Roanoke College

The Role of the Stabilization and Association Process in Trade Liberalization and Development

of the Western Balkans

Emily K. Bayens

IR 401A International Relations Seminar

Dr. Joshua B. Rubongoya

29 March 2016

Bayens 1

ABSTRACT The European Union has a certain set of requirements which a state must meet before it is able to join and reap the benefits of the Common Market. However, by completing these requirements, a state will relinquish part of its sovereignty in order to join the EU and gain access to wider markets. Trade Liberalization is one of the requirements, which is thought to bring about the greatest amount of economic growth. By completing the Stabilization and Association Process, the Western Balkans will liberalize their economies and receive the benefits of trade liberalization that can be applied to social development.

1. Introduction……………………………………………………………………………………3

2. The Balkan Experience………………………………………………………………………..42.1 Yugoslavia in the World Wars……………………….………………………………..52.2 Yugoslavia and Tito’s Socialism……………………………………………………...52.3 A Transforming World, a Transitional Yugoslavia……………..…………………….7

3. Literature Review……………………………………………………………………………..83.1 Capitalism and Dependency Theory……………………………………………………..10

3.1.1 Asymmetrical Trade and Dependency…………………………………………123.2 A Commentary on the Fall of Communism: Differences in Literature………………….123.3 Stability in Interregional and Intraregional Liberalization………………………………143.4 Foreign Direct Investment……………………………………………………………….163.4.1 Stabilizing Effects of Foreign Direct Investment……………………………………...163.5 Geography………………………………………………………………………………..18

3.6 Transport……………………………………………………………………………………..19

4. Methodology…………………………………………………………………………………21

5. Research and Findings……………………………………………………………………….235.1 Does Trade Liberalization affect Economic Growth?.......................................................23

5.1.1 Trade Liberalization and Economic Growth for the Western Balkans………...255.1.2 Trade Liberalization and Economic Growth in the Central and Eastern European

Countries………..………………………………………………………………..265.1.3 Trade Liberalization and Economic Growth in the EU Member Western

Balkans………………………………………………………………………..….275.2 The success of the Stabilization and Association Process in the Balkans…………...….28

5.2.1 Inter- and Intra-Regional Relations and Cooperation……………….................285.2.2 Transitional Policies of Transitional States Attempting Accession….……..….31

5.2.2.1 Competition and Dumping……………….......….…………………...325.2.2.2 Investment Promotion and Protection………………………………..325.2.2.3 Sectoral Revitalization……………………....……………………….335.2.2.4 Transportation……....………………………………………………..335.2.2.5 Free Movement of Goods and Duties………………………………..34

5.3 Open Markets and Economic Growth……….....………………………..……………...35

6. Conclusion…………………………………………………………………………………...36

Bayens 2

7. Appendences…………………………………………………………………………………397.1 Country Accession Groups…………………………………….………………………..39

7.1.1 Western Balkans GDP at market prices (current US$), Imports of goods and services (current US$), Exports of goods and services (current US$)…..………40Appendix 1: Albania……………………………………………………………..40Appendix 2: Bosnia and Herzegovina………………………………………...…40Appendix 3: Kosovo……………………………………………………………..41Appendix 4: Former Yugoslav Republic of Macedonia (FYROM)……………..41Appendix 5: Montenegro………………………………………………………...42Appendix 6: Serbia………………………………………………………..……..42

7.1.2 Central and Eastern European Countries (2004 ascending countries) GDP (at current US$), Imports of goods and services (at current US$), Exports of goods and services (at current US$)………………………….………………………..43Appendix 7: Czech Republic………………………...………………………….43Appendix 8: Hungary……………………..…………………………………….43Appendix 9: Poland………………………………..……………………………44Appendix 10: Slovak Republic……………...…………………………………..44

7.1.3 Balkan EU Member States (Bulgaria, Croatia, and Romania) GDP (at current US$), Imports of goods and services (at current US$), Exports of goods and services (at current US$)…………………………………………...……….….45Appendix 10: Bulgaria………………………………...………………….……45 Appendix 11: Croatia…………………………………………………….…….45Appendix 13: Romania………………………………………….……………..46

7.2 Trade Opennness and Economic Development…………………...…………………47Appendix 14………………………………………………………………………….47Appendix 15………………………………………………………………………….48

Bibliography…………………………………………………………………………………52

Bayens 3

1. Introduction

Development is a highly contested concept with many facets that can attribute to a

country’s well-being. Ranging from economic success to levels of happiness, development can

be measured in many different ways, which means that it is derived from many different sources.

Trade, which is characteristically measured in quantitative, empirical terms, has the ability to

potentially provide the economic growth necessary to provide for a developed life to states. This

paper argues that the development of states lies heavily in the functions of trade, which when

pursued through liberalized practices such as free trade, will be optimally expansive to a

country’s economy. However, in order for trade liberalization to be effective and an agent of

development, there must be effective policies and institutions that hold up the framework of

trade liberalization.

The Western Balkans is an interesting case for applying the principles of liberalization to

for several different reasons. First of all, the economies of the Western Balkans (Albania, Bosnia

and Herzegovina, Kosovo, the Former Yugoslav Republic of Macedonia, Montenegro, and

Serbia) were in a transitional stage after emerging from behind the Iron Curtain because of the

socialist and communist regimes dissolving in the 1990s. Then, the states were also faced with

the Yugoslav Wars, which would further disrupt the emerging states’ economies and trade. In

order to create stability in the region and to achieve its own goals of expansion, the European

Union made agreements with the countries emerging out of former Yugoslavia.

The Stabilization and Association Agreements were a series of arrangements between the

European Union and the states of the Western Balkans. The purpose of these agreements is to

stabilize the states with the goal of eventual accession to the EU, which has its own criteria found

in the acquis communautaire. The requirements of the acquis communautaire through accession

Bayens 4

very much reflect the values and principles that are prized by the EU. They include the deep

regard for diminishing barriers to trade, and are visible in the requirements of the Stabilization

and Association Process.

A concerning issue for European nations and scholars in the international community

about the accession of the Western Balkans, or perhaps any European state for that matter, is that

of surrendering sovereignty to the EU. Why would a state give up its most valuable facet,

sovereignty, which gives it all of its power in the modern nation-state system? States will give up

their sovereignty to join the European Union in order to access larger markets that will give way

to opportunities to increase trade, which will produce more revenue that can be used to further

development.

2. The Balkan Experience

To understand the modern Balkans, it is first important to have a comprehensive knowledge

of the states and their history to understand their experiences of transition and accession. The

complexities that characterize intra-regional cooperation now stem from a historical narrative

that must be put into context. Comprehending the drastic nature of the transition economy, it is

first crucial to understand the experience of the Balkan states. First, the demographic makeup is

very diverse through a complex concept of ethnicity and nationality, which has only been shaped

from years of complicated history between the nations on the Balkan Peninsula. Secondly, the

history of the region, shaped a certain set of events that formed the cultural ideas of policies in

the socialist state of Yugoslavia, and unlike walls, cultural ideas and norms cannot be torn down

as easily.

In addition to the states that compromise the Western Balkans, stated earlier, the states

that are typically known today to make up the Balkans include Bulgaria, Croatia, Romania, and

Bayens 5

Slovenia. Bulgaria, Croatia, and Romania are the only states from the region that have joined the

European Union. Greece has a geographic proximity and importance to the region, but has a

much different history than the countries listed, and therefore, is typically not associated with the

Balkans. All of the states known as the Western Balkans, aside from Albania, were part of the

Social Federal Republic of Yugoslavia, which disassembled during the Balkan Wars of the

1990s. Aside from other factors, this war was caused by the historic, different nationalities that

make up the Western Balkans.

2.1 Yugoslavia in the World Wars

When the Austrian-Hungarian Empire eroded in the early twentieth century, the nations

of the Balkans united in fear of expansionist Italy (Curtis: 1992, 26-27). From the beginning, of

the union, there were contested ideas of whether Yugoslavia should be centralized or a republic,

which fueled ethnic, religious, and cultural tensions among the people. Ultimately, the state

became a monarchy known as the Kingdom of Yugoslavia (1992, 29). During World War II,

though, the beginnings of a new regime began playing out. Yugoslavia was attacked by the

Germans, and Tito, the marshal and prime minister of the country, negotiated with Stalin in order

to secure the country (1992, 41-42). This secured Tito’s future position as leader of the country

as well as gave way to the future of Yugoslavia.

2.2 Yugoslavia and Tito’s Socialism

In the postwar period, the Communist Party was able to politically secure Yugoslavia.

