Adam, Antonis, Theodora S. Kosma and Jimmy McHugh. 2003. âTrade Liberalization Strategies: What Could Southeastern Europe Learn from CEFTA and BFTA ...
June 12, 2006
Albania’s Integration into Global Economy in Regional Perspective: Distinctive Features and Challenges1 By Bartlomiej Kaminski
Abstract: This study takes a closer look at extent to which established institutional infrastructure helps in country’s integration into global markets from two perspectives. The first one is institutional focusing on assessing the progress made to build competitive markets. The second one is policy-oriented looking into contestability of Albania’s domestic markets. The rationale is simple: taking advantage of opportunities offered by global markets requires good institutions and openness to external competition. All success stories of economic development over the last two decades have had common ingredients: they have all been based on export-oriented policies combined with low or declining barriers to imports and, more recently, openness to FDI inflows. The test of implemented institutional and policy measures lies in the mode of integration into international markets. This includes not only trade in goods and services but also other ‘global’ links related to factors of production. A large portion of this study discusses these links in a regional perspective.
1
Background paper prepared for a Country Economic Memorandum on Albania, ECA, World Bank
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1. Introduction Considering the legacy of orthodox central planning, prolonged period of an almost complete cutoff from the external world and a very low level of economic development, Albania’s progress in establishing institutional foundation of a market economy has been impressive. So has it been its overall macroeconomic performance. It was one of the fastest growing economies among transition countries. The progress in transition, albeit marked by two periods of social upheaval, has been critical to its economic performance. Albania was the only Balkan country that took a radical approach to economic reforms following the collapse of central planning. While the implementation of structural reforms hit a number of barriers, its business climate and quality of governance does not diverge from other countries in the region. This study takes a closer look at extent to which established institutional infrastructure helps in country’s integration into global markets from two perspectives. The first one is institutional focusing on assessing the progress made to build competitive markets. The second one is policy-oriented looking into contestability of Albania’s domestic markets. The rationale is simple: taking advantage of opportunities offered by global markets requires good institutions and openness to external competition. All success stories of economic development over the last two decades have had common ingredients: they have all been based on export-oriented policies combined with low or declining barriers to imports and, more recently, openness to FDI inflows. The test of implemented institutional and policy measures lies in the mode of integration into international markets. This includes not only trade in goods and services but also other ‘global’ links related to factors of production. A large portion of this study discusses these links in a regional perspective. The study is organized as follows. The second section identifies Albania’s development features setting it apart from other countries of the region. Section 3 review changes in broadly conceived investment climate. Section 4 discusses access to Albania’s markets. The focus of Section 5 is on depicting Albania’s global linkages or mode of integration in comparative perspective. The last section concludes.
2. Albania’s unique developmental traits Among SEE-6 countries2, Albania stands out in three structural dimensions. First, it faces a different developmental challenge than other Western Balkan countries. Although it scores similar on some development indices, i.e., life expectancy, adult literacy, UNDP human development index and no longer has the lowest GDP per capita among them, it is unique in two respects: agriculture and level of education. It is a largely agricultural economy with 57 percent of population living in rural areas and almost 50 percent of its output produced by this sector. While the percentage of urban population is comparable with that of BiH, the share of agriculture in the 2
SEE-6 countries include Albania, Bosnia and Herzegovina (BiH), Croatia, Former Yugoslav Republic of Macedonia (FYROM), Moldova, and Serbia and Montenegro. This group is part of the SAP (Stability and Association Process). SEE-8 includes additionally two other Balkan countries—Bulgaria and Romania— which have already begun accession negotiations with the EU. They are all part of the Stability Act group.
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GDP is by far the largest. This puts the agricultural sector, devastated by a half century of misguided communist policy of self-sufficiency on the top of developmental agenda. Another developmental characteristic that makes Albania distinct from other SEE-5 is the level of education. While Albania, a lower middle income economy, has a more educated labor force than the average for upper middle income economies, the overall level is well below that in other SEE6 countries. Second, while other SEE-6 economies face the challenge of restructuring and often reconstruction, Albania faces the problem of development and has not had to deal with the legacy of outdated industrial structures to the same extent as other SEE-8 economies. On the eve of the collapse of communism, Albania was the least developed economy in Europe. Its small industrial base, further devastated during turmoil accompanying the collapse of a communist regime in 1990-92 and during the 1997 uproar over the collapse of a ‘pyramid’ savings scheme, contrasted sharply with those of much higher developed economies of former Yugoslav republics or former CMEA members—Bulgaria and Romania. While the latter still face the task of restructuring inherited industrial capacities, Albania has been largely spared from this particular burden of conversion and industrial restructuring.3 The private sector share of 75 percent in 2002 put Albania at the top of the SEE-economies including both Bulgaria with 70 percent and Romania with 65 percent (EBRD 2002). Last but not least, Albania has never been part of the former Yugoslav national economy. In contrast to other former Yugoslav republics, rail and road networks linking it to other Balkan countries, in spite of ongoing effort under the Stability Pact, are still poorly developed creating significant barriers to trade. This explains, among other factors, much larger reliance on trade with the EU than of any other European transition economy including its 2004.
3. Institutional infrastructure for ‘plugging-into’ global structures The experience of countries that have successfully taken advantage of opportunities offered by global markets suggests that two elements have to be in place—successful implementation of first-generation reforms (liberalization of prices, foreign trade and exchange regimes) and consistent movement towards a rule-based institutional regime with the capacity of their enforcement. The former is relatively easy to implement, provided absence of political opposition, whereas the latter requires advanced institutional capacity of the state. In contrast to other SEE6 states, Albania moved swiftly in implementing first-generation reforms. The 1992 stabilizationcum-transformation program was successful in quickly restoring macrostability and laying the foundations for a demand- rather than supply-constrained economy, characteristic of central planning. Weaknesses in state capacity combined with political instabilities have stood in the way of moving fast in structural reforms, although Albania has not been a laggard even vis-à-vis its more developed regional partners.
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Albania had 76 large enterprises with more than 250 employees in 2000, as compared with 194 in FYR Macedonia and 1,032 in Serbia and Montenegro. EBRD Survey of National Authorities quoted in Falcetti et al. 2003.
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This section takes a closer look at Albania’s reforms. It first briefly examines its stabilization-cum-transformation program. It then assesses the progress in second-generation reforms by tracing improvement in governance and corruption in regional perspective and examines in greater detail regulatory underpinnings of backbone services and contestability of Albania’s domestic markets. Both can be regarded as necessary, albeit not sufficient conditions for a country’s successful ‘plug-in’ globalization.
3.1. Radical approach to first-generation reforms Despite its legacy of a command economy that was virtually sealed off from the external world including the countries of the defunct Council for Mutual Economic Assistance (CMEA),4 Albania has followed the path of radical reformers in Central Europe in its approach to first-generation reforms, i.e., stabilization and liberalization. This has set Albania apart from all former Soviet republics excluding the Baltic states and all Balkan countries excluding Slovenia. Bulgaria and Romania initially took this path but both had quickly restored some administrative controls. The almost complete disintegration of political and economic institutional structures underlying the communist regime has clearly created—to borrow a term from Leszek Balcerowicz, the architect of a first successful program to transition from a supply-constrained to demand-constrained economy—a ‘window of opportunity’ to pursue a radical approach to economic reforms. With considerable domestic and external support, Albania followed the radical path in its approach to first-generation reforms.5 In 1992 almost with the stroke of a pen central controls over prices of most tradables were removed; state monopoly over foreign trade abolished; and foreign exchange rate regime liberalized. ‘Small’ privatization including the agricultural sector proceeded swiftly, whereas monetary restraint and other measures slashing subsidies and government deficit were comprehensively introduced. While macroeconomic performance has been impressive since the introduction of the stabilization-cum-transformation program in 1992, the progress in implementing the secondstage institutional reforms has been less spectacular, albeit not disappointing. But considering initially feeble state institutions, whose credibility and capacity were further eroded during the 1997 crisis, and inherent difficulties in eradicating the prevailing culture of corruption, the progress in establishing market-supporting institutions has steadfastly won praise from international financial institutions (IMF 2001). Financial sector has quickly recovered from damage in its credibility suffered in the aftermath of the ‘pyramid’ savings scandal in 1996-97. The market-based financial system with a two-tiered banking responsive to indirect tools of monetary policy has been gradually emerging. In spite of criticisms of Albania’s privatization 4
Although Albania was formally a member of the CMEA until its dissolution in 1991, it had not participated in it since 1961 (Staar 1988). 5
The EU and Bretton Woods multilateral financial institutions not only provided technical and humanitarian aid but also public order among others through direct presence of the Italian Army. The latter have been behind the design and implementation of Albania’s reform program through policy advice, lending operations, and technical assistance in various sectors. Even before Albania’s membership in the IMF and World Bank in October 1991, both organizations were actively involved in designing stabilization-cumtransformation program.
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program, the private sector accounts for around 75 percent—the participation similar to that recorded in fastest reformers of Central Europe. All these reform measures have paid off rather handsomely in terms of economic performance. Inflation was brought under control by 1993. This year also witnessed an economic turnaround with the real GDP registering a healthy growth of around 10 percent. Except for 1997, the economy was expanding in the 1990s at impressive growth rates driven mainly by expanding services, construction and agricultural output. Growth resumed in 1998 with the annual average of eight percent over 1998-2001. After a dramatic contraction of around 80 percent in the early 1990s, industrial output has been slowly recovering since 1995. Despite a severe recession following the collapse of the pyramid scheme in 1997, the real output recovered already in 1998 and was in 2001 well above its pre-transition level in 1989.
3.2. Progress in second-generation reforms in regional perspective A proxy variable for assessing the progress in structural reforms is the improvement in the quality of governance supplemented by the ‘cost of doing business’ indicators and corruption external assessments. We shall use methodology and data developed by the World Bank for the first two, and Transparency International’s country rankings for the latter. They are all intertwined with the progress in building institutions supporting competitive markets and improving business climate. Governance takes into account the capacity of state to provide environment conducive to business activity, i.e., transparency, accountability, enforcement of the rule of law, regulations supporting competition, etc. The ‘cost of doing business’ indicators provide measures to assess business-friendliness of regulations, whereas corruption indicators the extent of graft as perceived by international investors. Two caveats are important. First, the shared weakness of governance and cost of doing business indicators is that a low score in a single dimension can offset high scores on other dimensions. For instance, friendly conditions for entry of start-ups would matter little if the government preys on existing businesses. In a similar vein, political instability will make superfluous positive scores on other dimensions of governance. Second, governance is not a synonym for corruption. Although better governance implies lower corruption, the two are different. Governance includes supply of public goods and services. Better governance and regulatory environment, low ‘hassle’ cost of conducting business, labor force, etc., all increase the probability of receiving higher FDI inflows. Empirical research strongly suggest that progress in second-generation reforms, i.e., with the focus on institutions supporting competitive markets, provides explanation in country variation of FDI inflows. Garibaldi et al. (2002) have shown, that the quality of institutions explain the variation in FDI flows to transition economies. In a similar vein, Broadman et al. (2003, p.13), plotting the data on FDI per capita and EBRD’s governance and restructuring indices for all Balkan countries also find a very strong positive association between these two variables. Countries that have made the largest progress in transition to competitive markets have also attracted the largest inflows of FDI, whereas countries with weaker business climate have been less successful in attracting FDI. Ineffective protection of property rights and weaknesses in contract enforcement discourage
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foreign investors.6 As FIAS notes in its study of barriers to investment in Albania, “… weak governance and institutions, coupled by tenuous rule of law, are deferring informal enterprises from graduating to the formal sector. This discourages entry by long-term and strategic investors…” (FIAS 2003, p. vii). FIAS derives this conclusion from interviews with local businesses. Having had examined the results of its standard Administrative and Regulatory Cost Survey of 500 companies in Albania pointing to the poor regulatory and administrative environment, frequent ‘un-official’ payments, lack of transparency in operational procedures, the FIAS reports concludes: “While these features are not unusual among transition economies in the region, their severity is remarkable when benchmarked against comparable country survey results.” (FIAS 2003, p. viii). Similar conclusions can be drawn from other regional surveys placing Albania on top of lists ranked in terms of pervasiveness of corruption (RCM 2002). Hence, we shall turn to the question whether Albania is really so corrupt and poorly governed, as these studies seem to suggest. Corruption and FDI International investors’ perception of the Albanian investment climate does not seem to be so extreme. Consider first that the verdict given by participants in Transparency International surveys is less harsh than that pronounced by local businessmen, which may suggest the presence of a ‘whining’ component in local culture. While indeed Albania scored lowest among SEE-8 in 1999 in terms of the value of Corruption Perception Index, albeit with two countries not ranked (Bosnia and Herzegovina and Serbia/Montenegro), it was clearly not the worst performer in 2003 (Table 17). Admittedly, Albania’s score of 2.5 on the scale between maximum of ten for a ‘perfectly clean environment’ and zero for maximum corruption is not particularly impressive, but is also not the worst in the SEE region.7 Yet, “when benchmarked against comparable country,” in contrast to domestic assessments, Albania does not stand out. It was ranked slightly below Romania, but above other SEE-6 countries except for Croatia and, quite surprisingly, Bosnia and Herzegovina. Moreover, Albania’s position clearly improved vis-à-vis Romania and Moldova. Second, Albania appears to pass quite well two other standard tests. First, its Customs Administration does not appear to be as corrupt as various surveys monitoring regional corruption strongly suggest (e.g., RCM 2003). Consider the following: its data on imports from the EU have matched within the margins implied by FOB/cif range data reported by EU Customs Services on
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There are two exceptions to this general rule: First, investments in natural resource sectors tend to flow as long as the state is firmly in control and can shield an investor from the domestic investment climate. Second, even the best climate may fail to attract investors if a country, for instance, has no viable transportation infrastructure, it suffers from chronic shortages of electricity or is located in the middle of nowhere. As we shall argue in 3.3., whereas Albania does not have attractive natural resources (oil or natural gas), its infrastructure remains relatively underdeveloped and electricity remains the major barrier to economic development. 7
For comparative purposes, note that the average value for CEEC-8 (EU 2004 entrants) was 4.5 and that for EU-15 members was 7.8 in 2003.
