May 10, 2013

Cross-Border Cooperation in the Western Balkans: A Driver of Reform?
Heather A. Conley and David L. Phillips Introduction The vision of a Europe “whole, free, and at peace” has been a fundamental tenet of U.S. foreign policy. In its earlier manifestation, U.S. and EU policy concentrated on the political and economic liberalization and transformation of Central and Eastern Europe. In the eyes of Washington, this objective was largely completed in 2004, after the majority of these countries were accepted into the European Union and NATO. However, for most Western Balkan countries, the goal of full European integration is yet to be achieved. To reach this objective, the United States and Europe firmly believed that the magnetic attraction of both the European Union and NATO would be sufficient to spur political reconciliation and economic reform by the political elite and civil society in the Western Balkans, as had been the case in Central Europe. The transatlantic policy community pointed to the Former Yugoslav republic of Slovenia as an example of the region’s most significant success. Montenegro, with a population of 657,000, was offered a Membership Action Plan (MAP) by NATO in 2009 and granted approval to begin EU membership talks in June 2012. Croatia is likely to formally join the European Union in 2013, strongly reinforcing the enduring success and relevance of this policy. Yet reform efforts were successful in Central Europe not only due to unprecedented levels of policy focus and assistance by the United States and Europe, but also to the receptivity for internal reform across the political spectrum within each aspirant country. Unfortunately, despite a significant amount of Western investment in the Western Balkans, there is no politically unifying vision among the elite and civil society to maintain sufficient reform momentum for rapid transformation. Moreover, traditional reform tools, even on a very large scale, such as the EU Rule of Law (EULEX) mission in Kosovo, were unable to achieve desired institutional and integration success. 1 Assistance funds were occasionally unspent or spent unwisely. For example, in August 2012 it was reported that government officials in Kosovo tapped into funds intended for human capital retention to raise salaries and hire their own party members. 2 Clearly, Western strategies and technical programs that were successful a decade ago in Central Europe have fallen on uncertain and, on occasion, infertile soil in the Western Balkans. As time has passed, regional reform efforts have grown more uneven and precarious in the Western Balkans. Simultaneously, NATO and EU membership have become more aspirational than inevitable. Concurrently, both the United States and Europe are internally consumed with their own domestic debt and deficit challenges. The European Union has particularly struggled with the need to correct the structural flaws of its currency union, which has prevented it from constructing a more coherent, cohesive, and common foreign policy following ratification of the 2009 Lisbon Treaty. For example, four years after Kosovo’s declaration of independence in 2008, and following the end of international supervision, five EU members have yet to formally recognize the country. Void of political leadership, the EU enlargement agenda and its policies have become perfunctory and technical in nature rather than bold and visionary. Although the magnetism of EU membership demonstrates that from time to time it still has some “pull,” as the recently successful Serbia-Kosovo agreement demonstrated, the EU accession process

European Court of Auditors, “European Union Assistance to Kosovo in the Rule of Law,” Special Report No. 18 2012, 2 Muhamet Brajshori, “EU’s blue card attracts Balkan professionals,” Southeast European Times, 16/08/2012.

2 normally boils down to a series of progress reports, visits by senior EU officials, and technical assistance. The road to European integration and accession has never seemed so distant for the Western Balkans. The United States has been eager to focus on new regions of interest and opportunity, specifically the Asia Pacific, as it seeks to unwind itself from its longstanding security presence in South Asia, the Middle East, and Europe. For example, commenting on Albania’s EU accession process in June 2012, Deputy Assistant Secretary of State Philip Reeker said, “There are 12 key recommendations that the European Union provided over a year ago. It is time to work on that because the window is rapidly closing. The European Commission will soon set to work on its annual report—the status report—and so there is an opportunity now to make some real progress, particularly in three key areas: parliamentary reform, electoral reform, and lifting of immunities.” It is unclear whether U.S. encouragement of EU-demanded reforms enhances the prospect of reform or simply reverberates in an increasingly loud policy echo chamber. Transatlantic policy toward the Western Balkans appears to be a “perfect storm” of outdated policies that are out of sync with the region, ineffectual policy tools, and of waning policy interest. Therefore, it is time to examine potential new drivers of reform that emanate from within the region. One such driver is cross-border cooperation. The International Conference on the Albanian Neighborhood With generous support from the Rockefeller Brothers Fund, the Center for Strategic and International Studies and Columbia University’s Program on Peace-building and Rights at the Institute for the Study of Human Rights launched an initiative entitled, “The Albanian Neighborhood Project: Fostering Albanian Cross-Border Cooperation in the Western Balkans.” This project was designed to examine one driver of regional reform: cross-border cooperation or “interest solidarity” among ethnic Albanians in Albania, Kosovo, the Former Yugoslav Republic of Macedonia, Montenegro, and Serbia with an emphasis on people-to-people and cultural contacts in the fields of:     Economic Development Infrastructure Education and Culture Media and Communication

