respondents.

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� EU-15

� Turkey

� Macedonia, FYR

� US

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Source: UN Comtrade Database, October 2005

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FDI Inward and Outward Stock and Flow, 2000 and 2004

� 2000

� 2004

Source: UNCTAD World Investment Report 2005

Real GDP Growth, 1992–2005

Source: World Economic Outlook Database,IMF, September 2005


� Government debt as a

percentage of GDP

� Government surplus/deficit

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Source: Publicly available IMF Country Staff

Reports and Appendices

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1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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Rank out of Rank among 104 countries 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 2005–2006

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

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)

Starting a Business

� EU-15

� Albania

� SEE Average

Source: World Bank, Doing Business in 2006: Creating Jobs

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National Competitiveness Balance SheetThis page forms a country competitiveness balance sheet,providing detailed information on the relative strengthsand weaknesses of each economy.The balance sheet showsthe variables included in the calculation of the GlobalCompetitiveness Index, organized under the different specific issue areas, such as infrastructure, macroeconomicstability and business sophistication.The rankings for eachvariable are given out of the entire group of 117 countriesincluded in The Global Competitiveness Report 2005–2006.

The decision rule for selecting variables as advantagesor disadvantages is based on the methodology used for the117-country sample employed in The Global CompetitivenessReport. For top-ranked countries in the Global CI, variablesranked between 1 and 10 are considered an advantage. Forthose countries ranked from 11 to 50 overall in the GlobalCI, variables ranked better than the country’s own rank areconsidered to be advantages. For those countries with anoverall Global CI rank worse than 50, any variables rankedequal to or better than 50 are considered as advantages.

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NOTABLE COMPETITIVE ADVANTAGES Rank/117

Infrastructure

5.08 Telephone lines, 2003 .....................................................33

5.02 Railroad infrastructure development ...............................38

Macroeconomy

2.13 Government surplus/deficit, 2004...................................16

2.20 Government debt, 2004 ..................................................41

Health and primary education

4.13 Malaria prevalence ............................................................1

4.14 HIV prevalence ..................................................................5

4.12 Tuberculosis prevalence ..................................................48

4.10 Infant mortality ................................................................49

Higher education and training

4.03 Quality of math and science education...........................20

4.16 Secondary enrollment .....................................................30

4.01 Quality of the educational system ..................................42

4.17 Tertiary enrollment ..........................................................43

Market Efficiency

2.19 Imports, 2004..................................................................20

2.18 Exports, 2004 ..................................................................26

8.17 Hiring and firing practices ...............................................28

8.18 Flexibility of wage determination ....................................33

7.11 Time required to start a business, 2005 .........................39

8.20 Pay and productivity ........................................................41

4.09 Private Sector Employment of Women ..........................44

2.05 Ease of access to loans ..................................................47

7.10 Number of procedures required to start

a business, 2005 ...........................................................49

Technological readiness

3.18 Cellular telephones, 2003................................................44

3.19 Internet users, 2003........................................................45

3.15 Laws relating to ICT ........................................................46

Innovation

3.09 Availability of scientists and engineers ...........................31

NOTABLE COMPETITIVE DISADVANTAGES Rank/117

Institutions

6.16 Organized crime ............................................................110

8.21 Protection of minority shareholders’ interests..............110

6.08 Favoritism in decisions of government officials............101

6.24 Diversion of public funds ..............................................100

6.15 Business costs of crime and violence ............................95

6.14 Reliability of police services ............................................93

8.04 Ethical behavior of firms .................................................92

6.06 Wastefulness of government spending ..........................89

6.01 Judicial independence.....................................................88

6.26 Public trust of politicians .................................................87

6.03 Property rights.................................................................85

8.16 Efficacy of corporate boards ...........................................81

6.07 Burden of government regulation ...................................77

8.23 Strength of auditing and accounting standards ..............67

2.02 Business costs of terrorism ............................................63

Infrastructure

5.04 Air transport infrastructure quality ..................................98

5.01 Overall infrastructure quality ...........................................83

5.05 Quality of electricity supply.............................................71

5.03 Port infrastructure quality................................................60

Macroeconomy

2.15 Real effective exchange rate, 2004 ..............................114

2.14 National savings rate, 2004.............................................89

2.16 Inflation, 2004 .................................................................78

2.17 Interest rate spread, 2004...............................................62

Higher education and training

8.11 Extent of staff training ....................................................89

8.15 Quality of management schools .....................................84

7.09 Local availability of specialized research and

training services ............................................................56

Health and primary education

4.15 Primary enrollment..........................................................74

4.05 Medium term business impact of tuberculosis ..............70

4.04 Medium term business impact of malaria .....................68

4.06 Medium term business impact of HIV/AIDS...................58

4.11 Life expectancy ...............................................................51

Market Efficiency

2.12 Agricultural policy costs ................................................115

4.08 Brain drain .....................................................................110

8.22 Foreign ownership restrictions......................................103

8.14 Reliance on professional management.........................102

2.03 Financial market sophistication .......................................98

6.02 Efficiency of legal framework .........................................97

7.01 Intensity of local competition..........................................94

6.11 Extent and effect of taxation...........................................89

7.02 Effectiveness of antitrust policy......................................88

2.08 Local equity market access.............................................86

8.19 Cooperation in labor-employer relations..........................84

2.04 Soundness of banks........................................................69

2.09 Prevalence of trade barriers ............................................57

2.06 Venture capital availability ...............................................51

Technological readiness

3.02 Firm-level technology absorption ..................................100

3.01 Technological readiness ..................................................90

3.04 FDI and technology transfer............................................65

3.21 Personal computers, 2003 ..............................................64

Business sophistication

8.12 Willingness to delegate authority....................................96

8.01 Nature of competitive advantage....................................92

8.08 Control of international distribution.................................85

8.06 Extent of marketing.........................................................84

8.05 Production process sophistication ..................................81

7.06 Local supplier quality.......................................................74

8.02 Value chain presence ......................................................67

7.05 Local supplier quantity ....................................................65

Innovation

6.04 Intellectual property protection .......................................90

National Competitiveness Balance Sheet9


44

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try

Prof

iles:

Alb

ania

Albania

Key Indicators

Total population in millions, 2004 ......................................................3.2Total GDP in billions of US dollars, 2004 ...........................................7.6GDP per capita (PPP) in US dollars, 2004......................................4,937Real growth in GDP (%), 2004 ..........................................................5.9

Growth of output (average annual percent growth) 1990–2003 .......4.6Agriculture......................................................................................3.6Industry ..........................................................................................2.0

Manufacturing ............................................................................n/aServices .........................................................................................7.4

Inflation (annual percent change), 2004 ............................................2.9Government surplus/deficit (as percent of GDP), 2004...................–4.9Gross fixed capital formation (as percent of GDP), 2005 ..................n/aNational savings rate, 2004 .............................................................17.2Interest rate spread, 2004 .................................................................5.2

Real effective exchange rate*, 2004.............................................113.1Exports of goods and services (as percent of GDP), 2004 .............16.8Imports of goods and services (as percent of GDP), 2004 .............36.0Current account balance (as percent of GDP), 2004 .......................–4.4Gross official reserves in months of imports, 2004 ..........................4.1Government debt as a percentage of GDP, 2004 ...........................55.3Total unemployment (ILO definition, %), 2004 ...............................14.4Gini 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 ..............................98.7Life expectancy at birth, 2003 .........................................................72.0HIV prevalence rate for population aged 15 to 49,

in percent, 2003.............................................................................0.1Public expenditure on health (as percent of GDP), 2002 ..................2.4


Paved roads (percent of total roads)................................................39.0Main telephone lines per 100 inhabitants, 2003 ...............................8.3Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..35.8Personal computers per 100 inhabitants, 2002.................................1.2Internet 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)


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 forInternational Development; ITU World Telecommunications Indicators 2004



� EU-15� Turkey�� Macedonia, FYR� US� Other


45

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try

Prof

iles:

Alb

ania


� 2000� 2004





� Government debt as a percentage of GDP

� Government surplus/deficitas a percentage of GDP

Source: Publicly available IMF Country Staff Reports and Appendices

0

500

1,000

1,500

2,000

–12

–9

–6

–3

0

3

6

9

12

15

53

57

61

65

69

73

–12

–10

–8

–6

–4

–2

0


1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1998 1999 2000 2001 2002 2003 2004

1% 6%

90%

2%

< 1%

US$

(mill

ions

)Pe

rcen

tG

over

nmen

t deb

t

Gov

ernm

ent s

urpl

us/d

efic

it


46

Coun

try

Prof

iles:

Alb

ania


Global Competitiveness Index..........................................................100................................8

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

Efficiency Enhancers...................................................................................................95 ......................................8Higher education and training .....................................................................93 ................................8Market efficiency.......................................................................................100 ................................8Technological readiness ..............................................................................98 ................................7

Innovation Factors......................................................................................................112 ......................................8Business sophistication.............................................................................107 ................................8Innovation..................................................................................................115 ................................8



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


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.