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EU exports to Albania and duty collection rate is quite close to imported weighted average tariff rate. Both measures suggest that shipments from the EU are fully reported and subject to tariffs and other border charges transferred to the state budget. The European Commission in its annual report notes that “… in terms of revenue collection, the Customs administration collected around Euro 400 million in 2003, which amounts to 95 % of the target for the period.” (EC 2004a: p. 23). T ABLE 1: VALUES OF CORRUPTION PERCEPTION INDICES FOR SEE COUNTRIES IN 1999, 2002 AND 2003 SEE-6
1999
2002
2003
2004
2005
Index, 2005 1999=100
Albania
2.3
2.5
2.5
2.5
2.4
104
Bosnia and Herzegovina
n.a
n.a
3.3
3.1
2.9
n/a
Croatia
2.7
3.8
3.7
3.5
3.4
126
Macedonia, FYR
3.3
n.a
2.3
2.7
2.7
82
Moldova
2.6
2.1
2.4
2.3
2.9
112
Serbia/Montenegro
n.a
n.a
2.3
2.7
2.8
n/a
Memorandum:
2.7
Bulgaria
3.5
4.0
3.9
4.1
4.0
111
Romania
2.9
2.6
2.8
2.8
3.0
103
72%
76%
75%
75%
70%
97
Ratio of Albania's scores to the average for Bulgaria and Romania
Source: website of Transparency International.
The second test is in the extent to which Albania has been successful in attracting FDI. To be sure, there are many other factors that may attract investors even though corruption incidence may be high. Yet, despite variation in the level of economic development, SEE-5 countries provide a good benchmark, as neither the location factor nor political stability does significantly differentiate among them. Considering Albania’s level of economic development, the absence of attractive assets for privatization and two upheavals contributing to prolonged perception of Albania among international investors as an unstable country in a highly volatile region, Albania has not fared poorly in attracting FDI inflows. As shown in Section 4.2, the total value of FDI over 1990-03 of US$ 352 per capita is higher than in other SEE-5 countries except FYR Macedonia, but significantly lower than in Bulgaria (US$ 652) and Croatia (US$ 2,057).8 The existing differences in FDI per capita appear to be a reflection of the variation in the level of GDP per capita rather than differences in the values of Corruption Perception Indices with two exceptions. Transparency International ranked Bosnia and Herzegovina well above Albania, yet Albania attracted much larger FDI inflows and ‘more corrupt’ FYR Macedonia beat other SEE5 countries in FDI inflows per capita. More broadly, the existing differences in FDI are also a reflection of progress in secondgeneration reforms. A number of empirical studies focusing on transition economies have 8
See Table 7, Section 5.2.
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corroborated this observation. Garibaldi et al. (2002) have shown, that the quality of institutions explain the variation in FDI flows to transition economies. In a similar vein, Broadman et al. (2003, p.13), plotting the data on FDI per capita in 1990-2002 and EBRD 2001 indicators of progress in enterprise reform for SEE-8 countries also find a very strong positive association between these two variables. Albania ranked on a par with Bulgaria and FYR Macedonia in terms of the EBRD indicator attracted, however, smaller FDI inflows per capita. The only country ranked below Albania that had larger FDI inflows per capita was much more developed Romania. One may thus conclude that neither the values of Corruption Perception Indices nor the size of FDI inflows justifies treating Albania as a regional ‘outcast.’ While there is always room and need for improvement, Albania’s performance has been decent at worst. Quality of governance: regional perspective An examination of selected indicators of the quality of governance—as measured by the World Bank—further corroborates an observation that Albania is not an “outcast” among SEE-5 countries. Table 2 reports three governance indicators—political stability, government effectiveness and regulatory quality—and their average, which may be interpreted as an aggregate index of the quality of governance. Three other indicators measuring such dimensions of governance as the rule of law, control of corruption, and voice and accountability are not taken into account. For post communist countries, they are strongly correlated with other three indicators, with the values of correlation coefficients equal or above 0.9. Hence, taking them into account into a single aggregate indicator of governance would not bring new information. Furthermore, we normalize the scores, originally falling within –2.5 (the worst case) and +2.5 (the best case), by expressing them in terms of averages for SEE-countries that are already on the EU accession path—Bulgaria and Romania. Hence, for instance, 75% in regulatory quality means that a country is 25 percent below corresponding values for the average for Bulgaria and Romania, which are not very demanding comparators.9 While Albania is ranked third among SEE-6 below Croatia and Moldova, the ranking is slightly different than that of the Transparency International. The latter put Croatia and Bosnia and Herzegovina rather than Moldova ahead of Albania in 2003. Albania is regarded as having overall better governance than remaining SEE-6 countries—Bosnia and Herzegovina, Macedonia and Serbia/Montenegro. But it lacks behind in regulatory quality—except for Bosnia and Herzegovina other SEE-6 score higher.
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Bulgaria and Romania have been well outside the quality of governance in CEEC-8 in 1996-98. But Bulgaria has been catching up with since 1998 and Romania since 2000, although it remains overall the worst performer among CEEC-10 countries.
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T ABLE 2: SELECTED INDICATORS OF THE QUALITY OF GOVERNANCE IN PERCENTILE RANK , 1998 AND 2004 ( NOT NORMALIZED ) Political stability
Government effectiveness
Regulatory quality
Simple average
1998
2002
1998
2002
1998
2002 1998 2002
Albania
24.2
16.5
27.3
40.9
24.5
48.3
25.3 35.2
Bosnia and Herzegovina
27.3
21.8
18.6
34.1
7.6
23.2
17.8 26.4
Croatia
64.2
57.3
69.9
64.9
60.9
58.1
65.0 60.1
Macedonia, FYR
34.5
14.6
36.1
51.4
38.6
45.3
36.4 37.1
Moldova
51.5
29.1
32.8
25.0
30.4
31.0
38.2 28.4
Serbia and Montenegro
6.7
16.5
10.4
48.1
4.3
22.2
7.1
Average for Bulgaria and Romania
59.7
52.5
19.2
53.9
61.7
59.7
51.1 51.7
28.9
Source: derived from data available at www.worldbank.org/wbi/governance/gov_data.htm and discussed in Kaufman, Kraay and Mastruzzi (2003).
Hence, again Albania stays in the middle of a regional pack. The only ‘outcast’ in terms of observed quality of governance is not Albania but, in a positive sense, Croatia scoring above the average for projected 2007 EU entrants—Bulgaria and Romania. In a negative sense, Bosnia and Herzegovina scored the lowest. Furthermore, Albania is neither above nor below the space delineated by the values of a single aggregate indicator of governance. With the value of 65 percent of the average percentile ranking for Bulgaria and Romania, its quality of governance is as good, if not better, as in other SEE-6 countries. Business climate: ‘doing business’ survey While the discussed survey are necessarily subjective, the review of data derived from the World Bank ‘doing business’ survey sheds lights on tangible components shaping the cost of conducting business in Albania. We look into three areas: starting business, contract enforcement and labor. The last line of Table 3 offers the frame of reference, i.e., the best practice in the world. Not surprisingly, Albania, together with other SEE countries as well as the last entrants to the EU, has a long way to go on all counts. How does Albania’s business climate compare with those of its regional peers in each of the three areas pertinent to conducting business activity? Assuming that the worst component does the most to discourage business activity, this question can be answered by locating a ‘standout’ in each area. As for the first area, the cost of starting business, i.e., business license fee is clearly the most discouraging aspect. Albania charges its potential ‘start-ups’ the most among SEE-6. But the actual cost may be even higher. FIAS (2003) noting that the actual time spent on registration is 18 days rather than 47 days (Table 3) suggests that many requirements “… are, in practice, probably ignored or circumvented through bribery.” (FIAS 2003, p.8). If anything, this points to much more prohibitive costs of starting business than identified in ‘doing business’ surveys, which is already by far the highest in the region. As for the remaining two areas, barriers on some aspects of conducting business in each of them are among the most restraining in the region. In the area of contract enforcement, a
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‘stand-out’ is the cost of contract enforcement in terms of GNI per capita. It is more than ten times higher than in Croatia, which has the lowest cost among SEE-8 economies. In the labor-related area, Albania has the most complex labor procedures, although it scores very high on other counts indicating flexibility of labor markets. T ABLE 3: SELECTED INDICATORS OF BARRIERS TO ‘DOING BUSINESS ’ IN SEE-8 COUNTRIES IN 2006 Starting business
Contract enforcement
Labor market
Min. Number Cost (% Capital Proceof of GNI (% of Number Cost (% dural Proce- Duration per GNI per of proce- Duration GNI per Compledures (days) capita) capita) dures (days) capita) xity Index
CondiFlexi- tions of bility of EmployHiring ment Index Index
Flexi- Employbility of ment Firing Laws Index Index
Albania
11
41
31.1
39.9
39
390
28.6
44
20
80
48
31
Bosnia and Herzegovina
12
54
40.9
57.4
36
330
19.6
56
30
40
42
42
Croatia
12
49
13.4
22.7
22
415
10.0
61
50
60
57
17
Macedonia, FYR
13
48
11.3
145.2
27
509
32.8
61
40
60
54
33
Moldova
10
30
17.1
22.0
37
340
16.2
33
70
100
68
30
Serbia and Montenegro
10
15
6.0
9.5
33
635
18.1
44
40
0
28
25
Bulgaria
11
32
9.6
104.2
34
440
14.0
61
10
60
44
32
Romania
5
11
5.3
0
43
335
12.4
67
50
60
59
34
11
27
4.2
0
0
0
0
0
Best worldwide
1
2
0
0
Note: The best performers among SEE-6 economies are marked in bold italics, and the worst in italics. Source: derived from data in www.worldbank.org/Doingbusiness
Albania overall does not score badly, although SEE-8 countries are not very demanding in terms of the conditions of doing business. Both the identified ‘stand-outs’ as well as other business conditions are well below the respective averages for the CEEC-8 group as well as for Bulgaria and Romania. The exceptions include the amount of capital required to register a business (25% below the average for CEEC-8), the number of days to enforce a contract (31% below the CEEC-8 average) and all, except one, variables related to labor market. In fact, the latter ranks very high in terms of flexibility, which usually augurs well for attracting FDI.10
3.3. Concluding observation This analysis provides evidence supporting the view that Albania is not a ‘regional outcast.’ In terms of the examined indicators capturing the quality of governance, incidence of corruption and cost of doing business, Albania scores higher than most other SEE-6 except Croatia. But Croatia
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As a recent study (Javorcik and Spatareanu 2004) shows, the magnitude in labor market flexibility is significant. For instance, with the flexibility of the host country labor market increasing from the level of Slovakia (inflexible) to the level of Hungary (flexible), the volume of investment goes up by between 14 and 18 percent, all else being equal. Moreover, FDI in services sectors appear to be more sensitive to labor regulations than investments into manufacturing
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performs substantially better in most dimensions than projected 2007 EU entrants—Bulgaria and Romania. The progress achieved in establishing structures supporting competitive markets is particularly impressive taking into account developmental features setting Albania apart from its Balkan neighbors. As discussed earlier (see Section 2), at the outset of transition Albania was the only European Third World country, with the soaring population growth, dominance of agricultural sector, low level of education and poorly developed physical and institutional infrastructure. Even accounting for war destruction inflicted upon former Yugoslav republics, closing so many gaps vis-à-vis SEE-6 countries over a span of a decade strike one as noteworthy, if not impressive. Having had set Albania’s transition to competitive markets against the background of other countries in the region, we may now turn to a more detailed assessment of its institutions particularly relevant for taking advantage of opportunities offered by global markets.
