# Chapter 1. Public Governance Fundamentals and European Integration: Towards Convergence for the Western Balkans?

## 1.1. Introduction

In 2020, the European Commission (EC) presented its proposals for an enhanced accession process, to provide a more credible EU perspective for the Western Balkans. At the core of the revised EU accession process is an “even stronger focus on fundamental reforms, starting with the rule of law, the functioning of democratic institutions and public administration as well as the economy of the candidate countries” combined with a merit-based approach based on objective criteria for accession (EC, 2020[1]).

This chapter provides a snapshot of where countries and economies in the Western Balkan region stand with respect to the three fundamentals for the EU-enlargement process. It draws on new data collected in 2019 based on the standard OECD Government at a Glance surveys, which for the first time allows direct comparison of the Western Balkans in all fundamental areas with OECD members, including those that are also members of the EU (OECD-EU). Key findings from the 2017 and 2019 reviews conducted by SIGMA (Support for Improvement in Governance and Management) are also presented in the section related to public administration reform.

This first edition of Government at a Glance, Western Balkans benchmarks countries from the region with EU and OECD countries on government practices, policies and public governance outputs, recognised as OECD Principles and Recommendations of Public Governance.1 The publication provides sound evidence on the size of the “convergence gap” in specific areas of public governance, such as public finance and economics (chapter 2), public employment (chapter 3), centre of government (chapter 4), budgeting practices and procedures (chapter 5), HRM (chapter 6), public procurement (chapter 7), and digital government (chapter 8); core government results (chapter 9); and serving citizens (chapter 10).

The Western Balkan region is located at the doorstep of the EU. With a combined population of nearly 18 million people, a territory the size of Italy, and a geopolitically strategic location at the crossroads of Central Europe, the Adriatic and Black Sea regions, the region has for centuries played an integral role in European politics, business and commerce. The Stabilisation and Association Agreements have further integrated the Western Balkans and EU economies (as explained further below in the section on economic criteria). In addition, transnational crises relating to migration or the recent COVID-19 pandemic illustrate how interdependent EU and bordering countries are on many public policy issues in the 21st century. This publication also provides insights into how resilient the public governance systems in the Western Balkans are in the face of the COVID-19 challenges for public finance, public employment, digital service delivery, etc.

Populations from the Western Balkans region support EU membership, with more than half on average viewing EU accession favourably. This is a rising trend, from a regional average of 42% in 2014 to 59% in 2019, although support in Serbia has fallen in recent years. Overall, EU membership is associated with economic prosperity, freedom to travel and study, and a guarantee for peace and safety (RCC, 2019, p. 38[2]). Governments in the Western Balkans are equally committed to accession, indicated best by the resolution after 26 years of deadlock of the “Macedonia” naming issue.

The EC’s progress reports note the level of preparedness of each Western Balkan country. The EC’s five-point scale has been converted into numerical values and summarised for the region in the table below. On average, countries are placed lower in areas related to the rule of law, and there is greater variation between countries in the areas relating to economic criteria.

Three characteristics cut across and affect all these fundamental areas in the Western Balkans: low trust in institutions, high levels of informality and policy capture. (Transparency International, 2016[3]; Hellman, Jones and Kaufmann, 2000[4]; EC, 2018[5]). Policy capture reduces trust and promotes informality. These characteristics are often found in contexts where justice and law enforcement institutions are weak, political systems are heavily influenced by private interests, regulatory frameworks for policy making are dysfunctional, and media and citizens are unable to check the State. Together, they lower economic competitiveness and make public and democratic governance reforms extra challenging (OECD, 2017[6]).

The rest of the chapter is structured according to the three fundamentals for the EU Enlargement process: functioning of democratic institutions and public administration reform; rule of law; and economic growth and competitiveness. The chapter illustrates that these three fundamental areas are closely interlinked. Although they can be conceptually separated, reforms in one area depend on established foundations in the others.

## 1.2. Functioning of democratic institutions and public administration reform

In its 2014 Enlargement Strategy, reflecting on the experience with previous rounds of enlargement where public governance had been a blind spot, the EC first created the notion of “fundamentals first” and stressed that three pillars of EU integration are closely interlinked: rule of law, economic governance and public administration reform. It was also acknowledged that democratic governance had previously been narrowly defined to focus on the mechanisms of democratic elections rather than the existence of solid democratic institutions, norms and practices (EC, 2014[7]).

The 2018 Enlargement Strategy re-emphasised the need to address fundamental reforms in the region: “Addressing reforms in the area of rule of law, fundamental rights and good governance remains the most pressing issue for the Western Balkans. It is also the key benchmark against which the prospects of these countries will be judged by the EU.” (EC, 2018, p. 4[5]) With the EC Communication of February 2020, titled “Enhancing the accession process - A credible EU perspective for the Western Balkans”, the EC also reorganised its own internal structures to prioritise the “fundamentals first” approach: “Credibility should be reinforced through an even stronger focus on the fundamental reforms essential for success on the EU path. These fundamentals will become even more central in the accession negotiations. Negotiations on the fundamentals will be opened first and closed last and progress on these will determine the overall pace of negotiations.” (EC, 2020, pp. 2-3[1]). The old acquis chapter structure has been reconfigured to allow the fundamentals to take priority, and specific roadmaps for each of the three fundamentals will be developed.

### Functioning of democratic institutions

The 1993 Copenhagen criteria (the rules that define whether a country is eligible to join the European Union) emphasise democratic governance, but in the first rounds of EU accession, the EC was mainly focused on assessment criteria related to the rule of law and a functioning market economy. So-called political criteria for democratic governance focussed on issues such as having free elections with secret ballots, the right to establish political parties, etc. The new 2018 Enlargement strategy and the 2020 Communication signal for the first time in concrete terms that the functioning of democratic institutions go beyond the rule of law and fundamental rights.

