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EU integration scares some Albanian businesses

TIRANA, May 21-  Albania has turned its eyes to Brussels for this summer, keeping its spirit up to the decision for opening accession negotiations with the European Union. If the answer is negative, most likely a wave of pessimism will cause very damaging consequences for the country’s economy rather than the tough process of EU membership itself. In the real aspect regarding benefits, the economy as a whole will not benefit from any additional EU funding at least in the next four years, whether negotiations start or not. On the other hand “Made in Albania” production can take the final blow if membership talks start.

The Balkan Eurobarometer for 2018 found that 4 percent of businesses in Albania think that EU integration is a very bad thing, 19 percent think the situation will be the same, and 75 percent of them consider the integration process as a good thing. The survey showed how both Albanian businesses and citizens alike want EU integration more than any other Balkan country. Tired of the destructive internal policies and the high level of poverty, both citizens and Albanian businesses tend to take every offer from abroad without being clear about the consequences. In this case the integration requires high-cost standards that will put Albanian businesses in the face of real bankruptcy.

But if negotiations are opened, then the Albanian businesses are too late to cope with the consequences. Alban Zusi from the Exporters Association said the government should have started a consultation process with manufacturing businesses in time to inform them about the consequences. Businesses affected by the EU integration process need to conduct in-depth analysis of costs in order to have arguments to demand protective measures from EU products. Nikolin Jaka who is Chairman to the Chamber of Commerce and Industry in Tirana, said implementation of standards is a long process which will continue even after Albania’s EU membership. Their full implementation requires not only a lot of time, but also considerable funds that Albania does not hold today. Full implementation of these standards will also require a further increase of EU financial support. Jaka said this situation requires rigorous cooperation with the private sector, especially in terms of monitoring, information, and support with technical assistance and financial funds for businesses to achieve the implementation of these standards.

 

Two negative effects by the negotiations

Zusi said the Albanian businesses will be negatively affected in two directions by the integration process. Firstly, the abolition of customs tariffs for all EU imports will make Albanian products uncompetitive in domestic markets as well. Albania has high costs because it lacks economies of scale and consequently the goods coming from the largest and most advanced economies risk destroying Albanian production at the beginning. This process will most probably affect the agro-processing industry. Secondly, meeting the standards that the membership process requires is costly and only affordable in some cases by small industries like those of Albania. If in the case of customs tariffs there is negotiation space, there is no tolerance for the standards. Each production line should invest at least 300 to 400 thousand euros in water discharge plants and hundreds of thousands of euros in terms of environmental standards and food safety.

This means that if the negotiations are opened the profits through years of Albanian businesses will go to meeting the standards rather than activity expansion or new technology investments. When Bulgaria and Romania joined the EU in 2008, many businesses were definitively or temporarily closed because they did not meet the standards required by the EU. Slovenia negotiated that Gorenje electrical household products were also protected with tariffs, even four years after EU membership. The protective measures are negotiable. Albanian meat or milk producers may require EU products to enter our market with customs rates of over 10 percent, both during the negotiation period and post-accession, until our industries become competitive.

Zusi said that as soon as Albania joins the EU, local producers will either block production or make important investments, unaware whether they can afford them due to high costs. The dairy processing sector, the fruit-vegetable processing industry, such as cottage cheese, pickled peppers or cucumbers, the chicken, egg-producing industry, and the confectionary one which uses milk and eggs, are expected to be the most affected . Zusi said the EU does not allow subsidies for more than 200,000 euros for a company, however the needs of Albanian companies today only for improving water spillings need higher investments than that amount. Hypothetically, if Albania joins the EU all Albanian companies need to be shut down.

 

Costs if negotiations won’t start

Adrian Hackaj who is a renowned economist from the Cooperation and Development Institute (CDI), said the opening of negotiations is not linked to direct benefits to the Albanian economy at least in the first three to fours years of the process. Even if negotiations are opened Albania will continue to be treated financially by the EU through IPA funds, as well as currently. Hackaj said that if the negotiations are not opened the country’s image is mostly damaged in the eyes of investors. If the European Union decides to open negotiations for Macedonia and not for Albania, it would position Albania at a non-competitive level, especially in terms of foreign investment. If a foreign company wants to expand into the Balkans and hypothetically all countries offer the same regulatory and fiscal conditions, it would choose Serbia, Macedonia, or Montenegro because of their opened membership negotiations. Hackaj said that from an economic point of view this would cost the economy as a whole.