Tito headed the country as prime minister, and his supporters filled cabinet positions. The

monarchy was dissolved, and the Kingdom of Yugoslavia became the Socialist Federal Republic

of Yugoslavia in 1945. Six republics were formed under the new government, comprising of a

federation. A Soviet-style economy was adapted. By doing so, the state enacted land

Bayens 6

redistribution and rapid industrialization policies (1992, 44). However, distrust and anger came

to characterize Stalin and Tito’s relationship. Stalin felt as Soviet control of socialism was

threatened in Europe, by Yugoslavia. After Soviet economic sanctions in the form of blockades

and propaganda against Tito, the rift between the two became larger, and Yugoslavia assumed

that Soviet invasion was imminent. Relationships would not be mended until after Stalin’s death

between the two states. During this time, the trade relationship between the Soviet Union and

Yugoslavia dwindled. Because of the strained relations between Yugoslavia and the USSR, the

West began to send aid to Yugoslavia in the true Cold War fashion (1992: 46-47).

Due to the relationship with the largest socialist bloc being strained, Yugoslavia was

faced with no option other than to reform national economic policies. State ownership of the

means of production became social ownership, which meant that management responsibilities

went to workers, although government-appointed directors held veto power over the decisions.

This type of organization became known as the self-management system, which forced the

communist party to loosen its reigns on decisions over the market economy (Curtis 1992: 47-48).

The self-management system led to an era some scholars refer to as “a golden period of the

Yugoslav economy” (Horvat qtd. in Mahmutefendić: 2012, 29). Trade also grew during this

period, uncharacteristically for a state-planned economy. Yugoslavia showed the second highest

growth rate between 1957 and 1960 after the economic policy changes. Social development

indicators such as education and healthcare improved drastically as a result (1992, 47-48).

Trade had, interestingly, always been important to the Yugoslav economy, especially

after blockades by the Soviet Union and the rest of the socialist Eastern European countries. The

Common Market Economies of the European Union doubled their imports from Yugoslavia,

although they tripled imports from other countries in the 1970s. However, Yugoslav trade with

Bayens 7

the Common Market fell by 15 percent in the first half of the next decade (McFarlane: 1988, 93).

These relationships with countries in the European Economic Community undoubtedly have

effect on the current relationship between the states of the Western Balkans and the European

Union today.

By the 1980s, Yugoslavia had fallen into a drastic trade deficit, and was forced to adopt a

policy to “export by any means.” Yugoslavia was forced to accept help from the IMF with the

familiar Structural Adjustment Package. The Communist common market, the CMEA, was once

again important for Yugoslav trade, and the Soviet Union was the largest trade partner.

Yugoslavia, in its attempt to build its economy through trade, built relations with developing

countries in Asia, Africa, and South America. However, trading with such small countries was

not enough to achieve Yugoslavia’s goals of integrating into the global economy (McFarlane:

1988, 94-95).

2.3 A Transforming World, a Transitional Yugoslavia

When the 1990s rolled around, the international system was radically shaken. The end of

the Cold War, which had defined political agenda for so many states’ foreign policy was finally

over. With the fall of international communism, some scholars, such as Craig Nation (2003),

believe that the “post-Cold War disorder” was so powerful that it had the ability to destroy the “

predictable context for domestic development, interstate relations, and great power engagement,”

that had been seen in Yugoslavia since the end of World War II (77-78). Tensions began in the

1980s when Serbia and Kosovo disagreed about the latter’s autonomy. As the communist

countries of Eastern and Central Europe began dissolving, the sentiment to oust the communists

was shared among the different republics that made up the Yugoslav Federation. The fighting

Bayens 8

lasted for roughly a decade and is remembered as one of the most gruesome parts of world

history in the modern day.

With the bloody civil war being fought in the Balkan region, it was in the European

Union’s best interest to stabilize the area, and with the interest of expansion, this could become a

reality through the Stabilization and Association Process. However, with the new states at war, it

would be necessary to rebuild the relationships in the area, as well as to transform the states’

policies and practices into those that would be more conducive in a united, European way. To

begin stabilizing the area and the process of enlargement, it became necessary to adapt

procedures that would develop the Western Balkans. This would be done in a familiar manner by

the European Union: through trade liberalization.

3. Literature Review

The literature referencing development and trade largely points to trade liberalization as

the key principle to expanding a state’s development. By opening markets through liberalization

processes, states are more likely to create trade relationships with more partners, which will

increase revenue. This increase in revenue can then be used in order to develop society, as the

literature often equates development in terms of economic growth when discussing its

relationships to trade. However, as authors such as Barrel (2006) believe, trade should not be

considered as an end, but rather a mean in coordination with many other instruments to

propagate a state’s development (219). It is also known that by creating intense economic

transactions between neighboring countries, both sides will contribute and benefit (Skayannis

and Skurgiannis: 2002, 42).

Petrokos (2002) says, “The inability to sustain the pre-1989 economic and political

structures has forced a process of transition from central planning toward a Western-type market

Bayens 9

economy in [the Balkans]. This process has been supported by market-oriented policies, that is,

privatization, liberalization, and internationalization, and by policies of institutional changes [i.e.

the Stabilization and Association Process)]” (7).

The general measurement for development in terms of trade is economic growth.

However, a concept as contested and researched as development must include a multi-faceted

approach. The Comprehensive Development Framework, defined by the World Bank is “a

holistic approach to development, highlighting the interdependence of social, economic, human

capital, governance, environment and financial aspects of development” (The Road to Stability

and Prosperity in South Eastern Europe: 2000, 6). This approach is useful when looking at the

benefits of joining the European Union and conforming to the Stabilization and Association

Process because of the many facets also included in the Stabilization and Association Process as

well as the acquis communautaire.

The European Union, in its constitutional document, The Treaty of Lisbon, orders for the

establishment of “an internal market” (2007, Article 2). Through this internal market, the

development of Europe shall be sustained using economic growth and macroeconomic principles

such as price stability and a competitive work force. The sustainable development shall work to

create social progress and protect the environment (Lisbon Treaty, 2007, Article 2).

Because of this holistic approach and expansive idea of development, the process of

achieving acquis communautaire is one which must take a great deal of factors into

consideration. In terms of Europe and the EU’s values, this paper argues that development

emerges from economic growth, revenue, a functioning market economy, and economic

liberalization. Along the way to achieving these things, though, the acquis communautaire

Bayens 10

establishes positive social conditions such as employment and education through the process of

accession.

Mehrotra and Jolly point out that growth does not necessarily lead to social development

(2000: 442). Instead, they argue, development is achieved from state activity in “cataly[zing] the

synergy between interventions which promote poverty-reducing growth and social development”

(2000, 445). The process of joining the European Union is designed to create economic growth,

one of the primary reasons states wish to join, but in the process, the states are also forced to

adopt policies that construct the social development Mehrotra and Jolly discuss.

As noted before, in terms of trade and development, economic growth is the primary

factor to keep in mind. However, the European Union uses characteristics such as democracy,

anti-corruption, equality, etc. to gauge development, as they are part of its founding values. Since

the EU holds these standards so dearly, they obviously have a deeper meaning for the Union

which is constantly trying to develop through improvement. Petrakos links the importance of the

Stabilization and Association Process to trade and development by stating, “the policies of

European integration do not have only economic importance, because in the long run, they also

contribute to peaceful coexistence and cooperation among the peoples of Europe,” which is a

proper summation of necessities for development by the terms of the European Union liberal

policies of interdependence (2002, 7).

3.1 Capitalism and Dependency Theory

The liberalized practice of free trade is also discussed in most of the literature as having

deep roots in capitalism. Levy and Claude (2011, 32) point out that many developing countries

were slow to accept liberalizing principles in their trade policies because of their attraction to

Marxist-inspired, socialist state-controlled economies. Many states who frowned upon the

Bayens 11

concepts of free trade considered dependency theory in response to being encouraged to

liberalize trade. Dependency theory states that social and economic maldevelopment is caused by

external factors, most notably, the power developed states hold over underdeveloped states

(Lamy et al.: 2013, 111).

Levy and Claude discuss how Raul Prebisch contradicted the teachings of David Ricardo

and Adam Smith by saying that the liberalization of markets by opening up to free trade would

not lead to specialization, and therefore economic growth would not succeed (2011, 32).

Mercantilist protection policies were implemented by introducing “import substitution” and

subsidies for new industries. These policies, however, did not trigger economic growth, but

rather, competition for government resources, which led to corruption. Additionally, protectionist

policies kept the developing world shut off to foreign investment, technology, and knowledge

(Levy and Claude: 2013, 33-35).

However, the experiences of several countries in East Asia during the 1960s created new

ideas about trade and development. The East Asian governments decided to adopt and implement

policies that promoted export and then gradually opened their markets to foreign investments and

imports, which would create competition for domestic firms (Levy and Claude: 2011, 34). This

practice became known as “outward orientation.” Chatterji (1988, 138) states, “Outward

orientation coupled with minimal government interference will stimulate efficiency within firms

and lead to efficient allocation of resources between firms.” He goes on to state that the exposure

to foreign trade and investment will increase technology transfer, and therefore enhance

productivity. By liberalizing trade practices, there’s an increased access to technology that can

behave in a cyclical manner and advance economic growth further.

