Conference on:THE EU AND THE BALKANS:

ASSESSMENT AND PERSPECTIVES

Charles Kovacs

Vice Chairman, Committee on Non-Member Economies, Business and Industry Advisory Committee to the OECD

Jean Monnet Chair – Universite de Montreal30 March 2005

FROM 1990 TO KOSOVO

• INTRINSIC INSTABILITY OF YUGOSLAVIA• SLOWER LIBERALIZATION THAN IN NORTHERN

PART OF EASTERN EUROPE• STRONGER, LESS FLEXIBLE COMMUNIST

PARTIES AND OLIGARCHIES• EXPLOITATION OF NATIONALISM BY THE “LEFT”

FOR SURVIVAL/SLOWING OF REFORMS

=• SECESSIONIST WARS IN YUGOSLAVIA

FROM 1990 TO DAYTON

• ABSENCE OF COMMON EUROPEAN POLICY TOWARDS WARS

• UNILATERAL RECOGNITION OF SLOVENIA AND CROATIA WAS DECISIVE FOR THE FUTURE

• FAILURE TO CONTAIN VIOLENCE WITH UN/EU FORCE THROUGH 1994: ATROCITIES, MASSACRES, GENOCIDE, SREBRENICA

• US/NATO INTERVENTION IN BOSNIA-HERZEGOVINA: DAYTON ACCORDS IN 1995

FROM DAYTON TO KOSOVO

• TEMPORARY PEACE• CEASARISM IN CROATIA AND SERBIA• STABILITY ONLY IN SLOVENIA• UNREST IN MACEDONIA AND ALBANIA• BEGINNING OF REFORMS IN ROMANIA AND

BULGARIA• DEMONSTRATIONS IN BELGRADE FROM 1996• START OF CLASHES WITH ALBANIANS IN

KOSOVO IN 1997

FROM KOSOVO TO THE PRESENT• NATO/EU AIR WAR AGAINST SERBIA FOR

KOSOVO: AMBIGUOUS SETTLEMENT WITH SERBIA; FUTURE STILL UNKNOWN

• STABILITY PACT FOR SE EUROPE TO ENCOURAGE PEACE, STABILITY, REFORMS

• FALL OF MILOSEVICH; DEATH OF TUDJMAN• CONSISTENT GDP GROWTH IN MOST

COUNTRIES• $3 BILLION OF FOREIGN INVESTMENT P.A.

SINCE 2000• NATO MEMBERSHIP FOR BULGARIA, ROMANIA• PROMISE OF EVENTUAL EU MEMBERSHIP FOR

ALL

Global FDI Trends

• Figure 1: Global FDI Trends

-

50 000

100 000

150 000

200 000

250 000

300 000

350 000

400 000

450 000

500 000

550 000

600 000

650 000

700 000

750 000

1995 1996 1997 1998 1999 2000 2001 2002 2003

(milli

ons

of U

S$)

European Union

Asia and the Pacific

North America

Latin AmericaCEEAfrica

FDI inflows in CEE countries, 1998-2003

FDI Inflows (USD millions)

1998 1999 2000 2001 2002 2003

Central and Eastern Europe

24305.2

26518.1

27507.7

26370.7

31232.0

20970.4

Albania 45.0 41.2 143.0 207.3 135.0 180.4 Belarus 203.2 444.0 118.8 95.8 247.1 170.5 Bosnia and Herzegovina

55.8 154.1 147.2 130.2 265.4 380.9

Bulgaria 537.3 818.8 1001.5 812.9 904.7 1419.4 Croatia 932.4 1467.2 1088.7 1561.3 1124.0 1713.0 Czech Republic 3700.0 6309.8 4984.4 5638.9 8482.7 2582.6 Estonia 580.6 305.0 387.0 542.4 284.4 890.6 Hungary 3827.9 3311.9 2764.1 3936.0 2844.5 2470.0 Latvia 356.7 347.5 410.5 163.3 383.9 359.7 Lithuania 925.5 486.5 378.9 445.8 732.0 179.2 Moldova 75.5 37.9 134.3 146.1 116.6 58.5 Poland 6365.0 7270.0 9341.0 5713.0 4131.0 4225.0 Romania 2031.0 1041.0 1037.0 1157.0 1144.0 1566.0 Russian Federation