There is no set of established standard indicators in this area, Trust in democratic institutions seems to be an appropriate proxy for their legitimacy and efficacy. Trust is not only an outcome indicator but also a crucial policy enabler. Governments cannot function effectively without a degree of public trust. The less public trust, the less able a government is to undertake ambitious, costly or long-term reforms. Robust levels of trust are thus a necessary condition for the kind of structural, far-reaching reforms that most Western Balkan countries have embarked on for the European Integration journey. Trust in governments is considerably lower in the Western Balkans compared to countries that are members of the OECD and the EU. Another worrying trend is that younger people in the Western Balkans trust their governments less on average compared to their OECD and OECD-EU counterparts (see Chapter 9). Serbians have the highest level of trust as 48% of the citizens reported that they have confidence in their national government. People in Bosnia and Herzegovina have least confidence in their national government (23%). Trust has been declining since 2007 across the region, on average by 4 p.p. Citizens of Bosnia and Herzegovina and North Macedonia lost most confidence in their national government since 2007 (15 and 13 p.p.), whereas Serbian citizens gained confidence (14 p.p.). Confidence in OECD and OECD-EU governments also declined after 2007, but rose again by 2019 (reaching 45% and 44% respectively)

Trust in parliaments is also low in the region. About 60% of the population tend not to trust or totally distrust the parliament (RCC, 2020[8]). There is no directly comparable dataset in this area, but distrust in parliaments appears to be at the same level on average in EU member countries where approximately 60% tend not to trust their national parliaments. However, there is significant variation within the EU, from Sweden and Denmark where only 26% of the population distrust the parliament to Croatia and Bulgaria where respectively 84% and 72% distrust parliaments (EC, 2019, pp. 44, 50[9]). Oversight institutions, such as the Ombudsperson and Supreme Audit institution consistently enjoy higher levels of public trust in the Western Balkans than governments, parliaments and courts.

Citizens’ low levels of trust in democratic institutions in the Western Balkans correspond with expert assessments of the 2018 Global State of Democracy indices conducted by the International Institute for Democracy and Electoral Assistance (IDEA). On a scale of 0-1 where 1 is the best, Western Balkan countries on average earned a score of 0.60 in “clean elections” compared to 0.84 and 0.85 for OECD and OECD-EU countries. For “sub-national elections” the Western Balkan region stood at 0.52 and OECD and OECD-EU at 0.76 and 0.78, respectively. Similar size gaps are found in areas such as “effective parliaments”, “media integrity”, and “civil society participation”. (IDEA, 2020[10])

Trust in public institutions is influenced by many factors along two foundations: first, citizens must believe that their government has the competence, expertise, technical knowledge and capacity to make the best judgement and deliver services (responsiveness and reliability); second, governments must be impartial and fair in their decision-making, and they must listen and consult with citizens in the process (integrity, openness, fairness) (OECD, 2017[11]; Rothstein, 2011[12]). Chapters 2-8 show how the countries in the Western Balkan region have established many regulations and institutions similar to OECD and OECD-EU countries in different areas of public governance; however, often their implementation is lagging. And when it comes to performance and effectiveness in core government results (chapter 9) and in delivering services to citizens (chapter 10) there are significant differences, which can explain the low levels of trust. For example, satisfaction with basic health and education services as well as objective measures of the quality of healthcare and education systems are significantly and consistently lower in the Western Balkans compared to OECD and EU countries.

The concept of good administration has been gradually defined by EU countries and is included in the EU Charter of Fundamental Rights, Article 41. The notion of a European Administrative Space was set out by SIGMA, a joint initiative of the OECD and the EU, in 1999 (OECD, 1999[13]). It included components such as reliability, predictability, accountability and transparency, as well as technical and managerial competence, organisational capacity, financial sustainability and citizen participation. The EC outlines six key areas for public administration reform as follows:

1. 1. Strategic framework for public administration reform — this includes the political commitment to the reform process, including political leadership and technical coordination and monitoring of implementation.

2. 2. Policy development and coordination — this includes strategic planning, functioning of the centre of government, policy co-ordination and policy development and analysis.

3. 3. Public service and HRM — this includes organisation and functioning of the public service, including depoliticisation, merit-based recruitment and promotion, training and professionalisation.

5. 5. Service delivery — this includes improving services for citizens and business, including better administrative procedures and e-government services

6. 6. Public financial management (PFM) — this includes a commitment to a more comprehensive approach to improving management of public finances and the overall budgetary process through preparation and implementation of multi-annual PFM programmes and engaging in a PFM policy dialogue (EC, 2014, pp. 4-5[7]).

Through the SIGMA programme, the Principles of Public Administration were developed to set standards within each of these areas for the EU integration process (OECD, 2017[14]). The capacities and performance of public administrations have gradually improved since 2015 when SIGMA established a baseline against a set of standard indicators for the Principles of Public Administration (SIGMA, 2020[15]). However, progress has been incremental and uneven. No countries have leapfrogged to a state where their public administration systems are at the same fundamental level as the majority of EU member countries. This is not unexpected, as the fastest reformers in the 20th century took decades to achieve basic governance transformation in the areas of bureaucratic quality, government effectiveness, control of corruption and the rule of law (World Bank, 2011, p. 11[16]).

SIGMA’s methodology uses a scale of 0-5 (5 being the best), in line with the EC’s scale as shown above. The point allocation is constructed so that a value of 3 cannot be achieved without showing that implementation of key processes is happening in practice. Many countries still struggle to reach 3 on average for the different areas. The best performing areas are public service and HRM and service delivery. As shown in chapters 9 and 10, improvements have mainly been for businesses services, not services to citizens.

