Small and middle sized enterprises: pillars to the economy

2.1 SME in Europe

The main pillars to the modern economy today are the small and medium
enterprises (SME). In European Union 99% of all enterprises are SME and hire 65
million people. These enterprises are the core of the innovation and serve as basis
for the development of the economy for one country. They are more easily
adjustable to the external changes and represent the main basis for the tax
collection. SME are the ones that carry the load for the development of specific
sectors of the economy and gradually absorb the vast mob of the unemployed.
These are the reasons why the European Union members offer various programs for
the professional and financial support of these enterprises.

2.2 SME in Kosovo

The development of the private sector in Kosovo can be characterized as the

development of the SME, due to the fact that they make up 99% of the overall
number of the enterprises , whereas the private sector till late has been neglected
and its effects in economy are not visible yet. The small and medium enterprises
promote the economical development, and this can be observed through their
impact and contribute in employment and in the increase of the GDP. Kosovo in the
after war period has marked a great progress in the fulfillment of the legal
infrastructure especially in the areas where the little business are challenged. The
government of Kosovo in collaboration with the other local and international
institution has prepared a legal package some of which have been approved and
some in parliamentary approval procedure. Nevertheless, the lack of adequate legal
infrastructure that adjusts the means for the establishment and operation of the
SME in Kosovo, the absence of the economical macro-politics that support the
development of the private sector especially the SME, is impeding even more the
quiet operation and the normal development of the SME, part of which had hardly
survived the risky investments of the 90s. The main barriers addressed by the private
sector are: lack of the appropriate financial- banking institution, lack of checking
system, collapse of the ex-social big companies, the extension of the privatization
process and the operational disputable politics. The private sector likewise faces
other problems like lack of electricity, unfair competition, issues concerning the
transportation, telecommunication, educational and managerial abilities, etc.
despite these obstacles, during the after war period, the SME sector has indicated
progressive growth. Thus, till the end of 2003, 27920 businesses were recorded,
26399 of which individual businesses, with single ownerships, whereas till the end of
2004 the number of the businesses reached 39257. At the end of December 2005,
there were 50591 registered businesses in Kosovo. Regarding the trade area, Kosovo
is experiencing a liberalization age. Kosovo has signed and is implementing so far the
free trade agreement with the countries in the region: Albania, Macedonia, Croatia
and Bosnia Herzegovina. The industrial production status in Kosovo is facing major
issues which have become part of the new born economy. It must be stressed that
the social industry in Kosovo was very much undeveloped even before 1999 (the
private industry was inconsiderable and mostly craftwork), while its frame does not
fit at all in the new economical circumstances created in Kosovo. Considering the
loss of potential markets, the destruction of material and financial grounds during
the war and prior to it, the lack of investments, the administration and bad
management during those two decades, nowadays this industry has become
paralyzed, therefore its influence in Kosovo’s economical development is
inconsiderable and salvation for it would be the privatization process and changing
the officials. So far, the Kosovo Trust Agency which holds complete legal personality
as well as manages and controls the privatization (process of the social and public
enterprises) has announced 16 rounds of privatization, during which 235 social and
public enterprises have become private. Kosovo has lack of practice and application
of various financial mechanisms and instruments. The only mechanisms that give
financial support to the SME, apart from the informal sources, are the micro-finance
institution and the loan lines of the commercial banks which except of expensive, are
quite often red tape. Accomplishing the needs of the SME sector for loans by the
commercial banks, even though it is being improved, compared to other countries is
still small, this condition increases even more the cost of a business loan in Kosovo.

2.3 Why SME?

Trust in personal ideas and abilities, willingness to put one’s capital at risk, wish for
individual independence, ability to create contacts, push and zeal and ability to think
and create are only some of the features of a successful entrepreneur. Alongside,
the success of appropriate entrepreneurship is immediately connected to the
founder’s professional qualification and his knowledge of business. Crucial footing
for the successful enterprises is the support of family and friends in the
accomplishments of the idea. In addition it requires support and assistance from the
family, which helps to accomplish the ideas. Creating a successful enterprise
represents a financial security bases for the entrepreneurs and his family.

