The pre-accession economies in the global crisis: from exogenous to endogenous growth?

This publication examines the experience of the pre-accession countries in the global economic and financial crisis. It looks at the main channels of development of the crisis, policy responses to weather its effects, and finally, at some of the challenges for the years ahead.

This study covers Turkey and the candidate and potential candidate countries in the Western Balkans – Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, Kosovo (under the United Nations Security Council Resolution 1244), Montenegro, and Serbia.
These countries achieved high economic growth rates between 2002 and 2007, driven in particular by strong investment growth and buoyant consumption. The good performance of the pre-accession economies before the crisis occurred against the background of a booming global economy, easy access to international finance and ample liquidity. However, the growth was slower than might have been expected when taking into account the relatively low income levels in these countries and the performance of comparable new EU Member States.

The pre-crisis growth pattern was challenged by the large private consumption, which grew further in the boom years in some of the pre-accession countries. Moreover, investments in the region were geared to financial services and real estate. The manufacturing sector reduced its share in the economy, while the construction and retail trade sectors have continued their steady upward trend.

The economic crisis has affected, to a different degree, all pre-accession economies. However, notwithstanding their vulnerabilities, and fears that they could suffer deeply in the global deleveraging process, pre-accession countries demonstrated a high degree of resilience to the financial turmoil.

The crisis has not led to a sudden stop in external financing, which continued to flow to the region, although at significantly lower levels. Despite the previously high credit growth, most of the countries entered the crisis with relatively healthy banking sectors. Most of the financial indicators worsened in the crisis but the overall financial stability was preserved or quickly regained in some of the countries, which experienced small bank crises. By the end of 2009, official reserves stabilised at close to their pre-crisis levels.