EU Growth Plan and Reforms: The Western Balkans’ Key to Economic Success

The World Bank report highlights that the Western Balkans lag behind the EU due to weak governance, incomplete reforms, and low trade integration but argues that targeted policies and the EU’s €6 billion Growth Plan could double their growth rate and accelerate economic convergence. By strengthening institutions, boosting investment, improving education, and deepening trade ties, the region can unlock its economic potential and achieve faster integration with the EU.

The World Bank, in collaboration with researchers from the European Bank for Reconstruction and Development (EBRD) and the International Monetary Fund (IMF), has released an in-depth report analyzing the economic trajectory of the six Western Balkan countries (WB6)—Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia. The study highlights the region’s struggle to match the economic progress of Central and Eastern European New Member States (NMS) due to weak governance, incomplete market reforms, poor trade integration, and a lagging education system. However, the launch of the EU’s €6 billion Growth Plan, combined with structural reforms, presents a unique opportunity for the WB6 to accelerate their convergence with the EU. The report suggests that implementing key economic changes could potentially double the region’s growth rate, bridging the gap with European peers more quickly than currently projected.

Why the Western Balkans Fell Behind

The economic divergence between the WB6 and the NMS can be traced back to the early 1990s when both regions transitioned away from socialism. While the NMS quickly adopted market-oriented reforms and aligned with EU standards, the WB6 faced political instability, wars, and economic collapse following the disintegration of Yugoslavia. These conflicts delayed economic modernization and institutional development, setting the region back by at least a decade.

Despite some recovery in the early 2000s, the WB6’s progress was repeatedly disrupted by external shocks such as the 2008 global financial crisis, the Eurozone crisis, the COVID-19 pandemic, and, more recently, the Russia-Ukraine war. These events have led to slow and inconsistent growth, with GDP per capita in the WB6 remaining significantly lower than that of the NMS. Unlike their Central European counterparts, which successfully leveraged EU membership to accelerate development, the WB6 continue to lag in key areas of economic policy, governance, and regional cooperation.

Major Roadblocks to Economic Growth

Several structural weaknesses have kept the WB6 from achieving sustained economic progress. One of the biggest challenges is the incomplete transition to a fully functional market economy. Unlike the NMS, which successfully privatized industries and promoted competition, the WB6 still rely heavily on state-owned enterprises (SOEs). These SOEs dominate key sectors, limiting private-sector growth and deterring foreign investment. Regulatory inefficiencies, excessive bureaucracy, and inconsistent policymaking further hinder business development.

Another significant issue is the region’s weak human capital. Educational outcomes remain below EU standards, and there is a substantial mismatch between workforce skills and labor market needs. This has led to high youth unemployment and an ongoing "brain drain," as skilled workers migrate to Western Europe in search of better opportunities. Poor governance, characterized by corruption, weak legal enforcement, and inefficient public administration, also poses a major obstacle to growth, discouraging both domestic and foreign investment.

Additionally, trade integration remains a critical weakness. While the NMS successfully integrated into the EU single market, the WB6 remain relatively isolated. The Central European Free Trade Agreement (CEFTA) has facilitated some trade between WB6 countries, but progress has been hindered by non-tariff barriers, political disputes, and inefficient border procedures. As a result, intra-regional trade remains well below potential, limiting economic expansion and reducing competitiveness.

The Growth Potential of Key Reforms

The report uses an econometric model to assess the potential impact of policy reforms in governance, investment, trade, and education. It suggests that aligning WB6 institutions with NMS standards could boost annual GDP growth by 0.4% to 0.7%. Increased investment, particularly through EU structural funds, could add another 0.5% annually. Strengthening trade integration—both within the WB6 and with the EU—could contribute an additional 0.4% to 0.6% in annual growth. Education reform, aimed at improving workforce skills and aligning with EU norms, could add 0.1% to 0.5% to GDP growth per year.

If all these reforms are implemented together, they could potentially increase the WB6’s economic growth by 1.6% to 2.2% annually—effectively doubling the current growth trajectory. This would bring the region closer to achieving full convergence with the EU within the next two to three decades, rather than by the end of the century as some estimates predict.

The EU Growth Plan: A Catalyst for Change

The EU’s newly launched Growth Plan is seen as a critical tool for accelerating economic reforms in the Western Balkans. The plan includes €6 billion in financial assistance, measures to facilitate trade—such as “green lanes” that speed up border procedures—and the expansion of the Single Euro Payments Area (SEPA) to reduce transaction costs between the WB6 and the EU. If fully implemented, these measures could provide immediate economic benefits even before full EU accession.

The plan also encourages deeper regional cooperation, which is essential for unlocking trade potential. By addressing key bottlenecks such as border delays, regulatory fragmentation, and non-tariff trade barriers, the WB6 could become a more attractive destination for investment. This would not only create jobs and boost economic growth but also improve political stability in the region.

A Roadmap to Economic Transformation

The report concludes with a clear economic agenda for the WB6, outlining five key priorities. First, deeper structural reforms are necessary to complete the transition to a full market economy, including reducing the dominance of SOEs, improving financial markets, and modernizing infrastructure. Second, investment in human capital is critical, with a focus on improving education, aligning skills with labor market needs, and encouraging workforce participation. Third, governance must be strengthened through anti-corruption measures, legal system reforms, and digitalization to enhance public sector efficiency.

Fourth, trade integration needs to be prioritized by reducing non-tariff barriers, investing in cross-border infrastructure, and facilitating stronger regional economic ties. Lastly, the green transition must be embraced, particularly in energy production. The WB6 remain heavily reliant on outdated, coal-based power plants, which are inefficient and environmentally harmful. Shifting toward renewable energy would not only meet EU decarbonization targets but also reduce energy costs and enhance competitiveness.

The Western Balkans now have a unique window of opportunity to accelerate their path toward EU convergence. With the EU Growth Plan providing crucial financial and structural support, the region must seize the moment to implement meaningful reforms. If these changes are pursued with commitment and urgency, the WB6 can unlock their full economic potential, achieve higher living standards, and position themselves as valuable partners within the European economic framework.