An Economic Agenda to Accelerate Convergence of the Western Balkans with the European Union Europe and Central Asia in Focus Office of the Chief Economist Nicola Pontara Pavle Medic Ana Relic Richard Record WORLD BANK EUROPE AND CENTRAL ASIA IN FOCUS An Economic Agenda to Accelerate Convergence of the Western Balkans with the European Union Nicola Pontara Pavle Medic Ana Relic Richard Record © 2025 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522- 2625; e-mail: pubrights@worldbank.org. Cover photo: Gent Shkullaku Cover design: Lauren Kaley Johnson, adapted by Michael Alwan Contents Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. Growth and Convergence of NMSs and the WB6 (1991–2023): A Comparative Snapshot. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Factors Explaining the Lackluster Growth Record in the WB6 . . . . . . 6 3. Unlocking the Potential of the WB6 to Grow and Converge Faster with the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Data and Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4. A New Economic Agenda for the WB6. . . . . . . . . . . . . . . . . . . . . . . . 12 5. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Annex. Additional Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Figures 1. Growth in Real GDP, EU-15, NMSs, Western Balkans (1991–2023) . . . . . . . . . . . . . . 4 2. Real GDP Per Capita, EU-15, NMSs, Western Balkans (1991–2023). . . . . . . . . . . . . . 5 3. Average Per Capita GDP, NMSs, Western Balkans (1991–2023) . . . . . . . . . . . . . . . . 5 4. Alignment with NMS: Cumulative Impact on Western Balkans GDP. . . . . . . . . . . . . 11 A1. Regulatory Quality, Balkans and NMSs (Selected Countries, 2010–2022) . . . . . . . . . 15 A2. Governance Indicators: WB6 and Selected NMSs (1996–2022). . . . . . . . . . . . . . . . . 15 A3. Institutional Convergence with NMSs and Impact on WB6 GDP. . . . . . . . . . . . . . . . 16 A4. Structural Funds: Net Inflows before and after Membership (Selected Countries) . . . . 16 A5. Convergence with NMSs Mean Years of Schooling and Impact on WB6 GDP. . . . . . 17 Tables 1. Impact on Western Balkan Countries’ GDP Growth Rates from Convergence with NMS Averages for Key Strucural Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 iii iv  n   World Bank Europe and Central Asia In Focus Acknowledgements This policy note was prepared by Nicola Pontara (Country Manager for Serbia, World Bank), Pavle Medic (University of Belgrade), Ana Relic (Consultant, World Bank), and Richard Record (Lead Country Economist for the Western Balkans, World Bank). The note greatly benefited from the comments received from Lazar Sestovic (Senior Economist for Serbia) and guidance provided by Xiaoqing Yu (Country Director for the Western Balkans). Michael Alwan copyedited and type- set the report. World Bank Europe and Central Asia In Focus n  v Abbreviations CARDS Community Assistance for Reconstruction, Development and Stabilisation CBAM Carbon Border Adjustment Mechanism CEFTA Central European Free Trade Agreement EBRD European Bank for Reconstruction and Development EC European Commission EU European Union FDI foreign direct investment GDP gross domestic product IMF International Monetary Fund ISPA Instrument for Structural Policies for Pre-Accession NMS New Member States OECD Organisation for Economic Co-operation and Development OLS ordinary least squares PHARE Poland and Hungary: Assistance for Restructuring their Economies PPP purchasing power parity SAAs Stabilization and Association Agreements SAPARD Special Accession Programme for Agriculture and Rural Development SEPA Single Euro Payments Area SMEs small and medium enterprises SOEs state-owned enterprises WB6 Western Balkans Introduction The European Union (EU) enlargement process to include the six Western Bal- kans countries (WB6), for years characterized by “fatigue,” is experiencing un- precedented dynamism (Gori and Pontara 2024).1 From February 2022 to the spring of 2024, Brussels launched accession negotiations with Albania and North Macedonia and granted Bosnia and Herzegovina candidate status.2 Montenegro and Albania have made commitments to complete accession negotiations in the next two to three years. In November 2023, the European Commission (EC) launched the Western Balkans Growth Plan (2024–27), supported by a €6 billion financial instrument, the Reform and Growth Facility.3 The novelty of the Growth Plan is that it offers substantial benefits and incentives to candidate countries before accession. As such, its implementation—if accompanied by robust reforms in the WB6—could be a game changer and accelerate socioeconomic convergence between the region and the EU. Indeed, the EU has been a formidable “convergence machine” (Gill and Raiser 2012). Since 1990, 13 of the 31 countries in the world that managed to transition to high-income economies did so in the EU (Gill and Raiser 2012; Iacovone 2025). The progressive convergence of New Member States (NMSs4), first during the enlargement “big bang” of 2004 and then again in 2007 and 2013, spurred eco- nomic development and the achievement of higher standards of living (Beyer et al. 2024). Conversely, the violent breakup of Yugoslavia, coupled with the col- lapse of socialism, widespread economic and political instability, and the pro- 1. We refer to Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia as the Western Balkans. 