Bayens 12

3.1.1 Asymmetrical Trade and Dependency

There is also a general consensus that the relationship between the European Union and

the ascending hopefuls of the Western Balkans is one that mirrors a so-called “North-South”

relationship, otherwise characterized as an “East-West interaction” (Petrakos: 2002, 8). This

brings in discussions and considerations of dependency theory and asymmetrical trade.

Dependency theory, as noted above, is the idea that practices involving economics and trade over

time have come to benefit certain states known as the core while the efforts or resources of the

periphery are exploited in order to do so. Applied to Balkan trade, we can see this with the very

asymmetrical trade patterns between the modern Balkan states and the European Union as well

as with former Yugoslavia and the European Economic Community.

Petrakos describes the West-East relationship as “inter-industry” asymmetry. In this

interaction, he points out that Western Europe specializes in industries which are typically

associated as more developed in terms of economic growth such as technology, knowledge, and

capital. Central and Eastern Europe, on the other hand, specialize in raw material and labor

intensive industries (2002, 8). Additionally, asymmetry exists in the trade relationships between

the EU and the Western Balkans. Although the European Union has begun accepting trade with

the Balkans, the EU’s trade partners have not necessarily also accepted the Balkans as their trade

partners (Montanari: 2005, 63).

3.2 A Commentary on the Fall of Communism: Differences in Literature

It is important to note that there is a stark difference in trade and development literature

before and after the Communist collapse. Earlier literature (Sydow: 1968; Chatterji: 1988) had

debates about the effectiveness of trade in developing a state’s economy. However, after the fall

of Communism, the Washington Consensus largely spread, and current literature (Levy and

Bayens 13

Claude: 2011; Liargovas and Skandalis: 2011; Montanari: 2005; Petrakos: 2002) speaks of

liberalization as the orthodoxy. By the large, global institutions such as the IMF and World Bank

supporting the ideas behind the Washington Consensus and implementing them through

practices such as the Structural Adjustment Programs, trade liberalization has become accepted

as the norm.

Many scholars of socialist economies agreed that foreign trade was a “relatively

independent, ultrastable subsystem of the national economy,” although it was warned that it must

still be thought of as a component of the national economy as a whole (Sydow: 1968, 119).

Socialist economies, such as Yugoslavia’s, were very much command economies that still

required planning of international trade through the Council for Mutual Economic Assistance

(CMEA or Comecon), and dependence on planned economies such as the USSR’s was

detrimental to foreign trade. At the end of the Cold War, when the USSR and communism

disappeared, the ideas around trade and development obviously changed.

For instance, in Sydow’s, “On Macroeconomic Forecasting of Foreign Trade

Development in the Socialist Economy,” he subscribes to the basic economic theories that all

trade, including foreign trade, depends on the basis of demand (1968, 123). He then goes on to

say that the dependence of imports and exports must be considered as a function of national

income development, meaning that “the entire growth of foreign trade become[s] dependent on

overall economic effectiveness” (124). The nature of this relationship, where not only imports,

but also exports are dependent on domestic economic growth is characteristic of the command

economy.

The nature of liberalized trade in post-Cold War Europe is extremely contrary to the

concept of trade being a dependent variable to economic growth. Instead of depending on

Bayens 14

economic growth determining whether or not imports can be afforded, the liberalization of trade,

where exports become the independent variable and economic growth the dependent, represents

the polar opposites of the ideas. The reversal of roles between these items shows that the

ideologies of socialist and post-Cold War era surrounding trade and development is quite

different and the orthodoxy of literature after the drastically altering event shifted.

3.3 Stability in Interregional and Intraregional Liberalization

The Balkan experience with trade and development is not as successful as with the

Central and Eastern European countries (CEECs) or Bulgaria and Romania. Authors such as

Montanari claim this is due to a range of problems in the area at the time of the successfully

integrated countries accession (2005, 61). Reasons include that trade within the European Union

as well as intraregionally was very limited. This stems from the instability present in the region

that was not conducive to development. Trade relationships did not develop, as investors and

other states were wary about investments and trade with unstable countries. Additionally, as a

result of the wars and relations that had formed the character of the Balkans, the states were also

subjected to sanctions. Also, the goods that were being produced in the Balkans were not up to

the standards of the European Union’s strict guidelines. This is likely due to the fact that the

industrial technology in the Balkans was not as advanced as that of the industries’ in the

European Union.

In regards to stimulating development and trade in the Balkans, the literature also

considers processes of liberalization through enlargement and spreading the trade policies of the

European Union and their principles as a promising method. This concept of spreading

liberalization is supported by the demand for immediate liberalization of trade with the Balkans

and the European Union (Gligorov, Kaldor, and Tsoukalis 1999). This argument states that by

Bayens 15

granting tariff-free access to industrial imports, which would likely encourage liberalization, free

trade would be complete in just a few years (1999, 32). Steil and Woodward (1999) also had

ideas that the European Union should create a customs union with the Balkans followed by an

enlargement of the European Economic Area that would include the region. These suggestions of

trade liberalization initiated by the European Union as the knight in shining armor were

supported by a strategy paper published by the Word Bank (Montanari, 2000).

In the study, the World Bank recommended a two-step process for quickening the pace of

trade liberalization between the EU and the Balkans. First, the EU was to negotiate bilateral trade

agreements that would set the foundations of trade liberalization among the states. Secondly, the

European Union was to begin a free trade area with the Balkan states. By doing so, Montanari

(2005) claims, this would speed up the process of integration (63).

An important feature of the Stabilization and Association Process that comes up in the

literature is that intraregional trade is vital. Much of the literature (Montanari: 2005; Petrakos:

2002; Skayannis and Skyrgiannis: 2002) mentions how this is beneficial for several reasons. The

first being that it builds cooperation and trust among the Balkans, which is needed after the

Yugoslav Wars in the 1990s when ethnic and national feuds arose. In this sense, interregional

trade liberalization builds trust and cooperation between the countries. Interregional trade also

helps develop the economy in several ways. First, by liberalizing trade through the process of the

Balkans opening markets to one another, each state is increasing the chances of building revenue

due to an increase in trade partners. Secondly, by institutionalizing liberal practices such as

decreasing or abolishing tariffs or opening the borders to more trade, competition is introduced

to the market (Montanari: 2005, 64).

Bayens 16

3.4 Foreign Direct Investment

The relationship between trade and development is interesting is for the fact that it is for

its cyclic nature. This type of relationship is characterized by the fact that when economic growth

characterizing development is obtained, revenue can be invested in programs such as trade to

improve the current institutions in place. In the literature on trade liberalization and development

of the Balkans, this principle is discussed at length in the form of foreign direct investment

(FDI). When capital from FDI enters a state, the economy may expand. It also has the capitalist

principles of liberalization that allow for increased competition.

Foreign Direct Investment has special relationships with other characteristics of trade and

development, which uniquely describes the association between the Western Balkans and the

European Union in terms of stabilization and accession. Liargovas and Skandalis (2012) find that

there is a positive relationship between inflow of foreign direct investment and trade openness.

However, with the spirit of a holistic approach using the Comprehensive Framework

Development, they also mention that there are other factors such as stability in politics and

exchange rates as well as market size (329). These are all issues that are important in the

Stabilization and Association Process literature outlining the European Union’s goals for the

region due to the fact that they compose of the underlying nature of the EU. The importance of

foreign direct investment’s role in economic growth and development can be seen in its effects

on improved technology, knowledge, and corporate governance (Kaminski: 2001, 25-26).

3.4.1 Stabilizing Effects of Foreign Direct Investment

The tensions that caused the wars of the 1990s are often pointed to as a cause of the lack

of development in the Western Balkans as well as a reason for the absence of expansive foreign

direct investment. As expected, the wars pushed investors away from devoting capital in the

Bayens 17

region due to the hostilities in the 1990s. This is very much unlike the experiences of the Central

and Eastern European countries who had an increase of foreign direct investment at the end of

the Cold War. For instance, by 1997, the Central and Eastern European countries, which had

peaceful intraregional relations at the time, had access to the European Union’s Common Market

without duties (Kaminski:2001, 27). During the period between 1990 and 1997, when hostilities

were still being waged in the Balkan states, Foreign Direct Investment in the transitional

economies of central and eastern European countries amounted to USD 49 billion, which was

seventy-seven percent of the total amount of FDI that was received by all transition economies

(USD 64 billion) (Kaminski: 2001, 29).