2761.0 3309.0 2714.0 2469.0 3461.0 1144.0

Serbia and Montenegro

113.0 112.0 25.0 165.0 475.0 1360.0

Slovakia 706.7 427.9 1925.4 1584.1 4123.4 571.2 Slovenia 217.9 105.7 137.4 369.0 1606.4 181.0 TFYR Macedonia 127.7 32.7 174.5 441.5 77.8 94.6 Ukraine 743.0 496.0 595.0 792.0 693.0 1424.0

Source: UNCTAD, FDI/TNC Database

FOREIGN DIRECT INVESTMENT IN SOUTH EAST EUROPE

FDI inflows into select SEE countries, 2002, 2003

2002

2003

17131566

14191360

381

180

1124 1144

905

475

265

1350

200

400

600

800

1,000

1,200

1,400

1,600

1,800

(US

D m

illio

n)

FOREIGN DIRECT INVESTMENT IN SOUTH EAST EUROPE

FDI stock, select SEE countries, 2002, 2003

2002

2003

12 693

11 351

5 082

3 319

1 153 1 091

8 873

6 711

3 662

1 959

772

9100

2 000

4 000

6 000

8 000

10 000

12 000

14 000

(US

D m

illio

n)

Rankings by Freedom House, CEE countries, 2003

Country Democratisation Rating Rule of Law Corruption

Slovenia 1.8 1.9 2.0Hungary 1.8 2.3 2.8Estonia 1.9 2.1 2.5Czech Republic 2.0 3.0 3.5Bulgaria 3.1 3.9 4.3Romania 3.3 4.4 4.5Croatia 3.4 4.5 4.8Serbia and Montenegro 3.5 4.6 5.0Macedonia 3.9 5.0 5.5Bosnia and Herzegovina 4.3 5.0 5.0Moldova 4.4 5.4 6.3Ukraine 4.5 5.1 5.8Georgia 4.7 5.1 5.8Russia 4.9 5.1 5.8Albania 5.0 4.6 5.0

Source: Freedom House

Rankings of the business climates, select CEE countries, 2003-2007

Country Expected for Historical 2003 - 2007 1998 - 2002

Estonia 7.6 6.9Czech Republic 7.3 6.6Hungary 7.2 6.8Slovenia 7.2 6.3Croatia 6.5 5.8Bulgaria 6.2 5.4Russia 5.9 4.6Romania 5.7 4.7Serbia-Montenegro 5.5 3.2Macedonia 5.4 4.7Ukraine 5.3 4.2Albania 5.2 4.5Moldova 5.0 4.2Georgia 5.0 4.1Bosnia-Herzegovina 4.8 4.2

Average 5.7 4.9

Source: Economic Intelligence Unit

Note: Rankings are done on a scale from 1 (the worst) to 10 (the best).

Rankings by Transparency International, SEE countries, 2003

Country rank Country CPI 2003 scoreNumber of

surveys usedHigh-low

range

50 Greece 4.3 9 3.7-5.654 Bulgaria 3.9 10 2.8-5.759 Croatia 3.7 8 2.6-4.7

70Bosnia and Herzegovina 3.3 6 2.2-3.9

83 Romania 2.8 12 1.6-5.092 Albania 2,5 5 1.9-3.2106 Macedonia 2.3 5 2.0-2.7

106Serbia and Montenegro 2.3 5 2.0-3.2

Source: Transparency International

SE European Countries Split in Two Tiers

•FDI Concentration in Romania, Bulgaria, and Croatia

•BiH, Albania, Macedonia each with only cca. $1 Billion of FDI

•Serbia and Montenegro in limbo (pending resolution of political issues, but attractive for privatization transactions)

