Economic Relations Between the Western Balkan Six Countries

48Regional cooperation between the western Balkan countries is the key factor that will lead those countries towards the EU perspective. Improving relations of the Western Balkan countries is a goal that should be fulfilled. The improvement of these relations is a commitment made by the countries themselves at the EU-Western Balkans Summit of Zagreb (2000) and Thessaloniki (2003). Regional cooperation is the way towards regional economic prosperity, social and economic stability.

It is very obvious nowadays that the responsibilities and benefits of the western Balkan countries are tied to the development and bilateral cooperation. Cooperation is an issue applied in different fields, the ones of cross-border nature, to political understanding, addressing to a social and socio-economic prosperity.

Regional cooperation is an important strategic approach of building positive relations. The Western Balkan countries should be opened to collaborate towards a sustainable economy, regional collaboration and partnership as factors of vital strategic importance of building positive relations among them.

I will do the analysis of the impact of such collaboration in in the economic cooperation, achieving economic stability and identifying the respective competitive advantages, strengthening regional market integration and mutual elimination of non-tariff trade barriers. In specific, in this paper I will focus on bilateral economic relations between Albania and Serbia in the frame of integration process.

INTRODUCTION

“We note increasingly stronger support among the countries of the region for the development of regional ties. It is very encouraging that the areas of trade, energy and transport are among those where regional cooperation is the most substantial. Economic development is crucial if the region is to produce the jobs needed for its people. Further efforts are needed to increase trust and cooperation between peoples and countries. In the area of justice and home affairs, the countries need to enhance regional cooperation to achieve results.

Extended regional cooperation in south-eastern Europe is essential, regardless of the different stage of integration of the various countries, and an important criterion for the European course of the western Balkan countries. The stability, prosperity and security of the region are of significant interest to the EU. The EU will continue to foster all endeavours to promote regional cooperation.”

Perhaps the most tangible achievement of all lies in the fact that most of the Western Balkan countries are on a path towards European Union accession, something that seemed far off in the 1990s. It is incumbent upon us not to understate the serious challenges that lie ahead, both in terms of macroeconomic stability and even more so with regard to longer-term development. A key contribution of this book is to underscore the incomplete reform process in the region. We should be worried about this, as without further reforms the lackluster growth of recent years could become the norm, imperiling the convergence of living standards towards Advanced European levels, and denying employment opportunities to many in the region.

ANALYSIS OF THE ECONOMIC RELATIONS BETWEEN THE WESTERN BALKAN COUNTRIES

According to David Lipton, IMF first deputy managing Director, he transition from socialism to capitalism and democracy was less smooth than in other parts of Emerging Europe. But once the war ended and peace returned, these countries did more than rebuild: they began a transformation into market economies, liberalizing prices, privatizing many state- and socially-owned enterprises, and building the institutions needed to support a market economy.

On his report analyses the main economic developments and achievements in the Western Balkan countries, and lays out the key macroeconomic policy challenges for the future. While the collapse of communism 25 years ago marked the start of the transition to market economies for all Emerging Europe, the economic transformation of the Western Balkans really got going only after the conflicts that engulfed the region in the 1990s subsided. Hence, the past 15 years are the main focus of this report. The report is structured as follows. The overview chapter surveys the key findings and policy recommendations. Individual analytical chapters then focus in depth on the following key thematic issues: growth and structural reforms, macroeconomic developments and policies and the role of the IMF in the economic transformation, and the financial sector. Each analytical chapter concludes by outlining the key challenges that the Western Balkans face and suggests possible policy responses. Given that the Western Balkan countries are following the path previously taken by New Member States to become members of the European Union, the analysis relies heavily on comparisons between these two subregions. In compressing the experience of more than 17 countries over 15 very eventful years, the report inevitably focuses on broad themes, and cannot do justice to the nuance and diversity of individual country narratives. While the report highlights the role of the IMF during the economic transition, the Fund is only one of a number of agencies that have supported these countries over the past 25 years. In particular, the IMF may have taken a lead role in the early phases of transition, but for some Western Balkan countries the prospect of accession to the European Union has also been an important catalyst for reform. Other key players include the European Bank for Reconstruction and Development, European Central Bank, European Investment Bank, and World Bank, as well as bilateral country donors and private and voluntary sector institutions. But whether external assistance comes from the IMF or others, its impact pales in significance to the importance of domestically-driven reform and development, which is the principal subject of the report. The report was prepared by a team from IMF headquarters in Washington DC, IMF offices in the region, and the IMF’s Joint Vienna Institute (JVI). The views presented are those of the authors.

