TIRANA, Nov. 22 – Regional EU aspirant Western Balkans countries need to undertake business climate reforms and boost cooperation to attract increasing levels of foreign investment, a report by UNCTAD, the United Nations body responsible for international trade has shown.
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 comes 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.
“Enhanced regional cooperation is of crucial importance to enhance FDI in South-East Europe as we aim to guide the region to meet the strategic needs of investors and avoid the race to the bottom,” said Goran Svilanović, the Secretary General of the Regional Cooperation Council.
The report shows FDI in the six Western Balkans countries and Moldova dropped by 5 percent to about 4.5 billion euros in 2016 and is still a long way from reaching the SEE 2020 FDI target of annual inflows of €7.3 billion. FDI in the region, which remains largely concentrated on financial services and energy, has fluctuated at this level for the past four years.
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 which in 2016 declined by 2 percent to US$1.75 trillion
Significant progress in investment policy reform across the region and the end of a harmful fiscal race are among the report’s key findings. Easing restrictions on trade, such as simplifying customs procedures and granting market access, remains another area which could help attract investors – especially those firms seeking to export.
Another key proposal in the report is the creation of a regional investment promotion platform.
“Taking a regional approach to investment attraction makes sense. Multinational firms and investors operate and invest regionally, based on strategic decisions about market size, regional production networks and infrastructure links,” says James Zhan, the UNCTAD Director of the Investment and Enterprise Division.
With internal investment resources being quite limited and unable to make the region as whole more competitive in the short and medium run, FDI is seen as a key tool to bring know-how and reduce high unemployment rates and significant brain drain affecting current and future development prospects.
In the latest Doing Business report regional economies ranked in the top 70 out of 190 countries with Serbia and Albania featuring the highest tax burdens.
GDP growth in the region in the past few years has been at modest levels of 1 to 3 percent, negatively affected by spillover effects from crisis-hit Eurozone trading partners.
The UN reports shows Albania has a disadvantage compared to other regional economies when it comes to tax incentives as existing incentives are not periodically evaluated against effectiveness or administered by independent entities.
In the latest UNCTAD 2017 World Investment report, Albania continued to remain the Western Balkan’s second largest FDI recipient for the seventh year in a row, but its FDI stock at the end of 2016 lagged behind three regional competitors.
Albania’s 2016 FDI inflows rose to a historic high of €983 million driven by two major energy-related investment such as the Trans Adriatic Pipeline and the Devoll Hydropower plant.
However, the country’s FDI stock increased to a total of $5 billion, higher only compared to neighboring Montenegro and Kosovo among regional competitors.
Albania’s recent FDI has mainly been focused in non-tradable and natural resource-based, making it vulnerable to international headwinds such as the 2014 slump in commodity prices paralyzing investment in the oil and mining industry or weather-related factors such as this year’s prolonged drought halting hydro-dependent domestic electricity generation.
“Attracting FDI to higher value-added activities would integrate the economy better into global supply chains, boost productivity and create more and better jobs throughout the economy. This, however, would require wide-ranging structural reform to bring about substantial improvements in the investment environment,” says the European Commission in a recent report.
Albania’s current cooperation with CEFTA member countries that includes six Western Balkan member countries and Moldova is currently poor and already hurt by frequent trade disputes and barriers.
Albania’s exports to CEFTA countries account for only about 14 percent of the total while imports for only less than 7 percent, compared to about three-quarters of exports and two thirds of imports to and from EU member countries.
The Western Balkans regional economic area, which Balkan leaders agreed to at the Trieste Summit last July, aims at developing an area where goods, services, investments and skilled workers can move without obstacles.
The Western Balkan region is Europe’s most underdeveloped suffering huge gaps in terms of economic development, rule of law and unemployment compared to Western Europe. Ethnic tensions are frequent especially in Bosnia and Herzegovina, Macedonia and Kosovo.
Only Serbia and Montenegro have currently launched accession talks. Albania is waiting to initiate talks pending the implementation of a long-awaited justice reform. Macedonia seems stuck because of a name dispute with Greece. Bosnia is struggling with inter-ethnic disputes while Kosovo which gained independence from Serbia in 2008 is still not recognized by five EU members.
Enlargement prospects remain pessimistic in the short and medium-run considering internal developments in the bloc with the Brexit, the migrant and financial crises as well as rising populism high on the agenda.