Starting a Business, 2005

� EU-15� Albania� SEE Average


0

2

4

6

8

10

12

Num

ber

of p

roce

dure

s

0

5

10

15

20

25

30

35

40

45

Tim

e (d

ays)

0

5

10

15

20

25

30

35

Cost

(per

cent

of i

ncom

e pe

r ca

pita

)



47

Coun

try

Prof

iles:

Alb

ania


Health and primary education4.13 Malaria prevalence ............................................................14.14 HIV prevalence ..................................................................54.12 Tuberculosis prevalence ..................................................334.10 Infant mortality ................................................................384.06 Medium term business impact of HIV/AIDS...................414.05 Medium term business impact of tuberculosis ..............50

Macroeconomy2.16 Inflation, 2004 .................................................................45

Market Efficiency8.17 Hiring and firing practices ...............................................168.18 Flexibility of wage determination ....................................268.20 Pay and productivity ........................................................294.09 Private Sector Employment of Women ..........................308.19 Cooperation in labor-employer relations..........................40

(Disadvantages cont’d. from bottom of right column)


Technological readiness3.15 Laws relating to ICT ......................................................1103.01 Technological readiness ................................................1093.02 Firm-level technology absorption ..................................1033.19 Internet users, 2003......................................................1013.21 Personal computers, 2003 ..............................................953.04 FDI and technology transfer............................................913.18 Cellular telephones, 2003................................................53

Business sophistication7.06 Local supplier quality.....................................................1157.05 Local supplier quantity ..................................................1108.02 Value chain presence ....................................................1078.06 Extent of marketing.........................................................958.12 Willingness to delegate authority....................................938.05 Production process sophistication ..................................858.01 Nature of competitive advantage....................................568.08 Control of international distribution.................................54

Innovation3.07 University/industry research collaboration ....................1173.08 Government procurement of advanced technology

products ......................................................................1178.03 Capacity for innovation..................................................1173.05 Quality of scientific research institutions ......................1166.04 Intellectual property protection .....................................1123.06 Company spending on research and development ......1093.09 Availability of scientists and engineers ...........................843.17 Utility patents, 2004 ........................................................81


Institutions6.08 Favoritism in decisions of government officials............1116.24 Diversion of public funds ..............................................1096.16 Organized crime ............................................................1088.21 Protection of minority shareholders’ interests..............1026.26 Public trust of politicians ...............................................1016.03 Property rights...............................................................1008.23 Strength of auditing and accounting standards ............1002.02 Business costs of terrorism ............................................966.06 Wastefulness of government spending ..........................958.04 Ethical behavior of firms .................................................946.14 Reliability of police services ............................................926.07 Burden of government regulation ...................................886.15 Business costs of crime and violence ............................858.16 Efficacy of corporate boards ...........................................846.01 Judicial independence.....................................................82

Infrastructure5.01 Overall infrastructure quality .........................................1165.05 Quality of electricity supply...........................................1155.04 Air transport infrastructure quality ................................1145.02 Railroad infrastructure development .............................1095.03 Port infrastructure quality..............................................1055.08 Telephone lines, 2003 .....................................................80

Macroeconomy2.15 Real effective exchange rate, 2004 ..............................1102.13 Government surplus/deficit, 2004.................................1002.14 National savings rate, 2004.............................................852.20 Government debt, 2004 ..................................................612.17 Interest rate spread, 2004...............................................54

Health and primary education4.15 Primary enrollment..........................................................564.04 Medium term business impact of malaria .....................514.11 Life expectancy ...............................................................51

Higher education and training7.09 Local availability of specialized research and

training services ..........................................................1168.15 Quality of management schools ...................................1128.11 Extent of staff training ..................................................1114.01 Quality of the educational system ..................................904.17 Tertiary enrollment ..........................................................844.16 Secondary enrollment .....................................................704.03 Quality of math and science education...........................56

Market Efficiency2.08 Local equity market access...........................................1177.02 Effectiveness of antitrust policy....................................1164.08 Brain drain .....................................................................1152.03 Financial market sophistication .....................................1092.05 Ease of access to loans ................................................1072.18 Exports, 2004 ................................................................1067.01 Intensity of local competition........................................1026.02 Efficiency of legal framework .......................................1018.14 Reliance on professional management...........................948.22 Foreign ownership restrictions........................................892.04 Soundness of banks........................................................802.06 Venture capital availability ...............................................772.09 Prevalence of trade barriers ............................................722.12 Agricultural policy costs ..................................................712.19 Imports, 2004..................................................................716.11 Extent and effect of taxation...........................................717.11 Time required to start a business, 2005 .........................687.10 Number of procedures required to start

a business, 2005 ...........................................................61

< < < (Cont’d. in bottom of left column)

National Competitiveness Balance Sheet


48

Coun

try

Prof

iles:

Bos

nia

and

Herz

egov

ina

Bosnia andHerzegovinaKey Indicators


Growth of output (average annual percent growth) 1990–2003 .......n/aAgriculture......................................................................................n/aIndustry ..........................................................................................n/a

Manufacturing ............................................................................n/aServices..........................................................................................n/a

Inflation (annual percent change), 2004 ............................................0.4Government surplus/deficit (as percent of GDP), 2004...................–0.7Gross fixed capital formation (as percent of GDP), 2005 ..................n/aNational savings rate, 2004 ...............................................................4.6Interest rate spread, 2004 .................................................................6.6

Real effective exchange rate*, 2004...............................................98.3Exports of goods and services (as percent of GDP), 2003 .............23.7Imports of goods and services (as percent of GDP), 2003 .............79.1Current account balance (as percent of GDP), 2004 .....................–25.6Gross official reserves in months of imports, 2004 ..........................6.1Government debt as a percentage of GDP, 2004 ...........................58.0Total unemployment (ILO definition, %), 2004..................................n/aGini index**.....................................................................................0.26


Gross primary enrollment (percent of relevant age group), 2003.................................................................................93.8






Paved roads (percent of total roads)................................................52.3Main telephone lines per 100 inhabitants, 2003 .............................24.5Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..27.4Personal computers per 100 inhabitants, 2004.................................6.0Internet users per 10,000 inhabitants, 2003 .................................391.4






� EU-15� Croatia�� Serbia and Montenegro � Slovenia� Hungary� Other



� 2000� 2004








49

Coun

try

Prof

iles:

Bos

nia

and

Herz

egov

ina

0

500

1,000

1,500

2,000

–10

0

10

20

30

40

50

60

70

80

0

20

40

60

80

100

120

–10

–8

–6

–4

–2

0

2


1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1998 1999 2000 2001 2002 2003 2004

14%

38%

20%

16%

8%

4%

US$

(mill

ions

)Pe

rcen

tG

over

nmen

t deb

t

Gov

ernm

ent s

urpl

us/d

efic

it


50

Coun

try

Prof

iles:

