Investment Reform Index 2010:

Investment Reform Index 2010
MONITORING POLICIES AND INSTITUTIONS Investment

FOR DIRECT INVESTMENT IN SOUTH-EAST EUROPE
Reform

Improving the climate for investment is a strategic economic priority for South-East Europe. The
global economic crisis has highlighted the importance to the region’s long-term prosperity of
generating higher levels of direct investment. Many of the policy reforms needed to strengthen the
Index 2010
investment climate are also necessary for membership of the European Union, to which countries MONITORING POLICIES AND
in the region generally aspire.
INSTITUTIONS FOR DIRECT INVESTMENT
Using an innovative methodology, the Investment Reform Index 2010 (IRI 2010) monitors
investment-related policy reforms in the economies of South-East Europe and compares these
IN SOUTH-EAST EUROPE
to best practices in the OECD area. Based on inputs from governments, the private sector,
independent experts and multilateral organisations active in the region, the IRI 2010 assesses
policies and institutional settings in eight fields of policy critical to domestic and foreign investors.
MONITORING POLICIES AND INSTITUTIONS FOR DIRECT INVESTMENT IN SOUTH-EAST EUROPE

These are: investment policy and promotion; human capital development; trade policy and
facilitation; access to finance; regulatory reform and parliamentary processes; infrastructure
for investment; tax policy analysis; and SME policy. For the economies examined, the IRI 2010
provides:
• A
n independent and rigorous assessment of investment-related policy settings and reform against
international good practice.
• Guidance for policy reform and development.
• An evidence base with which to facilitate prioritisation of donor activities supporting investment
and growth.
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Investment Reform
Index 2010
MONITORING POLICIES
AND INSTITUTIONS FOR DIRECT INVESTMENT
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
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domestic and international policies.
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FOREWORD
Foreword
I ncreasing the volume and quality of private investment is critical to the economies of South-East
Europe. Despite a recent record of positive and in some cases rapid economic growth, levels of private
investment need to rise. As transition proceeds and privatisation processes conclude, the
opportunities for attracting significant new privatisation-driven foreign direct investment will
diminish. Higher volumes of foreign investment are now needed in greenfield projects, particularly in
export-oriented activities. Increasing domestic private and foreign investment will help to raise
output and productivity in South-East Europe, which are critical to employment creation, sustainable
trade balances, improved government finances and ultimately to addressing the region’s pressing
social problems. The global financial and economic crisis, which hit the region severely during the
preparation of this study, has further underlined the importance of achieving more and better private
sector investment.
In this context, the Investment Reform Index 2010 provides a detailed assessment and
benchmarking of critical policy settings and institutional conditions that shape the environment for
direct investment. Best practice policies in the OECD area are used as pointers to guide the
assessment. The assessment itself has been prepared through a process that has included senior
policy makers, independent experts and the private sector in each country, as well as OECD staff
working across a broad range of policy specialisms. The Investment Reform Index 2010 is a follow-up
to an equivalent study undertaken in 2006. In many parts of the report progress since 2006 has been
highlighted.
This study is one among a number of studies and advisory projects currently undertaken by the
OECD’s Investment Compact for South-East Europe. Working with policy makers from all countries
of the region, through the South-East Europe Investment Committee, the Investment Compact
represents a prime instance of how knowledge and expertise possessed by the OECD can be
harnessed and shared with non-member countries.
Mr. Anthony O’Sullivan

Head of the Private sector Development Division
Directorate for Financial and Enterprise Affairs
OECD
INVESTMENT REFORM INDEX 2010 © OECD 2010 3

ACKNOWLEDGEMENT
Acknowledgement
P reparation of the Investment Reform Index 2010 has involved many experts, institutions
and government officials. Alistair Nolan has had overall editorial and management
responsibility. Individual chapters have been prepared by: Milan Konopek (Investment
Policy and Promotion); Alistair Nolan, Sara Barclay and Erin Hengel (Human Capital
Development); Andrea Beltramello (Trade Policy and Facilitation); Nicolas Philiponnet
(Access to Finance); Jakob Fexer and Adelina Vestemean (Regulatory Reform and
Parliamentary Processes); Steve Clark and Erin Hengel (Tax Policy Analysis); and Edgardo
Valencia Cruickshank, Monica Chavez Lemos and Lotte van Mechelen (Infrastructure for
Investment). Drafting of country-specific texts was greatly assisted by Mary O’Mahony.
Critical advice has been had throughout from Antonio Fanelli. Additional support and
research assistance was provided by Aleksander Leicht, Monica Chavez Lemos, Lotte van
Mechelen and Renata Seperic. Anthony O’Sullivan, Alexander Böhmer, Fadi Farra,
Barbara Fliess, Philipp Carlsson-Szlezak and staff from across the OECD’s Private Sector
Development Division contributed to valuable exchanges on the assessment
frameworks used.
The work of independent experts from South-East Europe has been central to this
study. The experts include Selim Belortaja, Haris Abaspahic, Emina Kadric, Anelia
Damianova, Zrinski Pelajic, Danijela Tepšic, Maja Vehovec, Lidija Švaljek, Pleurat Hundozi,
Michael Gold, Peers Brewer, Driton Fetahi, Visar Kelmendi, Arben Abdullahu, Dragan
Martinovski, Simona Sosolceva, Richard Currie, Silvana Mojsovska, Verica Janeska, Anatol
G r e m a l s c h i , S o r i n R ev e n k o, I v a n a Vo j i n ov i c , D r a g o s P i s l a r u , Ko s ov k a
Ognjenovic and Aleksandra Brankovic.
Colleagues from across the OECD Secretariat have advised on assessment criteria and
commented on texts. These include Bob Bonwitt and his colleagues at the SIGMA
Programme as well as Stephen Lumpkin and Mihaylo Milovanovitch, Evdokia Möisé and
Stephen Thomsen.
As sources of valuable information and comments thanks are also due to Evgeny
Evgeniev, Borko Handjiski, Gordana Popovik-Friedman, Vito Intini and Susanne Szymanski.
This study has entailed considerable effort from government counterparts. In this
connection, thanks are due to all the Country Economic Team leaders, and their staff,
working with the OECD Investment Compact for South-East Europe.
Thanks are also due to delegations and offices of the European Commission from
throughout the region, and to the Business Advisory Council, as well as all participants in
the Private Sector Focus Group Meetings held in all countries of the region. Valuable
information was also provided by the CEFTA Secretariat.
The support of Eurochambres, and especially Micol Martinelli, in facilitating the
Private Sector Focus Group Meetings is gratefully acknowledged.
4 INVESTMENT REFORM INDEX 2010 © OECD 2010

ACKNOWLEDGEMENT
The Regional Co-operation Council kindly hosted the initial meeting of regional
government officials convened to design the study.
Critical administrative support has been provided by Laureline Decourtye, Elisa
Larrakoetxea, Geraldine Daly, Laurent Rota and Lynn Whitney. The publication process has
been led by Vanessa Vallée.

Acknowledgment to the donors community
Special thanks are due to all the Donors of the Investment Compact for South-
East Europe for their constant support of the OECD’s work in the South-East
European region. Particular thanks are due to the United States of America, the
Government of Flanders and the European Union for their specific financial
contributions to the Investment Reform Index.
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TABLE OF CONTENTS
Table of contents
Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Investment Reform Index 2010: Key Findings and Recommendations . . . . . . . . . . . . . 15
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
IRI 2010: Summary of Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Part I
Policy Findings by Dimension
Chapter 1. Investment Policy and Promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

1.1. Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
1.2. Investment policy and promotion assessment framework . . . . . . . . . . . . . . 38
1.3. Results by subdimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
1.4. Conclusions and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Chapter 2. Human Capital Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

2.1. Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
2.2. Human capital and direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
2.3. The human capital development assessment framework . . . . . . . . . . . . . . . 72
2.5. Human capital outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Chapter 3. Trade Policy and Facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

3.1. Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
3.2. Trade policy and foreign direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
3.3. Trade policy and facilitation assessment framework . . . . . . . . . . . . . . . . . . . 104
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Chapter 4. Access to Finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

4.1. Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
4.2. Access to finance assessment framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

TABLE OF CONTENTS
4.3. Overview of access to finance in South-East Europe . . . . . . . . . . . . . . . . . . . . 145

4.4. Results by subdimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
4.5. Conclusions and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
Chapter 5. Regulatory Reform and Parliamentary Processes . . . . . . . . . . . . . . . . . . . . 169

5.1. Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
5.2. Regulatory reform and parliamentary processes assessment framework . . . . . 171
5.3. Results by subdimensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Annex 5.1. Romania’s Law on Decisional Transparency
in Public Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
Chapter 6. Tax Policy Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

6.1. Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
6.2. Tax policy analysis assessment framework . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
Chapter 7. Infrastructure for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

7.1. Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
7.2. Infrastructure for assessment framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
Chapter 8. SME Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

8.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238
8.2. Key findings on progress in policy elaboration and implementation
in the Western Balkan region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238
8.3. Key findings of the SME Policy Index 2010 by economy . . . . . . . . . . . . . . . . . . 240
8.4. Key findings by area of the European Charter for Small Enterprises . . . . . . 242
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248

TABLE OF CONTENTS
Part II
Chapters by South-East European Economy
Albania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Bosnia and Herzegovina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
Bulgaria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
Croatia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
Kosovo under UNSCR 1244/99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
The Former Yugoslav Republic of Macedonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
The Republic of Moldova . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
Montenegro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299
Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
Serbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313
•••
Tables
1.1. Investment policy and promotion: Scores by indicator . . . . . . . . . . . . . . . . . . . 67
2.1. Selected indicators of education spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
2.2. Unemployment benefits for a single male earning the average wage
in manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
2.3. Tax wedge for a single person at two thirds of average earnings (2006/07). . . . . . 91
2.4. Minimum wages as share of average gross wage in manufacturing . . . . . . . . 92
2.5. EPL index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
2.6. PISA mean scores 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
2.7. Human capital development: Final (weighted) scores . . . . . . . . . . . . . . . . . . . . 95
3.1. Trade policy co-ordination mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
3.2. SEE integration in the Multilateral Trading System . . . . . . . . . . . . . . . . . . . . . . 112
3.3. Membership in international and European standardisation organisations . 119
3.4. Number of transposed standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
3.5. Membership in international and European accreditation organisations. . . . 121
3.6. Number of accredited conformity assessment bodies . . . . . . . . . . . . . . . . . . . . 122
3.7. Trade policy and facilitation: Final scores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
4.1. Access to finance: Final scores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
5.1. Characteristics of SEE parliamentary websites . . . . . . . . . . . . . . . . . . . . . . . . . . 181
5.2. The role of parliaments in economic reform: Weighted final scores . . . . . . . . 184
6.1. Recent changes in CIT rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
6.2. Tax policy analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209
8.1. Key SME policy reform initiatives launched in the Western Balkans
since the 2007 SME Policy Index Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
Figures
1.1. Investment policy and promotion: Dimension and subdimension
average scores. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
1.2. Assessment framework for investment policy and promotion. . . . . . . . . . . . . 39
1.3. FDI policy subdimension: Average scores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
1.4. Cadastres, land titles and restitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
1.5. Scores for intellectual property rights indicator . . . . . . . . . . . . . . . . . . . . . . . . . 48
1.6. Estimated personal computer software piracy rates . . . . . . . . . . . . . . . . . . . . . 49
1.7. Investment promotion and facilitation subdimension: Average scores . . . . . 51

TABLE OF CONTENTS
1.8. Transparency subdimension: Average scores . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

1.9. Privatisation and PPP policy subdimension: Average scores . . . . . . . . . . . . . . . 61
2.1. Human capital development: Dimension and subdimension
average scores. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
2.2. Human capital development assessment framework . . . . . . . . . . . . . . . . . . . . 73
2.3. Strategy formulation subdimension: Average scores and scores
by indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
2.4. Inputs to initial education subdimension: Average scores and scores
by indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
2.5. Vocational education and training subdimension: Average scores
and scores by indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
2.6. Continuing education and training subdimension: Average scores. . . . . . . . . 89
3.1. Trade policy and facilitation: Dimension and subdimension average scores. . . . 102
3.2. Trade policy and facilitation assessment framework. . . . . . . . . . . . . . . . . . . . . 105
3.3. Trade policy formulation and evaluation subdimension: Average scores
and scores by indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
3.4. Average applied tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
3.5. Trade liberalisation subdimension: Average scores and scores
by indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
3.6. Customs duties on capital goods in SEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
3.7. Technical barriers to trade: Average scores and scores by indicators . . . . . . . 118
3.8. Number of ISO 9001 certificates per million population . . . . . . . . . . . . . . . . . . 124
3.9. Number of ISO 9001 certificates, 2003-07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
3.10. SPS: Average scores and scores by indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
3.11. Administrative barriers to trade: Average scores and scores by indicators. . . . . . 130
3.12. Proactive export promotion subdimension: Average scores and scores
by indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
4.1. Access to finance: Dimension average scores . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
4.2. Access to finance assessment framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
4.3. Share of bank loans in external financing of new fixed assets . . . . . . . . . . . . . 145
4.4. Evolution and composition of domestic credit to the private sector . . . . . . . . 147
4.5. Size and liquidity of stock markets in South-East Europe . . . . . . . . . . . . . . . . . 147
4.6. Legal and regulatory framework subdimension: Average scores . . . . . . . . . . . 150
4.7. Coverage of public and private credit registries . . . . . . . . . . . . . . . . . . . . . . . . . 153
4.8. Collateral requirements in SEE economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
4.9. Availability of alternative financial instruments subdimension:
Average scores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
4.10. Loan guarantee schemes subdimension: Average scores . . . . . . . . . . . . . . . . . 161
4.11. Investment readiness subdimension: Average scores . . . . . . . . . . . . . . . . . . . . 163
5.1. Regulatory reform and parliamentary processes: Dimension average scores . . . 170
5.2. Assessment framework for regulatory reform and parliamentary processes . . . 171
5.3. Better regulation and legislation subdimension: Average Scores. . . . . . . . . . . 172
5.4. Relationship between inward FDI and quality of governance. . . . . . . . . . . . . . 173
5.5. Top Determinants of FDI in SEE according to foreign investors . . . . . . . . . . . . 174
5.6. Transparency and dialogue subdimension: Average scores . . . . . . . . . . . . . . . 179
6.1. Tax policy analysis dimension and subdimension: Average scores. . . . . . . . . 190
6.2. Structure of the assessment framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
6.3. Analysing fiscal position and planning subdimension: Average scores . . . . . 195

TABLE OF CONTENTS
6.4. Analysing taxation, investment and employment subdimension:

Average scores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
6.5. Analysing taxation of SMEs and MNEs subdimension: Average scores . . . . . . 202
6.6. Taxing owners of incorporated SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
7.1. Infrastructure for investment assessment framework. . . . . . . . . . . . . . . . . . . . 215
7.2. Indicator 1.1: Time required to obtain a new telephone line for a business . . . . . 217
7.3. Indicator 1.2: Persons with broadband access . . . . . . . . . . . . . . . . . . . . . . . . . . 218
7.4. Indicator 1.3: Fixed line and mobile penetration rate . . . . . . . . . . . . . . . . . . . . 218
7.5. Indicator 1.4: Telephone faults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
7.6. Indicator 1.5: Average cost of a peak rate fixed-line call to Germany . . . . . . . 220
7.7. Indicator 1.6: Active operators providing fixed-line telephony services . . . . . 220
7.8. Indicator 2.1.1: Length of road network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
7.9. Indicator 2.1.1: Paved roads as a percentage of total road length . . . . . . . . . . . 224
7.10. Indicator 2.1.3: Total length of motorways, highways, main or national roads 225
7.11. Indicator 2.1.4: Annual expenditure on road construction . . . . . . . . . . . . . . . . 225
7.12. Indicator 2.1.5: Annual expenditure on road maintenance of road . . . . . . . . . 226
7.13. Indicator 2.2.1: Total length of rail network/country area . . . . . . . . . . . . . . . . . 227
7.14. Indicator 2.2.2: Number of trains operating per km of railway . . . . . . . . . . . . . 228
7.15. Indicator 2.2.3: Annual expenditure on maintenance of rail network . . . . . . 228
7.16. Indicator 2.3.1: Aircraft departure per day at the country’s largest airport . . . . . . 230
7.17. Indicator 2.3.2: Average annual air cargo transported . . . . . . . . . . . . . . . . . . . . 230
7.18. Indicator 2.3.3: Average cost of a tonne of airfreight to Frankfurt . . . . . . . . . . 231
7.19. Indicators 3.1 and 3.2: Average time required to obtain an electricity
connection for a business (calendar days) and necessary steps/
documentation to get a connection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
7.20. Indicator 3.3: Average industrial electricity tariff . . . . . . . . . . . . . . . . . . . . . . . . 232
8.1. Scores in Charter Area 2 – Cheaper and faster start-up . . . . . . . . . . . . . . . . . . . 243
8.2. Scores in Charter Area 3 – Better legislation and regulation . . . . . . . . . . . . . . . 244
8.3. Scores in Charter Area 5 – Improving online access . . . . . . . . . . . . . . . . . . . . . . 245
8.4. Scores in Charter Area 6 – Getting more out of the Single Market . . . . . . . . . . 245
8.5. Scores in Charter Area 8 – Strengthening the technical capacity
of small enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247
8.6. Score in Charter Area 9 – Successful e-business models and top-class
business support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
8.7. Scores in Charter Area 10 – Developing stronger and more effective
representation of small enterprises’ interests . . . . . . . . . . . . . . . . . . . . . . . . . . . 248

ABBREVIATIONS
Abbreviations
ALB Albania
BIH Bosnia and Herzegovina
BGR Bulgaria
HRV Croatia
XK Kosovo under UNSCR 1244/99
MKD The former Yugoslav Republic of Macedonia
MDA The Republic of Moldova
MNE Montenegro
ROU Romania
SRB Serbia
ACAA Agreement on Conformity Assessment and Acceptance of Industrial Products

ATM Autonomous trade measure
AV Ad-valorem
AVE Ad-valorem equivalent
BAN Business angel network
BEEPS Business Environment and Enterprise Performance Survey
BHEPA Bosnia and Herzegovina Export Promotion Agency
BIT Bilateral investment treaty
CA Conformity assessment
CAB Conformity assessment body
CBA Cost-benefit analysis
CCL Canadian Council on Learning
CEFTA Central European Free Trade Agreement
CEN European Committee for Standardization
CENELEC European Committee for Electrotechnical Standardization
CET Continuing education and training
CIT Corporate income tax
CLI Composite learning index
COECE Business Organisation for the Coordination of Foreign Trade
CPF Croatian Privatization Fund
CRANE Croatian Business Angel Network
CRM Client relationship management
EA European co-operation for Accreditation
EA MLA Multilateral Agreement of the European co-operation for Accreditation
EFTA European Free Trade Association
EPL Employment protection legislation
ETSI European Telecommunications Standards Institute
EU European Union
FDI Foreign direct investment

ABBREVIATIONS
FTA Free trade agreement

GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
GSP Generalised System of Preferences
HAMAG Croatia Agency for SMEs
HANFA Croatian Financial Service Supervisory Agency
IA Interim agreement
IAF International Accreditation Forum
ICT Information and communication technology
IEC International Electrotechnical Commission
ILAC International Laboratory Accreditation Cooperation
IPA Investment promotion agencies
IPAK Investment Promotion Agency Kosovo
IPF Investment promotion and facilitation
IPO Initial public offering
IPPC International Plant Protection Convention
IPR Intellectual property right
IRI Investment Reform Index
ISCED International System for the Classification of Education
ISO International Standardisation Organisation
ITU International Telecommunications Union
JEREMIE Joint European Resources for Micro to medium Enterprises
KfW Kreditanstalt für Wiederaufbau
METR Marginal effective tax rate
MFI Microfinance institution
MLA Multilateral agreement
MNE Multinational enterprise
NGO Non-governmental organisation
NTB Non-tariff barriers
OIE World Organisation for Animal Health
OSCE Organization for Security and Co-operation in Europe
OSS One-stop shop
PISA Programme for International Student Assessment
PPP Public-private partnership
QA Quality assurance
RIA Regulatory impact assessment
SAA Stabilisation and Association Agreement
SEE South-East Europe
SIA Sustainability impact assessment
SIEPA Serbian Investment and Export Promotion Agency
SME Small- and medium-sized enterprise
SNA Skill needs analysis
SPS Sanitary and phytosanitary standards
TBT Technical barrier to trade
TRIPS Trade-related aspects of intellectual property rights
VET Vocational education and training
WIPO World Intellectual Property Organisation
WTO World Trade Organization

Monitoring Policies and Institutions for Direct Investment
in South-East Europe
© OECD 2010
Investment Reform Index 2010:

Key Findings and Recommendations
Investment Policy and Promotion
South-East Europe (SEE) has progressively reduced restrictions to national treatment since
completion of the previous Investment Reform Index (IRI 2006). Restrictions only remain in a
limited number of sectors, e.g., arms production and manufacturing.
The protection of physical property has been enhanced with the digitization of land
registries and cadastral books. However, enforcement of intellectual property rights (IPR)
remains a challenge. Consideration should be given to using designated IPR courts to
expedite cases of IPR infringement.
SEE economies should review procedures and criteria for acquiring business-related
licenses and permits at the sub-national level (such as building/construction permits) and
ensure their overall transparency. One option is to have investment promotion agencies
function as one-stop shops for inward investors.
The scope for additional privatisation-related investment is narrowing, while public
private partnerships (PPP) are in their infancy. Policy makers in SEE are encouraged to
exchange best practices on the design of PPP units, PPP-related legislation, cost-benefit
analysis and monitoring, drawing for instance on the OECD Principles for Private Sector
Participation in Infrastructure.
Human capital development
Governments in SEE must address skills development on an urgent basis given the long
gestation period of human capital policies and the global increase in demand for skills.
While reforms are occurring in different parts of education and training systems in many
countries, evidence suggests considerable misalignment between the profile of skills
supplied and the needs of employers. SEE governments also need to tackle weaknesses in
the connections between industry and academia more broadly. For instance, many
governments need to assess how truly inclusive their consultative processes are and why,
in some cases, private-sector participation is limited.
Spending on students as a share of per capita income, at secondary and tertiary levels, is
often low compared to OECD norms. The challenge is to step up this investment while
increasing quality.
15
INVESTMENT REFORM INDEX 2010: KEY FINDINGS AND RECOMMENDATIONS
Better data-gathering and monitoring capacity is urgently required in all SEE countries, but
particularly in the Western Balkans. There is a paucity of essential data on inputs to and
outcomes from national education and training systems.
Participation in adult training is low and systems of work-related training are
underdeveloped. Measures are needed to develop effective incentive schemes and improve
the quality of training provided.
Opportunities exist for regional co-ordination and co-operation in the education domain.
One area highlighted here is quality assurance, but regional co-operation could also be
pursued in such fields as research or curriculum alignment. The experience of the Nordic
Council serves as a practical example of how regional co-operation can be pursued.
Trade policy and facilitation
Since the IRI 2006, all SEE economies have strengthened their ties with the multilateral
trading system and furthered intra-regional trade.
Tariffs on agricultural and non-agricultural products have been adjusted to world averages,
and the regimes for other non-tariff measures such as licenses and quantitative
restrictions are highly facilitatory.
Most SEE economies should speed up the adoption of the EU sectoral acquis for industrial
products. Priority should be given to products and sectors strategic to increased intra-
CEFTA trade.
The institutional framework for accreditation should be strengthened, in particular by
increasing the number and qualifications of staff of national accreditation bodies.
Governments across the region should further support the establishment of a network of
independent conformity assessment bodies to facilitate certification for local firms,
especially SMEs. Governments should also promote the use of standards among
companies, with the aim of boosting export competitiveness.
The implementation of sanitary and phytosanitary measures needs to be facilitated by
augmenting human and financial resources, infrastructure and information and
communications systems.
Despite some improvements in trade facilitation, businesses still face hurdles in finding
information on customs and trading procedures. This highlights a need for improving the
transparency and public availability of information on customs regulations and procedural
requirements.
Consideration needs to be given to how export promotion agencies and programmes can
be strengthened. In some instances this requires an increase in the budget allocations for
export promotion agencies, but such increases need to go hand in hand with consistent
adoption of documented best practices.
Access to finance
Limited access to finance is a major concern of entrepreneurs in SEE. This problem has
been accentuated by the global financial crisis.
Mechanisms for the sharing of credit-related information have been introduced in all SEE
economies. International reporting standards are promoted and credit bureaus and

collateral registries are well developed. However, measures should be taken to expand
adoption of the standards and, in some economies, to improve the coverage and reliability
of data included in the registries.
Both formal venture capital and business angel activity are scarce. Some initiatives in the
region demonstrate that policies can facilitate the development of the market for informal
equity finance.
Many initiatives exist in SEE to develop guarantee schemes. However, numerous
schemes do not seem to have achieved the expected results and visibility. The design,
scope and impact of schemes should be more fully assessed.
The growing role of microfinance institutions calls for clearer legal and regulatory frameworks.
Regulatory reform and parliamentary processes
Most SEE economies have progressed in establishing institutional and legal frameworks for
regulatory reform and in implementing regulatory reform programmes.
However, the use of Regulatory Impact Analysis (RIA) is still in its infancy in the region.
Prospective EU accession, and the associated adoption of EU laws and regulations,
underlines the importance of establishing an effective review system for draft legislation.
Furthermore, in times of economic crisis and budgetary constraint, RIA is an important
means to increase the cost-effectiveness of regulatory decisions. SEE governments should
prioritise the implementation of RIA. Several OECD publications provide guidance on
setting up an RIA system. Sharing the experiences of more advanced SEE economies in this
field, such as Serbia, could also benefit the region.
Few SEE economies have adopted a lobby or transparency law. Sound consultation
processes can address many causes of regulatory failure, such as inadequate information
in the public sector. Romania's transparency law could serve as an example of good
practice for other SEE economies.
The limited capacity of parliaments to analyse complex economic legislative proposals
remains a problem. Parliaments need to strengthen partnerships with universities, non-
governmental organisations and think tanks in order to enhance their capacity and
supplement their often modest resources.
Tax policy analysis
In recent years SEE economies have made important progress in strengthening their
capacity to carry out tax policy development and implementation, regularly forecasting
aggregate tax revenues and monitoring public revenues and expenditures.
However, no SEE economy has implemented a full array of tax models, e.g. corporate
income tax micro-simulation models or tax wedge models. Such models are important for
providing, among other things, information on how a given tax reform will affect different
taxpayers.
While some SEE economies undertake ad hoc studies on tax issues relevant to small and
medium-sized enterprises and multi-national enterprises, no country systematically
conducts such assessments. These studies are essential for evaluating the effectiveness of
tax policy and identifying tax planning opportunities.

Infrastructure for investment
SEE economies have considerably improved their legal frameworks on infrastructure.

Recent reforms are largely in compliance with EU standards and aim at fulfilling the acquis
requirements.
Broadband internet penetration is low in most SEE economies. In some countries, a long-
term telecommunications strategy is still under development. To improve transparency in
the telecommunications market, public-private consultations should be organised more
regularly.
The presence of motorways, even among the most advanced economies of the region, is
limited. Cross-border and intra-regional co-operation in developing road infrastructure
should be established in order to raise the investment attractiveness of individual
countries and the entire region.
Underdeveloped rail networks characterise SEE. In some economies, expenditures on rail
maintenance are insufficient and construction of new rail corridors is almost nonexistent.
Co-operation at the intra-regional level, in conformity with the Trans-European Rail
Network guidelines, would benefit the entire region.