4. Institutional infrastructure and contestability of domestic markets The openness of the economy to foreign investment and import competition determines the extent to which domestic markets are contestable. Contestability of domestic markets entails not only issues of access to markets for goods and services as embodied in tariffs, narrowly conceived non-tariff barriers and competition-unfriendly regulations. It also entails market access implications of domestic policies and regulations (e.g., regulatory environment for services provision, standards requirements, phytosanitary measures, and environmental standards) as well as treatment afforded to foreign investment. Higher levels of contestability usually generate higher rates of economic growth and better export performance. How contestable are Albania’s markets? Or, to put it differently, how does Albania fare in terms of openness to external competition in capital, goods and services markets? This is a central question addressed in this section.
4.1. Border measures: tariffs and non-tariff barriers Despite instability in Albania’s trade policy and trend towards protectionism during the initial stages of transition and burdensome border measures, Albania’s trade laws and policies have significantly contributed to the increase in competition in domestic markets and expanded access to imports. Having had formally abolished state monopoly over foreign trade, a distinctive feature of central planning, in 1991, Albania has consistently pursued the policy of multilateral liberalization that included building institutions compatible with decentralization of foreign trade decisions and their neutrality in terms of impact on production and consumption patterns. (Kaminski 2003). Already back in 1993, it initiated the procedures required to accede to the WTO and submitted Memorandum on the Foreign Trade Regime in January 1995. Albania had made considerable efforts during the WTO accession negotiations to open its economy to foreign companies and investments. On September 8, 2000, it became a member of the WTO and therefore committed itself to observance of a variety of multilateral disciplines embodied in GATT/WTO Agreements. Although the status of an economy in transition allows for longer transitional periods for their full implementation, its commitments have already been quite
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extensive. Accession to the WTO has locked Albania into a liberal foreign trade regime providing the basis for sound foreign trade policy. Upon accession to the WTO in 2000, Albania made extensive commitments to maintain open borders to cross-border trade and foreign investment in services and reduce tariff and nontariff barriers on imports of goods. These are irreversible, as in most cases they are “bound.” This means that the government has pledged not to reduce the extent of openness in the future or to introduce any measures suppressing trade not in line with WTO multilateral disciplines. In most sectors there are no limits on foreigners’ share of equity. In addition, Albania’s signed a plurilateral WTO Information Technology Agreement (ITA), which has already led to zeroing of MFN tariff rates on products covered by the ITA.11 Albania has locked itself into a liberal tariff schedule. Albania has not only bound 100 percent of its tariffs, but bound them at levels of currently applied MFN tariff rates. The coverage of 100 percent extending to all of the tariff lines is even higher than the average percentage of tariff lines bound in highly developed countries or other transition economies.12 In other words, Albania has pledged not to impose tariffs on all products that are higher than bound rates for all products. As the bound rates are low and the coverage full, Albania has locked itself into a liberal tariff regime. Bindings were not only set at the level of currently applied tariff rates but they were also to be gradually lowered over the 2001-2009 period. Albania made commitment to reduce tariffs on a number of both industrial and agricultural products. Maximum tariff rates were slashed from 20 percent in 1999 to 18 percent in 2000 and 15 percent in 2001. In 2002 the maximum tariff rate was further reduced to 10 percent. The average applied MFN tariff rate fell from 11 percent in 2001 to 8.5 percent in 2002 (Table 4). Furthermore, in contrast to many other transition economies, Albania has avoided falling in the trap of duty exemptions usually granted to firms engaging in activities favored by the Government or—quite frequently—to favored individuals. It has not so far resorted to this measure that contributes to shopping for favors from officials thus creating rent seeking environment and distorting the patterns of production and consumption. As far as non-tariff measures are concerned, they do not seem raise transaction costs of access to Albania’s markets, Customs procedures appear to operate smoothly, with low opportunity costs of delay. The pre-arrival intelligence system collecting information on imports originating in Greece, Italy and Macedonia has also reduced arbitrariness in customs processing and the potential for smuggling and corruption (Kaminski 2003). Although viable institutions for
11
The ITA is a tariff-cutting mechanism that emerged from the Singapore WTO Ministerial Meeting in 1996. Fifty-six WTO members have signed this Agreement, which zeroes out tariff rates on all information technology (IT) products, components as well as final products. Most but not all of them have a high R&D component. For more details, see http://www.wto.org/english/tratop_e/inftec_e/inftec_e.htm. 12
The coverage of tariff lines bound, as negotiated during the Uruguay Round, was 99 percent for developed countries and 98 percent for transition economies. The coverage in tariff schedules of developing countries is lower—72 percent (GATT 1994).
12
full implementation of WTO Agreements on product standards, technical regulations and certification as well as sanitary and phytosanitary measures are not fully operational, despite enactment of appropriate laws, they do not constitute significant barriers to imports. T ABLE 4: AVERAGE APPLIED MFN TARIFF RATES IN SEE-8 C OUNTRIES (IN PERCENT ) Average MFN Applied Tariffs (%) Country
Year
All Goods
Agriculture Industrial Goods
Albania
2001
10.9
12.6
10.4
2005
6.3
8.6
6.0
Bosnia & Herzegovina
2001
5.3
4.4
5.4
Croatia
2005
5.3
9.0
5.0
Macedonia, FYR
2004
10.2
15.1
9.8
Moldova
2001
4.8
11.0
4.1
Serbia & Montenegro
2002
10.1
17.5
9.4
European Union
2005
4.3
6.3
4.1
Bulgaria
2005
10.4
22.2
9.6
Romania
2004
7.0
19.3
6.1
Memo:
Note: The classification of all goods, agricultural and industrial goods is based on HS 01-97, HS 01-24 and HS 25-97 respectively. Sources: UNCTAD TRAINS database and WTO IDB database.
Furthermore, Albania’s participation in the SAP launched by the EU in the aftermath of Kosovo war in 1999 augurs well for the future. In exchange for EU assistance, prospect of EU accession, and continuation of preferential access to EU markets, Albania together with SEE-5 governments have to upgrade their institutions and governance to European standards and engage in mutual regional cooperation including other Stability Pact member-countries. The SAP provides powerful incentive to improve contestablity of domestic markets and stay the course of liberalization. The SAP has introduced two new dimensions to liberalization. First, there is a regional dimension to its foreign trade policy, which has committed Albania to sign FTAs with SEE8 economies and expand cooperation in other areas facilitating trade. The SAP seeks to reduce the complexity of the current commercial logistics through promoting simplification and greater transparency in customs procedures and free trade among SEE-8 as well as between them and the EU. By the end of 2004 Albania will have FTAs in effect with all SEE-8 economies. As for its most important trading partner, the EU, Albanian GSP status was transformed to that of Autonomous Trade Preferences (ATPs) in October 2000, and negotiations on the Stabilization and Association Agreement were launched in early 2003. Second, more important, the SAP also implies signing the Stabilization and Association Agreement, which will ultimately lead to free trade with Albania’s by far most important trading partner—the EU. Regional integration calls for ‘deeper commitments’ going beyond and supplementing those undertaken upon Albania’s accession to the WTO.
13
4.2. Services: the importance of regulatory framework The economic impact of increasing competition in services in general and backbone services (transport, financial, telecommunications, distribution, and business services) in particular has huge welfare-enhancing potential. Efficient provision of services is not only the source of foreign currency earnings and employment but also assures their availability and low pricing. This in turn lowers the costs of exports of goods and imports alike. Considering that services contribute on average around 10-20 percent to the production cost of a product and account for all trading costs (transport, trade finance, insurance, communications, distribution services), savings thanks to efficiency gains can indeed be substantial (Hodge 2002). So do gains in competitiveness in international markets of both services and goods. Moreover, their supply is decisive for domestic firms to participate in the most rapidly expanding division of labor based on fragmentation of production, simply because without high quality ‘service links’ production will not be moved to a country.13 When Albania joined the World Trade Organization in 2000, it committed itself under the GATS to maintain open borders to cross-border trade and foreign investment in services. These commitments are comprehensive—virtually all sectors are included in Albania’s schedule. In most sectors there are no limits on foreigners’ share of equity. These commitments are also irreversible, as in most cases they are “bound,” with the government having had pledged not to reduce the extent of openness in the future. Liberal Law on Foreign Investment complements WTO/GATS commitments allowing commercial presence of foreign firms to provide services (e.g., establishing bank branches) and for presence of natural persons (temporary labor mobility). Trade via establishment of commercial presence (e.g., investment in insurance or banking institutions, telecommunications) can generate an influx of FDI leading to increased efficiency and more intense competition. But although the conditions of entry into the private sector in Albania, for domestic and foreign investors alike, appear to be liberal on paper, FIAS study (2003) notes there are significant administrative barriers to foreign investments. Indeed, unfortunately GATS/WTO commitments do not automatically assure the existence of regulatory environment supporting efficient provision of backbone services, i.e., transport, financial, telecommunications, distribution, and business services.14 Furthermore,
13
Bloc services are crucial to linking various fragments of production process located in different geographical locations (Jones and Kierzkowski 2001). So is trade facilitation environment, i.e., good transportation, business-friendly and efficient customs, and thereby low transaction costs. 14
GATS was deemed a success of the Uruguay Round not because of the progress in liberalization of trade in services but simply because it has locked countries into a standstill against backsliding, i.e., erecting new protectionist measures and to further rounds of progressive liberalization. The GATS has failed to introduce similar disciplines in scope and depth as under the 1994 GATT. First, while it commits WTO members to meet two general obligations: transparency and the most-favored-nation (MFN) principle across-the-board, the Agreement allows for temporary exemptions to MFN. Second, unlike the 1994 GATT, the principle of national treatment (i.e., no less favorable than afforded to domestic one) and market access applies only to sectors specified in national schedules of GATS commitments.
14
delays in meeting WTO/GATS commitments undertaken by Albania combined with regulatory environment that does not promote competition have been responsible for the low quality and high prices of telecommunications services. Weaknesses in Albania’s regulatory environment are rather typical for a country at a relatively low level of economic development and usually stem from the absence of autonomy and enforcement capacity of regulators. Telecommunications is the most glaring example, albeit illustrating problems encountered in many developing countries. Weaknesses in Albania’s regulatory regime appear to have been responsible for the low quality and high-cost services as well as for lack of interest among foreign companies in privatization of Albtelecom, the stateowned telecommunications-company. Albtelecom has monopoly on international connections as well as all GSM connections, although it will loose it once Albania fulfills its commitments under WTO/GATS (EC 2004a, p. 16). Although the telecommunications sector has significantly expanded thanks to increased investments in the fixed-line telephone system, as well as a rapidly expanding mobile market,15 its quality and costs remain much to be desired. Charges for telecom services including Internet services and roaming charges are relatively high. This explains limited use of Internet services exacerbated by the network limitations and high prices charged by service providers. Reluctance to privatization combined with non-transparent ‘competition’ maintained in order to appropriate significant cash flows generated by telecom services has been at the root of the problem. The European Commission has succinctly summarized issues at hand. In its annual opinion, it pointed to “… an urgent need to develop a sound sector policy which supports not only the sector liberalization, but also the strengthening of the relevant regulatory body and the approximation of Albanian legislation to the new EU framework for electronic communications” (EC 2004a, p. 30). Indeed, Albania has delayed the liberalization of fix telephony international calls until 1 January 2005 allegedly as part of its attempts to achieve the successful privatization of Albtelecom. The full liberalization of the sector has run into a dead end, as a third mobile telephony license has been awarded to a company owned by Albtelecom.16 The official explanation was that the issuance of mobile licenses to companies fully owned by Albtelecom would make Albtelecom more attractive to prospective buyers. But the crux of the matter is that it will not—as long as not accompanied by regulatory reforms—make telecommunications markets more competitive. No matter the ownership, only genuinely competitive environment
15
By the end of 2003, the number of Albtelecom’s fixed line subscribers reached 222 000. Mobile users have increased from about 800,000 in 2002 to 1,000,000 in 2003, with the mobile penetration reaching almost one third. Around 80 percent of the whole territory, corresponding to 90 percent of the total population is covered by the service. 16
The issuance of mobile licenses to companies fully owned by Albtelecom may make Albtelecom more attractive to prospective buyers. But it will not—as long as not accompanied by regulatory reforms—make telecommunications markets more competitive that would drive down prices of these services and improve their quality.
15
can assure provision of high quality telecommunications services at low prices. This calls for implementation of the above-quoted recommendation of the European Commission. The delays in setting up a transparent regulatory framework fostering competition have probably led to significant welfare losses. While no study has been conducted to estimate them in Albania, its size can be inferred from the econometric study of the impact of liberalization in basic telecommunications on sectoral performance in 86 countries (Fink, Mattoo and Rathindran 2002). The study, limited solely to telecommunications without addressing positive externalities associated with higher quality and cheaper services, has found that complete liberalization has paid off in terms of higher teldensity (8 percent higher than in countries following the route of partial liberalization) and labor productivity. Another typical weakness in Albania’s regulatory services frameworks concerns continuing state direct involvement in managing airports and seaports. Good international practice addressing inherent port inefficiencies calls for separation of operational and commercial functions (the landlord port), privatization of port services, giving concessions of large container and bulk terminals to private operators. Albania has made some strides in that direction. Separate organizations have been established to administer civil aviation, control air traffic and manage Rinas Airport. Furthermore, the Port Law passed in 2003 transformed its major seaport Durres to a ‘landlord port,’ with two private stevedoring companies have been established. However, the present management model has two deficiencies. First, the Port of Durres Authority (PDA) is neither responsible for debt service and investments (now handled by the government) nor is it allowed to retain port dues. The PDA should have both responsibilities and pay taxes on its profits—the practices followed in most countries—as this would create incentive to make sound investment decisions. Second, the PDA is open to government’s political interventions, as the Law obliges parliament approve ‘larger’ concessions of port operations. Other logistics related services such as freight forwarding, custom brokerage, insurance, etc. appear to be based on healthy foundations. They are open to both domestic and foreign firms. They provide competitive services and do not contribute to excessive transaction costs.
