1 Trade Integration in the Western Balkans Budapest April 4, 2005

2 Message Overall architecture beginning to fall into place, but a lot more work needed, mainlyon the home front, to yield full results

3 Roadmap Diagnostic What is happening? Why? Priorities

4 SEECs have received unprecedentely strong incentives to (re)integrate with EU and among themselves  The Autonomous Trade Preferences (ATPs): wider market access to the EU than provided under the Europe Agreements with the CEECs.  The Stabilization and Association process (SAp): from multilateral trade preference to bilateral Stabilization and Association Agreements.  A network of Bilateral Free Trade Agreements (BFTAs) among SEEs more liberal than CEFTA

5 Overview of Trade Arrangements ATPs by the EUSAA with EUCEFTA Membership WTO Membership Bilateral FTAs with SEEs* Albania Yes Negotiating SAA Yes8 BIH YesFeasibility Study completed No7 Bulgaria Yes 7 Croatia Yes 7 Macedonia YesNegotiating Yes7 FR Yugoslavia Yes Feasibility Study being prepared No7 Romania Yes 7 ATP: Autonomous Trade Preference, SAA=Stabilization and Association Agreement, EA=Europe Agreement, CEFTA= Central Europe Free Trade Area, * Dec. 2004

6 SEEs have not yet been able to take full advantage of this liberalized trade regime… ATPs quotas are underutilized and market penetration is still limited Share in EU external imports Albania Bosnia&Herzegovina Croatia Macedonia, FYR Serbia/Motenegro)

7 Contributing to persistently high trade deficits Merchandise Balance (as % of GDP) Albania Bosnia and Herzegovina Croatia Macedonia, FYR Serbia and Montenegro Source: IMF Balance of Payments Statistics, WB ECA Regional Tables

8 …and fueling protectionist tendencies  Before BFTAs, intra-WBC trade less than 10 percent of WBC trade with EU  More recently,  safeguard measures from Bosnia against Croatia and SAM  Export subsidization in Serbia  Tariff hikes in Montenegro

9 Disappointing trade performance are due primarily to insufficient progress with domestic reforms Slow progress in privatization and enterprise restructuring (Serbia, BiH), particularly in SOEs and “poorly privatized” enterprises (mass privatization, insiders takeover). Labor market rigidities (fYRs) Other costs for business entry, operations and exit remain high

10 Entry and exit costs Starting a businessClosing a business Number of procedures Time (days) Cost (% of income per capita) Time (years)Cost (% of estate) OECD Average Average SEE Albania BiH Bulgaria Croatia Macedonia, FYR Romania SAM Source: Doing Business Database 2005

11 Cost of contract enforcement Country Enforcing Contracts Number of proceduresTime (days)Cost (% of debt) OECD Average Average SEE Albania BiH Bulgaria Croatia Macedonia, FYR Romania SAM361,02823 Doing Business Database 2005

12 Remaining obstacles to trade Fragmented economic space within (BiH, SaM) and across countries (bFTAs) Trade facilitation bottlenecks (e.g., border crossings, technical standards, backbone services)

13 …discouraging FDI

14 And retarding SEE’s insertion in international division of labor under the aegis of EU multinationals Low involvement in intra-sectoral trade (fastest segment of world/EU trade) Low participation in network-led trade

15 Lack of FDI complicating the shift away from unskilled labor-intensive activities where WBCs have a hard time competing Average Gross Monthly Wages (in US dollar) 2004p Western Balkans Albania233 Bosnia474 Croatia992 Macedonia, FYR391 Serbia and Montenegro359 Other SEECs Bulgaria190 Romania253 New EU Members Czech Republic702 Hungary719 Poland608 Slovak Republic468 Slovenia1391

16 Priority 1: Completing domestic reforms Accelerating enterprise privatization and restructuring, including through secondary transfer of ownership and improving the business environment to increase domestic and foreign investment: Reforming labor markets (ongoing) Labor codes and industrial relations (BiH, Croatia, Macedonia) Labor taxation (shift to general taxation)

17 Priority 2: Unifying the economic space Unifying internal economic spaces (BiH, SaM) Folding BFTAs into single free trade area Option 1: Expand the geographical coverage of CEFTA to the whole region Option 2: Move towards a new SEEFTA, based on a modernized/upgraded CEFTA, or on texts of modernized bilateral FTA and supplemented by the "new" trade issues (services, investment, IPR, procurement). Expanding Pan-European Accumulation of Rules of Origin Complete WTO accession process

18 Priority 3: Greater focus on trade facilitation and trade institutions Strengthen regulation (national and regional) and competition in network industries as a basis for upgrading the quality of infrastructure and lowering the cost of services inputs (telecom, transport) Athens MoU on regional electricity market, an example Pursue services liberalization as a means to reducing the cost of back bone services Continue ongoing customs reforms, streamlining border crossing procedures, and improving coordination among border authorities Modernize the standards and technical regulations regimes in line with EU and international standards.

19 Both the SA process and active participation at the multilateral level are needed Harmonization of laws, regulations, and institutions to the acquis communautaire and according to WTO rules. Increased focus on implementation of trade measures Participation in global trade talks to influence the broader development agenda incuding dismantling of distortive export subsidies (e.g., from EU) and services liberalization