© OECD 2010
Introduction
R aising the quantity and quality of direct investment is critical to the economies of
South-East Europe (SEE). The importance of meeting this challenge has been underscored
by the global economic crisis.
The Investment Reform Index 2010 (IRI 2010) has a number of objectives:
● based on data valid to September 2009, to independently assess investment-related
policy settings and reform against international best practice;
● to give guidance for policy reform and development;
● to create a process that enhances the quality of policy development relating to
investment; and
● to generate an evidence base that facilitates prioritisation of donor activities supporting
investment and growth in SEE.
The IRI 2010 is a qualitative assessment of policy settings and institutional conditions
that shape the environment for direct investment. The study methodology has two key
parts: the use of detailed assessment frameworks that allow comparison of policies and
institutions with international best practice; and an assessment process that is highly
participatory and inclusive, involving policy makers, independent experts and the private
sector in each country. The study methodology is described on page 22.
The economies covered in the IRI 2010 are Albania, Bulgaria, Bosnia and Herzegovina,
Croatia, the former Yugoslav Republic of Macedonia, Kosovo under UNSCR 1244/99, the
Republic of Moldova, Montenegro, Romania and Serbia.
Eight dimensions of public policy are examined. These are: investment policy and
promotion, human capital development, trade policy and facilitation, access to finance,
regulatory reform and parliamentary processes, tax policy analysis, infrastructure for
investment and SME policy. Resources and practicability did not permit inclusion of every
field of public policy that affects the climate for direct investment. Competition policy, for
instance, is important in the context of South-East Europe and is omitted. Issues of political
stability are also not evaluated. Nevertheless, the eight dimensions of the IRI 2010 encompass
a critical and broad set of policies determining the quality of the investment environment.
IRI 2010 follows on from IRI 2006, which used the same method. When relevant, direct
comparison with performance in 2006 has been made.
The critical role of direct investment for the SEE region

Increasing the volume and quality of private sector investment is critical to economies
in the SEE region. A number of recent studies – in particular Kathuria (2008) and Handjiski
(2008) – highlight the investment-related challenges facing SEE (and especially Western
19
INTRODUCTION
Balkan) economies. While there is some diversity across countries, stylised facts for the
region include the following:
● Much FDI has occurred in the context of privatisations. Greenfield investments have
been limited. While the transfer from public to private ownership is continuing in
some sectors and countries, the privatisation process is well advanced (financial
services and telecommunications for instance are mostly privately owned in SEE).
Consequently, the scope for significant additional privatisation-driven FDI is small.
● FDI has been highly concentrated in sectoral terms, occurring particularly in financial
services and manufacturing (although in much lower volumes than in the Slovak
Republic for instance).
● While investment in machinery and equipment is positively associated with
productivity growth, much investment in the SEE region has occurred in real estate and
construction. Indeed, Handjiski (2008) shows that in all Western Balkan economies
except Serbia, construction accounts for more than 50% of gross fixed capital formation.
● The private investment share, expressed as a percentage of GDP, has also been low
compared to EU10, and low compared to a number of countries in earlier transition
periods.
● There has been little FDI in export-oriented activities.
● Evidence exists of the positive effects of FDI on growth in the SEE region (Sapienza,
2009) and on sectoral productivity in countries such as Croatia, the former Yugoslav
Republic of Macedonia and Serbia.
Higher levels of investment, particularly private investment in export-oriented
activities, are needed to raise total output and productivity. Growing output and productivity
are critical to employment creation, sustainable trade balances, government finances and to
addressing the region’s pressing social problems. The global financial and economic crisis,
which hit the SEE region with full force during the preparation of this study, has further
underlined the importance of achieving more and better private sector investment.
The global economic crisis in South-East Europe

As the global economic crisis unfolded in the United States and western Europe, there
were hopes that SEE might be spared the full brunt of its effects. These hopes proved to be
short-lived. The first signals that the crisis had arrived in South-East Europe included
slower growth in the fourth quarter of 2008, followed by contractions in national output in
several SEE economies in the first of quarter of 2009.
Tightening credit conditions among western European banks were eventually passed on
to the SEE region, with lending and deposit rates rising in the first quarter of 2009. However,
due to a combination of conservative banking regulations and quick interventions by central
banks, the region avoided a full-blown credit crunch. As regards trade, SEE economies
primarily export commodities and industrial products to the European Union (EU). The real
economy effects of the economic crisis in the EU had an immediate impact on industrial
activity and export demand in the SEE area. Indeed, the SEE region’s total trade with the EU25
in January 2009 was almost 40% lower than its peak in July 2008.
The economic crisis also dampened FDI flows. After a near record high of EUR 7.6 billion
in total net FDI in the second quarter of 2008, FDI flows to SEE fell to EUR 4.8 billion in the
third quarter of 2008, a 37% decline. The trend continued in the fourth quarter of 2008,

INTRODUCTION
when FDI inflows dropped by another 6%. In Bulgaria, the former Yugoslav Republic of
Macedonia, Montenegro and Romania FDI in the fourth quarter of 2008 fell by 36%, 20%,
12% and 9%, respectively, compared to the third quarter.
In a number of instances, foreign investors began to shy away from new privatisations,
concessions or public infrastructure projects. For example, Serbia’s state-owned airline, JAT
Airways, was scheduled to be privatised in late 2008. However, as a result of the crisis, JAT’s
privatisation was suspended as no investors had participated in the tender process.
Furthermore, the potential sale of state-owned Telecom Serbia was postponed until 2010.1
In Croatia, the tender of six state-owned shipyards by the Croatian Privatisation Fund (HFP)
was not successful in 2009, despite seemingly serious prior expressions of interest (EIU,
2009). The Montenegrin government extended the tender process for a long-term lease of
Velika Plaza and Ada Bojana beaches to mid-February 2010, as only one bid was received by
the initial deadline.2 And in Kosovo3 a plan to build a EUR 3.5 billion, 2 GW thermal power
plant was abandoned due to lack of investor interest.4
SEE governments employed a combination of monetary and fiscal policies to mitigate the
impact of the crisis. Some central banks cut their main policy rates (Albania, Moldova,
Romania and Serbia) and also reduced minimum reserve requirements for funds borrowed
from abroad (Bosnia and Herzegovina, Bulgaria, Croatia, the Republic of Moldova, Montenegro,
Romania and Serbia).5 To prevent potential bank runs and to put domestic banks on an equal
footing with parent banks headquartered in the EU, several countries raised the ceiling on
deposit guarantees (Albania, Bulgaria, Bosnia and Herzegovina, Croatia, Montenegro, Romania
and Serbia). To date, there has been only one instance of a government in the region having to
bail-out a private bank (Montenegro). At the time of writing, Serbia and Romania had
experienced significant currency devaluations and had applied for IMF support.6
Despite increasingly severe fiscal constraints, all SEE economies have used
expansionary fiscal policies. These included attempts to shift budget expenditure away
from current spending and towards various forms of capital investment (including
education, healthcare, road and rail infrastructure, municipal infrastructure and
information technology). To create additional fiscal space, some SEE governments have
introduced measures to cut the cost of public administration and have urged state-owned
enterprises to devise saving plans (Bosnia and Herzegovina, Croatia, Romania and Serbia).
At the time of writing, expanding economic activity in the euro area in the third
quarter of 2009 is beginning to pull the SEE region out of crisis. Total exports have risen and
industrial production has stabilised in SEE, although there is still excess capacity. However,
domestic demand is still far below potential. In spite of the incipient recovery, risks remain
that may slow economic recovery. In particular, decreases in tax revenues and increases in
public spending could lead to a further deterioration of public finances. In addition, there
is a risk that the region will experience high and protracted unemployment as layoffs lag
output contractions.
Since completion of the IRI 2006, the momentum of policy reform across the SEE
region has continued, and in many cases improved. Various iterations of the World Bank’s
Doing Business survey have placed a number of countries in the region among the fastest
reformers of policies affecting the ease of doing business. Many potential foreign investors
also consider that the attractiveness of the region as an investment location has improved
significantly in recent years (Ernst & Young, 2008). The findings of the IRI 2010 bear out
these positive trends. Nevertheless, across the eight dimensions of policy addressed by the

INTRODUCTION
IRI 2010, further reforms and the development of increased capacities are necessary. Such
developments will help to underpin medium to long-run success in augmenting direct
investment, beyond the timeframe of the current crisis. The section that follows
summarises key findings of the IRI 2010 by policy dimension.
Investment Reform Index 2010: The method used

The method employed in preparing the IRI 2010 has two key elements: the assessment
criteria used, and the participatory nature of the assessment process.
As concerns assessment criteria, each chapter in this study dealing with a specific policy
dimension begins by describing the assessment framework used. In each assessment
framework, the policy dimension under study is broken down into subdimensions. For
instance, for the purpose of this study, the policy dimension of Human Capital
Development is described as comprising five subdimensions: strategy formulation;
vocational education and training; work-related continuing education and training; inputs
to initial education; and labour market settings and demand for skills.
Policy settings and institutional conditions in each subdimension are then characterised
using indicators. For instance, the dimension of Trade Policy and Facilitation contains a
subdimension titled “Proactive export promotion”. This subdimension has two indicators:
i) the presence and operations of an export promotion agency; and ii) the number and
characteristics of export promotion programmes.
Each indicator has a 1 to 5 scale. For all indicators, a score of 1 represents a situation of
minimal policy development. Higher scores represent progressively superior policy or
institutional conditions. A score of 5 is equivalent to best practice in the OECD area (or best
practice globally). Best practices were determined based on extensive literature review and
expert consultation. For instance, consider the indicator used on land ownership. Investors
need to be confident that their ownership of, or right to use, property is legally recognised
and protected. On this indicator, a score of 1 is given when land ownership rights are not
clearly provided for in national laws, and foreign investors do not have the right to own
real estate. By contrast, a score of 5 corresponds to a situation in which there are no
restrictions on foreign ownership and registration of land, and administrative procedures
for foreign owners, including registration, are no less expeditious than procedures for
national investors. Given the centrality of prospective EU accession for economies in SEE,
many of the indicators used in the IRI 2010 also incorporate scoring criteria that reflect the
acquis communautaire. For every indicator, the precise criteria associated with a given score
– whether a 1, 2, 3, 4 or 5 – are specified in the assessment framework documents. The
assessment frameworks are available at www.investmentcompact.org.
The process of assigning scores on each indicator is participatory and inclusive.
Assessment framework documents were sent to each government, which undertook a self-
assessment, providing evidence for the self-assigned scores. Simultaneously, the assessment
was performed by independent experts in each country. In addition, focus group meetings
were held in each country with representatives of the private sector, including domestic and
foreign investors. Private sector representatives were there asked to give their judgment on
selected policies and their implementation. This trilateral process of information collection
was supplemented with extensive literature review by OECD Investment Compact staff.
Indeed, one of the informational merits of the IRI 2010 is that it places a large mass of
otherwise disparate information into a comparative framework. This literature review was
complemented by consultations in each country with staff from the European Commission as
well as multilateral, and in some cases bilateral, development agencies.

INTRODUCTION
Investment Reform Index 2010: The method used (cont.)

Review meetings were then held in each country to examine instances where discrepant
scores had been assigned by any of the above-mentioned parties. Where necessary, to
finalise the scoring process, additional information was solicited from governments.
Once scores were finalised, weights were applied to the subdimensions in each policy
dimension. Weighting is necessary because some policy subdimensions are more
important than others for SEE economies. For example, consider access to finance. An
assessment of enterprise finance should evaluate policies and institutions affecting the
provision of risk capital. However, the largest source of external finance for firms in SEE is
the banking sector. Venture-based finance is in fact relevant to only a small fraction of
firms in most OECD economies. Moreover, the emergence of significant venture-capital
activity requires a sizeable volume of potential deals (for this reason, even in the United
States, venture capital activity is concentrated geographically in locations where the
number of viable investment opportunities is high). Accordingly, in an assessment of
access to finance in the SEE region, it would be mistaken to give the same weight to
indicators of venture capital development as to indicators on banking.
A complication in applying weights to policy subdimensions is the lack of scientific
criteria for doing so. Research findings and common sense suggest that some areas of
policy are more important than others. But guidance on attaching a numerical weight to
the relative degree of importance is usually lacking. The approach taken here was
therefore to set out the problem and poll the views of independent experts in every country
examined. An average of the weights thus suggested was eventually used. Weighting was
subsequently seen not to significantly change the relative position of countries in each
policy dimension.
The final scores and texts were also sent to governments for comment.
Methodological constraints exist in any study that seeks to compress a large amount of
information into indices, and indeed in any study as extensive in scope as the IRI 2010. In
particular, not all policy conditions are easily amenable to a 1-5 characterisation. For
instance, some important regulatory standards have to be implemented in full: there is no
gradation in their application. Policy best practices are also sometimes hard to determine
with certainty. This reflects the scarcity of good policy evaluations in some fields, as well
as the complexity of policy settings. For example, systems of vocational education and
training take many forms across countries, often reflecting historical idiosyncrasies. The
selection of an optimal arrangement is open to debate. It is also the case that some
variables that are important in driving outcomes are not easily captured in an
international comparative monitoring framework. For example, career guidance services
affect outcomes in systems of vocational training. But characterising a country’s system of
career guidance is problematic, because arrangements can vary greatly across subnational
regions and even individual schools. To facilitate comparison with OECD norms, scores on
the assessment of tax policy analysis are also presented for Belgium. To further anchor the
scoring system used in the other policy dimensions of the IRI 2010, future work could
involve performing the assessment in selected OECD countries.

INTRODUCTION
Notes
1. FDI.net (November 2009), Focus: Financial crises and economic recession.
2. New Europe (August 2009), Bids on tourism tender delayed until 2010.
3. Throughout the report, “Kosovo” refers to “Kosovo under UNSCR 1244/99”.
4. Petroleum Economist (December 2009), Eastern Europe and CIS update.
5. For countries with fixed exchange rates or dollarisation, reduction in minimum reserve
requirements is the only monetary policy instrument available to monetary authorities operating
in this environment.
6. Serbia applied to the IMF as a preventive measure, while Romania has agreed to a EUR 17 billion
stabilisation programme with the IMF.

© OECD 2010
IRI 2010: Summary of Findings
Investment policy and promotion

The investment policy and promotion dimension assesses the policy frameworks
governing FDI. In addition, the dimension examines the types of services and activities
used to facilitate the entry and expansion of foreign investment and the transparency of
investment-related laws, regulations and procedures. Compared to IRI 2006, a new
subdimension is included, reviewing policies supporting privatisation and public-private
partnerships (PPPs).
Overall, the assessment shows that SEE economies have made progress in developing
open, transparent and predictable investment policies. Restrictions to national treatment
continue to be reduced. No evidence was found that any SEE economy had imposed a new
restriction or reversed a previous liberalisation measure since IRI 2006. Protection of
tangible property rights is improving as real-estate cadastres and land title registries in
urban areas are being updated and digitised, often with the support of international
organisations such as the World Bank. Nevertheless, progress in rural areas tends to be
slower. While SEE economies are introducing laws and regulations covering different forms
of intellectual property rights, effective implementation remains a challenge for the region.
Most SEE economies provide fiscal and financial incentives to attract FDI. However,
compared to municipal levels, information on FDI incentives tends to be more transparent
at the central government level.
All SEE economies have established investment promotion agencies (IPAs). Among
other functions, these agencies seek to help foreign investors navigate various licensing
and approval procedures, although none have authority to approve licences or permits.
Two areas where IPAs would benefit from exchanges of international best practices and
peer learning include aftercare services and facilitation of commercial linkages between
foreign enterprises and local SMEs. Interviews with private sector representatives revealed
that the transparency of procedures and criteria for acquiring business-related licenses
and permits is greater at the national level than the subnational level.
Privatisation is nearing its final phase in many SEE economies while public-private
partnerships (PPPs) are in their infancy. Given that PPPs are only beginning in the region,
SEE economies are encouraged to undertake exchanges of international best practices on
the design and implementation of PPP projects.

The stock of skills in the SEE region is low. Absolute shortage of skilled labour and so-
called “brain drain” are severe in some economies. Data from the OECD’s Programme for
International Student Assessment (PISA), which reflect the quality of education, show a
25
IRI 2010: SUMMARY OF FINDINGS
low level of performance relative to OECD averages. In some economies, skills shortages
appear to be holding back the development of specific sectors (such as tourism) and are an
obstacle to increased value added in manufacturing. The private sector frequently noted
the need for more employees with practical and technical skills. Skills shortfalls also affect
enterprise finance, with sources in some countries pointing to consequent inadequacies in
the preparation of business plans.
Spending on students as a share of per capita income, at secondary and tertiary levels,
is low compared to OECD norms. Such spending must be seen as a strategic investment.
However, the challenge is to step up investment while increasing quality.
Education system reform is ongoing almost everywhere in SEE. Nevertheless,
governments in the region must address skills development needs on an urgent basis given
the long gestation period of human capital policy, the likely global increase in demand for
skills and the region’s strategic need to reduce vulnerability to low-wage competition.
Evidence suggests considerable misalignment between the profile of skills supplied by
education and training systems, and the needs of employers. Few employers are fully
satisfied with the employability of graduates. The private sector in many economies feels
curricula are out of date and in some cases excessively theoretical. There is demand from
businesses for initiatives that facilitate skills matching. Issues of skills mismatch reflect a
broader weakness in the connection between industry and academia. In some countries of
the region, efforts are being made to strengthen the connection between business and
education systems (for instance, by encouraging internship programmes), but more needs
to be done.
Consultation processes in some areas of human capital policy are quite well
developed. However, many governments need to assess how truly inclusive consultative
processes are and why, in some cases, participation is limited.
Of all the subdimensions covered in this chapter, the scores for work-related
continuing education and training (CET) are on average the lowest. In a number of
economies there is little or no indication of any government strategy on CET. In economies
such as Bosnia and Herzegovina, and the Republic of Moldova, the responses indicate that
there are no significant incentives for work-related training. Employers in the region often
complain that the training market is not well organised, with many providers delivering
services of insufficient quality. Feedback from employers calls for measures to improve the
quality of training provided and to develop incentive schemes.
Better data-gathering and monitoring capacity are urgently required in all countries of
South-Eastern Europe, but particularly in the Western Balkans. There is a paucity of
essential data on inputs to and outcomes from national education and training systems as
well as skills needs analyses. In this connection, governments should consider committing
to participate in international skills surveys such as PISA. The data thus developed provide
valuable insight on the performance of education and training systems. Furthermore,
participation brings access to communities of expertise and numerous capacity-building
opportunities, which for some lower-income countries could likely be supported
financially by international donors.
Opportunities exist for regional co-ordination and co-operation in the education
domain, and there are inefficiencies in not doing so.


The trade policy and facilitation dimension gauges the effectiveness of SEE
economies’ institutional and operational arrangements for formulating, implementing and
evaluating trade policy. In addition, it examines the extent of trade liberalisation, in terms
of both integration in the multilateral trading system and the reduction of tariff and tariff-
equivalent barriers. This dimension also aims at assessing the steps taken to eliminate
non-tariff barriers, in particular technical barriers to trade, sanitary and phytosanitary
issues, and administrative barriers to trade. Finally, the trade policy and facilitation
dimension assesses countries’ export promotion strategies.
A main finding of the assessment is that since completion of IRI 2006, all SEE
economies have made progress in strengthening their ties with the multilateral trading
system and furthering intra-regional trade. Advances in WTO negotiations for some of the
region’s economies that are still not WTO members, the entry into force of symmetric trade
arrangements with the EU and the implementation of the Central European Free Trade
Agreement (CEFTA) are all indications of progress. In addition, tariffs on agricultural and
non-agricultural products have been adjusted to the world average, and the regimes for
other non-tariff measures such as licenses and quantitative restrictions are highly
facilitatory.
However, in all SEE economies mechanisms for consultation with civil society on trade
issues should be improved to include less powerful business representatives and other
stakeholders, such as trade unions, non-governmental organisations and academics.
To maximise regional and external trade, SEE economies must speed up the adoption
of EU technical regulations and standards as well as sanitary and phytosanitary measures.
The institutional framework for accreditation should be strengthened, in particular by
increasing the number and qualifications of staff of national accreditation bodies. In
addition, governments across the region should further support the establishment of a
network of independent conformity assessment bodies to facilitate certification for local
firms, especially SMEs. Governments should also promote the use of standards to the
business community, with the aim of boosting export competitiveness. In the sanitary and
phytosanitary area, a common feature across the region is the difficulty in implementation
of legislation, due to the lack of human and financial resources, infrastructure and
information and communication systems.
As concerns trade facilitation, there is a need to increase the transparency and public
availability of customs regulations and procedural requirements. Finally, consideration
also needs to be given to how export promotion agencies can be strengthened.
Access to finance
The assessment framework on access to finance collects data on access to finance for
firms and on the banking sector and seeks to evaluate the policies developed to improve
the credit environment in SEE.
Bank finance is the dominant form of external finance for firms in SEE. The market for
bank-based credit has grown rapidly in recent years. Domestic credit provided by banks
represented 35% of GDP for the region in 2005 and 51% in 2008. The banking market is
dominated by foreign-owned institutions whose presence is considered to have
contributed to increased efficiency. While stock markets operate in most SEE economies,
market capitalisation and liquidity are low. Stock markets contribute only marginally to

the financing of companies in SEE. While larger companies may have access to large loans
from banks, and in a few cases to capital markets, small- and medium-sized companies
face difficult credit conditions. SMEs face higher collateral requirements and often have
difficulties obtaining long-term financing. To ease financing constraints on SMEs,
governments and international financial institutions have set up a number of credit lines
targeting SMEs. However, these instruments need to be part of a larger reform process.
The regulatory framework governing access to finance in SEE economies is generally
well developed. Insolvency laws and their regulations have been the subject of numerous
reforms in recent years. Nevertheless, in many cases the implementation of regulations is
not yet completed. Resources, and in particular qualified professionals, are too few to
proceed with all insolvency cases in due time. However, measures such as the introduction
of out-of-court workout have been taken to improve the situation. Mechanisms are well
developed to ensure that lenders and investors have reliable and timely information on the
credit-worthiness of companies. In particular, credit bureaus are well-developed and in
economies such as Croatia and Serbia, the coverage and reliability of information is high.
In other economies, the coverage and reliability of information collected by credit
registries, particularly on firms, needs to be increased. Collateral requirements in SEE are
very high and represent a significant barrier to obtaining credit. Governments have taken
steps to help improve the situation, for instance by allowing movable assets to serve as
collateral and centralising information on pledges. While difficulties sometimes exist to
access the information in cadastres, cadastre registration is well-developed in SEE.
Alternative sources of finance are increasingly developing in SEE. Leasing is
widespread and has a significant track record. Factoring is a more recent activity and
implementation of the required legal framework is not yet comprehensive. Policy has been
restricted to monitoring, and no promotion or capacity building initiatives have been
taken. Business angels, business angel networks and venture capital are scarce in the
region. The absence of significant venture capital activity is inevitable, given the currently
small numbers of viable investee firms. However, there appears to be scope for further
developing the market for business angel investment. The CRANE initiative, a business
angel network in Croatia, demonstrates that policy can assist in this area. Microfinance in
SEE has evolved from donor-funded local initiatives to a large and increasingly profitable
industry with a diversified portfolio of products. However, the increasing scope of lending
provided by microfinance institutions has spurred a debate on the need to develop a
consistent legal and regulatory framework for their activities.
Many initiatives have been undertaken in SEE to develop guarantee schemes of
different sorts. However, significant results appear to be rare. A few success stories in the
region show that such schemes – be they credit, mutual or export guarantee schemes – can
substantially improve access to finance if well designed. In many cases, lack of funding is
a critical issue. Because guarantee schemes are generally financed from public funds,
impact assessment should be systematically conducted. As regards the demand side of
access to finance, programmes to support “investment readiness” have emerged in many
SEE economies and are in general well-connected to other government services provided to
companies. In Bulgaria, Croatia, the Republic of Moldova, Romania and Serbia, chambers of
commerce operate investment readiness programmes and provide other business advisory
services. The need to provide investment readiness services is often referred to in
government strategy documents on SME development. However, in individual countries
there is often a lack of co-ordination between the programmes offered.


The assessment in this policy dimension examines the implementation of tools and
programmes that have been used in OECD countries to improve the regulatory
environment. The dimension also measures the transparency of parliaments and their
economic commissions vis-à-vis key stakeholders during the legislative reform process.
The assessment shows that most SEE economies have made marked progress in
establishing the institutional and legal frameworks necessary for regulatory reform, and in
implementing regulatory reform programmes. Although the use of regulatory impact
analysis is still in its infancy in many SEE economies, SEE governments are implementing
Regulatory Guillotine programmes. They have also developed the foundations of forward
legislative planning. Nevertheless, progress needs to be sustained as many parliaments are
overburdened with complex legislative proposals often submitted at short notice, while the
co-ordination between parliaments and governments remains unsystematic.
Parliaments and assemblies in SEE have made progress in enhancing dialogue with
key stakeholders, thereby increasing the transparency of their procedures and activity.
However, few SEE economies have adopted a lobby or transparency law. Benefits would be
had from formalising consultations with stakeholders during legislative drafting and
adoption. Several SEE economies are envisaging the development and adoption of laws to
achieve this goal.
Tax policy analysis

Developing sound tax policy requires assessments of the economic efficiency, equity
and compliance costs of a tax system. Accordingly, the tax policy analysis assessment
examines how tax authorities in SEE analyse such issues. The assessment considers the
scope and breadth of analysis carried out by governments, and the underlying data and tax
models used to perform these analyses.
The assessment shows that in recent years SEE economies have made important
progress in strengthening their capacity to carry out tax policy development and
implementation. In particular, they now regularly forecast aggregate tax revenues and
monitor public revenues and expenditures. However, no SEE economy has implemented a
full array of tax models, including corporate income tax microsimulation models or tax
wedge models. Among other uses, such models are important for providing information on
how a given tax reform will affect different taxpayers. In addition, while a number of SEE
economies undertake ad hoc studies on tax issues relevant to SMEs and MNEs, no country
systematically conducts such assessments. These studies are essential for evaluating the
effectiveness of tax policy in achieving government objectives. Moreover, these studies are
crucial for identifying potential tax planning opportunities open to firms.
Infrastructure for investment

A robust body of international evidence demonstrates that infrastructure services
are crucial for the efficiency and growth of an economy. This chapter presents a set of
descriptive statistics covering telecommunications, transport and electricity in the SEE
region. The indicators used elicit information on infrastructure stocks, access, reliability
and affordability. Emphasis is placed on the infrastructure conditions faced by
businesses.

SEE economies have considerably improved their legal frameworks on infrastructure.

Recent reforms are largely in compliance with EU standards and aim at fulfilling the acquis
requirements. However, some issues in implementation and efficient regulation need to be
addressed. SEE governments recognise the weaknesses of their national regulation
systems and appear ready to undertake reforms. A number of important challenges
remain. In particular, broadband Internet penetration is low in most SEE economies. In
some countries, a long-term telecommunications strategy is still under development.
Information availability and transparency concerning telecommunications strategy are
necessary to stimulate private sector investment. To improve transparency in the
telecommunications market, public-private consultations should be organised more
regularly.
The presence of motorways, even among the most advanced economies of the region,
is limited. Cross-border and intra-regional co-operation in developing road infrastructure
countries and the entire region. Underdeveloped rail networks also characterise the SEE
region. In some economies, expenditures on rail maintenance are insufficient and
construction of new rail corridors is almost non-existent. Co-operation at the intra-
regional level and in conformity with the Trans-European Rail Network guidelines would
benefit the entire region. Airfreight and overall airport facilities are still relatively
underdeveloped. And in some countries interruptions in power supplies are still frequent,
although improvements appear to be underway. The lack of stable power systems
constrains the private sector. For example, to compensate, some firms are forced to
purchase their own power generators, raising their operational costs.
SME policy
The findings presented in this dimension are based on the SME Policy Index 2009, which
was jointly published in June 2009 by the OECD, the European Commission, the European
Training Foundation, and the European Bank for Reconstruction and Development. The
assessment examines the quality and level of implementation of policies that support the
development of small- and medium-sized enterprises (SMEs). The assessment framework
itself is based on the European Charter for Small Enterprises (the Charter), a set of policy
guidelines endorsed by European Union member states and a key component of the
European Union’s Lisbon Agenda. The Charter contains ten policy dimensions that are key
to SME-development.
The assessment shows that during the past two years there has been good progress in
elaborating and implementing policies supporting small enterprises across all Western
Balkan economies* and there is clear convergence towards the adoption of the policy
guidelines set in the Charter. However, progress has been uneven across the ten
dimensions and across the seven economies covered. In particular, Western Balkan
governments have generally made good progress in the policy areas that directly affect the
operational environment for small enterprises. For instance, the company registration
process has significantly improved in terms of time, costs and the number of steps
required, with the only exception of Bosnia and Herzegovina. A wide range of regulatory
reform programmes have been launched and are currently implemented in most Western
* This dimension assesses the following seven economies: Albania, Bosnia and Herzegovina, Croatia,
Kosovo, the former Yugoslav Republic of Macedonia, Montenegro and Serbia.

Balkan economies. On the other hand, most Western Balkan governments are at a
relatively early stage in introducing targeted policies for specific types of SMEs. For
instance, few governments have introduced measures targeting start-ups (positive
examples are Croatia and Serbia), targeting innovative enterprises, or supporting
technological or non-technological innovation.
The publication comprises eight chapters that detail the findings in each dimension of
policy. These are followed by a set of chapters that present findings by country, setting out
areas where policy attention is required.
Bibliography
Economist Intelligence Unit (October 2009), Country Report Croatia.
Ernst & Young (2008), South-East Europe Attractiveness Survey 2008, Ernst & Young.
Handjiski, B. (2008), Investment Matters: The Role and Patterns of Investment in Southeast-Europe, the World
Bank, Washington DC.
Kathuria, S. (2008), Western Balkan Integration and the EU. An Agenda for Trade and Growth, the World
Sapienza, E.(2009), FDI and Growth in Central and Southern Eastern Europe, Dipartimento di Scienze
Economiche, Matematiche e Statistiche, December.”

PART I
Policy Findings by Dimension
INVESTMENT REFORM INDEX 2010 © OECD 2010

© OECD 2010
Chapter 1
Investment Policy and Promotion
35
I.1. INVESTMENT POLICY AND PROMOTION
1.1. Key findings
Figure 1.1. Investment policy and promotion:

Dimension and subdimension average scores
Investment policy and promotion FDI policy Promotion and facilitation
Transparency Privatisation and PPP policy
Score
5
0
ALB BIH BGR HRV XK MKD MDA MNE ROU SRB
statLink 2 http://dx.doi.org/10.1787/805044444757
● Overall, South-East Europe (SEE) economies scored very well in the investment policy
and promotion dimension, as seen in Figure 1.1. Albania, Bosnia and Herzegovina,
Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Montenegro, Romania and
Serbia received scores between levels 3 and 4. This represents progress in developing
investment-related legislative frameworks and investment promotion services. The
Republic of Moldova and Kosovo lag behind the aforementioned SEE economies and
need to focus on improving services in areas such as investment promotion.
● SEE economies have made considerable progress in developing open, transparent and
predictable investment policies. In particular, the principle of national treatment is
anchored in primary and secondary investment laws. No evidence was found to indicate
that any SEE economy had imposed a new restriction or reversed a previous
liberalisation since the Investment Reform Index (IRI) in 2006.
● Most SEE economies provide foreign direct investment (FDI) incentives. Information on
FDI incentives offered by central governments is available on the websites of their
respective investment promotion agencies. However, information on incentives at
subnational or municipal level is not so readily available.
● Most SEE economies allow foreign-controlled enterprises to own industrial and
residential land. In the majority of SEE economies, agricultural land cannot be owned by
foreign investors.

