Zagreb Analysis Towards A Sustainable Economic Growth and Development in the Western Balkans Milica Uvalić Vladimir Cvijanović March 2018 n S ince the beginning of the transition to a market economy in 1989, the Western Balkan(WB) countries have faced particular difficulties in economic development, under the impact of the breakup of SFR Yugoslavia, military conflicts and international sanctions, thus delaying important economic and institutional reforms as well as integration with the European Union. n D uring the 2001-2008 period there was a general improvement in macroeconomic performance of all Western Balkan countries, especially among those lagging behind witnessed: an acceleration in GDP growth, declining inflation, a fast rise in foreign trade, substantial FDI inflows and the implementation of many transition-related economic reforms. n T he global financial and economic crisis severely hit the WB countries through two main channels – a drop in export demand in foreign(mainly EU) markets and the abrupt reduction in foreign capital inflows(foreign loans, FDI, donors’ assistance, workers’ remittances). Thereafter, most WB countries experienced a deep recession or a notable GDP slowdown(Albania, Kosovo), followed by a period of prolonged stagnation or repeated recessions and a very gradual economic recovery. n he multiple economic crises in the WBs after 2009 brought to the surface many structural problems: serious external imbalances deriving from high trade and current account deficits, essentially caused by insufficient competitiveness on foreign markets; mounting social problems, also due to the highly unsatisfactory situation on the labour markets; extreme deindustrialisation along with a fast expansion of services(banking, telecommunications, retail trade, real estate) that primarily serve the domestic market, thus contributing only indirectly to the development of the tradable goods sector and improved external competitiveness. n T he macroeconomic situation in the last few years has somewhat improved(gradual economic recovery, low inflation, some fiscal consolidation, lower current account deficits), but current economic policies are severely constrained – monetary policy by rigid exchange rate regimes and the high degree of euroisation of the WB economies, fiscal policies under strict EU surveillance. n M oreover, the structural weaknesses of the WB economies have not been removed. In comparison with the Central East European and the Baltic(CEEB) countries, the WB countries are today less developed, less competitive and less integrated into the global economy; most countries still have extremely high unemployment rates and low employment rates; and they are more de-industrialised than even some of the older, and most of the newer, EU member states. n T he WB countries should aim at implementing a model of development that balances economic, social and ecological aspects. Key issues to be addressed in the future, through more efficient industrial policies and development strategies, include agriculture, energy, R&D(human capital) and public administration reform.