Poor legal frameworks keep foreign investors away from Western BalkansAdriatic Journal 16 April 2019
Western Balkan countries need to put more effort into attracting foreign capital to help them end the deadlock and strengthen their economies.
Egon Zakrajšek, senior adviser and a member of the Federal Reserve Board (Fed) in Washington, warns that the global environment in 2019 can be marked by potential negative scenarios that could have a significant impact on global developments in markets: chaotic brexit, trade tightening between the US and China, a slump in China’s real estate bubble, and also a recession is an always possible option.
Zakrajšek sees the Western Balkans as an above-average exposed region, which has several geopolitical and economic challenges ahead. A political uncertainty and related political instability is one of them. This is present to a certain extent today in Serbia, and even more so in Bosnia and Herzegovina, Macedonia, and Kosovo.
Other problems include improperly established legal framework, such as insufficient regulation of property rights that largely lack sufficient guarantees to be able to attract foreign direct investment. “As an investor, you have to be sure that what you have bought really becomes your property,« says Zakrajšek, most recognised Slovenian economist in the world. »This is one of the serious problems in some countries of the Western Balkans, as it is causing a setback in terms of foreign direct investments.” Some countries in the region do not have enough of their own financial capacity that is needed to incentivise domestic consumption and boost their economies. “These countries need know-how brought by foreign direct investments in different industries due to long-term positive effects these investments have on the economy,” explains Zakrajšek.
How to attract foreign know-how?
“With a normal, transparent business environment that has reasonable taxes and expected stability for investors. These countries need a so-called slow-moving capital, not instant investors, who quickly collect their money and leave the country,” Zakrajšek warns. In this regard, long-term structural reforms and stable governments with the necessary competence to carry out proper reforms are important. “Countries need to be aware of the need to invest in infrastructure – roads, railways, telecommunications, networks … all of which contribute to openness, which attracts foreign private capital.”
Another problem are so-called “national champions”, the ineffective state-owned companies that would be best to get rid of, Zakrajšek indicates. “They are exhausting budgets, which has a long-term negative effect on the business environment.”
In spite of all this, Zakrajšek sees one of the countries far ahead of the others. “Slovenia is small, but this is an advantage that can be used. Slovenia can become a springboard for this part of the world, however it hasn’t taken full advantage of all its potentials. In exercising its role in the Western Balkans in the past years, Slovenia could have been more ambitious and aggressive. Especially after the adoption of euro, it would have been possible to make an even better use of its comparative advantage over others in the region” says Zakrajšek. He adds that a relatively large number of innovative Slovenian companies, many of them family-owned, could have been also more ambitious in using their knowledge and advantages to penetrate foreign markets. “I’m talking about aggression. The mentality of the people who run SMEs could be more ambitious. These companies could show more aggressive entrepreneurship,” Zakrajšek points out that it all comes down to a question: “Why would not more Slovenian companies become multinationals?”
Zakrajšek’s views expressed in this article are his own and do not reflect the views of the Federal Reserve Board