The PFM area is unpacked with its sub-areas, as the best average scores are found in two of those. The areas of external audit and public procurement come closest to full adherence to the Principles of Public Administration (value of 5) but even in these areas significant efforts are needed to converge with OECD and EU standards.

Table 1.1. Performance in public administration areas – wide variation across Western Balkans, 2017 and 2019

Strategic framework for PAR

Policy making

Public service and HRM

Accountability

Service Delivery

PFM

Budget management

Public Procurement

External audit

ALB

2.5

2.4*

3.4

2.6

3.3

2.8

2.6

2.8

3.5

BIH

1

1.3

1.6

1.8

1

1.7

1.2

2.2

2.5

XKV

2.5

2.8

3

2.6

3*

2.9

2.7

3

3.5

MNE

2.3

3.1

2.6

3.4

3*

2.6

2.4

2.6*

3.5

MKD

0.8

1.8

2.8*

2.6

3

2.8

2.4

3.4*

3

SRB

1.8

2.7

3*

2.6

3*

2.9

2.3

3.6

3.5

Western Balkans

1.8

2.4

2.7

2.6

2.7

2.6

2.3

2.9

3.3

Note: Blue indicates higher averages and grey lower averages. Indicator averages by areas of the Principles of Public Administration. The framework consists of 52 indicators, composed of more than 340 individual sub-indicators, triangulating different data sources to credibly measure the state of play in a public administration and progress in implementing reforms. For more information consult the Methodological Framework for the Principles of Public Administration (OECD, 2019[17]). The table includes information from 2017 and 2019 assessments (latest available values). Averages based on 2019 values are marked with an asterisk. SIGMA’s 2019 assessments did not cover all countries and areas unlike in 2017, so results may be slightly positively biased where data is more recent (2019 values are marked with an asterisk in the table). All countries assessed in the service delivery area in 2019 - Kosovo, Montenegro and Serbia - made significant improvements compared to 2017 (42% increase in scores). All countries assessed in the public service and HRM area in 2019 – North Macedonia and Serbia – also significantly improved (29% increase in scores).

Source: Own elaboration based on data drawn from SIGMA 2017 and 2019 monitoring reports, http://www.sigmaweb.org/publications/monitoring-reports.htm.

External audit is the only sub-area where the regional average is above 3, signalling that generally the quality of the legislative and regulatory framework is adequate and to progress countries need to improve key implementation practices and reach outcomes that matter for external stakeholders. One example is the implementation rate of recommendations from the Supreme Audit Institutions (SAIs). In 2017, the regional average for the Western Balkans, excluding Bosnia and Herzegovina where data was not available, was 50%, ranging from 30% (Kosovo) to 75% (Serbia) (SIGMA, 2020[15]). Comparable models of SAIs in EU member countries report implementation rates ranging from 53% to 94%.2 The relatively strong performance of external audit is also reflected in its contribution to budget management, where the timeliness of submission of the SAI report to parliament, and indeed the timeliness of the parliamentary discussion of that report, is generally quite strong in Western Balkan countries. In contrast, parliamentary ex-ante scrutiny of the annual budget is lacking across the region. Figure 5 shows that parliaments in the region generally have less formal powers in amending the budget compared to OECD and OECD-EU countries. Chapter 5 also shows that parliaments in the region are less involved in the budgetary process for key items such as the report on fiscal risks and the pre-budget fiscal policy statement compared to the OECD.

The public procurement sub-area average comes close to 3, with more variation between countries than external audit. Competitive procedures are used frequently in the Western Balkans. However, contracts are mainly awarded based on lowest price as the sole criterion, whereas in most of the EU countries other criteria (related to strategic outcomes and quality) are more common, according to DIGIWHIST data. The average number of bids per tender is lower for the Western Balkan region compared to the EU average.

Table 1.2. Public procurement performance indicators, 2018

ALB

BIH

XKV

MNE

MKD

SRB

Western Balkans

EU

Number of contracts awarded by competitive procedure (%)

84

97

92

98*

97.5

91

94

74

Number of competitive procedures awarded by acquisition price only (%)

82

26

99

98*

99

89

94

40

Average number of tenders per competitive procedure

3

2.4

5

3

3.5

2.5

3

4.3

Source: Data for the Western Balkan region are based on 2018 annual reports from public procurement offices. Values with an asterisk are from 2017 SIGMA monitoring reports. The EU average has been calculated by DIGIWHIST, an EU’s research project funded by Horizon2020. Indicators are calculated using publicly available public procurement announcements on Tenders Electronic Daily (TED) and, where available, also on official national procurement portals. The public procurement data used for the analysis of TED notices comes directly from the TED database accessible at ftp://ted.europa.eu/ in XML format. See http://digiwhist.eu/ for more information. Data collection algorithms are accessible here: https://github.com/digiwhist/backend and the human-readable methods descriptions here: https://opentender.eu/at/about/how-opentender-works.

Data also show a clear difference in approach when it comes to public procurement authorities having regular dialogue with the private sector. Only North Macedonia has regular dialogue with economic operators in the region, as opposed to 77% of OECD countries.

As mentioned, public service and HRM is one of the best performing areas overall. Nevertheless, as shown in Figure 7, there is room for improvement, for example in developing policies to create a dedicated group of senior managers, having centrally-defined skill profiles for this group and placing more emphasis on performance management (See more in Chapter 6). A regional success story here is that the share of women in national parliaments rose from 23% in 2012 to 32% in 2020 across the Western Balkan region. The average is now on par with the average levels for OECD and OECD-EU countries. This was promoted by the introduction of gender quotas in all Western Balkan parliaments. Similar positive development has been demonstrated for ministerial positions. In 2012, only 9.5% of ministers were women on average for the region. In 2020, the percentage rose to 28 (See more in Chapter 3).