Bos

nia

and

Herz

egov

ina


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





� EU-15� Bosnia and

Herzegovina� SEE Average


0

2

4

6

8

10

12

Num

ber

of p

roce

dure

s

0

10

20

30

40

50

60

Tim

e (d

ays)

0

5

10

15

20

25

30

35

40

45

Cost

(per

cent

of i

ncom

e pe

r ca

pita

)



Global Competitiveness Index............................................................88................................7

Basic Requirements.....................................................................................................87 ......................................6Institutions.................................................................................................106 ................................7Infrastructure.............................................................................................100 ................................7Macroeconomy ...........................................................................................52 ................................4Health and Primary Education .....................................................................84 ................................8

Efficiency Enhancers...................................................................................................91 ......................................7Higher education and training .....................................................................81 ................................7Market efficiency.........................................................................................91 ................................5Technological readiness ............................................................................105 ................................8

Innovation Factors........................................................................................................98 ......................................7Business sophistication...............................................................................94 ................................7Innovation..................................................................................................101 ................................7



51

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try

Prof

iles:

Bos

nia

and

Herz

egov

ina


Institutions2.02 Business costs of terrorism ............................................45

Infrastructure5.08 Telephone lines, 2003 .....................................................49

Macroeconomy2.16 Inflation, 2004 .................................................................112.13 Government surplus/deficit, 2004...................................34

Health and primary education4.13 Malaria prevalence ............................................................14.14 HIV prevalence ..................................................................54.06 Medium term business impact of HIV/AIDS...................374.04 Medium term business impact of malaria .....................464.11 Life expectancy ...............................................................46

Market Efficiency2.19 Imports, 2004..................................................................138.18 Flexibility of wage determination ....................................19


Institutions6.07 Burden of government regulation .................................1176.03 Property rights...............................................................1136.14 Reliability of police services ..........................................1116.06 Wastefulness of government spending........................1108.04 Ethical behavior of firms ...............................................1048.16 Efficacy of corporate boards .........................................1048.21 Protection of minority shareholders’ interests................986.15 Business costs of crime and violence ............................946.16 Organized crime ..............................................................916.26 Public trust of politicians .................................................918.23 Strength of auditing and accounting standards ..............916.08 Favoritism in decisions of government officials..............846.01 Judicial independence.....................................................836.24 Diversion of public funds ................................................62

Infrastructure5.03 Port infrastructure quality..............................................1155.04 Air transport infrastructure quality ................................1155.01 Overall infrastructure quality .........................................1115.02 Railroad infrastructure development ...............................955.05 Quality of electricity supply.............................................70

Macroeconomy2.14 National savings rate, 2004...........................................1142.17 Interest rate spread, 2004...............................................702.20 Government debt, 2004 ..................................................662.15 Real effective exchange rate, 2004 ................................61

Health and primary education4.15 Primary enrollment........................................................1024.05 Medium term business impact of tuberculosis ..............574.12 Tuberculosis prevalence ..................................................574.10 Infant mortality ................................................................54

Higher education and training8.11 Extent of staff training ....................................................937.09 Local availability of specialized research and

training services ............................................................928.15 Quality of management schools .....................................884.16 Secondary enrollment .....................................................794.17 Tertiary enrollment ..........................................................694.01 Quality of the educational system ..................................594.03 Quality of math and science education...........................53

Market Efficiency2.12 Agricultural policy costs ................................................1166.02 Efficiency of legal framework .......................................1097.02 Effectiveness of antitrust policy....................................1094.08 Brain drain .....................................................................1032.03 Financial market sophistication .....................................1022.18 Exports, 2004 ..................................................................994.09 Private Sector Employment of Women ..........................998.14 Reliance on professional management...........................996.11 Extent and effect of taxation...........................................982.08 Local equity market access.............................................918.22 Foreign ownership restrictions........................................877.01 Intensity of local competition..........................................868.19 Cooperation in labor-employer relations..........................852.04 Soundness of banks........................................................827.11 Time required to start a business, 2005 .........................782.06 Venture capital availability ...............................................757.10 Number of procedures required to start

a business, 2005 ...........................................................742.09 Prevalence of trade barriers ............................................678.20 Pay and productivity ........................................................668.17 Hiring and firing practices ...............................................652.05 Ease of access to loans ..................................................52





Technological readiness3.02 Firm-level technology absorption ..................................1143.04 FDI and technology transfer..........................................1143.15 Laws relating to ICT ......................................................1053.01 Technological readiness ................................................1023.19 Internet users, 2003........................................................823.21 Personal computers, 2003 ..............................................603.18 Cellular telephones, 2003................................................59

Business sophistication8.06 Extent of marketing.......................................................1067.05 Local supplier quantity ....................................................998.12 Willingness to delegate authority....................................978.01 Nature of competitive advantage....................................938.05 Production process sophistication ..................................927.06 Local supplier quality.......................................................918.02 Value chain presence ......................................................858.08 Control of international distribution.................................73

Innovation6.04 Intellectual property protection .....................................1133.08 Government procurement of advanced technology

products ......................................................................1103.06 Company spending on research and development ......1053.05 Quality of scientific research institutions ......................1013.09 Availability of scientists and engineers ...........................833.17 Utility patents, 2004 ........................................................813.07 University/industry research collaboration ......................768.03 Capacity for innovation....................................................64


52

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iles:

Bul

garia

Bulgaria

Key Indicators

Total population in millions, 2004 ......................................................7.8Total GDP in billions of US dollars, 2004 .........................................23.8GDP per capita (PPP) in US dollars, 2004......................................8,500Real growth in GDP (%), 2004 ..........................................................5.6

Growth of output (average annual percent growth) 1990–2003 .....–0.2Agriculture......................................................................................2.9Industry ........................................................................................–2.5

Manufacturing ............................................................................n/aServices........................................................................................–2.7

Inflation (annual percent change), 2004 ............................................6.1Government surplus/deficit (as percent of GDP), 2004 ....................1.8Gross fixed capital formation (as percent of GDP), 2005................23.6National savings rate, 2004 .............................................................16.0Interest rate spread, 2004 .................................................................5.8









Paved roads (percent of total roads)................................................92.0Main telephone lines per 100 inhabitants, 2003 .............................38.0Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..46.6Personal computers per 100 inhabitants, 2002.................................5.2Internet users per 10,000 inhabitants, 2003 ..............................2,058.4






� EU-15� Turkey�� US� Romania� Serbia and Montenegro� Other


53

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Bul

garia


� 2000� 2004








–1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

–12

–10

–8

–6

–4

–2

0

2

4

6

0

20

40

60

80

100

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0


1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1998 1999 2000 2001 2002 2003 2004

25%

54%

10%

4%

4%

3%

US$

(mill

ions

)Pe

rcen

tG

over

nmen

t deb

t

Gov

ernm

ent s

urpl

us/d

efic

it


54

Coun

try

Prof

iles:

Bul

garia



Basic Requirements.....................................................................................................58 ......................................2Institutions...................................................................................................95 ................................5Infrastructure...............................................................................................59 ................................3Macroeconomy ...........................................................................................47 ................................3Health and Primary Education .....................................................................42 ................................3

Efficiency Enhancers...................................................................................................59 ......................................3Higher education and training .....................................................................45 ................................3Market efficiency.........................................................................................78 ................................4Technological readiness ..............................................................................58 ................................4

Innovation Factors........................................................................................................74 ......................................3Business sophistication...............................................................................79 ................................4Innovation....................................................................................................72 ................................3



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





� EU-15� Bulgaria� SEE Average


0

2

4

6

8

10

12

Num

ber

of p

roce

dure

s

0

5

10

15

20

25

30

35

40

Tim

e (d

ays)

0

2

4

6

8

10

12

14

16

18

Cost

(per

cent

of i

ncom

e pe

r ca

pita

)