4.3. Conclusion The picture that emerges from this analysis can be summarized in two conclusions: First, Albania’s policy environment supporting ‘global links’ has dramatically changed over the last four years creating new opportunities for private businesses, foreign and domestic alike. It appears that Albania has established a solid base assuring stability and predictability of policies shaping its links with global economy. Second, Albania still lacks well-designed regulatory structures, which would support competition in two major backbone services sectors. These include telecommunications and airports and seaports. While there are no estimates as to their negative impact, it seems clear that they hinder Albania’s external interaction.
5. Mode of integration in a regional perspective: external performance While the previous two sections have focused on assessing the extent to which Albania has developed institutional infrastructure friendly towards external interaction, this section examines outcomes. More specifically, it discusses developments in Albania’s global linkages. It focuses on
16
examining and comparing Albania’s mode of integration into global economy, mainly the EU, with those of other SEE-8 economies. The main question addressed in this section boils down to the following: What were the distinctive features of Albania’s integration into the global economy during transition from orthodox central planning and what opportunities it has failed to tap?
5.1. Trade in goods and services: importance of remittances ‘Global links’ include not only flows of goods and capital, but also of services purchased or sold to foreign residents. The distinctive feature of Albania’s integration into global markets is ‘export’ of labor, with around one third of its population at working age working abroad mainly in Italy and Greece. Huge workers’ remittances amounting to 13 percent of the GDP in 2003, however, do not make Albania unique among SEE-6. Serbia and Montenegro had even slightly higher inflows in terms of GDP from ‘labor factor exports.’ Bosnia and Herzegovina, with 10 percent was not significantly behind, and Croatia had even higher remittances in terms of value, albeit not in terms of the GDP (Table 5). T ABLE 5: EXPORTS OF GOODS AND SERVICES AND REMITTANCES IN REGIONAL PERSPECTIVE , 1999-2004 (IN PERCENT ) Services in total exports
Total exports
Average annual
Remittances
in GDP
growth of exports
as % of GDP
2002 2004
2004
1999-2004
2004
Average 1999-01 Albania
56.8
60.8
63.3
21.4
21.0
13.6
BiH
24.3
25.9
19.8
26.1
12.0
15.4
Croatia
49.2
54.4
50.8
47.5
13.9
2.5
Macedonia, FYR
22.8
22.3
22.6
40.1
4.6
3.0
Moldova
24.4
25.4
25.2
50.8
15.8
8.5
Serbia/Montenegr o
31.1
36.7
30.4
23.8
18.7
13.3a/
Bulgaria
31.7
29.4
29.7
58.4
16.6
..
Romania
14.8
15.3
13.4
37.1
19.4
..
*/
in 2003 as no data available for 2004. Source: derived from the data in UN COMTRADE database.
But what makes Albania unique is the relative size of private transfers in relation to its foreign currency earnings. In 2002, for instance, remittances were equivalent of 75 percent of Albania’s exports of goods and services. For Serbia and Montenegro, they were equivalent of 66 percent and for Bosnia and Herzegovina 38 percent. Remittances flowing to Albania allowed financing on average of almost one third of the value of imports of goods and services since the
17
collapse of central planning.17 Revenues from exports of goods and services together with net remittances have exceeded the value of imports of goods and services since 2000. The difference rose from 27 percent in 2000 to 41 percent in 2001 and 45 percent in 2002.18 In consequence, despite current account deficits driven by huge deficits in trade in goods, Albania appears to have been very successful in maintaining external sector stability thanks to external assistance, remittances, FDI inflows and prudent macroeconomic management. Albania benefited from official financial transfers amounting up to 4 percent of the GDP and financial assistance from the EU, which exceeded the total borrowed from multilateral financial institutions over 1994-2002, and bilateral assistance including that provided also by EU-member countries outside the EU PHARE and CARDS Assistance programs. These special sources of financing current account deficits might have had important direct implications for Albania’s pattern of integration into global economy. First, as imports have not been restricted to export revenues, pressure on stimulating export growth would have been relatively weaker than elsewhere. Second, buoyant domestic demand has provided sales opportunities for firms that could otherwise compete in international markets. In other words, incentive to market products abroad has been somewhat weakened by domestic opportunities. Last but not least, these inflows have significantly contributed to balance-of-payments stability. Yet, despite this ‘disincentive,’ Albania has an impressive record of export performance. The recovery and subsequent expansion of foreign trade following the 1997 crisis has been swift. Having had fallen more than 30 percent in terms of value, both exports and imports of goods and services exceeded their earlier 1996 peak levels in 1999, with the values of both exports and imports well above the levels reached in the pre-crisis year. In the 1999-2003 period, Albania had the highest average annual growth rate of exports of goods and services among SEE-8 countries followed by Serbia and Montenegro with 18 percent (Table 5 above). While Albania has been catching up with other SEE-8 economies, it still has a long way to go. Its exports of goods and services in terms of the GDP (18 percent in 2003) are the lowest in the region. Simultaneously, it has also the highest share of services in total exports, even higher than that in Croatia’s revenues, which is famous as a tourist attraction. But even excluding exports of goods, Albania’s exports of services in percent of GDP (10.4 percent) are much lower than in Croatia (24 percent), Bulgaria (16 percent) and Moldova (13 percent) and only slightly higher than in Romania (10.1 percent). Tourism is by far the largest items in Albania’s exports of services, although its significance has been on the decline since 2000. Its share in total receipts for commercial services (excluding payments for government services) rose from 70 percent in 1999 to 78 percent in 2000 and then 17
Private transfers from more than half a million Albanians working abroad totaled $US 4 billion over 19942002 overshadowing—with the exception of exports of goods and services (US$ 4.3 billion)—all other items in Albania’s balance-of-payments. 18
Including net worker remittances in exports of goods and services transforms trade deficits into surpluses in 2000-02. In 2002 the value of exports of goods and services and net labor remittances of US$ 1.5 billion exceeded imports of goods and services by US$ 478 million, or 45 percent.
18
fell to 77 percent in 2001, 76 percent in 2002 and 74 percent in 2003. The second largest item is “compensation of employees.” This balance of payments category is a proxy for presence of natural persons in Albania, as defined in the WTO General Agreements on Trade in Services (GATS). The revenue of US$ 105 million from this source amounted to 15 percent of total receipts from sales of commercial services in 2003 up from 13 percent in 1999. It thus appears that aid, remittances and more recently FDI inflows, as will be shown below, have largely shaped the dynamism of its external sector. They have all fueled expansion in the domestic demand and appear to have weakened incentives to develop exports of goods and services. With the prospect of falling inflows of both bilateral and multilateral assistance, Albania will have to increase export earnings in order to pay for imports. This points to the importance of attracting FDI, which both finance current account deficits and create capacities indispensable for export expansion. The experience of more advanced transition economies shows that foreign owned firms contribute to technology and knowledge spillovers and export growth.
5.2. Capital linkages: foreign direct investment in comparative perspective Notwithstanding the importance of remittances, foreign direct investments are crucial to increase competitiveness of Albanian products in international markets, sustain strong economic growth performance and increase competitive pressure in local markets. While domestic ‘start-ups’ contribute directly to the increased competition, mainly due to their intricate knowledge of local conditions, the impact of FDI is multifaceted. It may bring stronger competitive pressures, but there are other more prevalent benefits FDIs bring higher technology, knowledge and management as well as contacts with foreign customers. They allow domestic economies to take advantage of their endowments in skilled labor force, which Albania appears to have. Albanian legislation, with its Law on Foreign Investment, is open in terms of the right of establishment. It observes the principle of national treatment, i.e., foreign firm are subject to basically the same procedures to as domestic firms. Furthermore, there are no restrictions on entry into so-called sensitive sectors, such as transport and finance. But, as the SAP 2004 report notes, the weaknesses in implementation of this liberal approach adversely affect potential investment inflows (EU 2004a, p, 22). As the international experience shows, as long as personal contacts overshadow legal rules and procedures, investors, conscious of their reputation, tend to shun from investing. How has Albania performed in terms of attracting FDI inflows? What impact have foreign owned firms had on Albania’s foreign trade? What can be done to increase these inflows? These are three major questions addressed in this Section. Considering Albania’s level of economic development, the absence of attractive assets for privatization and two upheavals contributing to prolonged perception of Albania among international investors as an unstable country in a highly volatile region, Albania has not fared poorly in attracting FDI inflows. FDI inflows do not strike one as particularly low, although only in the context of SEE-6 economies excluding Croatia (Table 6). The total value of FDI over 1990-03 of US$ 352 per capita is higher than in other SEE-5 countries except FYR Macedonia, but significantly lower than in Bulgaria (US$ 652) and Croatia (US$ 2,057).
19
The differences in FDI per capita are a reflection of the variation in the level of GDP per capita. Flat economic growth explains large FDI flows to Moldova relative to its Gross National Income (GNI). With the total inflows over 1993-04 amounting to 35 percent of the 2001 GNI, Albania is on a par with Bosnia and Herzegovina and above Macedonia and Serbia and Montenegro. T ABLE 6: FDI INFLOWS TO A LBANIA IN REGIONAL CONTEXT . T OTAL AND TOTAL PER CAPITA OVER 1990-023, AVERAGE ANNUAL PER CAPITA IN 1993-96, 1997-2000 AND ANNUAL PER CAPITA IN 2000-03 ( IN US DOLLARS ) .
Average per capita FDI inflows per capita 1993-96
Albania
1997-00
2000
.
Total FDI 1990-04
Total Total 19931990-04 04 in percent
2001 2002 2004 Per capita (in mln. of of 2001 GNI US$)
22
23
76
68
44
137
482
1,494
35.2
0
26
88
30
68
157
456
1,770
35.1
47
223
334
301
273
280
2,417
10,803
55.9
Macedonia, FYR
1
44
96
219
39
77
564
1,136
33.4
Moldova
4
19
20
12
31
19
168
719
45.6
Serbia and Montenegro
5
24
81
20
17
119
436
3,822
33.1
Bulgaria
12
85
119
108
77
65
1,135
9,027
67.9
Romania
12
59
46
50
53
48
726
16,026
40.2
Bosnia and Herzegovina Croatia
Memorandum:
Source: UN ECE Annual Survey, various issues, United Nations, New York and Geneva: IMF Balance of Payments statistics and WIIW 2004.
Relatively good performance of Albania vis-à-vis former Yugoslav republics cannot be attributable solely to the prolonged period of wars and instabilities that had kept the region close to FDI through a good portion of the 1990s. For starters, note that Albania fared quite well in the post-Kosovo war environment in 2000-04. Except for FYR Macedonia, FDI inflows per capita to other SEE-5 were roughly at similar levels (see Table 6 above). Second, instabilities did not spare Albania. Social upheaval triggered by the collapse of the pyramid scheme in 1997 has negatively impacted Albania’s FDI performance. The price paid in terms of lost FDI inflows was significant demonstrating vulnerability of FDI inflows to political stability. The value of FDI fell almost 50 percent from US$ 90 million in 1996 to US$ 48 million in 1997 (Table 7). It fell further to US$ 45 million and US$ 41 million in 1999. Taking the 1996 level as a benchmark, i.e., assuming that the FDI would be in 1998-99 at the 1996 level, the total loss was US$ 136 million over three years or almost 14 percent of total inflows over 1993-03. T ABLE 7: ANNUAL FDI INFLOWS IN MILLION OF US DOLLARS AND IN PERCENT OF THE GDP IN 1993-02 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Net inflows ($ million)
58
53
70
90
48
45
41
143
207
135
178
426
as percent of GDP
4.7
2.7
2.9
3.0
2.2
1.6
1.2
3.9
5.0
3.0
3.1
5.6
Source: World Bank World Development Indicators (through SIMA) and IMF (2004).
20
WTO membership, preferential trading privileges granted by the EU combined with the progress in political stabilization in Albania as well as in the region following the Kosovo war all appear to have contributed to a more attractive investment environment. In 2000 the value of FDI inflows surged to US$ 143 million, exceeding by 40 percent the peak level reached before the 1997 crisis, and the upward trend has continued into 2001-02, but with a contraction in 2003. The IMF, however, projects FDI inflows over 2004-12 at levels above US$ 200 million per year (IMF 2004, Table 3).