The countries in the Western Balkan region are performing their best in services to businesses making improvements in particularly digital services (see Chapter 9). However, there has been less gains in citizen-oriented services. Figure 8 shows that the Western Balkans fall behind their EU neighbours in e-government services, regardless of whether it relates to user-centric government, transparency, citizen mobility, business mobility or key enablers. Chapter 8 compares the situation in the Western Balkans with OECD and OECD-EU countries in more detail for a range of such key enablers. For example, as shown in Figure 9, organisations that lead and coordinate digital government policies in the Western Balkans less frequently have a mandate to use hard policy levers, e.g. their ability to carry out ex-ante revisions and evaluation of ICT projects is limited.

The Digital Agenda for the Western Balkans, one of the EC’s six flagship initiatives in the 2018 Western Balkans Strategy, aims at better connectivity, digital skills, as well as performance in eGovernment, eProcurement and eHealth services (EC, 2018[5]). The data shows a clear need for such initiatives in the region.

The convergence gap for the policy making area is arguably one of the largest. All countries in the Western Balkan region have established the regulatory and institutional frameworks for most of the critical Centre-of-Government (CoG) functions, which are essential for effective policy making and co-ordination (see Chapter 4). However, Figure 10 shows that policy co-ordination in the Western Balkans takes place mostly in a formal, rule-based setting (such as cabinet meetings) rather than in informal ones (such as ad-hoc meetings and task forces). In addition, no Western Balkan country uses performance management as an instrument.

Countries in the Western Balkan region struggle to implement fully and consistently many of the CoG functions, as evidenced by the 2017 SIGMA monitoring reports. One of those challenges relates to the accessibility of legislation. Fifteen of 21 EU countries analysed by SIGMA provide online access to both primary and secondary legislation free of charge, including in consolidated format (amendments, if any, are embedded in the original text). None of the countries in the Western Balkan region provide this to citizens.3 (SIGMA, 2020[15])

## 1.3. Rule of law

The rule of law is a fundamental value for the EU, enshrined in the European Convention on Human Rights and the Charter of Fundamental Rights of the EU. In 1993, the Copenhagen criteria cemented the key requirements for accession to the EU in this area. As expressed by former EC President Jean-Claude Juncker in his 2018 State of the Union Address: “The European Union is a community of law. Respecting the rule of law and abiding by Court decisions are not optional.” According to the EC, countries that want to join the EU must ensure that:

• their judiciary is independent and impartial. This includes, for example, guaranteed access to justice, fair trial procedures, adequate funding for courts and training for magistrates and legal practitioners;

• their government and its officials and agents are accountable under the law and that political leaders and decision-makers take a clear stance against corruption; and

• the process by which laws are prepared, approved and enforced is transparent, efficient, and fair. Laws must be clear, publicised, stable, fair, and protect fundamental rights. (EC, 2020[18])

Recent evidence confirms the business case for access to justice, and the interlinkages with broader public governance reforms: “investments in access to justice can be a channel towards better governance, by tackling local situations of corruption and injustice, closing the gap between formal and actual rights, and triggering legal and institutional change – particularly when bottom-up solutions are implemented jointly with top-down reforms” (OECD and World Justice Project, 2019[19]),

In 2018, the EC provided the following assessment of the rule of law area in its regional strategy paper for the Western Balkans: “Today, the countries show clear elements of state capture, including links with organised crime and corruption at all levels of government and administration, as well as a strong entanglement of public and private interests. All this feeds a sentiment of impunity and inequality. There is also extensive political interference in and control of the media. A visibly empowered and independent judiciary and accountable governments and administrations are essential for bringing about the lasting societal change that is needed” (EC, 2018, p. 3[5]). In addition, the EC emphasised that “strengthening the rule of law is not only an institutional issue – it requires societal transformation” (EC, 2018, p. 4[5]). In 2018, all countries were seen by the EC to be at “an early stage” (value 1) when it comes to the fight against corruption and the fight against organised crime. As shown above, all countries except Kosovo improved to show “some level of preparation” (value 2) in 2019, with Montenegro even reaching “moderately prepared” (value 3).

### Confidence in the judiciary system and courts

Confidence in the judiciary system and courts is established through accessible, fair and transparent justice services and adequate legal assistance (OECD, 2017, pp. 141-149[11]). On average, confidence of the Western Balkan populations is far below those of the OECD and the EU. The average rate for Western Balkan region is 33%, with North Macedonia registering the lowest rate at 22%. There is wide variation across OECD and OECD EU countries, from Chile at 24% to Denmark at 89%. However, the OECD and OECD EU averages are 23 p.p. higher than the Western Balkan region. Within the region, the judiciary is the least trusted of the branches of government (RCC, 2020[8]). This is in stark contrast to the situation in the EU where the justice system is significantly more trusted than national governments and parliaments (EC, 2019, p. 56[9]).

The population in Kosovo has more confidence in the judiciary system and the courts than its counterparts in the region, and some OECD and OECD-EU countries. This is—at first glance—contradictory to the EC’s view of the level of preparedness, but not to the World Justice Project (WJP) Rule of Law index (see below). The high confidence in the judiciary systems in Kosovo has been stable since 2009. This corresponds with the significant international presence and support in this area, through institutions such as the European Union Rule of Law Mission in Kosovo (EULEX) and the United Nations Interim Administration Mission in Kosovo (UNMIK).