55

Coun

try

Prof

iles:

Bul

garia


Infrastructure5.08 Telephone lines, 2003 .....................................................335.02 Railroad infrastructure development ...............................38

Macroeconomy2.13 Government surplus/deficit, 2004...................................162.20 Government debt, 2004 ..................................................41

Health and primary education4.13 Malaria prevalence ............................................................14.14 HIV prevalence ..................................................................54.12 Tuberculosis prevalence ..................................................484.10 Infant mortality ................................................................49

Higher education and training4.03 Quality of math and science education...........................204.16 Secondary enrollment .....................................................304.01 Quality of the educational system ..................................424.17 Tertiary enrollment ..........................................................43

Market Efficiency2.19 Imports, 2004..................................................................202.18 Exports, 2004 ..................................................................268.17 Hiring and firing practices ...............................................288.18 Flexibility of wage determination ....................................337.11 Time required to start a business, 2005 .........................398.20 Pay and productivity ........................................................414.09 Private Sector Employment of Women ..........................442.05 Ease of access to loans ..................................................477.10 Number of procedures required to start

a business, 2005 ...........................................................49

Technological readiness3.18 Cellular telephones, 2003................................................443.19 Internet users, 2003........................................................453.15 Laws relating to ICT ........................................................46

Innovation3.09 Availability of scientists and engineers ...........................31


Institutions6.16 Organized crime ............................................................1108.21 Protection of minority shareholders’ interests..............1106.08 Favoritism in decisions of government officials............1016.24 Diversion of public funds ..............................................1006.15 Business costs of crime and violence ............................956.14 Reliability of police services ............................................938.04 Ethical behavior of firms .................................................926.06 Wastefulness of government spending ..........................896.01 Judicial independence.....................................................886.26 Public trust of politicians .................................................876.03 Property rights.................................................................858.16 Efficacy of corporate boards ...........................................816.07 Burden of government regulation ...................................778.23 Strength of auditing and accounting standards ..............672.02 Business costs of terrorism ............................................63

Infrastructure5.04 Air transport infrastructure quality ..................................985.01 Overall infrastructure quality ...........................................835.05 Quality of electricity supply.............................................715.03 Port infrastructure quality................................................60

Macroeconomy2.15 Real effective exchange rate, 2004 ..............................1142.14 National savings rate, 2004.............................................892.16 Inflation, 2004 .................................................................782.17 Interest rate spread, 2004...............................................62

Higher education and training8.11 Extent of staff training ....................................................898.15 Quality of management schools .....................................847.09 Local availability of specialized research and


Health and primary education4.15 Primary enrollment..........................................................744.05 Medium term business impact of tuberculosis ..............704.04 Medium term business impact of malaria .....................684.06 Medium term business impact of HIV/AIDS...................584.11 Life expectancy ...............................................................51

Market Efficiency2.12 Agricultural policy costs ................................................1154.08 Brain drain .....................................................................1108.22 Foreign ownership restrictions......................................1038.14 Reliance on professional management.........................1022.03 Financial market sophistication .......................................986.02 Efficiency of legal framework .........................................977.01 Intensity of local competition..........................................946.11 Extent and effect of taxation...........................................897.02 Effectiveness of antitrust policy......................................882.08 Local equity market access.............................................868.19 Cooperation in labor-employer relations..........................842.04 Soundness of banks........................................................692.09 Prevalence of trade barriers ............................................572.06 Venture capital availability ...............................................51

Technological readiness3.02 Firm-level technology absorption ..................................1003.01 Technological readiness ..................................................903.04 FDI and technology transfer............................................653.21 Personal computers, 2003 ..............................................64

Business sophistication8.12 Willingness to delegate authority....................................968.01 Nature of competitive advantage....................................928.08 Control of international distribution.................................858.06 Extent of marketing.........................................................848.05 Production process sophistication ..................................817.06 Local supplier quality.......................................................748.02 Value chain presence ......................................................677.05 Local supplier quantity ....................................................65





Innovation6.04 Intellectual property protection .......................................903.07 University/industry research collaboration ......................863.08 Government procurement of advanced technology

products ........................................................................843.06 Company spending on research and development ........798.03 Capacity for innovation....................................................763.17 Utility patents, 2004 ........................................................543.05 Quality of scientific research institutions ........................53


56

Coun

try

Prof

iles:

Cro

atia

Croatia

Key Indicators

Total population in millions, 2004 ......................................................4.4Total GDP in billions of US dollars, 2004 .........................................34.3GDP per capita (PPP) in US dollars, 2004....................................11,568Real growth in GDP (%), 2004 ..........................................................3.8

Growth of output (average annual percent growth) 1990–2003 .......1.7Agriculture....................................................................................–2.0Industry ........................................................................................–0.4

Manufacturing ..........................................................................–0.8Services .........................................................................................3.0

Inflation (annual percent change), 2004 ............................................2.1Government surplus/deficit (as percent of GDP), 2004...................–5.0Gross fixed capital formation (as percent of GDP), 2005................29.5National savings rate, 2004 .............................................................25.3Interest rate spread, 2004 .................................................................9.9









Paved roads (percent of total roads)................................................84.6Main telephone lines per 100 inhabitants, 2003 .............................38.9Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..58.4Personal computers per 100 inhabitants, 2002...............................17.4Internet users per 10,000 inhabitants, 2003 ..............................2,318.2





57

Coun

try

Prof

iles:

Cro

atia


� 2000� 2004



� EU-15� Bosnia and Herzegovina�� Slovenia� Serbia and Montenegro� Liberia� Other








0

3,000

6,000

9,000

12,000

15,000

–12

–10

–8

–6

–4

–2

0

2

4

6

8

0

10

20

30

40

50

60

70

–10

–8

–6

–4

–2

0


1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1998 1999 2000 2001 2002 2003 2004

US$

(mill

ions

)Pe

rcen

tG

over

nmen

t deb

t

Gov

ernm

ent s

urpl

us/d

efic

it

20%

52%

14%

7%

3%

4%


58

Coun

try

Prof

iles:

Cro

atia








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





� EU-15� Croatia� SEE Average


0

2

4

6

8

10

12

Num

ber

of p

roce

dure

s

0

10

20

30

40

50

Tim

e (d

ays)

0

2

4

6

8

10

12

14

16

18

Cost

(per

cent

of i

ncom

e pe

r ca

pita

)



59

Coun

try

Prof

iles:

Cro

atia


Institutions2.02 Business costs of terrorism ............................................166.24 Diversion of public funds ................................................49


Macroeconomy2.16 Inflation, 2004 .................................................................302.14 National savings rate, 2004.............................................32

Health and primary education4.13 Malaria prevalence ............................................................14.14 HIV prevalence ..................................................................54.06 Medium term business impact of HIV/AIDS...................164.05 Medium term business impact of tuberculosis ..............264.10 Infant mortality ................................................................264.04 Medium term business impact of malaria .....................314.11 Life expectancy ...............................................................354.12 Tuberculosis prevalence ..................................................48

Higher education and training4.03 Quality of math and science education...........................374.17 Tertiary enrollment ..........................................................427.09 Local availability of specialized research and

training services ............................................................484.16 Secondary enrollment .....................................................49

Market Efficiency2.18 Exports, 2004 ..................................................................382.19 Imports, 2004..................................................................38

Technological readiness3.21 Personal computers, 2003 ..............................................353.18 Cellular telephones, 2003................................................383.19 Internet users, 2003........................................................40

Business sophistication8.01 Nature of competitive advantage....................................40

Innovation3.17 Utility patents, 2004 ........................................................33