3. Kosovo and the free trade agreement

3.1 Kosovo and the free trade agreement

When we talk about fiscal and custom politics and their influence in economy, we
should not forget the free trade agreement that Kosovo has signed with the
neighboring countries. Some of them are:

 Kosovo-Albania(June 2003) came into force in October 2003

  Kosovo –Macedonia (August 2005) came into force in February 2006
 Kosovo-Croatia (September 2006) came into force in November 2006
 Kosovo-B. Herzegovina (October 2006) came into force in December 2006

3.2 FTA mission

Some of the objectives of the free trade agreement are:

 New economical surroundings

 Consolidation of commenced reforms
 Improved trade book keeping
 Trade exchange without excessive barriers
 Export incentive and further support with fiscal politics:

 For the local manufactures

 Potential exporters
 New industries with export potential or import substitution
 Trade exchange for reciprocal interest (efficient combination)

3.3 FTA profits

The profits from the free trade agreement are as follows:

 Well supplied market

 Increased competition
 Price drop
 Push for the improvement of technology
 Decrease of smuggling
 Push for the increase of foreign manufactures investment
 Incentive for export

3.4 Demanded requirements and criteria

 Non discrimination principle

 Application of non discrimination laws
 Anti-dumping
 Consumer protection
 New trade politics
 Stopping of state monopoly with trade character
 Eliminates export taxes or other taxes which have an influence on export
 Eliminates the deep gap in the normal custom fees, especially on the
agricultural products

3.5 Rules for the origin of the goods

The status of the origin for the goods is benefitted when:

 Product is entirely produced in the country

 Product undergoes additional processes/ treatment

4. CEFTA

4.1 What is CEFTA?

CEFTA (Central European Free Trade Agreement) is a free trade agreement in which
participate 8 countries from the western Balkan region: Kosovo, Albania, Macedonia,
Montenegro, Serbia, Bosnia and Herzegovina, Croatia and Moldavia. The first CEFTA
was signed from Poland, Hungary, Check republic and Slovakia in December 1992
and came into force in July 1994. By means of CEFTA these participating countries
bind to approach their political, legal, and economical institutions to the European
Union, reinforcing thus democracy and their market economy. Slovenia joined CEFTA
in 1996, Romania in 1997, Bulgaria in 1999, Croatia in 2003 and Macedonia in 2006.
Considering that by 2007 all the former CEFTA members had joined EU and left
CEFTA, it was decided that CEFTA would spread on the part of Balkan which had
remained outside EU. By this time Kosovo, Albania, Macedonia, Montenegro, Serbia,
Bosnia and Herzegovina, Croatia and Moldavia had signed a considerable amount of
bilateral free trade agreements under the frame of the Stability Pact for southeast
Europe. They were all replaced by a single multilateral agreement CEFTA. Lately, the
press and media in Kosovo have been talking largely about CEFTA and its impact on
the economy of Kosovo. Generally speaking, talks have been concentrated on
distinct aspects of CEFTA, especially on the liberalization of the custom fees with the
region countries. As far as this is concerned, it is crucial for CEFTA to be viewed from
a wider aspect and from different viewpoints so that it is accounted for what it really
is. To begin with, it is necessary to give a short description of the content and
purpose of CEFTA. Politically viewed, CEFTA is part of the attempts made by the
countries in the region and in the European Union (EU) to create a regional market
that renders possible the economical development and which will eventually
contribute in the growth of the political security and stability in the Balkans. CEFTA is
just one ingredient of the regional economical integration. Elements of the same
importance in this integration process are initiatives taken in other areas such as
Energetic community, Common Aviation zone, Southeastern Europe Memorandum
concerning Transport, Southeastern Europe Initiative concerning Telecommunication
and Internet, Investment Compact etc. All of these initiatives aim the creation of a
common regional market which at a later phase will be integrated in the big
European market. In fact, CEFTA is pre-accession instrument to the EU. Any ex-
communist block country which is now an EU member used to be a CEFTA member.
Likewise, any country which is in the EU accession process is today a CEFTA member.
The eventual accession of Kosovo to the EU requires preparations in the institutional
aspect and in the administration of the relationship with other member countries. To
be more specific, the accession of Kosovo to the EU means liberalization and
intensification of trade relationship with the EU countries. Under this approach,
CEFTA offers Kosovo an opportunity to exercise and to get used to the rules of the
game in a regional market so that the integration process is carried out successfully.
All the other ex-communist countries have undergone the same process. From the
economical viewpoint, CEFTA will help the economical development in the region by
liberalizing and developing the markets. World experience has shown that the
countries which close the door to trade close the door to development. Albania in
the communist years and North Korea today are typical examples of failure of the
isolation politics and door closing. From the antiquity, trade exchange has been the
most important cultural and economical development for all regions, countries and
empires. CEFTA will ease trade development by making the member countries have
a closer collaboration in political and technical level; tuning the politics, institutions
and rules connected to trade; liberalization of custom fees; elimination of no-fees
barriers; and application of favorable rules of origin. As mentioned above, it is crucial
to be understood that the implementation of CEFTA is not related just to the
liberalization of the custom fees in the trade with the countries in the region. On the
contrary, custom fees are just a small portion of what CEFTA involves. To follow up, I
will not concentrate in the technical details of what CEFTA involves, but I will try to
concentrate on the most important elements.

