Regional Integration of Economic Development

1. Regional Integration of Economic Development Dr. Krassen Stanchev Institute for Market Economics – Sofia (www.ime.bg ) Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

2. Issues • Development is not GDP growth; it is a broadening of choices and opportunities; but even as GDP there is a steady growth in almost all (except Macedonia) countries for already five years in row, and its average rate in 2004 was 6%. • Regionalism and cooperation, ideally, would provide some economic sense to the region, enlarge “domestic” markets, help attract FDI. • Economic interdependence as mutual penetration (of capital), specialization (in a Ricardian sense) and cross-border trade and clustering suffer from lack of adequate frameworks. There is an institutional chicken/egg issue. • Trade constellations demonstrate that neither governments nor international initiatives facilitate resolution of these issues. At least, it is clear that the process of setting regional options takes longer time than for other emerging European economies. • It is resent background that matters, not the so-called “culture”. Businesses whenever possible overcome these barriers to development. Most often it is happening via FDI’s. Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

3. The most radical change in the Balkans • Przeworski and Limongi, in Modernization: Theories and Facts, World Politics, vol. 49, No 2, January 1997, had published a statistics on all countries (for 1950 – 1990) and found that: • 1. for those with per capita income (at PPP) under $1,500 democracy regimes lived no longer than 8 year; • 2. between $1,500 and $3,000 – 11 years; and • 3. for countries with income level above $6,000 per capita the probability of democratic regime to disappear is in fact negligible – 500 years. • In 2004, the average GDP per capita was roughly $6,100; five years ago, in 1999, only three countries (Slovenia, Greece and Croatia) were above the threshold; • Today, only three are below that threshold: Macedonia is almost there, Albania and Bosnia and Herzegovina have their income at $4,600 and 4,200 respectively. Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

4. Why trading with the Balkans? • Domestic companies seek bigger market and better returns; FDI’s can operate in and look for economy of scale. • The Balkan market could be seen as an opportunity to meet larger demand, if frameworks allow it; but they do not. • Firms claim they have long-term interests in the region, provided the region exists in a market sense. • This orientation seems completely rational. The market, without Turkey, comprises more than 70 million consumers, and, in recent years, there is a growth in purchasing power. Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

5. Trade odds • There is strong pattern of gravity –dependence on geographic location and proximity; most neighbor-trading countries are those that experienced internal civic conflict and violence. • This coincidence of larger regional trade exposure and internal conflict may be explained by different hypothesis. • One is competition on the grounds of the nineteenth century economic and influence patterns: the greater the trade the greater the temptation to resort to physical (direct) control over trade roots and territories, in order to extort taxes. • Trade deficits are often wrongly interpreted in these countries as almost equal to invasion that put in jeopardy domestic businesses (and prosperity). Stability Pact sponsored FTA remain on paper. Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

6. Southeast Europe FDI (UNCTAD, WIR 2004, Nikos Efthymiadis, in US $million) Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

7. Comparative FDI flows: CEE, SEE, Black Sea (Nikos Efthymiadis) Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

8. Balkan governments • Relatively large but inefficient governments, three times more interventionist than governments of Estonia and Hungary. • High levels of government transfers and subsidies (except Albania and Bulgaria), • Comparatively low levels of economic freedom (Except Bulgaria and Croatia), • And high level of corruption perception. • The general conclusion is that the majority of the Balkan transition governments are big in terms of interference and weak in promoting and/or allowing prosperity to work. Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

9. Barriers, entry and exit • Interviewed in 2001 125 firms, and in 2004 – 180 (FDI’s excluded) identify as major problem to regional trade the customs - formalities, duties and procedures. • Another key problems of equal importance are found in: taxes, contract enforcement, and lack of information; • These answers suggest that the basic institutional infrastructure to mediate trade is missing; • Furthermore, the sample of companies identifies serious administrative obstacles to registering and operation in the regional market. Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

10. Juridical form of the company Type of competition the company faces most often Joint-stock company, % Sole proprietor, % Limited liability company, % Cooperation % Other % Low prices 30 11 35 0 44 Variety 17 9 12 33 11 Competitors privileged by government protection 7 9 4 0 11 Competitors who do not comply with legislation 39 71 42 67 22 Other 7 0 8 0 11 Total %, number 100% (54) 100% (35) 100% (78) 100% (3) 100% (9) Type of Competition (IME, 2004) Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

11. Type of Competition (IME, 2004) Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

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14. RCA on Bulgaria’s trade: Summary Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

15. RCA on Bulgaria’s trade: Comments • The more is the value added the less is the RCA on EU and CEFTA markets; • Even on those remaining RCA’s the intensity is very minimal, and perhaps temporary. Maybe the only exception is trade with EU in respect of Miscellaneous manufacturing (SITC 8); • The SEE market is a concentration of Bulgaria’s RCA`s; it compensates for lack of positions in other direction; • Bulgaria covers almost evenly the entire SITC classification in export to SEE markets. Although there is an obvious interest to maintain this presence, the improved restructuring of other economies will result in a challenge to improve own competitiveness of Bulgarian companies trading on the Balkans; • 2001 crisis in Macedonia, to which Bulgaria’s exports almost equals those to USA and Russia, is a warning about the risks associated with greater Balkan exposure and must signal political efforts to maintain stability in the region as a pre-condition for trade and cooperation; Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

16. Instead of conclusions • Countries of the region have embarked on the integration path in different years and have different statuses vis a vis the European Union and the European market, often resolving sovereignty issues no international body wanted to deal comprehensively with. • The only consecutive EU foreign policy is trade policy. Even asymmetric benefits from EU are not necessarily good. Companies would use them as a refuge from the need to restructure and extort privileges from the government. • Balkan markets only temporarily compensate for missing competitive positions in all other directions. Eventually trading with neighbors keeps you poor, while most companies compete on same advantages. Those countries that earlier qualified for EU protectionism seek to benefit at the expense of late comers. Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia

17. Instead of conclusions • Regionalism in thinking and the interest in regionalism exist as intellectual fashion or, at the best, as international community expectation. • Companies (local and foreign) that have stakes in the regional market may seek protection from opening up the region and may have vested interests in maintaining risks and impediments to do business in the Balkans. • For this reason the critical political mass of influence regional policies and approaches is missing; business frameworks are diverse and barriers to outsiders are, by and large, supported. • At the end of the day, there is little domestic will to set pre-conditions to trade and cooperate. Conference on Competitiveness Initiatives, June 9-10, 2005, Sofia