With invaluable assistance from the Institute for Contemporary Studies in Tirana, Albania, and with support from the municipality of Tirana, the project hosted a major international conference there that examined the benefits of “interest solidarity” as a tool for conflict prevention and to raise awareness and understanding of the dynamics of cross-border cooperation in the “Albanian Neighborhood” for U.S. and European policymakers. How can this cooperation complement regional integration and enhance the Euro-Atlantic aspirations of the region? The findings of this paper are based on the conclusions from the international conference and subsequent research. The International Conference was held in Tirana on July 8–10, 2012. In his opening remarks to the senior governmental and civil society participants from the region, Prime Minister Sali Berisha of Albania told the over 250 assembled guests that EU integration remained the preeminent project for the region, a sentiment with which regional and diaspora leaders strongly agreed. There was also strong agreement that the best path toward European integration included the promotion of free movement of goods, health, education, and culture across borders. These factors, combined with a renewed governmental commitment to fight rampant crime and corruption, improve governance, and build strong institutions will help these countries pursue reform from within. Developing “interest solidarity” through cross-border cooperation could be a critical tool through which these reforms can be implemented. Economic Development As the saying goes, “a rising tide lifts all boats.” In the Western Balkans, greater regional economic growth and development through cross-border collaboration and improved economies of scale would provide a tremendous boost to both internal reform efforts and external policy momentum. However, the regional economic figures are

3 daunting. Albania currently has an import/export ratio of 3:1 and a GDP per capita of $4,000. 3 Neighboring Kosovo has a GDP per capita of just over $3,500 and an import/export ratio close to 8:1. 4 Foreign direct investment (FDI) in these countries has been directly impacted by the European debt crisis, with foreign investment in Kosovo declining from €420 million in 2007 to €314 million in 2010. This has been the case in other countries in the region as well: in the Former Yugoslav Republic of Macedonia, FDI inflows fell from $693 million in 2007 to $211 million in 2010, and in Serbia FDI has sharply declined from $2.9 billion in 2008 to $1.34 billion in 2010. 5 The trend is projected to continue as the euro crisis persists well into 2013. FDI also has been deeply impacted by endemic corruption and crime in the region. Transparency International ranks the Western Balkan countries between 2.9 and 4.0 on a 10-point scale, with 0 representing the highest levels of corruption. Montenegro and the Former Yugoslav Republic of Macedonia rank 66 and 69 out of 182 countries respectively, while Kosovo and Albania fall within the lower half at 105 and 113. 6 Serbia is ranked near the median at 80. According to a Gallup Balkan Monitor poll, in 2010 more than 91 percent of surveyed Kosovars believed their government was corrupt, and 85 percent were skeptical about the legality of business practices. 7 A lack of transparency in public procurement tenders, difficulties enforcing laws and ensuring appropriate governmental oversight, and cronyism and graft have driven away potential investment and impaired the regional business climate. The international conference identified several opportunities to facilitate cross-border collaboration in the “Albanian Neighborhood” and enhance economic development in the region. One important idea is the creation of a regional free trade agreement (FTA), modeled after the “Benelux” FTA in Western Europe. A “Balkan Benelux” among the countries of Albania, the Former Yugoslav Republic of Macedonia, Montenegro, and Kosovo would form a regional free trade network and, most importantly, would develop clear and transparent trade and investment standards for the “neighborhood.” Because foreign investment requires predictability and transparency, the creation of and adherence to such trade standards in the context of an FTA would encourage greater investment in the region and eliminate corruption loopholes. In addition to a regional FTA, some economies of the Western Balkans would benefit from the creation of a joint capital market. Kosovo and Albania do not yet have capital stock markets, and the relatively low levels of economic development in each country do not make the establishment of independent exchanges viable. However, by combining the resources of both countries it may be possible to offset this disadvantage. Both countries have a great deal of economic potential. Kosovo’s banking sector is small but stable, having weathered the global crisis, and Albania is rich in a number of natural resources. 8 A joint capital market would provide a broader source of financing for firms to harness this latent potential. Additionally, the vast majority of companies in the Western Balkans are small- to medium-sized enterprises, and many are family run. A capital market would provide a source of external financing to encourage the expansion of these firms into joint stock companies. This would improve efficiency and development by separating the role of management from that of ownership, thereby also reducing incentives for corrupt behavior. The development of a joint stock exchange could serve as another way to enhance transparency and create regional accounting standards by requiring detailed financial auditing of participating companies. Making these audits publicly available for publicly
World Bank Data, “Per Capita GDP,” 2011,; Albanian Institute of Statistics/Instituti i Statistikave. 4 World Bank Data, “Per Capita GDP,” 2011,; Kosovo Agency of Statistics, Office of the Prime Minister. 5 UNCTAD Stat, “Foreign Direct Investment Inward Flow Report,” 1970–2011, tableView.aspx?ReportId=88. 6 Transparency International, “Corruptions Perceptions Index 2012.” 7 Gallup Balkan Monitor, “2010 Summary of Findings,” 2010, 8 IMF, “Republic of Kosovo: Request for Stand-By Arrangement,” April 2012, 2012/cr12100.pdf.