EU ACCESSION

•THE EU IS NOT A MONOLITH BUT AN INSTITUTION OF COMPETING OF STATES AND INTERESTS AMONG WHICH IS ITS OWN BUREAUCRACY

•THE SPECIFIC TERMS OF THE ACCESSION TREATIES ARE OF GREATER IMPORTANCE TO THE NEW MEMBERS THAN TO THE EU

•THE ACCESSION PROCESS IS A CLASH OF MANY INTERESTS

ELEMENTS OF ACCESSION

•POLITICAL

•ECONOMIC

•TECHNICAL/JUDICIAL

•ACCESSION = MAJOR CHANGES IN POWER AND ECONOMIC RELATIONS, THEREFORE:

–Each has its own overt and hidden dimension

–Overt and hidden dimensions have both national and international/EU elements and committed actors/special interests

POLITICAL ELEMENTSOVERT

•Representation in EU

•Acceptance of acquis

•Cross-border migration

HIDDEN

•Representation = Balance of power within EU:

North vs. South?

Rich vs. Poor?

Left vs. Right?

Pro-USA vs. Anti-USA?

HIDDEN ELEMENTS (continued)

•Acceptance of acquis = Accretion of power to EU

Fear of competitiveness of new members

EU fear of alternate political models

•Cross-border migration = Immigration

Disliked by old and new members, promoted by the EU

Impact on local politics

Threat to national guilds, political class

ECONOMICOVERT

•Contributions to EU budget

•Agricultural subsidies

•Regional assistance payments

•Acceptance of EU trade regime

HIDDEN

•Contributions = Higher taxes or deficits in net contributor countries, where

–Taxes are already too high

–Welfare states are in crisis

•Agricultural subsidies = An impossible political dilemma

–Powerful special interests

–˝Agrolobby

TECHNICAL/JUDICIALOVERT

Harmonization of laws

Derogation

Implementation

HIDDEN TECHNICAL/JUDICIAL

Harmonization = Opportunity for:

Covert changes/modernization at national level

–Expansion of national civil service

–Political exploitation

–Movement towards common currency

SITUATION IN SOUTH EAST EUROPE

THE GOOD NEWSSOUTH EAST EUROPE INVESTMENT

COMPACT – MONITORING OF REFORM EFFORTS

IDENTIFICATION OF TOP PRIORITIES:

•PRIVATE INVESTMENT

•ENTERPRISE AND SME DEVELOPMENT

•PUBLIC AND PRIVATE GOVERNANCE, INCLUDING REGULATORY REFORM

SUSTAINED GDP GROWTH OF 4%+ P.A.

FOREIGN INVESTMENT OF $3 BILLION+ P.A. SINCE 2000

COMMITMENT AND PROGRESS TOWARDS MARKET ECONOMY STRUCTURES

INCREASING TRADE AND EXPORTS

SITUATION IN SOUTH EAST EUROPE

THE BAD NEWSVERY SLOW PROGRESS ON INFRASTRUCTURE

UNEVEN PROGRESS: INCREASING GAPS BETWEEN THE TIERS

CONCENTRATION OF FDI IN THREE COUNTRIES

LIMITED REGIONAL COOPERATION

SLOW RESOLUTION OF YUGOSLAV SUCCESSION ISSUES

ADVERSE POLITICAL DEVELOPMENTS IN SEVERAL COUNTRIES

DECREASING US/EU INTEREST DUE TO CHANGING PRIORITIES

SLOW PACE OF STRUCTURAL REFORMS

EU ACTIONS AND OUTLOOK

• Membership for Bulgaria, Romania in 2007• Croatia and Serbia: political problems with both; may join in 2009 at earliest• Pre-accession discussions/reviews with second-tier countries, no membership before 2012• Actual expansion will be in affected by:

– EU experience with current round of 10 new members– Constitutional developments– Military and security implications– East European members’ views– Fate of agricultural and regional support programs– The specter of Turkey– Realization that East Europe+Balkans+Turkey will result in a new EU