Kaminski attributes the large amount of foreign direct investment channeled to the

transitioning economies of Central and Eastern European countries to the fact that there was a

large pool of skilled and unskilled labor as well as large deposits of nonrenewable resources in

some countries such as the Balkans (2001, 25). Using Western Balkans and Central Eastern

European states as a comparison is still useful, though, for two reasons. First, the Balkans are

geographically important for the European Union. Secondly, the post-socialist economies of the

former Yugoslavia had the same characteristics which Kaminski credits the foreign direct

investment growth of the Central and Eastern European countries with.

Interregional distrust could be attributed to the lack of similar models of socialism

(Skayannis and Skyrgiannis: 2005, 34). Slaveski and Nedanovski find that increase of foreign

direct investment is closely linked to increased revenue from bilateral trade. The authors point

out that an increase of stability and accession to the EU would help attract FDI inflow (2002,

86). It is crucial according to Petrakos that the neighboring countries of the western Balkan

Bayens 18

region must cooperate in trade in order to compete with the inter-industry competition they face

from countries of Western Europe in the EU.

Skayannis and Skyrgiannis point out that the purpose of a road is to serve as a tool that

creates change within an economy, attracting industrial relocation, population movement, and

attraction of investment (2002, 44). The authors then go on to warn that as barriers are removed,

and shipping goods is made more convenient, it is possible that the “stronger end,” the states

who have better transportation and policies, will “absorb” the “weaker,” states who do not have

advanced transportation infrastructure that support trade (2002, 46). This becomes worrisome for

regional development and accession. Not only does trade suffer, affecting economic growth and

development in the “weaker” countries, but it also fuels the distrust and disintegration which so

much literature has been concerned about in the Balkans since the dissolution of the Social

Federal Republic of Yugoslavia.

3.5 Geography

The geography of the western Balkan region is a benefit for the European Union, but it is

also a hurdle. “Macrogeography,” Petrakos states, “determines the cost of transportation and

communication, and this, the ease and potential access of goods, people, and services to large

markets” (2002, 18). In the following section on transportation, it is clearer how these issues of

geography play into the hurdles of development in the western Balkans. When discussing the

role of geography in trade and development as a catalyst of accession to the European Union, the

Kaminski (2001) utilizes the Central and Eastern European countries once again as a regional

variable to compare against the Balkans. Unlike the Balkans, the Central European countries

have a common border with the more developed, Western EU member states which are also part

of the European Union. This is a factor many authors like to contribute to the fact that the

Bayens 19

Central and Eastern European countries joined the European Union much more quickly than the

states of the western Balkans.

By extending its borders to include the Balkans, the European Union is achieving its

goals of expansion. This opens up more access to more diverse products, and with the

application of the liberalized principles enshrined by the European Union, the goods will be at a

much affordable price once acceding states are part of the Common Market.

3.6 Transport

As a principle of basic economics, the lower the production price, including shipping, the

greater a profit that can be made in the successful sale of a product. The very nature of a cross-

continental free trade area means that high transportation costs are involved. Montanari points

out that trade between two parties will increase with the “economic size” of one another, which

can be determined by GDP and the size of population (2005, 69). At the same time, the

likelihood of trade will decrease as distance increases between the two parties’ geographic

locations caused by the necessary rise in costs to transport the good. The lack of infrastructure in

the region also has been pointed to as a potential drawback of development, as there is not a

significant, proper amount of transportation networks.

The history of the Balkans has been particularly difficult on the infrastructure of the

region. First, the policies of the socialist state did not account for the funds for competitive land

transport networks and services. Skayannis and Skyrgiannis account this for the fact that the

principles of socialism were not conducive to interregional nor domestic mobility (2002, 33-34).

Secondly, the wars of the 1990s in the region left the infrastructure in dilapidation. The Western

Balkans failed to improve the transport conditions because they were preoccupied with war, and

Bayens 20

the northern and eastern parts of the Balkans were not able to invest enough capital to improve

conditions very much (Skayannis and Skyrgiannis: 2002, 33).

It is also important to note that land transportation is not adequate enough to meet the

investors of Western Europe’s needs (Skayannis and Skyrgiannis: 200, 41). This means that the

European Union’s cohesive goals of connecting the continent cannot be achieved as smoothly as

wished. In order to draw foreign direct investment into the Balkans to promote trade and

development, forming a cohesive transportation network to smoothly ship goods is inherently

necessary. However, Skayannis and Skyrgiannis point out threat the lack of cohesion is due to

the different development plans (2002, 41). In order to represent the spirit of the European Union

as well as the major overarching goal of the Stabilization and Association Process, the states of

the Western Balkans must come to better terms of communication and work in unison.

As noted before, geography of the Western Balkans has a major function in the actions of

trade and development. Also keeping the principle in mind that the amount of trade will decrease

despite the increase of liberalized open trade, due to the variable of increased distance, the

principles of the gravity model, enhanced transport networks that could ultimately make

transportation costs lower is crucial. It is not the concept of total distance in the gravity model

that matters, but the factors behind what makes distance important: convenience and ease and

ultimate transportation costs for the overall shipment.

Trade liberalization can only be useful if goods can be shipped efficiently, otherwise

firms will look at other states to invest with, and states will not be concerned with western

Balkan goods due to the fact that the products are costly to receive. Policies of liberalization are

only as useful as the institutions supporting trade and development.

Bayens 21

4. Methodology

In the midst of the current Greek crisis, it is suitable to ask if joining the European Union

is a profitable option for spurring economic growth. By considering the relationship between a

hopeful acceding state which is hoping to increase market access through integration and the

European Union, it becomes clear that the acceding state is giving up a fraction of sovereignty,

which raises two key questions. First, if membership will drastically harm a state’s sovereignty,

and secondly, whether or not membership will be beneficial. In order to assess if membership to

the European Union is advantageous to the acceding countries, there are three questions to

consider: (1) Does accessing the European Union’s common market through membership

actually enhance a state’s economic growth through trade? (2) How realistic is the Stabilization

and Association Process for the potential and candidate countries to create and adopt new

policies and institutions that will carry out the goals of the Stabilization and Association

Agreements? (3) Is trade liberalization, the principle of trade found in the Stabilization and

Association Process, the ultimate form of trade policy that will develop a state?

To assess the success of trade by becoming a member of the European Union, the growth

in two groups of countries’ trade will be studied quantitatively by using GDP of imports and

exports since their ascendance to the European Union. The first group, is the Central and Eastern

European countries which ascended in 2004: the Czech Republic, Hungary, Poland, and

Slovakia. These states have a similar, yet differing experience from the Balkans, which will shed

light on the effectiveness of joining the European Union. The second group of countries are the

ones that share a closer experience to the Balkans, Bulgaria, Romania, and Croatia, which are

geographically close to the Western Balkans and share a more common experience. Additionally,

Bayens 22

these are the three newest states that have joined the European Union and can give an idea of

what new membership is like.

In order to assess if the Stabilization and Association Process is realistic for potential and

candidate countries in the Balkans to achieve, a qualitative study of the Stabilization and

Association Agreements will be taken. This will give an idea of the expectations the European

Union had for the potential and candidate countries. In order to assess the reality of Balkan

capability to pursue and achieve these expectations, an analysis of the 2015 annual progress

reports will give an idea of how far the potential and candidate countries have come in the

process of stabilizing and accession to the European Union. The annual reports are organized by

subjects found in the Stabilization and Association Agreements. The success of each topic is

described with terms such as “moderately good,” and, “advanced progress” to depict how much

improvement has been made. There are possible fallacies in this portion of the study due to the

nature of the research approach and the question. First, because it is qualitative, the study does

run the risk of having biased findings depending on interpretations of the information found.

Secondly, the reports being used to analyze the successes of the Stabilization and Association

Process are written and submitted to the European Union by the states individually. This means

that there is a chance that states may present a better image of themselves in order acceding to

the EU more quickly, these states may give a false portrayal of their progress. Thirdly, the terms

used to code the success and progress of each country is a loose definition. Therefore, even if a

country is being honest about their progress, it is still questionable what it actually means in

relative terms to other topics of accession and other countries’ progress. An added benefit,

though, is being able to understand how countries are viewing their experiences with

stabilization, accession and Europeanization.

Bayens 23

Finally, to assess the importance of trade liberalizing practices that are present in the

Stabilization and Association Process, there will also be a comparison of countries with

liberalized trade policies while examining economic growth rates measured by imports and

exports in GDP. The Open Market Index, resulting from a study conducted by the International

Chamber of Commerce, will serve as the basis of data for the variable measuring trade

liberalization. Comparing this measurement against GDP, the variable representing economic

growth, will give an indication of trade liberalization and economic growth’s relationship.

