Bridging the gaps? Private sector development, capital flows and the investment climate in south-eastern Europe

This paper provides an overview of private sector activity and investment in south-eastern Europe (SEE). The importance of the private sector is growing in all countries of the region. The private sector is dominated by small and medium-sized enterprises (SMEs) and much economic activity takes place in the untaxed informal sector. Lack of finance is a key constraint for enterprises. Foreign inflows, therefore, play a crucial role in providing a source of finance for new investment. To date, however, capital flows to the region have been relatively modest, with net foreign direct investment declining in 2002 relative to the previous year. Recent years have seen progress in transition and an improvement in the investment climate, but businesses perceive access to finance, taxation and, in some cases, corruption and low quality of judiciary as the main obstacles to doing business. In conclusion, bridging the gaps in living standards and capital flows between the region and central Europe will take time, but can be facilitated by targeted measures to increase access to capital, reduce the size of the informal sector, enhance the investment climate and facilitate cross-border trade.