4.2 CEFTA –Technical Details and Sanitary and Phitosanitary measures

One of the most important topics that CEFTA is concerned about is that of the
Technical Barriers and Sanitary and Phitosanitary Measures. CEFTA will enable the
member countries harmonize the technical standards and the sanitary and
phitosanitary measures they use to secure the health of their people, animals and
plants. Quite often the technical standards and the sanitary and phitosanitary
measures are used to impede the free trade of goods or to discriminate the goods of
a specific country. By creating a common forum, CEFTA will not allow that these
measures impede the free trade and are solely used when they are scientifically
justified. This element of CEFTA is very important for the Kosovo traders. It is a fact
that in recent years Kosovo traders have faced all kinds of no-fee barriers. For
example, in various cases, the origin of their goods has not been recognized, some
other time the plate number of their vehicles has not been recognized, many times
the export of the food produce has been prohibited due to unconfirmed sanitary
certificates, whereas they have been retained for custom procedure in the
neighboring countries for various days causing them huge financial loss. CEFTA offers
a forum where these problems are discussed in regional level and are effectively
solved. Prior to this the Kosovo institutions have been obliged to raise these issues in
bilateral terms. In the bilateral forums, the power of Kosovo has been limited,
especially given the unclear status Kosovo had till late. This problem is eliminated by
CEFTA. In this multilateral forum, the power of Kosovo increases because the country
which breaks the common rules and blocks free trade discriminating, is put pressure
on by all the parties. It is important to stress that CEFTA enables Kosovo to solve out
the trade issues with Serbia which so far has been entirely impossible for the reasons
we all know.
4.3 CEFTA- the rules of the origin

Another important issue for CEFTA is the rules of the origin. CEFTA allows Kosovo
manufacturers to import raw material from the countries part of the CEFTA and
implement them to obtain Kosovo goods without endangering the Kosovo origin of
the final product. In other words any raw material imported from CEFTA countries
can be used as if it was Kosovo and the final product can be exported with zero
custom office (preferential treatment) in any CEFTA country. In the bilateral
agreement of free trade, this benefit is not possible. To avoid risking the origin of its
produce, a Kosovo manufacturer was obliged to use solely raw material imported
from the target country, whereas CEFTA allows this manufacturer to import raw
material from any CEFTA country and to export the final product in any CEFTA
country.

4.4 What is the origin of the goods?

Just like people belong to a certain country, goods too have a specific origin. In case
the goods are entirely produced in a country, their origin is obvious. For instance the
agricultural, livestock, wood, mineral (mainly raw materials) goods automatically
obtain the origin of the country where they are manufactured. But a considerable
amounts of goods (especially those that have been elaborated), are produced using
input imported from other countries. For example, juice produced in Kosovo may be
obtained using fruit extract imported from Macedonia and sugar imported from
Turkey. If this is the case, the question we ask is: the juice manufactured in Kosovo,
is of Kosovo origin, Macedonian, or Turkish? Marking the exact criteria for the
definition of the origin of the good gives the exact answer to this question.