### Equality before the law, fundamental rights, and judicial independence

In the Western Balkans, the lack of trust is linked with the widespread public perception that the judiciaries are not independent from politics and therefore cannot effectively scrutinise governments or hold them accountable to citizens (RCC, 2019, pp. 97-98[2]). The constitutions of the countries in the Western Balkan region provide a legal guarantee of equal protection for their citizens. All state organs must enable access to justice for all of their citizens. In that sense, fundamental rights should be de jure ensured (Hoxhaj, 2018[20]). However, two-thirds of the people in the region do not believe that the law is applied to everyone equally. This is an improvement from 2015 where the rate was 83% (RCC, 2019, p. 95[2]). Nevertheless, the public perception of unfairness and lack of confidence in the rule of law is striking.

Judges are not widely regarded as independent by Western Balkan populations. On average, only 26% believe that most judges decide cases according to what the law says (the lowest percentage is recorded in Albania: 17%). People are more likely to believe that judges decide cases on the basis of what powerful private interests tell them to do (45%) or what the government tells them to do (29%). Perceptions vary across OECD and EU countries, with the highest share of the population believing that judges decide cases according to the law at 89% in Denmark, but on average more than half of OECD populations believe that judges decide cases according to the law.

Citizens’ lack of confidence in judiciaries and beliefs that the law is not applied equally in their countries mirrors the assessment of independent legal practitioners and experts that fundamental checks-and-balances are not working adequately in the Western Balkans. The WJP Rule of Law index assesses performance based on experiences and perceptions derived from more than 130 000 household surveys and 4 000 legal practitioner and expert surveys worldwide across eight factors: Constraints on Government Powers, Absence of Corruption, Open Government, Fundamental Rights, Order and Security, Regulatory Enforcement, Civil Justice, and Criminal Justice.

Figure 14 shows that there are significantly less constraints on government powers in the Western Balkan region than in OECD and OECD-EU countries. The regional average is 0.46 compared to the OECD-EU average of 0.77. Similarly, the protection of fundamental rights in Western Balkans is evaluated much lower than in OECD and OECD-EU by WJP experts. Further analysis is provided in Chapter 9.

The overall WJP index ranking is provided in Figure 14. Overall, the region is faring far below OECD and EU countries. Over the last five years, Bosnia and Herzegovina experienced an annual percentage drop of -2.1% on average, placing it amongst the six countries worldwide that saw the largest declines, together with Egypt, Venezuela, Philippines, Cameroon, and Hungary (WJP, 2020[21]).

### Corruption

Rule of law is about more than independent and efficient courts. The activity and decisions of those holding functions of authority matter greatly, in both the public and the private sectors, including governments and public administrations, and their judicial control by the administrative and constitutional justice systems, parliaments, ombudsperson institutions, supreme audit institutions, etc. Thus, public integrity matters for the rule of law. A merit-based and professional civil service can reduce corruption risks and counterbalance clientelism (Dahlström, Lapuente and Teorell, 2012[22]). A study by the Regional School of Public Administration shows slight improvements on recruitment procedures from 2015 to 2019, and a survey of personnel managers from public sector institutions indicates that political influence in civil service recruitments slightly decreased over the same period in the region (Meyer-Sahling et al., 2019[23]). Nonetheless, the majority of citizens in the region feel that connections are more important than hard work to succeed in the public sector (RCC, 2020[8]). This is a larger proportion than in EU member countries, although EU member countries also show variation. In the EU, the same measure of meritocracy is positively related to the strength of the rule of law, low levels of perceived corruption, impartiality of the public sector and the length of EU membership (Charron, Dahlström and Lapuente, 2016[24]). On average, 75% of people living in the Western Balkans consider corruption to be widespread throughout government. Serbia has the lowest level of perceived corruption, at 55%, only slightly above the OECD and OECD-EU averages at 53%.

Evidence on the drivers of trust for OECD countries shows that public integrity and perception of corruption are crucial determinants of trust in government (Murtin, 2018[25]). This illustrates how interlinked the EU integration fundamentals are. Lowering levels of corruption in the Western Balkans will take more than the efforts of law enforcement and judicial institutions. Behavioural change must come from politicians, civil servants, citizens and businesses.

## 1.4. Economic growth and competitiveness

The economic criteria for EU integration have been stable since they were agreed at the June 1993 European Council meeting in Copenhagen (Copenhagen criteria). Broadly speaking, the criteria require countries to (a) have a functioning market economy, and (b) show capacity to cope with competitive pressures and market forces within the EU (EC, 2020[26]).

The EU is the leading trade partner for all the Western Balkan economies, accounting for over 72% of the region’s total trade. The total trade between the EU and the Western Balkan countries exceeded EUR 54 billion in 2018, which is twice as much as in 2006. Over the past decade, the economies of the Western Balkans region increased their exports to the EU by 130% against a more modest increase of EU exports to the region of 49% (EC, 2020[27]). This economic integration has been promoted by the Stabilisation and Association Process, through which the EU has concluded bilateral free trade agreements, known as Stabilisation and Association Agreements (SAAs) with each of the Western Balkan economies: North Macedonia (2004), Albania (2009), Montenegro (2010), Serbia (2013), Bosnia and Herzegovina (2015) and Kosovo (2016). The SAAs are the main vehicles for alignment with the EU acquis and integration into the EU market.

The EU and Western Balkan economies jointly adopt policy guidance at ministerial level in May of each year through the framework of Economic Reform Programmes (ERP). The ERPs set out a medium-term macro-fiscal policy framework and a structural reform agenda to promote competitiveness and economic growth. Economies in the Western Balkan region have made concerted efforts through the ERPs to reform their economies and economic governance, and can show positive trends for macroeconomic stability, unemployment rates, business environment and increasing economic integration with the EU. The sub-sections below show key data points for economic growth and competitiveness respectively.