2. In the case of Montenegro and Serbia, access negotiations started in 2010 and 2012, re- spectively. In addition, it is important to underline that accession talks have commenced with Ukraine and Moldova, while Georgia has obtained candidate country status. How- ever, this policy note does not discuss these three countries. 3. https://neighbourhood-enlargement.ec.europa.eu/enlargement-policy/new-growth- plan-western-balkans_en 4. The results of the model described in Section 3 are supported by selected data from the following NMSs: Bulgaria, the Czech Republic, Hungary, Poland, Romania, and the Slovak Republic. 1 2  n   World Bank Europe and Central Asia In Focus tracted transitional period of the 1990s (conditions that similarly affected Alba- nia), disrupted the convergence path of the WB6. The region’s fragile recovery, which began in the early 2000s, was further undermined by the financial crisis of 2008. An analysis of the growth and convergence trajectories of the WB6 since 1991 shows that their economic performance fell short of the progress achieved by the NMSs. This policy note reflects on the history of EU convergence and aims to identify a new, more dynamic economic agenda for the WB6. The note first explores the root causes of the lackluster growth of the WB6 during 1991–2023. This explora- tion informs the development of a set of policy actions that can be instrumental, in synergy with the Growth Plan, for boosting economic development. The anal- ysis undertaken in this policy note, based on an econometric model and the avail- able evidence in the specialized literature, shows that the WB6 could potentially double their economic growth by reaching the standards of NMSs with respect to the strength of institutions, level of investments, volume of trade, and quality of education. This policy note is structured as follows. Section 1 offers a comparative snap- shot of the growth and convergence trajectories of the WB6 and NMSs during 1991–2023. Section 2 identifies the key factors that hindered economic dynamism and reforms in the WB6. Section 3 presents the econometric model utilized to measure the impact on WB6 countries’ GDP of policy reforms in the realms of institutions, investment, trade, and education, and discusses the results obtained. Section 4 identifies the constituting elements of a new economic agenda for the WB6. Section 5 concludes. An Economic Agenda to Accelerate Convergence of the Western Balkans with the European Union n  3 1. Growth and Convergence of NMSs and the WB6 (1991–2023): A Comparative Snapshot An examination of the growth trajectories of NMSs and the WB6 over the past three decades supports the argument that growth convergence with the EU can be accelerated by closer alignment with the EU economic, legal, and regulatory framework, coupled with access to structural funds and integration into the single market. The case of the NMSs and WB6 is illustrative. Both groups lived through the crisis of the socialist economic system in the 1980s. After the fall of the Berlin Wall in 1989, both groups harbored great hopes of transforming into market economies. However, while in the 1990s the NMSs embarked on a steady transi- tion toward the EU—which culminated in the “big bang” of enlargement of 2004— the WB6 remained trapped in the conflicts that led to the breakup of Yugoslavia. Yet, at the end of the 1980s, the political and economic conditions of the WB6 were arguably more favorable than those of the NMSs.5 Yugoslavia had estab- lished a model of market socialism in which elements of administrative control over economic activities coexisted with a private sector made up of small and medium-sized enterprises (SMEs). Furthermore, the nonaligned position of Bel- grade supported an expansion of foreign trade with Organisation for Economic Co-operation and Development (OECD) countries. In 1990, about 60 percent of Yugoslavian trade was conducted with developed countries (Uvalić and Cvijanović 2018). As a result, in 1989, the levels of GDP per capita in Serbia and (now North) Macedonia were higher than those of Poland and Romania (Medic 2024). The paths of these two regions began to diverge in the 1990s. The NMSs imple- mented comprehensive structural reforms geared at transitioning to full-fledged market economies and aligning with the EU’s accession requirements.6 This com- mitment resulted in substantial early inflows of foreign direct investment (FDI) as well as financial assistance from the EU, notably through the PHARE pro- gram.7 Conversely, the conflicts of the 1990s8 in the WB6 resulted in significant loss of life, destruction of infrastructure, the breakdown of institutions, and a resulting economic collapse that inflicted a permanent shock on the region’s growth trajectory (Kešeljevic and Spruck 2023).9 Major EU assistance in the re- gion kicked in only in the aftermath of the Kosovo conflict with the launch of the 5. The Transition Index, produced by the European Bank for Reconstruction and Develop- ment (EBRD), shows that the WB6 were better positioned than the NMSs before 1991. This advantage, however, vanished in the 1990s (Dabrowski and Myachenkova 2018). 6. At the time, these were known as the Copenhagen Criteria for accession. 7. The Poland and Hungary: Assistance for Restructuring their Economies (PHARE) pro- gram aimed to promote economic and political transformation for the accession negotia- tions. During this decade, NMSs also received pre-accession assistance fund through other programs, such as the Instrument for Structural Policies for Pre-Accession (ISPA) and Spe- cial Accession Programme for Agriculture and Rural Development (SAPARD). 