Will the free
trade zone become true
One of the
magic solutions for the Balkans
In analyzing
the trends in the development of the countries in Southeast Europe, the World Bank stated
in its report that one of the “magic” solutions for fostering of the economic activity
would be the establishment of a free trade zone on the Balkans. Whether such an idea is not contradictory to the
European integration of Bulgaria and Romania and the intentions of the other countries for
membership the European Union is subject to discussion and analysis. Furthermore - whether the establishment of such a
zone on the Balkans would be a parallel process to the accession of the Balkan states in
the European Customs Union or it should be finalized before the completion of the
accession negotiations. Another sensitive
problem is how the Stability Pact will turn into a power engine for the development of the
Southeastern countries and will lead them on the “road of stability and prosperity”.
Harmonization
of tax and customs legislation
As a result of
the failure of the initial economic reforms in the region, each of the countries faced at
a different stage the necessity for a choice of an appropriate model for a fiscal policy,
that could guarantee to a maximum extent long-term fiscal stability. In the absence of any specific geopolitical
alternatives, most of the countries in Southeast Europe chose the European models of tax
and customs legislation, that have already proven their efficiency. In parallel to the gradual process of
harmonization of their internal legislation some of the countries - Bulgaria and Romania,
were invited in December 1999 to start negotiations for accession in the Union. This fact, supported by relevant technical
assistance, had additionally encouraged the rest of the countries in the region to
undertake serious steps in the approximation of their national legislation. Albania, Croatia and Macedonia initiated
substantial legislative reforms and as a first step introduced Value Added Tax, based on
the provisions of the European legislation. At
the same time, the customs legislation in some of the countries was set much in align with
the European requirements.
The idea for a
free trade zone in Southeast Europe is unrealistic in the absence of common rules in the
tax and customs legislation. Immediately
after the removal of the trade barriers, the differences in the tax legislation among the
countries - especially in VAT and excise duties will become apparent. For example, in case of substantial differences in
the applicable rates of VAT and excises for certain groups of commodities, a striking
growth in the cross-border trade can be anticipated.
This may lead to fiscal losses in revenue for the countries applying higher
indirect tax rates.
Given the
above, it is extremely important that an analysis of the requirements of the European
Union in direct and indirect taxes is carried out together with a review of the level of
harmonization of the internal legislation in the field of each country in Southeast
Europe. The differences should be removed or
limited in very short terms prior to the establishment of such zone.
Advantages
and risks
The countries
in the region are small in territory and population, and considerably isolated from
economic point of view. The establishment of
a free trade zone will additionally assist in the overcoming of this isolation, as for the
goods produced in the countries a new market with approximately 55 million customers will
be opened. In this way, it can be anticipated
that the low competitive production in the region will gain new prospects for realization
and will help the economic stabilization on the Balkans as a whole.
At a meeting
held recently in Geneva the seven countries in Southeast Europe expressed in a mutual
declaration consent for the creation of a free trade zone on the Balkans. In June this year, it is expected that the
countries will produce a memorandum of understanding, in which specific terms for its
practical implementation will be agreed.
A basic
disadvantage of the idea, even at this stage, that can be pointed out is the initial loss
of revenue from customs duties, which are still a substantial part of the budget revenues
in the countries in Southeast Europe. This
decrease can be compensated by the an increase in export revenues, realized within the
zone.
For the moment,
it can be presumed that the risks are substantial, but manageable. For example, such risks are the differences in the
economies of the countries, the lack of political and institutional support, the pace of
harmonization process of tax and customs legislation.
In addition, there are practical problems, relevant to the subsidizing of this
complex project and the provision of technical assistance.
Whether the introduction of a common currency in the region will have an additional
positive effect, is another item open for discussion.
Hypotheses
of implementation
In pretty
practical terms the establishment of a free trade zone can take effect in several ways. One of the alternatives is the creation of a new
customs union among all or part of the countries in Southeast Europe. Another scenario is the creation of a network of
bilateral agreements for free trade between the seven countries in the region and
approximation of already existing agreements - i.e. between Bulgaria and Macedonia. It could be accepted as a working hypothesis, the
possible inclusion of Croatia, Albania, Macedonia, Bosnia and Herzegovina and Yugoslavia
in CEFTA, whose members are Bulgaria and Romania. Least
but not last is the opportunity to wait for the moment of the individual accession of each
country in the European Union, which will lead to the gradual incorporation of the
countries in European customs union.
Each of these
alternatives has its advantages and disadvantages in terms of timing and complexity of
practical implementation. Whether the
economic logic, contained in the plan for the establishment of a free trade zone on the
Balkans, and the arguments of international organizations such as the Stability Pact and
the World Bank will succeed in uniting the heterogeneous interests of the countries in
Southeast Europe in support of the idea, is an event, which the investors and the public
will expect from the politicians with greatest interest.
And in very short terms.
Published in March 2001 in “LEADER
Dnes” magazine
Sofia, Bulgaria
[1] This article is supported by a grant funded by the Foundation Open Society Institute