● The process of updating real estate cadastres and land title registries in urban and rural
areas has advanced since the results of IRI 2006. In many instances, SEE economies are
moving to digitise their land title registries and cadastral books. Overall, the titling of
urban areas is largely completed. In Kosovo, the process of updating cadastral books and
land titles lags considerably behind the rest of the SEE economies.
● Legal frameworks are in place covering different forms of intellectual property rights
(IPRs) in SEE economies. However, proper enforcement of IPR laws remains a challenge
and greater efforts are needed in this regard.
● Nearly all SEE economies are signatories to both the New York Convention on
Recognition and Enforcement of Foreign Arbitral Awards and the Washington
Convention on the Settlement of Investment Disputes between States and Nationals of
Other States (the ICSID Convention). Montenegro and the Republic of Moldova have not
ratified the ICSID Convention, while Kosovo is not a party to the New York Convention.
● Albania, Bulgaria, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia,
the Republic of Moldova, Montenegro and Serbia have sufficiently developed investment
promotion strategies. Croatia, Romania and Kosovo are in the process of developing new
investment promotion strategies.
● All SEE economies have publicly funded investment promotion agencies (IPAs) that are
tasked to attract and facilitate entry of foreign investors. The IPAs have fixed annual
budgets and receive the support of senior government officials. Bulgaria, Croatia, the
former Yugoslav Republic of Macedonia and Serbia have the most advanced IPAs. These
organisations tend to hire staff with experience in both public and private sectors. These
IPAs also use detailed planning mechanisms to support their operations.
● Croatia, Serbia and Albania have the most advanced programmes in the region
facilitating commercial linkages between FDI and domestic small- and medium-sized
enterprises (SMEs). The remaining SEE economies have not launched SME-FDI linkage
programmes, although they do operate supplier databases.
● The majority of IPAs in SEE do their best to help foreign investors navigate licensing and
approval procedures, either at the national or subnational level. Continued vigilance is
needed to find efficient means of improving licenses and permit approvals.
● IPAs in Croatia, the former Yugoslav Republic of Macedonia and Serbia were found to
offer high-quality aftercare services to investors. Services typically include assistance in
finding local suppliers, housing searches for expatriates, facilitating expatriate work
permits and communication between investors and municipalities.
● All SEE economies publish their investment-related laws and subsequent amendments
in their official gazettes. English versions of investment-related laws can be found on the
websites of IPAs in Bulgaria, Bosnia and Herzegovina, Montenegro, Serbia and Kosovo. In
the former Yugoslav Republic of Macedonia, national legislation harmonised with the
European Union (EU) acquis is available in English. English summaries of investment-
related laws can be found on the websites of IPAs in Albania, Croatia and Romania.
● With respect to investment-related legislation, official procedures exist for prior
notification and consultations in SEE economies. However, concerns have been raised by
members of the private sector that consultations are pro forma, with not enough time
given to stakeholders to consider new proposals and provide thoughtful feedback.

Private-sector representatives in some countries also hold that consultations occur on

an ad hoc basis, and that only larger business interests are invited to participate.
● The procedures and criteria for acquiring business-related licenses and permits at the
national level appear more clear and transparent when compared to similar
requirements at the municipal level. Interviews with private-sector representatives
indicated that in all SEE economies, procedures and criteria are inconsistent across
different municipalities.
● Privatisation is nearing its final phase in many SEE economies, with foreign investment
having played an important role. Public-private partnerships (PPPs) are in their infancy.
SEE economies have either introduced new legislative frameworks to address PPPs or
have expanded existing laws covering concessions and procurement. PPP units within
governments are being created and tools to undertake cost-benefit analysis and
monitoring are being developed.
1.2. Investment policy and promotion assessment framework

The benefits of private investment are widely recognised and include expansion of
productive capacity, job creation, income growth, technological diffusion and enterprise
development. Creating a business environment that is conducive to all forms of
investment is an important policy challenge for emerging market economies.
The experience of OECD economies has shown that legal and regulatory frameworks
underpinned by principles of transparency and non-discrimination are instrumental in
attracting foreign enterprises and in benefiting from their presence (OECD, 2002). Foreign
investment is unlikely to occur unless investors have a reasonable understanding of the
environment in which they will be operating. Over the years, OECD member countries have
sought to develop international “rules of the game” relating to the treatment of
international investment, by agreeing to instruments such as the Declaration and
Decisions on International Investment and Multinational Enterprises.
The analytical framework presented in this chapter is inspired by many of the
elements contained in various OECD instruments and policy tools to assist governments in
developing and promoting stable, transparent and predictable business environments for
international investment. As depicted in Figure 1.2, the framework used comprises four
subdimensions: foreign direct investment (FDI) policy, with a focus on the legal and
regulatory framework for foreign investment based on the principles of stability and
predictability; investment promotion services and activities to promote and facilitate
inward investors; transparency of laws, regulations and procedures, including access to
senior policy makers through consultations; and frameworks supporting privatisation and
public-private partnerships (PPPs).
1.3. Results by subdimension

Subdimension: Foreign direct investment policy
The assessment of foreign direct investment (FDI) policies covers three broadly
defined policy areas critical to attracting foreign enterprises: non-discrimination, property
rights and investor protection. Non-discrimination concerns the treatment accorded to
foreign investors relative to domestic investors. The assessment of property rights
examines the extent to which ownership of property is legally recognised and protected.
This includes both tangible property (i.e. real estate) and intangible property (i.e.

Figure 1.2. Assessment framework for investment policy and promotion
Investment policy
and promotion
Investment promotion
FDI policy Transparency Privatisation and PPPs
and facilitation
• National treatment • Strategy • Publication avenues • Privatisation strategy

• Admittance of personnel • Institutional support and tools • Privatisation consultations
• Transfers • Monitoring • Prior notification • Restrictions on foreign
• FDI incentives and evaluation and stakeholder investor participation
• Performance • FDI-SME linkages consultations in privatisation
requirements • One-stop shop • Procedural transparency • PPP units
• Land ownership • Client relationship • PPP legislation
• Titling, cadastre management • PPP consultations
and restitution • Policy advocacy • PPP cost-benefit analysis
• Intellectual property • Aftercare services • PPP monitoring
rights
• Expropriation
• International investment
agreements
• International
arbitration
intellectual property rights). The assessment of investor protection covers instruments

that provide investors with protection against discriminatory acts by the host government,
as well as tools to resolve disputes.
Overall the performance of South-East Europe (SEE) economies in this subdimension
is very good. As illustrated in Figure 1.3, there is considerable homogeneity across
economies reflecting high degrees of non-discriminatory treatment for foreign investors
and their investments in the SEE region. EU members Romania and Bulgaria received the
highest scores, whereas variation among the Western Balkan economies was small.
Challenges regarding protection and enforcement of property rights in Kosovo resulted in
that economy receiving the lowest score of the group.
Figure 1.3. FDI policy subdimension: Average scores

Score
5
0

Restrictions to national treatment

The principle of national treatment stipulates that, in like situations, a government
treats investments controlled by nationals or residents of another country no less
favourably than domestic investors. In practice, most countries maintain certain
restrictions on foreign investment in order to fulfil certain policy objectives such as the
protection of industries deemed to be strategic. Many countries also maintain restrictions
on foreign investment in order to protect essential security interests and public order. A
key finding of the OECD’s Freedom of Investment Project is that any restrictions designed
to protect national security should be transparent, subject to accountability and
proportional to the objective pursued.1 Restrictions can be trans-sectoral (and applied
across all economic sectors) or they might be sector-specific, such as in financial services,
telecommunications or transportation. The OECD encourages countries to be transparent
about their security-related restrictions to national treatment and subjects them to peer
review, using its Guidance on Recipient Country Investment Measures Relating to National
Security (OECD, 2009).
This indicator is assessed on the basis of: whether restrictions to national
treatment are clearly codified in laws and regulations and whether public authorities
take steps to review, and when appropriate, reduce the number of restrictions to
national treatment on a periodic basis.
SEE economies have made considerable progress in incorporating the principle of
national treatment in their FDI-related legislative frameworks. Since the OECD Investment
Compact’s first comprehensive national treatment review in 2003, SEE economies have
taken steps to eliminate various restrictions to national treatment. For example, Croatia,
Montenegro and Serbia have indicated that previous trans-sectoral reciprocity conditions
for inward foreign investment no longer apply. No evidence was found to indicate any SEE
economy had imposed a new restriction or reversed a previous liberalisation since the
Investment Review Index (IRI) in 2006. SEE economies refrain from using trans-sectoral
screening procedures for foreign investment. In most SEE economies, foreign-controlled
enterprises are required to notify their presence by registering in local commercial courts
or business registry agencies.
For sectors covered by separate legislative frameworks, such as air and maritime
transport, banking, financial services and fishing, investors must meet certain technical
requirements before being admitted into the host country. The ubiquitous presence of
foreign banks and mobile phone operators in SEE is an illustration of progress in reducing
restrictions to national treatment in banking and telecommunications sectors.
Typical forms of restriction to national treatment in the SEE region include:
● a 49% foreign ownership limitation in industries and sectors related to arms
manufacturing, trading and production (e.g. Bosnia and Herzegovina, the former
Yugoslav Republic of Macedonia, Montenegro, Serbia and Kosovo). In the Republic of
Moldova, arms manufacturing and production are under state monopoly;
● a limitation on foreign ownership of agricultural land (nearly all SEE economies except
Kosovo);
● restrictions on the purchase of real estate in areas deemed sensitive, e.g. forests, border
zones, national parks and historical areas (a restriction common to all SEE economies in
one form or another); and

● restrictions on maritime transport services (e.g. Albania, Bulgaria, Croatia, Montenegro

and Serbia), air transport (e.g. Bosnia and Herzegovina, Croatia, Serbia, Romania) and
fishing (e.g. Albania, Bulgaria, Croatia and Montenegro).
The motivation for eliminating national treatment restrictions in SEE economies
comes as a result of efforts to join the European Union (EU) and the World Trade
Organization (WTO). Bulgaria and Romania became full members of the EU in 2007. Their
laws governing inward investment are in line with EU regulations on free movement of
capital and the right of establishment. Both economies are members of the WTO and apply
investment-related commitments regarding the Agreement on Trade-Related Investment
Measures (the TRIMS Agreement) and the General Agreement on Trade in Services (GATS)
Mode 3.2 Romania is the only SEE economy which is an adherent to the OECD Declaration
on International Investment and Multinational Enterprises, and participates actively in the
deliberations of the OECD’s Investment Committee. As a result of its OECD commitments,
Romania provides an annual update on national treatment restrictions to the OECD’s
Investment Committee.
For the remaining SEE economies, the primary driver of reform of investment-related
laws (and, as a result, elimination of national treatment) is their relationship with the EU.
Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, the Republic
of Moldova, Montenegro, Serbia and Kosovo have their restrictions to national treatment
reviewed each year in progress reports produced by the European Commission. WTO
members such as Croatia, the former Yugoslav Republic of Macedonia and the Republic of
Moldova can have their restrictions questioned by other WTO members during periodic
WTO Trade Policy Reviews.
This assessment found little evidence to suggest that SEE economies undertake
unilateral or domestically driven reviews of restrictions to national treatment. An example
of an international best practice in this area is Canada’s recent review of competitiveness.
This review examined, inter alia, national treatment restrictions in specific sectors such as
air transport and telecommunications (see Box 1.1).
Admittance of business personnel in support of FDI

Restricting the ability of foreign nationals to work in affiliates of foreign enterprises
may discourage potential inward investors. Stipulations that nationals or residents must
form a majority of the board of directors may undermine foreign owners’ control over their
holdings and possibly make them hesitant to invest. Similarly, if regulations restrict the
employment of foreign nationals, investors may judge that they cannot find the necessary
specialised expertise to make their investment worthwhile.
This indicator assesses the degree to which members of boards of directors can be
foreign nationals and whether temporary entry is granted to workers with specialised
knowledge (e.g. engineers, architects, accountants) in support of foreign enterprise
operations.
This assessment shows that Albania, Bulgaria, Croatia, Montenegro, Romania, Serbia
and Kosovo do not impose nationality requirements on members of boards of directors,
nor restrictions to temporary entry for specialised business personnel supporting the
operations of foreign-controlled enterprises. Although Bosnia and Herzegovina performed
well under this indicator, its Foreign Investors Council expressed concern about
cumbersome procedures regarding temporary entry of workers (Foreign Investors Council,

Box 1.1. Domestic investment policy reviews:

Canada’s Competition Policy Review Panel
In 2007, the government of Canada created a Competition Policy Review Panel to examine
domestic investment and competition policy with a view to enhancing Canada’s long-term
competitiveness. The Panel’s mandate included reviewing Canada’s restrictions to national
treatment in sectors such as air transport, uranium mining and telecommunications.
The Panel held extensive consultations across Canada with a broad cross-section of
stakeholders. In response to its consultation paper “Sharpening Canada’s Competitive
Edge”, the Panel received 155 submissions from domestic and foreign businesses, law
firms, governments, individuals, academics, unions and non-governmental organisations
in Canada, as well as government officials from the United States, Australia, the OECD and
the European Union. More than 20 studies were commissioned by the Panel and 13 full-day
sessions of consultations and round tables were organised across Canada.
The Panel’s final recommendations were released in July 2008 in a publication titled
“Compete to Win” and among other things, recommended removing certain foreign
ownership limitations in the air transport, uranium mining, telecommunications and
broadcasting sectors. All of the research papers and written submissions by stakeholders
are publicly available on the Panel’s website.
Source: Competition Policy Review Panel (www.competitionreview.ca)
2008). The former Yugoslav Republic of Macedonia and the Republic of Moldova do not
impose nationality restrictions on boards of directors. However, private-sector
representatives in the former Yugoslav Republic of Macedonia expressed concern that
procedures for approving temporary workers are time-consuming. In the Republic of
Moldova, the government has imposed a quota of up to 1 300 persons for temporary labour.
Transfer of FDI-related capital

Transferring investment-related capital, including repatriated earnings and liquidated
capital, is important for any business to be able to make, operate and maintain
investments in another country. OECD member countries have a long history of
maintaining open, non-discriminatory and transparent regulations on transfers of capital.
The OECD’s Code of Liberalisation of Capital Movements and the Code of Liberalisation of
Current Invisible Operations constitute legally binding rules that stipulate progressive,
non-discriminatory liberalisation of capital movements, the right of establishment and
current invisible transactions (mostly services). Public authorities, however, may need to
limit capital transfers, but only in specific circumstances such as balance of payment
crises, tax evasion or suspected money laundering.
This indicator assesses whether laws, regulations or international commitments (such
as acceptance of International Monetary Fund [IMF] Article VIII) have been implemented to
provide for the free transfer of FDI-related capital (e.g. transfers of profits, dividends,
proceeds from sales of investments).
Inward transfers of FDI-related capital are generally made freely and without delay in
SEE economies. Nearly all SEE economies have accepted IMF Article VIII whereby members
undertake not to impose restrictions on payments and transfers for current international
transactions, and not to engage or permit any of their fiscal agencies to undertake any
discriminatory currency arrangements or multiple currency practices, except with IMF

approval. Private-sector interviews and reports by other international institutions did not
indicate concerns regarding transfers of FDI-related capital for Bulgaria, Croatia, the
Republic of Moldova, Montenegro, Romania and Kosovo. European Commission country
reports for 2009 highlighted some restrictions in Albania (certain restrictions still remain
on capital movements as part of the Stabilisation and Association Agreements [SAA]) and
Serbia (outward payment procedures appear slow). In 2008, the IMF noted that Bosnia and
Herzegovina had not accepted the obligations under Article VIII, Sections 2, 3 and 4, and
maintains restrictions on the transferability of balances and interest accrued on frozen
foreign-currency deposits, subject to Fund jurisdiction under Article VIII (IMF, 2008).
FDI incentives
In the competition for FDI, many countries offer various forms of incentives to lure
prospective investors. The OECD Checklist for Foreign Direct Investment Incentive Policies
defines FDI incentives as “measures designed to influence the size, location or industry of
a FDI investment project by affecting its relative cost or by altering the risks attached to it
through inducements that are not available to comparable domestic investors” (OECD,
2003b). FDI incentives can take the form of fiscal incentives (e.g. reduced direct corporate
tax), financial incentives (e.g. infrastructure or job training subsidies) and regulatory
incentives (e.g. relaxation of environmental, social and labour standards).
This indicator examines whether SEE economies publish their FDI incentives and
whether the criteria for granting them are publicly available. In addition, SEE economies
were asked to indicate whether they review their incentives using a cost-benefit analysis
and whether the incentives are fixed for a limited time period.
Typical FDI incentives used by SEE economies include:
● tax holidays: full or partial reduction of profit tax for a defined period;
● grants: cash grants based on number of new jobs created;
● subsidised locations: subsidised access to premises or sites (e.g. industrial parks); and
● free trade zones: areas where a special regime for import duties, sales and profit taxes
applies.
Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Montenegro, Romania
and Serbia provide FDI incentives in a non-discriminatory manner and make publicly
available the criteria used to determine how the incentives will be granted. In addition,
these economies perform various forms of cost-benefit analysis (CBA) to monitor whether
the incentives are meeting their public policy objectives, and apply sunset clauses (i.e.
fixing the duration of their incentive schemes). CBA tends to be applied by the ministry of
finance.
The Republic of Moldova and Bosnia and Herzegovina did not provide information on
whether their incentives undergo periodic CBA. In addition to lacking sunset clauses and
methods for conducting CBA, incentive schemes in Albania (e.g. “Albania for 1 Euro”
Programme) and Kosovo (e.g. those incentives offered by municipalities) were not clear
regarding the specific criteria that investors would have to meet in order to benefit from
them.
Information on FDI incentives offered at the central government level in the SEE
economies is usually available on the websites of their respective investment promotion
agencies. However, information on incentives at the subnational or municipal level is less

readily available. The criteria used to grant the incentives are unclear and their duration is
not consistently published. The scope for their discretionary application is high.
Performance requirements
Performance requirements are conditions that host countries impose on the
operations of foreign enterprises. In some instances a foreign enterprise may be required
to meet a performance requirement to receive a specific advantage (subsidy or tax
incentive). An example of a performance requirement which is inconsistent with many
international trade agreements is one requiring a level of local procurement (e.g. local
content requirements). In many cases, performance requirements can discourage inward
FDI flows (OECD, 2006c).
This indicator examines whether performance requirements exist and whether they
are applied transparently. The indicator takes into account efforts to review performance
requirements based on a cost-benefit analysis and whether the government has taken
steps to eliminate any performance requirements on the basis of multilateral, bilateral or
unilateral commitments.
All SEE economies performed extremely well on this indicator. In no instances did this
assessment find that performance requirements, such as local content requirements, were
imposed on investors. Albania, Bulgaria, Croatia, the Republic of Moldova, the former
Yugoslav Republic of Macedonia and Romania are all WTO members and adhere to the
TRIMS Agreement. Bosnia and Herzegovina, Montenegro and Serbia are in the process of
acceding to the WTO and have made commitments not to apply performance
requirements inconsistent with the TRIMS Agreement. Although not in the WTO accession
process, Kosovo has indicated that its FDI laws and regulations prohibit the types of
performance requirements prohibited by the TRIMS Agreement.
Land ownership
Secure and transferrable rights to rural, urban and other types of land and forms of
property are a prerequisite for a healthy investment environment (OECD, 2006a). Clearly
defined ownership rights provide investors with an incentive to undertake new
investments and maintain existing ones. Circumstances may arise where foreign investors
are restricted from owning certain types of land. However, these restrictions should be
clearly defined in laws. In OECD countries, certain foreign ownership restrictions remain
on specific types of land. For example, Mexico does not permit foreign-controlled
enterprises from owning agricultural land (OECD, 2009).
This indicator assesses whether land ownership rights are clearly defined in laws and
if there is discrimination between domestic and foreign investors. The key criteria include:
whether foreign investors can own industrial real estate, residential properties or rural
land; and the extent to which procedures for purchasing property are preferential for
domestic investors.
Foreign-controlled enterprises established in SEE economies can own industrial and
residential land. In addition to foreign-controlled enterprises established in their
territories, Bulgaria and Romania permit foreign enterprises established in the EU to own
industrial and agricultural land. 3 Domestic legislation in Kosovo provides foreign-
controlled enterprises the opportunity to own residential, industrial and agricultural land.

Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, the Republic of
Moldova and Montenegro allow foreign-controlled enterprises registered in their countries
to own industrial and residential land with some restrictions. There are no restrictions for
industrial or residential land in Croatia since January 2009 for EU legal or physical entities.
For legal and physical persons outside of the EU, restrictions are eliminated based on
reciprocity. According to entity-level legislation in Bosnia and Herzegovina (law on
agricultural plants), foreign legal and domestic persons cannot become owners of certain
specified assets, such as natural resources. The right to use such assets for economic
purposes is provided by the granting of concessions. In some cases, reciprocity conditions
are applied to foreign investors.
In Croatia, the ministry of justice must give its consent to foreign investors of non-EU
states wanting to purchase real estate or property.4 Agricultural and protected areas
cannot be owned by foreign investors.
In the former Yugoslav Republic of Macedonia, foreign legal entities are permitted to
acquire construction land, business facilities, tourist capacities, apartments, houses and
factories, with the exception of agricultural land and border zones. Administrative
procedures for acquisition of land by foreign investors remain more burdensome than
those applying to domestic investors.
The Republic of Moldova restricts foreign enterprises and persons from owning
agricultural land. Montenegro allows foreign investors to acquire industrial real estate and
residential properties. The new Montenegrin Property Law passed in 2009 restricts foreign
ownership of agricultural land, land near border zones, forests and cultural landmarks.
However, the law provides certain exceptions to these restrictions and in some instances a
foreign investor could own land in these areas.
The circumstances for foreign investors owning land in Albania and Serbia are slightly
more restrictive than in other SEE economies. In Albania, foreign physical and juridical
persons are entitled to buy state-owned non-agricultural land provided that the value of
investment is at least three times higher than the value of the land. This restriction is
applied to foreign individuals and foreign juridical persons, but not to legal entities
registered in Albania owned by foreigners.5 Foreign-owned enterprises established in
Serbia may purchase certain types of land and own real estate. However, foreign legal
entities do not have the right to own urban construction land or agricultural land (although
the latter can be leased). However, the recently enacted Law on Urban Planning and
Construction will allow for foreign ownership of urban construction land, which is
expected to become fully operational upon the adoption of specific legislation on land
privatisation in 2010.
Land titling, cadastres and restitution

Land titles contain crucial legal information about a parcel of land, such as the
name of the registered owner(s), historical title details and registration numbers.
Similarly, cadastres are comprehensive registers of real property that include details of
ownership, tenure, precise location, dimensions and value of individual parcels of land.
Having accurate and up-to-date land titles and cadastral registers is critical to a stable
and predictable business climate. Indeed, the economic benefit of accurate and
verifiable title registers and cadastres has been observed by World Bank studies where
values of rural land in Brazil, Indonesia and Thailand increased anywhere from 43% to

81% after being properly titled (World Bank, 2005). Restitution is a process of returning
land or property to its rightful owners. An effective restitution process reassures
investors that land or property they acquire for business purposes is not claimed by
other parties.
This indicator assesses whether a system of land titling and real property cadastres is
in place. It also assesses the extent to which SEE economies have progressed in registering
land and real property, and the status of restitution processes.
The process of updating real estate cadastres and land title registries in urban and
rural areas in SEE economies is moving forward, compared to the results of IRI 2006. As
seen in Figure 1.4, progress in updating cadastral maps and land registers in SEE is even,
with the exception of Kosovo. In many instances, SEE economies are digitising their land
title registries and cadastral books. Overall, the titling of urban areas is largely completed
in SEE economies and governments have initiated restitution procedures. As these
restitution processes unfold, scores in this indicator will likely rise.
Figure 1.4. Cadastres, land titles and restitution

FDI policy Titling, cadastres and restitution
Score
5
0
As a result of reforms initiated in 2003, Croatia has converted nearly 100% of total land
registries to an electronic format, with three-quarters being verified against cadastre
records. The backlog of land registry cases has been reduced by 75% from 2004 to 2009.
Maps for 56% of cadastral municipalities are now in digital format in the state geodetic
office. In addition, an electronic register of liens on movable property is in place and
operated by FINA (a state-owned financial mediation firm). Problems do exist, however,
with unsettled property claims.
In the former Yugoslav Republic of Macedonia, cadastral maps had been updated for
90% of municipalities by end of August 2009 (compared to 46% in 2005). Registration of land
titles is progressing in rural areas, although more slowly than in urban centres.
In the Republic of Moldova, nearly 85% of properties were registered in cadastral maps.
Information from the real property register is public and has been available online since 2006.
In Albania, 70% of rural properties are registered in cadastral maps while 37 out of 138
cadastral zones are completed in urban areas. The restitution process is ongoing.

In Bosnia and Herzegovina, the process of land titling digitisation is under way in both
entities with the support of the World Bank’s LARIS Project. In the Federation, 70% of land
certificates have been downloaded to LARIS. In the Republika Srpska, 7 out of 19 municipal
courts have completed downloading information to LARIS. Although cadastral information
is accessible, there is concern that information might be unreliable.
In Bulgaria, the titling of properties within urban areas and the restitution process are
almost complete. Electronic cadastral maps are under development. However, some
problems were reported with registration of rural areas.
In Montenegro, 70% of land has been digitised in the form of topographic data cards
and 47% of general data in cadastral maps is in electronic form (this is largely completed
for urban areas). The government plans to finish digitisation of cadastral maps in five years
as part of a World Bank project. Land titling is largely completed in urban centres, although
progress is slower in rural areas. The restitution programme is ongoing.
In Romania, the titling of properties is mostly complete with fewer than 10% of
requests remaining to be processed. These delays appear to be the result of legal disputes
and slow property restitution. Digitisation of the cadastral maps is underway. However the
process is uneven and progress depends upon resources within the municipalities in
charge or on annual allocations from the state budget.
In Serbia, cadastral mapping is expected to be completed during 2010. As of the
beginning of 2009, over 87% of municipal cadastres were completed in Serbia. An electronic
register of liens on movable property is in place at the Serbian Business Registers Agency.
At the time of writing, a new bill on the restitution of property nationalised after World
War II was to be sent to parliament by late 2009.
The process of updating cadastral books and land titles remains problematic in
Kosovo. In 2004, a law on cadastres came into force. However, there are indications that the
accuracy of cadastral books and land title registries is questionable. The restitution process
is slow. One recent study by the Organization for Security and Co-operation in Europe
(OSCE) points to numerous cases of fraudulent property transfers resulting in overlapping
and inaccurate cadastral information (OSCE, 2009a).
Intellectual property rights

Intellectual property rights (IPRs) give businesses an incentive to invest in the
development of new products and services. They also give their holders the confidence to
share new technologies through various commercial arrangements such as joint ventures
and licensing agreements (OECD, 2006a). Typical instruments that safeguard IPRs include
patents, trademarks, copyright, industrial designs and geographic indications.
International bodies such as the WTO and World Intellectual Property Organisation (WIPO)
require their members to undertake binding commitments to protect IPRs. The OECD,
while not having binding instruments, has developed guidelines on particular aspects of
IPRs, such as access to research data from public sources and licensing of genetic
inventions (OECD, 2007a).
This indicator assesses: the completeness of domestic legal frameworks protecting
IPRs, whether international commitments have been undertaken through membership in
the WTO and WIPO, and evidence of IPR enforcement.
While the legal frameworks in SEE economies cover different forms of IPRs, evidence
of enforcement is weak and greater efforts are still needed. However, in comparison to the

results of the IRI in 2006, progress has been made in nearly all SEE economies. As seen in
Figure 1.5, Romania, Bulgaria, Croatia, Serbia and the former Yugoslav Republic of
Macedonia have demonstrated greater success in enforcement. Albania, Bosnia and
Herzegovina, the Republic of Moldova and Montenegro are not far behind. Enforcement of
IPR laws in Kosovo lags significantly behind the other SEE economies.
Figure 1.5. Scores for intellectual property rights indicator

FDI policy IPR
Score
5
0
Bulgaria and Romania, as EU and WTO members, have shown progress in efforts to
enforce their IPR regimes. In Romania, for example, a working group on IPR enforcement
has been established and is co-ordinated by the prosecutor’s office. The working group
brings together public authorities and private-sector representatives to monitor the fight
against counterfeiting and piracy.
Croatia has made considerable progress in IPR enforcement, as evidenced by the
lowest estimated rate of software piracy, at 58%, in the SEE region (see Figure 1.6). However,
greater co-operation between the ministry of justice, the customs agency and the state
inspectorate could further reduce instances of IPR infringement.
Serbia has taken important steps to align its IPR legislation with international best
practices and European standards (EC Progress Report, 2009). The government introduced
additional legislation that provides authorities with new powers to conduct inspections of
suspected violators of IPRs. New departments to deal with IP protection cases have been
established within Serbian district courts, supported by additional training for law
enforcement personnel.
In the former Yugoslav Republic of Macedonia the government established the
Coordinative Body for IPRs (CBIP) in April 2007 to reduce IPR infringements, especially
counterfeiting and piracy. The CBIP ensures co-ordinated whole-of-government
approaches to IPR policy development and enforcement. In 2009, the CBIP’s work led to
frequent and well-co-ordinated action across the country resulting in seizure and
destruction of counterfeit goods (EC Progress Report, 2009).
Albania, Bosnia and Herzegovina, the Republic of Moldova and Montenegro were
assessed similar scores for their efforts to enact and enforce IPR laws. Each of these economies

Figure 1.6. Estimated personal computer software piracy rates

2005 2008
%
100
80
60
40
20
Note: Data for Kosovo under UNSCR 1244/99 not available.
Source: Sixth Annual BSA-IDC Global Software 08 Piracy Study.
has a functional IP registration office and is working to pass laws and train law enforcement
officials with a view to reducing IPR infringement. Trademark and copyright infringement
remains the most common violation of IPR in the SEE region. Greater efforts should be made
to confiscate and destroy infringing goods. Continued training for public prosecutors and law
enforcement officials is needed to improve the effectiveness of the enforcement system.
The situation in Kosovo is the most precarious. Reliable statistics on IPR infringement
do not exist and the IP registration office has yet to begin operation (other than receiving
applications). Court cases for IPR infringement are not accessible and the most recent
European Commission Progress Report notes that enforcement of IPR laws remains very weak,
with high levels of counterfeiting and piracy.
Compensation for expropriation