The prolongation of the integration process would have a negative psychological effect on the citizens who seeing themselves in the EU, will be more urged to migrate to other Union member countries. According to the Gallup International survey, Albania has the highest emigration potentials in Europe. 60 percent of Albanians expressed the desire to leave the country in 2018, as Albania has the highest number of asylum seekers in the EU since 2015. The high level of emigration is restraining the country’s economic development because the Albanian businesses are beginning to feel the lack of workforce. In the absence of opening negotiations, Albanian citizens will be deprived of the standards offered by the accession process, especially in terms of food security. They will also be deprived of freedom of movement, to work and stay without deadlines in the union countries.

Precedents from other Eastern European countries which have joined the EU, show that the countries’ GDP has increased after accession. Trade with EU countries would further expand and with full membership EU import prices would become cheaper. Currently, about 80 percent of Albanian imports come from EU. Integration will provide a better business climate as the regulatory framework in this area needs to be aligned with EU standards. Perspectives on employment and education will also become easier and cheaper. Trade and goods costs will be reduced by lifting barriers and tariffs.

Jaka said that in the rapid reaction, the opening of the negotiations for Albanian entrepreneurship is undoubtedly an encouraging signal and strengthens the confidence of investors, both domestic and foreign, which in turn creates the premises for growth of employment and economic growth. He added that entrepreneurship confidence is strengthened as to clarify its plans for long-term investments, but also as a reflection to prepare for laying the foundations for a competitive economy focusing on priority sectors and offering competitive advantages. In the short term, Jaka said that a large market in which Albanian producers can export their products will open. But on the other hand Albanian producers will be even more exposed to the risk of high competitiveness from European goods. Jaka said this competition should be counteracted by the growth of Albanian exports, as well as by the opening of new businesses with Albanian or foreign capital, in order to create more export space to the European Union market.

 

How the egg industry will be affected

The agri-food industry will be the most affected by the EU integration process. The dairy processing sector, the fruit-vegetable processing industry, the poultry and confectionary industry that uses milk and eggs, are expected to be the most affected as they will be put in front of huge and immediate investment obligations at the time of imposing EU food security measures. Sami Gjergji who is a doctor of sciences in the field of zootechnics, explained how the integration process will affect the egg business. He said that currently the Ministry of Agriculture is preparing the standards of coding and trading of eggs according to EU standards, with four codes where the Code 0 is for biological eggs produced by chickens which grow in an open environment and have the entire chain from land to bio foods. Code 1 is the open access system for chickens with outside access which requires 4 square meters for each chicken. Code 2 is growth in land without outside access, and code 3 are industrial eggs from chickens grow in cages. Since 2012 the EU directives have changed the cage residence rate, reducing the number of poultry in the cage.

Another requirement for the eggs that are traded is the code that must be stamped on the egg, which contains the state, region, enterprise code, and date of production. According to EU rules, eggs should be consumed up 28 days after production, then the eggs should pass for industrial use. None of these standards apply today. The eggs are all according to the standard of industrial production and the manufacturers here set the exit from the warehouse date, and not the production one. When enforcing standards and putting codes, companies will be forced to lower the number of chickens. Gjergji predicts that at the moment of EU accession, our egg production industry will automatically collapse. He adds that today integration is seen as a political process when it is far more than that, and preparing for standard implementation should receive maximum attention.

