Author: Damir Bećirović, PhD
The information that Poland’s GDP (measured in Purchasing Power Parity) has reached Japan’s GDP, which symbolizes economic power, work and innovation, raises the question of the reasons for the significant lag in economic development of the Balkan countries compared to other countries that were in the process of economic transition from a communist to a market model of economy. GDP per capita (PPP) in Poland in 2024 amounted to 55,190 USD, while, for example, in Bosnia and Herzegovina, GDP per capita (PPP) in 2024 was more than three times lower at 17,189 USD, the situation is not much better when compared to other Balkan countries.
The fact that the transition process in Poland was facilitated by early EU membership and high amounts of EU aid, while the Balkan countries went through war devastation, does not offer enough arguments to explain such an imbalance in economic development over the past thirty years, especially considering where those states were and where Poland was after the fall of socialist systems. The most important step for Poland has been the willingness to enter into reforms and accept a market economy, which of course required painful cuts that the Polish population felt at the very beginning of the transition. However, since the mid-1990s, the economy has started to grow and today Poland is one of the most dynamic economies in the EU with an unemployment rate of 2.6%, which is far below the EU average. However, one of the most important things that has guided Poland to seize the opportunities provided is the building of stable institutions, which are not perfect, but still offer security of ownership and investment.
The importance of institutions
The most qualitative illustration of the importance of institutions for economic development was presented by last year’s Nobel Prize winners in economics Daron Acemoglu and James A. Robinson in their book Why Nations Fail: The Origins of Power, Prosperity, and Poverty . In a comparative analysis of countries with similar geographical and demographic characteristics, but different levels of development, the authors highlight the quality of institutions, both political and economic, as a key factor in the differences in the development of countries. What separates wealthy countries from poor ones are inclusive political institutions that create inclusive economic institutions. It is clear that there is a strong synergy between political and economic institutions. Inclusive institutions are a society of equal opportunities in which business success depends on ability, rather than belonging to a privileged political and economic group. On the other hand, extractive political institutions create extractive economic institutions, where power is in the hands of a small elite that often establishes such economic institutions that enable it to extract resources from other parts of society. This means that extractive economic institutions are a natural consequence of extractive political institutions, and their survival depends on the existence of extractive political institutions.
What kind of institutional and economic transition has occurred in the Balkans?
The Balkan states of the former Yugoslavia, with the exception of Slovenia, have never embraced a market economy. Generations of economists educated on the principles of socialist self-management lacked the vision of the importance of market reforms and did not advocate them. On the other hand, politics, in the difficult transitional situation of job losses due to the collapse of unproductive state-owned enterprises through dubious privatizations, quickly realized that voters could be manipulated through promises of employment, and had no incentive to engage in serious reforms that would lead to the construction of inclusive political and economic institutions. Unfortunately, this model has remained dominant to this day, because the state is still the largest employer, with a number of companies under state control, many of which generate constant losses. For example, it is estimated that two-thirds of economic activity in Bosnia and Herzegovina is under direct or indirect state control. As an example of further state interference in the economy, we can cite the latest moves of the Government of FBiH, such as a 60% increase in the gross minimum wage or the ban on shops operating on Sundays, which show that the trend of discouraging free private entrepreneurship continues, while again, after a short break caused by the COVID-19 crisis, the public sector is trying to make itself more attractive for employment. This not only gives political parties the tools to maintain power, but also permanently traps many talented young people in the uninventive business environment of the public sector.
What about the private sector? In such conditions of extractive political institutions and strong state regulation, only companies that base their business on working with the state could develop, which also creates extractive economic institutions. The private sector has developed most independently in sectors that the state has abandoned, such as trade, but instead of competitive market structures, oligopolistic market structures have emerged. All of the above has resulted in a very low level of innovation and productivity of private companies, as well as a complete unwillingness to take advantage of the opportunities of the global market. In other words, companies in such conditions of extractive institutions have no incentives to innovate and increase productivity, because income is guaranteed, while income redistribution is extremely unfair.
As an illustration of the importance of the quality of institutions in the context of creating economic growth based on innovation, we can analyze the Global Innovation Index for 2024 published by the World Intellectual Property Organization based in Geneva. According to this index, none of the Balkan countries that are not members of the EU (Bosnia and Herzegovina, Serbia, Montenegro, Albania and North Macedonia) are among the 50 most innovative economies. In total, this index covers 133 countries in the world. The Global Innovation Index looks at seven categories: Institutions, Human capital and research, Infrastructure, Market sophistication, Business sophistication, Knowledge and technology outputs and Creative outputs. The Institutions category includes Institutional environment, Regulatory environment and Business environment. Looking at the observed Balkan countries, apart from Albania, the Institutions category is the worst ranked (Bosnia and Herzegovina (110), Montenegro (86)), or it is the second worst ranked category (Serbia (67), North Macedonia (75)).
Conclusion
The transition of the Balkan states from communism to a market economic system was never a sincere process. There was a lack of real leaders who would be willing to convince the public of the importance of change. As a result, we have obtained a hybrid model of crony capitalism, which is fundamentally extractive and has emerged as a result of extractive political institutions. Now it is spiraling, as such a system feeds and sustains such political institutions. Unfortunately, neither the economic profession nor the private sector are capable of criticizing and breaking such a system. The only way out is an accelerated path to the EU, where the basic criteria for the progress of countries must be the building of institutions, the protection of private property, an independent legal system and the construction of a society of equal opportunities.