In certain situations, governments have a legitimate need to take possession of private
property for public purposes, for example, to develop critical infrastructure such as roads
and power stations. In these instances where public authorities initiate expropriation
procedures, a system of timely, adequate and effective compensation of the expropriated
party is a necessity. Provisions on compensation in cases of expropriation are a common
feature in both domestic legislation and investment treaties between OECD members.
This indicator assesses whether: compensation for expropriation is provided in
domestic laws; compensation is prompt, adequate, and effective; expropriation orders can
be reviewed by independent judicial authorities; international arbitration is available; and
a record of enforcing international awards exists.
The SEE economies score well under this indicator, as compensation for expropriation
or nationalisation is provided under constitutional provisions or separate FDI legislation.
Legitimate expropriation is typically defined in narrow cases in the public interest with the
expropriated party entitled to fair market value compensation. Expropriation orders in SEE
economies can be subject to judicial review, with opportunities to appeal decisions.
Kosovo received slightly lower scores for this indicator than other SEE economies. The
perceived inefficiency of the commercial court system in Kosovo by a recent study (OSCE,

2009b) raises questions about its capacity to resolve potential disputes related to
expropriation.
International investment agreements

International investment agreements promote cross-border investment by reducing
restrictions on sectors closed to FDI, offering foreign investors minimum levels of
protection based on international legal standards, and making the rights and obligations of
the parties more stable and predictable (OECD, 2008). The OECD through its Investment
Committee is taking stock of emerging patterns in investment agreements entered into by
OECD countries and developing countries. In recent years, it has explored various topics
such as indirect expropriation, transparency in investor state dispute settlement, and
definitions of investors and investments (OECD, 2006b).
This indicator assesses: the number of investment agreements signed and whether
signed international investment treaties have been ratified in parliament: the scope of those
treaties (e.g. is a broad definition of investment used, is national treatment provided at the pre-
and post-establishment phases, are there provisions for investor-state dispute settlement) and
whether the government reviews the operation of those treaties with its treaty partners.
The majority of bilateral investment treaties signed between the SEE economies
themselves are broadly consistent with one another in terms of the treatment and
protection they provide to investors and their investments. For example, similar open,
asset-based definitions for terms such as “investment”, “investor” and “returns” are used.
Provisions on “fair and equitable” treatment providing “full security and protection” are
common and most-favoured nation and national treatments are applied at the post-
establishment phase of investment. The Central European Free Trade Agreement (CEFTA)
is a regional free trade agreement among Albania, Bosnia and Herzegovina, Croatia, the
former Yugoslav Republic of Macedonia, Montenegro, the Republic of Moldova, Serbia and
UNMIK/Kosovo. It includes an investment chapter where national treatment is applied at
the pre-establishment phase of investment. Numerous bilateral investment treaties (BITs)
also exist between SEE economies and OECD member countries.
Croatia, Montenegro, Romania and Serbia have indicated that all of their signed BITs
have been ratified and entered into force. Albania, Bosnia and Herzegovina, Bulgaria, the
Republic of Moldova and the former Yugoslav Republic of Macedonia have ratified the
majority of their signed BITs. Kosovo6 has signed only two BITs (with Albania and Turkey).
International arbitration
Investor-state dispute settlement mechanisms contained in most investment treaties
provide rights to foreign investors to seek redress for damages arising out of alleged
breaches by host governments of investment-related obligations (OECD, 2006b). One of the
primary benefits of investor-to-state arbitration is that it tries to de-politicise disputes
between investors and host governments, as the dispute settlement process is undertaken
in a neutral forum.
This indicator examines whether the SEE economies are party to the New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) and the
Washington Convention on the Settlement of Investment Disputes between States and
Nationals of Other States (the ICSID Convention) (1965). Key criteria to assess this indicator

are: ratification of the New York and ICSID conventions and whether foreign arbitral
awards are recognised and consistently enforced by domestic courts.
Nearly all SEE economies are signatories to the New York and ICSID conventions.
Montenegro and the Republic of Moldova have not ratified the ICSID Convention, while
Kosovo is not a party to the New York Convention. All of the SEE economies have indicated
that awards resulting from international arbitration are recognised in their economies.
However, assessing whether the SEE economies consistently enforce arbitration awards is
difficult, as the number of arbitration cases involving SEE economies is small.
Subdimension: Investment promotion and facilitation

This subdimension, addressing investment promotion and facilitation (IPF), covers
issues bearing on the IPF strategy, the institution implementing the strategy (such as the
Investment Promotion Agency), and the monitoring and evaluation mechanisms in place
to gauge progress. The IPF subdimension also assesses specific investment promotion
services and activities to attract and retain foreign investment. These activities include,
among others, the development of linkages between foreign investors and local
enterprises, implementing client relationship management processes and one-stop shop
assistance for foreign investors in their pre-establishment phases.
All SEE economies recognise the importance of investment promotion and facilitation
services for foreign investors. In the IRI 2006 only two economies, Bulgaria and Serbia,
surpassed a score of 3 for this subdimension. As seen in Figure 1.7, in the IRI 2010 five SEE
economies received scores of 3 or higher: Bulgaria, Croatia, the former Yugoslav Republic of
Macedonia, Montenegro and Serbia. Investment promotion services and activities in these
economies benefit from well-staffed investment promotion agencies (IPAs), improved
client relationship management systems and a greater commitment to aftercare services.
Areas for improvement across nearly all SEE economies in this subdimension include:
facilitating commercial linkages between foreign enterprises and domestic businesses;
and expediting approvals of licenses and permits for foreign businesses, especially at the
subnational level.
Figure 1.7. Investment promotion and facilitation subdimension: Average scores

Score
5
0

Strategy
An investment promotion strategy can help attract new investors and retain existing
ones, especially in smaller, more remote markets or in those countries with a recent
history of macroeconomic and political instability (OECD, 2008). At its most basic, an
investment promotion strategy should identify specific objectives along with the actions to
reach those objectives. An example of such a strategy is the Czech Republic’s Operational
Programme Enterprise and Innovation 2007-13, which was launched in 2007 by the
Ministry of Industry and Trade. The objective is to increase the competitiveness of the
Czech economy and bring innovation performance in industry and services closer to the
level of leading European countries.7
The strategy indicator considers whether a strategy has been ratified by government,
identification of specific sectors to be promoted to foreign investors, an organisational
structure (e.g. responsibilities of senior management and implementing units in the IPA),
planning mechanisms relevant to human and financial resource needs (e.g. budget
estimates) and the presence of a timetable for review.
Bulgaria, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia,
Montenegro and Serbia all have investment strategies containing most of the elements
considered in the indicator. For example, in Bulgaria, the National Investment Promotion
Strategy was launched for the period 2005-10 with clear differentiation of both middle-
term (2005-06) and long-term (up to 2010) goals. The investment promotion plan is aligned
with the major priorities of the government’s National Development Plan 2007-13 and
includes measures for investment promotion in seven priority areas.
Albania and the Republic of Moldova have investment promotion strategic plans that
identify areas where they should compete and offer services. However, their strategic plans
do not offer details on organisational structures within the IPA that will meet planned
objectives.
Romania is in the process of restructuring its IPA (ARIS) and has drafted a new
strategic plan for the period 2008-11. Croatia is in the process of drafting an investment
promotion strategy which is expected to be passed by the government by the end of 2009.
The main elements of its investment promotion strategy are described in the Strategic
Development Framework for Croatia 2006-13.
Kosovo is in the process of developing an investment promotion strategy under the
authority of the Ministry of Trade and Industry.
Implementing agency
The implementing agency (or IPA) is responsible for executing the investment
promotion strategy. It can have several functions, including that of demand generator (e.g.
image building, marketing and promotion) and investment facilitator (e.g. helping foreign
investors navigate through regulatory procedures). For example, Denmark’s IPA, Invest in
Denmark, has units dedicated to the following activities and sectors: one-stop shop
services, business development, information and communication technologies (ICT), life
sciences, renewable energies, maritime services, marketing and communications, and
quality assurance.
This indicator considers whether: the IPA has the backing of senior government
officials; its internal organisation is developed; staff are drawn from both the public and
private sectors and speak multiple languages; the annual budget is based on a carefully

defined programme of work and covers all overhead and human resource costs; the IPA has
an internal planning mechanism which consists of a calendar of events, statistical tracking
database and internal rules of procedure; and a system exists for monitoring and
evaluating results of activities.
All of the SEE economies have publicly funded IPAs that are tasked to attract and
facilitate entry of foreign investors. The IPAs have fixed annual budgets and have the
support of senior government officials.
Bulgaria, Croatia, the former Yugoslav Republic of Macedonia and Serbia have the
most advanced IPAs. Staff in these organisations tend to be hired with experience in both
the public and private sectors. These IPAs also use detailed planning mechanisms to
support their operations. In addition, these IPAs tend to be organised into several
functional departments and provide training for their staff. The IPA in the former Yugoslav
Republic of Macedonia (InvestMacedonia) for example, is staffed with 25 employees and
has 23 economic promoters in different countries worldwide (with a plan to have a total of
32 promoters by the beginning of 2010).
Albania, Bosnia and Herzegovina, the Republic of Moldova, Montenegro and Romania
are not far behind the first group. The difference in their scores for this indicator lays in the
lack of detail provided regarding internal planning mechanisms used to support their
operations. In some cases, staff was primarily hired from the public sector with little
private-sector experience.
A major problem with the IPA of Kosovo is that staff is not fluent in foreign languages.
Interviews conducted with private-sector representatives in Kosovo indicate that the IPA’s
capacities would need to be strengthened.
Monitoring and evaluation

Monitoring and evaluation mechanisms can be used to track an IPA’s performance and
determine whether its objectives are being met and at what cost. Monitoring and
evaluation can have several benefits. It can shape the IPA’s decisions on resource allocation
(if necessary, dispensing with activities and services shown to be ineffective). It can also
provide accountability to oversight bodies. The results of monitoring and evaluation
exercises should be publicly available in the form of an annual report and where possible
benchmarked against performance of other IPAs.
The criteria used in this indicator include whether: annual reports are prepared by the
IPA, activities undertaken by the IPA are assessed, the performance is benchmarked
against other IPAs and the annual report is publicly released.
The IPAs in Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Montenegro,
Romania and Serbia monitor performance and produce annual reports for their oversight
bodies or ministries on their performance and on levels of FDI. In the interest of
transparency, these reports (or their summaries) should be publicly released on their IPA
websites. They also produce quarterly internal reports.
The IPAs of Albania, Bosnia and Herzegovina, the Republic of Moldova and Kosovo do
not have detailed monitoring and evaluation mechanisms in place.
With the exception of Kosovo, the IPAs in SEE participate in benchmarking exercises
undertaken by other international organisations, such as that described in the World
Bank’s Global Investment Benchmarking report (World Bank, 2009).

SME-FDI linkages
Small- and medium-sized enterprises (SMEs) in middle-income countries contribute
nearly 55% of total employment and 40% of GDP (OECD, 2004). Improving the economic
performance of SMEs is therefore an important facet of broader economic development.
Commercial relationships or business linkages between SMEs and FDI can be a powerful
conduit for sharing knowledge, skills and management.
This indicator considers whether: the IPA has a defined linkage strategy (e.g. have
specific sectors been prioritised and are there potential foreign and local participants), a
basic operating structure exists (i.e. is there a unit within the IPA that implements the
linkage programme), a monitoring mechanism exists to track the linkage programme’s
progress and whether the linkage programme has been expanded to other sectors.
Croatia, Serbia and Albania have the most advanced SME-FDI linkages programmes in
the region. Albania’s IPA (AlbInvest) launched a pilot linkage programme in the garment,
fisheries and wood industry sectors, with the purpose of expanding export markets,
encouraging investment in new technology and matchmaking. Croatia’s IPA supports
linkages through its information and communication technology (ICT) cluster (CRO-ICT),
Croatian Semiconductor Cluster (SEMICRO) and Croatian Angel Network (CRANE). The IPA
expanded its linkage programme to include the gourmet-food sector and organised an
exhibition of eight Croatian food companies in Spain and Portugal. The IPA in Serbia (SIEPA)
launched a two-year supplier development programme in co-operation with the World
Bank. The programme operated with the support of 14 multinational enterprises in Serbia
that acted as supervisors. The purpose of the programme was to upgrade the management
skills and production processes of participating Serbian SMEs using the European
Foundation for Quality Model.
In the former Yugoslav Republic of Macedonia, the Law on the Establishment of the
Agency for Foreign Investment is being amended in order to expand the IPA’s mandate to
include export promotion. The IPA believes this will enhance its ability to promote greater
commercial linkages between foreign investors and local SMEs.
The IPAs in the remaining SEE economies have not launched SME-FDI linkage
programmes. Most have various forms of supplier databases where foreign investors can
look for domestic suppliers. However, specific initiatives to facilitate business relationships
between domestic SMEs and FDI are limited.
One-stop shop
To assist foreign investors in overcoming regulatory hurdles, an IPA may designate a
single point of contact or a one-stop shop (OSS). The basic idea is that an investor would
only have to contact a single entity to obtain all the necessary paperwork in one
streamlined and co-ordinated process, rather than having to go through numerous
government bodies. One of the best examples of an OSS is Singapore’s Economic
Development Board, which provides foreign investors with nearly all the approvals and
clearances required for their investment.
This indicator assesses to what extent foreign investors can rely on an IPA’s OSS
services. An IPA which can provide on-site approval for licenses, permits and other
registration steps will receive a higher score than an IPA which only collects the necessary
documents and forwards them to the appropriate bodies within the government.

None of the SEE IPAs provide true OSS service. The majority of IPAs in SEE do their best
to help foreign investors navigate licensing and approval procedures either at the national
or subnational level. However, they do not have the authority to approve licenses or
permits.
Client relationship management

A process for client relationship management (CRM) enables an IPA to manage
relations with foreign investors in an organised and strategic manner. Using a CRM-based
system, the IPA can keep track of key foreign investor information such as contacts,
exchange of communications, meetings and location preferences. A CRM-based system
should go beyond recording basic corporate information about potential foreign investors.
IPAs can analyse the data from CRM-based processes to identify their most likely foreign
investors, enrich and individualise presentations and marketing campaigns, and serve
wider geographical regions.
This indicator considers whether: the IPA has a system in place to track foreign
investors’ corporate information and all exchanges of communication between the IPA and
the foreign investor, noting specific preferences in location; there is timely follow-up of
investor inquiries; the CRM database is structured, regularly updated, user-friendly and
easily accessible; and the IPA uses information gathered from its CRM system to tailor
promotional material to investors.
Croatia, the former Yugoslav Republic of Macedonia and Serbia have the most
advanced CRM systems among the SEE economies. In Croatia, the IPA consistently updates
it contacts database and arranges meetings tailored to the specific needs of interested
foreign investors. The IPA uses a custom-made information technology CRM system. As
part of its ISO certification programme, the IPA must respond to each investor inquiry
within two days.
In the former Yugoslav Republic of Macedonia, the IPA uses a statistical tracking
mechanism for corporate information about all foreign companies that have contacted the
agency or participated in promotional events (road shows, investment forums, etc.). The
IPA tracks all exchanges of communication and meetings with potential investors and
follows up with the potential investors.
In Serbia, SIEPA collects information on all interested investors (i.e. those with
inquiries, or who contacted the IPA on more than one occasion), no matter their size or
sector. CRM software was tailored to suit SIEPA’s specific requirements. Presentations are
developed initially on a common platform. However, they are eventually modified to meet
the specific interests of individual investors. Although SIEPA is capable of providing
relevant information on all industries in Serbia, there are some sectors which are
prioritised, and specialist advisors are appointed for each of these sectors.
Bosnia and Herzegovina, Bulgaria, Montenegro and Romania have more limited CRM
systems. In most cases, they have FDI databases which track basic corporate information.
However, there is little evidence to suggest the IPAs are using their CRM resources to target
investors from a range of geographic destinations.
Albania, the Republic of Moldova and Kosovo are in the process of developing their
CRM databases.

Policy advocacy
Given its close relationship with the foreign investor community, an IPA should be well
positioned to bring key policy constraints (legal, regulatory or administrative) to the
attention of policy makers.
The indicator considers whether: a specific unit exists within the IPA to undertake
policy advocacy activities, regular consultations are held with foreign investors, annual
assessments of the impact of FDI are undertaken and the unit has a specific role in the
development of investment policy.
IPAs in Bulgaria, Montenegro and Serbia demonstrated that they undertake
frequent consultations with foreign investors, produce annual assessments on the
impact of FDI and have designated staff (if not entire units) responsible for policy
advocacy. In Bulgaria, the IPA has the authority to propose changes in regulatory and
administrative practices to the Ministry of Economy and Energy based on reviews of
existing measures.
In Montenegro, the IPA (MIPA) consults regularly with domestic business associations
and foreign investors. The head of the agency reports to the prime minister and is
frequently consulted on reforms to investment-related changes in policy or regulations.
In Serbia, policy advocacy functions are performed by senior staff and management.
Consultations with the private sector are frequent, and as a result of the IPA’s efforts the
government introduced a decree on investment incentives in 2006.
In the former Yugoslav Republic of Macedonia, the government created an FDI
Committee chaired by the prime minister and consisting of cabinet ministers and senior
officials from all relevant economic ministries responsible for investment-related policy
files to examine barriers to FDI. The IPA, InvestMacedonia, participates in the deliberations
of the FDI Committee by identifying obstacles to FDI and proposing solutions. The FDI
Committee has initiated amendments to laws and regulations as a result of
InvestMacedonia’s contributions. InvestMacedonia plans to have a fully operational policy
advocacy unit from January 2010.
IPAs in Croatia and Romania undertake policy advocacy activities such as consulting
with foreign investors and undertaking annual assessments of FDI. However, information
was not available to assess how their activities have led to reforms in investment-related
laws or regulations, or whether the IPAs have designated units to undertake policy
advocacy activities.
Limited policy advocacy activities were noted in Albania, Bosnia and Herzegovina, the
Republic of Moldova and Kosovo.
Aftercare services
Aftercare services that IPAs provide to foreign investors are intended to retain existing
foreign investors in the host country or facilitate their expansion. Aftercare services can
range from assisting foreign investors with administrative procedures (such as obtaining
building permits and licenses) to more advanced services such as identifying local
suppliers. For example, Austria’s IPA provides a suite of aftercare services for interested
foreign investors which include identification and selection of appropriate sites (such as
office locations and commercial properties), practical support in the initial phases of start-
up and identifying potential Austrian investment partners and suppliers.

This indicator considers the type of aftercare services an IPA provides to foreign
investors, such as administrative support (e.g. assistance with obtaining licenses and
permits) or operational support (e.g. finding local suppliers). The indicator also considers
whether the IPA provides investors with guaranteed response times to inquiries.
IPAs in Croatia, Serbia and the former Yugoslav Republic of Macedonia were found to
offer extensive aftercare services. In Croatia, the IPA offers investors assistance with
finding local suppliers and housing for expatriates. The IPA has started implementation of
customer responsiveness guarantees, with the goal of providing an initial response to an
investor’s inquiry within 48 hours. In Serbia, the provision of aftercare services is a key
component of the IPA’s strategy. The IPA provides operational aftercare services, such as
helping investors find local suppliers, facilitating expatriate work permits, and bridging
communication between investors and municipalities. Similar services are provided by the
IPA in the former Yugoslav Republic of Macedonia.
IPAs in Bosnia and Herzegovina, Bulgaria, Montenegro and Romania recognise the
importance of aftercare services. However they need to demonstrate their ability to provide
support to established foreign investors.
Evidence of aftercare services in Albania, the Republic of Moldova and Kosovo was
hard to come by for this assessment. Interviews with private-sector representatives
indicated that these IPAs offer limited aftercare services.
Subdimension: Transparency
Transparency remains one of the top concerns of investors worldwide. In 2003, the
OECD adopted a Framework for Investment Policy Transparency to help OECD and non-
OECD economies to address this concern (OECD, 2003a). Transparency can be improved by
codifying primary and subordinate investment laws and making them publicly available,
undertaking prior notification and consultation efforts with interested parties and
stakeholders regarding reforms to investment policies and regulations, and improving
elements of procedural transparency such as ensuring that criteria for issuing licenses and
permits are published.
The performance of SEE economies in this subdimension improved relative to IRI 2006.
As illustrated in Figure 1.8, four economies received a score of 4: Albania, Bulgaria,
Montenegro and Romania. They are closely followed by Bosnia and Herzegovina, Croatia,
the former Yugoslav Republic of Macedonia and Serbia. The Republic of Moldova saw its
score improve compared to IRI 2006, while Kosovo was the only SEE economy to receive a
score between levels 2 and 3. Publication of laws and regulations is standard practice across
all SEE economies, and in many cases laws are available in English. There are still
challenges in ensuring that private-sector representatives and other stakeholders are
given fair opportunities to comment on new or amended investment-related measures. In
addition, improving the availability of information on licenses and permits at the
subnational level is a concern to representatives of the private sector.
Publication avenues and tools

In the OECD, good regulatory practices include the codification of primary and
secondary investment-related legislation and public access to this information via the
Internet. Most OECD members provide their legislation or descriptions of their policies in
at least one foreign language, generally English.

Figure 1.8. Transparency subdimension: Average scores

Score
5
0
This indicator assesses the extent to which laws and regulations are codified and
publicly available on the Internet and whether English translation can be obtained for free
or at limited cost.
All SEE economies publish their investment-related laws and subsequent
amendments in their official gazettes. Versions of these laws in their original language can
be found electronically on the websites of the official gazettes or ministries of justice.
English versions of investment-related laws can be found on the websites of IPAs in
Bulgaria, Bosnia and Herzegovina, Montenegro, Serbia and Kosovo. In the former Yugoslav
Republic of Macedonia, national legislation harmonised with the EU acquis is available in
English. English summaries of investment-related laws can also be found on the websites
of IPAs in Albania, Croatia and Romania. However, in the Republic of Moldova, English
translations of laws or summaries are not publicly available.
Prior notification and stakeholder consultations

Giving prior notification and inviting consultation with interested parties are
considered good practices for public sector transparency. Engaging foreign investors and
other stakeholders in the process of investment-related regulatory changes can
contribute to the legitimacy and effectiveness of new measures. Furthermore, enabling
feedback through prior notification and consultation, before taking decisions, can help
public authorities develop better investment regulations and build support for
compliance.
This indicator assesses the extent to which governments give prior notification to
interested parties regarding new (or revisions to existing) investment laws and regulations.
In addition, the indicator considers if the government holds face-to-face consultations
with a broad range of interested parties on a periodic basis and releases summaries or
transcripts of those consultations.
In all SEE economies, amendments to existing investment-related legislation or the
introduction of new legislation are subject to prior notification and a consultation process.
For example, in the former Yugoslav Republic of Macedonia, ministries are required to post
draft laws on their websites in order to enable wider public discussion. Furthermore, the

ministries have an obligation to keep their laws posted on the websites for at least a year
after their adoption.
Although official procedures exist for prior notification and consultations, concerns
have been raised by some members of the private sector. For instance, business
representatives in Albania, Bulgaria, the Republic of Moldova, Romania and Kosovo felt
consultations tend to be of a pro forma nature, with not enough time given to stakeholders to
consider new proposals and provide thoughtful feedback. In Montenegro, representatives
from the private sector expressed dismay when reporting that subnational authorities tend
to enact measures without any prior notification or consultation.
In Bosnia and Herzegovina, Croatia, Serbia and Kosovo, members of the private sector
felt that consultations were limited to a narrow group of stakeholders, usually larger
business interests. And in Albania, Bulgaria, Croatia, the former Yugoslav Republic of
Macedonia, Montenegro and Serbia, private-sector representatives were concerned that
consultations took place on an ad hoc basis.
Transcripts or summaries of consultations are not released by public authorities in any
of the SEE economies.
Procedural transparency
Registration and other authorisation procedures for permits and licenses impose costs
on business, whether in time or money. Because these formalities can also be a source of
administrative discretion and corruption, it is crucial that they be administered in a
transparent, uniform and impartial manner. Procedural transparency provides investors
with opportunities to register complaints or appeal decisions by public authorities and
allows for prompt and impartial reviews.
This indicator assesses the level of transparency associated with procedures required
for obtaining permits and licenses. The indicator considers whether the criteria for
approving licenses or other permits are clear and publicly available, whether the investor
is provided with a rationale in cases where an investment is denied and whether
opportunities exist to appeal negative decisions.
The procedures and criteria for acquiring business-related licenses and permits at the
national level in the SEE economies appear to be reasonably clear and transparent.
However, the situation at the subnational or municipal level is of concern. Interviews with
private-sector representatives indicated that procedures and criteria are inconsistent
across different municipalities in all SEE economies. IPAs tend to do their best to help
investors navigate these procedures at the municipal level.
In Albania, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Montenegro,
Romania and Serbia, investors are informed in writing if a decision has been made to deny
a license, permit or an investment in a sensitive sector (e.g. arms production). Indeed,
investors are also informed in writing if permits and licenses are granted, as the practice of
silence is consent is only at the initial stages of implementation in SEE. Private-sector
representatives in Bulgaria had the impression that decisions regarding approvals were
made on a discretionary basis and that approvals for smaller investors were prolonged in
order to expedite those for larger investors.
In Albania, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, the Republic
of Moldova, Montenegro, Romania and Serbia, appeals of decisions are permitted in
instances where a permit or license had initially been denied. Private-sector

representatives in Croatia and the former Yugoslav Republic of Macedonia were concerned
that the backlog of cases in the court system slowed the appeals process.
In Kosovo, interviews with the private sector and other evidence noted that the
approval of investments in sensitive sectors is characterised by opaqueness. Most approval
procedures were thought to be made at the discretion of public officials without clear
criteria. The services of the IPA to assist investors navigate municipal approval and permit
procedures were also considered unhelpful.
Subdimension: Privatisation and public-private partnerships (PPPs)

Privatisation is an important means by which governments can help create efficient
and competitive markets for goods and services. The form of privatisation need not be
limited to a full transfer of ownership from the state to the private sector, but may also
comprise partial ownership transfers, or concessions to provide a specific service. Many
elements should be in place in order to increase the likelihood of successful privatisations,
these include: a strong political commitment, clearly identified and prioritised objectives,
process transparency, an effective communication campaign directed at key stakeholders,
and allocation of adequate resources to meet the policy demands and many tasks
associated with privatisation (OECD, 2003c). In 2003 the OECD released Privatising State-
Owned Enterprises: An Overview of Policies and Practices in OECD Countries. This work sought to
identify best practices and lessons learned from privatisation processes in OECD countries.
Building on this analysis, the indicators on privatisation presented here are designed to
assess two specific elements: the ability of a government to consult with stakeholders and
the degree to which foreign investors are able to participate in privatisation exercises.
PPPs are arrangements between governments and private entities created with a
view to more efficiently delivering specific public services, such as those in the
infrastructure sector. In an effort to identify best practices in PPP policy design and
implementation, the OECD released in 2006 the Principles for Private Sector Participation in
Infrastructure. Based on these principles, the indicators for this portion of the
subdimension are intended to evaluate the presence of: a specific unit within government
to co-ordinate and develop PPP policy; a legislative framework covering PPP projects; a
consultation process; a method for conducting cost-benefit analysis; and monitoring
mechanisms.
The performance of SEE economies in this subdimension was uneven, as illustrated
in Figure 1.9. In general, the privatisation process is nearing its final stages in SEE and
the role played by foreign investors has been important. Romania, Bulgaria, the former
Yugoslav Republic of Macedonia and Croatia began their privatisation programmes in the
early- to mid-1990s while the rest of the SEE economies initiated their programmes from
2000 onwards. In all cases, there was a strong commitment by political leaders to the
privatisation process. To implement the process, privatisation agencies were established
and provided with human and financial resources in nearly all SEE economies. PPPs, in
contrast, are just emerging. In this area, SEE economies are only beginning to put in
place the legal and regulatory frameworks to implement such projects. Scores for
Montenegro and Romania reflect the level of progress in PPPs. Croatia, Bulgaria, the
former Yugoslav Republic of Macedonia, Albania and Serbia are not far behind. Some of
these economies need to create, for example, specific units or agencies to co-ordinate
and implement PPP policy. Bosnia and Herzegovina, Kosovo and the Republic of Moldova
are in the initial stages of developing legal frameworks on PPPs. In all cases, actual

Figure 1.9. Privatisation and PPP policy subdimension: Average scores

Score
5
0
experience with PPP projects (excluding concessions) is lacking. Exchanges of

international best practices and joint learning would be beneficial for all SEE economies
as they move forward in this policy field.
Consultation with stakeholders

A key lesson learned by many OECD countries is that a communication strategy should
be in place to explain privatisation policies and processes, and to allay stakeholder concerns
(OECD, 2003c). An effective communication campaign should be directed at stakeholders
explaining the policy objectives of privatisation and the means by which they will be
achieved. This can help respond to public concerns and secure support for the policy.
This indicator assesses the consultation process with stakeholders, and considers
whether a wide spectrum of stakeholders is included in the process. These stakeholders
may include domestic and foreign businesses, academia, non-governmental organisations
(NGOs) and civil society. In addition, the indicator assesses whether consultations are
arranged on a consistent or ad hoc basis.
In Montenegro, consultations on privatisation are open to domestic and foreign
businesses and all third parties including academics, labour organisations, NGOs and other
civil society groups. In Romania, the government undertakes regular consultations with
stakeholders through the Commission for Social Dialogue and the Authority for State
Assets Recovery (AVAS) on economic issues including privatisation. The Commission for
Social Dialogue meets monthly. Typical stakeholders included in consultations are
company managers, employees, trade unions, advisors and financial services bodies.
Bulgaria, Croatia and Serbia undertake regular and timely consultations on upcoming
privatisations with both the domestic and foreign business communities. Yet interested
third parties appear to be excluded from consultations on specific privatisation projects.
The former Yugoslav Republic of Macedonia indicated that consultations include foreign
and domestic businesses. However, the nature of those consultations is ad hoc, as the
privatisation process is nearing its end.
Albania, Bosnia and Herzegovina, and Kosovo undertake ad hoc forms of consultations
on upcoming privatisations, primarily involving domestic businesses.