Unfortunately, the International Chamber of Commerce did not have data for the Western Balkan

countries, which would have been optimal for the study. However, there was information for

seventy-six countries. Two of the countries had to be removed, as the World Bank did not report

numbers for these countries’ GDP per capita. Despite this challenge, the data that is available

will give an idea of the more generalized relationships between trade liberalization and economic

growth overall due to the fact that the countries presented are spread across the world. In order to

give this part of the study more relevance to the European Union, countries will be color coded

by region to give an idea of what the extent of trade liberalization values in Europe and their

effects on the economy.

5. Research and Findings

5.1 Does Trade Liberalization affect Economic Growth?

The graphs in appendices 1-13 show the relationship between GDP and variables of

trade. GDP was chosen as a variable which would represent the overall economic growth when

being viewed on a line graph over time. Imports and exports were chosen in order to represent

the amount of trade that occurred during the same time. To run the test, it was necessary to

choose variables that represented the amounts of trade measured in the same, common unit of

Bayens 24

measurement. Unfortunately, the only variables the World Bank dataset has to measure both

GDP and the variables of trade which use a common unit are ones measured in “current US$, so”

the options for data were limited.

The data results, however, found in appendices 1-13, for the first question offer an

interesting point simply by first sight. When looking at the graphs, the exports and imports,

specifically, have a trend to follow the slopes of GDP. This proves, that trade does have an effect

on state’s overall GDP. In other words, trade’s role as an agent of economic growth is proven in

these relationships.

It is noteworthy, though, to notice that the lines representing imports are more likely to

conform to the lines representing GDP. Referring back to Sydow’s (1968) argument, he states

that import volume is a better indicator of trade than export volume. Imports, he says, are

dependent on revenue, in a socialist economy the volume of imports a country purchases is

dependent on GDP (128). However, as noted before, trade liberalization often makes the point

that revenue is instead, dependent on trade, most notably, exports. These graphs challenge this

concept and give support to Sydow’s theory. This may be due to the fact that the economies are

still in transition, as they still hold some of the characteristics of planned and command

economies.

Trade deficits, where imports are greater than exports, can be visualized by the gap

between the lines representing the two variables. If the literature holds true, the trade

liberalization policies of capitalist countries like those in the European Union are characterized

by greater exports to imports in trade. As the states in the region conform to the Stabilization

and Association Process, then, this gap should actually shrink because they are adopting more

liberalized policies.

Bayens 25

Another possible reason for this phenomenon is asymmetry, which is characteristic of the

“West-East” relationship between the Balkans and the member states of the European Union.

The less developed countries of the Western Balkans are creating a trade deficit by importing

more western goods than they have exported. By applying dependency theory, the states of the

Western Balkans are serving as a peripheral market for goods from western Europe to be sold.

However, in typical asymmetric relationships, there is no reciprocaty and not as many goods are

being exported from the Balkans to the EU as there are imports being sent to the Balkans.

Overall, though, all countries register economic growth. This shows that the states which

are active in integration and Europeanization are experiencing economic growth due to trade

revenues. An important factor to remember is that the graphs shown do not necessarily represent

factors of trade such as possession of natural resources. Instead, the charts are used in order to

shed light on the relationships between what trade is being conducted at a certain point in time

where liberalization policies may be adopted or other events that affect the trade and economics

of the state may occur.

5.1.1 Trade Liberalization and Economic Growth for the Western Balkans

Appendices 1-6 represent the economic growth of the Western Balkan countries which

correlate with tendencies of trade liberalization. These states are the ones which are either

potential or candidate countries to the European Union currently. By measuring the differences

in GDP overtime, it is possible to see how the different events in the states’ history have affected

the trade and economic growth. More specifically, with a better analysis of the events in each

country’s specific transitions to new economies, this will give a better idea of how those events

affected trade and economic growth. Additionally, with an analysis of the actions towards

achieving acquis procedures as stipulated and outlined in the Stabilization and Association

Bayens 26

Agreements, the slopes would increase as the objectives were accomplished. This is if the

Stabilization and Association Process was successful in establishing economic growth in its trade

liberalization policies that reflect the European values.

5.1.2 Trade Liberalization and Economic Growth in the Central and Eastern

European Countries

In the next group of states, the Central and Eastern European countries, which are a small

subset of countries that joined the European Union in 2004, a steady growth is visible for all of

the countries from post-communism up until 2008, which would more than likely signify the

global financial crisis. This decrease is present in all of the states in appendices 1-13. The slope

of these countries’ GDP and trade related variables also makes an interesting change around the

year 2000. This is more than likely due to the fact that trade liberalization practices to prompt

integration began in these countries as early as 1999, as stated above.

The gap between exports and imports for these countries is also noteworthy. The gap is

not nearly the size of its counterparts in the Balkan grouping of charts. Typically, for most of the

Central and Eastern European countries, the values for imports and exports were almost

identical, creating an overlapping line. There are a few instances where the gap is larger in some

states than others, but typically the values are almost equal. This signifies that the Central and

Eastern European countries are less likely to have asymmetrical trade and trade deficits as drastic

as the Western Balkan states. It is also worth noting that the largest gaps occur around 2008, the

year of the financial crisis. Additionally, the gap tends to increase

The decreased noticeability of the gap between imports and exports compared to the

Western Balkan states could signify the quality of transition from a planned economy to that of

an open economy. If we regard Sydow’s theory that planned and command economies have a

Bayens 27

predictable nature of purchasing imports due to revenue success, whereas open economies

revenue success depends on their ability to export goods, this idea holds true. It is well known

that the economies of the Central and Eastern European countries had a much easier time of

integrating to the standards of the acquis, and the literature supports that trade liberalization

practices such as bilateral trade with the European Union were better with this set of countries.

Also in relation to the success of liberalization policies, the values are represented to give the

effect that the trade variables are much more closely incorporated with the GDP of the country.

The peaks and valleys of the graphs are much clearer in relation and follow slope more closely.

Interestingly, the gap between the import and export values tends to increase as time goes

on. This may be a concerning issue involving trade deficits and asymmetry as well as their

relationships to trade liberalization. If the gap is a definite sign of asymmetry and deficits, this

signifies that these countries with this trend are not experiencing the expected benefits of

accession to the European Union or trade liberalization.

5.1.3 Trade Liberalization and Economic Growth in the Acceded Balkan States

The third set of countries, Bulgaria, Romania, and Croatia, represent the countries which

do not necessarily have the same experience as the Western Balkans although, they should due to

geographic proximity. Croatia was the only state among this group that was part of the former

Socialist Republic of Yugoslavia. Bulgaria was also the only one of this group that had a

communist experience rather than a socialist one. Bulgaria and Romania both ascended to the

European Union in 2007, while Croatia is the newest member to join the European family as of

2013.

Despite shared characteristics such as geography and command and planned economic

experiences, something occurred with these three countries that made the adoption of acquis and

Bayens 28

therefore integration to the European Union much easier. This is evidenced by the lines on the

graphs. The values that represent trade follow the values that represent overall economic growth

more closely, and look more like the Central and Eastern European group of charts than those

from the Western Balkans group. This would lead one to conclude that the adoption of trade

liberalization and its effects on economic growth were more successfully adopted and applied to

the economies of these states than the other Balkan states which have candidate and potential

member status.

5.2 The success of the Stabilization and Association Process in the Balkans

This section analyzes the European Union’s expectations of the Western Balkans when

signing the Stabilization and Association Agreements. The requirements which represent the

underlying values of the European Union and principles of “Europeanization,” are presented in

the Stabilization and Association Agreements. By analyzing the 2015 reports from the potential

and candidate countries, the progress in achieving trade liberalization and accession requirements

stated in the acquis communautaire will be assessed on a country by country basis. Cross

referencing the information from these two types of documents will give an idea of how each

country is working towards achieving acquis, their progress, and any additional issues that may

be included.

5.2.1 Inter- and Intra-Regional Relations and Cooperation

The language in the Stabilization and Association Agreements reflects the behavior and

ideas of the European Union’s principles of liberalization-in trade and general theory. The

Stabilization and Association Agreements refer to the European Union member states as “the

Community,” and discuss the relationships it has with the signing state positively in union and

equality. Because the relationships between these parties must be positive in order for trade

Bayens 29

liberalization theory and healthy trade relationships to succeed, there is a large emphasis on

developing positive inter- and intraregional relationships with Member states of the EU, other

states undergoing the Stabilization and Association Process, potential, and neighboring countries.

This is extremely crucial for the stabilization portion of the process as well as for the

Enlargement Policy of the EU due to the previously strained relationships that emerged from the

Balkan wars of the 1990s.