4 traded stocks would greatly increase regional transparency, helping to ensure the legality of business ventures, and improving tax collection capacity. In addition to securing the benefits of a potential free trade agreement and joint stock market, the region’s economy would also benefit from establishing a “Western Balkans regional indicator model” to monitor economic progress throughout the region. This model would function in parallel with EU acquis requirements by ranking countries in the region in such areas as judicial reform, institutional development, property rights, and transparency investments in research and development, as well as higher education enrollment. For example, the Global Innovation Index ranks Albania 129 out of 141 countries in research and development, with the Former Yugoslav Republic of Macedonia faring slightly better at 92. 9 The regional indicator model could include other leading indexes, such as Transparency International, the IMF, the World Bank, and the 2012 Global Innovation Index. A regional indicator model would serve to highlight areas where regional differences need improvement, as well as where progress has been made. Countries in the region could serve as mentors to those countries that are challenged in particular areas. Moreover, political attention toward broader regional goals rather than narrow, individual interests within each country would be achieved. Extensive media coverage of such an indicator index would also create “peer pressure” between states and on political leaders to strive harder to meet EU accession standards. The Albanian diaspora is yet another untapped source of human and financial capital with the potential to benefit the regional economies of the Western Balkans. According to the World Bank, in 2011 there were 1.4 million Albanians living abroad.10 This is equal to 48.4 percent of the population of Albania. The Albanian diaspora provided an estimated $1.162 billion in remittances to Albania in 2011—a striking figure when compared to the country’s $1.03 billion in FDI inflows. 11 Additionally, a 2011 UN Development Program (UNDP) study indicated that nearly 25 percent of all households in Kosovo are still dependent on income sent from relatives abroad. 12 Given the breadth and financial resources of this community, regional economies would benefit if an organization was created to partner the diaspora with investment opportunities in the region. For example, special economic zones could be created to channel investment funds from the diaspora to key regional projects in areas such as infrastructure and education. Tourism is another area of untapped economic potential for the region. The Western Balkans’ rich cultural heritage, rugged terrain, and pristine beaches offer a broad range of recreational opportunities to travelers. In 2011, total contributions to the economy by travel and tourism were estimated at 21.8 percent of GDP in Albania and 15.4 percent in Montenegro, evidencing the industry’s strong impact in the region. 13 A major obstacle to the further development of this sector, however, is the poor condition of basic infrastructure, particularly in the transportation and water and sanitation sectors. 14 Further development of that infrastructure would optimize this strong source of potential regional revenue. Infrastructure In addition to efforts to fight corruption and develop more dynamic regional economic markets, all countries in the “Albanian neighborhood” require the development of functional and safe infrastructure to support key economic