The Republic of Moldova did not indicate the nature of its consultation process.
Foreign ownership restrictions

Policy on foreign ownership of privatised state-owned enterprises can be a sensitive
issue, particularly in the context of industries considered to be of national and strategic
importance. The rationale for opening up privatisation transactions to foreign investors is
that they can be an important source of capital, especially where the domestic pool of
capital is too small to absorb any offerings. This is particularly relevant to emerging market
economies and former transition economies where domestic financial resources may be
insufficient. The experience of OECD countries has shown that only a very narrow
limitation has been required to address specific national security and public interest
concerns. Post-privatisation control devices are provisions and arrangements that
governments put in place to retain a degree of control over the privatised enterprise. A
common post-privatisation control device is the use of golden shares that provide
governments with special powers and veto rights in fully or partially privatised companies.
Golden shares have been used by OECD countries including France, the Netherlands, Spain,
Portugal, Belgium, New Zealand, Italy, the Czech Republic, Poland, Hungary and Turkey
(OECD, 2003c).
All SEE economies have relied heavily on foreign investors in the privatisation process,
with very limited interference by the host government. In Croatia, post-privatisation
control devices may be used by the government in very specific areas, such as those related
to national security and the public interest. Golden shares are permitted by law in Albania,
however in practice they have not been used. The Romanian government has indicated
that it has terminated the use of golden shares.
Bulgaria, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Kosovo,
Montenegro and Serbia indicated that they do not have policies on golden shares.
Existence of a PPP unit

PPP units are created to manage a government’s PPP programme. As noted in the OECD
Principles for Private Sector Participation in Infrastructure, “authorities responsible for privately-
operated infrastructure projects should have the capacity to manage the commercial
processes involved and to partner on an equal basis with their private sector counterparts”.
This indicator assesses: whether the government has created a PPP unit; whether it is
staffed with a multidisciplinary team of lawyers, finance experts, economists and project
managers; whether the unit has a policy co-ordinating role or simply an advisory function;
and whether it enjoys high-level political support within government.
In contrast to privatisation of state-owned enterprises, PPPs are new phenomena in
SEE. With the exception of the Republic of Moldova, Serbia and Kosovo, PPP units to some
extent have been established in the rest of the SEE economies.
Croatia appears to have the most advanced PPP unit (an agency called AJPP) which was
established in 2008. AJPP is staffed with 11 employees (a mix of lawyers, economists,
engineers, accountants, etc.). AJPP assesses and approves PPP projects, while the Ministry
of Finance conducts financial impact assessments. The Ministry of Finance is in charge of
the strategic and policy framework for PPP.
In Montenegro, PPP units are project-specific. The first unit of its kind was created for
the recently announced highway between the port of Bar and the municipality of Boljare

near the border with Serbia. PPP units have representatives from various line ministries,
including legal and financial experts. They do not have a policy co-ordinating function; this
remains with the Ministry of Finance.
Albania, Bulgaria, the former Yugoslav Republic of Macedonia and Romania have
central PPP units that provide advisory functions for potential projects.
In Bosnia and Herzegovina, PPPs are managed at the entity level, although there is the
intent to create a unit within the Ministry of Trade.
PPP legislation
The 2007 OECD Principles for Private Sector Participation in Infrastructure suggest that
governments engaging in any form of PPPs establish “a sound enabling environment for
infrastructure investment, which implies high standards of public and corporate governance,
transparency and the rule of law, including protection of property and contractual rights”. The
legal environment for PPPs includes national legislation, regulations and ordinances at the
subnational level, and the specific contractual obligations between public and private
participants in the project. A legislative framework on PPP-related projects should include
provisions on granting concessions and should cover the lifetime of the project (i.e. design,
build, finance, ownership, operation and eventual transfer back to the public sector).
This indicator focuses on the legislative framework at the national level and considers
whether there is sectoral or horizontal legislation covering PPP projects, and whether
different forms of PPPs besides concessions are covered.
In the period between 2002 and 2006, a legal framework for PPPs was created for the
first time in Romania. After negotiations with the EU, Romania agreed to stop any new PPP
contracts until revised legislation was put in place. A new legal framework was created in
2006. The new legislation and current institutional framework are suitable for preparing
and implementing PPP projects in a competitive and transparent environment.
Albania has a broad concession law (No. 9663) that allows for various forms of PPPs
including build operate and transfer projects.
In Bosnia and Herzegovina, a law on concessions exists at the central and entity levels.
Concessions can be provided in infrastructure and services, the exploitation of natural
resources, financing, design, construction, rehabilitation, maintenance and/or operation.
The Federation and the Republika Srpska have draft laws on PPPs.
In Croatia, a new procurement law was adopted in 2008 and allows the creation of
PPPs. The 2009 European Commission Progress Report notes an improvement regarding the
overall regulatory framework for PPPs.
In the Republic of Moldova, in 2008 the government passed Law No. 179 on Public-
Private Partnerships, which goes beyond typical concessions.
Bulgaria, the former Yugoslav Republic of Macedonia and Montenegro have concession
laws that provide for PPPs. However, the European Commission has expressed concern that
existing PPP laws in the former Yugoslav Republic of Macedonia and Montenegro do not
meet international best standards. A new law on PPPs is in the process of adoption and is
expected to be harmonised with the EU acquis.
Serbia and Kosovo are in the process of designing legislative frameworks to cover PPPs.

PPP consultations
The success of PPP projects depends on public authorities communicating to
consumers and other interested stakeholders that PPP undertakings are in the public
interest (OECD, 2007b). Open, transparent and consistent consultations with relevant
stakeholders, including but not limited to, consumers (i.e. domestic end users), domestic
businesses, potential foreign investors and others allow public authorities to build support
for PPP projects.
This indicator considers whether the government undertakes consultations prior to
engaging in a PPP project and who they include. An additional consideration is whether the
consultations are held periodically or on an ad hoc basis.
According to Concession Law 08/09, Montenegrin officials must provide an
opportunity for interested stakeholders to voice their views on proposed concessions or
PPPs. Once a public invitation for consultations is issued, the hearings should take place
within 30 days. The hearings are open to all interested stakeholders.
In Bosnia and Herzegovina, consultations on potential PPP projects are open to
different stakeholders, including foreign investors. In some instances, these consultations
are primarily geared to foreign investors.
Bulgaria reported holding public consultations on PPPs. However, according to the
quarterly surveys of the business climate conducted by the ESTAT Agency on behalf of the
Centre for Economic Development, only 5%-10% of interviewed entrepreneurs perceive PPP
procedures as transparent and fair.
In 2009, Croatia initiated consultations on PPPs in the form of a Public Procurement
System Forum. The Forum is open to domestic business interests, non-governmental
organisations and academics. It appears that foreign investors are excluded.
In Romania, the contracting authority should elaborate a substantiation study prior to
launching a PPP project, providing an opportunity for public consultations. However,
consultations appear not to be mandated by legislation.
The remaining SEE economies, Albania, the former Yugoslav Republic of Macedonia,
the Republic of Moldova, Serbia and Kosovo, appear at best to hold ad hoc consultations on
PPPs and with limited stakeholder participation, usually domestic business interests.
Approach to cost-benefit assessment for PPP projects

The decision to involve the private sector in projects should be guided by an
assessment of the relative long-term costs and benefits. A cost-benefit assessment (or
analysis) should take into account: all alternative modes of delivery, the degree to which
costs can be recovered from end users, a risk assessment based on the public interest (e.g.
shifting too much risk onto the private sector may result in higher prices for consumers),
and the potential public financial implications (e.g. fiscal implications of issuing
guarantees, including in the event of macroeconomic crises). This indicator considers
whether public authorities examine these elements when undertaking a CBA for PPP
projects.
Albania, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Montenegro,
Serbia and Romania undertake CBAs prior to PPP projects. Although different CBA methods
are employed, they generally involve common elements such as calculations based on

alternative modes of delivery, costs that can be recovered from end users and risk
assessments based on the public interest.
In the Republic of Moldova, the government uses feasibility studies which must
include a risk analysis.
In Kosovo, the draft PPP law calls for CBAs that include an investment-grade feasibility
study, a value for money assessment and a public-sector comparator.
PPP monitoring
Ensuring that PPP projects meet their stated policy objectives calls for specific
monitoring mechanisms over the lifetime of the PPP project. The OECD Principles for Private
Sector Participation in Infrastructure advises that “formal agreements between public
authorities and the public sector should be specified in terms of verifiable infrastructure
services to be provided to the public on the basis of output or performance based
specifications” (OECD, 2007b).
This indicator considers: whether a mechanism to monitor the performance of PPP
projects is in place; what aspects of PPP projects are monitored (e.g. financial and technical
details); whether the government monitors all PPP projects and how often; and whether
the private partner in a PPP project is required to submit business and budget plans on an
annual basis.
In Croatia, the PPP unit is responsible for monitoring the implementation of PPP
projects. Within six months of awarding a PPP contract (or establishing a joint company
with a private partner), the public partner is required to submit for review to the unit a
report on the implementation of the project. The public partner must thereafter submit a
report every six months. The unit may conduct an on-site professional inspection in order
to verify the report.
In the former Yugoslav Republic of Macedonia, the PPP law stipulates that monitoring
of the performance of PPP projects should be specified in the contract between the two
parties. Monitoring mechanisms can be tailored for each project individually.
Under the concession law in Montenegro, the contract between the public authority
and the private entity must include an element of monitoring. The terms of the contract
determine the manner and period of monitoring.
In Albania, the type of monitoring performed is stipulated in the terms of the contract.
The monitoring of the contract has more to do with the phase of construction than
operations. The contract defines the time and process for monitoring, and business plans
are to be submitted annually.
In Bulgaria, the government monitors on an ad hoc basis the financial and technical
state of some (but not all) PPP projects. The government has declared that civil control will
be introduced at a later stage in all projects and sectors supported by the EU.
In Romania, the monitoring mechanism is stipulated in the terms of the PPP contract.
Periodic reporting from the private partner can be specified in the terms of reference.
However, there is no horizontal mechanism to monitor the performance of all existing PPP
projects.
In Serbia, PPP project (or concession) contracts should contain details on mechanisms
of mutual reporting, including monitoring the obligations of the parties to the contract.
However, each contract may contain different monitoring elements.

Bosnia and Herzegovina, the Republic of Moldova and Kosovo are in the process of
either adopting additional regulations or implementing new guidelines on monitoring PPP
contracts.
1.4. Conclusions and recommendations

The investment policy and promotion dimension of the IRI has attempted to assess
the progress that SEE economies have made in fostering open, transparent and
predictable environments for investment. The assessment examines whether laws and
regulations are underpinned by principles of non-discrimination and transparency. In
addition to legal and regulatory frameworks for investment, this chapter has examined
the kinds of investment promotion services provided to investors to ease their entry
into SEE economies. A new subdimension was included in this iteration of the IRI to
examine the status of privatisation processes and frameworks surrounding PPPs. The
final scores on all indicators in this dimension of the assessment are presented in
Table 1.1.
The key finding for this dimension is that SEE economies have made considerable
progress in incorporating non-discrimination in FDI-related laws and regulations.
Investment promotion and facilitation activities need to focus on assisting investors in
their post-entry phase. Efforts at improving transparency at the national level have shown
positive results. However, there is concern that opaque regulations at the subnational level
may deter investment. Privatisation is nearing its end in SEE, and PPPs are likely to have a
more important role in the future. The following summarises some of the main findings
while identifying areas for improvement.
The majority of SEE economies provide FDI incentives to attract foreign investment.
Those incentives offered at the national level are publicised and promoted by IPAs on their
websites. However, FDI incentives at the subnational or municipal levels are often unclear.
SEE economies should increase the transparency of FDI incentives at the subnational level.
Overall, titling registration of land is progressing in urban areas in SEE, but increasing
registration of land in rural areas should be examined.
Although legal frameworks for IPR protection are in place in SEE economies,
enforcement mechanisms need improvement. SEE economies should examine ways of
increasing the efficiency of court procedures related to IPR enforcement.
In the region, Croatia, Serbia and Albania have the most advanced programmes
facilitating commercial linkages between FDI and domestic enterprises. The remaining SEE
economies should examine information on best practices in facilitating SME-FDI
commercial relationships.
None of the SEE IPAs provide true OSS service, and the quality of aftercare services
varies from one IPA to the next. SEE economies and managers of IPAs should examine
which specific areas of aftercare need greater attention.
SEE economies should review their processes for investment-related consultations to
maximise the contributions from the private sector and other interested stakeholders. An
exchange of regional best practices would be beneficial in this regard.
The procedures and criteria for acquiring business-related licenses and permits at the
subnational level are of concern to the private sector. The SEE economies should review
these processes to ensure elements of discretionary approval are reduced.

Table 1.1. Investment policy and promotion: Scores by indicator

Restrictions to national treatment 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 5.0 4.0
Admittance of business personnel 5.0 4.5 5.0 5.0 5.0 4.0 5.0 5.0 5.0 5.0
Transfers 4.0 3.5 5.0 5.0 5.0 4.0 4.0 5.0 5.0 4.0
FDI incentives 2.5 3.0 4.0 4.0 2.0 4.0 3.0 4.0 4.0 4.0
Performance requirements 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
FDI policy
Land ownership 3.0 4.0 5.0 4.0 5.0 4.0 4.0 4.0 5.0 3.0
Titling, cadastre, and restitution 3.0 3.0 3.0 3.0 1.0 3.0 3.0 3.0 3.0 3.0
IPR 3.0 3.0 4.0 4.0 2.0 3.0 3.0 3.0 4.0 4.0
Expropriation 4.0 4.0 4.0 4.0 3.0 4.0 3.0 4.5 4.0 4.0
International investment agreements 3.5 3.5 3.5 4.0 2.0 3.0 3.0 4.0 4.0 4.0
International arbitration 4.0 4.0 4.0 4.0 3.0 4.0 3.0 3.0 4.0 4.0
Subdimension average: FDI policy 3.7 3.8 4.2 4.2 3.4 3.8 3.6 4.0 4.4 4.0
Strategy 3.0 4.0 5.0 2.0 2.0 4.0 3.0 4.0 3.5 4.0
Institutional support 4.0 4.0 5.0 5.0 2.0 5.0 4.0 3.5 4.0 5.0
Promotion and facilitation
Monitoring and evaluation 2.0 2.0 3.0 3.0 2.0 3.0 1.0 3.0 3.0 4.0
FDI-SME linkages 3.0 1.0 1.0 4.0 1.0 2.0 1.0 2.0 1.0 4.0
One-stop shop 2.0 1.0 2.0 2.0 1.0 2.0 1.0 2.0 2.0 2.0
Client relationship management 2.0 3.0 3.0 4.0 2.0 4.0 2.0 3.0 3.0 4.0
Policy advocacy 2.0 2.0 4.0 3.0 1.0 3.0 1.0 4.0 3.5 4.0
Aftercare services 2.0 3.0 3.0 5.0 1.0 4.0 1.0 3.0 3.0 4.0
Subdimension average:
Promotion and facilitation 2.5 2.5 3.3 3.5 1.5 3.4 1.8 3.1 2.9 3.9
Publication avenues and tools 4.0 4.0 5.0 4.0 4.0 4.5 4.0 4.0 4.0 4.0
Transparency
Prior notification and stakeholder

consultations 4.0 3.0 3.0 3.0 3.0 3.0 3.0 4.0 3.0 3.5
Procedural transparency 4.0 4.0 4.0 4.0 1.0 4.0 3.0 4.0 5.0 3.5
Transparency 4.0 3.7 4.0 3.7 2.7 3.8 3.3 4.0 4.0 3.7
Communication plan 3.0 3.0 4.0 4.0 3.0 3.0 1.0 5.0 3.0 4.0
Restrictions on foreign investor
participation 4.0 5.0 5.0 4.0 5.0 5.0 5.0 5.0 5.0 5.0
Privatisation and PPP
PPP implementing unit 3.0 3.0 3.0 4.0 2.0 3.0 2.0 3.5 3.0 2.0
PPP legislation 4.0 4.0 3.0 4.0 2.0 3.0 4.0 3.0 5.0 2.0
PPP consultations 2.5 3.0 3.0 3.0 2.0 2.0 2.0 4.0 3.0 2.0
PPP cost-benefit analysis 4.0 1.0 4.0 4.0 2.0 4.0 1.0 4.0 4.0 4.0
PPP monitoring 3.5 1.0 3.0 4.0 2.0 4.0 1.0 4.0 3.5 3.0
Privatisation and PPP policy 3.4 2.9 3.6 3.9 2.6 3.4 2.3 4.1 3.9 3.1
Dimension average:
Investment policy and promotion 3.5 3.3 3.8 3.8 2.6 3.7 2.9 3.8 3.8 3.8
Given that PPPs are only beginning in the region, economies are encouraged to
exchange international best practices on the design of PPP units, legislation, cost-benefit
analysis, monitoring and evaluation.
Notes
1. The OECD’s Freedom of Investment Project provides a forum for intergovernmental dialogue on
how governments can reconcile the need to preserve and expand an open international
investment environment with their duty to safeguard the essential security interests of their
people. A key finding of these discussions is that any restrictions designed to protect national
security should be transparent, subject to accountability and proportional to the objective

pursued. To the extent possible, other policy remedies to the problem should be used before
considering new restrictions. See www.oecd.org/daf/investment/foi.
2. GATS Mode 3 is defined as “the supply of a service by a service supplier of one Member, through
commercial presence in the territory of any other Member” [GATS Article 1: 2(c)]. The notion of
commercial presence may include FDI.
3. Some restrictions to foreign ownership of land exist as a result of transitional arrangements
negotiated at the time of EU accession. For example, restrictions exist until 2014 for rural land and
2012 for all others.
4. Croatian Law on Ownership and other Property Rights No. 146/08.
5. Law on Acquisition of Plots No. 7980/95.
6. The signatory party is UNMIK.
7. www.mpo.cz/dokument24442.html.
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Study.
Foreign Investors Council – Bosnia and Herzegovina (2008), White Book, Foreign Investors Council,
Sarajevo.
European Commission (2009), Progress Reports on:
• Albania;
• Bosnia and Herzegovina;
• Croatia;
• The former Yugoslav Republic of Macedonia;
• Montenegro;
• Republic of Moldova;
• Serbia; and
• Kosovo.
IMF (2008), Bosnia and Herzegovina, Country Report No. 08/327, IMF, Washington DC.
OECD (2002), Foreign Direct Investment for Development: Maximising Benefits and Minimising Costs, OECD,
Paris.
OECD (2003a), A Framework for Investment Policy Transparency, OECD, Paris.
OECD (2003b), A Checklist for Foreign Direct Investment Incentive Policies, OECD, Paris.
OECD (2003c), Privatising State-Owned Enterprises: An Overview of OECD Policies and Practices in OECD
Countries, OECD, Paris.
OECD (2004), Background Paper on Promoting SMEs for Development, OECD, Paris.
OECD (2006a), A Policy Framework for Investment, OECD, Paris.
OECD (2006b), Improving the System of Investor-State Dispute Settlement, OECD, Paris.
OECD (2006c), OECD’s FDI Regulatory Restrictiveness Index: Revision and Extension to More Countries, OECD,
Paris.
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OECD (2007b), OECD Principles for Private Sector Participation in Infrastructure, OECD, Paris.
OECD (2008), Policy Framework for Investment: User’s Toolkit on Investment Policy, OECD, Paris.
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Recommendation adopted by the OECD Council on 25 May 2009, OECD, Paris.
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Washington DC.

© OECD 2010
Chapter 2
Human Capital Development
69
I.2. HUMAN CAPITAL DEVELOPMENT
2.1. Key findings
Figure 2.1. Human capital development:

Dimension average (weighted): Human capital development Continuing education and training
Vocational education and training
Score
5
0
● The stock of skills in the South-East Europe (SEE) region is low. Absolute shortage of
skilled labour and so-called “brain drain” are severe in some economies. However,
various initiatives are underway to counter brain drain, and education system reform
could play a role here.
● Data from the OECD’s Programme for International Student Assessment (PISA), which
reflect the quality of education, show a low level of performance for most countries
relative to OECD averages.
● In some economies, skills shortages appear to be holding back the development of
specific sectors (such as tourism) and are an obstacle to increased value added in
manufacturing. The private sector frequently noted the need for more employees with
practical and technical skills. Skills shortfalls also affect enterprise finance, with sources
in some countries pointing to inadequacies in the preparation of business plans. Skills
deficiencies also affect the ability of countries to design and implement public policy.
● Spending on students as a share of per capita income, at secondary and tertiary levels, is
low compared to OECD norms; such spending must be seen as a strategic investment.
However, the challenge is to step up investment while increasing quality.
● Governments in SEE must address skills development on an urgent basis given the long
gestation period of human capital policy, the likely global increase in demand for skills
and the region’s strategic need to reduce vulnerability to low-wage competition.

● Education system reform is ongoing almost everywhere in SEE, spurred in the case of
higher education by the Bologna Process.
● Evidence suggests considerable misalignment between the profile of skills supplied by
education and training systems, and the needs of employers; few employers are fully
satisfied with the employability of graduates. The private sector in many economies
feels curricula are out of date and in some cases excessively theoretical. There is
demand from businesses for initiatives that facilitate skills matching.
● Issues of skills mismatch reflect a broader weakness in the connection between industry
and academia. In some countries of the region, efforts are being made to strengthen the
connection between business and education systems (for instance, by encouraging
internship programmes) but more needs to be done. Promoting internship programmes
is an initiative governments can undertake at relatively little cost.
● Policy settings and institutional design in the fields of teacher recruitment, retention
and development are, overall, significantly positive. However, the reported evidence
suggests that some economies need to give additional policy attention to teacher
recruitment and retention, particularly Bosnia and Herzegovina, Montenegro and
Serbia.
● Consultative processes operate in some areas of human capital policy. However, many
governments need to assess how truly inclusive their consultative processes are and
why, in some cases, private sector participation is limited. A process for consultation is
necessary, but not sufficient.
● Of all the subdimensions covered in this chapter, the scores for work-related continuing
education and training (CET) are on average the lowest. In a number of economies, there
is little or no indication of government strategy on CET. In economies such as Bosnia and
Herzegovina, and the Republic of Moldova, the responses indicate that there are no
significant incentives for work-related training.
● Employers in the region often complain that the training market is not well organised,
with many providers delivering services of insufficient quality. Feedback from employers
calls for measures to improve the quality of training provided and to develop incentive
schemes.
● While few statistical data are maintained by public authorities, evidence suggests that
participation in adult training in South-East Europe is low by international standards.
● In recent years, reform and development of the vocational education and training (VET)
system has received much attention from the donor and policy communities in SEE. A
number of economies have adopted policies and designed institutions that approach
international best practice.
● Better data-gathering and monitoring capacity is urgently required in all countries of
South-Eastern Europe, but particularly in the Western Balkans. There is a paucity of
essential data on inputs to and outcomes from national education and training systems as
well as skills needs analyses. This finding has also been highlighted in earlier work by the
OECD (2003) that pointed to a complete absence of data on adult education in the region.
● Opportunities exist for regional co-ordination and co-operation in the education
domain, and there are inefficiencies in not doing so. One area highlighted here is quality
assurance, but others have identified other opportunities (Linden et al., 2008).

● While not a focus of this assessment, interviews frequently highlighted the need for
reform in tertiary-level education. The functioning of many university systems was
considered inefficient (for instance, a large percentage of professors are inactive) and
unresponsive to market realities, while rationalisation of the number and location of
universities is required in a number of countries.
2.2. Human capital and direct investment

The combined skills, knowledge and aptitudes of workers is commonly referred to as
human capital.1 Research has shown that a country’s human capital is closely related to
investment outcomes and overall economic development. For instance:
● The quantity of human resources affects foreign direct investment (FDI): Research indicates
that an additional year of educational attainment in the population raises the stock of
FDI by 1.9% (Nicoletti et al., 2003).
● Human capital is fundamental to the quality of entrepreneurship: More skilled enterprise
founders tend to operate firms that have higher survival probabilities and grow faster.
And better educated entrepreneurs are also more likely to innovate (Koellinger, 2008).
● Human capital is particularly critical for competitiveness in high-tech sectors: This relationship
has been examined with particular reference to the information and communication
technologies (ICT) sector (Bartelsman et al., 2004). Attracting high-technology business is
considered a strategic priority by many SEE governments. The supply of university
graduates in particular affects a country’s potential for absorbing, developing and
disseminating advanced technology and supplying the labour market with highly skilled
workers. And economies with large cohorts of well educated scientists and engineers are
likely to experience productivity advantages, given the increasing importance of
technology in economic development.2
● Better educated employees tend to be more productive: While there are significant differences
in individuals’ rates of return from education, there is a strong positive relationship
generally between educational attainment and average earnings (and by implication,
productivity). In most countries, including those in the SEE region, graduates of tertiary-
level education earn substantially more, and have superior employment probabilities,
than upper- and post-secondary non-tertiary graduates. Recent research on a set of
mainly OECD economies suggests that a country able to attain literacy scores 1% higher
than the international average will achieve levels of labour productivity 2.5% higher than
those of other countries (Coulombe et al., 2004). Other research shows that increasing
average educational attainment by one year raises aggregate productivity by at least 5%,
with stronger long-term effects through innovation (de la Fuente and Ciccone, 2003).
2.3. The human capital development assessment framework

As shown in Figure 2.2, the assessment framework has five subdimensions. The
uppermost dimension in Figure 2.2 examines the use of evidence in strategy design. It also
assesses the inclusiveness of the strategy formulation process.
The subdimension at the left considers resource allocation to initial education. It
incorporates qualitative indicators bearing on the development of the teaching workforce
(as teacher quality has been shown to directly affect student outcomes), as well as selected
quantitative indicators of the magnitude of public and private resources dedicated to initial
education (encompassing primary, secondary and tertiary levels).

Two further subdimensions assess strategy implementation and development in both

vocational and work-related continuing education and training (the latter is also
sometimes referred to as “adult learning”).
The final subdimension, lowermost in Figure 2.2, considers a set of policy conditions
that impact on the supply of, and demand for, labour. The data and literature findings
reviewed in this subdimension were not scored, but serve as general background. Issues of
non-wage labour costs, unemployment benefits, minimum wages and the strictness of
employment protection legislation are briefly reviewed here.
The assessment framework covers key themes that are both amenable to policy and
relevant to the investment climate. But a comprehensive assessment of the education and
training system is not intended. Such an assessment would need to address an exceedingly
broad and complex set of issues in such areas as: the availability, accessibility and quality
of education services; efficiency in the provision of education services; education-system
governance; the distribution of public resources across levels of education; and an array of
learning outcomes, among others.
Figure 2.2. Human capital development assessment framework
Strategy formulation
Workforce skills strategy: Design and evidence
Vocational education Continuing education

Inputs to initial education
and training (VET) and training (CET)
Teacher recruitment and retention Development of the VET system Extent of development of work-
related system of continuing
Development of the teacher workforce Consultative processes
education and training
in the VET system
Annual total spending
on secondary education Participation in vocational
per enrolled secondary student education and training
Annual public expenditure Participation in vocational
on education as percentage of education and training with
total government expenditure a word-based training element
Annual expenditure from all sources
per secondary student as a percentage
of GDP per capita
Labour market settings

and demand for skills
Non-wage labour costs

(as % labour costs)
Unemployment benefits
Minimum wages
Strictness of employment
protection legislation

Subdimension: Formulation of strategy on workforce skills
This subdimension characterises different features of strategy development in the
area of workforce skills. Figure 2.3 depicts the average scores on this subdimension, along
with the scores for the two indicators that it comprises.