8. All Yugoslav republics were directly or indirectly involved in military conflicts: Slovenia (1991), Croatia (1991–95), Bosnia and Herzegovina (1992–95), the former Yugoslavia (1998– 99), and Macedonia (2001). The UN and EU also sanctioned the former Yugoslavia in 1992– 96 and 1998–99. In Albania, civil unrest culminated in the 1997 crisis (Uvalić and Cvijanović 2018). Trade linkages during this period were severely disrupted. 9. The recessions of the 1990s were very severe. GDP declined 20 percent in Albania in 1991, 9 percent in Croatia in 1993, 11 percent in Serbia in 1999, and 8 percent in North Macedonia in 1993. Inflation reached 225 percent in Albania in 1992 and remained in double figures in Serbia and Montenegro until the end of the decade (IMF 2015). 4  n   World Bank Europe and Central Asia In Focus Community Assistance for Reconstruction, Development and Stabilisation (CARDS) program in 2000. The turn of the millennium, however, ushered in a period of economic resur- gence in the WB6. Between 2000 and 2008, “first-generation” reforms triggered a rapid influx of foreign capital.10 The restoration of macroeconomic stability and the intensification of financial and trade ties with the EU—on the back of the signature of several Stabilization and Association Agreements (SAAs)—spurred growth, which averaged around 5 percent during this period. Growth in the WB6 was thus faster than in the EU-15 but remained below that recorded in NMSs. The latter continued to integrate into the single market and benefited from sub- stantial further increases in investment and access to structural funds. The 2008 global financial crisis brought this period of robust expansion in the WB6 to an end. The sudden slowdown in the Eurozone economy led to declines in FDI, bank credit, remittances, and demand for the region’s exports. These phe- nomena pushed the region into economic recession—first in 2009 and then again in 2011–12, on the back of the “euro crisis.” During 2013–19, economic growth in the WB6 averaged around 3 percent, a rate comparable to that of NMSs but insuf- ficient to drive meaningful convergence. In this period, moreover, “enlargement fatigue” in the EU was mirrored by a growing “reform fatigue” in the WB6, fur- ther delaying structural reforms essential for faster economic growth. More re- cently, the COVID-19 pandemic and the 2022 Russian invasion of Ukraine caused further economic shocks, which triggered a global energy crisis, an inflationary spike, and a sharp slowdown in economic activity. Growth in the region aver- aged around 2.5 percent during 2020–23. 10. These reforms included price liberalization, trade, and exchange rate reforms—and an initial drive to privatize state-owned enterprises (SOEs). FIGURE 1. Growth in Real GDP, EU-15, NMSs, Western Balkans (1991–2023) 6 5 4 Percent 3 2 1 0 1991–2000 2001–2008 2009–2012 2013–2019 2020–2023 −1 EU-15 NMSs Western Balkans Source: Calculations based on World Bank data. Note: Calculated as unweighted average. EU-15 includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxem- bourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom. An Economic Agenda to Accelerate Convergence of the Western Balkans with the European Union n  5 In sum, the WB6 experienced growth episodes exceeding, in some years, the NMSs and EU-15 (Figure 1). However, the permanent shocks of the 1990s and the subsequent small growth differentials between the WB6 and the EU-15 (except for the period 2000–08) slowed convergence. As a result, the gap in living stan- dards between the WB6 and NMSs increased during this period, both in absolute terms (Figure 2) and in relation to the EU-15 (Figure 3). FIGURE 2. Real GDP Per Capita, EU-15, NMSs, Western Balkans (1991–2023) 80,000 70,000 US dollars PPP per capita 60,000 50,000 40,000 30,000 20,000 10,000 0 1991 1995 1999 2003 2007 2011 2015 2019 2023 EU-15 NMSs Western Balkans Source: Calculations based on World Bank data. Note: Calculated as simple average. FIGURE 3. Average Per Capita GDP, NMSs, Western Balkans (1991–2023) 70 Percent of average GDP per capita of EU-15 60 50 40 30 20 10 0 1991 1995 1999 2003 2007 2011 2015 2019 2023 NMSs Western Balkans Source: Calculations based on World Bank data. 6  n   World Bank Europe and Central Asia In Focus The growth rate differentials between the WB6 and EU11 during the examined period can be also extrapolated to derive some preliminary hypotheses about future convergence patterns of the WB6. In an optimistic scenario, if the WB6 were to achieve a growth rate differential with respect to the EU comparable to the “golden period” of 2000–08, full convergence could be attained by 2043. Con- versely, a more realistic scenario based on the growth differential between 2001 and 2021 would see the WB6 converge by 2062. A more pessimistic scenario, ac- counting for the growth differential between 2009 and 2021, hence excluding the “golden period,” would push the convergence milestone to 2093 (EBRD 2024).12 Considering these results, it is pertinent to ask: what can be done in the WB6 to spur growth and convergence? We look for answers first by formulating some hypotheses about the lackluster record of the region in the last three decades (Section 2) and then by conducting simulations of the impact of selected reforms on the WB6 countries’ GDP growth trajectories (Section 3). 