4.5 Why is the concept of the origin of the good important?

The concept of the origin of the good becomes important in the case of
differentiated treatment that a country makes on the produce of another country.
For example, through the system of “Autonomous trade preferences”, the European
Union allows Kosovo products to enter the European common market duty free. On
the other hand, the Chinese products are not entitled to such a preferential
treatment. In this case, it is important for the European Union that only Kosovo
Products are entitled to such a treatment. The Chinese imported products in Kosovo
should not enter EU making use of the preferential treatment accorded to Kosovo
only. Likewise, China imported goods that have not undergone any important
treatment or transformation in Kosovo (for example: wrapping and labeling), cannot
access EU profiting the preferential treatment that belongs to Kosovo. For these
reasons it is necessary to define exactly which goods will be recognized by the EU as
Kosovo product. This case is solved through the concept of “rule of the origin”.
4.6 How to define the origin of the goods?.

As mentioned above, when the products are manufactured in a single stage, or are
entirely obtained in a single country, their origin is relatively easy to be defined. In
the case when the products are manufactured using materials or parts imported
from another country, to define the origin we make use of the rules for the origin.
These rules define the method used to evaluate if the given product has undergone
enough treatment or if it has undergone core transformation in such a way that it
can take the origin of the country where this treatment or transformation was
performed.

4.7 What are the concrete benefits that CEFTA brings according to the rules of the
origin?

What treatment is adequate and how essential should a transformation be for the
good to take the origin of the place where the transformation was performed? There
is some criteria that measures the degree of the transformation. Unfortunately,
there is no simple origin rule, which can serve as a standard and be universal for all
the countries. The trade practice usually makes use of three principal methods to
define whether the treatment has been adequate and the transformation
fundamental:

 Change of fee classification according to the laws of the custom

 Minimal added value quantity (value percentage)
 Specific treatment process
 Combination of the above mentioned method

None of these methods is superior. Each has its values and weaknesses. Some trade
agreements use just one method for all products.

4.8 Which are the rules for the origin in CEFTA agreement and how do they change
from the rules used in bilateral agreements?

In bilateral free trade agreements all of the above mentioned methods are used to
define origin. Every agreement includes a long list of products and group of products
and specifies clearly the method used to define the origin. The accumulation applied
in those agreements is bilateral. To explain how this kind of accumulation functions
we will see a more concrete example. A Kosovo manufacturer buys fabric in
Macedonia to manufacture clothes. If the bilateral accumulation with Macedonia
was not applied the clothes manufactured in Kosovo would not gain the Kosovo
origin because the elaboration performed in Kosovo would not be enough
(appropriate transformation would be thread to clothes). In such a case this product
would enter Macedonia with the non-preferential fee Macedonia applies. Whereas,
according to the bilateral agreement, Kosovo accumulates its origin with Macedonia.
This means that the fabric imported from Macedonia, can be considered of Kosovo
origin. This way the transformation condition is fulfilled enough for the clothes to
obtain Kosovo origin and can be exported back to Macedonia with zero fees. The
same happens with the other countries Kosovo has bilateral agreement (Albania,
Bosnia, and Croatia). However it is vital to understand that if the Kosovo
manufacturer buys the fabric in Macedonia, he is unable of exporting the clothes in
Albania with zero fees, because the origin is not accumulated in case the raw
material (fabric) is bought outside Albania. That is, accumulation is possible between
the two parts (Kosovo-Macedonia, or Kosovo-Albania, or Kosovo-Montenegro etc).
Bilateral free trade agreements have now been replaced by the CEFTA agreement.
According to this agreement, the products of Kosovo origin can access the CEFTA
countries with zero fees (Macedonia, Albania, Serbia, Montenegro, Bosnia and
Herzegovina, Croatia, and Moldavia). This agreement makes use of all the above
mentioned methods to define the origin of the products. The list for the method
used for every product or group of products is quite long. Accumulation applied in
this agreement is diagonal. To explain how this accumulation functions, we will give
a concrete example. A Kosovo manufacturer may buy fabric from a CEFTA country,
for example Macedonia, to make clothes. The fabric imported from Macedonia is
considered of Kosovo origin and the transformation to clothes is enough to satisfy
the rule of the origin. The clothes obtained, gain Kosovo origin and can be
transported at zero fees not only in Macedonia (as in the case of bilateral
agreement), but also in any other CEFTA country.

