Business and the Economy

The Balkan region needs to restart its economy. Although the legacy of socialism and the impact of the wars have delayed the region’s economic development, a highly literate and multilingual workforce with human capital potential in IT, agribusiness, and healthcare position these countries to take advantage of a rapidly transitioning global and digital economy.

The countries of the former Yugoslavia have only limited experience with a free market economy over the past century. Although small private industries were encouraged by the government of Yugoslavia during a period of reforms in the 1960s, the government later favored the acquisition and management of industrial enterprises. Under this “self-management” planned economy, the state acquired and worker unions managed industrial enterprises with a mandate to provide products and jobs[i]. The outbreak of war in the 1990s cut short Yugoslavia’s experiments with the market reforms that started in the mid-1980s. Postwar privatizations that occurred without competitive bidding, at large discounts, or with bribes soured public opinion regarding the sale of state assets. Other state-owned industries were privatized in the current form, versus attempting to update and pivot established infrastructure to new products and services. In short, the region never had an opportunity to effectively privatize many of the industrial companies that were the backbone of the old economy and that could have been the basis of a new economy.

Although corruption is often cited as the reason that privatization was never completed,[ii] the lack of value among the assets being privatized also hindered the process.[iii] Many of the businesses that were not affected by war were antiquated and irrelevant in the postindustrial, information-age marketplace. Previously, the region’s economy had been based on an industrial model.[iv] Shipbuilding, early tech manufacturing, petrochemicals, and pharmaceuticals were a few prominent industries in the essentially self-sustaining former Yugoslavia. During the technological and globalization revolution of the 1990s, other counties leapt ahead whereas these countries were mired in war, leaving any remaining businesses and products unappealing and uncompetitive. Thus, the region found itself with antiquated businesses and business models, compounded by a scarcity of management talent capable of pivoting in an information age, and yet many blamed the inadequacies on privatization itself.

Of paramount importance to each country in the region is developing the economy and attracting trade and investment. Today the region’s youth unemployment rate hovers around 50 percent. Those who are lucky enough to work are paid low wages—in 2015, monthly salaries averaged $450 in BiH, $815 in Croatia, $445 in Kosovo, and $430 in Serbia.[v] Remittances in 2015 accounted for 18 percent and 12 percent of GDP for Kosovo and BiH respectively, with only ten countries worldwide edging out Kosovo with a higher dependency on diaspora funding.[vi] In Serbia, BiH, and Croatia, a oversized public sector distorts wages and stymies entrepreneurial vision—a 2015 European Bank for Reconstruction and Development report cites a small private sector and high government salaries as reasons why people in Bosnia and Herzegovina “wait” for a job in the public sector.[vii] Most countries have had little-to-no experience or guidance on how to build an economy in a free market, postindustrial, global age. These challenges are further compounded by the comparatively limited relevance of the region in the global economy, and the hurdles of corruption, government stagnation, cumbersome bureaucracy, and weak rule of law, which make investment risky for outside investors.

Interviewees cite the region’s mentality as an obstacle to growth and development. Aid money distorts the economies, particularly in Kosovo and BiH, where some respondents say that aid has “spoiled citizens” and that outside money fuels corruption. In Kosovo, says one academic, “Many people have degrees but no practical knowledge.” Across the region, forward-thinking citizens expressed the desire to shift from receiving handouts or routine jobs to a more creative and entrepreneurial society.

Old systems are a drag on the economy. The public sector dominates in almost all of these countries, with government salaries in BiH twice as large as those of the private sector.[viii] Croatia’s efforts to privatize are hindered by a public that is reluctant to sell what they see as public goods, a holdover from botched privatizations. Serbia is trying to reduce the size of its public sector and government spending, but the public sector is still a heavy burden on the economy and reliant on subsidies.[ix] Says one businessperson in Serbia, “It is difficult to work with the government sector because there is no clear line of responsibility.” A 2016 loan by the International Monetary Fund to BiH is being used mainly to support the payment of government salaries and pensions.[x] With electoral participation in BiH often tied to government employment, this type of loan serves to shore up the ruling parties.

However, the global economy’s transition from manufacturing and industry to digital services presents a major opportunity for these countries, where small- and medium-sized enterprises are growing. A 2015 World Bank report states that four in five formal jobs in emerging and developed markets are in SMEs.[xi] Yet, more than fifty percent “lack access to finance, which hinders their growth.” BiH, Croatia, Kosovo, and Serbia certainly fit this description. To date, these countries have struggled to attract large multinational or manufacturing companies, while also lacking the infrastructure to launch and scale more SMEs.