2. Factors Explaining the Lackluster Growth Record in the WB6 Several factors adversely impacted economic performance in the WB6 and have contributed to delaying the implementation of important reforms in the last three decades. These include, first and foremost, exogenous factors. The regional con- flicts of the 1990s derailed the region’s development, profoundly disrupting its economic and social fabric and severely damaging infrastructure. Additionally, the succession of global crises from 2008 onward hampered efforts in the WB6 to recapture the robust economic vitality exhibited during 2000–08. On the internal front, moreover, an examination of the available evidence points to four clusters of issues. Incomplete market transition. The WB6 countries and the NMSs implemented similar economic policies in the “transition period,” embracing price liberaliza- tion, reforms of trade and exchange rate regimes, and then moving to privatiza- tion and policies to boost competitiveness. But the breadth and depth of reforms were greater in the NMSs. On the privatization front, there was uneven progress in the WB6. In these countries, state-owned enterprises (SOEs) continue to retain significant market shares in key sectors of the economy, even more so if a broader definition of businesses of the state is applied (World Bank 2023). Additionally, while essential steps were taken to streamline bureaucracy and enhance the busi- ness environment and regulatory quality, the WB6 still lag the standards of NMSs (IMF 2015). Weak human capital. Economic growth in the WB6 has been primarily driven by capital accumulation and (to a lesser extent) total factor productivity, fueled 11. In this case, EBRD uses the EU-27 as a comparator (EBRD 2024). 12. These hypotheses can be replicated for the individual countries in the WB6. Serbia, for instance, would converge with the EU only in 2074 if it continues to growth at an average of 2.8 percent, that is, the average growth rate attained during 2001–21. But it could bring this goal forward to 2050 with an average growth rate of 4 percent; and to 2042 if it man- ages to push growth to an average of 5 percent per year (Gori and Pontara 2023). An Economic Agenda to Accelerate Convergence of the Western Balkans with the European Union n  7 by technological advancement, infrastructure upgrades, and market reforms. Only during the 2015–20 period did human capital development begin to play a modestly more significant role, while still below the levels observed in the NMSs and the broader EU (IMF 2024). An examination of growth drivers from 2012 to 2022 reveals that the region heavily relied on private consumption as the main driver of economic activity, often at the expense of investment, while net exports fre- quently negatively impacted growth (Bakovic 2021; IMF 2015; World Bank 2024a). Governance deficit. Comparative analysis reveals that the WB6 countries con- tinue to exhibit significant institutional weaknesses compared to NMSs. Despite achieving improvements since 2000, the region’s governance indicators—specifi- cally regulatory quality, government effectiveness, control of corruption, and the rule of law—continue to lag those of the NMSs. This governance deficit has im- posed transaction costs on economic actors, constrained domestic and foreign in- vestment, hindered the growth and productivity of enterprises, and eroded pub- lic trust in institutions. It has also exacerbated “brain drain” and emigration and fostered pattens of clientelism and patronage (EBRD 2024; Figure A2 in the Annex). Limited trade and integration. The Central European Free Trade Agreement (CEFTA) process has played a key role in stimulating trade in NMSs. After the EU accession of these countries, trade volumes took off. In the WB6, CEFTA suc- ceeded in eliminating tariffs for intraregional trade, but overarching gains re- mained limited. The region has remained highly fragmented due to persistent territorial disputes, political conflicts, nontariff barriers, and burdensome border procedures, leading to much longer import-export times and higher costs com- pared to the EU. As a result, trade in the WB6 remains significantly below its potential (Del Monte et al. 2023). A combination of both exogenous and internal factors, therefore, explains the lackluster growth record of the WB6 and the gap that has continued to increase with respect to the performance displayed by NMSs. This begs the question as to whether targeted reforms and interventions that would bring the WB6 on par with NMSs in selected domains could trigger greater economic dynamism and result in higher rates of growth in the region and consequently faster conver- gence with the EU. Section 3 attempts to further explore this question. 3. Unlocking the Potential of the WB6 to Grow and Converge Faster with the EU Data and Model The potential socioeconomic impact of EU accession on the economies of the WB6 can be realized through several transmission channels. In this section, the focus is on institutions, investment, education, and market integration. We explicitly model the relationship between growth and institutions, investment and educa- tion, while for market integration we rely on results obtained from Del Mar Gómez et al. (2023). These “growth factors,” while not exhaustive, were chosen based on a literature review on the fundamental drivers of GDP growth over the medium to long term (see, for example, Petrović et al. 2019; Loayza and Pennings 2022). 