4.9 CEFTA-Anti dumping

CEFTA also considers the events when the market of a given country is ruined by the
imports of another member country in the agreement. To enable the participating
countries protect their sectors and activities, CEFTA allows the use of anti dumping
and Protective measures instruments. Anti-dumping, for instance, is a politics that
allows the raise of custom fees, or the placement of limitations to import when
noticed that the product of a certain country is sold in Kosovo markets at a price
lower than the real manufacturing cost. This might happen in the case of over-
production of a certain product in a partner country which in turn dumps its
excessive product in Kosovo, selling it below cost. In that case, if we can prove that
this import production is causing severe damage to domestic produce, we are right
to limit temporarily the import from the given country by implementing higher fees
or by temporary quota. The protective measures are used similarly to the anti-
dumping ones, but they are undertaken even if the import price is higher than the
manufacturing cost- of importance here is proving that import is causing serious
damage to given sectors.
4.10 CEFTA -The gradual liberalization of service, investment and governmental
procurement sectors

Another important element for CEFTA is the gradual liberalization for the sectors of
Service, Investment and governmental procurement the aim is to open these sectors
towards free competition in the region and to eliminate the discrimination of the
regional investors. This liberalization will enable the business in Kosovo to act in
member countries markets in equal and non-discriminated manner.

4.11 The right to the intellectual property

As far as the intellectual property rights are concerned, CEFTA aims the most
efficient protection of these rights. The goal is to attract foreign investments and to
promote the reciprocal investments between the member countries by protecting
the intellectual property of the investors equally throughout the region.

4.12 How does CEFTA interact with the bilateral agreement for the free trade?

During the last 6 years, in accordance with the stability pact (which is an initiative
promoted by the European Union), Kosovo has negotiated and signed four bilateral
agreements for the free trade with the neighboring countries: Albania, Macedonia,
Bosnia and Herzegovina, and Croatia. The purpose of these deals has been the
improvement of trade collaboration and the increase of exchange for the goods with
these countries. Under the fee aspect, there has been a complete liberalization of
trade with Albania and Bosnia, and an asymmetrical liberalization with Macedonia
and Croatia, which means that the Kosovo products enter these countries duty free,
whereas some sensitive products of Kosovo are protected by the application of the
custom obligations in Kosovo. Under the frame of the stability pact, all the countries
in the region have signed bilateral trade agreements amongst them. After a
successful multi-year bilateral experience, in 2006, the regional countries agreed to
replace the existing net of bilateral agreements (over 30 such agreements), with a
single agreement (CEFTA). The priorities of a single agreement towards the net of
bilateral agreements are plentiful. Some of these priorities are as follows:

 A single agreement will bring about a uniformity of rules and politics, instead
of having distinctive rules and politics for every bilateral agreement.
 A single agreement will improve transparency for the companies that operate
in between borders. Thus, a company that operates in some regional
countries will face the same rules and politics in Kosovo as well as in
Macedonia or in Albania.
 A single agreement makes implementation easier for the government.
Instead of a big number of bilateral agreements the government simply
implements a common agreement.
  A single agreement improves regional collaboration. All the countries
negotiate together. To Kosovo, for instance, this agreement represents an
opportunity to solve the trade problems with Serbia, which could not be
done bilaterally.
 It is important to stress that the fee system (including the secure protection
for the sensitive products) agreed on the bilateral agreements will be entirely
born in CEFTA.