5.3. Goods exports performance in regional perspective Following the implementation of stabilization cum transformation program in 1992, an impressive foreign trade performance has been mainly due to the explosion in foreign trade with the EU during four years following the implementation of radical first generation reforms. Yet, its export performance, although displaying significant variation, has been much better than that of most transition economies in 1998-2002. F IGURE 1: T IME PROFILES OF ANNUAL GROWTH RATES OF A LBANIA (1993-98) AND ESTONIA (1994-99) IN TERMS OF THEIR RESPECTIVE SHARES IN EU TOTAL IMPORTS ( IN PERCENT )
160 140
120 100 80 60
40 20 0 t='1
t='2
t='3
t='4
t='5
t='6
-20
Estonia
Albania
Source: Derived from data reported by the EU to UN COMTRADE database.
Albania’s overall export time profile is quite distinct from that of other SEE-6 economies. It is strongly reminiscent of some Central European reformers, especially Estonia during the initial stages of transition, but only in terms of their exports to the EU. This may be surprising, but it can be easily explained. There are two reasons to expect similarities. First and foremost, their trade with the EU was much more suppressed under central planning than that of other Central European economies. Second, they all adopted similar big-bang approach to stabilization cum transformation. Liberalization of foreign trade and the introduction of convertibility of domestic currencies had a powerful impact on exports. In the case of Baltic states and Albania, former under-trading has magnified this effect, as Figure 1 above illustrates it. It plots annual rates of growth of EU-oriented exports, as reported by the EU. The time scale is moved back by a year for Albania, with t=1 being 1993 for Albania and 1994 for Estonia and SEE-5. As can be seen during the first four years into transition, Albania had the same growth profile as Estonia.
21
Albania had the strongest export performance in EU markets among all former centrally planned economies matched only by Estonia during the first four years into transition. The average rate of growth in 1993-96 was 65 percent for Albanian exports, 63 percent for Estonia in 1994-97, 21 percent for SEE-5 and 13 percent for Latvia. Instabilities in the region and the EU’s embargo on trade with the then Federal Republic of Yugoslavia suppressed export growth performance of SEE-5 economies in the 1990s. The war in Kosovo was responsible for the contraction of SEE-5 exports in 1999—their value fell 11 percent. During the most recent stages of transition in 2000-03 Albania ceased to be a blockbuster performer, but its export growth has not been lackluster either. Although the average of 11.2 percent over this period puts Albania below Estonia (18.4%) and even the average for CEEC-10 of 11.4%, but it is well above the average for SEE-5 economies of 8.8 percent. In this context, Albania performance looks quite impressive, although it was below the growth of Bosnia and Herzegovina and Serbia and Montenegro. Table 8 presents the share of Albania and other SEE-5 countries in EU imports over 19932004, annual changes in this share, and values of EU imports from Albania. The share in EU imports is neutral to exchange rate fluctuations. Since EU accounts for around 90 percent of Albania’s exports, they provide an almost all-inclusive picture of Albania total exports. T ABLE 8: P ERFORMANCE OF SEE-5 ECONOMIES IN EU MARKETS IN 1993, 1997-2004 ( IN PERCENT AND MILLION OF US DOLLARS ) Share in EU15 external imports
Index 2004
Country
1993 1997 1998 1999 2000 2001 2002 2003 2004 1998=100
Albania
0.017 0.028 0.030 0.029 0.028 0.035 0.035 0.037 0.035
117
Bosnia & Herzegovina
0.007 0.024 0.034 0.044 0.049 0.057 0.060 0.070 0.067
199
Croatia
0.369 0.256 0.251 0.228 0.197 0.214 0.214 0.243 0.238
95
Macedonia, FYR
0.113 0.070 0.083 0.074 0.072 0.061 0.055 0.064 0.066
79
Moldova
0.006 0.015 0.016 0.017 0.018 0.022 0.027 0.028 0.030
186
Serbia & Montenegro
0.002 0.147 0.144 0.070 0.076 0.101 0.125 0.126 0.124
86
SEE-6: Total
0.514 0.540 0.559 0.462 0.441 0.490 0.517 0.567 0.560
100
Albania's share in SEE-6 total
3.3
5.2
5.4
6.2
6.2
7.1
6.8
6.5
6.3
117
336
427
Memo: Albania's trade with EU15 (in $ million Exports
97
222
248
246
266
331
502
202
Imports
481
593
617
724
737
969 1,027 1,216 1,434
232
Source: Derived from the UN COMTRADE database.
Albania has fared well in comparison to its Stability and Association partners, i.e., SEE-6 economies in EU markets. Not surprisingly given instabilities in the region, Albania has outperformed other partners over 1993-96, with its share in total SEE-5 EU oriented exports increasing from 4 percent in 1993 to 7 percent in 1996. The increase has been due to a combination of Albanian impressive performance and a very weak export growth, especially of Croatia and BiH. In 1998-2002, Albania has succeeded in maintaining its share. Except for Albania
22
and Bosnia and Herzegovina, other SEE-6 countries has had so far weaker export performance in EU markets than in the 1990s. Macedonia’s share in EU imports peaked in 1995, Serbia’s and Montenegro’s in 1997, and Croatia’s in 1993. It appears that the end of embargo and extension of ATMs to Serbia and Montenegro and prospects of deeper, policy-induced integration into the EU have so far failed to provide boost to exports. The decade of instabilities and slow progress in second generation reforms in the region appears to have taken toll on supply capacities of former Yugoslav republics. It seems that there is no much potential left to tap in most of SEE-6 countries at least in the short run. Despite Albania’s overall impressive foreign trade performance since the collapse of central planning, exports on a per capita basis remain relatively low and they have not been as important lever of GDP growth as in many other transition economies. The value of Albania’s total exports on a per capita basis in 2003 stood at 43 percent of that of Bosnia and Herzegovina (US$ 137 vs. US$ 318), which had the second lowest value among SEE-5 economies. The value of total exports and services tripled from US$ 94 in 1998 to US$ 283 in 2002, mainly as a result of a dramatic increase in exports of services—their value rose from US$ 87 million in 1998 to US$ 269 million in 1999 and US$ 688 million in 2002.19 Last but not least, Albania, which remains one of the least developed European economies, seems to be an exception to fast growers in one important respect. For the reasons discussed earlier, a very solid economic growth performance after a short-lived, albeit deep, transformational recession in the early 1990s, and social upheaval triggered by the 1997 pyramid scheme has not been export-led, as GDP tended to grow slightly faster. Despite strong expansion in exports over 1993-96, the growth in GDP was slightly faster and the relative significance of exports declined from 16 of the GDP in 1993 to 13 percent in 1996 and 9 percent in 1997. In 19992001 growth was export-led with the share reaching 20 percent of the GDP in 2001 and then slightly contracting to 19 percent in 2002 and further down to 18 percent in 2003. Total trade in goods and services as percent of the GDP also significantly increased from 41 percent in 1998 to 64 percent in 2001-02 but fell in 2003 to 60 percent.
5.4. Direction of trade in goods: marginalization of SEE-8 markets Albania is unique among SEE-8 economies in the extent to which its trade is geographically concentrated on the EU. The share of the EU in total trade turnover of Albania is by far the largest among SEE-8 economies, including those that are already on the accession path—Bulgaria and Romania (Table 9). But its ‘edge’ over other countries has been falling, as the importance of the EU in their trade has increased and contracted in Albania’s trade.
19
The increase in 1999 was mainly due to the change in collecting data on trade in services. But it does not change the overall picture. Between 1999 and 2002 the value of these exports more than doubled.
23
T ABLE 9: T HE EU IN TOTAL TRADE OF SEE-8 COUNTRIES IN 1996-2003 (IN PERCENT ) 1996 1997 1998 1999 2000 2001 Albania 78 84 84 81 78 77 Bosnia & Herzegovina 60 59 63 69 72 72 Croatia 56 57 55 54 55 56 Macedonia, FYR 40 37 39 43 40 45 Moldova 14 18 22 24 26 25 Serbia & Montenegro 39 39 41 40 40 42 Memorandum: Bulgaria 37 40 47 50 47 52 Romania 54 54 61 63 60 62 Source: Derived from data in the UN COMTRADE database.
2002 75 71 55 47 25 42
2003 73 70 56 48 27 na
2004 70 68 53 45 26 41
53 62
52 62
51 60
The EU took every year more than 90 percent of Albania’s total exports in 1998-2003, but supplied on average ‘only’ three-fourths of Albanian total imports. In contrast to exports, the share of the EU in Albania’s imports has been on the decline since 1997. It fell from 83 percent to 68 percent in 2003 (Table 9). Trade with two EU member countries, neighboring Greece and geographically very close Italy, has been the main lever of Albanian-EU commerce. These two countries together accounted for 87 percent of Albania’s total exports and 54 percent of Albania’s total imports in 2003. The share of these two countries has declined in Albania’s imports from the peak of 72 percent in 1997, but not in exports where it has been growing and reached 93.3 percent in 2003. T ABLE 10: GEOGRAPHIC PATTERN OF A LBANIA ’S EXPORTS AND IMPORTS IN 1996-2002 (IN PERCENT ) Exports
1996
1997 1998 1999
2000
2001 2002
2003 2004
European Union (15)
86.0
87.4
92.5
94.9
92.9
91.0 92.3
93.3
89.9
Of which: Greece
13.0
20.5
19.8
13.5
12.7
12.7 13.3
12.8
12.0
57.8
49.4
60.0
69.5
70.6
71.0 71.4
74.9
73.1
14.0
12.6
7.5
5.1
7.1
9.0
7.7
6.7
10.1
5.3
7.3
2.6
2.3
4.2
5.3
3.9
3.2
2.0
Share of SEE-8 in ROW exports
37.8
58.0
34.2
45.3
59.2
58.5 50.9
47.3
20.3
Total (in million of US $)
211
138
208
351
261
305
313
447
596
European Union (15)
76.0
83.3
81.6
76.6
74.4
74.3 71.2
67.9
65.1
Of which: Greece
20.3
26.0
27.5
23.2
26.4
25.8 21.7
20.0
18.5
40.3
45.8
43.2
33.5
35.2
31.9 34.5
33.5
32.6
Rest-of-World
24.0
16.7
18.4
23.4
25.6
25.7 28.8
32.1
34.9
Of which: SEE-8
10.4
5.6
5.2
5.8
7.1
7.2
5.5
5.5
Share of SEE-8 in ROW imports
43.3
33.9
28.2
24.7
27.6
22.7 24.9
17.1
15.8
Total (in million of US $)
938
629
841 1,154 1,089 1,331 1,504 1,864 2,268
Italy Rest-of-World Of which: SEE-8
Imports
Italy
Source: Based on Albania's data from UN COMTRADE Statistics.
5.8
24
Albania’s trade is also geographically concentrated in its ROW dimension, with the export side displaying different features and trading partners than the import side. Serbia and Montenegro together with Macedonia have been the major ROW markets for Albanian products. They jointly took 45 percent of Albania’s ROW-oriented exports in 2003, down from the peak of 58 percent in 2001. The share of top three ROW in Albania’s ROW-destined exports fell from 74 percent in 2001 to 58 percent in 2003 indicating falling geographic concentration of ROW exports.20 On the import side, among top ten ROW suppliers there have been only five countries that were among top ten Albania’s export markets. Turkey has been the major ROW supplier to Albania. Its share in Albania’s imports from ROW has stayed within the range between 18 percent and 26 percent. It was 20 percent in 2003. Over 1996-2000 Bulgaria was the second most important supplier of Albania, with China taking over this position in 2001-03. Albania’s imports have been less geographically concentrated than exports, with the top three ROW suppliers accounting for between for between 37 percent and 44 percent of Albania’s imports from ROW over 1996-2003. This share fell from 44 percent in 1999 to 40 percent in 2003. Two factors have been responsible for extremely high dependence of Albania on trade with the EU. First and most importantly, geography matters. The most developed Balkan economy, Greece, borders Albania, while Italy is within an easy reach across the sea. Both countries’ GDP is several times higher than that of Albania or of any of its other neighbors. Albania with its abundant supply of cheap labor complements their factor endowments. Both countries have also strong political interest in Albania’s stability and ultimately prosperity. Furthermore, a large immigrant population of around half million in Greece and Italy has probably contributed not only to extensive trade links but also to stronger involvement of these countries in aid to Albania. Second, one might also point to the combination of worse conditions in access to SEE markets than to EU markets thanks to Albania’s preferential status there and underdeveloped transportation links with SEE economies. Both might have contributed to depress trade with SEE6 economies. Ultimately, however, much more important is slow economic growth and therefore low import demand as well as limited export offer of traditionally most important regional trading partners of Albania—FYR Macedonia and Serbia and Montenegro. Their exports to Albania have been negligible. Although they have together been the second most important markets for Albanian products after the EU over the last decade, their share in Albanian exports has been on the decline since 2001. It fell from 5.2 percent in 2001 to 3.8 percent in 2002 and 3 percent in 2003. Despite this fall, Serbia and Montenegro remained the second largest importer of Albanian products and Macedonia was the third largest destination in 2003. Overall, developments in trade with SEE-8 have not been very encouraging, especially on the export side (see Figure 2). The stability in the Balkans following the end of war in Kosovo 20
In the 1996-2003 period Turkey was among top three in 1996 and 2002-03, Slovenia in 1997-98, the US in 1997-98 and 2000, Switzerland in 1999 and 2001.