INSEAD, “Global Innovation Index 2012,” 2012, World Bank, “Migration and Remittances Factbook 2011,” 2011, Resources/334934-1199807908806/Albania.pdf. 11 UNCTAD Stat, “Foreign Direct Investment Inward Flow Report,” 1970–2011, tableView.aspx?ReportId=88; World Bank Data & Research, “Migration & Remittances Data,” 2012, WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:22759429~pagePK:64165401~piPK:64165026~theSitePK:476883 ,00.html. 12 UNDP, “Kosovo Remittance Survey 2011,” 2011, Remittance_Survey_Fact_Facts_2011_Final-trans.pdf. 13 World Travel and Tourism Council, “Travel and Tourism Economic Impact 2012: Albania,” 2012, site_media/ uploads/downloads/albania2012.pdf. 14 Republic of Albania, Ministry of Tourism, Culture, Youth and Sports, “Sector Strategy on Tourism 2007–2013,” 2008,
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5 sectors. Infrastructure is a critical pillar in cross-border collaboration that focuses on strategic sectors such as energy, communications, tourism, and agriculture. Improving roads, rail, air, utilities, and water will enhance regional cooperation as well as economic development. There are already a number of important infrastructure projects underway. Most notably, the Turkish-American consortium Bechtel-Enka is in the process of completing a €1 billion motorway in Kosovo to provide the landlocked country with access to Albania’s Adriatic ports. 15 Traffic flows have already surpassed expectations, suggesting the highway’s potential impact on the regional economy. It is estimated that 5,000 to 10,000 vehicles use the highway daily, a considerably higher figure than the World Bank’s initial projection of 2,000 to 4,000. 16 Similarly, the government of Serbia has embarked on the €1.3 billion Corridor X highway project, nearly 50 percent of which is funded by the European Bank for Reconstruction and Development (EBRD). 17 In 2010, the Italian-based Terna company signed an agreement with the state of Montenegro and local transmission operator CGES to develop a subaquatic trans-Adriatic power grid. 18 Terna’s contribution to the project is expected to be €760 million. The Terna project is one example of a broader strategy that has been adopted in a number of EU member states to access the vast renewable energy potential in the Balkans to service growing domestic demand. 19 Plans to connect the Balkans to the European power grid have been accompanied by a series of energy infrastructure development projects in the region. Hydropower has been a particularly important area of focus in this regard. Energji Ashta, an Albanian developer owned by Austrian companies Verbund and EVN, recently completed the first of two hydroelectric plants in northern Albania, investing over €200 million in the project. 20 The Italian Maccaferri Group recently signed agreements to develop hydroelectric plants in Serbia along the Ibar River for €350 million. 21 There are also several projects under consideration in the Former Yugoslav Republic of Macedonia, such as the Boskov Most hydropower plant and the Lukovo Pole Water Regulation and Renewable Energy Project (both costing just over €80 million). However, the development process for the Boskov project has been halted by wildlife concerns. 22 One area of infrastructure that is in need of specific attention is Internet technology and fiber optic cables. Roughly 45 percent of the population in the Western Balkans has access to the Internet, a figure that drops to 20 percent in Kosovo.23 These figures are especially striking when compared to Northern Europe, where 80 percent of the population has Internet access. In addition to developing regional fiber optic infrastructure, there are several Internet issues that need to be resolved as quickly as possible, specifically involving domain registration and frequency sharing. Kosovo currently uses Serbia’s state Internet domain, as it does not yet have its own, and is also dependent on Serbia for allocating Internet frequencies to the country. This is an untenable situation that should be remedied
15 16