Institutions6.07 Burden of government regulation ...................................978.21 Protection of minority shareholders’ interests................956.03 Property rights.................................................................866.16 Organized crime ..............................................................858.16 Efficacy of corporate boards ...........................................838.04 Ethical behavior of firms .................................................796.08 Favoritism in decisions of government officials..............776.01 Judicial independence.....................................................766.06 Wastefulness of government spending ..........................746.26 Public trust of politicians .................................................736.14 Reliability of police services ............................................718.23 Strength of auditing and accounting standards ..............706.15 Business costs of crime and violence ............................58

Infrastructure5.04 Air transport infrastructure quality ..................................805.03 Port infrastructure quality................................................785.02 Railroad infrastructure development ...............................615.01 Overall infrastructure quality ...........................................575.05 Quality of electricity supply.............................................53

Macroeconomy2.13 Government surplus/deficit, 2004.................................1032.17 Interest rate spread, 2004...............................................872.15 Real effective exchange rate, 2004 ................................802.20 Government debt, 2004 ..................................................64

Health and primary education4.15 Primary enrollment..........................................................95

Higher education and training8.15 Quality of management schools .....................................928.11 Extent of staff training ....................................................834.01 Quality of the educational system ..................................71

Market Efficiency2.12 Agricultural policy costs ................................................1122.06 Venture capital availability ...............................................988.19 Cooperation in labor-employer relations..........................977.02 Effectiveness of antitrust policy......................................868.22 Foreign ownership restrictions........................................836.02 Efficiency of legal framework .........................................796.11 Extent and effect of taxation...........................................788.20 Pay and productivity ........................................................782.08 Local equity market access.............................................752.03 Financial market sophistication .......................................747.10 Number of procedures required to start

a business, 2005 ...........................................................744.08 Brain drain .......................................................................734.09 Private Sector Employment of Women ..........................737.11 Time required to start a business, 2005 .........................727.01 Intensity of local competition..........................................678.14 Reliance on professional management...........................652.05 Ease of access to loans ..................................................568.17 Hiring and firing practices ...............................................568.18 Flexibility of wage determination ....................................552.04 Soundness of banks........................................................542.09 Prevalence of trade barriers ............................................53

Technological readiness3.04 FDI and technology transfer..........................................1093.02 Firm-level technology absorption ....................................943.01 Technological readiness ..................................................873.15 Laws relating to ICT ........................................................57

Business sophistication7.05 Local supplier quantity ....................................................768.05 Production process sophistication ..................................748.12 Willingness to delegate authority....................................728.06 Extent of marketing.........................................................697.06 Local supplier quality.......................................................628.02 Value chain presence ......................................................598.08 Control of international distribution.................................55





Innovation3.06 Company spending on research and development ........783.08 Government procurement of advanced technology

products ........................................................................696.04 Intellectual property protection .......................................678.03 Capacity for innovation....................................................663.09 Availability of scientists and engineers ...........................623.05 Quality of scientific research institutions ........................603.07 University/industry research collaboration ......................59


60

Coun

try

Prof

iles:

Mac

edon

ia, F

YR

Macedonia, FYR

Key Indicators


Growth of output (average annual percent growth) 1990–2003 .....–0.1Agriculture....................................................................................–0.5Industry ........................................................................................–1.5

Manufacturing ..........................................................................–3.2Services .........................................................................................1.3

Inflation (annual percent change), 2004...........................................–0.3Government surplus/deficit (as percent of GDP), 2004 ....................0.4Gross fixed capital formation (as percent of GDP), 2005 ..................n/aNational savings rate, 2004 .............................................................15.9Interest rate spread, 2004 .................................................................5.9

Real effective exchange rate*, 2004...............................................96.0Exports of goods and services (as percent of GDP), 2004 .............39.5Imports of goods and services (as percent of GDP), 2004 .............64.2Current account balance (as percent of GDP), 2004 .......................–8.2Gross official reserves in months of imports, 2003 ..........................4.0Government debt as a percentage of GDP, 2004 ...........................26.4Total unemployment (ILO definition, %), 2004 ...............................37.2Gini index**.....................................................................................0.28

















61

Coun

try

Prof

iles:

Mac

edon

ia, F

YR


� 2000� 2004



� EU-15� Serbia and Montenegro�� Croatia� US� Turkey� Other




0

200

400

600

800

1,000

1,200

–8–7–6–5–4–3–2–1

012345

0

10

20

30

40

50

60

70

–8

–6

–4

–2

0

2

4


1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1998 1999 2000 2001 2002 2003 2004

13%

54%

21%

5%

3%

4%

US$

(mill

ions

)Pe

rcen

tG

over

nmen

t deb

t

Gov

ernm

ent s

urpl

us/d

efic

it


62



Basic Requirements.....................................................................................................69 ......................................4Institutions.................................................................................................100 ................................6Infrastructure...............................................................................................79 ................................5Macroeconomy ...........................................................................................22 ................................1Health and Primary Education .....................................................................72 ................................7





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





� EU-15� Macedonia, FYR� SEE Average


0

2

4

6

8

10

12

14

Num

ber

of p

roce

dure

s

0

10

20

30

40

50

Tim

e (d

ays)

0

2

4

6

8

10

12

14

16

18

Cost

(per

cent

of i

ncom

e pe

r ca

pita

)


Coun

try

Prof

iles:

Mac

edon

ia, F

YR



Health and primary education4.13 Malaria prevalence ............................................................14.14 HIV prevalence ..................................................................54.12 Tuberculosis prevalence ..................................................414.10 Infant mortality ................................................................49

Higher education and training4.01 Quality of the educational system ..................................464.03 Quality of math and science education...........................50



Macroeconomy2.16 Inflation, 2004 ...................................................................52.20 Government debt, 2004 ..................................................202.13 Government surplus/deficit, 2004...................................28

Market Efficiency2.19 Imports, 2004..................................................................258.18 Flexibility of wage determination ....................................402.06 Venture capital availability ...............................................42


Institutions6.16 Organized crime ............................................................1142.02 Business costs of terrorism ..........................................1118.04 Ethical behavior of firms ...............................................1076.01 Judicial independence...................................................1046.03 Property rights...............................................................1026.15 Business costs of crime and violence ............................968.16 Efficacy of corporate boards ...........................................936.26 Public trust of politicians .................................................896.06 Wastefulness of government spending ..........................848.21 Protection of minority shareholders’ interests................816.08 Favoritism in decisions of government officials..............766.07 Burden of government regulation ...................................726.24 Diversion of public funds ................................................718.23 Strength of auditing and accounting standards ..............716.14 Reliability of police services ............................................67

Infrastructure5.03 Port infrastructure quality..............................................1035.04 Air transport infrastructure quality ................................1005.01 Overall infrastructure quality ...........................................815.05 Quality of electricity supply.............................................685.02 Railroad infrastructure development ...............................64

Macroeconomy2.14 National savings rate, 2004.............................................902.17 Interest rate spread, 2004...............................................652.15 Real effective exchange rate, 2004 ................................57

Health and primary education4.15 Primary enrollment..........................................................964.04 Medium term business impact of malaria .....................844.05 Medium term business impact of tuberculosis ..............814.06 Medium term business impact of HIV/AIDS...................714.11 Life expectancy ...............................................................51

Higher education and training7.09 Local availability of specialized research and

training services ............................................................778.11 Extent of staff training ....................................................748.15 Quality of management schools .....................................714.17 Tertiary enrollment ..........................................................654.16 Secondary enrollment .....................................................61

Market Efficiency4.08 Brain drain .....................................................................1098.14 Reliance on professional management.........................1097.01 Intensity of local competition........................................1066.02 Efficiency of legal framework .......................................1058.22 Foreign ownership restrictions......................................1052.04 Soundness of banks......................................................1028.19 Cooperation in labor-employer relations........................1027.02 Effectiveness of antitrust policy......................................996.11 Extent and effect of taxation...........................................972.03 Financial market sophistication .......................................902.05 Ease of access to loans ..................................................902.09 Prevalence of trade barriers ............................................847.10 Number of procedures required to start

a business, 2005 ...........................................................848.17 Hiring and firing practices ...............................................842.08 Local equity market access.............................................794.09 Private Sector Employment of Women ..........................792.12 Agricultural policy costs ..................................................727.11 Time required to start a business, 2005 .........................708.20 Pay and productivity ........................................................642.18 Exports, 2004 ..................................................................63