25
contributed to an increase in Albanian exports to the region in 2000-01, but Albanian exports to the region in terms of value have yet to reach their peak level in1997. They fell 20 percent in 2002 from US$ 6.7 million to US$ 5.4 million and further 33 percent in 2003 to US$ 3.6 million. This was almost exclusively because of the fall in exports to Serbia and Montenegro, which had been the major driver of the recovery in Albania’s SEE-8 exports in 2000-01. Serbia and Montenegro accounted for over 52 percent of Albanian SEE-8 destined exports in 2003 down from 64 percent in 2000. In consequence, the share of SEE-8 in Albanian exports has been falling since 2001.
8.0
140
7.0
120
(in percent)
6.0
100
5.0
80
4.0 60
3.0
40
2.0
20
1.0 0.0
(in million of US dollars)
F IGURE 2: E XPORTS AND IMPORTS FROM SEE-8: VALUES AND SHARES IN TOTAL IN 1997-2004 (IN PERCENT AND US DOLLARS )
0 1997
1998
1999
2000
2001
2002
2003
2004
Share of SEE-8 in exports
Share of SEE-8 in imports
Exports to SEE-8
Imports from SEE-8
Source: As in Table 8.
So has been their share in Albanian imports since 1997, although it has displayed significant volatility. Their aggregate share in Albania’s imports fell from 10 percent in 1996 to 5 percent in 2003. After a dramatic contraction in 1997-98, the value of imports doubled in 1999, remained flat in 2000-01, jumped 33 percent in 2002 and contracted 4 percent in 2003. Major SEE suppliers have been Bulgaria, Croatia and Romania. Bulgaria emerged in 2003 as the largest exporter among SEE-8, with the value of sales of US$ 41 million. These three countries accounted in 2002-03 for almost three-fourths of SEE-8 exports to Albania. Will the network of free trade agreements signed by Albania with each SEE-8 country boost trade? Without a detailed analysis matching preferential margins, i.e., the differences between applied MFN rates and preferential rates on potentially traded goods, it is not possible to give a precise answer. In general terms, one should not expect sudden surge in Albania’s regional trade. For a starter, MFN applied tariff rates in SEE-8 economies have been relatively low (see Table 4). Second, having had examined the historical and current trade flows, gravity estimates, the composition of this trade, and comparative assessment of trade flows among founding members of CEFTA and former Soviet republics, Kaminski and Rocha (2003) arrive at the
26
conclusion that the limited potential the expansion of intra-SEE-5 trade within the existing productive structures is rather limited. While deficiencies in infrastructure constitute a barrier to Albania’s SEE-8 exports, this is not the main reason for poor export performance in these markets. Consider that Albania’s imports from SEE are almost twenty times higher than exports. It would seem that what can be brought to Albania can be also taken out. In other words, had transportation been a barrier, it would have also suppressed imports to the levels of exports. But this clearly has not been the case. To the contrary, transportation costs would be even lower than on imports. With such a high proportion of trucks returning empty to SEE exporters to Albania, Albanian exporters could have negotiated attractive freight rates. One may thus conclude that the supply side in Albania remains the main obstacle to exports. As long as the supply side is not addressed by government policies stimulating savings and investments, there is little potential for the growth in exports to SEE economies. While the desirability of increased investment can hardly be challenged, strong domestic demand and better prices offered by EU buyers might have contributed to it.
5.5. Factor content of trade and composition of exports SEE-8 economies are not a homogenous group. They are highly diversified in terms of the attained level of economic development and the size of population. There are also some differences in climate, not to mention access to the sea, although they all share relatively moderate climate. Another ingredient that they share is that each of them has a large pool of low-cost labor, albeit relatively educated. As mentioned earlier in Section 2, however, the level of education is lower in Albania than in other SEE-8, with the possible exception of Moldova. Another distinct feature of Albania is a large share of agricultural employment and a limited industrial base. Albania together with Croatia also has moderate climate favoring Mediterranean-style agriculture dominated by vineyards, oil groves, and cultivation of fruits. Factor intensities of SEE-8 trade Differences in endowments among SEE-8 notwithstanding, one would expect that (a) natural resource intensive and unskilled labor intensive products would tower above skilled labor and capital intensive products, and (b) that in exports of more developed SEE-8 economies (Croatia, Serbia and Montenegro as well as Bulgaria and Romania) skilled labor and capital intensive products would account for a larger share. One would also expect that, with industrialization and restructuring, this aggregate share of skilled labor intensive and capital intensive products would grow. Last but not least, SEE-8 economies should import relatively more skilled labor and capital intensive products. In other words, one would expect them run lower deficits (or surpluses) in trade in unskilled labor intensive products and possibly in natural resource intensive products as well. The variation in composition of exports of SEE-8 countries is in line with these expectations (Table 11). First, their exports tend to be concentrated in natural resource intensive products, with their shares in 2003 ranging from 29 percent (Croatia) to 69 percent (Moldova). Furthermore, export baskets are also heavily tilted towards unskilled labor intensive products, with one notable exception—namely that of Serbia and Montenegro.
27
T ABLE 11: FACTOR INTENSITY OF TRADE OF SEE-8 ECONOMIES IN 1996 AND 2004 (IN MILLION OF US DOLLARS AND PERCENT ) Total
Natural
Exports
Resource
US$ mln.
Unskilled Capital Skilled Labor
Labor
Skilled labor and capital
Total
Natural
exports Resource
(in percent)
Unskilled Capital Skilled Labor
Labor
Skilled labor and capital
Index, 2003 1996=100
Albania
596
45.3
42.0
4.2
8.5
12.7
282
74
130
126
294
204
Croatia
8,023
33.3
29.9
25.9
10.9
36.8
178
101
86
106
137
114
Macedonia
1,673
34.0
36.5
7.1
22.5
29.5
146
78
106
69
195
135
Moldova
986
65.7
22.9
5.9
5.6
11.4
151
81
259
90
143
110
S & M /a
3,801
41.4
11.4
20.3
26.8
47.2
206
75
97
116
173
142
Bulgaria
9,930
37.6
28.8
17.6
16.0
33.6
203
90
180
66
102
80
Romania
23,485
22.5
35.9
21.8
19.8
41.6
290
80
99
117
116
116
Memorandum:
Exports in percent of imports in 2003
Change: Index 2003, 1996=100
Albania
26.3
111.2
270.9
19.1
39.4
29.1
117
93
111
124
187
166
Croatia
48.4
118.9
213.0
87.1
38.8
63.5
84
115
93
107
113
104
Macedonia
57.6
88.5
393.9
31.7
74.9
56.5
82
74
218
71
140
115
Moldova
55.6
148.8
156.0
26.7
29.0
27.8
91
100
141
96
108
101
S & M /a
33.4
126.3
126.4
62.1 105.4
81.1
74
97
123
96
130
113
Bulgaria
68.6
157.2
167.1
57.4
56.7
57.1
71
202
98
50
49
50
Romania
71.9
79.6
210.4
69.0
85.7
76.1
102
112
86
116
72
97
Memorandum:
Notes: /a Due to the missing data, Bosnia & Herzegovina is excluded. 2002 data are used for Serbia and Montenegro. Source: Computations based on UN COMTRADE Statistics.
Second, factor intensities of respective export baskets largely reflect the attained level of economic development. The aggregate share of skilled labor and capital intensive products is the highest for the most developed Croatia. At the other extreme, Moldova, the poorest country in Europe in terms of GDP per capita, has the lowest share of these products in its exports. Albania, with its exports almost evenly split between natural resource and unskilled labor intensive products. The only deviation from the pattern appears to be Serbia and Montenegro, with a share very close to that of Croatian and Romanian exports. This, combined with a very low share of unskilled labor intensive products in its exports, may point to weaknesses in Serbian/Montenegrin economic regime preventing allocation of resources to sectors with potential comparative advantage. Third, in line with expectations, SEE-8 economies export more natural resource and unskilled labor intensive products in relation to their respective imports. Except for Albania and Macedonia, the coverage of imports by exports is the highest for natural resource intensive products. Albania’s exports of unskilled labor intensive products cover 60 percent of their imports,
28
well above the ratio of 24 percent for total imports, and Macedonia’s exports of these products are almost four times higher (379 percent) than their imports. All SEE-8 economies run deficits in skilled labor and capital intensive products as measured by export coverage of imports much higher than for total trade in goods. Again deficits are relatively the highest for the lowest developed countries—Albania and Moldova. But this is a snapshot—description that does not take into account dynamics. In fact, a more interesting question concerns the evolution in factor intensities of exports. Has there been any movement towards closing the gaps between endowments and exports? Has there been a shift towards skilled labor or capital intensive lines of production? The answers to these questions should shed light on the extent of restructuring that has, or has not, taken place, as revealed in country’s exports. Data tabulated in Table 11 above compare the 2003 composition with that in 1996 offering a relatively long-term perspective. The picture that emerges from this comparison could be summarized as follows: First, Albania stands out tall among SEE-8 countries in terms of both dynamics and the depth of structural transformation in factors intensity of export basket. Albania and Romania outperformed other SEE-8 economies in terms of export growth. They succeeded in more than doubling the value of their respective exports. No other SEE-8 country came even close to that, with Bulgaria, the third best performer, achieving an increase of 54 percent. Croatia was the best performer among former SEE-Yugoslav republics with a 36 percent increase. Second, exports of SEE-8 countries have become more labor intensive and less capital intensive, albeit there were some exceptions. Except for Croatia, there was a significant shift towards unskilled labor intensive products mostly at the expense of natural resource and capital intensive products. The share of unskilled labor intensive products in total exports significantly increased in 1996-2003. The share of natural resource intensive products fell in SEE-8 exports, except in Romania’s for which it remained the same as in 1996. The only two SEE-8 economies, whose exports of capital intensive products increased more than total exports were Albania and Croatia. Simultaneously, all SEE-6 countries recorded a very significant increase in exports of skilled labor intensive products. Albania experienced the largest shift, although from a very low base. Interestingly, these products lagged behind others in exports of Bulgaria and Romania. The ‘low base argument’ notwithstanding Albania has clearly experienced the biggest change in its export basket in line with its endowments in factors of production. Labor intensive products experienced the fastest growth. The value of exports of these products increased from US$ 76 million in 1996 to US$ 124 million in 2000 and US$ 214 million in 2003. Within labor intensive products, there was a shift towards skilled labor intensive products. Their exports increased more than of those of unskilled labor intensive products. The value of skilled labor intensive products increased from US 8 million in 1996 to US$ 33 million in 2003. Composition of exports Data tabulated in Table 12 provide insights into which products have shaped change in factor intensities of exports of SEE-countries. Except for Croatia’s exports, manufactures were one of the main drivers. Their share in total exports increased, with Moldova experiencing the strongest increase followed by Albania. But while Moldova’s total exports were rather stagnant, those of
29
Albania increased rather dramatically indicating dynamic realignment responsible for the above noted shift in factor content of exports. T ABLE 12: C OMPOSITION OF SEE-8 EXPORTS IN 1996 AND 2003 (IN PERCENT AND MILLION OF US DOLLARS ) Year
Country
Exports Foods Agric. Raw Ores & Fuels Manu- Chemi- Leather Textiles MachiMotor in US$ & feeds Mtls. Metals factur cals & & nery vehicles & mln. es rubber Clothing parts share in percent
1996 Albania
211
11.1
9.0
11.6
3.0
65.3
1.4
20.2
25.1
1.7
0.0
Croatia
4,512
11.4
4.7
2.2
9.2
72.4
13.9
2.3
16.5
20.0
1.4
Macedonia
1,147
21.2
3.5
9.5
0.9
64.8
5.8
0.7
29.8
5.9
1.8
Moldova
653
77.5
1.6
0.7
0.0
20.3
1.3
0.8
5.4
6.4
0.5
S and M
1,842
28.2
4.0
14.8
2.2
48.9
8.8
3.8
5.9
10.3
1.7
Bulgaria
4,890
18.1
2.9
9.7
6.5
60.2
18.3
1.8
10.0
11.7
0.8
Romania
8,084
8.5
3.4
3.2
7.4
76.7
9.8
3.6
21.8
11.6
2.1
2003 Albania
447
5.6
5.1
4.1
1.0
84.1
0.6
27.5
34.8
3.3
0.3
Croatia
6,164
12.2
4.2
2.3
9.6
71.4
9.3
1.6
11.5
27.6
1.6
Macedonia
1,363
16.8
1.2
4.7
5.4
71.7
4.9
1.1
33.2
4.5
1.4
Moldova
776
59.2
5.0
2.8
0.6
32.2
1.2
1.0
16.3
4.4
0.1
S and M
2,275
23.1
4.0
12.1
3.4
55.0
7.0
5.7
8.8
9.5
1.6
Bulgaria
7,540
10.2
2.2
10.3
5.8
65.9
7.4
1.9
23.5
12.5
0.6
Romania
17,618
3.2
3.1
4.3
6.5
82.3
4.7
4.8
25.7
18.8
2.7
Notes: The product groups are classified by SITC product in Revision 2 as Food & Feeds (0+1+22+4); Agricultural Raw Materials (2-22-27-28); Minerals Fuels (3); Ores & Metals (27+28+68); All Manufactures (5+6+7+8-68); Chemicals (5); Wood & Papers (63+64); Leather & Rubber (61+62); Textiles & Clothing (26+65+84); Machinery, excluding automobiles (7-78); Motor Vehicles & Parts (78); and Miscellaneous Manufactures (8-84). Due to the missing data, Bosnia & Herzegovina is excluded, for Serbia & Montenegro only 2002 data are available.