Bechtel, “Kosovo Motorway,” 2013, World Highways, “Kosovo’s award-winning green highway construction,” Jan-Feb 2012, sections/key-projects/features/kosovos-award-winning-green-highway-construction/. 17 EBRD, “Corridor X Highway Project,” 2012, 121015b.shtml. 18 “Terna: final agreement signed for building the Italy-Montenegro electricity interconnection,” p ress release, November 23, 2010, 19 Nela Lazarevic, “The Italy-Montenegro Cable,” Balkan Insight, November 11, 2011, the-underwater-cable. 20 Verbund Press Release, “EVN and Verbund Open the Ashta Hydropower Plant in Albania,” 2012, article/evn-and-verbund-open-the-ashta-hydropower-plant-in-albania. 21 Gordana Filipovic, “Italy’s Maccaferri to Build Hydropower Plants in Serbia,” Bloomberg, October 5, 2012, 22 “Boskov Most Hydro Power Plant, Macedonia,” EBRD project Briefing, May 2012, briefing-EBRD-Boskov-09May2012.pdf. 23 Developing Markets Associates, “Investing in Kosovo 2010,” 2010, docs/Attach_1._Investing_in_Kosovo_2010.pdf.

6 through frequency sharing between Albania and Kosovo and focused cross-border development projects to improve Internet connectivity throughout the region. Planning for future regional projects must be done in a smart and strategic manner, in which priorities are clearly established. Inefficient infrastructure must be upgraded, such as irrigation channels and rail lines, some of which date from the Ottoman Empire. Efforts must also be made to correct imbalances within certain countries. For example, Kosovo has an overreliance on coal, and its energy mix could be better balanced by developing cleaner technologies, such as offshore wind technology, and by building a regional gas pipeline. Additionally, the electrical grids between Kosovo and Albania could be integrated. Projects such as these would not only create jobs, but also promote further regional integration and mutual dependency. Although significant infrastructure development and investment are urgently needed in the Western Balkans, it is also the area where official corruption is at its greatest due to the magnitude of the projects. For example, the Kosovo government inexplicably sold its electrical distribution network to the Turkish consortium Limak-Çalık for $26.3 million, half of what the company spent on internal improvements and a fraction of the nearly $180 million invested in the network over the past five years. 24 Cross-border infrastructure development projects are frequently stymied due to the “cost” of corruption. Education and Culture Investment in human capital through education is essential to the future success of both the economy and the region. As with economic development, cross-border education initiatives not only improve standards and economic opportunity, but also build an “economy of scale model” for institutional development that benefits the region. To date, there have been several bilateral agreements that seek to enhance cooperation on education and culture, such as the one signed by the Former Yugoslav Republic of Macedonia and Albania that expired in 2010 and has yet to be renewed. However, the implementation of these initiatives has not produced concrete results. 25 Differences in language have also posed a barrier to coordination in the field of education, especially among the Albanian community, as dialects vary across regions and countries. The Ministry of the Diaspora of Kosovo has attempted to confront this obstacle by launching an interactive online program, the Gjuha Ime Portal, to serve as an instructional language resource for Albanians living abroad. 26 Language synchronicity is an initial step in working toward the establishment of curriculum standards in the region to ensure that students from both Kosovo and Albania, for example, achieve the same qualifications and core competencies. Practical steps, such as having universal teacher qualifications and university credit reciprocity, using the same text books, and standardizing testing could encourage greater regional cooperation and economic dynamism in the Western Balkans. Initiatives for greater intra-university cooperation should be established, giving students in the region greater opportunities to participate in exchange programs with other universities in the region. Joint research initiatives, particularly in science and technology, would encourage innovation and economic development. Some schools, such as South East European University in Tetovo, have attempted to overcome cultural barriers by cultivating a multiethnic student body and conducting courses in the English language. 27 This has been a novel approach to education in a deeply segmented society like that of the Former Yugoslav Republic of Macedonia, where culture has been highly politicized, that gives youth an opportunity to forge relationships across ethnic lines. The regional educational system must develop the skills needed to enhance economic development. For example, Kosovo is suffering from 45.3 percent unemployment 28 but lacks skilled labor to fill important job openings,

