15 former and only 15 percent in the latter (Table 2). On the other hand, differences between Croatia and FYR Macedonia in terms of the composition of GDP are much smaller despite huge discrepancies in GDP per capita.

_Table 2: Composition of GDP in SEE-5 countries in 1999_

||Albania|Bosniaand<br>Herzegovina|Croatia|FYR<br>Macedonia|FR<br>Yugoslavia|
|---|---|---|---|---|---|
|Agriculture|52.6|14.5|8.5|9.2|18.1|
|<br>Industry|11.9|22.1|20.4|21.5|38.9"|
|Services,ofwhich|35.5|63.4|71.1|69.2|43.0|
|Construction|13.5|6.7|6.7|6.3||
|Transportationandcommunication|3.2|8.0|9.2|7.2||
|<br>Otherservices|18.8|48.7|55.2|55.7||

iincludes construction.

Sources: Albania, FYR Macedonia, and Croatia-IMF data; Bosnia and Herzegovina-National<sup>Officeof</sup> Statistics; FR Yugoslavia-Economic _Survey of Europe,_ No. 1., United Nations Economic Commission<sup>for</sup> Europe, Geneva 2001.

Heterogeneity in economic development combined with the fact that even its most developed economy is well below the level of a least developed EU member raises the<sup>riskthat</sup> intra-regional integration will lead to relocation of industrial activity to Croatia at the expense of poorer members in the regional FTA. If this were to happen, there would be a danger<sup>thatde-</sup> industrialization pressure in some countries would exacerbate rather than relieve regional tensions.

The case of intra-regional liberalization without concurrent integration into the EU and/or multilateral trade liberalization falls into the South-South framework with all its potential pitfalls. This applies only to SEE-5 preferential trade arrangements, as other MoU signatories-Bulgaria and Romania-are already part of a single European market for manufactures fully in<sup>placesince</sup> January 1, 2002. Duty-free access of firms from the EU, EFTA, CEFTA and a<sup>host</sup> of<sup>other</sup> countries effectively wipes away potential distortions inflicted by a South-South FTA. For SEE-5 economies, however, liberalization in intra-regional trade would lead to a South-South<sup>trap unless</sup> they significantly reduce MFN tariff rates and open to EU imports at a similar pace as<sup>tothose</sup> from other preferential partners within the region.

One should also note that the South East European region is rather small in both economic and population terms, which has potentially negative welfare implications. The aggregate GDP of US$50 billion amounts to around 40 percent of the GDP of Greece.<sup>Itis</sup> merely 2.5 times larger than that of a small former Yugoslav republic of Slovenia while their<sup>total</sup> foreign trade tumover of about US$30 billion is lower than that of Slovenia. Inclusion of Bulgaria and Romania-two countries already on a different track of pan-European<sup>integration-</sup> does not significantly alter the picture. The combined size of the region in terms of<sup>GDPis still</sup> well below that of the Greek economy. The danger inherent in the small size is significant from the point of view of preferential trade arrangements. The empirical evidence suggests that FTA among small economies usually lead to welfare losses as they result in trade<sup>diversionandlittle</sup> trade creation.