Figure 2.3. Strategy formulation subdimension:

Average scores and scores by indicators
Subdimension average: Strategy formulation Workforce skills strategy: Design and evidence
The inclusiveness of strategy formulation
Score
5
0
Workforce skills strategy: Design and evidence

This indicator aims to assess the extent of development and implementation of a
national workforce skills strategy. The indicator assesses the presence of a strategy and the
breadth of evidence used to shape and monitor the strategy. A score of 1 represents a
situation where no strategy exists. A score of 5 indicates a strategy exists and a wide variety
of evidence is gathered to evaluate its effectiveness (including private-sector consultations
and formal policy evaluations conducted by independent evaluators).
The scores presented in Figure 2.3 show that evidenced-based strategy development
could be considerably strengthened in a number of the region’s economies. Nevertheless,
some relatively high scores are also registered, notably for Bulgaria, the former Yugoslav
Republic of Macedonia, Montenegro and Romania. In the former Yugoslav Republic of
Macedonia, a well-functioning skill needs analysis (SNA) model for short-term labour
market forecasts was established in 2006. The Employment Service Agency has used the
SNA regularly since 2007; it identifies specific skills requirements in eight sectors once a
year. The Ministry of Economy then prepares sectoral strategies with the systematic
involvement of all interested parties.
While a number of economies do not have a single overarching strategy on workforce
skills, it is often the case that multiple documents or policy statements taken together
effectively constitute a strategy. For instance, while Albania does not have a single strategic
statement on workforce skills, there is a National Strategy for Pre-University Education (a
new one was recently submitted for the period 2009-13), while the development of the
Sectoral Strategy for Employment and Vocational Training was linked with workforce skills.
This Sectoral Strategy was based on a short-term investigation performed by 36 labour
offices throughout Albania (the labour offices do not have the capacity to conduct medium-
and long-term analysis of skill needs).
Other economies are on the way to developing strategies on workforce skills. For
instance, in Bosnia and Herzegovina, at the time of writing, a State Strategy on

Employment was being drafted that directly addresses workforce skills. The Agency for
Statistics carried out a fourth labour force survey in May 2009, directly addressing
workforce skills. At the end of July 2008, Montenegro adopted the updated National
Employment Strategy and Human Resource Development 2007-11, and the corresponding
National Action Plan for Employment 2008-09. Bulgaria has a broad array of skills
development initiatives underway, largely driven by European Union (EU) programmes.
The inclusiveness of strategy formulation

This indicator seeks to gauge the extent to which relevant stakeholders provide input
into the process of strategy formulation for workforce skills. These stakeholders include
central government ministries, the private sector, local and regional governments, trades
unions and community groups. A score of 1 represents a situation where no systematic
dialogue on workforce skills exists across government, with the private sector or with civil
society. A score of 5 indicates that a wide variety of co-ordination and consultative
mechanisms is consistently employed, across government and with external stakeholders
(including the private sector), aimed at monitoring strategy implementation, defining new
priorities and overseeing the evolution of strategy.
Figure 2.3 shows that in most economies in the SEE region, the scores on consultative
processes are higher than those for evidence-based policy making. Indeed, economies such
as Bulgaria, the former Yugoslav Republic of Macedonia, Montenegro, Romania and Serbia
all use multifaceted consultative practices that in some cases approximate best practice in
the OECD area.
In Bulgaria, strategies have been developed with key stakeholders including
representatives of social partners, research institutes and the National Statistical Office.
There are regular consultations between ministries and other stakeholders concerned with
education and employment. According to the government, civic organisations play an
important role in the formulation of policy on workforce skills.
The Serbian Ministry of Education invites private-sector representatives to participate
in drafting laws. Drafts also go to public hearings: ministry representatives travel
throughout the country to present draft laws to local governments, scientific institutions,
centres for teacher training, parents and other groups. The Ministry then forwards the
drafts to other ministries for consultation. Relevant ministries, the National Employment
Service, the Union of Employers and Chambers of Commerce are reported to be working
together under the auspices of the National Council for Higher Education to produce a
National Qualifications Framework, albeit progress is said to be slow. The National
Programme for Development of Education 2005-15 in the former Yugoslav Republic of
Macedonia was adopted following broad debate in the country.
Progress is also evident in some economies that do not yet score highly. For instance,
in the Republic of Moldova, a consultative body (the National Council for Occupational
Standards and Certification of Professional Skills) has been set up under the Ministry of
Economy, while a Council for Participation was established during preparation of the
National Development Strategy for 2008-11.
In some cases, even where extensive consultative processes exist, participation could
still be strengthened. For instance, Romania has implemented formal consultative
processes at the national, regional and sectoral levels. However, interviews with private-

sector representatives and expert opinion suggest that private-sector engagement is

relatively weak.
The Canadian Council on Learning is an example of good practice in strategy-related
consultation that might be emulated in the SEE region (see Box 2.1). This Council is an
independent agency that works with the private sector to examine the status of learning in
Canada. It produces a Composite Learning Index, among other oversight roles.
Box 2.1. Canadian Council on Learning

The Canadian Council on Learning (CCL) is an independent agency that provides
learners, educators, employers and policy makers with the knowledge and tools to make
evidence-based decisions about learning. Its activities include funding and conducting
education research in five thematic areas (literacy, culture, e-learning, learning in French
and gender). The CCL maintains five knowledge centres focusing on Aboriginal learning,
adult learning, early childhood learning, health and learning, and work and learning.
Through the CCL, academics, researchers and policy makers draw on current research in
fields as diverse as neurology, pedagogy, psychology and systems theory to explore new
approaches to learning. To identify research priorities for the formal education system, the
Council also works with subnational governments, school boards and education-related
non-governmental organisations.
Among its many publications, the Council produces a Composite Learning Index (CLI).
The CLI is compiled annually and measures Canada’s progress in lifelong learning by
benchmarking 4 700 cities and communities across Canada. The CLI is composed of a
basket of 17 indicators that are weighted based on their statistically determined level of
importance. Indicators reflect UNESCO’s conceptual four-pillar framework of lifelong
learning. The CLI measures knowledge acquired in the classroom, at work, in the
community and at home. It does this by using indicators such as high-school dropout
rates, participation in job-related training, access to broadband, distance to learning
institutions and participation in civic groups. Cities or communities that receive a high CLI
score generally have learning conditions that support social and economic well-being.
In a rigorous and statistically sound way, the CLI gives Canadian policy makers,
researchers and the general public an instrument to measure and identify relatively more
and less successful environments for learning in Canada. Most importantly, the Council
offers a central location for identifying gaps in education in Canada and engaging all
stakeholders in addressing such education deficits. The Council’s work signals the re-
orientation in Canada, as in Europe, towards a lifelong perspective on human development
and learning. A set of European Life Long Learning Indicators based on the CLI is being
developed by the German charitable foundation Bertelsmann Stiftung.
Subdimension: Inputs to initial education

Initial education is a key to the development of generic skills (such as literacy,
numeracy and problem solving) that usually command high returns in the labour market.
These generic skills also form the foundation on which specific skills are acquired.
Research also shows that company-based training does not compensate for poor initial
education (EBRD, 2006).
Using two indicators, this subdimension examines policies and institutional settings
related to the teaching workforce, as evidence suggests that teacher quality is a prime

determinant of student outcomes (OECD, 2005). A variety of indicators of spending on

initial education were also examined. However, as noted below, the data returned were
generally limited in coverage and quality.
Figure 2.4. Inputs to initial education subdimension:

Subdimension average: Inputs to initial education Teacher recruitment and retention

Development of the teacher workforce
Score
5
0
Teacher recruitment and retention

This indicator aims to gauge the development and implementation of policies that
affect teacher recruitment and retention. A score of 1 represents a situation where there is
no national teacher recruitment and retention strategy. A score of 5 is given when at least
three of the following conditions are met: working conditions (including salary
competitiveness) are not an important obstacle to teacher recruitment or retention; there
is no shortage of suitably trained teachers, including in maths and sciences; teachers
renew their teaching certificates periodically (for instance every five or seven years)
through an open, fair and transparent system of teacher evaluation; and teachers’
representative organisations have systematic input into the development of teacher policy.
As seen in Figure 2.4, the highest scores were had by Albania and the former Yugoslav
Republic of Macedonia. In Albania, a National Strategy for Training Teachers and Principals
has been prepared by the Institute for Curriculum and Training. The first complete
evaluation of the teaching workforce in the former Yugoslav Republic of Macedonia was
planned for the summer of 2009 and a database on teacher shortages is also planned.
Three economies (Bosnia and Herzegovina, Montenegro and Serbia) received a score of
2 or below, indicating significant room for progress. Despite a low country score overall,
teacher recruitment is treated as an important issue in Bosnia and Herzegovina’s Strategic
Directions of Education Development, which has an implementation plan for 2008-15.
Development of the teaching workforce

This indicator assesses the presence of policies and programmes to develop the
teaching workforce. A score of 1 represents a situation where there is no national strategy
on teacher development. A score of 5 is given when at least three of the following

conditions are met: a lifelong learning framework exists for teachers that connects initial
teacher education, induction and professional development; policies encourage the
development of teacher learning communities (such as networks of schools); there is a
nationwide system of accreditation for teacher education programmes; flexible structures
exist for initial teacher education; and feedback and evaluation mechanisms allow the
outcomes of teacher education to be monitored and their quality improved.3
Economies such as Albania, Bulgaria, the former Yugoslav Republic of Macedonia,
Romania and Serbia all score highly when compared with best practice in the OECD area.
In Romania, for instance, the National Centre for Pre-University Teaching Staff Training
defined a series of general and specific skills necessary to measure the quality of teaching
activities. New measures for teacher development have been put in place since the school
year 2005/06 as a consequence of the Bologna Process. Since 2007, more than 82 000
teachers benefited from more than 1 500 courses designed to meet their specific needs,
which were identified at the local level.
Croatia, Kosovo and Montenegro also scored well. Indeed, the assessment in
Kosovo indicates a notably cohesive and comprehensive system for teacher
development. A National Council for Teacher Licensing was established in January 2009,
comprising representatives from the Ministry of Education, teachers’ unions,
universities, the non-governmental organisation sector and independent experts. The
Strategy of Development of Pre-University Education in Kosovo 2007-17 also addresses
professional training of the teacher workforce. It includes specific objectives and an
action plan with a time frame.
Box 2.2. The challenge of encouraging reverse migration

The emigration of skilled workers, often referred to as “brain drain”, is significant in many SEE
countries. The magnitude of remittances is one indicator of the extent of brain drain. According to
the World Bank’s Migration and Remittances Factbook, in 2007, in the Republic of Moldova,
remittances accounted for 36.2% of GDP. The remittance share of GDP in Bosnia and Herzegovina,
the second largest recipient of remittances as a percentage of GDP in eastern Europe (after the
Republic of Moldova), is 19.7% (World Bank, 2008). Households in the former Yugoslav Republic of
Macedonia receive an average of EUR 240 per month in remittances and large numbers of the
young and educated have emigrated in search of work.
While remittances can provide much-needed foreign exchange and support consumption
among low-income groups, emigration also contributes to the shortages of different forms of
skilled labour evident in SEE economies. Policies to promote return migration should complement
broader educational and labour market initiatives essential to developing increasingly knowledge-
based economies. However, the challenge of attenuating (and even reversing) brain drain will be
made more acute as visa restrictions are progressively relaxed.
Brain circulation occurs with the return of skilled workers to source countries, and has
economic and social benefits for source economies and the migrants themselves. For instance,
a study using a dataset from 2003 found that, holding all else constant, young eastern European
men with work experience in western Europe have almost 30% higher earnings on their return
than those who stay in eastern Europe (Lara, 2008). At the aggregate level, the potential benefits
of brain circulation include the creation of a more dynamic labour market, the introduction of
new methods in the workplace, and connections with foreign universities and research
institutions.

Box 2.2. The challenge of encouraging reverse migration (cont.)

What policies and programmes might SEE governments adopt to promote return migration? As
emigration is driven in part by lack of economic opportunity, large-scale return migration is
unlikely in the absence of sustained economic growth. So reforms that augment economic growth
must be actively pursued.
But lack of economic opportunity is not the only barrier to return migration. A 2005 study of
Albanian émigrés by the Albanian Institute for International Studies in Tirana suggests that barriers
to young educated Albanians returning home include hiring and firing practices, alleged nepotism
and lack of transparency in both academia and the public administration. A 2006 UNDP study
echoes these findings, noting that a lack of suitable advanced training and career development
opportunities is one among several push factors for Albanian academics. Institution building that
addresses modernisation of public governance could help to attract young educated workers back
to SEE economies. Policies to attract skilled labourers back to their home countries must be
accompanied by reforms in domestic education systems to improve the quality and accessibility of
education, and build human capital at home.
Active outreach to diaspora communities might also be beneficial. A recent Gallup poll of citizens
of Western Balkan countries found that 60% of respondents who mentioned a desire to migrate
stated that they intended to return after a couple of years at most (Gallup, 2009). In some countries,
merit might also be had in developing differentiated approaches to outreach efforts, given the
diversity in some diaspora communities. Many skilled workers from some of the republics of the
former Yugoslavia are already second- or even third-generation migrants. In the former Yugoslav
Republic of Macedonia, the government has taken a proactive approach to encouraging brain
circulation. The Agency for Emigrants builds links with and advocates for the fair treatment of the
Macedonian diaspora. It also creates and distributes promotional material to encourage members
of the diaspora to return and invest. The government has cited émigrés and their interests among
the priorities of the Ministry of Foreign Affairs and in 2006 four members of the diaspora were
appointed to the cabinet.
Targeted donor support has also played a positive role in mitigating or reversing brain drain
in some SEE countries. In the fall of 2003, UNESCO and Hewlett-Packard launched the project
“Piloting Solutions for Alleviating Brain Drain in South East Europe”. This project sought to
support scientific research and reduce brain drain by creating opportunities for young
scientists in their home economies. Universities in Albania, Bosnia and Herzegovina, Croatia,
the former Yugoslav Republic of Macedonia and Montenegro were given grid-computing
technologies and seed money to fund exchange visits and guest lectures by expatriate
scientists. The project has connected local scientists with colleagues in the diaspora. Grid
technology provides access to information, computing power and storage that would not
otherwise be available. The programme has also sparked dialogue among researchers at the
various partner universities throughout South-East Europe, a welcome side benefit. Outputs of
the programme include an interactive website of Croatian physicists around the world, based
at the University of Split, and newly developed e-learning programmes at the universities of
Sarajevo and East Sarajevo.
In another programme, the World Bank-supported Unity Through Knowledge Fund engages the
Croatian scientific diaspora in joint projects with Croatian research and development institutions.
Not only does this direct the talents of diaspora members toward supporting these institutions, it
also aims to motivate scientists to return to Croatia, where a restructured research and
development sector can employ their knowledge and skills in applied research activities. A part of
the financial costs of return are borne by the project, and evidence indicates that over 200 Croatian
scientists and engineers previously living abroad have made use of the scheme.

Box 2.2. The challenge of encouraging reverse migration (cont.)

In a similar programme, the UNDP is supporting Albanian efforts to involve the diaspora in its
development through its Brain Gain Initiative. Characterised by strong government support, the
project provides incentives for highly skilled émigrés to return to work in Albania. It brings
prominent Albanian academics from the diaspora to Albanian universities for a series of lectures
and involves them in higher education reforms. In 2009, the initiative placed more than
60 individuals in Albanian universities. Other activities include establishing an information
website to help with recruiting, holding conferences and workshops, and amending legal policies
so that overseas graduates can join the Albanian Civil Service.
Governments should also ensure that administrative barriers do not create obstacles to potential
returnees, by ensuring short administrative procedures for return migrants and pension
transferability.
There are signs of progress in the area of teacher workforce development in Bosnia
and Herzegovina, where the Agency on Pre-Primary, Primary and Secondary Education
began operating in January 2009. This body is mainly responsible for curriculum
development, evaluation, quality assurance, teacher training, certification and recognition.
Spending on initial education

In this subdimension, the assessment sought to gather data on spending on education.
Ratios of spending on education can illustrate the degree of priority a country accords to
education in relation to its overall allocation of resources. Data were gathered on five
measures of spending: annual total spending on secondary education per enrolled
secondary student; annual public expenditure on education (at all levels) as a percentage of
total government expenditure; annual expenditure from all sources per secondary student
as a percentage of GDP per capita; annual public and private expenditure on pre-primary
education per enrolled child; and annual public expenditure on pre-primary education as a
percentage of all public spending on education. Data on each of these indicators would
illustrate different facets of the priority accorded to investment in education.4
Developing better quality data in the SEE region is essential. Unfortunately, few govern-
ments in the region could provide data on the above indicators. This fact alone illustrates
the need for technical support in the area of data development. In some cases, such as in
the case of Montenegro, data development would require substantial support at the
municipal level (in the case of information on annual expenditure per pupil5). In some
cases, data from the Ministry of Education do not match data from the National Statistical
Office. In Bosnia and Herzegovina, there is no unique system of data collection on education
statistics and available data are not in line with EUROSTAT and other international
standards, in particular the International System for the Classification of Education (ISCED)
(however, through the 2009 IPA Programme, the Ministry of Civil Affairs is taking steps to
improve education data).
Developing better data will make it possible to begin assessment of the efficiency of
education systems (by matching input-related data with outcome-related data).6 Research
suggests where the highest economic returns to investment in education lie (Carneiro and
Heckman, 2003). If governments in the region do not have an accurate view of what is being
spent, it is unlikely that efficiency goals will be met by design. In a related way, better data

are essential for informing policies that have both efficiency and equity objectives. For
instance, research using data from the International Adult Literacy Survey shows
disproportionately high-growth effects from improvements in skills among low-skill
groups.7 So policy makers need to know how much is being spent, and in what ways, on
population groups with different attainment and socio-economic backgrounds. Having
good data on spending might also help identify where regional level co-operation could
help to lower the costs of delivering educational services (see Box 2.3).
Box 2.3. Lowering the cost of education services

through regional co-operation
Regional co-operation can be an efficient way to pursue common goals while taking advantage
of economies of scale. The Nordic Council is an example of this. Founded in 1953, the Nordic
Council is the common advisory council of the countries of Denmark, Finland, Iceland, Norway and
Sweden. Parliamentary delegations and appointed cabinet representatives from each member
country meet annually to promote inter-Scandinavian co-operation in areas including research
and education, and to co-ordinate national laws and practices. Education ministers meet
biannually to work on expanding co-operation at all levels of education policy, from pre-primary to
higher and adult education, language learning, and information and communication technology.
Their resolutions take the form of recommendations to member governments and are usually
acted upon favourably. The Council also operates schemes to promote the mobility of students and
teachers among Nordic countries.
Such a model might serve South-Eastern European countries as they undertake reforms with a
view to joining the EU and integrating into the European Higher Education Area. One potentially
fruitful area of regional co-operation is in higher education reform and the creation of quality
assurance (QA) mechanisms. All Bologna signatory countries, including those in SEE, have
established (or are in the process of establishing) agencies for external quality control.
Most countries in SEE have developed or are in the process of developing National Qualification
Frameworks. A regional forum in which advocates can compare and learn from the experience of
neighbouring countries might be particularly useful in the early stages of reform, when raising
awareness and mutual learning is most important. The experience of the Tempus Programme
shows that such activities can kick-start larger reform processes. For example, with the support of
the Tempus Programme, reformers in Croatian universities engaged a broad range of stakeholders
(including managerial and teaching staff, the Ministry of Education and the National Council) to
raise awareness of the need for a cultural shift in the Croatian system of higher education. Over
time, through training and seminars, the programme has led to developments including the
establishment of QA offices at all Croatian universities, the development of a QA Handbook used in
all faculties, the introduction of student feedback questionnaires and staff development processes,
and legislation making the National Council for Higher Education responsible for the quality of
education in Croatia. The inclusiveness of the programme and the dissemination of information at
many levels were keys to its success. Such a programme might be seen as a model for expanded
efforts to introduce quality assurance across universities in SEE.
A similar initiative at the University of East Sarajevo began with the training of 20 university
staff in self-assessment procedures and led to the development of new guidelines for self-
assessment in medical faculties, the establishment of self-assessment teams for staff and
increased transparency in admissions procedures. Based on these initiatives, each faculty at the
university established a QA Office whose first task was to document the responsibilities and
obligations of staff. The university is now disseminating the results of this project to other
universities throughout Bosnia and Herzegovina.

Box 2.3. Lowering the cost of education services

through regional co-operation (cont.)
Such national efforts to promote awareness of QA could be duplicated on a larger scale across
SEE. Universities may want to begin co-ordinating quality assurance standards and may consider
establishing regional data collection systems and indicators of university quality. Co-operation in
the development of QA systems could increase transparency, facilitate the exchange of good
practice, and ensure that enough common criteria are shared among universities to allow for
mutual recognition of procedures and qualifications.
QA is an excellent arena for co-operation on education policy in South-Eastern Europe
because it touches on all aspects of the education system. Co-operating countries would
benefit from the resources and experiences of others while facilitating regional and European
integration.
Regional co-operation in the education sphere is being promoted through the Education Reform
Initiative and the Regional Co-operation Council’s Task Force for Building Human Capital. Both
initiatives foster regional peer learning and knowledge transfer, linking these efforts to European
frameworks for education development. Another goal is improved access to EU funding through
building capacities to prepare reform and project proposals.
Within the constraints of data quality and coverage noted above, Table 2.1 presents
selected data on spending on initial education. Many data are gleaned from international
sources and cover different time periods. Others derive from government responses. For
definitional and quality-control reasons these data must be treated with considerable
caution.
The data show that, in absolute terms, spending on secondary education per enrolled
student is low compared to the EU average, which is to be expected given divergences in
national income. But data on public expenditure on education as a share of all government
spending (which illustrates the priority given to spending on education relative to other
public policy objectives) approximates the EU average (with the exception of Montenegro).
The third variable in Table 2.1 illustrates the resources spent on secondary-level students
relative to per capita income (or, in other words, the ability to pay). Albania is the only
economy to register a level of spending above the EU average. The Republic of Moldova
records a figure close to the EU average. Lower expenditure shares are seen in the
Table 2.1. Selected indicators of education spending

Indicator ALB BIH BGR HRV XK MKD MDA MNE ROU EU average
Annual total spending on secondary education 766.4 n.a. n.a. 1547.92 n.a. n.a. n.a. n.a. 649.13 5246.74
per enrolled secondary student (EUR)
Annual public expenditure on education 11.55 10.96 11.67 10.38 13 15.69 19.810 7.2 19.911 13.2
as percentage of total government expenditure
Annual expenditure from all sources 28.312 n.a. 19.213 18.614 n.a. 7.515 24.116 n.a. 17.517 26
per secondary student as a percentage of GDP
per capita
1. All exchange rates from 2009.11.06; 2. 2008; 3. 2006; 4. 2005; 5. 2008; 6. 2004; 7. 2006, UNESCO database; 8. 2008; 9.2005,
World Bank database; 10. 2007, UNESCO database; 11. 2006; 12. 2008, obtained by summing data on ISCED2 and ISCED 3;
13. 2006, EUROSTAT database; 14. 2007; 15. 2005, WDI database; 16. 2005, WDI database; 17. 2006.
Data on Serbia were not available.

remaining economies, and significantly lower in the case of the former Yugoslav Republic
of Macedonia.
Other analysis shows that for the period 2003-06, countries in the SEE region spent
26.6% of per capita income on tertiary-level students. This figure is far below that seen in
OECD economies, which during the same period spent the equivalent of 34.8% of per capita
income on tertiary students (EBRD, 2008).
Subdimension: Vocational education and training

In most OECD economies, a large share of students at the upper-secondary level follow
programmes oriented towards specific occupations or trades. Indeed, in around half of all
OECD countries, the majority of students at upper-secondary level choose to attend such
vocational or apprenticeship programmes. A well designed and appropriately financed
system of vocational education and training, one in which teaching quality is high, is an
essential element of the institutional framework facilitating labour market transition and
equitable labour market outcomes.8
Figure 2.5 presents the average scores for this subdimension, along with those for
the two qualitative indicators it comprises. The assessment also posed questions
regarding the share of VET students at upper-secondary level who are engaged in VET
programmes that have a work-based training element, as research suggests that a work-
based element is desirable. However, the data returned were incomplete and so are not
reported here.
Figure 2.5. Vocational education and training subdimension:

Subdimension average: Vocational education and training Development of the VET system
Consultative processes in the VET system
Score
5
0
From a global perspective, variation across countries in the design of VET systems
complicates the identification of best practice. But this diversity also offers possible
sources of learning. In this connection, Box 2.4 describes recent innovations in Hungary’s
VET system and possible lessons for the SEE region.

Box 2.4. Innovation in VET: Lessons from Hungary

Hungary offers some instructive examples for the countries of SEE as they innovate in their VET
systems. The Hungarian VET system has faced some of the same challenges seen in the SEE region.
These include the perceived irrelevance of the VET system to labour market demands (especially
complaints that it is too theoretical), falling enrolment in VET-specific secondary programmes,
high unemployment, lack of skilled trainers in VET and lack of new training recruits. Despite these
challenges, Hungary has recognised the important role of VET in offering career paths to persons
with different educational aptitudes and interests, in easing school-to-work transitions and
integrating the unemployed into the labour market.
Two programmes highlighted in the OECD report Working out Change (OECD 2009) show how
Hungary is making VET qualifications more responsive to the labour market. The first is the
National Vocational Qualification Register, an updated and flexible qualifications framework
designed to accurately reflect the skills needs of the labour market. This framework also organises
VET in Hungary, as programmes can now be linked to definitions and qualifications in the Register.
The Register directs the focus of VET onto labour-market competencies and increases the
relevance of VET. It is also designed to be flexible enough to evolve to reflect changing labour
market demands.
Another innovation in VET, Step One Forward, is a programme for helping low-skilled,
unemployed adults acquire marketable qualifications. The programme was introduced with
substantial EU support. The first phase ran from November 2005 until May 2007 and the second
(which incorporated lessons learned from the first phase), began in September 2007. Step One
Forward is designed to allow both underemployed and unemployed adults to advance their
educational or professional development. It aims to integrate those populations most at risk in the
Hungarian context: the long-term unemployed, early school leavers, the Roma and those with
special needs. The programme has enrolled a higher number of adults than any other similar
scheme.
While the findings cannot be considered conclusive until a full evaluation takes place, the
experience of these two programmes highlights several important lessons:
Strong political support can expedite innovation, but should be balanced with grassroots involvement.
Both programmes enjoyed strong political support. While this was helpful in Hungary, where VET
is a relatively recent development and does not yet have broad appeal, political support should be
balanced with grassroots engagement. The Step One Forward programme took input from a variety
of stakeholders and later benefited from the flexibility to respond to local needs, making the
programme relevant and encouraging broad participation.
Stakeholder involvement needs to be carefully encouraged. The Register highlights the delicate balance
that must be struck when seeking stakeholder involvement. In this case, qualifications were
explicitly designed to focus on employers’ needs, so policy makers deliberately took an employee-
oriented approach. Input from 9 395 stakeholders contributed to the Register early in the process.
Representatives from the independent sector and other government ministries involved in VET
training (i.e. health, justice) were also included. Educators were not involved in the early stages.
Including teachers earlier may have encouraged greater buy-in during implementation, when
there was significant resistance to the Register by teachers (for various reasons, including the lack
of textbooks to cover new materials). It is important to think strategically about all the stakeholders
who will be important to the long-term success of a programme.
Good data are crucial to support programme innovation. Tools for building a knowledge base included
new surveys and studies to gather knowledge and evidence for the specific purposes of the
initiative.

Box 2.4. Innovation in VET: Lessons from Hungary (cont.)

Monitoring and oversight are important. In accordance with the requirements of EU Structural Funds,
the Step One Forward programme is overseen by a Monitoring Committee. It is composed of high-
profile individuals: directors, deputy state secretaries, deputy heads of commercial and industrial
chambers, and high-level representatives of employers and employees. It can initiate measures within
the intermediary organisation and/or within the supervising authority. The Monitoring Committee is
responsible for checking if the necessary financial support is available for the programme, overseeing
how relevant grants are spent, noting if financial support is hindered and tracking deadlines.
Pilot programmes can be valuable in assessing and improving programmes before larger roll out. In the
case of the Register, smaller initiatives were implemented at the regional level in 16 VET centres for
two years before the programme was introduced at the national level. Evaluation findings helped
build the national initiative.
Innovation must be supported by basic implementation capacities. For example, the revised Register
was not accompanied by revised textbooks, which made it difficult for teachers to teach to the new
qualifications standards.
It is important to have a strategy to communicate new roles. Lack of clarity on the roles of those involved
is a barrier to innovation. If guidelines for implementation are too general, it can be difficult for
schools or practitioners to implement them using action plans. The case of teacher involvement with
the Register illustrates that it is also important to have a deliberate strategy to communicate new
roles and expectations. Teachers may have found it easier to accommodate the new demands they
faced if they had had a full and clear understanding of the benefits of reforming VET qualifications.
Extent of development of the VET system

This indicator aims to gauge the development and implementation of a country’s
system of vocational education and training. VET can include initial VET (at secondary,
upper-secondary and higher levels) or continuing VET (such as in-service training). The
indicator addresses VET at the initial level of education. Criteria covered by the indicator
encompass the availability of specialised VET programmes, the existence of mechanisms
for monitoring the VET system and its outcomes, and the availability of options for VET
students to transfer into tertiary education.
In recent years, reform and development of the VET system has received much
attention from the donor and policy communities in SEE. Figure 2.5 shows that a number
of economies have adopted policies and designed institutions that approach international
best practice. The former Yugoslav Republic of Macedonia, the Republic of Moldova and
Romania are cases in point. In the former Yugoslav Republic of Macedonia a new law on
VET came into force in 2006 and a VET Centre was established in 2007. According to the
VET Law, employers have the right to claim financial support and tax relief for training. A
VET Council was formed in September 2008, playing an advisory role to the VET Centre.
University-level VET programmes are also offered.
In the Republic of Moldova the structure of VET is maintained by the Education Code,
adopted by Parliament in December 2008. Activities are under way to set up a National
Centre for Vocational Education Development. Among other things, the Centre will be
responsible for lifelong education of teaching and managerial staff.
In some economies with slightly lower scores, significant developments are
nevertheless underway. For example, in 2006 Serbia adopted the Strategy for Development

of VET. An Action Plan for implementation of this Strategy was introduced in March 2009.
This plan defines the activities to be completed as well as the tools for financing and
monitoring. Similarly, in July 2008 the Croatian government adopted a development
strategy for the VET system for 2008-13. It specifies the ways in which aspects of the VET
system could develop in the medium term. A new VET Act was adopted by the Croatian
Parliament in February 2009 and is the first legal document in Croatia that exclusively
regulates the VET system. Bosnia and Herzegovina’s Council of Ministers adopted the
Strategy for VET 2007-13. The Framework Law for VET was adopted in August 2008, and
a Unit for VET operates within the Agency for Pre-primary and Secondary Education.
Consultative processes in the VET system

