TIRANA, Jan. 29 – As Western Balkan countries prepare to adopt measures for an EU-backed regional economic area, a test before their apparent eventual European Union integration, Albanian economy experts say the government should initiate a process of dialogue with the country’s business community to identify the sectors Albania can decently compete both regionally and within the European single market.
Selami Xhepa, an economy expert who heads the Pashko European Institute, a Tirana-based think tank, says regional economies should be able to pass this first easier test before facing tougher competition from a much more competitive market such as the European Union.
“That is the reason why we should focus and orient our policies and economic resources in those sectors where Albania can decently compete not only in the region, but always keep in mind the European perspective,” Xhepa said last week on the sidelines of the Tirana Economic Forum, bringing together Albanian and regional experts to discuss the Balkans’ future.
“That is a big challenge even for entrepreneurs themselves who have to understand that this process has an end, it has a date and in this sense they have to build their own agenda on how to adjust and handle that pressure. That is the first exercise. We should not forget that the perspective we aspire to is European and competition with the European Union will be much tougher,” says Xhepa.
The Union of Producers has already identified the garment and footwear manufacturing sector producing the country’s top exports, olive oil, water, fish and oil and minerals as Albania’s competitive products which the Albanian government can support to boost their regional competitiveness.
Albanian producers have earlier voiced concern that the EU-backed regional economic area initiative that the six Western Balkan leaders agreed to in mid-2017 at the Trieste Summit will put ‘Made in Albania’ products at a disadvantage unless the Albanian government provides tax and subsidy incentives to make them more competitive regionally.
Based on the principles of non-discrimination and creating a level playing field for all within the region, the Western Balkan regional economic area will enable unobstructed flow of goods, services, capital and highly skilled labour, making the six regional economies more attractive for investment and commerce, accelerating convergence with the EU and bringing prosperity to all its citizens, according to an action plan. The regional economic area initiative foresees the implementation of actions at all levels in the period between 2017 and 2020 with some actions extending until 2023.
“We should first understand that the Balkan region continues to have the weakest economies compared to the West. In this sense, the competitiveness of our region is problematic and I believe that is the reason why the European Union initially asked for regional integration, because our economies are more or less comparable regarding standards, technology, organization etc. In this way, that would be a kind of exercise which if successfully handled, then regional economies will be able to even face tougher competition from the European Union,” added Xhepa.
Central bank worried
Addressing the forum, Albania’s central bank governor Gent Sejko said regional countries, including Albania have to tackle problems with the business climate, including corruption and tax evasion, as the main barriers to economic growth and the attraction of foreign direct investment.
“A common complaint by foreign investors is that our markets are too small and fragmented and poorly attractive. Although that is partly inaccurate, we should do more to boost our integration regarding trade and infrastructure,” said Sejko, adding that the individual low-tax policy race is not productive for the region as a whole.
“Competing for the same group of international investors, regional countries often try to boost their individual profile, offering tax incentives or subsidies. That race to the bottom is not productive,” he added.
Since 2014, the corporate income tax and the withholding tax on dividends, rents and capital gains have increased by 5 percent to 15 percent, making the tax burden in Albania one of the region’s highest and a key concern for foreign and local investors. Most regional economies apply flat tax regimes of about 10 percent.
“Addressing those issues requires vision, strong institutions, determined political action but also regional coordination,” Sejko added, suggesting a regional stock exchange to develop financial market and reduce financing costs.
A recent report by UNCTAD, the United Nations body responsible for international trade, has shown regional EU aspirant Western Balkans countries need to undertake business climate reforms and boost cooperation to attract increasing levels of foreign investment.
The recommendations come at a time when FDI in the region as a whole is declining at a faster pace compared to global FDI with the exception of Serbia and Albania, the two key Western Balkans players. It also came few months after regional leaders at the Trieste Summit reconfirmed support to an EU-backed regional economic area of 20 million consumers to facilitate the EU integration process for the six EU aspirants.
FDI in the Western Balkans, largely perceived as lacking rule of law and where corruption remains a key barrier to attract big investors, accounted for only about 0.27 percent of total global FDI in 2016. Regional FDI declined by 5 percent compared to a global decline of 2 percent, unveiling the region’s lack of competitiveness as a whole.
Moderately prepared
In its 2016 country report on Albania, the European Commission says Albania is moderately prepared in developing a functioning market economy.
“Albania has some level of preparation in terms of capacity to cope with competitive pressure and market forces within the Union. Some progress was made particularly as regards improving higher and vocational education as well as prioritising infrastructure investments,” says the EU’s executive arm.
“However, the quality of education needs to be raised at all levels to better equip people with skills in line with labour market needs. Gaps in transport, energy and digital infrastructure still hinder Albania’s competitiveness and constrain trade, which remains below potential and sectorally concentrated. Albania’s capacity for research, development and innovation remains low,” it adds.
As the European Commission is expected to unveil an enlargement strategy early next February, only Serbia and Montenegro, which have already launched accession talks, have been apparently selected as the sole Western Balkan aspirants that could join the block by 2025.
Short and mid-term enlargement prospects for the six Western Balkan countries have been hampered by internal developments in the bloc with the Brexit, the migrant and financial crises as well as rising populism high on the agenda.
Albania, an EU-candidate since mid-2014 is hoping to launch accession talks this year as it has launched the implementation of its long-awaited justice reform, a key requirement by the European Commission, that would also boost investor confidence in the judiciary.
Catching up with the average EU income could take Albania and other EU aspirant Western Balkan economies about six decades unless current sluggish GDP growth doubles to 5 or 6 percent, the World Bank has warned in a recent report
“With faster growth of 5 to 6 percent, convergence could be achieved in just two decades. That will require a bold and sustained implementation of structural reforms and steady progress in EU accession processes,” says the Washington-based financial institution.
Albania, whose consumption and GDP per capita is at only a third of the EU average, will need 35 years to catch with the EU average income if it continues growing under the current 4 percent rate and 20 years if growth accelerates to an annual 5 percent, World Bank officials have said citing an optimistic scenario.