8  n   World Bank Europe and Central Asia In Focus The theoretical model underlying this analysis is based on the key determi- nants of economic growth, as put forward in the literature on conditional beta convergence and endogenous growth theory (Acemoglu, Johnson, and Robinson 2005; Barro and Sala-i-Martin 1992; Solow 1956). In its general form, the growth rate of real GDP (GDPg) can be expressed as: GDPg = β₀ + β₁ ln(GDPpc) + β₂ Institutions + β₃ Investment + β₄ Education + β5 d1 + β6 d2 + ε (equation 1) where: • GDPg refers to real GDP growth rate. • ln(GDPpc) represents the natural logarithm of initial GDP per capita, which captures conditional beta convergence. A negative coefficient (β₁ < 0) is ex- pected, in that poorer countries tend to grow faster than richer ones when structural factors are controlled for. • Institutions capture the quality of governance, proxied by the arithmetic mean of the World Bank’s Rule of Law and Control of Corruption indicators from the Worldwide Governance Indicators. A positive coefficient (β₂ > 0) is ex- pected, as better institutions reduce uncertainty, encourage investment, and foster productivity. • Investment represents gross fixed capital formation (as a percentage of GDP), capturing the role of capital accumulation in driving growth. A positive coef- ficient (β₃ > 0) is expected, reflecting that higher investment contributes di- rectly to GDP growth. • Education refers to the natural logarithm of average years of schooling, which represents human capital. A positive coefficient (β₄ > 0) is expected, as a more educated workforce increases productivity and innovation. • d1 is a dummy variable for the global economic crisis. A negative coefficient (β5 < 0) is expected, reflecting the adverse impact of the crisis on growth. • d2 is a dummy variable for the COVID-19 pandemic. A negative coefficient (β6 < 0) is expected, capturing the pandemic’s detrimental economic effects. To operationalize this theoretical framework, we split the 2000–22 sample into five subperiods (2000–02, 2003–07, 2008–12, 2013–17, and 2018–22) and estimate equation 1 using the Ordinary Least Squares (OLS) method: GDPg = 10.947*** − 1.720*** ln(GDPpc) + 0.762** Institutions + 0.153*** Investments + 2.039** Education − 2.896*** d1 − 0.640** d2 . The results align well with theoretical expectations and exhibit strong econo- metric properties, with an adjusted R2 of 52 percent and no evidence of heterosce- dasticity or autocorrelation. Conditional beta convergence is confirmed, with poorer WB6 countries growing faster when structural factors are controlled for. Institutional quality (0.762**), investment (0.153***), and education (2.039**) sig- nificantly and positively impact growth, emphasizing their importance as driv- ers of economic development. Meanwhile, external shocks, such as the global fi- nancial crisis (−2.896***) and the COVID-19 pandemic (−0.640**), have strong negative effects on growth. An Economic Agenda to Accelerate Convergence of the Western Balkans with the European Union n  9 For market integration, we rely on Del Mar Gómez et al. (2023), who use a quantitative spatial model of trade to assess the economic impacts of alternative integration scenarios—including WB6 trade coordination and integration and EU single market accession on income. We expect these effects to materialize over the medium term, typically within a time frame of five years, as the benefits of increased trade and structural alignment accrue gradually. Overall, we assume that by joining the EU (or by going through an intensified process of EU accession, such as the one supported by the Growth Plan), the WB6 can strengthen institutions, attract structural funds to the least developed regions, increase the quality of education, and draw benefits by first “completing” the re- gional market and then integrating into the EU single market. All these factors, combined, should boost economic growth. Results The results of the model for the four dimensions examined are summarized in Table 1. We discuss them in turn. Institutions. The relationship between economic growth and institutional de- velopment is symbiotic over time (Acemoglu et al. 2005; Barro 1991; Fukuyama 2011; Putnam 1993). Institutions enforce property rights, create a level playing field, and encourage investment and innovation, thus playing a central role in determining long-term growth. A particular benefit for an EU candidate country that develops its institutions in line with EU standards is to unlock higher credit ratings,13 which in turn reduce borrowing costs and attract higher-quality invest- ments. Indeed, since the 2004 “big bang” of EU enlargement, the NMSs have experienced notable progress in improving institutional quality, although the degree of improvement varies from country to country (Grieveson and Holzer 2021; Tóth and Hajdu 2021). According to our model, assuming institutional con- vergence with the NMSs, potential annual GDP growth rates in the WB6 could increase from 0.4 percent (Montenegro) to 0.7 percent (Bosnia and Herzegovina). The impact would be even greater, ranging from 0.7 to 1 percent of GDP, if con- vergence occurred with the Czech Republic, the most advanced among the NMSs (Table 1; Figure A3 in the Annex). Investment. Capital investment is a key driver of productivity, innovation, and long-term economic growth (World Bank 2024c). Higher-capital-intensive investments tend to flow toward stable environments with strong governance and predictable legal systems, as well as larger, more dynamic, and better-con- nected markets. The NMSs have significantly outperformed the WB6 in attract- ing investments, benefiting from their proximity to the EU, availability of skilled labor, and institutional reforms, which collectively facilitated their integration into EU value chains (Gattini et al. 2017). Here, we focus on investments driven by EU structural funds, which address key developmental bottlenecks by 13. Sovereign credit ratings are highly correlated with market-determined credit spreads. Revisions of such ratings can trigger shifts in capital flows that affect real GDP per capita (Chen et al. 2016). 