This indicator examines the extent of consultative processes in the VET system. A
score of 1 is given where there are no consultative processes on VET. A score of 5 is given
when employers and unions are regularly involved (possibly through a dedicated body) in
consultative processes at national and sectoral levels, with consultation addressing all
major issues affecting VET policy and implementation.
Generally, the scores indicate that good progress is being made by a number of
countries in the area of consultation, with Romania on par with international best practice.
Economies with lower scores are generally taking significant steps to facilitate
consultation of different sorts. For instance, in Albania the National VET Council includes
representatives from employers and unions. All strategic documents go to this Council
before being approved by the Council of Ministers.
Developing internship programmes in SEE. Internship programmes are of relevance

both to VET systems and the broader relationship between education systems and
business. High youth unemployment rates in SEE economies reflect difficult school-to-work
transitions. The accrual of employable skills and the cultivation of networks and contacts,
the latter often referred to as social capital, are important to successful transitions. But
linkages between schools and business are weak in the SEE region. For instance, a recently
compiled index based on data from PISA scores the strength of school-business links on a
100-point scale. The index is based on five PISA background questions related to the degree
of school exposure to business. This index has a range from 79, for Germany, with the
strongest links between business and lower-secondary education, to the lowest scorers,
Macau and Israel, with a score of 45. Of the four South-Eastern European countries included
in the index, three score below the mean of 59: Montenegro at 54, Serbia at 52 and Bulgaria
at 50. Croatia, scoring 62, is the only country to score higher than the mean.9
One way to strengthen the connection between schools and businesses, and ease
transitions to work is through internships. Internship programmes can provide an avenue
for youth to the develop skills and social capital that can ease the transition from school to
employment (Sweet, 2009). Interns develop specific occupational skills and personal links
with potential employers while also obtaining signals of their own employability that can
serve them on the job market. Young people can use internships to explore career paths
and employers can more efficiently evaluate and then recruit potential new hires.
Combining formal education with work-based learning can help young people
contextualise and apply skills learned in the classroom. This can augment students’
interest in school as they eventually gain a combination of generic, job-specific and

interpersonal skills. Furthermore, interns can also transfer skills and knowledge to trainers
and mentors within host firms (OECD, 2000).
Formal internship programmes can have other benefits too. With greater access to
employers and hence increased awareness of the demand for skills, schools can gain from
community input into curriculum development. In turn, firms benefit from heightened
visibility in their local communities. In some cases, internship programmes can shift some
of the cost of education and training to firms, freeing capacity in schools (Sweet, 2009).
The most successful work-based education programmes benefit from institutional
support in the labour market and qualifications systems. They also involve co-operation
between employers and educational institutions and between the public and private
sectors, and convergence between education, labour market, economic and social policies.
Close working relationships between trade unions, employers and governments generally
improve the quality of the internships (Sweet, 2009). These relationships can be stimulated
by, for example, involving teachers in monitoring the progress of internships with site visits.
Challenges to developing internship programmes in SEE include the lack of a tradition
of internships and the lack of a legal framework (in particular the lack of provision for
internships in the Labour Code). The prevalence of informal labour markets may also affect
the supply of internships as competition from undocumented workers keeps wages low
and reduces the pressure for firms to invest in training (Sweet, 2009). Incentives to help
compensate for this imbalance may encourage firms to expand the supply of internships
and allow smaller firms to accept graduates as interns. An evaluation of the Shell
Technology Enterprise Programme, a graduate placement scheme in the United Kingdom,
demonstrates that such programmes can yield net benefits. This research found that
participating graduates came to look more favourably on a career in a small business. After
graduation, participants were significantly more likely to be offered full-time jobs than
similar non-participating students. Fully three-quarters of host firms also indicated
benefits for their businesses from the programme (Westhead, 1998).
Policies to encourage internships should involve all stakeholders from education,
employers and government, and other groups such as trades unions. Policies should create
incentives for both firms and students to participate, and should ensure that internships
are part of a broad set of options to help students gain skills for the workplace. Experience
from other regions indicates that appropriate legislation is a key facilitator of successful
programmes (Sweet, 2009). Nevertheless, legislation alone is not sufficient. Funding,
administrative support and the consent of key stakeholders are all necessary. Pilot
programmes conducted without a broad strategy for expanding work-based learning and
linking to the VET system are unlikely to have much impact.
A few SEE countries offer incentives for internship schemes, but on a limited scale. For
example, members of the Albanian private sector are helping develop internship
programmes and have developed agreements with some universities. Through this
scheme, the government provides incentives to employers for 6-12 month paid internships
with social insurance covered by the state. The UNDP is also helping to create a permanent
scheme of public sector internships through its Brain Gain Initiative.
In Kosovo, a project sponsored by USAID offers a limited number of internships for
business schools, through which part of the cost is covered by businesses and 30% by
USAID. The private sector has been enthusiastic about this initiative and willing to receive
(and organise) internships. However, the unemployment rate of around 40% makes it more

profitable for companies to hire full-time employees than to host three-month interns. The
Ministry of Trade and Industry tries to promote internships, but these are limited in
number. The private sector cites the lack of legislation, lack of a tradition and a dearth of
incentives for internships as obstacles to developing such programmes.
In Serbia, internships have usually been the result of individual initiative. However,
the government has decided to finance internships for 90 000 young people. A pilot project
in Montenegro to encourage youth to gain practical experience has so far been conducted
in two occupations: hair dressing and car mechanics. However, there are no internship
programmes for more technical professions such as engineering and design.
Subdimension: Continuing work-related education and training

Skills depreciate if they are not actively maintained. For this reason, and because of new
and increasingly complex work tasks (and possibly greater job mobility), continuing
education and training (CET) is essential. However, the incidence of CET varies greatly across
countries. Within the OECD area alone, a small group of mainly Nordic countries have overall
participation rates that are consistently close to (or even exceed) 50% of the workforce. But
another group, composed largely of southern European and some eastern European
countries, has participation rates consistently below 20%. Furthermore, participation varies
greatly and systematically within countries. Younger and more highly educated workers, as
well as workers in larger companies, typically receive more CET than others.
CET is clearly of great relevance to economies such as those in South-East Europe
where relatively high levels of unemployment and a process of industrial restructuring
require the upgrading of work skills, especially among middle-aged cohorts who lack
educational and training opportunities.
There are a number of obstacles to ranking the development of CET. Consequently, any
ranking of CET systems must be highly schematic. A particular obstacle is that little
systematic research exists on how different funding arrangements for CET affect the
efficiency, equity and quality of provision.10 There are few internationally comparative
studies of the impact of different financial arrangements. Furthermore, some countries with
very high rates of participation in CET, such as the Nordic countries, are not noted for the
extent of financial support given to firms. And enterprises in the United Kingdom, Denmark,
the Netherlands and Sweden spent a higher share of labour costs on training in 1999 than
enterprises in other European countries, but only the Netherlands had an elaborate system
of financial support for firms (European Commission [2005]). Furthermore, similar schemes
for financing firms exist in countries that have different levels of CET participation.
As underlined in the OECD’s Thematic Review of Adult Learning Policies and Practices
(2005), adult learning is also a complex policy field in which one ministry rarely has
complete accountability for design, implementation, management and overall guidance.
This makes it difficult to draw conclusions regarding optimal policy settings and
institutional configurations.
Development and implementation of a work-related system of continuing education

and training
Within the conceptual constraints noted above, this indicator aims to gauge the extent
of development and implementation of a country’s system of CET. A score of 1 represents
a situation where no CET strategy currently exists. A score of 5 is given when strategy

implementation occurs with a high quality of programme delivery, information gathered

from consultation processes and skills survey evidence is systematically used to improve
policy, and incentives for employer participation are deemed sufficient by employer
representatives.
Figure 2.6 presents the scores on this indicator. For many countries in the SEE region,
these scores are noticeably far from international best practice. Indeed, of all the
subdimensions in this chapter, the scores for CET are on average the lowest. In a number
of economies there is little or no strategic documentation covering CET. In economies such
as Bosnia and Herzegovina, and the Republic of Moldova, the responses indicate that there
are no significant incentives for work-related training (employers, for instance, cannot
deduct training outlays from taxable income in the Republic of Moldova).
Figure 2.6. Continuing education and training subdimension: Average scores

Score
5
0
In Bosnia and Herzegovina, a framework law will be drafted on adult learning. It will
address statistics and promotion of public providers of adult learning through grant
schemes. In the former Yugoslav Republic of Macedonia, the adoption of the Law on
Education of Adults in 2008 brought significant changes to adult education. An Adult
Education Centre was established at the end of 2008, covering formal and informal learning
for adults. A Council for Education of Adults was established in 2009. The Serbian
government adopted the Strategy for Development of Adult Education in 2006. Later, in
March 2009, an Action Plan for Implementation of the Strategy was introduced. It includes
activities to be undertaken and indicators for monitoring its success. In Montenegro, a
strategy has been adopted for Lifelong Entrepreneurship Learning 2008-13, along with an
Action Plan (2008-09).
Data were also sought on the share of 25-to-64-year-olds participating in work-related
education and training. However, country responses suggest that publicly maintained data
on this quantitative variable are almost non-existent in the region.
Data collected as part of the Business Environment and Enterprise Performance
Survey show that, for employed adults, the share of firms in the region offering training to
their employees is significantly below the EU27 average of 60%, with participation ranging
from 22% to 53%. Employee training is most common in Croatia. Indeed, Croatia and

Romania are the only economies in SEE where the cost of employee training is tax
deductible. Employers in the region often complain that the training market is not well
organised, with many providers delivering services of insufficient quality. Feedback from
employers suggests that measures to improve the quality of training provided and to
develop incentive schemes should be considered.
Subdimension: Labour market settings and demand for skills

Employment policies can have a significant impact on investment, not least because
domestic and foreign investors carefully consider labour costs. The text that follows
provides a brief overview of unemployment benefits, labour taxes, minimum wages and
employment protection legislation in the SEE region.11
Unemployment benefits
Abundant empirical literature indicates that high and long-lasting unemployment
benefits can: reduce the intensity with which the unemployed seek work and their
willingness to accept offered jobs, thereby lowering labour supply; and increase the wage
demands of workers, lowering labour demand.
Unemployment benefit systems in SEE are characterised by low ratios of benefits to
average wages, short benefit durations and limited coverage, especially when compared to
EU countries (Gligorov et al., 2008). Table 2.2 provides an overview of the magnitude of
unemployment benefits and their duration. The final column provides information on the
total benefit received as a percentage of the average annual wage.
Table 2.2. Unemployment benefits for a single male earning

the average wage in manufacturing
Amount per month Maximum duration Total received Total received as %
(EUR) (months) (EUR) of average annual gross wage
Albania 63 12 759 43
Bulgaria 102 6 613 21
Croatia 163 11 1 838 18
The former Yugoslav Republic of
Macedonia 94 6 563 23
Republic of Moldova 108 12 904 43
Montenegro 33 9 297 4
Romania 82 12 984 36
Serbia 250 7 1 581 41
Note: Calculations based on the case of a single male with basic high-school education and 10 years of
contributions to the national insurance scheme, and earning the average wage in manufacturing. His termination
of employment is assumed to be due to plant closure. Figure on total received as a percentage of the average
annual gross wage reflects total benefits he would receive over a 12-month period divided by the average annual
gross wage in manufacturing.
Source: Own calculation, based on gross wage data in manufacturing from the International Labour Organization
for the latest available year (net earnings in the former Yugoslav Republic of Macedonia). Information on the
benefits systems obtained from countries’ laws on unemployment benefits, the Vienna Institute for
International Economic Studies, and the US Social Security Administration Social Security Programs throughout
the World (www.ssa.gov/policy/docs/progdesc/ssptw). EUR exchange rates reflect average 2009 bidding rates
(www.oanda.com).
In Albania, the number of people receiving unemployment insurance has fallen

substantially over the past 15 years. The ratio of the benefit to the minimum wage also
decreased over that period, although it increased to 50% of the minimum wage in June 2009.12

In Montenegro, unemployment cash benefits are 60% of the national basic minimum wage.
However, the basic minimum wage is only EUR 55 per month, while the average gross wage
in 2008 was EUR 615 per month,13 resulting in a very low ratio of total unemployment
benefits to the average gross wage. Kosovo is the only SEE economy that does not maintain
an unemployment benefits scheme.
In most SEE economies, unemployment benefits are limited to 12 months. However,
Croatia, the former Yugoslav Republic of Macedonia and Montenegro do not restrict benefit
duration in cases where the worker has many years of work experience or is close to
retirement.14
Labour taxes
The total cost of employing workers includes wages and any social security
contributions and/or other taxes the employer is expected to pay on the behalf of
employees. If these taxes are increased, and if employers are unable to pass the added costs
on to workers in the form of lower wages, then labour demand will decrease, others things
staying the same. Similarly, when supplying their labour, employees calculate their net
take-home pay by looking at wages less any personal income taxes and/or social security
contributions they must pay. If these taxes are increased, labour supply will decrease. Both
of these factors will result in lower employment, especially among low-wage workers and
those with a high reservation wage relative to their earnings potential.15, 16
Arandarenko and Vukojevic (2008) found that labour taxes in five Western Balkan
economies were relatively high, due largely to high social security contributions (see
Table 2.3). This tax wedge was found to be higher than the EU25 average in all SEE
countries, with the exceptions of Albania and Bulgaria. Both Bulgaria and Croatia have
reduced their tax wedges in recent years: Croatia has made cuts in both its personal
income tax and social security contributions and Bulgaria recently implemented a flat rate
personal income tax of 10% (Gligorov et al., 2008).
Table 2.3. Tax wedge for a single person at two thirds

of average earnings (2006/07)
Tax wedge (%)
Albania 27.9
Bulgaria 31.1
Croatia 40.1
The former Yugoslav Republic of Macedonia 37.6
Montenegro 38.6
Romania 42.2
Serbia 38.4
Sources: Arandarenko et al. (2008) and Gligorov et al. (2008).

Minimum wages
Empirical evidence on the impact of the minimum wage on unemployment is
inconclusive.17 However, the general consensus is that minimum wages should be low
enough not to significantly impede employment creation. All SEE economies have
established minimum wages.18 In many, the minimum wage increases with education. For
example, in Montenegro the basic minimum wage is multiplied by a factor of 1.95 for those
with a high school education, and by a factor of 4 for those with a doctorate. Countries such

as Bulgaria, and to some extent Romania and the Republic of Moldova, have higher
minimum wages in particular sectors. However, in many SEE economies the statutory
minimum wage, the sectoral minimum wages and wages dependent on educational
attainment fall far below the average wage (see Table 2.4).
Table 2.4. Minimum wages as share

of average gross wage in manufacturing
Minimum wage/average gross wage
in manufacturing (%)
Albania 86
Bulgaria 51
Croatia 51
The former Yugoslav Republic of Macedonia 42
Republic of Moldova 28
Montenegro 9
Romania 52
Serbia 40
Note: For full-time employees aged over 23. The former Yugoslav Republic of
Macedonia reflects net earnings.
Source: Own calculation based on data from www.fedee.com/minwage.html and ILO.
Employment protection legislation

Employment protection legislation (EPL) comprises the restrictions imposed on firms
when hiring and firing workers. EPL raises firms’ costs, especially when dismissing
workers. This decreases job destruction. But to the extent that higher firing costs cannot be
pushed onto workers via lower wages, because of the bargaining power of incumbent
workers, it also results in lower job creation. The net impact is lower job turnover, but with
an ambiguous effect on unemployment. Despite the uncertain effect that strict EPL has on
total unemployment, it is often expected to have other negative effects on the labour
market, such as:
● Increasing unemployment spells (because job turnover rates are reduced);
● Reducing employment among marginal groups and temporary workers: if excessive
wage claims made by protected workers result in lower labour demand, the effects might
be borne largely by groups with weak links to the labour market, such as new entrants
(e.g. youth) and workers on temporary contracts;
● Increasing informal employment: firms might seek to avoid the higher costs associated
with EPL by hiring workers informally, particularly in countries with weak enforcement
of EPL; and
● Reducing productivity: strict EPL makes it difficult to reallocate resources from declining
to newer industries. Strict EPL might also make it more difficult for firms to react to new
technologies or changes in consumer demand.
The OECD has created a methodology for determining the strictness of EPL (OECD,
1999). This breaks down the costs of hiring and firing permanent and temporary employees
and the costs of collective dismissal. Based on this method, Micevska (2004) and Gligorov et al.
(2008) calculated the EPL index for all SEE economies. They find that SEE countries generally
have relatively flexible EPL for permanent contracts, in contrast to most EU member states.
Conversely, temporary contracts in SEE tend to be restricted to specific situations such as

Table 2.5. EPL index

Year Regular employment Temporary employment Collective dismissals EPL index
Albania 1995 2.1 3.0 2.8 2.6

Bosnia and Herzegovina 2003 1.8 3.1 3.3 2.6
Bulgaria 2003 2.2 3.4 2.6 2.7
Croatia 2003 2.6 1.9 4.3 2.6
Kosovo 2001 1.3 2.8 4.6 2.5
The former Yugoslav Republic of Macedonia 2003 2.0 3.1 4.0 2.8
Montenegro 2003 2.2 4.5 4.8 3.6
Romania 2003 1.7 3.0 4.8 2.8
Serbia 2005 2.0 4.4 3.6 3.3
SEE average 2.0 3.2 3.9 2.8
EU average1 2008 2.4 1.8 3.2 2.3
OECD average 2008 2.1 1.8 3.0 2.1
1. Excludes Cyprus, Latvia, Lithuania and Malta.

Sources: Micevska (2004), Gligorov, et al. (2008) and OECD (2008): http://dotstat/OECDStat_Metadata/
ShowMetadata.ashx?Dataset=EPL_OV&Lang=en&backtodotstat=false (Version 2).
seasonal work and the replacement of temporarily absent permanent employees (see
Table 2.5).
In all SEE economies, redundancy is a legitimate basis for dismissal. In Montenegro,
workers cannot be dismissed for poor performance (Gligorov et al., 2008). No prior approval
from a third party, such as a trade union, is required before firing an employee. Severance
pay for long-time employment is low in Romania and Bulgaria, but much higher in all other
SEE economies, particularly Albania, Croatia, the Republic of Moldova and Montenegro
(World Bank, 2009).
Compared to OECD and EU economies, economies in SEE maintain relatively
restrictive regulations on temporary contracts and collective dismissal. Fixed-term
contracts in SEE are generally restricted to specific situations. Only Bosnia and Herzegovina
and Bulgaria allow for fixed-term contracts in more general situations (World Bank, 2009).
Moreover, only Croatia and Romania have legislation explicitly allowing temporary work
agencies (Gligorov et al., 2008). With respect to legislation on collective dismissals, the SEE
average index is above both the OECD and EU averages. All countries require prior
notification of a third party (e.g. a trade union) in the event of a collective dismissal,
although approval is not required. In Croatia and Kosovo, collective dismissals can only be
made three months after notification at the earliest.
2.5. Human capital outcomes

As part of this assessment, data were sought on a number of human capital outcomes:
the average number of years in formal education among the general population (research
on the relationship between human capital and macroeconomic growth most often uses
average years of schooling among members of the labour force as a measure of the stock of
human capital), the percentage of the population that has attained upper-secondary
education, the percentage of the population that has attained tertiary education, and
science and engineering graduates as a share of all tertiary graduates. Country responses
were extremely limited, and even for those responses received important questions
remained regarding definitions and data quality. In the absence of a comparative review of
all data items, it was decided not to publish the figures provided.

The stock of skills in SEE is low. Linden et al. (2008) cite estimates of tertiary-level
attainment among persons under 35 that reach a high of 20% in Montenegro. By contrast,
tertiary attainment levels among 25-34 year-olds now stands at around 34% on average
across OECD countries (OECD, 2009).
Primary, secondary and tertiary-level student enrolment rates in SEE are far below
those in OECD economies. The gap is greatest in tertiary enrolment. For the period 2003-06,
EBRD (2008) notes a tertiary-level gross enrolment ratio of 33.8% in the region, compared to
61.6% in the OECD area. Even this low enrolment rate is likely to overstate the rate of
human capital formation in the region, owing to a high incidence of university-level
incompletion (Linden et al., 2008). Linden et al. (2008) point out that in the coming years,
demographic change in the SEE region will further exacerbate human capital shortfalls.
The Programme for International Student Assessment (PISA) is the most
comprehensive and rigorous international programme to assess student performance and
to collect data on the student, family and institutional factors that can help explain
differences in performance. Originally created by the governments of OECD countries, PISA
has now become a major assessment tool around the world. PISA scores provide language,
curriculum and culture-neutral measures of proficiency in reading, numeracy and science.
Not only do PISA scores offer a reliable measure of education quality, they also provide
insight on the prospect of educational attainment. For instance, studies in Australia,
Canada and Denmark show a strong relationship between performance in reading on the
PISA 2000 Assessment at age 15 and the chance of a student completing secondary school
and proceeding to post-secondary studies at age 19.
Table 2.6 presents the scores for the five SEE countries that participated in PISA 2006:
Bulgaria, Croatia, Montenegro, Romania and Serbia (Albania and the former Yugoslav
Republic of Macedonia participated in PISA 2000). Croatia stands out, particularly with
respect to science, for having scores near the OECD averages. But the other economies fall
far below, in some cases by around 100 test points. The significance for the investment
environment of such low scores is reflected in research covering a sample of 50 countries
showing that an increase in the test scores of 100 points is associated with an increase in
annual growth rates of GDP of 1.3 to 2.0 percentage points (EBRD, 2008).
Table 2.6. PISA mean scores 2006

Science Math. Reading
OECD average 500 498 492

Bulgaria 434 413 402
Croatia 493 467 477
Montenegro 412 399 392
Romania 418 415 396
Serbia 436 435 401

This assessment examined a number of policy and institutional settings that affect
the formation of human capital in the SEE region. The final scores are presented in
Table 2.7 and key findings were described earlier in the chapter. While there are limitations
in the extent to which policy directions can be drawn from a cross-country assessment, a

Table 2.7. Human capital development: Final (weighted) scores

Workforce skills strategy: 1.00 1.00 4.00 3.00 1.00 4.00 3.00 4.00 4.00 3.00
design and evidence
formulation
Strategy
The inclusiveness of strategy 3.00 2.00 4.00 3.00 2.00 3.50 3.00 4.00 5.00 4.00
formulation
Subdimension average: 2.00 1.50 4.00 3.00 1.50 3.75 3.00 4.00 4.50 3.50
Strategy formulation
Teacher recruitment and retention 3.50 2.00 3.00 2.50 3.00 3.50 3.00 1.00 3.00 2.00
Inputs to initial
education
Development of the teacher 4.00 2.00 4.00 3.00 3.00 4.00 2.50 3.00 4.00 4.00
workforce
Inputs to initial education
Development of the VET system 3.50 3.00 3.50 3.00 3.00 4.00 4.00 3.00 5.00 3.00
Continuing education Vocational education
Consultative processes in the VET 3.00 3.00 4.00 4.00 3.00 4.00 3.00 4.00 5.00 3.00
and training
system
Vocational education and training
Extent of development of work- 1.00 2.00 3.00 3.00 1.00 2.50 3.00 3.00 4.00 2.00
related system of continuing
and training
education and training
Dimension average (weighted): 2.68 2.17 3.51 3.03 2.28 3.50 3.03 2.91 4.14 2.83
number of common areas for government action can be identified. These are summarised
below:
● Governments in SEE must address skills development on an urgent basis, given the long
gestation period of human capital policy, the likely global increase in demand for skills
and the region’s strategic need to reduce vulnerability to low-wage competition.
● Spending on students as a share of per capita income, at secondary and tertiary levels, is
low compared to OECD norms. Such spending must be seen as a strategic investment:
governments in the SEE region need to raise the level of this investment and increase
quality.
● Governments need to address the multi-faceted issue of misalignment between the
profile of skills supplied by education and training systems, and the needs of employers.
Few employers are fully satisfied with the employability of graduates. While some
countries of the region are taking steps to strengthen the connection between business
and education systems, more needs to be done. For example, governments can promote
internship programmes at relatively little cost.
● For a few countries, the reported evidence calls for additional policy attention to teacher
recruitment and retention.
● Consultation processes in some areas of human capital policy are quite well developed.
However, many governments need to assess how truly inclusive consultative processes
are, and why in some cases participation is limited. A process for consultation may be
necessary, but not sufficient.

● Governments should further examine how they can shape effective strategies and
programmes in the area of continuing education and training, including financial
incentives for work-related training.
● Feedback from employers suggests that measures are needed to improve the quality of
training provided in the training market, as many providers deliver services of
insufficient quality.
● Better data gathering and monitoring capacity is urgently required in all countries of
South-East Europe, but particularly in the Western Balkans. Essential data on inputs to
and outcomes from national education and training systems, and skills needs analyses,
are often lacking. Very few countries are investing in skills needs analyses, although
there are good practices in the region that could be emulated.
● Governments should consider committing to participate in international skills surveys
such as PISA. The data thus developed provide valuable insight on the performance of
education and training systems. Furthermore, participation brings access to
communities of expertise and numerous capacity-building opportunities, which for
some lower-income countries could likely be supported financially by international
donors.
● Opportunities exist for regional co-ordination/co-operation in the education domain,
and there are inefficiencies in not doing so. One area highlighted here is quality
assurance, but others have pointed to opportunities at the tertiary level (Linden et al.,
2008). These opportunities should be actively pursued through such regional fora such as
the SEE Education Reform Initiative and the Regional Co-operation Council’s Task Force
on Building Human Capital.
● While not a focus of this assessment, there is clearly a need for reform of tertiary
education.
Notes
1. Measurement of human capital is far from straightforward and proxy measures are typically
employed. Proxies include educational attainment (the most commonly used measure of
population skills), occupational classification, skills tests (for instance, the International Adult
Literacy Survey), tests based on self-assessment of skills and job requirements. The latter
technique involves surveying employees on the time dedicated in the workplace to different finely
specified tasks. The feasibility of using this approach for international comparisons is currently
being studied by the OECD.
2. Indeed, there is some empirical support for the proposition that countries with a high proportion
of science graduates grow more rapidly than countries where most graduates are from the
humanities (Murphy et al., 1991).
3. While the focus of this assessment is on policy settings, it is noted that assessment of teachers’
quality is controversial among OECD member countries, and there is no agreed methodology
which would allow for international comparisons.
4. However, indicators of the magnitude of spending do not illustrate the efficiency of spending. One
of the PISA findings is that the relationship between student performance and cumulative
expenditure per student is not direct. In fact, national resources devoted to education depend on a
number of interrelated supply and demand factors. These include the demographic structure of
the population (the larger the number of young people, the greater the potential demand for
educational services), enrolment rates (which reflect both the supply of and demand for different
educational services), income per capita, the level of teachers’ salaries, and the organisation and
delivery of instruction.

5. Montenegro has in fact begun a project funded from the Instrument for Pre-Accession to collect
data on annual expenditure per pupil.
6. The SEE region is also lacking in capacities to analyse data. In most cases, the work of education
research institutions is limited to pedagogical research.
7. Coulombe et al. (2004) found that even small increases in the middle of the literacy skills
distribution, where most workers are, would yield sizeable growth effects. Still more significant
economic gains could be had from raising literacy among those with the lowest literacy skills.
8. However, a drawback of apprenticeship schemes in many countries is that students, parents and
even employers often regard such schemes as a second-best option. Policy must seek to counter
any diminished status for VET, for instance through adequate investment in the training of
specialised teachers.
9. The index was constructed by Professor Richard Sweet of the University of Melbourne and Sweet
Group Pty Ltd.
10. See for instance Levin (1998) and Oosterbeck (1998). The variety of financing schemes across and
within countries is considerable and has included profit tax deductions for firms, payroll tax
deductions, payroll tax exemptions, grants based on payroll tax contributions and grants drawing
from the government’s central budget.
11. Other government institutions also affect labour demand and supply, including active labour
market policies and product market regulation. For a more detailed discussion of labour market
institutions in SEE, see Gligorov et al. (2008).
12. At the end of 2009 there were approximately 9 000 people receiving unemployment benefits in
Albania.
13. Wage data is from the International Labour Organisation. In 2008 the average net wage in
Montenegro was EUR 416 per month (Government of Montenegro).
14. In Montenegro, unemployed persons are entitled to unemployment benefits for a period of 3-12
months, depending on the length of time one has contributed to the national insurance scheme.
Persons having 25 years or more of work experience are entitled to a longer benefit duration.
15. The reservation wage is the minimum wage a worker will accept to enter the workforce. It is a
function of take-home pay and other factors such as the unemployment benefits he is entitled to,
the value placed on leisure, the work opportunities available in the informal economy, etc. For
example, many married women with children might require a higher wage to induce them to place
their children in day care, give up the utility derived from being at home and enter the workforce.
16. Belot and Van Ours (2001), Nickell (1997) and Bassanini and Duval (2006) find evidence that tax
wedges positively impact unemployment. Other studies are less conclusive (e.g. Scarpetta [1996]
and Nunziata [2002]).
17. For instance, Card and Krueger (1994), Card and Krueger (2000), Card (1992), Dolado et al. (1996), and
Neumark and Wascher (2003).
18. While Croatia has no statutory minimum wage, it does maintain a lowest wage for full-time
employment which is 35% of the average wage.
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© OECD 2010
Chapter 3
Trade Policy and Facilitation
101
I.3. TRADE POLICY AND FACILITATION
3.1. Key findings
Figure 3.1. Trade policy and facilitation:

Dimension average: Trade policy and facilitation Trade policy strategy formulation and evaluation
Trade liberalisation Non-tariff barriers (NTBs) Proactive export promotion
Score
5
0
ALB BIH HRV XK MKD MDA MNE SRB
● There is a good level of inter-institutional co-ordination in trade policy making across all
the economies of South-East Europe (SEE). In most instances intra-governmental co-
ordination is ensured by committees or working groups, but a minority of governments
rely instead on ad hoc consultations with relevant line ministries.
● All SEE economies have set up arrangements for public-private consultation on trade
policy issues. A lack of participation of civil society, other than the most powerful
business representatives, characterises most economies. In some cases, overall
consultation could be significantly strengthened.
● Governments in SEE have made very little progress in monitoring and evaluating the
overall impact of trade measures. Evaluations occur sporadically and are limited to
specific sectors. However, in some cases, thorough analyses of trade policy outcomes
have been performed in the framework of multilateral and bilateral trade
negotiations.
● Since 2006, Bosnia and Herzegovina, Montenegro and Serbia have made significant
progress in obligatory institutional and legislative implementation of WTO provisions as
well as bilateral market access negotiations for goods and services.
● Since 2006, there has been significant progress in the EU Stabilisation and Association
Process. A Stabilisation and Association Agreement is in place in Albania, and
agreements were signed for Bosnia and Herzegovina, Montenegro and Serbia. Interim

trade measures are in place for Bosnia and Herzegovina, and Montenegro, and have been
unilaterally implemented by Serbia.
● Since 2006, and in order to approximate legislation to the EU acquis, a number of SEE
economies have either introduced a new law on standardisation or amended existing
legislation. There has been significant progress in adopting other relevant horizontal or
sectoral legislation. In particular, a majority of SEE economies adopted a number of EU
technical regulations and New Approach directives.
● Since the 2006 assessment, most SEE economies have made progress in improving the
institutional framework for certification, including the development of a functioning
accreditation system. 1 However, although capacities have been strengthened,
institutional frameworks for accreditation remain weak throughout the region, and in
particular require additional human resources. Furthermore, there is considerable
variation in the strength of institutional settings across SEE economies.
● The technical and human capacities of conformity assessment bodies remain weak
almost everywhere in the region. In many cases, companies still need to rely on foreign
bodies to obtain certification. Hence, while the situation has improved since the 2006
assessment, and quite significantly in some economies, much effort is still needed to
ensure the operation of a well-functioning conformity assessment system.
● Significant progress has been made by several economies in aligning their conformity
assessment systems with those operating in the EU. This is being done either through
the Multilateral Agreement of the European Co-operation for Accreditation (EA MLA), or
through negotiations aimed at concluding Agreements on Conformity Assessment and
Acceptance of Industrial Products (ACAA).
● In the sanitary and phytosanitary area, a common feature across the region is the
difficulty in implementation of legislation due to the lack of human and financial
resources, infrastructure, and information and communication systems. There is a need
to further streamline the legislative framework and adopt implementing regulations and
rulebooks, the lack of which hampers effective health and safety inspections.
● Import and export licenses are only applied for non-economic purposes, in line with
standards typical of OECD economies. In some economies, such as Kosovo and Serbia, a
liberal licensing system is still in an early phase of implementation. In addition, private
sector representatives sometimes report problems with the implementation of licensing
regimes.
● The quality, transparency and public availability of information regarding customs and
other trading operations improved significantly across all SEE economies. For instance,
online single enquiry points have been established in local languages and English
(although sometimes this occurs with limited information). Yet problems remain in
finding information on customs and other procedures due to a lack of government
authorities responsible for providing such information, or in some instances due to the
provision of inconsistent, incomplete or delayed information.
● The quality and effectiveness of export promotion services vary greatly across the
region. Serbia and Croatia have a well-structured and fully operational export promotion
agency offering a broad range of integrated services to exporters, including export
financing and export credit insurance. No comprehensive export promotion strategy has
been adopted yet in Bosnia and Herzegovina or Kosovo.