63

Coun

try

Prof

iles:

Mac

edon

ia, F

YR



Technological readiness3.02 Firm-level technology absorption ..................................1103.01 Technological readiness ................................................1073.04 FDI and technology transfer..........................................1063.15 Laws relating to ICT ........................................................813.19 Internet users, 2003........................................................713.21 Personal computers, 2003 ..............................................613.18 Cellular telephones, 2003................................................51

Business sophistication8.01 Nature of competitive advantage....................................988.06 Extent of marketing.........................................................918.05 Production process sophistication ..................................887.05 Local supplier quantity ....................................................857.06 Local supplier quality.......................................................778.02 Value chain presence ......................................................728.12 Willingness to delegate authority....................................678.08 Control of international distribution.................................66

Innovation6.04 Intellectual property protection .......................................993.06 Company spending on research and development ........853.05 Quality of scientific research institutions ........................833.17 Utility patents, 2004 ........................................................813.07 University/industry research collaboration ......................773.08 Government procurement of advanced technology

products ........................................................................678.03 Capacity for innovation....................................................56


64

Coun

try

Prof

iles:

Rom

ania

Romania

Key Indicators

Total population in millions, 2004 ....................................................22.3Total GDP in billions of US dollars, 2004 .........................................71.3GDP per capita (PPP) in US dollars, 2004......................................7,641Real growth in GDP (%), 2004 ..........................................................8.3

Growth of output (average annual percent growth) 1990–2003 .......0.1Agriculture....................................................................................–1.1Industry ..........................................................................................0.1

Manufacturing ............................................................................n/aServices .........................................................................................1.2

Inflation (annual percent change), 2004 ..........................................11.9Government surplus/deficit (as percent of GDP), 2004...................–1.1Gross fixed capital formation (as percent of GDP), 2005................23.9National savings rate, 2004 .............................................................17.0Interest rate spread, 2004 ...............................................................14.5

Real effective exchange rate*, 2004.............................................109.8Exports of goods and services (as percent of GDP), 2004 .............37.2Imports of goods and services (as percent of GDP), 2004 .............46.0Current account balance (as percent of GDP), 2004 .......................–7.5Gross official reserves in months of imports, 2003 ..........................3.3Government debt as a percentage of GDP, 2004 ...........................21.4Total unemployment (ILO definition, %), 2004 .................................8.0Gini index**.....................................................................................0.30








Paved roads (percent of total roads)................................................50.4Main telephone lines per 100 inhabitants, 2003 .............................19.9Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..32.4Personal computers per 100 inhabitants, 2003.................................9.7Internet users per 10,000 inhabitants, 2003 ..............................1,840.5





65

Coun

try

Prof

iles:

Rom

ania


� 2000� 2004



� EU-15� Turkey�� Hungary� US� Bulgaria� Other








–5,000

0

5,000

10,000

15,000

20,000

–10

–8

–6

–4

–2

0

2

4

6

8

10

0

5

10

15

20

25

30

35

–6

–5

–4

–3

–2

–1

0


1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

1998 1999 2000 2001 2002 2003 2004

19%

65%

7%

4%

3%

2%

US$

(mill

ions

)Pe

rcen

tG

over

nmen

t deb

t

Gov

ernm

ent s

urpl

us/d

efic

it


66








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





� EU-15� Romania� SEE Average


0

2

4

6

8

10

12

Num

ber

of p

roce

dure

s

0

5

10

15

20

25

30

35

40

Tim

e (d

ays)

0

2

4

6

8

10

12

14

16

18

Cost

(per

cent

of i

ncom

e pe

r ca

pita

)


Coun

try

Prof

iles:

Rom

ania



Institutions2.02 Business costs of terrorism ............................................436.07 Burden of government regulation ...................................50

Infrastructure5.02 Railroad infrastructure development ...............................46

Macroeconomy2.20 Government debt, 2004 ..................................................162.13 Government surplus/deficit, 2004...................................37

Health and primary education4.13 Malaria prevalence ............................................................14.14 HIV prevalence ..................................................................54.04 Medium term business impact of malaria .....................47

Higher education and training4.03 Quality of math and science education.............................84.01 Quality of the educational system ..................................417.09 Local availability of specialized research and

training services ............................................................414.17 Tertiary enrollment ..........................................................50

Market Efficiency7.10 Number of procedures required to start

a business, 2005 ...........................................................108.20 Pay and productivity ........................................................237.11 Time required to start a business, 2005 .........................328.18 Flexibility of wage determination ....................................342.19 Imports, 2004..................................................................47

Technological readiness3.04 FDI and technology transfer............................................123.19 Internet users, 2003........................................................48

Business sophistication8.12 Willingness to delegate authority....................................46



Institutions6.15 Business costs of crime and violence ............................746.14 Reliability of police services ............................................758.23 Strength of auditing and accounting standards ..............756.26 Public trust of politicians .................................................766.03 Property rights.................................................................786.16 Organized crime ..............................................................808.16 Efficacy of corporate boards ...........................................806.01 Judicial independence.....................................................868.04 Ethical behavior of firms .................................................896.06 Wastefulness of government spending ..........................906.08 Favoritism in decisions of government officials..............936.24 Diversion of public funds ................................................938.21 Protection of minority shareholders’ interests................94

Infrastructure5.03 Port infrastructure quality................................................545.08 Telephone lines, 2003 .....................................................595.05 Quality of electricity supply.............................................735.04 Air transport infrastructure quality ..................................795.01 Overall infrastructure quality ...........................................84

Macroeconomy2.14 National savings rate, 2004.............................................862.15 Real effective exchange rate, 2004 ..............................1042.17 Interest rate spread, 2004.............................................1062.16 Inflation, 2004 ...............................................................107

Health and primary education4.06 Medium term business impact of HIV/AIDS...................534.11 Life expectancy ...............................................................604.10 Infant mortality ................................................................634.05 Medium term business impact of tuberculosis ..............664.15 Primary enrollment..........................................................864.12 Tuberculosis prevalence ..................................................884.16 Secondary enrollment .....................................................628.11 Extent of staff training ....................................................658.15 Quality of management schools .....................................66

Market Efficiency4.09 Private Sector Employment of Women ..........................518.14 Reliance on professional management...........................642.05 Ease of access to loans ..................................................662.18 Exports, 2004 ..................................................................672.09 Prevalence of trade barriers ............................................702.06 Venture capital availability ...............................................732.08 Local equity market access.............................................742.04 Soundness of banks........................................................752.03 Financial market sophistication .......................................767.01 Intensity of local competition..........................................787.02 Effectiveness of antitrust policy......................................786.02 Efficiency of legal framework .........................................858.22 Foreign ownership restrictions........................................868.17 Hiring and firing practices ...............................................886.11 Extent and effect of taxation...........................................942.12 Agricultural policy costs ................................................1034.08 Brain drain .....................................................................1088.19 Cooperation in labor-employer relations........................117

Technological readiness3.21 Personal computers, 2003 ..............................................513.18 Cellular telephones, 2003................................................553.15 Laws relating to ICT ........................................................653.02 Firm-level technology absorption ....................................693.01 Technological readiness ..................................................73



67

Coun

try

Prof

iles:

Rom

ania



Business sophistication8.02 Value chain presence ......................................................638.08 Control of international distribution.................................638.06 Extent of marketing.........................................................688.05 Production process sophistication ..................................707.05 Local supplier quantity ....................................................827.06 Local supplier quality.......................................................848.01 Nature of competitive advantage..................................109