10  n   World Bank Europe and Central Asia In Focus TABLE 1: Impact on Western Balkan Countries’ GDP Growth Rates from Convergence with NMS Averages for Key Strucural Factors Bosnia and North Albania Herzegovina Montenegro Macedonia Kosovo Serbia Institutions 0.7 0.7 0.4 0.6 0.7 0.6 Investment* 0.5 0.5 0.5 0.5 0.5 0.5 Market integration** EU single market 0.4 0.3 0.6 0.5 0.4 0.4 Regional 0.1 0.1 0.1 0.1 0.1 0.1 Education 0.2 0.4 0.1 0.5 0.5 0.2 Total 2.0 2.0 1.6 2.2 2.1 1.8 Source: Calculations based on World Bank data. Note: *Shares of structural funds equivalent to those of Bulgaria; **Based on Del Mar Gómez et al. (2023). financing infrastructure, human capital, and innovation. If the WB6 countries were to receive structural fund inflows equivalent to Bulgaria’s post-accession levels—approximately 3.9 percent of GDP (Figure A4 in the Annex)—this would translate into an average increase in investment of 3.5 percentage points of GDP in the medium to long term.14 According to our model, this would result in an additional 0.54 percentage points in annual GDP growth for the each of the WB6 countries (Table 1). Market integration. Integration into the single market and the elimination of trade barriers benefited both old EU member states and NMSs (Baldwin and Wyplosz 2022).15 In the WB6, conversely, the existing SAAs have not eliminated border controls, which continue to result in delays and higher trade costs (Del Monte et al. 2023). Moreover, regional integration within CEFTA is still consider- ably lower than within the EU single market (Mulabdic and Ruta 2021). Accord- ing to Del Mar Gómez et al. (2023), the income gains from regional trade integra- tion and coordination are significant, ranging between 1.5 and 3.0 percent per country. Furthermore, deeper integration into the EU single market could in- crease these gains by an additional 6 percent.16 Under the assumption that the effects of coordinated regional trade integration materialize over a medium-term 14. The funds that the EU allocated to future NSMs before their accession stood at around 0.5–1.0 percent of GDP. This compares well with the resources expected under the Growth Plan Serbia, up to €2 billion or 0.5 percent of its GDP in 2023. After accession, however, this proportion increased to 1.3 percent of GDP for the Czech Republic and to 3.9 percent of GDP for Bulgaria (Medic 2024). 15. NMSs enjoyed technology transfers, while old EU’s companies “internationalized” part of the production processes, increasing their global competitiveness. 16. These income gains stem from reduced waiting times at borders due to trade facilitation reforms, including the introduction of the National Single Window and National Trade Certificates, investments in border management systems, and upgrades to border crossing points. Such measures lower administrative burdens, streamline customs clearance, and re- duce iceberg trade costs, leading to estimated welfare gains. The analysis compares indepen- dent policy implementations, cross-economy coordination, and full EU accession scenarios. An Economic Agenda to Accelerate Convergence of the Western Balkans with the European Union n  11 period of five years, the annual growth rate would increase by between 0.3 per- centage points in Bosnia and Herzegovina and 0.55 percentage points in Monte- negro. When the effects of EU single market integration are included, the com- bined impact on the growth rate ranges from 0.35 to 0.62 percentage points in the same two countries, respectively (Table 1). Education. Evidence shows a strong correlation between the quality of the human capital stock and GDP growth (Romer 1990). It also shows that EU mem- bership has positively influenced the quality of education in NMSs (Bergbauer 2019) and that the WB6 still lag some of the NMSs on education outcomes. Polish students, for example, complete 13 years of school education, compared to only 10 years for Macedonian students. Only Serbia and Montenegro currently dis- play the education quality levels of Romania and Bulgaria. Our model predicts that convergence with average levels of education quality in the NMSs could increase annual GDP growth rates in the WB6, ranging from 0.07 percent in Mon- tenegro to 0.45 percent in North Macedonia. But if the WB6 could converge with the standards of the Czech Republic—the frontrunner in the group of NMSs in- cluded here—the impact on growth would be significantly larger (Table 1; Figure A5 in the Annex). Figure 4 summarizes the potential growth impact in the WB6 in relation to the variables examined; added growth ranges between 1.6 percent (Montenegro) and 2.2 percent (North Macedonia). In some cases, achieving these results could in- crease WB6 growth rates by 40–80 percent in comparison to 2025 and 2026 projec- tions. These results are compatible with the positive economic impact that new entrants into the EU experienced during previous waves of enlargement FIGURE 4. Alignment with NMS: Cumulative Impact on Western Balkans GDP 6 0.07 0.21 0.05 0.07 0.39 0.23 0.42 0.05 0.55 0.50 5 0.08 0.3 0.05 0.54 0.44 0.45 0.36 0.54 0.54 0.54 0.08 0.56 0.54 0.38 0.52 GDP growth, percent 4 0.70 0.67 0.65 0.54 3 0.58 2 3.95 4.10 3.40 3.55 3.35 2.75 1 0 Albania Bosnia and Montenegro North Macedonia Kosovo Serbia Herzegovina Projected