 

Micro-businesses will be less competitive

The Albanian economy is characterized by small businesses with one to four employees which account for over 90 percent of the total enterprises, where self-employment prevails. These businesses are often at the margins of existence and do not have sufficient capital to adapt the standards that will need to compulsory meet as the country will gradually integrate. Gentian Elezi who is an expert on integration issues, believes that market opening and integration with the European market puts small entrepreneurs in trouble, as has happened elsewhere. Consequently, this process will also bring changes in the economic structure within the sector, enhancing competition and the need for scale economies and businesses that can withstand the market. It anticipates that the consequences are gradually expected in these ventures, but the impact will not be the same in each sector. In the medium to long term, a reallocation of the labor force according to the needs of the new integrated market will occur.

Stefan Pinguli who is an entrepreneur and the producer of Birra Stela, said that for domestic products in Albania, the measures for the balancing of prices between the small and the big producers don’t apply. Concretely in the European Union an agreement is set that big producers, whether of beer or other products, will have differentiated tax levels to balance the high costs of small business. He proposed that this EU directive should be extended to all industries, but above all to those foodstuffs for which the country has installed most of the industry and labor forces.

 

31 chapters with difficult obligations

The opening of the negotiations and Albania’s accession to the European Union will go through a long process which consists in the compliance of 31 chapters involving all of the country’s vital activity from democracy and its institutions, to economic and social criteria. Currently, 31 chapters are in effect since the country assumed the status of candidate. To date, the 31 chapters are at the initial stage of implementation which implies the compliance of Albanian legislation with that of the EU in all sectors.

Later, law enforcement will be the challenge of the process of opening negotiations and full membership. The first chapter is the free movement of goods, which basically removes the trade barriers and national safeguards for specific categories. Albania has received an average rating in this chapter for the required stage, as we have not met the legislation yet and we have not strengthened market surveillance institutions. The progress report provided positive assessments for public procurement procedures, copyright and food security, as well as fully assessed without progress the developments in the agricultural sector and investment in science and technology.

The latest progress report that gave the positive recommendation for the opening of negotiations emphasized the establishment of a functioning market economy, and the ability to cope with competitive pressures and market forces within the Union. According to the report, Albania has made some progress and is moderately prepared for the development in the functioning of the market economy. The European Commission notes that reforms to improve the business environment are crucial and require further efforts.

“The laws and rules that support the business climate remain difficult and the gaps in the rule of law continue to hinder businesses and investments,” the report notes.

 

Primitive agriculture fades the perspective

Developments in the agricultural sector received a negative assessment from the latest Progress Report, which noted that the Albanian government is not progressing on elementary EU issues such as property titles and farm registers. The government failed to make accounts in the agriculture sector, which also suffers from land fragmentation where about 350 thousand farms own an average of one hectare. It is not known how far the farm business goes because sales and profit are not reported in the sector. At these levels, a technology-based sector development is farfetched, and competition with the EU can’t even be discussed at this stage. The Progress Report notes that public spending on farmers’ support is very low and there is no yearly follow-up on the amount of aid provided.

Regarding the organization of the common market, two legal acts have been adopted in olive oil, which partially approximate the relevant national legislation with the EU. There are currently no special support schemes aimed at protecting landscapes, natural habitats, and biodiversity, or preventing adverse effects. Our economy is driven by the service sector, but agriculture still plays an important role. Services accounted for about 54 percent of the GDP in 2017. Agriculture remained the second most important sector with about 22 percent contribution, the industry with 13.3 percent has gradually increased its share of the economy over the last 10 years  mainly as a result of the growth in crude oil production. Within industry the production is relatively small at 6.4 percent, and mainly produces low value products and high-intensity products such as textiles and footwear at 10.5 percent.

 

Problematic food security

EU overseers confirm the concerns of Albanian experts that food security will be the most problematic issue in the country’s integration process. EU’s hygiene rules for the production of foodstuffs provide a high level of food safety. Animal health and food safety of animal origin prevail. Also, the food production chain from plant to processing requires high quality assurance. In the EU’s 2018 progress report it was noted that Albania has started preparing on the fields of food security, veterinary and phytosanitary policies. Some progress in implementing relevant policies in the field of food and veterinary safety are made, but the problem remains to update the relevant legislation to bring it into line with the latest EU legislation on animal health and plant health checks, and enforce food safety rules including controls on imports and maximum levels of waste pesticides. The EU requires Albania to complete the restructuring of the veterinary sector in accordance with the duties and functions set out in the amended legislation.

