The Western Balkans are showing signs of growth and resilience, with sectors like tourism and remittances rebounding, yet challenges from COVID-19 and inflation persist as the region seeks to attract foreign investment and foster long-term economic expansion
The Western Balkans stand at a critical juncture, needing to attract foreign technologies, capital, and expertise to drive stronger economic growth and achieve high-income status. While economic forecasts for the region have slightly improved, it’s unclear whether this marks a long-term recovery from COVID- 19 or reflects short-term trends. Ivailo Izvorski, Chief Economist for Europe and Central Asia at the World Bank, highlights both recovery signs— like the tourism rebound and remittance growth—and the lingering challenges, cautioning that the region’s aggregate GDP remains below pre-pandemic trends.
With the recent forecast showing a slight improvement in economic growth for the Western Balkans, do you view this as a sign that the region is finally overcoming the effects of the COVID-19 crisis, or is it driven more by short-term economic fluctuations?
— The region is recovering from the overlapping shocks of recent years. We indeed expect modestly faster growth in the Western Balkans this year and next compared with our projections from June 2024. The pace of economic expansion in the Western Balkans will likely strengthen from 2.6 per cent in 2023 to 3.3 per cent this year and further to 3.7 per cent on average in 2025-26. This compares with the average growth rate of 3.5 per cent from 2000-19. The shocks from COVID-19 and inflation have not yet been fully overcome, both in the Western Balkans and the EU. This year, aggregate GDP in the Western Balkans will likely be about half a percentage point below its pre-pandemic trend.
On the upside, tourism and remittances, one of the key drivers of growth in the Western Balkans, show signs of a robust rebound from the COVID-19 pandemic. For example, international tourist arrivals dropped by 70 per cent in 2020 and were 36 per cent higher in 2023 than in 2019. Remittance inflows amounted to almost $14 billion in 2023, or up by 34 per cent compared to 2019.
What are the key factors, aside from the crisis, that are holding back regional economies? How effectively have they tackled the root causes of slow growth, and what progress have they made in overcoming the challenges to accelerating convergence with the EU?
— The Western Balkans need to sustain progress in growth-enhancing reforms, build up human capital, and facilitate private sector investment. For example, structural reform should address distortions to market competition created by the remaining state-owned enterprises, build education systems that can produce the quality human capital and skills demanded by firms, improve the governance of public sector institutions, and fill gaps in critical infrastructure, such as transportation and digital connectivity. These reforms will help address the issues of high unemployment rates, especially among youth, and low workforce participation rates of women. Climate change adaptation and mitigation investments are also needed to address the growing risks of extreme heat, floods, and air pollution.
While closer integration with the EU is a natural path for these economies politically and economically, could the current slowdown in Europe and the broader decline in European productivity pose risks to the region’s growth?
— The European Union and the Western Balkans are closely interlinked, with the EU accounting for over 70 per cent of the Western Balkans’ exports. The EU is also a major source of remittances and tourism. Some countries in the Western Balkans are also integrated into European manufacturing supply chains. As a result of these intense and tight connections, slower growth in the EU is a negative risk for Western Balkans countries.

However, growing EU integration and the benefits of future EU accession need to be considered. For example, all the countries that joined the European Union since 1990 are now high-income economies (e.g., Bulgaria, Croatia, Poland, Romania) thanks to their access to the EU markets, alignment of institutions and regulations, and large inflows of capital and structural funds. The EU is already providing substantial financial support for reforms in the Western Balkans. Further progress along the EU accession path should help catalyse additional private investment.
Generally speaking, can the region’s economies continue relying on strategies like attracting foreign investment, or is this approach becoming outdated? How effectively have countries in the region been able to foster domestic investors to grow into a significant pillar of their national economies?
— The countries in the Western Balkans need to bring in additional foreign technologies, capital, and expertise to support stronger economic growth. This “infusion” of foreign technologies and knowledge is essential for reaching high-income status. Rather than an “old strategy,” this integration into global markets and global value chains is the tried-and-tested process of growing faster and better.
Net Foreign Direct Investment (FDI) inflows amounted to about 6 per cent of GDP on average in the Western Balkans in 2023. Though smaller than 10 per cent of GDP prior to the 2008 Global Financial Crisis, FDI is a far more important source of capital for the Western Balkans than for the Europe and Central Asia region as a whole or for East Asia and the Pacific on average, where net FDI inflows were less than 2 per cent of GDP and about 0.5 per cent in 2023, respectively.
The Western Balkans remain very attractive to foreign investors because of their proximity, good connectivity to European markets, and ongoing European integration. A post-pandemic surge in nearshoring, or the relocation of production closer to the EU, also benefits the Western Balkans. However, many local firms still struggle to grow and take advantage of the regional and global supply chains because of their small size, shortages of talent, and constraints in accessing financing.
STRATEGIC
The Western Balkans remain very attractive to foreign investors because of their proximity, good connectivity to European markets
ROBUST
Net Foreign Direct Investment (FDI) inflows amounted to about 6 per cent of GDP on average in the Western Balkans in 2023
CONVERGENCE
The EU provides significant financial support for reforms in the Western Balkans, with further progress on the accession path expected to attract more private investment