growth rate 2025–26 Institutions Structural funds EU single market Regional market integration Education Source: Calculations based on World Bank data. 12  n   World Bank Europe and Central Asia In Focus (Campos et al. 2019; Rapacki and Prochniak 2019). It is important to stress that our model may overstate the growth impact on the WB6, as it assumes full EU membership and complete convergence with the standards of the NMSs for the indicators examined. The WB6 economies currently stand relatively far from these benchmarks. Therefore, the estimates presented here should be regarded as upper bounds. The growth benefits resulting from structural reforms are likely to be gradual, depending on the actual pace of EU accession and implementation of the Growth Plan. 4. A New Economic Agenda for the WB6 The evidence and results discussed in the previous sections can help identify the main pillars of a new economic agenda for the WB6. We identify five areas for action, notwithstanding the heterogeneity of the region and specificity of indi- vidual countries. (i). Deepen “second generation” reforms. The transition of the WB6 to full- fledged market economies requires, among other things, closing infra- structure gaps through an increase in both public and private (domestic and foreign) investments; improving efficiency in product markets to in- crease the level of competition; promoting diversification and deeper inte- gration of financial markets; reducing the role of SOEs in the economy; and reforming the labor market making it more flexible and inclusive.17 (ii). Boost human capital. The demographic challenges in the region call for a better utilization of the existing human capital. This implies reforming the education sector starting with early childhood throughout the lifecycle; achieving a better match between the existing skills and the needs of the private sector; and promoting inclusion in the labor market of those who remain on the margins of economic and social development, such as women, young people, and ethnic minorities. (iii). Strengthen institutions. Governance needs to be improved to remove brakes and obstacles to achieving faster growth. The opportunities offered by digitalization and artificial intelligence could be exploited here. New technologies can play an instrumental role in simplifying interactions be- tween governments, citizens, and businesses and increasing the transpar- ency of various processes as in the case, for example, of public tenders.18 17. The experience of countries that have managed to converge with the EU-15 is instructive in this regard. These countries exhibit several characteristics: (i) high labor force participa- tion rates, (ii) high rates of openness to international trade, (iii) robust governance indica- tors, (iv) substantial spending on research and development (on average, 2 percent of GDP), (v) dynamism and innovation of SMEs, (vi) competitive business climate, and (vii) lower energy intensity. See IMF (2015) and Iacovone (2025). 18. Digital solutions in public procurement can result in public savings, efficiency gains and innovation. Although governments in the WB6 use e-procurement systems, these systems are used to disseminate information rather than to support interactions and transactions between authorities and businesses, particularly in the post-tender phase (EBRD 2024). An Economic Agenda to Accelerate Convergence of the Western Balkans with the European Union n  13 (iv). Improve regional connectivity. The WB6 show competitiveness in several productive sectors,19 and tertiary sectors (tourism, ICT) are experiencing rapid growth.20 Building on these strengths, faster and more efficient freight transport across borders can boost trade and competitiveness. However, improving freight transport requires strengthening cross-border connections and adopting a coordinated approach to reforms at the re- gional level to facilitate trade and economic integration. (v). Focus on the green transition and energy diversification. Most of the en- ergy produced in the WB6, except for Albania, comes from coal-fired, ob- solete, inefficient, and polluting thermoelectric power plants, with nega- tive repercussions on public health and competitiveness (particularly considering the EU’s Carbon Border Adjustment Mechanism [CBAM]). Transitioning to renewable energy, whose production costs are falling, will be essential to meet growing demand and achieve decarbonization. The EU Growth Plan is synergetic to this reform agenda. The establishment of “green lanes” to facilitate trade across borders can greatly improve regional con- nectivity. Similarly, the completion of the Common Regional Market through a revamped Berlin Process would further boost integration between the WB6.21 Finally, the expansion of the geographic area of the Single Euro Payments Area (SEPA) to the WB6 could result is a significant reduction of the costs of bank transfers between the region and the rest of Europe, yielding savings estimated at €500 million euros per year for the countries involved (World Bank 2024b). 