REGIONAL COOPERATION

Regional cooperation is a principle of the highest importance for the political stability, the security and economic development of the western Balkan countries: Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, and Serbia and Montenegro (including Kosovo, under the auspices of the United Nations, pursuant to UN Security Council Resolution 1244 of 10 June 1999). Many of the challenges facing the western Balkan countries are not only common to them but also have a cross-border dimension, which involves their regional neighbours.

Since the enlargement of 1 May 2004, the EU and the western Balkans have become even closer neighbours, and so the situation in the western Balkan countries, their progress on the road to European integration and their present and future relations with the EU really are of immediate concern to the EU itself. When Bulgaria and Romania become EU members, the entire western Balkan region will be surrounded by Member States of the European Union. This will have important repercussions for both the countries of the region and the EU in a number of areas, in particular where the free circulation of goods, services and persons are concerned. These challenges have to be addressed in the broader context of south-eastern Europe.

The different set of reasons – political, economic and security – for which regional cooperation in the western Balkans is crucial, are closely interlinked: for instance, regional stability and security are needed for economic development, which in turn favours stability and security in the region.

Since the Stability Pact was founded, the heads of state and government of the south-eastern European countries have met regularly for consultation. At the Bucharest Summit in February 2000, they adopted a ‘Charter on Good Neighbourliness, Stability, Security and Co-operation in South-eastern Europe.’ A range of co-operative relationships has replaced bilateralism. Most Stability Pact projects and activities were proposed and are carried out by two or more countries of the region.

Previously every country of south-eastern Europe had a big brother outside, and most of the countries of Europe had a preferred partner in the Balkans. That was the reason for many conflicts, sometimes even proxy-wars, or a reason why conflicts in the Balkans became wars in Europe. The Stability Pact is the political answer to this outdated political approach from the nineteenth century. The Pact has created an upward spiral of mutual trust and practical steps. But both sides are still mistrustful, watching to see that the other side delivers, gives indications of confidence-building and that the conditions are fair. Seems that the region is about to choose a positive and successful path: day by day, the Pact is building the new, wider Europe.

Why did the Western Balkans converge more slowly? One possible explanation is that the closer physical distance of the New Member States to advanced EU economies may have offered advantages in terms of access to markets and investments, and facilitated the transfer of knowledge. These relative advantages are only recently partially offset by improvements in infrastructure links between the Western Balkans and Advanced EU economies. Yet even after controlling for the physical distance, econometric evidence suggests that, except for the postwar recovery period, the pace of convergence in the Western Balkans has been slower than in the New Member States. This is partly due to the absence of convergence within the Western Balkan region, because poorer countries such as Albania and Bosnia and Herzegovina failed to grow significantly faster than the richer countries, such as Croatia. What other factors may have constrained faster convergence? There is a growing literature on the impact of structural factors on convergence, though mostly on larger panels of countries. Findings suggest that domestic financial development speeds up convergence and that human capital is more important to growth for countries that are less developed. Better institutional infrastructure and selected labor market reforms have been shown to facilitate convergence at the regional level (Che and Spilimbergo 2012). Reform priorities for sustaining convergence have been found to vary with income levels. Empirical evidence suggests that in lower-middle-income countries, priorities should be reforming banking and agricultural sectors, reducing barriers to FDI, increasing competition in product markets for a more vibrant services sector, improving the quality of secondary and tertiary education, and alleviating infrastructure bottlenecks. In upper-middle income countries, boosting productivity growth would require deepening capital markets, developing more competitive and flexible product and labor markets, fostering a more skilled labor force, and investing in research and development and new technologies (Dabla-Norris and others 2013). Finally, a survey of various studies that focus specifically on the transition process concludes that institutional quality and market liberalization policies to promote private sector growth have a positive impact on economic growth, despite their initially disruptive effect. In line with these findings, the analysis here shows that improving the quality of governance, and developing market-oriented institutions, a strong human capital base, and deeper financial systems help poorer countries catch up. In contrast, the dominance of the public sector in the economy hinders the catching-up process. And the Western Balkans have lagged behind the New Member States in these areas. In light of the critical importance of economic transformation, the next section explores progress to date.