There are two potential growth paths for countries in the region. The first is to leverage the region’s burgeoning IT capabilities to enable technology-based businesses that reach across all sectors. The emerging global economy, rooted in technology and information, does not require vast capital expenditure; rather, it requires connectivity to the Internet and local market expertise. Combining these two factors allows for the development of a strong and flexible sector that can help transition from the outmoded industrial economy. Many emerging-market countries are taking advantage of the wired world and low local costs to provide back-end services to companies needing digital coders. Regionally, Romania is a good example of a country that has seen strong GDP growth driven by development of IT and a policy environment that encouraged this growth.[xii]

In each of the countries this report examines, government officials, business leaders, and civil society activists are holding out hope that IT will provide jobs for youth and boost the economy. Kosovo, we were told, is called “Little India, for its growing role as Europe’s IT service center.” According to a U.S. official, IT is said to be the fastest growing sector in BiH, increasing over 70 percent in the past few years. In Serbia, Microsoft has been working with high schools and universities to develop IT hubs. According to Zeljko Vujinović, the general manager of Microsoft in Serbia, the average age of IT experts at the Microsoft Development Center in Serbia is 30 and the Serbian Chamber of Commerce expects an annual addition of 3,500 new IT graduates.

Many of these countries are starting to develop an ecosystem of technology hubs that provide development services to both the European and U.S. markets. BiH’s HUB 387, Innovation Centre Kosovo, Open Data Kosovo, and Serbia’s accelerator at Novi Sad are promising potential models that provide access to those who have skills to code. These hubs serve as both training centers and incubators, offering courses and providing connections to grow. However, there is still work to be done. According to the Serbian Chamber of Commerce, Serbia is currently investing only €60 per capita into the development of the IT industry, far less than Croatia (€200), which itself invests only one-quarter of the EU average (€800). An entrepreneur in Kosovo says that the education system needs to be developed to encourage this kind of training—right now there are still not enough graduates well versed in coding.

Another option for regional growth is to support and grow entrepreneurship. This can be assisted by U.S. companies that develop products and services that target both consumer and business markets. These products—such as social media platforms, video games, healthcare, data analytics, and insurance, along with services across all sectors—are quickly becoming the backbone of growth across the developed world. The opportunity is for companies with such products to license their technology and business models to local companies in the region. To date, most product innovation in the United States is developed, funded, and sold in U.S. markets. However, as with all profitable products, the business is a combination of the product/technology and business model, as these companies are often creating businesses and new business models that have not existed in the past. The combination of the business model “know-how” and the product/technology itself form a package that the original business can market to local entrepreneurs and regional partners.

Under this structure, local firms partner with larger U.S.-based companies to provide local market knowledge, including sales, marketing, and distribution expertise. This model creates additional profit for the U.S. company through licensing fees, without having to assume all the risk of a global expansion. Local companies in countries such as BiH, Croatia, Kosovo, and Serbia can commercialize these products without having to go through the cost of developing and funding a new product from scratch.

According to a local expert in innovation and technology, most programs focus on investing in local innovation. Yet, this is the most difficult way to create both a business and a vibrant economy—it requires a wealth of expertise and resources to converge at one time, including access to capital, management experience, and technological innovation. However, developing a new model that licenses innovative products and technologies will allow the region to create local companies around products that have already been piloted and funded through the early-stage venture ecosystem in the United States. This is a rapid way to create an economy, employ people, and start to develop experience.

The most promising sectors for growth in this area are businesses that leverage technology and those that provide healthcare. The changing shape of healthcare, with digital health becoming a leading growth industry, opens ample opportunities worldwide. Digital health encompasses electronic health records, digital diagnostic systems, and wireless technologies and can be used to record a patient’s history, make a diagnosis, run radiology images, conduct lab tests, track insurance information, and share treatment plans. Focusing on this sector will allow the region to leapfrog infrastructure requirements, much as the development of cellular technology made the wired infrastructure required for landlines redundant. For example, many diagnostic tests no longer require large capital expenditures on equipment[xiii]. Instead, diagnostic tests can be done digitally without investments in equipment-heavy labs. Distribution of care is at the start of an upheaval worldwide. Cost-efficient digital measures that leverage data, access to global expertise, and make use of the internet for monitoring will provide better access to care, particularly in rural regions. Given the region’s strong IT potential and historically well-trained medical professionals and pharmaceutical researchers, there is a lot of opportunity in the growing area of digital health for these countries.