Despite the progress, the EC’s 2018 regional strategy paper still found that “critical parts of the region’s economies are uncompetitive, with too much undue political interference and an underdeveloped private sector. None of the Western Balkans can currently be considered a functioning market economy nor to have the capacity to cope with the competitive pressure and market forces in the union. In spite of all progress on reforms, many structural issues remain, which in turn affect labour markets and notably employment opportunities for younger people” (EC, 2018, p. 3[5]). Nevertheless, in the 2019 EU progress report North Macedonia was upgraded to “well advanced” (4 out of 5) for the existence of a functioning market economy, and there has generally been tangible improvements in reducing unemployment, improving the business environment and controlling government debt. Still, real GDP growth rates are positive but declining, and share of exports to GDP is still relatively low.

Citizens in the Western Balkans see unemployment (60%), the overall economic situation (47%) and corruption (26%) as their biggest issues. The populations of Serbia and North Macedonia view the economic situation as more worrying than unemployment, but otherwise these three issues are consistently listed across the region (RCC, 2019, p. 27[2]). Businesses rank the following factors as most problematic for the growth and operation of their businesses, by order of importance:

• Macroeconomic instability

• Anti-competitive practices of other competitors

• Tax administration and tax rates

• Corruption

• Availability of labour

Table 3 facilitates a comparison between the Western Balkan economies and the averages of the OECD and OECD-EU economies with regard to a number of key economic indicators. It also shows the gap that remains before they are fully prepared for EU integration. For example, GDP per capita on average for the Western Balkan region in 2018 was $15,465, which was about one-third of the OECD average of$46,176. Furthermore, the average unemployment rate for the region was 18.2%, considerably higher than the OECD average of 6.1%. The contribution of exports to GDP was 42% whereas for the OECD average it was 56% and for EU countries that also are members of the OECD, the average was even higher at 68%. This shows the progress that the small economies of the Western Balkans need to make as they work towards EU integration. On the other hand, it is notable that fiscal deficits are low, with only Montenegro recording a deficit in excess of 3% in 2018 and Serbia actually recording a surplus. The debt to GDP ratio for the region was less than 50%, and only in Albania and Montenegro was it higher than 60%. This compares favourably to the OECD average debt to GDP ratio of 108%. Overall, the relative stability of the public finances in the Western Balkan economies provides room for manoeuvre in the face of the COVID 19 crisis.

Table 1.3. Key economic indicators, 2018

GDP per capita, current prices PPP

GDP real annual average growth rate, 2008-2018

Unemployment

Exports, % GDP

General government fiscal balance, % GDP

General government gross debt, % GDP

Albania

13 327

2.72

12.2

32

-1.63

69.9

Bosnia and Herzegovina

13 583

1.66

18.4

41

1.73

34.3

Kosovo

11 664

3.49

29.6

26

-2.86

17

Montenegro

19 172

1.81

15.2

43

-6.3

72.6

North Macedonia

15 715

2.09

20.7

60

-1.76

40.5

Serbia

17 552

1.19

13.3

51

0.81

54.5

OECD

46 175

1.6

6.1

56

-2.86

108.6

EU28/OECD-EU*

44 669

1.01

6.9*

68*

-0.72

Western Balkans

15 465

1.75

18.2

42

-0.27

49.4

Note: Data marked with an asterisk refer to the OECD-EU average. Regional averages of unemployment and exports as a share of GDP are simple averages of the region.

Source: IMF (2020), World Economic Outlook Database 2019, October; data for ratio of exports to GDP is drawn from the World Bank (2019), World Development Indicators 2019.

### Economic growth

Throughout the region, human capital and labour market deficiencies have put persistent challenges to the underpinnings of economic growth. The Western Balkan economies’ labour markets have generally exhibited high rates of unemployment, especially among the young, as well as high levels of long-term unemployment, persistent gender gaps, and a substantial informal sector. This situation is further exacerbated by the high levels of emigration of skilled labour. Moreover, relatively poor enforcement of competition policy – particularly in the highly concentrated banking, utilities and transport sectors – have to some extent undermined fair market conditions. Cumbersome state-owned enterprises and feeble anti-corruption enforcement have continued to be persistent structural obstacles to economic competitiveness. Economic policies have also failed to facilitate economic growth in an environmentally friendly way, undermining public health and long-term competitiveness. Comparatively low expenditures on sciences, technology and innovation and weak support for technology diffusion as well as weak linkages between business and academia have continued to challenge the prospective of sustainable economic growth. To leave the middle-income trap, the Western Balkan economies need to further transition to higher value-added products and services underpinned by innovation (OECD, 2018[28]).

Economic growth in the Western Balkans is driven by small and medium-sized enterprises (SMEs) and entrepreneurs. SMEs make up 99% of all firms in the region, generate around 65% of total business sector value added and account for approximately three-quarters of total business sector employment. Micro enterprises account for 90.4% of all enterprises in region, ranging from 88% in Albania to 96% in Serbia (OECD et al., 2019, pp. 3, 39[29]).

Public procurement authorities in the Western Balkan region have therefore initiated a range of supportive measures for SMEs as shown in Figure 14. However, more can be done to provide online documentation or guidance focused on SMEs and simplified administrative procedures for SMEs.

The most commonly cited barriers to economic growth in the region are a lack of business finance, overregulation, political instability and corruption. Such impediments encourage informal activity and hit SMEs particularly hard. Ineffective state-owned enterprises also reduce productivity (OECD, 2018[28]; Sanfey and Milatovic, 2018[30]). This perhaps helps explain why SMEs make a significantly smaller contribution to business sector employment, value added and total exports than their proportional representation in the economy (OECD et al., 2019, pp. 41-50[29]).