The implementation of the economic collaboration is the way towards progress, standing for a multilateral agreement successfully applied in those countries. This framework should be assisted and monitored. This monitoration should include evaluation of the economic outcomes as far as provide a full vision of the potential benefits and on reducing the trade costs and increasing trade.

ADVANTAGES AND POTENTIAL DRIVERS TO REGIONAL MARKET INTEGRATION

Reforms are considered potential drivers to regional market development and integration.

1. Institutional Reforms.

The protection of property rights is a common problem in most of the Western Balkan countries, particularly relative to the EU average, though to a lesser extent in FYR Macedonia. Indicators related to corruption and government inefficiency also point to reform gaps in most countries. Compared to NMS, inefficient government spending appears to be an important constraint in Serbia, Albania, Croatia, and Bosnia and Herzegovina. In Serbia, and to a lesser extent in Croatia, Bosnia and Herzegovina, Albania, and Montenegro, reform needs are large in areas linked to corporate sector performance. Specifically, this includes the strength of reporting standards, efficacy of corporate boards, and protection of minority shareholders. Encouragingly, Albania, Bosnia and Herzegovina, FYR Macedonia, and Montenegro score relatively well in terms of burden of government regulation, even compared to the EU average. For Croatia and Serbia, however, the gaps in this area remain large.

2. Infrastructure.

The analysis of specific reform gaps within the broader infrastructure pillar suggests that the Western Balkan countries have had a mixed performance when assessed vis-à-vis their peers. In terms of overall quality of infrastructure, Croatia ranks better than its New Member State peers, while the largest overall quality gaps exist in Bosnia and Herzegovina and Serbia. All Western Balkan countries, except Croatia, lag behind the EU by a wide margin. The gap analysis points to important reform potential in railroad infrastructure in Albania, FYR Macedonia, and Serbia. Compared to the average EU country, road and air transport infrastructure gaps are large in all countries, though to a lesser extent in Croatia.

3. Goods Markets Efficiency.

The results of the analysis suggest that the Western Balkan countries impose a relatively low tax burden on businesses. Total tax rates are well below those of NMS and EU average in FYR Macedonia, Montenegro, and Bosnia and Herzegovina. Similarly, all countries but Bosnia and Herzegovina perform well or are broadly at par in terms of procedures and time to start a business. Gaps in competition policy, measured by the intensity of local competition and the effectiveness of anti-monopoly policy, point to potential reform needs in this area.

Gaps in trade barriers, tariffs, and impediments to foreign ownership and foreign direct investment (FDI) are relatively moderate in most Western Balkan countries, but almost always negative. Rules on FDI and foreign ownership seem to be stricter in Croatia and Serbia. Agricultural policy cost seems to be a significant burden for the economy in Croatia and Serbia, and to a lesser extent in Albania.

Labor Market Efficiency Performance of regional labor markets, when benchmarked against New Member State peers, is relatively mixed, as measured by indicators on the flexibility of setting wages, flexibility of hiring and firing, and redundancy costs. All of the Western Balkans lag behind their peers in at least one of these three areas. Croatia has relatively more inflexible hiring and firing rules, and stronger tax disincentives to work but relatively more flexible wage setting. The labor tax wedge is also relatively large in Serbia. In contrast, Albania and Bosnia and Herzegovina score lower in terms of flexibility of wage setting. Most of the Western Balkan countries (except Albania and Montenegro) compare less favorably to the New Member States in terms of retaining and attracting talent, contributing to skilled labor shortages. In these areas, as well as in professional management and cooperation on labor-employer relations, gaps tend to be larger vis-à-vis the EU. In other areas, differences with respect to the EU are less important, reflecting significant labor market rigidity in both sets of countries.

