Ardian Fullani: The western Balkans - from regional cooperation to EU
membership
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the conference "The
western Balkans: overcoming the economic crisis - from regional cooperation to EU
membership", Brussels, 9 December 2009.
* * *
During the last 20 years the region has undergone significant structural changes, which have
fueled economic incentives and economic growth. In the early stages of transition a fast and
significant transformation in the labor and later in the capital market reoriented all factors of
production toward more productive sectors. This contributed to higher total factor productivity
and consequently fast economic growth.
The final stage of transition was dominated by a robust financial deepening process fueled
among others from EU based capital inflows. This financial intermediation busted credit
growth and consumption yielding to absorption led growth model in the region.
In the aftermath of crises our policy choices are limited. From a broad prospective the region
should chose a new philosophy, different from the boom-bust model of the last decade. I
strongly believe this must be the focal point of the Regional Policies.
The current crisis pointed out several problems in our growth models. The so called catching
up process was a model of unsustainable consumption behavior rather than sustainable long
run equilibrium. Despite the overall fiscal consolidation and relatively high rate of growths, it
resulted in increasing macroeconomic imbalances mostly evidenced in the fast enlargement
of current account deficits. From a micro analysis point of view that was reflected on
unsustainable financial position of enterprises and households balance sheets, lead by
persistent fighting for market share in products and services in the banking system.
It is for that reason that hard gained achievements attained during the last 15 years in
eastern Europe, got reversed within one week.
Today, one year after the eruption of the financial crisis, I have to affirm that all the measures
undertaken by central banks of countries in the region resemble one another. Generally
speaking, in my opinion the measures adopted during this period are of an extreme nature;
they are unusual and go against the "constitution" of the modern central bank with regard to
liquidity, money market and monetary policy transmission channels. However, we have
embraced the philosophy that "the end justifies the means".
Nevertheless, I think the central bank has become more vulnerable in terms of independence
and monetary policy efficiency. Providing liquidity in any case, in any quantity, with any
maturity and accepting any kind of collateral would definitely damage the monetary policy,
with potential second round effects on financial stability. If central banks in the short run shift
their focus from the primary objective to supporting economic growth at any cost, it would
indirectly create premises for long rung economic imbalances.
The current polices pursued by both monetary and fiscal authorities should not be
considered as a new normality. While the global economy is adjusting toward a new
equilibrium, solid macro-prudential long run policies should replace current stimulating
efforts. Therefore the challenge for our economies in the long run is to address current
problems and the inherited ones based on a new model of growth, based on: (i) higher
savings and investments, aiming toward a contained consumption matched by domestic
production; (ii) persistent FDI inflows oriented toward tradable sectors; (iii) regional
cooperation.
Let me briefly share with you some of my thoughts on the
importance of this last remark,
namely regional cooperation. Following arguments illustrate the benefits of cooperation, at
several levels:
•
From a development point of view, increased cooperation and integration on a
regional level creates a greater scope for economies of scale. This would increase
incentives for local and foreign investors to undertake big investment project that
would not be profitable otherwise. A related advantage would be increased
specialization of our economies, leading to a higher economic performance.
•
On a policy level, coordinated macroeconomic policies, legal and prudential
frameworks, would tend to improve the allocation of resources and to prevent
beggar-thy-neighbor policies. This race to the bottom type of philosophy would not
benefit the region as a whole.
• our region is in competition with several emerging
From a strategic point of view,
regions on a global scale. It's not sufficient any more to be the best guy in the
village; especially when there are an increasing number of villages on a global
scale, with an ever increasing number of clever guys.
•
From a convergence point of view, the sharing of experiences would avoid costly
errors, while coordinated policies and steps would make a stronger case for a faster
EU integration. We should demonstrate that the region is fit to enter the club, by
firstly adopting the rules of the club among ourselves.
In a more technical and concrete approach, the efforts of the public authorities in our region
to achieve a real and meaningful cooperation should consider the followings:
the mentality of the societies in our region should
First, change. It is noted that this region
has a history full of conflicts and many other disputes. It is now up to the young generations
and to the people with an open-minded approach in our region, to find solutions and to
promote behaviors that will build our future path toward Europe.
Second, the commitment to full integration with the European Union, should serve as a
solid platform for cooperation, and as an anchor for pursuing sound policies and
coordinated structural reforms.
Third, a very important precondition will be the strengthening of countries domestic
anchors, specifically in the form of medium-term fiscal rules, fiscal councils, or embedding
fiscal constraints in countries' constitutions.
Fourth, the legal basis that supports such international cooperation should be fully in
place. It is important that such cooperation be guided from a set of consolidated principles
with regional relevance.
Fifth, there is urgent need for policies that would encourage stronger inward FDI and other
non-bank flows. The region's growth model might need to be more self-reliant, emphasizing
domestic savings, better mobilization of labor resources, and a much greater role for the
traded good sector as an engine of growth.
Dear participants,
Let me conclude by pointing out that our region offers an interesting combination of
countries, languages, culture and geographical composition. Analyzed individually, it is
difficult to think that our economies generate substantial incentives for foreign investors,
particularly for strategic and technologically advanced investors, able to use the advantages
provided by the economies of scale. Moreover, the cost associating different strategic
projects at a national level would be higher for our still lagging economies. I do believe that
there is plenty of room to establish a joint regional market and our duty is to make utmost use
of it. There are still a few gaps in the region with respect to infrastructure, energy, tourism,
financial architecture, mining and agriculture. Out task is to jointly identify missed
opportunities, to jointly incorporate those into realistic business plans and to jointly present
these regional projects in a contemporaneous way to private investors and supranational
agencies, to benefit their political, financial and technological support and finally ensure a
stable growth model. On a national level, there is still the need for deep structural reforms
and all efforts should be made for them to operate in a concerted way across the SEE
region. I believe that the European Union structures should closely orientate, monitor and
assess this process. This is the only way to steadily convert our countries into highly
productive economies, attractive to foreign investors against the backdrop of favourable
labour cost. This all makes sense once we fully re-dimension our educational capacities,
particularly in technology and other areas where we could discover and explore advantages
compared to other economies. Instead of looking at each other merely as competitors, we
should approach the regional cooperation as a non-zero-sum game, where each country has
to gain in partnership.
Summarizing, this process calls for risk adverse macro and development policies;
well coordinated policy mix; stronger cross border co-operation, and concerted efforts
- perhaps harmonized and motivated across the region - to deepen the quality of
structural reforms. Structural reforms targeted to improving the business environment
will help foster new capital inflows and strong and sustainable growth.
In this respect (and in the light of the last crisis lessons), countries can make better
use of the EU fiscal surveillance process as explicit policy commitment devices.
Candidate and potential candidate countries on one side and the EC on the other have
the opportunity to transform this surveillance process (possibly enhancing it with an
analytical input form IMF) into an efficient foreign anchor.