5. Conclusion Our analysis has highlighted key factors that have prevented the WB6 countries from attaining NMS living standards and have delayed socioeconomic conver- gence with European peers. These factors include the incomplete transition to market economies, the limited contribution of human capital to the growth pro- cess, a persistent governance deficit, and regional integration that falls below potential, both with the EU and among the WB6. Exogenous events outside of the control of policy makers, such as violent conflicts and global shocks, have also 19. EBRD identifies several sectors of excellence in the WB6, including in Albania (food, carnival masks, metal products, online payments, ICT, wood recycling), Bosnia and Herze- govina (coffee, telecommunications software, retro bicycles, fireproof glass products, pack- aging, ICT, beekeeping), Kosovo (fruit drinks, carbon fiber auto parts, ICT), Montenegro (domain registration, port solutions for super yachts and mega yachts), North Macedonia (chemicals, freight transport, wine, ajvar production), and Serbia (point-of-sale equipment, lighting, copper products, ICT, packaging, protective clothing). 20. In Serbia, for instance, exports of ICT services increased by more than 11 times between 2010 and 2022 and now surpass the ICT exports of Estonia, one of the forerunners of digital services in Europe (EBRD 2024). 21. By some estimates, CEFTA has increased intraregional trade by 37 percent (Bertelsmann Stiftung 2022). Since 2014, the Berlin Process has also played a valuable role in regional economic cooperation, with the launch of two important projects: the Multi-annual Action Plan on the Regional Economic Area 2017–2019, adopted in Trieste in 2017, and the Com- mon Regional Market 2021–2024 Action Plan, launched at the Sofia summit in 2020. 14  n   World Bank Europe and Central Asia In Focus inhibited convergence. Through our econometric model, we have tested how alignment with the NMSs in critical dimensions such as institutional strength, investment levels, volume of trade, and quality of education could positively impact the potential growth of the WB6 and accelerate economic convergence. This analysis has also helped to identify a set of policy measures that could reignite economic dynamism in the WB6. These include completing “second gen- eration” reforms, bolstering human capital, strengthening institutions and gov- ernance frameworks (including through digitalization), accelerating trade with the EU while deepening regional economic integration, and embarking on the green transition. The momentum for the implementation of such a reform agenda is propitious considering the renewed dynamism of the EU enlargement process with the launch of the €6 billion EU Growth Plan. The Plan offers financial as- sistance and progressive, deeper integration into the single market. However, these benefits are contingent on the implementation of ambitious reform agendas in the candidate countries. The benefits deriving from the synergetic implementation of robust reform agendas in the WB6 and the Growth Plan cannot be overemphasized. The Plan offers important incentives and benefits prior to accession—such as greater flows of financial assistance, the establishment of “green lanes,” a revamped CEFTA and Berlin process, and financial programs like SEPA. In the medium term, full EU membership would further galvanize growth prospects for the WB6 by trig- gering access to greater volumes of structural funds and full integration into the single market—both tools for convergence. Similarly, by integrating further with WB6 through nearshoring and friendshoring, the EU can secure production closer to home, reducing vulnerabilities and strengthening economic ties within its immediate neighborhood. An Economic Agenda to Accelerate Convergence of the Western Balkans with the European Union n  15 Annex. Additional Data FIGURE A1. Regulatory Quality, Balkans and NMSs (Selected Countries, 2010–2022) 1.6 1.4 1.2 2010 1 2015 0.8 2022 0.6 Index 0.4 0.2 0 −0.2 −0.4 Bosnia and North Slovak Czech Albania Herzegovina Kosovo Montenegro Macedonia Serbia Republic Slovenia Poland Republic −0.6 Source: Calculations based on World Bank data. FIGURE A2. Governance Indicators: WB6 and Selected NMSs (1996–2022) Control of Corruption Regulatory Quality 1.00 1.50 0.50 1.00 Index Index 0.00 0.50 −0.50 0.00 −1.00 −0.50 Government Effectiveness Rule of Law 1.50 1.50 1.00 1.00 0.50 0.50 Index Index 0.00 0.00 −0.50 −0.50 −1.00 −1.00 WB6 Bulgaria Romania Czech Republic Source: Calculations based on World Bank data, Worldwide Governance Indicators. 16  n   World Bank Europe and Central Asia In Focus FIGURE A3. Institutional Convergence with NMSs and Impact on WB6 GDP 1.2 1 0.8 Percentage of GDP 0.6 0.4 0.2 0 Bosnia and Albania Herzegovina Montenegro North Macedonia Serbia Kosovo −0.2 NMS Bulgaria Romania Czech Republic Source: Calculations based on World Bank data. FIGURE A4. Structural Funds: Net Inflows before and after Membership (Selected Countries) 5.0 4.5 3.87 4.0 3.09 2.99 3.5 2.75 Percentage of GDP 3.0 2.10 2.5 2.0 1.38 1.26 0.95 1.5 1.0 0.33 0.29 0.15 0.13 0 3 years pre-accession 2022 Bulgaria Romania Hungary Slovak Republic Poland Czech Republic Source: Calculations based on World Bank data. An Economic Agenda to Accelerate Convergence of the Western Balkans with the European Union n  17 FIGURE A5. 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Drawing on the development trajectory of the Western Balkans and selected New Member States during 1991–2023, and simula- tions measuring the impact on GDP of specific policy reforms, this policy note puts forward a “new” economic agenda for the Western Balkans—to be implemented in synergy with the Growth Plan. The analysis shows that if these countries could reach the levels of New Member States with respect to the strength of institutions, level of investment, volume of trade, and quality of education, their growth rate could as much as double. Scan the QR code to see all the titles in this series.