The economic development is certainly tied to the political stability which make the direct approach to the regional cooperation. This kind of approach builds strong relations between the western balkan countries. The non-tariff trade is a way of having a sustainable future not only for the country itself, but even for the region. Accompanying that to the other key factor of political stability, sees to be the right way of non forced, natural cooperation towards the bright economic future of these countries.

CHALLENGES AND PROSPECTS FOR A SYNCHRONIZED INVESTMENT AGENDA IN THE REGION

The event on February 24th – the first all-inclusive Western Balkans summit at the EBRD – will provide an ideal opportunity for business leaders and international companies to learn more about the countries and the Bank’s role in them.

“The idea is to present this region as a whole as an investment destination,” said the EBRD’s Senior Political Counsellor Oleg Levitin. “We hope that this conference, besides facilitating much needed foreign investment, will send a very strong political message about the maturity and stability of the region.”Regional integration through road corridors, gas pipelines, expansion in the manufacturing sector and other projects will be at the top of the agenda.”We believe that regional integration needs to be made a priority,” said Claudio Viezzoli, the EBRD’s Director, Western Balkans.

The EBRD sees supporting and promoting the Western Balkans as particularly important to foster the region’s development by strengthening its potential. The countries benefit from the IFI Joint Action which includes more than €30 billion of joint commitments for the period 2013-2014 in Central and South Eastern Europe as a whole.In the Western Balkans and Croatia alone the EBRD invested in more than 80 projects totaling more than €1.2 billion in 2013. This was a new record. Over the years, the total of EBRD investments in the region has reached €10.5 billion.

The Bank is active in all sectors of the economy but has a targeted approach in each country, based on the individual country’s needs and priorities as defined in the respective country strategies. A major goal of the EBRD’s increased engagement in the region in recent years has been to support the countries in their response to and overcoming the financial crisis which had hit the region hard.

After a protracted period of contraction, in 2013 the countries again registered growth of 2 per cent on average and prospects for growth in 2014 are similar. Particularly interesting for investors are the significant catch-up potential and the efficiencies of increased cross-border economic activity.

The attractiveness of the region for foreign investment has increased thanks to improved political stability and progress in the Euro-Atlantic integration in recent years. Croatia became a member of the European Union in 2013, and Montenegro and Serbia are in the process of membership negotiations. Other countries are continuing on the course of EU approximation. At the same time intensified regional cooperation has significantly brightened economic prospects and the region’s stability.

The EBRD sees itself as a supporter of these processes, a promoter of the interests of the Western Balkans and a door-opener for international and regional investors contemplating an engagement in the region.The countries have a lot to offer: from fertile soil to a strong industrial tradition, from vibrant entrepreneurship to a proud history of innovation, from rich natural resources to a skilled and educated labour force and to stunningly beautiful landscapes – the Western Balkans have it all. The Western Balkans investment forum offers a unique opportunity to learn more about the countries and the region and to get in touch with key decision-makers and business representatives.

Having a stability in politics and regional cooperation make the Western Balkan countries interesting to generate new employments as a result of positive impact in the economy. The gain in this case will be more collective than individual. Negotiations should be strengthened. There are lakes and rivers shared by these countries, therefore specific regional cooperation is needed.

DIRECTIONS AND AREAS OF ECONOMIC INTERACTION BETWEEN ALBANIA AND SERBIA IN THE LIGHT OF THE EUROPEAN INTEGRATION PROCESS

Free trade

Regional trade liberalisation is progressing. A network of bilateral free-trade agreements among the countries of the region, including Romania, Bulgaria and Moldova, has been established, thus creating a free-trade area of 55 million consumers. This sends an important signal to the investor community, which will find a market of high absorption potential for industrial and consumer goods. To reap the full benefits of trade liberalisation in the region, the free-trade agreements need to be fully and efficiently implemented. The countries of the region committed themselves to complete the network of free trade agreements. Regional trade across south-eastern Europe is fully in keeping with the EU perspectives of the different countries in the region, independently of where they stand on their way to membership. Trade liberalisation and facilitation is one of the pillars of the stabilisation and association process (SAP): a main instrument of the SAP is the autonomous trade measures that the western Balkan countries enjoy – free access, without quantitative limit, to the EU market for practically all products.