Another feature shared by CEE-8 economies (excluding Croatia) is that textiles and clothing and to a much lesser extent leather and rubber have been behind faster growth of manufactures than of total exports. Textiles and clothing have been mainly responsible for the increase of the share of unskilled labor intensive products in their exports. Indeed, Moldova’s shift towards unskilled labor intensive manufactures can be almost fully explained by clothing, with their share in manufactured exports raising from 27 percent in 1996 to 51 percent in 2003. Except for a slight increase in leather and rubber, the shares of other manufactured products in Moldova’s total exports contracted. In contrast, Albania’s performance was more dynamic and, in some respects, more diversified in spite of higher product concentration. Footwear parts (leather and rubber in Table 12) and textiles and clothing drove its export performance, with their aggregate share in manufactured exports increasing from 69 percent in 1996 to 74 percent in 2003. Both product groups recorded similar increase in the value of exports over 1996-2003. But expansion was not limited to these two manufactured-product groups. Albania was among few countries—Bulgaria,
30
Croatia and Romania—that experienced strong increase in exports of machinery, with their share doubling in 1996-2003. Admittedly the share at 3.5 percent still remains the lowest among SEE-8 economies, but the gap between Albania and other SEE-8 economies has narrowed. Furthermore, only Albania, Croatia and Romania have succeeded in increasing the share of motor vehicle parts in their respective total exports. Again the amounts involved are tiny, as the value of these exports was US$ 1.2 million in 2003, up from US$ 70,000 in 1996. These are not huge numbers. But consider that Moldova’s exports fell from US$ 3.1 million in 1996 to US$ 1.2 million in 2003, while those of Macedonia remained unchanged at around US$ 20 million.
5.6. Participation in international production and distribution networks Fragmentation of production and creation of distribution and production networks, also referred to as global value chains spanning across continents have characterized international trade over the past decade. Technological progress and information revolution has made possible to divide the industry’s value chain into smaller functions that can be contracted out to independent suppliers. This fragmentation of production offers a unique opportunity for producers in small countries to move from servicing their limited local markets to supplying large multinational firms (MNCs) and indirectly their customers all over the world. 21 For a MNC, it offers a wider menu of choices in the strategies to expand their position in global markets, as they may become more competitive thanks to lower costs stemming from moving some production segments to the region. Following the approach taken by Kaminski and Ng (2001 and 2004), one may distinguish between three networks or global value chains—furniture, automotive and electronic or Information Technology networks of production and distribution. To be sure, this classification does not exhaust all possible venues of participation in global networks. Nor does it cover all usually identified global value chains. Among them the clothing network clearly stands out. But there are also chains in footwear, not to mention, in machinery with production of parts spread to firms operating in various countries. Except for the latter, they may be associated with a much lower level of economic development. Engagement in global networks in electronics or automotive industry usually comes at higher stages of development. The point of departure has been as a rule inward processing in relatively technologically simple and capital non-intensive activities such clothing often followed in transition economies by furniture. The TC at first involves cut-make-trim (CMT) tasks, possibly followed by a move to FOB, i.e., firm providing the fabric itself and charging for the final garment rather than earning only a processing fee. The ability to shift to FOB critically depends on the price and quality of domestically available fabrics. Their absence weakens competitiveness of domestic 21
An example of such labor sharing arrangement in Far East where capital intensive electronic components, for instance, micro-chips and transistors, are produced in Japan and are then sent to low wage countries such as Thailand, the Philippines or China for further assembly. The latter process may involve wiring the components into metal boards, or the final assembly of office equipment, computers, or electronic machines. These finished goods may then be re-exported to Japan or to third country markets. In 1996, the value of East Asian intra-trade in parts and components intended for further assembly totaled $165 billion (Ng and Yeats, 2002).
31
producers. As the experience from other countries indicates, foreign investments are crucial to overcome this barrier.22 They are also critical for more complex and technologically more sophisticated operation requiring more skilled labor input activities in global IT and automotive networks. Clothing and, to a lesser extent, footwear have been the quintessential engines of growth for many CEEC-10 during the initial stages of transition. They have accounted for a significant share of value added and manufacturing employment, with consequential implications for poverty reduction. With labor cost going up, many of outward processing operations in the clothing sector moved to other countries in Central and South East Europe through the 1990s. While exports of clothing dramatically expanded in the early 1990s in Central Europe, they became engines of export growth for many SEE-8 economies only in the second half of the 1990s and early 2000s. Their share in exports of manufactures peaked in 1997 for Croatia, 1998 for Albania and Serbia/Montenegro, 1999 for Romania, and only in 2002 for Macedonia, Moldova and Bulgaria (Table 13). Excluding Croatia, Serbia/Montenegro and Romania, clothing products account for over 40 percent of manufactured exports originating in other SEE-8 economies. Moldova and Bulgaria recorded the fastest growth over 1996-2003 among SEE-8 economies. While negative growth rates of exports from Croatia were probably caused by the loss of competitiveness due to growing wages, the reasons for steeper contraction in exports from Serbia/Montenegro are not clear. Considering the availability of cheap unskilled labor force, adverse business climate might have been responsible for it. T ABLE 13: S HARE OF CLOTHING IN EXPORTS OF MANUFACTURES (EXCLUDING CHEMICALS ) OF SEE-8 ECONOMIES IN PEAK YEAR AND 2003 AND AVERAGE ANNUAL GROWTH RATE IN 1996-2003 ( IN PERCENT ) Share in
Share in
Index, 2003
Average annual growth
Peak year
peak year
2003
peak=100
rate, 1996-2003
Albania
1998
48.5
41.1
85
17.2
Croatia
1997
25.8
15.5
60
-0.9
Macedonia, FYR
2002
46.4
44.9
97
7.3
Moldova
2002
52.4
49.1
94
27.3
Serbia & Montenegro
1998
18.7
14.5
78
-4.4
Bulgaria
2002
34.8
34.0
98
27.0
Romania
1999
32.8
29.8
91
18.5
Memorandum
Note: Clothing is defined as SITC 84 and manufacturing, excluding chemicals, defined as SITC. 6+7+8-68. Source: UN COMTRADE Database.
It thus appears that except for Serbia and Montenegro other SEE-8 economies have been quite successful in tapping opportunities offered by outward processing mostly by EU firms of garments. In all of them, exports of other manufactures have begun outpacing garments exports.
22
For instance, this shift was made possible for some firms in Vietnam solely thanks to Korean and Taiwanese investments. See Nadvi et al. 2004.
32
An interesting question to which we shall now turn concerns the extent to which firms from SEE-8 have become parts of more capital and skilled labor intensive activities associated with furniture, automotive and IT networks. The answer is negative for all but two SEE-8 economies— Croatia and Romania. While the share of network products and parts in manufactured exports, excluding chemicals, are well below levels of exports of, for instance, the Czech Republic and Hungary, respective shares in their exports of manufactures moved up. In Croatia’s exports the share rose from 9 percent in 1999 to 13 percent and Romania’s exports from 13 percent in 1999 to 15 percent in 2003. Considering, however, that the value of Romanian exports of these products almost tripled, whereas that of Croatian exports increased 84 percent, Romanian performance has been more impressive (Table 14). Similarly, although the share of network parts and products in Bulgarian manufactured exports fell over the 1999-2003 period, the value of these exports more than doubled. Hence, two candidates for EU accession in 2007—Bulgaria and Romania—have outperformed all other SEE-6 economies. But this has not been a very demanding competition, as exports of network products and parts from Albania, FYR Macedonia and Moldova contracted in terms of value between 1999 and 2003 and from Serbia/Montenegro only slightly increased (33 percent). T ABLE 14: NETWORK TRADE OF SEE-8 IN 1999 AND 2003 (IN MILLION OF US DOLLARS AND PERCENT ) Total network
Furniture
Exports (in millions of US dollars)
Share in manufactured exports
1999
1999
2003
2003
Automotive and IT networks Share of parts
Import intensity
Share in manufactured exports
1999 2003 1999 2003 1999
Share of parts
Import intensity
2003 1999 2003 1999 2003
Albania
10
8
1.8
1.5
74
56
194
69
2.8
1.6
16
62
240
736
Croatia
221
408
3.8
4.6
32
44
22
23
5.5
8.0
77
63
136
146
30
26
1.0
0.6
17
17
22
43
3.2
2.4
67
82
160
208
7
8
1.5
0.5
50
37
58
112
5.2
3.2
16
35
270
493
Serbia/ Montenegro
116
154
4.2
3.2
11
11
15
28
12.8
11.2
79
81
116
155
Bulgaria
132
276
2.4
3.0
20
22
18
11
4.9
3.9
61
48
197
226
Romania
741 1,987
6.9
5.8
10
16
3
5
5.7
9.7
81
59
149
90
Macedonia, FYR Moldova
Source: UN COMTRADE Database.
Yet, there are indications that SEE-6 firms that have survived act as suppliers of parts and are involved in assembly operations. Except for Moldova, parts accounted for the bulk of other SEE network exports. This points to the importance of a supply function. On the other hand, high import intensity of automotive and IT networks, measured as a ratio of imports of parts to exports of parts and products, significantly exceeds 100 percent. While this may point to a wide array of different activities such as, for instance, replacement of worn-out parts, this usually indicates assembly operations either for domestic or external markets. The pattern of engagement in furniture network is different than that in automotive and networks. Note that the share of parts in furniture network exports tends to be lower than in aggregate exports of automotive and IT networks. So is import intensity. Taken together they
33
point to the dominance of assembly operations using not only imported but also domestically produced inputs. In contrast to Bulgaria and Romania as well as to other Central European new EU members, the share of parts in SEE-6 furniture network exports was either stagnant or declined. The only exception was Croatia. The share of parts in furniture network exports that grew faster than total manufactured exports rose from 32 percent in 1999 to 44 percent in 2003. Including garments, network products and parts accounted for a large part of SEE-8 exports. Their share in manufactured exports, excluding chemicals, varied between 28 percent (FYR Macedonia and Serbia/Montenegro) and 53 percent (Moldova). Clothing dominate in total global chains exports of all SEE-8 economies. They accounted in 2003 for more than 90 percent of exports from Albania, FYR Macedonia and Moldova (Table 15). T ABLE 15: T HE VALUE OF CLOTHING AND OTHER NETWORK EXPORTS AND THEIR SHARE IN MANUFACTURED EXPORTS: THE SHARE OF CLOTHING IN CLOTHING / NETWORK EXPORT IN 2003 ( IN MILLION OF US DOLLARS AND PERCENT ) Share in manufactured exports, excluding chemicals
Share of clothing in Network/Clothing Exports (in networks’ exports million of US$
Albania
44
93
120
Croatia
28
55
907
Macedonia, FYR
48
94
422
Moldova
53
93
121
Serbia & Montenegro
29
50
308
Bulgaria
41
83
1,635
Romania
45
66
5,824
Memorandum:
Source: UN COMTRADE Database.
In all, Albania as well as other SEE-8 economies have yet to take advantage of opportunities offered by incorporation of local producers into production and marketing networks going beyond clothing. This brings not only new technologies and managerial know-how but also direct access to larger markets and thus benefits of economies of scale. It boosts exports without local firms having to incur marketing expenses and provides greater stability in earnings thanks to a global reach of a “parent” company. Fragmentation of production eliminates the need to gain competency in all stages and aspects of production and allows a small country to focus on a subset of activities. Simultaneously, production sharing can broaden the range of final products whose components are produced in the small country and thus protect the country from a demand shock to a particular good. Last but not least, it offers a unique opportunity to export, which usually requires special marketing skills, contacts and significant investments. Thanks to its proximity to the EU, Albania is well positioned to take advantage of these opportunities offered by contemporary global economy. But these do not come by default. They require availability of cheap backbone services, i.e., transport, telecommunication, customs, logistics providers, assuring smooth operation of linkages among stages of production process driven by ‘just-in-time’ arrangements. As the experience of developing and transition economies amply demonstrates, the quality of these services determines whether country’s firms will
34
participate in higher value-added and more knowledge intensive chains or simple ones requiring less skilled labor force. The simplest chains, relatively immune to the quality of overall business environment involve unskilled labor intensive operations such as inward processing of garments, footwear and furniture. Depending on the improvement in business climate and availability of disciplined high skilled labor, MNCs may show interest in moving fragments of production to a country in such areas as electronics or automotive.