Both the SIGMA monitoring reports and the data collected for this publication show that Western Balkan countries have improved their medium-term budgetary frameworks, which was a key focus of the ERP process. However, going forward, attention should be paid to management of fiscal risks. Three-quarters of OECD countries have a central agency or unit responsible for identification and management of fiscal risks. Only half of the economies in the Western Balkan region have such a body. As shown in chapter 5, only North Macedonia has centrally-defined criteria for deciding which fiscal risks need to be measured and monitored; this is the case in one-third of OECD countries.

In addition, Chapter 5 shows significant discrepancies in budget execution practices related to budget carry-overs.4 Carry-overs are not permitted in any of the Western Balkan economies for any type of expenditures. In OECD countries different carry-over modalities are practiced for all types of expenditures. In about three-quarters of OECD countries, carry-overs are allowed for investment and operational spending, more than half allow them for discretionary spending while only about 40% permit them in the case of mandatory spending.

All Western Balkan economies have real GDP growth rates that are higher than the OECD and OECD-EU average rate, and they have been on an upward trajectory in the past decade. Nevertheless, compared to the GDP per capita values, these growth rates would not allow the economies in the Western Balkan region to reach convergence with EU counterparts in the near future (Sanfey and Milatovic, 2018[30]). The gap has been closing very slowly with an average of slightly more than 2.1% growth rate for the Western Balkans comparing to an average of just 1% for EU28 countries. This represents a very slow rate of economic convergence with the EU.

Economies in the Western Balkan region have, on average, managed to reduce their fiscal deficit to 1.5% in 2018, compared to 4.1% in 2019, fulfilling the Maastricht criteria. Increased fiscal revenues came as a result of tax reforms (raising multiple tax rates) and improved economic performance, which fuelled VAT and labour tax revenues (RCC, 2019[2]). The increased revenues did not lead to an unsustainable increase in expenditures and, as a result, public finances are generally on a much sounder trajectory even in those countries that have a debt ratio that is higher than the average. For example, in Serbia the debt ratio has fallen from 73.0% in 2016 to 54.5% in 2018. This was mainly due to significant efforts from 2015 to both lower expenditures (wages and pension cuts) and strengthen tax and financial discipline (reduced shadow economy), and to create a favourable macroeconomic environment. In Albania, the public debt ratio has stabilised at around 70%, having been on an upward trajectory prior to 2017; this stabilisation was a consequence of fiscal rules and principles being enshrined in legislation to support a counter-cyclical fiscal policy. Although the debt-to-GDP ratio for Montenegro stood at 72.6% at the end of 2018, authorities are also attempting to stabilise public finances with a retrenchment programme that the government endorsed in 2016.

While stabilising public finances is a positive development in the region, it should be noted that transparency surrounding public expenditure arrears and the process of eliminating those arrears could be improved. This is an important matter to be addressed. Failure to meet contractual commitments on time has implications for the wider economy and for business in particular. If governments fail to make payments in a timely manner this can have a cascade effect with contractors failing to make payments to their suppliers and so on. It is also notable that enforcing contracts is seen as a particular challenge for businesses in the Western Balkan region.

Unemployment in the region is down to 18.2% in 2018 on average, having been just under 25% in 2012. This is one of the most significant positive changes over this period. It is also notable from Figure 22 that all economies in the Western Balkan region have reduced unemployment since 2008. However, further gains are needed to converge with the OECD-EU, where the unemployment rate stood at 6.9% at the end of 2018. Furthermore, unemployment rates are decreasing not only due to job creation, but also because of low activity rates (52.7% in 2017 compared to 73.3% in the EU) and increasing emigration of the working age population (RCC, 2019[2]). As shown in chapter 3, although the share of public employment to total employment is higher in the Western Balkan region (27.2%) compared to OECD countries on average (21.1%) and OECD-EU countries (23.7%), it is positive that the annual average total employment rate increased faster (1.8%) than the public employment rate (0.1%) over the period 2011-2018.

### Competitiveness

Owing to the limited domestic market size of small economies such as those in the Western Balkans and the limited purchasing power of their populations, stronger growth in tradable sectors will have to be found primarily in foreign markets. For this to happen, more companies, particularly domestic SMEs, will need to start exporting and integrating in global value chains. The key to greater competitiveness in the Western Balkan region therefore is to remove barriers for small and medium-sized enterprises (SMEs) and entrepreneurs (OECD et al., 2019, pp. 3, 39[29]).

A favourable business environment is an important enabler for competitiveness. As shown in Chapter 9, the Western Balkan region performs fairly well compared to OECD and OECD-EU countries in the World Bank’s Ease of doing business index.5 In 2020, the regional average was 73 (on a scale from 0-100). With a score of 81, North Macedonia outperforms the OECD and OECD-EU averages of 77 and 78. Western Balkan economies perform best on average in starting a business (85) and trading across borders (95). Protection of minority investors (59) and enforcement of contracts (62) are the most challenging components, generally for all countries but in particular for Western Balkan economies. This relates directly to the rule of law challenges documented in the section above.

The greatest differences from the Western Balkans regional average to the OECD-EU average is in paying taxes and getting electricity, where the regional averages are 13 and 12 points below the OECD-EU average. Getting credit is the only area where the average of the region (75) was above the OECD-EU average in 2020.6

Examining the sub-components shows that the most pressing issues are paying taxes in comparison with OECD and OECD-EU averages. The ease of paying taxes for businesses varies widely across the region as the score varied from 60 (Bosnia and Herzegovina) to 82 (Kosovo). In the Western Balkan region the average number of tax payments is high. In three countries in the region, businesses need to make over 30 payments, namely Albania (35), Serbia (33) and Bosnia and Herzegovina (33). In addition, businesses in the region have costly time inputs for paying these numerous taxes. On average, it takes 244 hours a year for an incorporated business to deal with tax forms, compared with an OECD-EU average of 164 hours and an OECD average of 163 hours. Inefficiencies in tax management and collection systems do not only have negative impact on the business environment, but also lead to large-scale tax avoidance and undermine government revenue streams (OECD, 2018[28]; Sanfey and Milatovic, 2018[30])

Businesses across the region are generally most satisfied with digitalisation efforts of the government compared to other services, but when asked which infrastructure upgrades would have the highest positive impact on their businesses they point first to roads (60%), electricity supply (13%), and then telecommunications (8%) (RCC, 2019, pp. 38, 40, 61[31]). Such dimensions are not covered by the Doing Business index.