Innovation3.17 Utility patents, 2004 ........................................................538.03 Capacity for innovation....................................................703.08 Government procurement of advanced technology

products ........................................................................713.06 Company spending on research and development ........726.04 Intellectual property protection .......................................773.05 Quality of scientific research institutions ........................873.07 University/industry research collaboration ......................93


68

Coun

try

Prof

iles:

Ser

bia

and

Mon

tene

gro

Serbia andMontenegroKey Indicators

Total population in millions, 2004 ....................................................10.5Total GDP in billions of US dollars, 2004 .........................................24.0GDP per capita (PPP) in US dollars, 2004......................................4,858Real growth in GDP (%), 2004 ..........................................................7.2

Growth of output (average annual percent growth) 1990–2003 .......1.4Agriculture......................................................................................n/aIndustry ..........................................................................................n/a

Manufacturing ............................................................................n/aServices..........................................................................................n/a

Inflation (annual percent change), 2004 ............................................9.5Government surplus/deficit (as percent of GDP), 2004...................–0.3Gross fixed capital formation (as percent of GDP), 2005 ..................n/aNational savings rate, 2004..............................................................–1.0Interest rate spread, 2004 ...............................................................12.8

Real effective exchange rate*, 2004.............................................100.7Exports of goods and services (as percent of GDP), 2004 .............13.8Imports of goods and services (as percent of GDP), 2004 .............27.0Current account balance (as percent of GDP), 2004 .....................–13.1Gross official reserves in months of imports, 2003 ..........................n/aGovernment debt as a percentage of GDP, 2004 ...........................80.0Total unemployment (ILO definition, %), 2003 ...............................15.2Gini index** .......................................................................................n/a





Adult literacy rate age 15 and above (%), 2003 ................................n/aLife expectancy at birth, 2003 .........................................................73.0HIV prevalence rate for population aged 15 to 49,








69

Coun

try

Prof

iles:

Ser

bia

and

Mon

tene

gro


� 2000� 2004



� EU-15� Bosnia and Herzegovina�� Macedonia, FYR� Switzerland� Russian Federation� Other








0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

–20

–15

–10

–5

0

5

10

0

20

40

60

80

100

120

140

–5

–4

–3

–2

–1

0


1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

2000 2001 2002 2003 2004

24%

40%

15%

9%

8%

4%

US$

(mill

ions

)Pe

rcen

tG

over

nmen

t deb

t

Gov

ernm

ent s

urpl

us/d

efic

it


70



Basic Requirements.....................................................................................................92 ......................................7Institutions...................................................................................................93 ................................4Infrastructure...............................................................................................97 ................................6Macroeconomy .........................................................................................106 ................................8Health and Primary Education .....................................................................58 ................................4





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





� EU-15� Serbia and

Montenegro� SEE Average


0

2

4

6

8

10

12

Num

ber

of p

roce

dure

s

0

5

10

15

20

25

30

35

40

Tim

e (d

ays)

0

2

4

6

8

10

12

14

16

18

Cost

(per

cent

of i

ncom

e pe

r ca

pita

)


Coun

try

Prof

iles:

Ser

bia

and

Mon

tene

gro



Institutions6.15 Business costs of crime and violence ............................48


Macroeconomy2.13 Government surplus/deficit, 2004...................................31

Health and primary education4.13 Malaria prevalence ............................................................14.04 Medium term business impact of malaria .....................214.06 Medium term business impact of HIV/AIDS...................254.05 Medium term business impact of tuberculosis ..............354.12 Tuberculosis prevalence ..................................................454.11 Life expectancy ...............................................................464.14 HIV prevalence ................................................................47

Higher education and training4.03 Quality of math and science education...........................284.17 Tertiary enrollment ..........................................................48

Technological readiness3.04 FDI and technology transfer............................................10

Innovation3.09 Availability of scientists and engineers ...........................463.08 Government procurement of advanced technology

products ........................................................................50


Institutions6.07 Burden of government regulation .................................1168.21 Protection of minority shareholders’ interests..............1146.06 Wastefulness of government spending........................1088.16 Efficacy of corporate boards .........................................1086.03 Property rights...............................................................1036.08 Favoritism in decisions of government officials..............956.26 Public trust of politicians .................................................926.01 Judicial independence.....................................................916.24 Diversion of public funds ................................................848.23 Strength of auditing and accounting standards ..............826.14 Reliability of police services ............................................816.16 Organized crime ..............................................................678.04 Ethical behavior of firms .................................................582.02 Business costs of terrorism ............................................54

Infrastructure5.01 Overall infrastructure quality .........................................1155.04 Air transport infrastructure quality ................................1105.03 Port infrastructure quality..............................................1015.05 Quality of electricity supply.............................................895.02 Railroad infrastructure development ...............................80

Macroeconomy2.14 National savings rate, 2004...........................................1162.16 Inflation, 2004 ...............................................................1012.17 Interest rate spread, 2004...............................................992.20 Government debt, 2004 ..................................................942.15 Real effective exchange rate, 2004 ................................70

Health and primary education4.15 Primary enrollment..........................................................904.10 Infant mortality ................................................................52

Higher education and training8.11 Extent of staff training ..................................................1088.15 Quality of management schools .....................................794.01 Quality of the educational system ..................................667.09 Local availability of specialized research and

training services ............................................................634.16 Secondary enrollment .....................................................53

Market Efficiency2.18 Exports, 2004 ................................................................1134.08 Brain drain .....................................................................1138.14 Reliance on professional management.........................1128.19 Cooperation in labor-employer relations........................1112.03 Financial market sophistication .....................................1052.04 Soundness of banks......................................................1037.02 Effectiveness of antitrust policy....................................1032.19 Imports, 2004..................................................................974.09 Private Sector Employment of Women ..........................978.22 Foreign ownership restrictions........................................966.02 Efficiency of legal framework .........................................888.20 Pay and productivity ........................................................887.01 Intensity of local competition..........................................822.06 Venture capital availability ...............................................782.08 Local equity market access.............................................782.05 Ease of access to loans ..................................................767.11 Time required to start a business, 2005 .........................758.18 Flexibility of wage determination ....................................697.10 Number of procedures required to start

a business, 2005 ...........................................................612.12 Agricultural policy costs ..................................................556.11 Extent and effect of taxation...........................................548.17 Hiring and firing practices ...............................................532.09 Prevalence of trade barriers ............................................51



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Technological readiness3.01 Technological readiness ................................................1133.02 Firm-level technology absorption ..................................1013.21 Personal computers, 2003 ..............................................823.15 Laws relating to ICT ........................................................733.19 Internet users, 2003........................................................653.18 Cellular telephones, 2003................................................54

Business sophistication8.01 Nature of competitive advantage..................................1088.12 Willingness to delegate authority..................................1088.02 Value chain presence ....................................................1048.06 Extent of marketing.......................................................1028.05 Production process sophistication ..................................948.08 Control of international distribution.................................937.06 Local supplier quality.......................................................877.05 Local supplier quantity ....................................................84

Innovation6.04 Intellectual property protection .....................................1108.03 Capacity for innovation....................................................993.06 Company spending on research and development ........923.17 Utility patents, 2004 ........................................................813.05 Quality of scientific research institutions ........................613.07 University/industry research collaboration ......................51


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Slovenia

Key Indicators

Total population in millions, 2004 ......................................................2.0Total GDP in billions of US dollars, 2004 .........................................32.2GDP per capita (PPP) in US dollars, 2004....................................20,306Real growth in GDP (%), 2004 ..........................................................4.6

Growth of output (average annual percent growth) 1990–2003 .......3.1Agriculture....................................................................................–0.9Industry ..........................................................................................2.6

Manufacturing ............................................................................2.7Services .........................................................................................3.4

Inflation (annual percent change), 2004 ............................................3.6Government surplus/deficit (as percent of GDP), 2004...................–1.9Gross fixed capital formation (as percent of GDP), 2005................25.2National savings rate, 2004 .............................................................26.1Interest rate spread, 2004 .................................................................4.8

Real effective exchange rate*, 2004.............................................101.7Exports of goods and services (as percent of GDP), 2004 .............59.9Imports of goods and services (as percent of GDP), 2004 .............60.5Current account balance (as percent of GDP), 2004 .......................–0.9Gross official reserves in months of imports, 2004 ..........................5.0Government debt as a percentage of GDP, 2004 ...........................29.1Total unemployment (ILO definition, %), 2004 .................................6.1Gini index**.....................................................................................0.28



Gross secondary enrollment (percent of relevant age group), 2003...............................................................................109.4





Paved roads (percent of total roads)..............................................100.0Main telephone lines per 100 inhabitants, 2003 .............................40.7Cellular mobile telephone subscribers per 100 inhabitants, 2003 ..87.1Personal computers per 100 inhabitants, 2003...............................32.5Internet users per 10,000 inhabitants, 2003 ..............................4,006.0





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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 ............................

