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The Sling Effect: Croatia and SEE After the Fall of the Berlin Wall

Velimir Šonje

Central European Business Review, 2021, vol. 2021, issue 2, 85-109

Abstract: The concentration of real convergence in a short period before the Great Recession (2001-2008) is a characteristic shared by many countries, but it was particularly pronounced in Croatia, Serbia, Bosnia and Herzegovina and Bulgaria. Bulgaria managed to converge after the Great Recession, but convergence in other mentioned countries was meagre; Slovenia even diverged since 2010. Direct effects of post-Yugoslav wars belong to the past, but indirect effects may have had more persistent effects: a lost decade of the '90s led to weak institutional development and the creation of the local form of state capitalism, which provides weak fundamentals for economic growth. Monetary policy and exchange rate regimes in the region are mostly centred around stable exchange rates and strive for the introduction of the Euro (Bulgaria and Croatia joined the ERM II in 2020). However, the impact of exchange rate regimes on long-run economic growth is neutral. Preference for credibility building monetary regimes is a legacy of the past. Financial predictability served as a shock absorber and a substitute for good institutions in order to attract inflows of international capital, which flooded ex-communist countries after the emerging markets crisis in the late '90s. However, when the wave of capital inflows stopped in the Great Recession, more fundamental growth factors emerged, explaining the slow convergence of the majority of SEE countries in the second decade of the 21st century.

Keywords: transition; convergence; institutions; monetary policy; exchange rate regimes (search for similar items in EconPapers)
JEL-codes: P16 P24 P30 P37 (search for similar items in EconPapers)
Date: 2021
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Faculty of Business Administration, University of Economics, Prague

DOI: 10.18267/j.cebr.283

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