5.7. Albania in footwear and clothing EU-based value chains In contrast to trade in other networks, both footwear and textiles/clothing have been bright spots in Albania’s external trade performance. These products, i.e., footwear and clothing have been almost exclusively produced for exports to the EU. Producers from both sectors are firmly anchored within corresponding value chains organized around EU, mostly Italian and Greek firms. Textiles and clothing together with footwear and leather products play a huge role in Albania’s EU-oriented exports accounting for almost three-thirds of Albania’s exports to the EU over the last seven years. Their aggregate value, including leather products, was US$ 208 million dollars in 2002 up from US$ 165 million in 1998. Their share peaked in 1999 at 68 percent and has been falling thereafter. It stood at 63 percent in 2002 (Table 16). T ABLE 16: TRADE IN TEXTILES / CLOTHING (TC) AND FOOTWEAR IN 1996-2003 (IN MILLIONS OF US DOLLARS AND PERCENT ) 1996 1997 1998 1999 2000 2001 2002
2003
Textiles and Clothing (SITC 65 and 84): Exports of Textiles & Clothing (million of US dollars)) Share of textiles in exports of textiles and clothing Imports of Textiles ($ '000) Share of textiles in imports of textiles and clothing Imports of textiles as % of exports of textiles and clothing Memo Items: Share of textiles & clothing in Albania's exports (%) Share of EU in total textiles & clothing exports (%) Share of Albania in EU external imports of textiles and clothing
75.2 3.8 42.8 52.6 56.9
68.7 3.1 25.3 47.1 36.9
86.8 3.2 35.5 43.0 40.9
87.4 1.3 38.4 41.9 44.0
94.1 1.3 35.0 38.3 37.2
120.4 0.7 48.3 42.6 40.1
91.9 0.6 53.0 40.3 57.7
127.3 0.7 72.1 39.1 56.7
29.9 97.2 0.12
30.6 97.7 0.10
35.0 98.5 0.12
35.5 99.0 0.13
35.2 98.5 0.13
36.4 98.9 0.17
27.3 98.8 0.13
30.4 98.9 0.13
76.8 90.0 50.3 65.5
57.9 87.7 13.1 22.6
71.6 93.8 35.9 50.2
71.5 89.8 31.4 44.0
69.5 89.0 26.6 38.2
88.7 86.7 35.0 39.4
103.7 86.0 33.7 32.5
138.8 78.4 61.2 44.1
30.6 99.9 0.95
25.8 96.8 0.66
28.9 94.6 0.83
29.1 94.4 0.79
26.0 98.9 0.73
26.8 99.4 0.86
30.8 99.1 0.94
33.2 99.5 0.96
Footwear and parts (SITC 85 and 6123) Total Exports of Footwear and Parts (million of US$) Share of parts in total footwear exports Imports of Footwear Parts ($ '000) Imports of parts as % of exports of footwear and parts Memo Items: Share of footwear & parts in total exports (%) Share of EU in Albania's exports of footwear and parts (%) Share of Albania in EU external imports of footwear and parts
Note: The classifications of products are based on SITC Revision 2 as: Textiles (65+8998), Clothing (84), Footwear (85) and Footwear Parts (6123). Source: Own calculations based on UN COMTRADE Statistics as reported by EU.
Except for the 1997 crisis, which dramatically affected production and exports, trade in both sectors has experienced steady growth, albeit Albanian suppliers have failed to significantly increase their shares in respective markets. On the one hand, this shows a considerable degree of stability of established commercial links between Albanian suppliers and EU firms. On the other hand, however, this also points to their inability to expand at rates exceeding the growth in EU
35
import demand. Albania’s share in EU external imports of textiles and clothing have remained unchanged, except in 2001, despite an almost 40 percent increase in the value of their clothing and textiles exports in 2003. Since this was mainly due to the appreciation of Euro against the US dollar, it has not brought about the increase in a market share. Similarly, Albanian firms exporting footwear and parts have also failed to expand significantly their presence in EU markets, although since 2000 there has been improvement. Their share in EU external imports in 2003 slightly exceeded the previous maximum level attained in 1996. Another interesting feature is that the data point, albeit with many caveats, to the emergence of backward linkages at least in the garment sector. 23 Note that imports of textiles as percent of exports of textiles and garments has been steadily declining since 1996. The index for textile/clothing declined from 53% in 1996 to 40% in 2002. This suggests that some inputs, e.g., accessories have become domestically manufactured. This may also point to the declining weight of simple CMT operations in the garment sector and the shift to FOB operations, although it would require examination of developments in this sector. Similar trend of relative decline in import content of footwear sector can be dissected, as the ratio of parts imports to exports of footwear and parts has rather dramatically declined. In 1996 these imports were in terms of value around 30 percent higher than the exports of footwear parts and shoes.
5.8. Role of foreign firms in Albania’s foreign trade FDI inflows had been critical to industrial restructuring and competitiveness in world markets in all transition economies. While the relationship between the stock of inward FDI and trade performance is often ambiguous, as there are other factors involved, the experience of CEEC-10 shows that foreign owned firms have been decisive in shaping trade performance of most transition economies in both EU and other markets. However, this applies mainly to foreign firms involved in more complex processing activities typical of, for instance, automotive or electronic industries (Kaminski and Smarzynska 2001). As it will be demonstrated below, these are not yet lines of export specialization of firms—mainly involved in OPT operations, albeit with their share in EU-destined exports falling—located in Albania. An interesting question concerns thus the extent to which FDI have so far directly impacted Albania’s trade. One may infer indirectly from the composition of FDI that foreign owned firms would be likely to make contribution to Albania’s export performance. Consider the following. According to the estimate of the Vienna Institute for International Economic Studies (WIIW 2004, 36), clothing and footwear took around one-fifth of almost US$ 1 billion of cumulative FDI inflows into Albania. Another large recipient of FDI inflows was wholesale (27.2% by end-2001), followed by foods (6.4%), construction (6.2%) and non-metal products (5.3%). Clothing and footwear are the largest
23
This is clearly a gross simplification for the following reasons: First, imported inputs may be used in the production of final goods sold domestically. Second, the trade classification does not allow identifying indirect inputs, e.g., leather used to produce footwear uppers or soles. Last but not least, domestic firms may export rather than supply parts to local producers of final products for exports.
36
items in Albania’s exports. Over 2000-03 they accounted for around one-third of total exports, although their share has been on the decline. More detailed data compiled by the Albanian Institute of Statistics corroborate both huge presence of foreign firms in clothing and footwear as well as an overall expectation that foreignowned firms tend to be export-oriented. The largest exporters among foreign owned firms are those producing clothing and footwear. Footwear foreign owned exporter accounted for 10 percent of total Albanian exports in 2003 (Table 8). Footwear and garments producers dominate the list of top 10 foreign owned exporting firms. T ABLE 17: F OREIGN OWNED FIRMS ENGAGED IN EXPORTS IN 1997-2003. NUMBER OF FIRMS , SHARE IN TOTAL EXPORTS AND CONCENTRATION OF EXPORTS ACROSS FIRMS ( SHARE OF THE LARGEST AND SHARE OF TOP FIVE IN TOTAL EXPORTS ) 1997
1998
1999
2000
2001
2002
2003
Share in total exports of goods
15.3%
9.3%
10.3%
47.0%
45.9%
44.0%
46.4%
Share of top three firms in total exports
46.5%
43.3%
41.6%
20.2%
20.8%
24.8%
31.2%
Share of the largest firm
15.2%
16.9%
12.8%
5.7%
6.2%
8.7%
10.1%
Share of exporters in total number of foreign owned firms
25%
24%
31%
47%
44%
43%
45%
Number of firms involved in exports
214
208
261
399
425
431
440
Source: Derived from database set by the Albanian Institute of Statistics
Over 1999-2003 foreign firms have been powerful levers of Albania’s exports. Their share in total exports increased from 10 percent in 1999 to 46 percent in 2003 (Table 8). In 2003 they generated export earnings to the tune of US$ 207 million. An increasing number of foreign owned firms specialize in production for exports. Since 1997 there have been altogether 855 foreign owned firms that have been involved in export activities in one or more years.
6. Conclusions Albania stands out among SEE-6 economies in both export growth performance and its mode of integrating into global markets. A very impressive economic growth performance has accompanied its unexpectedly smooth and fast transition away from orthodox central planning. Albania not only recovered quickly from transformational recession, but—despite two outbursts of public unrest in 1990-92 and 1997—it recorded among transition economies the second fastest real GDP growth in 1990-01 after Poland.24 In consequence, it ceased to be the least developed economy in Europe, although—as argued above—it still has many characteristics of a developing economy including a very large share of agriculture. Despite Albania’s lagging behind other SEE-6 in terms of openness as measured by the ratio of trade to GDP, ‘global links’ have played a crucial role in Albania’s economic growth performance. Average growth in real trade was 6.8 percentage points higher than the average growth in real GDP over 1990-2001 (WDI 2003). No other SEE-6 economy has attained similar 24
The annual average rate of growth was 4.5 percent for Poland and 3.7 percent for Albania (WDI 2003, Table 4.1.)
37
levels of growth in integrating into external markets—the closest was FYROM with 5.9 percentage points, but with the negative average growth rate in real GDP. Albania’s ‘global links’ are not limited to capital inflows or trade in goods and services. By far one of the most important sources of financing imports has been revenue from “factor exports,” that is, labor. Together with Serbia and Montenegro Albania is among top 20 countries in the world ranked by remittances in terms of GDP in 2001 (World Bank 2003). Private transfers have been significant amounting on average to almost one third of the value of imports of goods and services since the collapse of central planning. This has had an important direct implication for the pattern of integration into global economy. As imports have not been constrained by export revenues and external assistance, pressure on stimulating export growth has been relatively weaker than elsewhere. Furthermore, buoyant domestic demand has provided sales opportunities for firms that could otherwise compete in international markets. Yet, with unemployment hovering at around 15 percent, faster export growth would benefit the poor. The expansion in global links has been due to the confluence of several developments. Domestic instabilities, proximity of Italy and Greece combined with poverty has boosted emigration. First- and second-generation reforms propelled in part by the WTO accession process have created environment, in a large measure, friendly towards private sector activity. Reform measures have also led to significant liberalization in conditions in access to Albanian markets thus exposing domestic producers to stronger competition from imports. In all, the preceding analysis offers empirical support to the following observations. First, external sector has contributed significantly to laying macroeconomic foundations necessary for sustainable growth of the Albanian economy and does not appear to threaten it in the near future. The aggregate of private transfers, export earnings from sales of goods, FDI inflows and surplus in trade in services has been growing faster than imports of goods thus creating a solid base for their growth in the future. In consequence, the prospects of dramatically easing, if not breaking, inflows of foreign aid and credits do not seem to threaten external equilibrium and sustained macroeconomic performance, provided that measures are taken to improve business climate. Second, despite the appearance to the contrary based solely on developments in the goods market linkages, the factor markets linkages with the external world relative to Albania’s GDP have not contracted but have been expanding. In particular, labor movements mainly to the EU member countries—Italy and Greece—have strongly influenced Albania’s income. But another factor market linkage, i.e., mobility of capital, has been acquiring importance since 2000, with the surge of FDI. To sustain this trend, further progress on the second-generation reform frontage is needed. Third, decent, though unimpressive, export performance should not suggest a major failure of transition in Albania. The lack of a well-developed transportation infrastructure remains a barrier to the development of commercial linkages based on production fragmentation and specialization in production of parts and components, which have been the major lever of world trade over the last decade. Furthermore, huge remittances from expatriates accounting on average to around 30 percent of the value of imports of goods have reduced incentives to export through two channels: appreciation of exchange rate and domestic demand. Albania’s
38
unimpressive export performance, but only as compared to other non-Balkan transition economies, was not merely the result of the contraction in import demand triggered either by war or transformational recessions but mainly of outdated productive capacities, their dismantling during two waves of social unrest and expanding domestic demand. Fourth, Albania’s geographic trade patterns shifted towards those determined by economic rather than political factors and the composition of its exports moved towards unskilled labor intensive products. Its trade shifted to large markets relatively closely located mainly in Italy and Greece. There is a sharp difference in the composition of exports to the EU and SEEeconomies. In the former, industrial products dominate, whereas in the latter low-processed natural resource intensive products account for the bulk of exports. The potential for the expansion of trade with other SEE-economies remains limited at least in the short term. Fifth, Albania has failed to exploit opportunities offered by proximity of EU markets as well as those of its SEE neighbors. While as far as the latter are concerned it would be tempting to blame weaknesses in trade facilitating infrastructure, this has not prevented SEE countries to have exports almost ten times higher than those of Albania. The explanation appears to lie in limited industrial capacities and other limitations imposed by its investment climate. The improvement in the latter should help address the supply constraint. Last but not least, while cautious macroeconomic management combined with FDI inflows, concessional aid and remittances has so far allowed to run large trade deficits, the anticipated fall in external aid would have to be compensated by increased exports of goods and services. FDI inflows are important on two counts: they are a source of financing current account deficits and they, with some lead time depending on a sector of the economy, usually boost country’s capacity to compete and increase export earnings.
39
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