29 discrepancies in data reported by SEE-5 countries on their mutual trade, we averaged<sup>the data on</sup> imports and exports as reported by respective partners.

The values of G-L indices for intra-SEE-5 trade are extremely low, and<sup>probably</sup> overestimated given a high level of aggregation of trade data, not only for<sup>Albania'stradebut</sup> also for trade among former Yugoslav republics. There are also huge imbalances<sup>inthistrade</sup> (values below the diagonal in Table 9). For instance, Croatia's exports to<sup>Albaniaare24-times</sup> larger than its imports from Albania. Croatia's and FYR Macedonia's exports<sup>toBosniaand</sup> Herzegovina and Albania are almost five-times larger than their respective<sup>imports fromthese</sup> countries.

_Table 9: Values of Grubbel-Lloyd indices (above diagonal) and ratio of exports_<sup>_(reporters in rows)_</sup><sup>**_to_**</sup> _imports from other SEE-5 countries in 1999 (in percent)_

||Albania|Bosniaand<br>Herzegovina|Croatia|FYRMacedonia|
|---|---|---|---|---|
|Albania|N/A|0|1|15|
|BosniaandHerzegovina|0|N/A|23|15|
|<br>Croatia|_2378_|_474_|N/A|19|
|FYRMacedonia|474|_209_|_80_|N/A|

Source: Own calculations based on data from WITS database.

The low levels of intra-industry trade in trade among SEE-5 countries have<sup>two important</sup> implications. First, they point to a limited potential for growth at least in<sup>theshort term,i.e.,until</sup> new industrial capacities are established. At present the differences in factor endowments rather than economies of scale associated with supplying a larger market and fixed<sup>costsof production</sup> continue driving this trade. Low values of G-L indices usually indicate limited trade in<sup>similar</sup> differentiated products, which, in turn, point to low levels of interaction among firms operating in the same networks of production and distribution as suppliers of parts and components.<sup>Since</sup> previous ties among industrial firms within the former SFRY were weak and<sup>a decadeof turmoil</sup> in the region wiped them away, these would have to be built from scratch. While<sup>onemay hope</sup> that the SA process will lead to the creation of a regional market, the crux of the matter is that investment response to these new opportunities offered by a larger market will<sup>nothappen</sup> overnight.

Second, the low levels of intra-industry trade, as captured by the<sup>valuesof G-Lindices,</sup> suggest not only the low potential for growth, but also considerable potential<sup>forprotectionism</sup> and trade friction.<sup>3 8</sup> The dominance of inter-industry trade has<sup>seriousimplicationsforregional</sup> trade liberalization effort. Inter-industry trade, which is driven by gains from<sup>differingfactor</sup> proportions, may produce significant inequalities in regional development and income distribution. Conforming upon this trade preferential treatment would have serious<sup>income-</sup> distributional ramifications threatening incomes of unskilled labor force<sup>inmoredeveloped</sup> countries and those of skilled labor force in less developed areas. To<sup>besure,liberalization</sup> the presence of two-way trade across all sectors and zero when exports<sup>donot overlap withimportsacross</sup> sectors.

**38** There are some exceptions, however. As discussed below, profiles of<sup>economicstructuresandtrade</sup> indicate some complementarity, which would suggest lower adjustment cost of<sup>tradeliberalization.The</sup> examples are the following dyads: Albania-Croatia and Albania-FYR Macedonia.