In order to take full advantage of these countries’ potential for both technology and entrepreneurship, regulatory changes should be made. According to the World Bank Ease of Doing Business Survey in 2016, Croatia ranks 43rd of 190 countries in having a regulatory environment that is conducive to the establishment and operation of a local firm, just behind Russia in European rankings. Serbia is 47th, Kosovo 60th, and BiH ranks 81st. Governments will need to make starting a business easier in each of these countries. Similarly, governments should ensure flexibility in labor laws, allowing companies to hire and fire at will. Although this introduces uncertainty and risk, and care will need to be taken to ensure that hiring flexibility is not abused, without this ability start-ups cannot thrive. Even in this risk-mitigated business environment, there were will be much trial an error in establishing sustainable business models, and entrepreneurship needs to allow for learning failures.

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[i] Yugoslavia’s economy; Glenny, M. (2000). The Balkans: nationalism, war and the great powers, 1804-1999. New York: Viking. p. 574, p. 623

[ii] Corruption in the Balkans; Habdank-Kołaczkowska , S. (2013). Nations in Transit 2013. Retrieved February 15, 2017, from https://freedomhouse.org/report/nations-transit/nations-transit-2013

[iii] The privatization process in the Balkans; Balkan Economic Forum, Retrieved February 15, 2017, from http://www.balkaneconomicforum.org/wp/private-sector-investment-in-the-balkans/

DONAIS , T. (2002). The Politics of Privatization in Post-Dayton Bosnia. Retrieved February 15, 2017, from http://www.u4.no/recommended-reading/the-politics-of-privatization-in-post-dayton-bosnia/

[iv] Yugoslavia’s economy and reliance on heavy industry; Tagliabue, J. (1983, March 07). YUGOSLAV ECONOMY: A SENSE OF URGENCY. Retrieved February 15, 2017, from http://www.nytimes.com/1983/03/08/business/yugoslav-economy-a-sense-of-urgency.html

[v] Average salaries in the Western Balkans; TRADING ECONOMICS | 300.000 INDICATORS FROM 196 COUNTRIES. (n.d.). Retrieved February 16, 2017, from http://www.tradingeconomics.com/

Agencija za statistiku BiH. (n.d.). Retrieved February 16, 2017, from http://www.bhas.ba/?option=com_content&view=article&id=247

[vi] Remittances percentage in BiH and Kosovo; Wormald, B. (2016, August 31). Remittance Flows Worldwide in 2015. Retrieved February 16, 2017, from http://www.pewglobal.org/interactives/remittance-map/

[vii] EBRD Transition report; EBRD Transition Report 2015-16. (2015). Retrieved February 16, 2017, from http://www.ebrd.com/news/publications/transition-report/ebrd-transition-report-201516.html

[viii] Public sector salaries in BiH; Goldstein, E., Davies, S., & Fengler, W. (2016, July 28). Three reasons why the economy of Bosnia and Herzegovina is off balance. Retrieved February 16, 2017, from https://www.brookings.edu/blog/future-development/2015/11/05/three-reasons-why-the-economy-of-bosnia-and-herzegovina-is-off-balance/

[ix] Serbia’s public sector size and government spending; Verheijen, T. (2014). Serbia – State Employees Galore, But Where Is the Private Sector? Retrieved February 16, 2017, from http://www.worldbank.org/en/news/opinion/2014/04/02/serbia-state-employees-galore-but-where-is-private-sector

[x] IMF loan to BiH; Toe, R. (2016). Bosnia Struggles to Get New IMF Loan. Retrieved February 16, 2017, from http://www.balkaninsight.com/en/article/bosnian-parties-struggle-to-get-new-imf-loan-04-20-2016

[xi] 2015 World Bank report on Small and Medium Size Enterprises; Bell, S. (n.d.). Small and Medium Enterprises (SMEs) Finance. Retrieved February 16, 2017, from http://www.worldbank.org/en/topic/financialsector/brief/smes-finance

[xii] Romania’s GDP growth; Speculations, G. (2016, July 28). Romania Did This, And Now It’s Among The Fastest Growers In Europe. Retrieved February 16, 2017, from http://www.forbes.com/sites/greatspeculations/2016/07/27/romania-did-this-and-now-its-among-the-fastest-growers-in-europe/#342d2dfd7078

[xiii] App turns smart phone into portable medical device; (2014). Retrieved March 02, 2017, from https://www.sciencedaily.com/releases/2014/03/140319103612.htm

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