4.13 What are the profits from CEFTA?

To a country which has no sea approach, regional integration in general, as well as

good trade relationship with the neighboring countries in particular, are of special
importance. Free trade is indispensible for Kosovo, not only because it enables it to
import raw materials and ready products which cannot be manufactured at home,
but it also secures and approach to potential markets for exports. Likewise, it is
important to understand that the big investors are not that interested for the 2
million markets in Kosovo as they are for the regional 20-30 million markets where
they can exploit the workforce and the raw material market and where they can sell
their products afterwards. Likewise, these investors regard this regional market as an
opportunity to approach in preferential way the huge European market. This
regional market will not become tactile if CEFTA does not operate effectively. Free
trade is the best instrument that sets the dimensions of a market. Nevertheless, it
must be understood that CEFTA is not a magic wand, but an opportunity to solve
issues. In other words, if the opportunities offered by CEFTA are not implemented
effectively, the business profits, the entrepreneurs and the society in general
understand the obligations and profits of CEFTA and collaborate to obtain them. The
government of Kosovo and especially the Ministry of Commerce and Industry, in
collaboration with the other international partner institutions, are working so that
the adequate institutional infrastructure is constructed in order to effectively
confront the challenges of CEFTA and increase to the maximum the profits for
Kosovo. The profits of CEFTA can be viewed from different angles. Politically, it is
obvious that Kosovo profits a lot from CEFTA. Kosovo has become a member with
full sovereignty in this regional initiative. Kosovo has not remained the black hole in
the Balkan, blocked by the status solution; instead it has expressed its willingness to
be an integral part in the region. Likewise, by becoming part of CEFTA, Kosovo has
become part of the mechanism of the regional collaboration which promotes
political stability in the region. Thus, Kosovo solves the problems dialoging and
talking, not confronting and threatening. Furthermore, CEFTA increases the
negotiating power of Kosovo towards bigger countries in the region. Solving the
issues Kosovo has with regional countries becomes part of the solutions to the
problems in the region in which all the parties exercise pressure on the
discriminating party. Solving the issues bilaterally, would always be harder for
Kosovo, especially when it comes to Serbia. There have always multiple trade issues
which have always been hard to solve due to the lack of willingness from the Serbian
party to discuss over these issues. The profits are abundant even from the economic
aspect. Firstly, Kosovo undertakes a number of obligations for institutional reforms
in very important areas, such as:

 State help
 Competition
 Public
 Public procurement etc.

It would be hard to undertake such reforms in other ways, due to the political and
administrative energies that they require. Under this frame, CEFTA will serve as an incentive
to these reforms and will assist by offering the best solutions in the regions. Second of all,
CEFTA will mediate the tuning of the politics, institutions, laws and procedures. This makes
the region more attractive to the foreign investors because they would not prefer to operate
in a regional market where the rules of the game change every time they cross the border.
Economically speaking, it is important to point out the benefits of the Kosovo consumer. The
well-being of the Kosovo business is as important as the well-being of the consumer.

4.14 What will the Kosovo businesses benefit from CEFTA?

This is a very disputable topic and naturally the most delicate part of the debate is CEFTA.
The concerns that some businesses raise on the competition they might confront make
sense considering that the principle of CEFTA is the liberalization of the markets. Even then ,
the profits and the cost of CEFTA must be regarded as a whole and not apart from the wide
aspect it operates. Being part of a 30 million consumer market is a strong reason which
pushes one to be the best because it is everybody’s knowledge that competition demands
the best, otherwise you go bankrupt.

4.15 Declaration businesses make on CEFTA

“We are not very enthusiastic about CEFTA”. Bashkim Osmani, president of the juice
company “Laberion” declares that CEFTA agreement has caused him a lot of loss. “No, CEFTA
has been of no help to me. On December 3, 2008 I lost 2.2 million euro when Bosnia and
Herzegovina stopped me from exporting in this country because they did not recognize the
stamps of the Republic of Kosovo, unless it was UNMIK to sign for Kosovo” he said. Osmani
went on to say that he had to open a company to open a company to re-export to
Montenegro to pass the product through Montenegro to Bosnia. The Serbian and Bosnian
goods access the Kosovo market by providing a simple VAT certificate. Whereas, the Kosovo
produce has no chance of penetrating their market. The expenses are tripled, because
transport is very expensive,” he points out. The president of the most successful company of
the year for 2009, made a call to the institutions to place mutual measures with the
neighboring countries, Serbia and Bosnia. More businessmen have declared that CEFTA has
been of no help to them. Burim Piraj, owner of the “Meka” company says that CEFTA is one
sided. “Kosovo has always implemented it, but we have never had a chance of profiting from
it”, he admits.

Stiljan Muça