Albania needs to update animal registries to provide solid traceability systems for food of animal origin. On the general food safety, the National Food Authority for the second consecutive year will carry out official controls under a risk-based plan adopted at the beginning of 2017. The EU notes that Albania needs to match internal control procedures with those of the EU. The National Food Authority began using the TRACES system during 2017, to issue veterinary export certificates for animal products such as fish and eggs. As far as veterinary policy is concerned, mass vaccinations against rabies, brucellosis, skin diseases in cattle, and anthrax in infected areas have continued.

Although positive efforts have been made during the second half of 2017 to update information on the animal identification and registration system, there is still insufficient or inaccurate data on the ground due to the lack of reporting in previous periods. The veterinary services reform announced since 2015 was intended to consolidate the veterinary to create a clear chain of communication. The EU assessed that the pace of reform is slow, the services remain fragmented, and there are no personnel with various remaining functions that are being discovered, such as animal waste management, farm biosecurity, or aquaculture. Monitoring of unwanted substance residues has covered pesticide residues in ten plant products.

Albania’s capacity to improve food security in the market is expected to grow further in 2018 with the help of IPA funds. Improvements are recorded in the microbiological monitoring methodology of raw materials such as milk, based on samples from each milk processing unit or dairy factory with a capacity of more than one ton per day. Samples are analyzed for counting somatic plates and cells every three months. This approach provides a clearer picture of the situation for crude milk. In addition to the general rules contained in the Food Law, no progress has been made in preparing the legislation required for specific food rules.

 

The precedent

Croatia is the last Balkan country to join the European Union through a lengthy negotiation process of almost nine years, from 2004 to 2013. Croatia was the most developed country in the region after Slovenia. The shipping industry and tourism brought the country 10 billion euros exports a year prior membership, but now, four years after joining the EU the country is going through a difficult period. Public debt has risen 10 percentage points since 2013 while the deficit in goods trade has deepened further as the country is facing aging populations and high emigration that incited membership. The country faced difficulties in the recent years after Agrokor, the country’s biggest company which used to employe 60,000 persons, filed bankruptcy as among other things it could not withstand competition from opening up markets with the EU. But membership has further strengthened institutions and democracy in the country at all levels, and Croatian citizens benefited from the opening of trade with the EU by buying more quality goods at cheaper prices. Foreign investment has been on the rise and air travel tickets have become cheaper.

Following Croatia from other regional countries, Montenegro and Serbia are in the process of negotiating membership with the EU and are expected to join by 2025, while Albania and Macedonia are expected to receive the green light in June for opening the talks that could lead to membership in the next decade. Albania’s biggest challenge is facing the EU markets opening up and preparing its businesses to become competitive in this process. Unlike the entire region, agriculture in Albania accounts for a large part of the economy, at 20 percent in GDP and around 40 percent in employment. The European Commission  gave a low rating to this sector in its latest Progress Report, compared to other chapters that received the most average rating.

“During the negotiation process, Albania needs to diversify into value-added sectors and find the way to become part of the EU’s economies of scale,” the report wrote.

 

Balkan Federation prior EU integration

The prime ministers of Serbia, Albania, Macedonia, Montenegro, Bosnia, and Kosovo, have signed an agreement, and an action plan is currently underway to create a free trade zone by 2023, as in the EU countries. In some respects, this facilitation which has started with the CEFTA agreement, significantly reduces barriers and trade procedures between countries, but puts some industries in difficulty to become uncompetitive with the opening up of markets for several reasons. Adi Haxhiymeri from the Flourery Processing Association and administrator to Bloja factory, said that even under conditions when the market was not fully liberalized, the Albanian industry is not coping the competition of the regional flour. Serbia, Macedonia and other countries in the region apply subsidy policies for wheat production, while Albania does not. Although Albanian flour-mills have invested in modern technology, they do not have the same access to raw material as other flour-processing businesses in Serbia and Macedonia. Haxhiymeri said that if measures are not taken to prevent subsidies, the flour industry in the country will go bankrupt in the face of customs-free trade.