To underline the importance of the necessity of cooperation, the agreements all have

clauses discussing cooperation. Because cooperation is commanded for a multitude of states in

which the European Union has relationships with, the definitions of cooperation are spelled out

very concisely. The first type of cooperation is with the European Union. The article calling for

cooperation with the EU, or the Community, as it is referred to in the agreements states: “The

Community and [signing state] shall establish a close cooperation aimed at contributing to the

development and growth potential of [signing state]. Such cooperation shall strengthen the

existing economic links on the wides possible foundation, to the benefit of both parties”

(Stabilisation and Association Agreement Albania: 2006, Article 86). This statement gives the

EU authority in the accession process. Also, it orders for the submission of sovereignty in

exchange for accession while simultaneously providing purpose for the rest of the document.

The success of this requirement is conveyed in the overall reports. Because the states are

taking the effort to take the requirements seriously, this portion of the Stabilization and

Association Process is seen as effective. Although there are points in which the reports show

regression in their goals, typically they progress and can claim advanced degrees of alignment to

the acquis communautaire. Since cooperation is the most vital part of the European Union’s

goals and the overall success of liberalization lies in cooperation between two or more parties,

Bayens 30

this step is critical for states to complete in order to access the trade markets and increase

revenue that can be applied to the infrastructural and social aspects of development.

This portion of the Stabilization and Association Agreements also typically commands

the states to maintain and create bilateral agreements with other countries in the area that will

potentially become member states. This must be done in order to create and sustain good

relationships with other countries that are also associated with the EU during the transition

process. The Stabilization and Association Agreements encourage compromises of bilateral

agreements between acceding hopefuls and other states. Continued involvement in free trade

areas such as the Central European Free Trade Area (CEFTA) is also encouraged (Stabilisation

and Association Agreement Macedonia, Serbia, Kosovo: 2001, 2008, 2015, Articles 14, 17, 16)

In preparation of joining the EU customs union and FTA, the agreements also order that a

bilateral agreement be set up between the Community and the signatories for a certain amount of

years. Between he six states, the amount of time each agreement should last is anywhere between

a maximum of five to ten years. In the amount of time that the bilateral agreements are open

between the EU and the signatory, the individual state will be able to enjoy the benefits of

accessing the European Common Market before full accession occurs.

For all of the Western Balkans that have potential or candidate status, the reports

conclude that the European Union is the largest trade partner. As seen with the graphs in

Appendix 7.1, there still is a trade deficit between Western Europe and the Balkan states. The

deficit is a product of the “West-East” phenomenon of dependency theory and is noted in all of

the reports. One could argue that because this deficit does exist, joining the European Union

may not be advantageous for economic growth because the states are still not being treated as

equally as the European Union would show. However, there is proof that since the years of

Bayens 31

adopting the Stabilization and Association Agreements signatory states have in fact experienced

economic growth from trade. The issue is that the states are still in transition and must adapt their

trade, economic policy, and markets.

5.2.2 Transitional Policies of Transitional States Attempting Accession

The states of the Western Balkan range from having a “good level of preparation”

(Stabilisation and Association Agreement Macedonia: 2006, Article 25) to being in the “early

stage of developing a functioning market economy” (Stabilisation and Association Agreement

Bosnia and Herzegovina, Kosovo: 2008, 2015; 29, 30). A market economy, the Stabilization and

Association Agreements claim, is the crucial factor of adopting trade liberalization. There is also

a correlation between the date of signing the Stabilization and Association Agreements and how

far the development of the market economies are in their respective state. Thus, the longer that a

state has been in transition under the Stabilization and Association Process, the more likely they

are to having a stronger functioning market economy and the trade liberalization procedures

found necessary for accession to the EU. This also shows that the transitioning markets take time

for liberalization to set in. After explaining the level of success a state has had in developing a

functioning market economy, the reports explain what steps can be taken to make more progress

over the next year and into the future.

The suggestions for creating a more liberal economy that will be able to join the

European Union often lies in the privatization of public enterprises, strengthening the rule of law,

increasing education, and invest in transportation infrastructure in order to promote foreign direct

investment. There are drastic differences between each country and their strategies for

developing a stronger market economy because the rules of the acquis communautaire are so

varied.

Bayens 32

5.2.2.1 Competition and Dumping

First, because the European Union values trade liberalization, healthy competition is also

strived for in all of the domestic economies. This does become an issue, though, when

cooperation is also valued in the Union. Each country has an interest in implementing subsidies

and aid to certain sectors in order to promote their own products abroad. Unfortunately, this

harms markets domestically and internationally for other economies. Therefore, in order to

protect economic interests and competition, the European Union has certain laws about dumping,

which is the practice of selling a good abroad for less than its original worth or below the cost of

production. If the practice of dumping does occur, either party of the Stabilization and

Association Process can report the act to the World Trade Organization (WTO). In order to show

progress in stopping unfair competition practices that are illegal under the Stabilization and

Association Agreements, Western Balkan states develop State Aid Commissions (SACs). These

commissions monitor the levels and dispersion of aid states give to private and public industries

in order to create transparency. Many of the states all agree that there are measures they could

take in order to strengthen their SAC that would bring about a greater amount of trade

liberalization and reduce threats to inter- and intraregional trade.

5.2.2.2 Investment Promotion and Protection

Another reason to create a greater deal of liberalization in the economies of the Western

Balkans is to attract investment. Paradoxically, by liberalizing trade in a way where competition

is set more by the laws of supply and demand, industry will grow by appealing to other

businesses to enter their market, which will create domestic revenue. All states’ agreements and

reports claimed that there was a greater need to promote and protect investments. All of the

reports show that there is an increase in foreign direct investment over time since adopting the

Bayens 33

Stabilization and Association Process. The investments in businesses in these countries creates

more revenue, which can then be applied to development programs.

5.2.2.3 Sectoral Revitalization

Other strategies the states of the Western Balkans in transition economies with to

implement is industrial diversification, modernization, and restructuring. Many of the states in

the Western Balkans such as Serbia have a large informal sector (Annual Report Serbia: 2015,

30). Another sectoral issue is the micro-enterprises, which can be seem in countries such as

Macedonia. For instance, in Macedonia, small businesses make up 98% of companies and are

responsible for employing 80% of all people (Annual Report Macedonia: 2015, 30).

Diversification in industries, especially ones that will have larger output will make the

economies of the Western Balkans more competitive while also staying within the framework set

out by the acquis communautaire (Stabilization and Association Agreement Kosovo: 2015,

Article 99).

5.2.2.4 Transportation

The Stabilization and Association Agreements all state that transportation is also key to

accession to the EU, for reasons of interconnectivity to the rest of the continent as well as the

ability to move goods that are being traded. Serbia’s annual report, which claims to be

“moderately prepared” (2015: 41) in the area of transportation stated that by improving

dilapidated infrastructure from the conflicts that happened in the 1990s, private and public

investment would increase (29). Interestingly, the Stabilization and Association Agreements

discuss transportation in a way largely centered on trade. However, in the annual reports, there is

a slight shift. Although many realize that there is an advantage in increasing and improving trade

through developing transportation infrastructure, more modern issues have arisen since the

Bayens 34

signing of the agreements. For instance, Macedonia’s annual report discusses meeting acquis

communautaire road safety requirements (2015: 43). Other reports, such as Albania’s, mentions

keeping a closer check on drug transportation (2015: 93). Although there is a shift on focus, the

states do realize that it is important to continue developing infrastructure to support trade within

countries. By doing so, the states are not only increasing revenue, but complying with other

European Union standards which might have not been an original focus.

5.2.2.5 Free Movement of Goods and Duties

The most attractive part of joining the European Union, however is for the abolishment of

tariffs due to strenuous trade liberalization laws. This makes it cheaper for producers to sell their

goods abroad because they do not have to impose a tax on the consumer. The products therefore

enter a country without a duty. For the acceding states to fully benefit from this, first, they must

also adopt their laws regarding their tariffs and the movement of goods. As a reciprocity

principle, this means that in return for not receiving a tax on their goods, a state must not impose

a tax on another state’s goods. This underlines the importance of cooperation of the European

Union and the interdependence of liberalization. In all of the Stabilization and Association

Agreements, there are clauses about reducing and/or abolishing duties on goods. There are also

clauses about abolishing the quantitative restrictions of imports a state might place on a certain

good. All of the states besides Kosovo are “moderately prepared” in the free movement of goods.

Kosovo, the most recent to sign a Stabilization and Association Agreement, is in the “early

stage” of preparedness for the free movement of goods. By reciprocating the practice of

abolishing customs, and adopting new liberalized practices, the acceding states are more likely to

join the European Union more quickly. Only then, will they fully be able to enjoy the full

benefits of being a trade member of the European Union that could increase market access while

Bayens 35

simultaneously decreasing trade costs. Increasing market capacity, then in return, would increase

the prospects for revenue.

