Analysis of the EU’s economic growth plan for the Western Balkans

Stefan Veljanovski



The success of this initiative will hinge on its effective implementation, including the government's ability to undertake necessary reforms and manage the expected influx of funding appropriately to turn them into sustainable economic growth.

In her address at the GLOBSEC forum, President Ursula von der Leyen outlined the European Union's position on the Ukrainian conflict while introducing a pivotal new growth initiative for the Western Balkans. The implications of this plan for the Western Balkans, specifically Macedonia, are intriguing and worth analyzing from a theoretical standpoint to receive a better understanding of why the EU is moving forward with this plan.

Von der Leyen's growth plan is built on four pillars, each of which carries economic implications that could reshape the future of Macedonia.

Pillar I - EU Single Market

The first pillar seeks to bring the Western Balkans closer to the EU Single Market. From an economic standpoint, this could significantly strengthen Macedonia's trade prospects, potentially leading to increased GDP growth. This is supported by several economic theories, most notably the theory of comparative advantage and economies of scale.

The theory of comparative advantage suggests that countries should focus on producing goods and services they can produce more efficiently (at a lower opportunity cost) than other countries. By gaining access to the EU Single Market, Macedonia could focus on exporting goods and services in which it has a comparative advantage, increasing its economic efficiency and leading to potential GDP growth.

Economies of scale theory is another relevant economic principle. As the scale of production increases, the average cost of producing each unit decreases. By accessing a larger market of 450 million consumers, Macedonian firms could produce and sell goods on a larger scale, thus reducing average costs and potentially increasing profitability. This is particularly relevant for industries with high upfront costs such as e-commerce or cybersecurity.

Endogenous growth theory might also be applicable. This theory emphasizes the importance of knowledge and innovation in driving sustainable economic growth. By participating in the EU's Digital Single Market, Macedonia could foster innovation and technological advancement, leading to long-term economic growth.

Pillar II - Regional economic integration

The second pillar focuses on deepening regional economic integration which is backed by several economic theories, most notably the theories of economic integration, the gravity model of international trade, and new economic geography.

The theory of economic integration claims that countries within a region can benefit from reduced trade barriers, harmonized regulations, and increased cooperation. This theory suggests that such integration can lead to increased trade and foreign direct investment (FDI), leading to improved economic performance for all countries involved.

The gravity model of international trade implies that larger economies and those closer together are more likely to trade with each other. According to this model, by deepening economic integration, Macedonia could increase its trade with other Western Balkan nations and larger European economies, boosting its own economic growth.

New economic geography theory offers insights into how economic integration could lead to the creation of new economic opportunities. This theory suggests that reducing trade barriers and promoting integration could lead to the concentration of economic activity in certain areas, creating 'agglomeration economies' and promoting regional development.

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Theory of "FDI spillovers" advises that increased FDI, as a result of greater regional integration, can lead to positive spillovers in the host country. These can come in the form of technology transfer, human capital formation, and other productivity improvements.

Pillar III - Acceleration of fundamental reforms

The third pillar relates to the acceleration of fundamental reforms. Here, the call for an independent judiciary, transparent public procurement, and a strengthened fight against corruption resonates with economists' longstanding recommendations for improved governance and institution building. This is supported by the institutional economics theory, primarily focusing on the role of institutions in shaping economic behavior, and the theory of sustainable development.

Institutional economics indicates that the structure and quality of institutions - such as the judicial system and public procurement processes - play a significant role in economic performance. These institutions help create a predictable environment, reducing uncertainty and transaction costs, thus encouraging economic activity.

Moreover, effective institutions, such as those that robustly fight corruption, can increase economic efficiency, and foster economic growth by promoting fairness and competition. Therefore, the call for an independent judiciary, transparent public procurement, and intensified anti-corruption efforts resonates with the principles of institutional economics.

The emphasis on energy market reforms is aligned with the theory of sustainable development. According to this theory, economic development should meet the needs of the present without compromising the ability of future generations to meet their own needs. Transitioning to a more diversified and renewable-based energy market is a crucial step toward sustainable economic development. The sustainable development theory underscores the necessity of integrating environmental considerations into economic planning and decision-making.

Pillar IV - Stimulating economic growth

Finally, the promise of increased pre-accession funding could provide Macedonia with the essential capital needed to facilitate these reforms and investments. Increased funding could stimulate economic growth, reduce fiscal strain, and provide a buffer against economic shocks, aligning with the theory of fiscal federalism and the concept of Keynesian fiscal stimulus.

The theory of fiscal federalism, which involves the fiscal relationships between different levels of government, suggests that larger, central bodies (like the EU) can provide public goods more efficiently in some instances and can handle stabilization and redistribution better. Thus, the pre-accession funding from the EU can be viewed as a fiscal transfer from a federal body to a smaller regional entity to facilitate necessary investments, reforms, and risk sharing.

Keynesian fiscal stimulus concept proposes that government spending can stimulate economic growth, especially during periods of economic downturn or slow growth. According to this theory, the influx of funds from the EU could serve as an economic stimulus, increasing aggregate demand, spurring investments, creating jobs, and ultimately driving economic growth in Macedonia. This concept is particularly relevant in times of economic uncertainty or downturn, as increased government spending can help offset reduced private-sector spending.

Overall, von der Leyen's Western Balkans growth plan represents a comprehensive approach to stimulate economic growth and development in the region and signals promising prospects for Macedonia.

However, the success of this initiative will focus on effective implementation, including the government's ability to undertake necessary reforms and manage the expected influx of funding appropriately to turn them into sustainable economic growth.


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Stefan Veljanovski

Stefan Veljanovski is a Doctor of Economics and a professor of micro and macroeconomics at Indiana University Northwest. He is also a Certified Fraud Examiner (CFE) from the Association of Certified Fraud Examiners (ACFE), holds a Lean Six Sigma Green Belt, a Public Leadership Credential from the Harvard Kennedy School, and a Carbon Literacy Certificate from the University of Nottingham.