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Nearshoring: The Golden Economic Future for the Balkans

28 March 2022

The world is now coming to terms with hugely disrupted supply chains, with new and increasing fears of just how fragile and wasteful the global manufacturing and distribution networks are. Supply chain woes dominate the headlines. From vessels stuck in canals or queuing for ports to a lack of critical HGV delivery drivers in the UK and continental Europe.

However, even the myriad of existing and potential issues that damaged supply chains could cause businesses to be pale compared to the existential dread of the climate crisis. Since COP26, companies should have net-zero ambitions and sustainability at the front of their minds.

Both supply chain issues and the climate crisis represent a substantive, structural and institutional threat to the modern, industrialised economy and its supply chains – and they cannot be solved with a single cure.

However, a reasonably simple solution can do a lot to help — nearshoring: bringing manufacturing closer to home. This trend represents a helping hand in making supply chains shorter, safer, and more efficient and reduces the carbon-rich miles of globalised, intercontinental goods production. It also offers an excellent opportunity for the Balkan region.

The data

2020 wasn’t easy for anyone — and looking at foreign direct investment (FDI) flows during this period, we can now see a fall in 2020 of some 35 per cent globally, but this masks some significant micro trends. According to the Brookings Institute, the Western Balkans faired far better than the EU bloc. Here, investment fell by only 12 per cent, compared to an eye-watering 73 per cent for the EU itself.

Yet, this was 2020 — a time when the recession was the global norm. If we fast forward to a more positive second-half of 2021, Brookings points to a growth figure of 20 per cent. This sudden uplift in inward investment is a vital economic indicator that may be illustrative of a significant new trend in the Balkans due to the pandemic and the disruption caused to the global supply chain.

Why now?

In opposition to globalisation and outsourcing (or offshoring) that was so concretely established by the last half-century of global manufacturing, businesses are starting to view long supply chains as fragile and expensive.

Unprecedented global shipping delays have hit every market, not just due to the Suez Canal fiasco in 2021. A ship blocking a canal is the best visual representation of a supply chain disaster. However, many less visible trends are also creating current or potential concerns: rising labour costs in a rapidly developing Asia, shifts in production technologies, geopolitical tensions and conflicts, and the growing climate crisis and subsequent political and consumer will to eliminate omissible causes of emissions.

A simple and elegant solution to many of these issues is to bring production as close to home as possible. At the most, it massively reduces carbon miles and threats to stability. At a minimum, it at least diversifies supply chains — increasing their resilience and ensuring a ‘plan B’ production hub.

Why the Balkans?

Suppose far-flung Asia is now starting to be seen as too risky, too wasteful, or too expensive. In that case, the Western Balkans is now an increasingly agreeable fit: it is close to Europe, in terms of distance, culture and politics, and has a huge and ever-increasing workforce of well-educated, young, and often multilingual talent. Furthermore, low-cost production is ensured by lower-wage demands and general business costs.

The World Bank has argued this in its new Regular Economic Report, which looks specifically at the vast potential offered by the Western Balkans. It illustrates that GDP growth in the region is projected to grow 4.1% in 2022 and 3.8% in 2023, which points to a rapid post-Covid economic recovery.

Growing potential, contextualised risks

As uncertainty remains, many companies still prefer to avoid disruptive and costly relocations. However, multinational firms have a more robust appetite to reduce dependence on single or dominant source countries. Furthermore, new risks have put worries surrounding nearshoring into context: moving your production base is not easy, but it may be the best option right now.

Ultimately, the longer that supply chain disruptions continue, the more motivation they will have to diversify sourcing or turn to nearshoring. For the Western Balkans, given the relatively small size of their economies, this is excellent news, as even small-scale nearshoring could have a significant impact.

Yet, hurdles remain if the Balkans want to take full advantage of these opportunities, not least improving access to finance for SMEs.

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