Overall, by analyzing the progress of the Western Balkan states commitment to achieving

acquis communautaire through their progress, it is clear that there is quite a bit of work to be

done in terms of aligning policies to those of EU accession requirements. However, many of the

states seem to be making a great deal of progress. It is also important to note that typically,

Macedonia would be more prepared in the fields of accession. This is more than likely due to

being the first of the Western Balkans to sign a Stabilization and Association Process. However,

it is also important to note that Croatia signed their agreement after Macedonia and has already

joined the European Union. This means that some states were also more ready to accede, or

perhaps, were more “European” than others at the time of signing the Stabilization and

Association Agreements.

5.3 Open Markets and Economic Growth

After plotting the data that measures economic growth and market openness-an indicator

of trade liberalization-an interesting relationship emerges as seen in Appendix 14. There is a

positive correlation between the two variables, whereas trade openness increases, so does GDP.

This reinforces the concept that practices of trade liberalization such as trade openness do have

an effect on economic growth, which can be used to further development.

However, the positive correlation is not the most interesting portion of the relationship. In

fact, the graphing creates an exponential function. This indicates that as the values for open

market increase there comes a point where a limit begins to take place. As OMI score is

measured on the x-axis, by analyzing where the limit intersects the axis, we are able to see where

the optimal level of market openness exists. This value is somewhere around 5.

Bayens 36

Interestingly, there is also a cluster of European countries, which are represented by the

blue dots. This existence of this cluster gives an idea of the practiced amount of market openness

by the European Union, as the majority of the countries that make up the “Europe” region are

member states. These dots that represent Europe are mostly located between 3 and 5, the

majority hovering around 4. This indicates that the European countries are not necessarily the

most developed, but that they are coming to the limit of market openness.

The outliers for the case of market openness, Singapore and Hong Kong are textbook

examples of trade liberalization. It is visible on the chart, though that these countries still do not

have the greatest GDP, though. For the outliers representing high GDP, are Luxembourg,

Switzerland, and Norway, which all have relatively high levels of market openness also. The

chart representing country values of OMI scores and GDP can be found in Appendix 15.

6. Conclusion

Based on the history and current conditions of the Western Balkans, accession to the

European Union seems to be in the best interest of the states in the region for a multitude of

reasons. It also appears that the European Union’s Expansion Policy seems inevitable to pick up

these states as members. Revisiting the idea of foregoing certain amounts of sovereignty to join

this political block, one must ask what makes membership so desirable, considering the

difficulties of accession. The promise of increasing trade potential due to the access of the

Common Market in Europe seems like a promising answer for the sovereignty conundrum.

In order to join the EU and gain their access to this market, it is crucial for potential and

candidate states to adapt to the expectations and requirements of the European Union, most

notably the trade liberalization policies. However, one must ask if these alterations will be worth

accession in the long run. By analyzing the relationships between trade, liberalization, and

Bayens 37

economic growth, it is clear that there is a positive relationship, proving that it would be

advantageous to join the European Union if not only for the process of adaption to more

liberalized trade policies that will create economic growth. The economic growth which is

earned through an increase in revenue, can then be applied to development programs that will

further enhance the state.

The literature shows that there are clearly still barriers to accession as well as more

liberalized, prosperous trade. Challenges include adopting European values such as non-

corruption and equality as well as more tangible features like infrastructure such as

transportation networks and foreign direct investment. Geography of the Western Balkans also

provides an interesting relationship between the hopeful states and European Union, which is

positive and negative in some aspects. These issues must be considered in order to create

stronger trade and development.

A suggestion for further study is to analyze the specific growth patterns and market

openness of the country groups: Western Balkan potential and candidate states, Central and

Eastern European states, and the EU member Balkans. This will give a clearer idea of how

important market openness is to the successful integration to the European Union. An index

following the framework of the International Chamber of Commerce’s will be needed to also

cross analyze the specifics of these regions to the entirety of the selected states in Finger’s study.

Additionally, it will be more effective to study the growth of certain institutions of social

development against economic growth. This will further cement the relationship between trade

liberalization, which has been proven to create economic growth, and development when

increased revenue is applied. It is expected that there would be some issues with this study, as

funds need to be applied properly in public finance to create effective social development. It

Bayens 38

would be encouraged that if this study was to be done, one would also look at the issues of

effectively applying the increase in revenue and see what challenges were in store. For the case

of the Balkans, it would be expected for issues such as corruption to be the biggest issue.

Bayens 39

7. Appendences

7.1 Country Accession Groups

Groups States Year of Accession

Central and

Eastern European

Countries (CEECs)

Slovakia , Czech Republic , Hungary , Poland ,

Cyprus, Malta, Slovenia, Latvia, Lithuania,

Estonia

2004

Acceded Balkan

States

Bulgaria, Romania, Croatia 2007, 2013

Candidate

Countries

Albania, Montenegro, Serbia, Macedonia

(FYROM ), Turkey

2025-2030?

Potential Countries Bosnia and Herzegovina, Kosovo ???

7.1.1 Western Balkans GDP at market prices (current US$), Imports of goods and

services (current US$), Exports of goods and services (current US$)

Bayens 40

Appendix 1: Albania

Appendix 2: Bosnia and Herzegovina

Appendix 3: Kosovo

Bayens 41

Appendix 4: Former Yugoslav Republic of Macedonia (FYROM)

Bayens 42

Appendix 5: Montenegro

Appendix 6: Serbia

Bayens 43

7.1.2 Central and Eastern European Countries (2004 ascending countries) GDP (at

current US$), Imports of goods and services (at current US$), Exports of goods and

services (at current US$)

Appendix 7: Czech Republic

Appendix 8: Hungary

Bayens 44

Appendix 9: Poland

Appendix 10: Slovak Republic

Bayens 45

7.1.3 Balkan EU Member States (Bulgaria, Croatia, and Romania) GDP (at current

US$), Imports of goods and services (at current US$), Exports of goods and services (at

current US$)

Appendix 10: Bulgaria

Appendix 11: Croatia

Bayens 46

Appendix 13: Romania

Bayens 47

7.2 Trade Opennness and Economic Development

Appendix 14

Bayens 48

Appendix 15

Country Region

OMI

Value1 GDP2

Luxembourg Europe 4.9

113726.

6

Norway Europe 4.4

102832.

3

Switzerland Europe 4.5 84669.3

Australia Pacific 4.3 67627.8

Sweden Europe 4.4 60283.2

Denmark Europe 4.3 59818.6

Singapore Asia 5.5 55979.8

United States

North

America 3.7 52980

Canada

North

America 4.2 52305

Ireland Europe 4.6 51814.9

The

Netherlands Europe 4.7 51425.1

Austria Europe 4.3 50557.8

Finland Europe 4.2 49492.8

1 Finger, Michael K. 2013. Open Markets Index. International Chamber of Commerce (ICC). 2 (April). 2 “GDP Per Capita.” 2016. World Bank. http://data.worldbank.org/indicator/ny.gdp.pcap.cd (February 17, 2016).

Bayens 49

Iceland Europe 4.5 47493.2

Belgium Europe 4.8 46625.3

Germany Europe 4.2 46441.7

UAE MENA 4.6 42831.1

France Europe 3.8 42627.7

United

Kingdom Europe 4 42309

New Zealand Pacific 4.1 42308.2

Japan Asia 3.7 38633.7

Hong Kong Asia 5.5 38364.2

Israel MENA 3.9 36281.2

Italy Europe 3.7 35420.9

Spain Europe 3.6 29370

Cyprus Europe 4 27910.6

Korea,

Republic of Asia 3.6 25997.9

Saudi Arabia MENA 3.7 24646

Slovenia Europe 4.2 23144.1

Malta Europe 4.7 22776.2

Greece Europe 3.2 21719.2

Portugal Europe 3.6 21618.7

Czech

Republic Europe 4.2 19813.9

Estonia Europe 4.5 19155.4

Bayens 50

Slovakia Europe 4.4 18109.5

Uruguay Africa 2.7 16879.5

Chile

Latin

America 3.9 15741.7

Lithuania Europe 4 15692

Latvia Europe 3.9 15025.8

Russia Asia 2.8 14487.3

Argentina

Latin

America 2.5 14443.1

Poland Europe 3.8 13776.5

Kazakhstan Asia 2.9 13611.5

Hungary Europe 4.2 13585.4

Brazil

Latin

America 2.2 11711

Turkey MENA 3.4 10975.1

Malaysia Asia 3.9 10973.7

Mexico

North

America 3 10172.7

Romania Europe 3.7 9587.2

Columbia

Latin

America 3 8020

Bulgaria Europe 4.1 7656

China Asia 2.8 6991.9

South Africa Africa 3.2 6889.8

Bayens 51

Peru

Latin

America 3.6 6603.8

Thailand Asia 3.2 6229.2

Algeria MENA 2 5491.6

Jordan MENA 3 5200.3

Tunisia MENA 2.6 4310

Ukraine Europe 3.7 4029.7

Sri Lanka Asia 2.4 3628.3

Indonesia Asia 3 3623.5

Morocco MENA 2.6 3156.2

Egypt MENA 2.9 3104.2

Nigeria Africa 2.3 2978.8

Philippines Pacific 2.8 2787

Vietnam Asia 3.5 1908.6

Sudan Africa 1.8 1726.1

India Asia 2.5 1455.1

Pakistan MENA 2.1 1275.4

Kenya Africa 2.1 1257.2

Bangladesh Asia 1.9 954.4

Uganda Africa 2 674.3

Ethiopia Africa 1.8 503.9

Bibliography

Bayens 52

Albania 2015 Report. 2015. European Commission. (11 October). http://ec.europa.eu/

enlargement/pdf/key_documents/2015/20151110_report_albania.pdf. (23 February 2016)

Balaam, David N., and Bradford Dillman. 2014. Introduction to International Political

Economy. Edinburgh: Pearson.