But as the free trade agreement has taken the consensus of the respective prime ministers, Albanian businesses are not informed and are not even aware of the process. Albania is undergoing an internal transition  this year due to elections, the political crisis, and the crippled justice system. The Regional Cooperation Council (RCC), set up with the contribution of the six countries to create the common WB6 market and with the support of donors, has started to operate. In addition to the free trade space, progress has been made on the establishment of a common energy market. A study on a common foreign investment platform has been completed, where it will intervene in six areas since the laws and the level of taxation for investors.

The transport sector has completed a study on regional corridors and businesses to be developed by infrastructure and logistics. In the field of tourism, countries have drafted a joint bid for the Balkan tour that has started to be applied this summer. Also, a regional task force has been set up for anti-corruption and improvements in justice systems. In the field of free movement it is agreed in principle for the recognition of diplomas in the field of medicine, dental services, engineering, and architecture. At the service of all these reforms there are already available 2 billion euros donated by the donors to be used according to the initiatives for each reform.

The prime ministers of the six countries have signed that until 2023 in our region the goods, services, investments, and people can freely move without tariffs just like the EU today, without quotas or barriers and where trade is facilitated by the World Trade Organisation (WTO) rules. Joint border control with one stop should start working during 2018-2019. The lifting of barriers to trade in services and the electronic recognition of certificates should take place by 2023. By 2020 additional protocol for the settlement of CEFTA disputes should be implemented and countries should also have completed investments in the internal trade infrastructure without a fee. By 2020, a Task Force must also be in place to stop the secretive subsidies of individual states to certain sectors. Albania currently has limited trade with the countries of the region. According to CEFTA data, Albania’s trade with these countries has not been significantly affected as expected since the signing of the agreement in 2013.

 

Why should Balkan countries unite

Macroeconomic stability has been difficult in the Western Balkans, especially after the 2008 crisis. The global financial crisis tensed fiscal positions in the six countries, significantly reducing fiscal performance and boosting public debt pressure on the other hand. Countercyclical policies led to doubling of primary deficits in the region from 1.7 percent of GDP in 2008 to 3.8 percent in 2009, continuing by over 2 percent by 2016. As a result the average gross debt in the region grew from about 30 percent of GDP in 2008 to over 50 percent in 2016, where Albania and Serbia have the highest level in over 70 percent. The crisis also highlighted some other structural weaknesses. The World Bank (WB) analyzed that there is a need to improve efficiency, equity, and transparency of fiscal discipline and policies for more effective resource mobilization, and improve the delivery of public services. Public spending in the region remains concentrated on salaries, pensions and social payments, leaving little room for investment.

The WB estimates that there is room for improving tax collection and for greater progress in tax policies. After the financial crisis, there is now a common need in the Western Balkans to ensure macroeconomic stability to consolidate public finances and to increase capacities in attracting direct investment flows. Transition towards the consolidation of the market economy remains incomplete in the Western Balkans. The region has made considerable progress in price liberalization, foreign trade, and privatization, but structural transformation remains lagging behind and at the back of other small transitioning economies. Particularly today, the result of transition in the Western Balkans is similar to that of other European transitioning economies in 1996. Progress has been slow in the areas of competition, governance, restructuring of state-owned enterprises, and large-scale privatization.

In recent years the convergence to reach EU countries has been low in the countries of the region. Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro, and Serbia, marked a sharp decline in poverty since the beginning of transition to market economies. Living standards increased nearly sixfold in Bosnia and Herzegovina, almost tripling in Albania, and doubling in Serbia between 1995 and 2015. During 2000-2008, living standards in the Western Balkans expanded faster than in other countries of the world and the EU average. During this period, creating new jobs helped reduce poverty. In the early 2000s, nearly one in three people in the region lived in less than 5 dollars a day. By 2008, this figure dropped to only one in five. Indicators such as longevity, skill, and access to services also improved during this period. 

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