Does external finance facilitate economic convergence? : a comparison between the Western Balkans and Central and Eastern Europe

Abstract

The paper aims to assess the economic implications of the Western Balkans’ (WBs) accession to the European Union in terms of economic growth and ‘convergence’. It does so by comparing the accession process of Central Eastern Europe and the Baltics (CEEBs) with that of the Western Balkan countries. Recent studies reveal that the convergence process of the latter has been much slower than for the CEEB. The central question addressed is whether the key factor in promoting economic growth and convergence in the two regions has been the amount of financial resources that each country has received through external sources (transfers from the EU budget, bilateral assistance of EU member states, Foreign Direct Investments, workers’ remittances). Once the distinction between pre- and post-EU accession funding is introduced, the analysis reveals that both areas have received substantial financial resources during the pre-accession period. However, the situation is fundamentally different after EU accession, when the new member states have received much larger amounts of external capital inflows. These findings explain why, among other reasons, economic and social transition in the WBs has been much slower than in the CEEBs. The paper argues in favour of a revised and more comprehensive EU strategy for the WB region. For the WBs it advocates improved economic and policy governance and a more genuine commitment to EU membership.