When Slovenia entered the EU in 2004, it left behind the other five republics of the former Yugoslavia. These republics, now four independent countries, have had mixed success in turning their economies round and following in Slovenia's footsteps towards European integration.
"Croatia is at what we would consider an advanced state of transition, at a similar level or even above some of the new EU countries," says Peter Sanfey, lead economist at the EBRD. "The next in line would be Macedonia, then Bosnia-Herzegovina. Serbia and Montenegro are further behind. The reason those two countries lag behind is clear: they were late comers to the transition."
Serbia and Montenegro, for example, made significant progress on reforms following Slobodan Milosevic's fall from power in October 2000. However, the process slowed down sharply after the assassination of Prime Minister Zoran Djindjic in March 2003.
"The present government is doing the best it can in difficult circumstances," says Sanfey. "It is a minority coalition government that faces a lot of distractions: non-economic, non-investment related distractions to do with the Hague Tribunal, relations between Serbia and Montenegro and the status of Kosovo. These things have slowed down transition but they haven't brought it to a halt."
Bosnia-Herzegovina began its reform process after its disastrous war, five years before Serbia and Montenegro. However, that has proven haphazard, hampered by bureaucracy and high levels of mistrust between the two entities that emerged from the Dayton peace talks.
Sanfey, though, is optimistic that these problems can be overcome, pointing to the increasing cooperation between the two entities and the strengthening of state institutions on a scale that would have been unthinkable a few years ago.
Bosnia, for example, is making good progress in banking. Claudio Viezzoli, EBRD's director for the western Balkans, says that a number of foreign banks have entered the Bosnian market through acquisitions.
A strong banking industry is integral to the development of the Balkans, as Croatia can testify. "Croatia had a great head start, which was very much assisted by the easy entry for foreign banks and the fact that two of the big Italian banks purchased the two leading institutions. This has made finance really available in this market," says Charlotte Ruhe, EBRD country director for Croatia. With Austrian banks also very active in Croatia, some 91% of the country's banking industry is now under foreign ownership.
EBRD Role
Development of a country's financial institutions is an important goal for the EBRD and an area where the bank seeks to maximize the transition impact of its investments. "We have managed in most countries to get into the financial system very early on in the process, which means that we were willing to take very considerable risk in equity in some of the important local banks," says Viezzoli. "That helped local banks to grow, to restructure and be ready for foreign investment."
Outside of Bosnia and Croatia, there has been less progress on financial sector reform. In Serbia, for example, the slow pace of privatization has hampered development. So far only one state-owned bank has been sold. Nevertheless, with another four banks now being put out to tender, EBRD anticipates significant progress to be made in this area.
Overall, Viezzoli points to the financial institutions in the region as a success story, and this is also true of another EBRD priority: infrastructure. He says that whereas infrastructure priorities were set according to purely local needs until recently, "now they are dictated by regional integration. We believe that this is really the way to go because this area has no future without being properly integrated with Europe, but also they need to be strongly interconnected to each other."
The third area that the EBRD has set as a priority is private enterprise. The bank has financed a number of companies, including Croatia's largest food company, Agrokor, to help them restructure and finance regional acquisitions. It has also made a €12.5 million equity investment in Fruit, a Serbian fruit juice manufacturer which is looking to expand regionally.
One of Viezzol's favourite investments is in Bosnia. "[It] is a very small project within what we call the direct investment facility, which allows us to invest a very little equity component of about €1-€2 million in local companies," he says.
"We believe this is very important because it is spreading the rumour in Bosnia that even local companies that are sufficiently aggressive and forward looking can get EBRD funding."
Looking ahead, there is little doubt that the long-term future of all these countries lies in the EU. The European Commission and the countries themselves have made that clear.
The EBRD is happy that all the countries show genuine commitment to the transition process but acknowledges that good legislation can be hampered by poor implementation. As Sanfey says: "Getting there quickly rather than slowly is one of the biggest challenges." The EBRD is doing what it can to help meet that challenge.