The region’s exports have grown relatively fast in the past decade. The average ratio of exports to GDP rose from 30% to 42% between 2008 and 2018. In addition, exports of services are playing an increasingly important role. Despite the increase in exports, the share of exports to GDP, at 42%, is still relatively low compared to the OECD average of 56% and the OECD-EU average of 68%.7 There are significant differences in the level of openness in the region. External transactions were notably higher in North Macedonia and Serbia, where the ratio of exports to GDP was 60% and 51%, respectively. Kosovo is least integrated with global value chains as Kosovo’s exports-to-GDP ratio was 26% in 2018, which was the lowest in the region. Nonetheless, the compounded growth rates of the ratio of exports to GDP has been the highest in Serbia (6%) and Kosovo (5.4%) whilst Albania (2.3%) and Montenegro (0.8%) reported the lowest annual growth rates in the period 2008-2018.

## Conclusion

This publication responds to the EC’s strategic emphasis for a merit-based approach based on objective criteria for accession to the EU, as expressed in the EC Communication of February 2020. For the first time, governments and citizens in the Western Balkan region can directly compare their policies, practices and outputs with OECD and OECD-EU counterparts across a wide spectrum of public governance areas. This chapter presented the size of the “convergence gap” in specific areas of public governance based on objective, comparable data, as seen through the lens of the EU Integration fundamentals.

Overall, in line with the qualitative assessments in the EU progress reports (Figure 2), evidence shows that the largest gap between the situation in the Western Balkans and the OECD-EU countries is in the area of rule of law. Judiciary and law enforcement institutions in the region are not trusted by their populations, corruption is a systemic and pervasive problem, and equality before the law and fundamental rights has yet to be fully achieved. There are still sizeable gaps for the Western Balkans to close in the functioning of democratic institutions and public administration and in economic growth and competitiveness. However, the gap is narrowing is some sub-areas such as external audit, public procurement, service delivery to businesses and representation of women in politics. In addition, the relative stability of the public finances in the Western Balkans is a key factor with regard to establishing the necessary room for manoeuvre in the face of the COVID 19 crisis, but even so governments must continue to pursue fundamental reforms.

The data show many significant improvements in specific areas, which matter directly for citizens and businesses. However, progress is uneven across areas, economies and administrations. To advance, governments must continue reform efforts, particularly in areas where performance is low, as the fundamentals are interlinked. For example, as shown above, economic competitiveness is held back by factors outside the control of ministries of finance and economy, such as political instability and a lack of legal predictability. The new path to EU integration is not chapter by chapter, but one of “fundamentals first” as a coherent package.

Western Balkans leaders face their own specific challenges and reforms have their individual trajectories. However, one common denominator is the need to focus on de facto implementation and results, and to base action plans on evidence. This requires the use of evidence and development of meaningful performance indicators that can track progress. In addition, whilst this publication has set a regional baseline in key public governance areas, several measurement gaps persist, particular at the level of measuring outcomes and results of public governance. International and regional organisation should continue to address such measurement challenges to support government and further global policy dialogue.

## References

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## Notes

← 1. The OECD Policy Framework on Sound Public Governance weaves together such existing OECD legal instruments and tools on public governance. See more here: https://www.oecd.org/governance/policy-framework-on-sound-public-governance/.

← 2. The following values are found in the 2018 annual reports from the SAIs: Ireland (94%); Latvia (85%); Czech Republic (81%); Denmark (70%); Slovenia (65%); Austria (56%); Lithuania (54%); Poland (53%).

← 3. Even in Montenegro and Serbia, where primary and secondary legislation is published online by the relevant state institutions, it is not published in consolidated format and only private sector service providers ensure access to consolidated versions for a fee. Other Western Balkan countries do not consistently publish all primary as well as secondary legislation online or the state institution responsible for online publication of legislation charges a fee for this service (as is the case in North Macedonia).

← 4. A budget carry-over is the ability of line ministries to transfer unused funds or appropriations from one fiscal year to the next. This form of spending allows ministries to use previous budget appropriations for their undertakings the following fiscal year.

← 5. The ease of doing business index provides a comprehensive analysis of both legal and time and motion indicators, but it does not cover all aspects that matter for business environments, such as security, macroeconomic stability, corruption, labor skills of the population, underlying quality of institutions and infrastructure or the strength of the financial system. This is why firm-level surveys, such as the Balkan Business Barometer, the World Bank Enterprise Surveys and the World Economic Forum can provide a less optimistic picture of the business environment (RCC, 2019[31]; World Bank, 2020[32]; Schwab, 2019[33]).

← 6. This seems contradictory to what is actually happening in the region, and can be explained by the fact that this component of the index mainly measures the strengths of legal rights of lenders and borrowers and the existence of an online collateral registry, not the actual uptake of credit. Businesses in the Western Balkans predominantly use internal and informal sources of financing rather than bank loans, even if the banking sector is liquid. Sixty-one percent of businesses in the region avoid loans and rely on internal sources of financing, 36% use the banking sector, and 13% rely on resources provided by family and friends (RCC, 2019, pp. 89-92[31]).

← 7. The difference between the OECD and OECD-EU averages is due to the exclusion of some very large economies such as the United States, from the latter; large economies can generate significant economic activity from internal consumption.