Will the free trade zone become true

 

One of the magic solutions for the Balkans

Georgi Ranchev[1]

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