Energy and transport infrastructure

Significant progress is being made on forming a regional energy market and rebuilding infrastructure. The projected south-eastern Europe regional energy market, which should provide modern and liberalised gas and electricity systems, will be key to a regional energy market based on European standards, transparent rules and mutual trust, and it will set the right environment for the optimal development of the energy sector. The agreement governing energy trade will substantially contribute to attracting investment into this strategic sector. Where transport infrastructure is concerned, an integrated regional transport strategy, consistent with the trans-European networks and taking into account the pan-European corridors, is a high priority. The EU also supports projects of regional significance and regional initiatives in the areas of environmental protection, science and technology, information and communication technology, and statistics.

Fight against organised crime and corruption

Organised crime and corruption are threats to security and democratic stability, and obstacles to the rule of law and economic development in the region. Combating organised crime and corruption is a key priority for the governments of the region. Particular focus is being placed upon fighting all forms of trafficking, particularly of human beings, drugs and arms, as well as smuggling of goods. Strengthening the regional operational cooperation for police and prosecution is considered a key priority for the countries of the region.

EU assistance

To promote regional cooperation in priority areas, the EU is providing political support, practical/technical guidance and financial assistance through the CARDS programme (Community assistance for reconstruction, development and stabilisation), which is one of the main instruments of the stabilisation and association process.

Priority areas where regional CARDS assistance will be focused for 2005-06 are listed below.
• Institution building: this priority focuses primarily on strengthening the administrative capacity of the countries, and support to public administration reform, through instruments implemented regionally.
• Justice and home affairs: actions in this field have a special focus on the fight against organised crime and corruption, and include enhanced police regional cooperation and judicial regional cooperation.
• Cross-border cooperation: by promoting economic and social cooperation of border regions, including support to networking activities and the involvement of civil society. The EU supports the development of cross-border cooperation between the western Balkan countries, as well as between these countries and EU members, acceding and candidate countries.
• Private-sector development, by facilitating foreign direct investments in the region.
• Infrastructure development, through initiatives in the sectors of transport, energy, environment and information society.

Considering that in the Balkan countries exist multi-ethnic societies, should be a positive thing in terms of trade, because minority groups should be seen as an added value for the implementation of the non-tariff trade. The elimination of the barriers is an important factor that is representing the approach of positive relations between those countries.

Cross-border finance is the future of Western Balkan countries. Although traditional trade barriers such as tariffs have come down, and innovations in transportation and communications technology have shrunk the distance between nations, trade costs remain high, particularly in developing countries. High trade costs isolate developing countries from world markets, limiting their trade opportunities and impeding growth. High trade costs also appear to disproportionately affect small and medium-sized enterprises (SMEs), time sensitive products and goods produced in global value chains. Trade procedures that are more cumbersome than necessary and delay the movement, release and clearance of goods constitute a significant part of these trade costs. Trade facilitation is intended to relieve these bottlenecks at the border. The WTO’s Trade Facilitation Agreement (TFA) represents an important milestone by creating a multilateral framework for reducing trade costs. While changes in trade procedures can be implemented unilaterally, a multilateral agreement on trade facilitation brings added value. It provides greater legal certainty to the changes in measures. It helps reforming governments to marshal support from domestic constituents. Finally, it helps with the adoption of similar or compatible approaches to trade procedures and coordinates the provision of donor support for capacity-constrained developing countries.

Cooperation in the region represents a key element for the development of the Western Balkan in general, and a powerful collaboration towards an integrated market. Stability Pact has played an important role in the cooperation between the countries of Western Balkans. It is obvious that it many initiatives in order to promote democratic stabilization and economic development in the Western Balkan countries.