Leskovac, once known as the Serbian Manchester, is home to a textile industry that began in the 19th century, flourished under Communism, and has survived - albeit barely - until today. The town, which lies in the south of Serbia, boasts a textile school (set up in 1947), an association of textile engineers and its very own textile magazine.

The boom years are a distant memory, however.

Leskovac's Socialist-era companies are bankrupt, their production halls empty and their machines have been dismantled and sold as scrap. At the heart of the town's plight, and that of so many other regions in the Western Balkans, is the impact of dramatic de-industrialisation.

Contemporary Serbia is a society whose population is both aging (with an average age of 41, it is one of the oldest in the world) and shrinking. So is its industry. After stagnating during the economic recovery of the 2000s, the employment rate (the percentage of people of working age actually working) has sharply fallen since 2008. Today it is about 45 per cent, more than 20 percent worse than the EU average.

In the textile and clothing sector, the number of workers has collapsed from 160,000 in 1990 to around 40,000 in 2010. In all of this, it is the nation's youth - its most vibrant asset - that has taken the brunt of the pain, as half of young people are unemployed.

Serbia's textile industry is representative of much of its industry, and Serbia's labour market trends are representative of those in all of the post-Yugoslav states.

It is true that Europe's textile industry has been put on the defensive by the emerging Far East. However, the Serbian textile industry's decline was not inevitable.

In recent decades, the sector - one of the most globalised in the world - has seen employment shift from Germany to Poland, from Hong Kong to China, from Italy to Hungary and Turkey, and then to Bulgaria and Romania. In many peripheral regions in southeast Europe, textiles have become a locomotive of growth and exports, creating hundreds of thousands of low-skilled jobs.

Bulgaria was able to increase its exports in the sector from $280 million to more than $2 billion between 1990 and 2010, contributing more than 100,000 industrial jobs to the Bulgarian economy. Why has not this been possible in Serbia, Bosnia or Albania?

The same questions can be asked about other industries in the Balkans.

Why are there more than 10,000 jobs in the furniture industry in the central Turkish city of Kayseri, far from any forests, but not in Bosnia? Why are household appliance producers doing well in Slovenia, Romania and Turkey, but not in the Western Balkans? And why is there so little agro-processing for the EU market?

One answer

One answer is that the growth model adopted in the Western Balkans over the last decade has discouraged governments from even asking such questions.

Driven by a distrust of Socialist planning and a fear of corruption, the economic policies prescribed have had a laissez-faire flavour and focused not on specific sectors of the economy but on the general business environment.

Policymakers have been praised for avoiding the temptation to shield declining areas of the economy from the discipline of the markets. At the same time these policymakers have found it hard to acknowledge when former Socialist businesses were past the point of possible recovery, overburdened by debts and in urgent need of liquidation.

The key ingredients of the standard recipes for economic development remain valid. A stable macroeconomic environment and a good business climate are necessary conditions for sustained recovery. But they are not sufficient.

In a region ravaged by conflict and economic decline, a policy mix based on "hands-off" privatisation and deregulation cannot be sufficient to launch a sustained economic recovery. Even during periods of relative economic growth and high inflows of foreign investment (FDI), the employment generated by the new entrepreneurial private sector was not sufficient to offset the number of jobs lost in the restructuring and privatisation process.

Then came the financial crisis of 2008, which has wiped out more jobs than were generated during the entire recovery period.

While the recovery lasted, there was hope that FDI would accelerate by itself and begin to generate more employment. Now it is clear that this is unlikely to happen. Facing increasing pressure to generate jobs and dwindling options on how to do so, regional policymakers have begun taking desperate measures, such as dolling out large, blanket subsidies to foreign investors - the kind of step that has so often given industrial policy a bad name.

Alternative model

What could an alternative model of economic growth look like?

The key is inclusion into global chains of industrial production. Credible industrial policies are needed to define ways of encouraging FDI into those sectors where regions in the Balkans possess comparative advantages, from food processing to clothing, from furniture to basic engineering assembly.

In Leskovac, for example, new jobs have been linked to investments by companies from Germany, South Korea and Turkey, in both basic engineering and the clothing sector.

The question then becomes: what can be done to turn the trickle into a flood? Comparative advantages are likely to be hiding in the remnants of the past. Declining industries have left behind workers and educational institutions, albeit without the skills and resources needed to adjust to a new marketplace. Provincial cities like Leskovac have potential, but lack foreign contacts. The right initiatives and support can deliver what is needed.

A competent industrial development agency, modelled, for example, on the Irish Industrial Development Agency (IRA) could do this job. But the key word here is "competent." It would have to be able to offer support and advice, based on credible and painstaking sectoral analysis, to local administrations and companies. It would also have to be in a position to educate local governments on how to attract investors, and it would offer grants for private sector management training.

There is no reason to assume that such competence cannot be built up in the Western Balkans. But success will hinge on the governments' willingness to embrace a new philosophy about the important role of industrial policy in economic growth. This can only be done by the policymakers and governments of the countries themselves.

The EU is in a position to help. It could support the countries' abilities to develop and pursue credible multi-year strategies in a whole range of sectors, including agriculture and rural development, transportation, environment and regional development.

During the last wave of EU enlargement, the candidate countries integrated such strategies into their National Development Plans (NDP), which functioned both as national roadmaps and programming documents for EU assistance. Such an approach would benefit the countries of the Western Balkans where the public sector suffers from a dearth of planning capacity.

EU can help

Last but not least, the credibility of Western Balkan integration into the EU market could be enhanced.

For the Western Balkans, the last few years have seen agonisingly slow progress in this area, with no country other than Croatia having so much as opened EU accession talks. The more realistic the prospect of EU membership is, the bigger are the incentives for those interested in long-term investments in industrial production in the Balkans.

None of this is to suggest that there is a silver bullet for job creation. The Balkan economic development challenge is enormous, made all the more difficult by the current economic and financial conditions in Europe.

But re-industrialisation has taken place in recent years in a number of new member states and candidates, from Poland to Slovakia to Turkey.

Numerous industrial development clusters - from Timisoara in western Romania to the Istanbul region and many Turkish tiger cities - have seen growth and success. In all these cases, the political elites at the national and local levels have made the integration of local businesses into global chains of industrial production a strategic priority.

Allowing the Western Balkans to continue down its current economic path is not an option.

Today's lack of employment opportunities is generating too much despair, especially among the young. There is, in fact, no greater and more urgent social and economic issue in the region. Fortunately, examples of successful industrial recoveries abound. All that is required to change the fate of people in Leskovac and in countless other Balkan towns is to take those lessons to heart.

Kori Udovicki is assistant secretary-general at the UN Development Programme responsible for Europe and the Commonwealth of Independent States. Gerald Knaus is the founding chairman and lead analyst of the Berlin-based think tank, the European Stability Initiative