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Institutions2.02 Business costs of terrorism ............................................28

Infrastructure5.03 Port infrastructure quality................................................28

Macroeconomy2.20 Government debt, 2004 ..................................................242.14 National savings rate, 2004.............................................28

Health and primary education4.13 Malaria prevalence ............................................................14.14 HIV prevalence ..................................................................54.10 Infant mortality ..................................................................64.06 Medium term business impact of HIV/AIDS...................184.04 Medium term business impact of malaria .....................234.05 Medium term business impact of tuberculosis ..............234.11 Life expectancy ...............................................................264.12 Tuberculosis prevalence ..................................................29

Higher education and training4.17 Tertiary enrollment ..........................................................134.16 Secondary enrollment .....................................................147.09 Local availability of specialized research and


Market Efficiency2.09 Prevalence of trade barriers ............................................212.18 Exports, 2004 ..................................................................232.19 Imports, 2004..................................................................28

Technological readiness3.18 Cellular telephones, 2003................................................183.19 Internet users, 2003........................................................213.21 Personal computers, 2003 ..............................................24

Business sophistication8.02 Value chain presence ......................................................218.01 Nature of competitive advantage....................................248.08 Control of international distribution.................................24

Innovation8.03 Capacity for innovation....................................................213.17 Utility patents, 2004 ........................................................26


Institutions6.07 Burden of government regulation ...................................796.06 Wastefulness of government spending ..........................628.21 Protection of minority shareholders’ interests................538.16 Efficacy of corporate boards ...........................................516.01 Judicial independence.....................................................506.08 Favoritism in decisions of government officials..............506.03 Property rights.................................................................496.16 Organized crime ..............................................................466.26 Public trust of politicians .................................................456.14 Reliability of police services ............................................448.23 Strength of auditing and accounting standards ..............438.04 Ethical behavior of firms .................................................426.24 Diversion of public funds ................................................396.15 Business costs of crime and violence ............................33

Infrastructure5.04 Air transport infrastructure quality ..................................475.01 Overall infrastructure quality ...........................................355.02 Railroad infrastructure development ...............................335.05 Quality of electricity supply.............................................325.08 Telephone lines, 2003 .....................................................31

Macroeconomy2.15 Real effective exchange rate, 2004 ................................772.16 Inflation, 2004 .................................................................522.13 Government surplus/deficit, 2004...................................472.17 Interest rate spread, 2004...............................................47

Health and primary education4.15 Primary enrollment..........................................................35

Higher education and training4.03 Quality of math and science education...........................414.01 Quality of the educational system ..................................388.11 Extent of staff training ....................................................358.15 Quality of management schools .....................................35

Market Efficiency8.17 Hiring and firing practices .............................................1026.11 Extent and effect of taxation...........................................958.22 Foreign ownership restrictions........................................917.11 Time required to start a business, 2005 .........................832.12 Agricultural policy costs ..................................................828.18 Flexibility of wage determination ....................................784.09 Private Sector Employment of Women ..........................742.08 Local equity market access.............................................668.19 Cooperation in labor-employer relations..........................622.03 Financial market sophistication .......................................572.04 Soundness of banks........................................................562.06 Venture capital availability ...............................................506.02 Efficiency of legal framework .........................................507.01 Intensity of local competition..........................................507.10 Number of procedures required to start

a business, 2005 ...........................................................498.14 Reliance on professional management...........................484.08 Brain drain .......................................................................437.02 Effectiveness of antitrust policy......................................418.20 Pay and productivity ........................................................392.05 Ease of access to loans ..................................................30

Technological readiness3.04 FDI and technology transfer............................................993.02 Firm-level technology absorption ....................................603.01 Technological readiness ..................................................443.15 Laws relating to ICT ........................................................31

Business sophistication7.05 Local supplier quantity ....................................................508.06 Extent of marketing.........................................................447.06 Local supplier quality.......................................................358.12 Willingness to delegate authority....................................338.05 Production process sophistication ..................................31





Innovation3.09 Availability of scientists and engineers ...........................823.08 Government procurement of advanced technology

products ........................................................................603.05 Quality of scientific research institutions ........................373.07 University/industry research collaboration ......................323.06 Company spending on research and development ........306.04 Intellectual property protection .......................................30


Part

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The World Economic Forum would like to thank the following Partner Institutes of the Global CompetitivenessProgramme for their invaluable assistance in carrying outthe Executive Opinion Survey 2005:

Albania

Institute for Contemporary Studies (ISB)Artan Hoxha, Research DirectorSelami Xhepa, Research Manager, ACIT ProgramJuli Dhimitri, Researcher

Bosnia and Hercegovina

MIT Center—The Faculty of Economics, Sarajevo UniversityProfessor Zlatko LagumdzijaProfessor Bozidar MaticDr Zeljko Sain

Bulgaria

Center for Economic DevelopmentAnelia Damianova, PhD, Senior Expert

Croatia

National Competitiveness CouncilMira Lenardic, Secretary GeneralRuzica Simic, Advisor

Macedonia, FYR

National Entrepreneurship and Competitiveness Council (NECC)Svetozar Janevski, Co-chair of the NECC, Managing Director of

Skopsko BreweryStevce Jakimovski, Co-chair of the NECC, Minister of EconomyAna 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 DirectorDr Liviu Voinea, Research DirectorDiana Spiridon, Programme Coordinator

Serbia and Montenegro

USAID Serbia Enterprise Development ProjectBooz Allen HamiltonAndrew Vonnegut, Chief of PartyJelena Sevo, Deputy Chief of Party

Slovenia

Institute for Economic ResearchProfessor Peter StanovnikDr Art Kovac̆ic̆Dr Mateja Drnovs̆ek, Faculty of Economics

Partner Institutes


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The World Economic Forum would like to thank theRegional Economic Forum for Southeast Europe for supporting the production of this Report.

The Regional Economic Forum for Southeast Europe(REF SEE) (www.ref-see.org) is a nongovernmental initiative that brings together leaders from business andacademia as well as high officials from the following countries:Albania, Bosnia and Herzegovina, Bulgaria,Croatia, Macedonia, Romania, Serbia and Montenegroand Slovenia. Each of these countries, and their respective economies, either separately or jointly, faceinevitable challenges on their path to European Unionmembership—given that they are both partners and competitors.The REF SEE provides an institutionalframework and motivating environment for political andeconomic participants to gather once a year, where theyshare experiences and ideas related to the key short- andlong-term plans for their countries, their economies andthe citizens of the region. In accordance with this process,the idea of preparing this Report was put forward at theREF SEE meeting in 2003, and preliminary results werepresented at the REF SEE meeting in 2004, both held inCavtat, Croatia.The presentation of the Report itself willtake place at the REF SEE meeting 2006. Home address:Revicon, Sarajevo, BiH.

Acknowledgment


southeast europe competitiveness report 2006

Documents

oxford university

economist

minority shareholders

macroeconomynational

global aids

national savings

relevant age

international