GAP Institute for Advanced Studies, “October 2012 Policy Brief 28: The privatization process and asset value of KEK Energy Distribution and Supply Network (KEDS),” 2012, 25 “Pa marrëveshje arsimore me Shqipërinë, Koka,” 2009, 26 Kosovo Ministry of the Diaspora, “Abetare Digjitale,” 27 SEE University, “2009–2012 Strategic Plan,” 2009, 28 CIA, “2011 Estimate,” in World Factbook,

7 particularly in the technology and service sectors. 29 Improvements to education would encourage private industries to hire local workers and thus improve the overall business environment. This would ultimately attract FDI and reverse regional “brain drain” to a “brain gain” by attracting diaspora and emigrants back home. Educational scholarships in partnership with industry would help develop the skills and talents needed to improve economic opportunity in the future. Joint partnerships with Western institutions of higher education should also be considered. As the first tangible outcome following the International Conference, Columbia University has agreed to transfer its semester-long curriculum on “Conflict Resolution and Social Harmony” for adoption by universities in the Albanian neighborhood. The program will involve collaboration with South East European University to organize a training/transfer of curriculum and will involve over 285 educators from approximately seven universities. 30 Additionally, Columbia is organizing a “Seminar on Historical and Shared History as a Tool for Conflict Resolution,” led by Professor Elazar Barkan, director of Columbia’s Institute for the Study of Human Rights, for a two-day discussion hosted and organized by the Department of History and Philology at the University of Tirana. Such collaboration combines valuable tools and knowledge with practical application throughout the region while also fostering positive transatlantic relations. Investment should also be made in regional cultural projects that highlight shared language and traditions throughout the region. An affiliated network of regional museums could collaborate on cross-border “cultural dialogues.” These could emphasize a range of activities, such as preservation of ancient artifacts of the region, and highlight up-and-coming regional writers and artists. Media and Communications The role of regional media is critical to energize civil society and hold regional government officials accountable for their policies. Not only does Internet access empower economies, it also empowers and informs society. There is growing concern about the lack of transparency regarding media company ownership, as well as a greater polarization of the media, which reflects political polarization. Reporters Without Borders ranks Albania 96th in terms of media freedom. 31 In June 2012, the OSCE Representative on Freedom of the Media criticized Albania for failing to pass important legislation protecting the independence of the media. 32 A lack of media freedom is especially problematic for democracy building in a region wrought by a deep mistrust of political institutions. It will be important to ensure that the media is free of corruption to restore confidence in its function of improving transparency and accountability. With greater movement of people across borders due to improved infrastructure and with greater access to the Internet and social media, the media will play an increasingly important role in shaping regional and country-level policies. Conclusion It is clear that there is no sense of an “Albanian Neighborhood” among ethnic Albanians in the Western Balkans. Senior officials and civil leaders from the six countries do not know their counterparts, share experiences or best practices, or enter into dialogue with one another despite the fact that they share common challenges. The International Conference on the Albanian Neighborhood broke a taboo but only scratched the surface of urgently needed regional dialogue. The conference demonstrated a lack of political consensus on many issues but also revealed a strong regional convergence on the two E’s: economy and education. There is also convergence on the need for greater transparency to fight endemic corruption. A number of opportunities discussed during the International Conference deserve continued exploration and policy focus, particularly in the economic space.

Mihail Arandarenko and Will Bartlett, eds., “Labor Market and Skills in the Western Balkans,” Foundation for the Advancement of Economics, 2012, 30 Ss. Cyril and Methodius University in Skopje will be invited to join. 31 Reporters Without Borders, “World Press Freedom Index 2011–2012,” 2012, C_GENERAL_ANG.pdf. 32 Besar Likmeta, “OSCE Urges Albania to Improve Media Freedom,” Balkan Insight, 2012, article/osce-laments-media-s-lack-of-freedom-in-albania.

8 However, first and foremost, the Albanian neighborhood must work to practice consensus building and develop strategic regional priorities. Heather A. Conley is a senior fellow and director of the Europe Program at the Center for Strategic and International Studies (CSIS) in Washington, DC. David L. Phillips is director of the Program on Peace-building and Rights at Columbia University in New York, NY. This report is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s). © 2013 by the Center for Strategic and International Studies. All rights reserved.

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