Barral, Welber. 2006. “Trade and Development(s): Many Concepts, Different Approaches.” In

Proceedings of the Annual Meeting. American Society of International Law. 100 (March-

April): 217-220.

Baumol, William J., and Kyu Sik Lee. 1991. “Contestable Markets, Trade, and Development.”

The World Bank Research Observer (January): 1-17

Bosnia and Herzegovina 2015 Report. 2015. European Commission. (11 October). http://ec.

europa.eu/enlargement/pdf/key_documents/2015/20151110_report_bosnia_and_herzegov

ina.pdf. (23 February 2016)

Chatterji, Monojit. 1988. “Debt, Trade and Development.” Economic and Political Weekly 23

(January): 138-139.

Curtis, Glenn E., ed. 1990. Yugoslavia: A Country Study. Washington, D.C.: U.S. Government

Printing Office.

Dhar, Biswajit. 1993. “Trade Policy and Development.” Economic and Political Weekly 28

(December): 2910-2912.

Falkinger, Josef, and Grossman, Volker. 2005. “Institutions and Development: The Interaction

between Trade Regime and Political System.” Journal of Economic Growth 10

(September): 231-272.

Finger, Michael K. 2013. Open Markets Index. International Chamber of Commerce (ICC). 2

(April).

Bayens 53

The Former Yugoslav Republic of Macedonia 2015 Report. 2015. European Commission. (11

October). http://ec.europa.eu/enlargement/pdf/key_documents/2015/20151110_report_

the_former_yugoslav_republic_of_macedonia.pdf. (23 February 2016).

Frank, Isaiah. 1967. “New Perspectives on Trade and Development.” Foreign Affairs 45 (April):

520-540.

“GDP Per Capita.” 2016. World Bank. http://data.worldbank.org/indicator/ny.gdp.pcap.cd (17

February 2016).

Gligorov, Vladimir, Mary Kaldor, and Loukas Tsoukalis. 1999. “Balkan Reconstruction and

European Integration.” The Hellenic Observatory, The European Institute, The Centre

for the Study of Global Governance, The Vienna Institute for International Economic

Studies. (October): i-53.

Helleiner, Gerry. 1992. “Trade, Trade Policy and Economic Development in Very Low-Income

Countries.” The Bangladesh Development Studies (June-September): 55-68.

Jumo, K.S., and Rudgier von Arnim. 2008. “Trade Liberalisation for Development? Who Gains?

Who Loses?” Economic and Political Weekly (November): 11-12

Kaminski, Bartolomiej. 2001. “How Accession to the European Union Has Affected External

Trade and Foreign Direct Investment in Central European Economies.” The World Bank

Development Research Group. (April): 1-44.

Kaminski, Bartolomiej, and Manuel de la Rocha. 2003. "Stabilization and Association Process in

the Balkans: Integration Options and their Assessment." World Bank Policy Research

Group (August): 1-51.

König, Jörg. 2015. “European Integration and the Effects of Country Size on Growth.” Journal

of Economic Integration. (September): 501-525.

Bayens 54

Kosovo 2015 Report. 2015. European Commission. (11 October). http://ec.europa.eu/

enlargement/pdf/key_documents/2015/20151110_report_kosovo.pdf (23 February 2016).

Kotios, Angelos. 2002. “Southeastern Europe and the Euro Area: The Euroization Debate.”

Eastern European Economics 40 (November-December): 24-50.

Lamy, Steven L., et al. 2013. Introduction to Global Politics. New York: Oxford University

Press.

Levy, Philip I., and Claude Barfield. 2011. Swap: How Trade Works. Washington, D.C.: AEI

Press.

Liargovas, Panagiotis G. 2012. “Foreign Direct Investment and Trade Openness: The Case of

Developing Economies.” Springer (February): 323-330.

Mattoo, Aaditya, Randeep Rahindran, and Arvind Subramanian. 2001. “Measuring Services

Trade Liberalization and its Impact on Economic Growth: An Illustration.” The World

Bank Development Research Group. (August): 1-36.

McFarlane, Bruce. 1988. Yugoslavia: Politics, Economics, and Society. London: Printer

Publishers.

Montanari, Marco. 2005. “EU Trade with the Balkans: Large Room for Growth?” Eastern

European Economics 43 (January-February): 59-81

Montenegro 2015 Report. 2015. European Commission. (11 October). http://ec.europa.eu/

enlargement/pdf/key_documents/2015/20151110_report_montenegro.pdf. (23 February

2016)

O’Neill, Hugh. 1990. “The Role of the States in Trade Development.” Proceedings of the

Academy of Political Science 37 (4, International Trade: The Changing Role of the

United States): 181-189.

Bayens 55

Petrakos, George. 2002. “The Balkans in the New European Economic Space: Problem of

Adjustment and Policies of Development.” Eastern European Economics. 40 (July): 6-

28.

Rusinow, Dennison. 1988. Yugoslavia: A Fractured Federalism. Washington, D.C.: The Wilson

Center Press.

Scheckner, Harald. 2008. “The Stabilization and Association Process: An Engine of European

Integration in Need of Tuning.”

Serbia 2015 Report. 2015. European Commission. (11 October). http://ec.europa.eu/enlargement/

pdf/key_documents/2015/20151110_report_serbia.pdf. (23 February 2016).

Skayannis, Pantoleon D. and Haralambos Skyrgiannis. 2002. “The Role of Transport in the

Development of the Balkans.” Eastern European economics. 40 (September-October):

33-47.

Škuflić, Lorena, and Valerija Botrić. 2008. “Analysis of the Cohesive Trade Elements between

the European Union and the SEEC-7.” Eastern European Economics 46 (January-

February): 6-23.

Slaveski, Trajko, and Pece Nedanovski. 2002. “Foreign Direct Investment in the Balkans: the

Case of Albania, FYROM, and Bulgaria.” Eastern European Economics. 40 (July-

August): 83-99.

Stabilisation and Association Agreement Albania. 2003. (1 January). http://ec.europa.eu/

enlargement/pdf/albania/st08164.06_en.pdf. (23 February 2016).

Stabilisation and Association Agreement Bosnia and Herzogovina. 2008. (16 June). https://

www.gov.uk/government/uploads/system/uploads/attachment_data/file/228868/7743.pdf.

(23 February 2016).

Bayens 56

Stabilisation and Association Agreement Former Yugoslav Republic of Macedonia. 2001. (4

September). http://ec.europa.eu/enlargement/pdf/the_former_yugoslav_republic_of_

macedonia/saa03_01_en.pdf. (23 February 2016)

Stabilisation and Association Agreement Kosovo. 2015. (27 October). http://ec.europa.eu/

enlargement/news_corner/news/news-files/20150430_saa.pdf. (23 February 2016)

Stabilisation and Association Agreement Montenegro. 2007. (15 October). http://register.

consilium.europa.eu/doc/srv?l=EN&f=ST%2011566%202007%20INIT. (23 February

2016).

Stabilisation and Association Agreement Serbia. 2008. http://ec.europa.eu/enlargement/pdf/

serbia/key_document/saa_en.pdf (23 February 2016).

Steil, Benn, and Susan L. Woodward. 1999. “A European ‘New Deal’ for the Balkans.” Foreign

Affairs. (November/December). https://www.foreignaffairs.com/articles/europe/1999-11-

01/european-new-deal-balkans.

Stewart, Frances, and Ghani, Ejaz. 1986. “Trade Strategies for Development.” Economic and

Political Weekly 21 (August): 1501-1510.

Sydow, P. 1969. “On Macroeconomic Forecasting of Foreign Trade Development in the

Socialist Economy.” Soviet and Eastern European Foreign Trade. 5 (Spring-Summer):

118-127.

Treaty of Lisbon. 2007. Official Journal of the European Union. (17 December). http://eur-

lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2007:306:FULL:EN:PDF (1 March

2016)