Pushing on a String? an Evaluation of Regional Economic Cooperation in the Western Balkans
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Pushing on a string? An evaluation of regional economic cooperation in the Western Balkans Pushing on a string? An evaluation of regional economic cooperation in the Western Balkans Pushing on a string? 4 Contents Contents I. Abstract 7 II. Key findings 8 III. Introduction 12 Regional cooperation: An idea with deep historical roots 12 The ‘geography of animosity’ 13 Two lost decades for the region’s economies 14 Is EU accession still even possible? 15 An issue more important than ever 17 Aims of this paper 18 IV. Theoretical prerequisites for regional cooperation and their existence in the Western Balkans 20 IV.1 Institutional underpinnings 20 Outside forces 20 Local ownership 21 Territorial issues 23 Political relationships and trust 23 Institutional and governance standards 23 IV.2 Alignment of political incentives 25 Unified group 25 Benefits for all 25 Outside threats 27 IV.3 Economic fundamentals 27 Trade and investment relative to historical levels 28 Size and level of economic development 28 Shares of trade and investment within/outside the region 28 Complementarity in production structures 29 Economic development priorities and policy coordination 31 Connectivity 32 Growth in the regional/global economy 33 V. The EU strategy for economic integration: Implementation and results 36 V.1 Trade and investment 37 Bilateral investment treaties (BITs) 37 How institutional factors have influenced the effectiveness of bilateral investment treaties (BITs) 38 5 Pushing on a string? Free trade agreements (FTAs) 39 Central European Free Trade Agreement (CEFTA) 40 Stabilisation and Association Agreements (SAAs) 41 V.2 Infrastructure 42 Overview of the EU’s strategy and its key steps 42 Western Balkan Investment Framework (WBIF) 43 Berlin Process 44 Interaction between the EU and other infrastructure investors in the region 45 Impact of the EU’s strategy on transport infrastructure and connectivity 48 Impact of the EU’s strategy on energy infrastructure and connectivity 50 Persistent gaps and challenges ahead 52 VI. Taking stock: The state of play in 2020 59 Has the ‘geography of animosity’ been broken over the past 20 years? 59 Are the incentives for the Western Balkan countries to cooperate more aligned than they used to be? 63 Have governance challenges been overcome? 66 What is the role of outside actors now? 67 What are the next steps for regional cooperation in an economic sense? 68 When it comes to greater regional economic integration, are the potential economic upsides greater and the barriers lower than they were before? 71 How big are the demographic challenges that the region faces? 73 VII. Another way? ‘EU integration max’ 77 The example of the 2004 EU joiners 77 Access to the EU budget 79 Partial entry into other parts of the EU Customs Union and single market 81 Deeper services and labour integration 81 Partial entry into the single market: The examples of Norway and Switzerland 82 VIII. Conclusions and the way forward 84 IX. Acknowledgments 87 Figures and Tables 88 Publishing Information 90 6 Abstract I. Abstract This study evaluates the success of the EU’s Our findings lead to two main conclusions. First, strategy of regional cooperation in the Western regional cooperation efforts should continue, Balkans over the last two decades from an but more effort should be focused on securing economic perspective. the maximum possible level of economic integration with the EU. Second, economic First, we define the prerequisites for successful development and EU accession in the region are regional cooperation in an institutional, political severely hamstrung by territorial disputes and and economic sense, and assess the extent to constitutional deadlock. Without a breakthrough which they existed in the Western Balkans at on these issues – and especially the normalisation the start of the 2000s. Second, we identify the of relations between Serbia and Kosovo – no key facets of the EU’s strategy to deepen trade, amount of regional cooperation initiatives can investment and infrastructure connectivity in the fundamentally change the situation. Western Balkans, and establish the impact that this has had. Third, we assess the state of play in 2020, and make some suggestions for the way forward. Our main findings are a) that many of the most important prerequisites for regional cooperation have not existed in the Western Balkans during the past two decades, and that the potential gains from the EU strategy have therefore always been quite limited; b) that regional trade, investment and infrastructure integration has increased somewhat, but that there are still many gaps and challenges ahead; and c) that these efforts have not fundamentally altered the main obstacles to normalising political relations in the Western Balkans and, ultimately, to the EU accession of its constituent countries. 7 Pushing on a string? II. Key findings 1. This study set out to answer the question have bilateral disputes with other Western of whether the EU strategy of regional Balkan countries have had fewer incentives cooperation has produced concrete results to engage in the process, which has helped to in terms of economic connectivity and rising foster a persistent tension between regional living standards, and whether this in turn has cooperation and the bilateral accession had a positive impact on the normalisation process with Brussels. Serbia’s size relative of political relations in and progress towards to all other countries involved in regional EU accession of the Western Balkans. In cooperation – particularly after Croatia reassessing the various initiatives and joined the EU in 2013 – has also been a outlining the state of play in 2020, it has also complicating factor. There has not been a sought to form a basis for thinking about the single outside threat that could have spurred areas in which the efforts of regional and EU the Western Balkan elites to become more policymakers can be best directed in the next thoroughly committed to and engaged in decade. regional cooperation. 2. Many of the institutional underpinnings 4. The economic fundamentals of the necessary for effective regional cooperation region in the early 2000s added to the have not existed in the Western Balkans hurdles currently facing the EU’s regional during the past 20 years. Granted, the EU cooperation strategy. Some supportive and US have acted as important outside factors did exist. At least before 2008, forces driving the process, and local growth in the EU and global economies was ownership has gradually strengthened over strong, providing a supportive backdrop, the period. However, territorial issues remain while the Western Balkan countries had outstanding, many local elites have never different comparative advantages, meaning ‘bought into’ the process, and institutional that, in theory, there was a complementarity and governance standards generally remain in production structures. However, even low across the region. Together, these factors taking into account the disruption to regional have created significant hurdles to the trade caused by the wars of the 1990s, success of regional cooperation. the potential upside to regional economic integration – for both trade and investment 3. We establish that the political incentives – was not very high. All countries were poor required for effective regional cooperation and, with the partial exception of Serbia, have not always been aligned. Countries that very small, which further limited the feasible are more economically advanced or do not gains from increased regional economic 8 Key findings integration. Non-tariff barriers to trade Western Balkan countries, CEFTA has had and weak connectivity were also major an important positive impact in terms of obstacles. A genuine leap forward in terms increasing competitiveness, rebuilding the of regional economic integration would have regional market, and increasing the flow of also required significant policy coordination, goods, all of which would otherwise not have which is something that never materialised. been possible. 5. The material institutional, political and 8. Regarding investment, we have generally economic barriers to the EU’s regional found less impressive outcomes. The cooperation strategy have meant that bilateral investment treaties (BITs) between Brussels would necessarily have to offer Western Balkan countries, which started major incentives to the Western Balkan in the late 1990s, have not produced any countries in order for the plan to work. A statistically significant results. One of the multitude of initiatives in trade, investment key reasons for this has been the generally and infrastructure have been launched. low institutional standards in the region. If this were not the case, we believe that 6. We establish that the bilateral free trade higher intraregional investment would have agreements (FTAs) signed between Western materialised. Balkan countries beginning in 2002 have had a positive impact on intraregional trade. 9. The Stabilisation and Association However, we measure the positive impact Agreements (SAAs) signed by the Western of these FTAs on regional exports at 13.9 Balkan countries have had a positive impact percent, which is only around half of the on integration with the EU. Exports have positive impact that an FTA has on trade increased by 24.6 percent as a result of between two signatories on average. Our the SAAs, while the inward foreign direct results were significantly affected by Serbia, investment (FDI) stock from the EU