3.2. Trade policy and foreign direct investment

The importance of an open and liberal trade regime in promoting economic growth is
evident in economic literature. While the link between trade openness and growth has
been critiqued from several perspectives (Rodriguez and Rodrik, 2001), there is no
convincing evidence showing the opposite relationship, i.e. that liberal trade is bad for
economic growth. In particular, trade liberalisation has a positive effect on productivity,
because trade-related competition allocates resources towards more efficient firms. These
firms are also benefit the most from trade liberalisation, as they gain market shares and
experience increased profits (Melitz, 2003).
There is also a strong link between trade liberalisation and foreign direct investment
(FDI). One extensive literature review found that a country’s openness to trade is more
likely to be positively correlated with FDI than any other explanatory variable (Chakrabarti,
2001). A liberal trade regime contributes to attracting FDI. While under certain
circumstances, protection can attract certain forms of FDI (i.e. tariff-jumping or export
substituting FDI), efficiency-seeking FDI will be driven by such features as local economies
of scale and scope, and an open trade regime (Campos and Kinoshita, 2003). Even in the
case of market-seeking FDI, new trade is created when foreign affiliates export to their
parent companies or to other customers in third countries and import from foreign
suppliers. The increasing importance of intra-firm trade is closely tied to the
internationalisation of production by multinational enterprises (MNE) and the rise of global
value chains.
3.3. Trade policy and facilitation assessment framework

The assessment framework for trade policy and facilitation is built on the empirical
link between trade and FDI. An open and liberal trade regime is conducive to
investment and growth; harmonisation with international standards and procedures,
and transparency of national laws and regulations boost a country’s competitiveness
and act as catalyst for increased trade; and proactive export promotion policies can
help countries diversify their exports by encouraging trade in goods where there exists
a comparative advantage or by creating learning opportunities that result in new forms
of comparative advantages and therefore attract export-oriented investment (Brenton
et al., 2009).
As shown in Figure 3.2, the assessment framework has four subdimensions: trade
policy formulation and evaluation, trade liberalisation, non-tariff barriers and proactive
export promotion. Each subdimension contains a number of indicators.
The first subdimension gauges the effectiveness of an economy’s institutional and
operational arrangements for formulating, implementing and evaluating trade policy. The
second subdimension examines the extent of trade liberalisation, in terms of both
integration in the multilateral trading system and effectiveness in reducing tariff and
tariff-equivalent barriers. The third subdimension aims at assessing the steps taken to
eliminate non-tariff barriers. Given its breadth and complexity, this subdimension is
broken down into three themes: technical barriers to trade, sanitary and phytosanitary
measures, and administrative barriers to trade. Finally, the fourth subdimension focuses
on the effectiveness of export promotion strategies.
The remainder of this chapter describes each of the indicators used in each
subdimension of the assessment, as well as the results of the assessment in SEE.

Figure 3.2. Trade policy and facilitation assessment framework
1. Trade policy formulation

2. Trade liberalisation 3. Non-tariff barriers 4. Proactive export promotion
and evaluation
4.1. Presence and

Technical barriers Sanitary and phytosanitary
1.1. Institutional co-ordination 2.1. WTO membership Administrative barriers to trade operations of an export
to trade (TBTs) measures (SPS)
promotion agency
3.1. Institutional 3.5. Institutional 4.2. Number and

2.2. Extent of trade
1.2. Public-private consultation and legislative framework and legislative framework 3.7. Presence of licenses characteristics of export
integration with the EU
for standardisation for SPS measures promotion programmes
1.3. Monitoring and 3.2. Transposition 3.6. Transposition of European 3.8. Accessibility and
2.3. Customs duties
evaluation of the impact of European and international and international SPS transparency of customs laws
on capital goods
of trade measures standards measures and trading procedures
3.3. Institutional
I.3.
2.4. Extent of quantitative
and legislative framework
restrictions
for certification
TRADE POLICY AND FACILITATION

3.4. Status and outcomes
of certification arrangements
105
Bulgaria and Romania are not included in this assessment of trade policy and facilitation.
As both countries became EU members on 1 January 2007, they are part of the Common
Commercial Policy, which is an exclusive Union competence. Furthermore, by being part of the
EU Internal Market, Bulgaria and Romania already fully adopted the acquis communautaire in
the areas of standardisation, accreditation, and sanitary and phytosanitary measures.

Subdimension: Trade policy formulation and evaluation
Since 2000, trade policy has experienced sweeping changes, mainly caused by a
broadening of the coverage of multilateral trade negotiations in the World Trade
Organization (WTO) along with the sometimes harsh confrontations with various
representatives of civil society and other stakeholders during high-level trade summits. In
particular, trade negotiations are now not only concerned with tariff reductions and
elimination of quantitative restrictions, but increasingly encompass other policy issues
ranging from environmental to employment protection (Hocking, 2004).
This change of scope has three main implications. Firstly, trade policy makers and
negotiators need to regularly consult several different ministries, government agencies
and institutions when formulating and implementing trade policy. Secondly, policy makers
need to ensure transparency and inclusiveness in the formulation and implementation of
trade policy by consulting a broad range of civil society actors, including non-governmental
organisations (NGOs). And thirdly, once a trade-related policy or piece of legislation has
been adopted and implemented, governments need to monitor and evaluate the effects of
that policy on the wider economy, including environmental and social impacts.
The trade policy formulation and evaluation subdimension focuses on the
effectiveness of a country’s framework for formulating, implementing and evaluating trade
strategy. It comprises three indicators:
● strength of institutional co-ordination;
● extent of public-private consultation on trade policy issues; and
● monitoring and evaluation of the impact of trade policy.
Figure 3.3 gives an overview of the scores for this subdimension.
Institutional co-ordination
The existence of effective mechanisms for intra-governmental co-ordination is an
important pre-condition for effective trade policy processes. While the ministry of trade is
normally the institution in charge of co-ordinating the formulation and implementation of
trade policy, several other institutions and bodies will often need to be involved to some
extent.2 These include: Ministries of Finance, Agriculture, Foreign Affairs and Industry;
Customs Agencies; Standardisation Bodies; and Export Promotion Agencies. Ideally, the
lead ministry should ensure co-ordination among the different institutions and bodies. To
do so effectively, when issues of trade-related co-ordination are in question, the lead
ministry should have a strong position in the hierarchy of government bodies involved. It
should also receive high-level political backing. This would also help protect the lead
ministry from becoming hostage to protectionist or sectoral interests.
The assessment shows that a good level of institutional co-ordination exists across all
SEE economies. The Ministry of Economy is the lead institution in trade policy formulation

Figure 3.3. Trade policy formulation and evaluation subdimension:

Subdimension average: Trade policy formulation and evaluation Institutional co-ordination
Public-private consultation Monitoring and evaluation of the impacts of trade policy
Score
5
0
in Albania, Croatia, the former Yugoslav Republic of Macedonia, the Republic of Moldova,
Montenegro and Serbia. In Bosnia and Herzegovina, co-ordination between the State and
the Entities is ensured by the Ministry of Foreign Trade and Economic Relations (as there is
no equivalent to a ministry of economy at the state level). In Kosovo, the lead institution is
the Ministry of Trade and Industry.
In most instances, intra-governmental co-ordination is ensured by committees or
working groups. These have been set up to oversee trade policy formulation and
implementation (Albania, the former Yugoslav Republic of Macedonia and Serbia) or to
assume responsibility for broader economic issues, including trade policy (Croatia,
Montenegro). A minority of SEE economies do not have formal trade policy co-ordination
structures, but rely instead on ad hoc consultations with relevant line ministries (Bosnia
and Herzegovina, Kosovo and the Republic of Moldova).
Some notable points from the assessment include the following:
● In 2008, the Albanian Ministry of Economy, Trade and Energy launched a work
programme to assess the government’s internal capacity to institute proper mechanisms
for trade policy formulation, co-ordination, consultation and implementation (mainly in
preparation for participation in the EU Common Commercial Policy).
● In the former Yugoslav Republic of Macedonia, an intra-governmental body ensures trade
policy co-ordination at ministerial level. The body is chaired by a deputy prime minister.
Table 3.1 summarises the design and functioning of trade policy co-ordination
mechanisms across the region.
Public-private consultation
The elaboration of an effective trade policy calls for effective mechanisms for
consultation with the main stakeholders in trade policy making. In addition to government
representatives, these include the enterprise sector and civil society institutions such as
trade unions and consumer, environmental and social justice groups (OECD, 2001).

Table 3.1. Trade policy co-ordination mechanisms

Trade policy lead ministry Co-ordination procedure
Albania Ministry of Economy, Trade and Energy Network of government institutions with trade-related
portfolios (established by government decree in 2007)
Bosnia and Herzegovina Ministry of Foreign Trade and Economic Consultation with relevant bodies at State and Entity level
Relations (in line with internal co-ordination rules)
Croatia Ministry of Economy, Labour and Regular meetings of the intra-governmental body
Entrepreneurship for the co-ordination of economic policies
The former Yugoslav Republic Ministry of Economy Two trade-related co-ordination bodies: co-ordination body
of Macedonia at the ministerial level and expert co-ordination body
Republic of Moldova Ministry of Economy Ad hoc consultation with line ministries; obligation to consult
the Ministry of Finance, the Ministry of Justice and the Centre
for Combating Economic Crimes and Corruption
when amending trade-related legislation
Montenegro Ministry of Economy Commission for Economic Affairs and Finance
Serbia Ministry of Economy and Regional Consultation with relevant line ministries; working group
Development meetings; inter-sectoral groups
Kosovo Ministry of Trade and Industry Ad hoc consultations with relevant line ministries
Governments in all OECD countries typically consult extensively with the private sector
and other stakeholders on trade issues. For example, Canada has 12 Sectoral Advisory
Groups on International Trade, whose membership consists of business representatives,
trade unions, environmental groups and academia (Wolfe, 2007). Box 3.1 describes trade
policy consultation mechanisms in Mexico and Norway.
Box 3.1. Trade policy consultation in Mexico and Norway

In Mexico, a structured mechanism for public-private consultation on trade issues was
created during the NAFTA negotiations. A body known as the Business Organisation for the
Coordination of Foreign Trade co-ordinates information flows between government and
the private sector, and represents business interests. It brings together agricultural,
industrial and service sector representatives as well as academics and think tanks (such as
the National Council on Foreign Trade). This arrangement has led to efficient consultation
mechanisms on specific subjects. At the same time, it has prompted criticism that the
voices of other interest groups are given less weight or left out altogether.
In Norway, the Ministry of Foreign Affairs (the leading institution in charge of trade
policy) set up various consultative bodies on multilateral trade issues through which
interest groups are represented (including business, trade unions and NGOs). Currently
there are five advisory councils: WTO General, Services, Agriculture, WTO Accessions and
Market Access. The councils normally meet once or twice a year.
Sources: ITC, Mexico - Trade Policy Consultation Mechanisms, Business Briefing, Vol. 10, 9 November 2009; Melchior,
A. (2007), “Trade Policy Democracy: The Norwegian Experience”, in M. Halle and R. Wolfe (eds.), Process Matters:
Sustainable Development and Domestic Trade Transparency, IISD, Winnipeg.
All SEE economies have arrangements for consultation with civil society in trade
policy making. Yet across the region there are significant differences in the scope and
inclusiveness of the consultation. A feature common to most countries is a lack of
participation of civil society (other than business representatives). And in some cases, only
the most powerful business interests are heard. In various economies, the private sector
considers overall consultation procedures to be perfunctory.

In Albania and Croatia, consultations on trade-related legislation are carried out

through structures whose mandate embraces economic policy issues broader than just
trade. In Albania, the Business Advisory Council convened only twice in 2008, although
according to its statute its members should meet at least four times a year. In Croatia, the
Economic and Social Council provides a forum for consultation among business, trade
unions and other civil society representatives. However, trade policy is only one of many
policy areas falling under the mandate of the Council. In both countries, consultations with
civil society representatives are also conducted through working groups set up for specific
purposes, e.g. to reach a common position in multilateral or bilateral trade negotiations.
In Bosnia and Herzegovina, Kosovo and the Republic of Moldova, the views of civil
society on trade policy issues tend to be sought on an ad hoc basis. In addition, these
consultations almost exclusively concern business representatives.
In Montenegro and Serbia, formal consultation mechanisms are in place. However,
these are mostly open to business representatives (chambers of commerce and other
employers’ associations), and there is little attempt to broaden the inclusiveness of the
consultation.
In the former Yugoslav Republic of Macedonia, one of the main consultation
mechanisms is the Conference on Enhancing Macedonian Exports. This event has been held
annually since 2005, and brings together business representatives, donors, representatives
from academia and NGOs. The conclusions of the Conference are communicated to the
relevant institutions so that they can adopt measures to tackle the problems identified
during consultation. In addition, the government regularly consults the three main
chambers of commerce and business associations.
Monitoring and evaluation of the impact of trade measures

A government’s capacity to monitor and evaluate the impact of trade measures is an
important element of policy formulation and execution. This includes the evaluation of
impacts on the national economy as well as impacts on other areas of policy such as fiscal
policy, exchange rate management and public expenditure. Governments need to hire and
train officials capable of collecting and analysing data, in order to understand the country’s
position in the world trading system and the impacts of trade policy on individual sectors
(Nathan Associates, 2003).
Mechanisms for monitoring and evaluation of the impacts of trade policy are already
being implemented in several economies. For instance, the European Union carries out
Sustainability Impact Assessments to identify the potential economic, social and
environmental impacts of the trade agreements it negotiates. Other OECD countries
undertake ex-ante evaluations of the impacts of trade measures on the environment. For
example, the United States, Canada and Norway carry out National Environment Reviews.
Governments in SEE have made very little progress in this area. Across the region,
monitoring and evaluation of the impact of trade measures on the national economy
occurs sporadically and is limited to specific sectors. In some cases, thorough analyses of
trade policy outcomes have been performed in the framework of multilateral and bilateral
trade negotiations.
Only one SEE economy, Bosnia and Herzegovina, has a specific department or unit in
charge of analysing the impact of trade policy, where a Unit for Statistics and Analysis of
Foreign Trade was established within Department for International Trade Relations of the

Ministry of Foreign Trade and Economic Relations. However, this Unit seems to be
understaffed and insufficiently equipped to undertake the necessary analyses.
In some other economies, monitoring of the impact of trade measures is performed by
units or departments (usually within ministries of economy) with a broader mandate to
carry out national economic evaluation and analysis. This is the case in Albania, the
Republic of Moldova and Serbia. In other instances (such as Croatia and the former
Yugoslav Republic of Macedonia), there is no unit dedicated to trade policy analysis, but
sporadic evaluations are carried out by departments in charge of trade policy and
international economic co-operation. Some economies (Kosovo, Montenegro) rely heavily
on the national statistical office or other government agencies to provide some degree of
analysis of trade statistics and indicators.
Many SEE economies already use, or are in the process of adopting, regulatory impact
assessment (RIA) mechanisms to monitor and evaluate the impact of trade measures on
the national economy.3 However, the RIA methodology is a general framework used to
evaluate ex-ante the impacts of all economic-related draft legislation. In order to
adequately evaluate the impacts of trade policy, a complete impact assessment would
need inputs deriving from the application of specific trade analysis tools. Such tools
include quantitative techniques (modelled through general or partial computable general
equilibrium models, input-output analysis, or gravity models, depending on the issue to be
examined) as well as a variety of qualitative assessment approaches (such as those based
on case studies and expert opinion). Some SEE economies performed scenario analyses of
the impacts of membership in the WTO and other plurilateral or bilateral free trade
agreements, as well as analyses of harmonisation with the acquis communautaire. These
economies include Bosnia and Herzegovina, Croatia and the former Yugoslav Republic of
Macedonia. However, these are ad hoc exercises and monitoring is not conducted
systematically for each sector of the economy.
Most SEE economies extract trade statistics from their national offices of statistics.
However, given the complexity of fully analysing the impacts of trade policy, it is
recommended that government departments in charge of monitoring and evaluation draw
from data and expertise provided by other government institutions and agencies, as well
as from external sources such as economic research institutes, academia and independent
consultants. In Croatia, the Institute of Economics, Institute for Tourism, Croatian Bureau
of Statistics and Croatian Employment Bureau collect data and provide relevant analysis.
Subdimension: Trade liberalisation

As shown in Figure 3.4, average applied tariffs for agricultural and industrial products
in SEE are broadly in line with world and OECD averages, although they are on average
higher than EU tariff levels.
The signing and entry into force of the Central European Free Trade Agreement
(CEFTA) 2006 represents an important landmark in the process of intra-regional trade
liberalisation (see Box 3.2). CEFTA 2006 goes beyond tariff liberalisation and includes
provisions on technical barriers to trade, sanitary and phytosanitary measures, rules of
origin, and the so-called “new trade” issues (i.e. trade in services, investment, government
procurement and intellectual property).
Table 3.2 summarises the status of integration of SEE economies in the multilateral
trading system.

Figure 3.4. Average applied tariffs

2008 (or latest available year)
% All products Agricultural products Industrial products
25
20
15
10
0
ALB BIH HRV XK MKD MDA MNE SRB EU27 OECD World
Sources: ITC Market Access Map; World Bank Trade Indicators.

Box 3.2. CEFTA 2006

Developed under the auspices of the Stability Pact for South-East Europe, the Central
European Free Trade Agreement (CEFTA) 2006 emerged from a network of more than 30
bilateral free trade agreements negotiated with the support of the Stability Pact Trade
Working Group in the period of 2000-06. Creating a market of nearly 30 million consumers,
CEFTA had been ratified by all Parties by December 2007. The Agreement provides for the
immediate liberalisation of trade in industrial products, and the gradual liberalisation of
trade in agricultural products. It also incorporates advanced provisions on free trade in
services as well as clauses on investment promotion and protection, provisions on
government procurement and dispute resolution mechanisms. As such, CEFTA constitutes
a truly modern and ambitious free trade agreement.
A CEFTA Secretariat was established in Brussels. The Secretariat provides administrative
support to the structures established under CEFTA (a Joint Committee plus three
specialised Subcommittees on Agriculture, Customs, and Technical Barriers to Trade and
Non-Tariff Barriers). The Secretariat also plays an important role in monitoring the
implementation of the Agreement through its presence in these CEFTA structures. The
Regional Cooperation Council, successor to the Stability Pact, seeks to ensure continued
political support for the implementation of the Agreement, while the OECD Investment
Compact works to monitor the Agreement’s investment-related clauses.
In this assessment, the extent of trade liberalisation is measured through four

indicators:
● status of WTO membership;
● extent of trade integration with the EU;
● customs duties on capital goods; and
● extent of quantitative restrictions.

Table 3.2. SEE integration in the Multilateral Trading System

WTO EU interim trade measures EU SAA Other arrangements
Albania Member since 8 September Entry into force December Entry into force 1 April FTA with Turkey since 1 May 2008
2000 2006 2009
Bosnia Negotiating accession Entry into force on 1 July 2008 Signed on 16 June 2008 FTA with Turkey since 1 July 2003
and Herzegovina since 15 July 1999; latest
round of market access
negotiations in March 2009
Croatia Member since 30 November Entry into force March 2002 Entry into force FTA with EFTA since 1 January
2000 1 February 2005 2002; FTA with Turkey since 1 July
2003
The former Member since 4 April 2003 Entry into force 1 June 2001 Entry into force 1 April FTA with Turkey since 1 September
Yugoslav 2004 2000; FTA with Ukraine since
Republic 5 July 2001; FTA with European
of Macedonia Free Trade Association since 1 May
2002
Republic Member since 26 July 2001 Autonomous Trade Not foreseen. Member of CIS since 30 December
of Moldova Preferences granted Partnership and 1994; FTAs with all CIS members
in March 2008 Co-operation Agreement (except for Tajikistan)
in force. Ongoing
consultation on starting
negotiations for a deep
and comprehensive FTA1
Montenegro Negotiating accession Entry into force 1 January Signed 15 October 2007 FTA with Turkey signed
since February 2005 2008 28 November 2008
Serbia Negotiating accession Signed 29 April 2008; Signed 29 April 2008 FTA with Belarus signed 31 March
since 15 February 2005 unilaterally applied by Serbia 2009; FTA with Turkey signed
1 June 2009; FTA with the Russian
Federation implemented since 2001
Kosovo Application under preparation Autonomous Trade Application under
Preferences granted in 2000 preparation
1. The government of the Republic of Moldova reports that negotiations for a new Association Agreement (including
an FTA) between the EU and the Republic of Moldova could be launched in January 2010.
Figure 3.5 gives an overview of the scores for the indicators in this subdimension.
Figure 3.5. Trade liberalisation subdimension:

Subdimension average: Trade liberalisation Extent of quantitative restrictions
WTO membership Extent of trade integration with the EU Customs duties on capital goods
Score
5
0

WTO membership
Membership in the World Trade Organization is an important signal of a country’s
willingness to abide by commonly agreed and shared international trade rules. These are
the fundamental principles included in the agreements that constitute the cornerstone of
the international system of trade rules: the GATT (General Agreement on Tariffs and
Trade), GATS (General Agreement on Trade in Services) and TRIPS (Agreement on Trade-
related Aspects of Intellectual Property Rights). While the creation of the WTO brought the
institutional structure and enforcement of international trade rules to a higher level of
sophistication, a number of basic principles were already included in the GATT: non-
discrimination, reciprocity, binding and enforceable commitments, transparency and
safety valves (Hoekman, 2002). Besides these general principles, WTO members are also
required to observe rules on agriculture, industrial standards and product safety, food and
plant health, and non-tariff barriers, among others. A country’s full adherence to
international trade rules strengthens foreign investors’ confidence in commitments to
trade liberalisation and openness.
Four SEE economies (Albania, Croatia, the former Yugoslav Republic of Macedonia and
the Republic of Moldova) are already WTO members. Bosnia and Herzegovina, Montenegro
and Serbia are currently negotiating accession. Since 2006, all three economies have made
significant progress in the required institutional and legislative implementation of WTO
provisions, as well as bilateral market access negotiations for goods and services. Some
highlights of these reforms include:
● Bosnia and Herzegovina set up agencies for food safety, plant health protection and
protection of intellectual property rights;
● Montenegro concluded bilateral market access negotiations with almost all WTO
members that requested them;
● Serbia adopted legislation on product and food safety, as well as on foreign trade
transactions, fully in line with WTO requirements.
Kosovo has not yet formally applied to become a WTO member. However, the
government has started to prepare the necessary documentation and to implement the
institutional and legislative requirements.
Extent of trade integration with the EU

Trade relations between the EU and the Western Balkans are part of the broader
Stabilisation and Association Process. Stabilisation and Association Agreements (SAAs) are
one of the main tools in the process of accession to the EU for both candidate and potential
candidate countries in the region. The SAAs require that the economies of the Western
Balkans bring their legislation in line with the EU acquis in several areas (namely
competition, intellectual property rights, public procurement and the internal market).
The SAAs also encourage co-operation with the EU in the design and implementation of
many policies. The SAA chapter on the free movement of goods provides for the
establishment of a free trade area between each candidate/potential candidate country
and the EU, for both agricultural and industrial goods. In addition, the SAAs can facilitate
trade between the EU and the Western Balkans by encouraging the adoption of EU
standards and conformity assessment procedures as well as the approximation of food
safety, veterinary and phytosanitary legislation to the EU acquis.

The trade provisions of SAAs add to the autonomous trade measures (ATMs) that were
unilaterally granted in 2000 to the candidate and potential candidate countries by the EU.
The ATMs have allowed goods from the Western Balkans duty-free entry to the EU with the
exceptions of wine, sugar, baby beef and certain fisheries products.
SAAs with Croatia and the former Yugoslav Republic of Macedonia have been in force
since 2005 and 2004, respectively. Since 2006, there has been significant progress in trade
integration with the EU by all other economies of the Western Balkans. The SAA with Albania
entered into force on 1 April 2009. Agreements were also signed with Bosnia and Herzegovina,
Montenegro and Serbia, but have not yet entered into force. Pending ratification by all EU
member states, the trade provisions of the SAAs entered into force for Bosnia and Herzegovina,
and Montenegro through Interim Agreements (IAs) on Trade and Trade-related Issues. The IA
has not yet entered into force for Serbia, but the country unilaterally implements the trade
provisions of the SAA and therefore grants preferential market access to EU exporters.
Kosovo benefits from autonomous trade measures, and no steps have been taken
towards initiation of an SAA.
The Republic of Moldova is not part of the Stabilisation and Association Process.4
However, since 2006 there have been important developments in the regime governing the
country’s trade relations with the EU. Until recently, the Republic of Moldova benefited from
preferential access to the EU market under the Generalised System of Preferences. In 2008,
the EU granted autonomous trade preferences to Moldova, providing for duty-free access to
all goods except certain agricultural products. Further integration is foreseen in the
Partnership and Co-operation Agreement, in the form of a deep and comprehensive free
trade agreement. The European Commission has launched a feasibility study on the
possibility of negotiating an FTA when the Republic of Moldova meets a number of basic pre-
conditions.5
Customs duties on capital goods

High duties on imports of capital goods6 can have a particularly negative effect on FDI
inflows and a country’s international competitiveness. With access to cheaper capital
goods, companies can gain export competitiveness. In addition, the country benefits from
increased capital accumulation (OECD, 2005). Trade in capital goods (as measured by
imports of machinery and equipment relative to GDP) can also act as a transmission
mechanism for spillovers of R&D conducted in OECD countries to non-OECD countries
(Coe, Helpman and Hoffmaister, 1997).
Figure 3.6 shows simple and trade-weighted average duties on imports of capital
goods in SEE. In most cases the duties are on average at OECD and EU levels, and sit at the
lower end of the protection scale.7
Bosnia and Herzegovina, the Republic of Moldova, Montenegro and Serbia exempt
imports of capital goods from payment of customs duties when the goods are imported as
part of an initial capital investment. In addition, duty exemptions are applied when capital
goods are imported into free trade zones in Albania, Bosnia and Herzegovina, the former
Yugoslav Republic of Macedonia, the Republic of Moldova, Montenegro and Serbia.
Extent of quantitative restrictions

Quantitative restrictions can be defined as measures that are applied at the border and
that have a direct effect on imports and/or exports. In the case of imports, their objective is

Figure 3.6. Customs duties on capital goods in SEE

2008 (or latest available year)
Trade-weighted average Simple average

Customs duty, %, AV and AVE
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
84 85 90 84 85 90 84 85 90 84 85 90 84 85 90 84 85 90 84 85 90 84 85 90
Notes: Average duties were estimated for the following categories of the Harmonised System of Tariff Classification:
84 (nuclear reactors, boilers, machinery and mechanical appliances; parts thereof), 85 (electrical machinery and
equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and
reproducers, and parts and accessories of such articles) and 90 (optical, photographic, cinematographic, measuring,
checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof).
Duties are ad-valorem (AV) and ad-valorem equivalent (AVE).
2006 values of imports from individual partner countries were used to calculate trade-weighted averages. Trade-
weighted averages could not be calculated for Kosovo, Montenegro and Serbia due to data non-availability.
Source: OECD calculations based on ITC Market Access Map Database.
to limit the volume of imported goods in the domestic market, or to prohibit the
importation of certain products altogether (Czaga, 2004). A country can also apply
restrictions or prohibitions to exports of goods to other markets (these measures are also
called “export controls” and “export restraints”) (Kazeki, 2005).
As a general rule, the GATT prohibits quantitative restrictions to imports and exports.
At the same time, it foresees a number of exceptions that can be applied by WTO members
for both economic and non-economic reasons.
Quantitative restrictions on imports and exports for economic reasons have been
abolished in all SEE economies. Currently, few quantitative restrictions on imports can be
applied only for non-economic purposes. This is in line with Article XX of the GATT. Article
XX authorises measures necessary for achieving certain public objectives. These objectives
can include such goals as protection of public morals and the protection of human, animal
and plant life or health.

SEE economies have also adopted a system of quantitative restrictions on imports of

certain agricultural products, and maintain a system of differentiated exemptions in the
framework of CEFTA.8 Currently, the Parties to CEFTA are negotiating further liberalisation
by abolishing some of the quantitative restrictions.
Subdimension: Non-tariff barriers

Of course, the potential benefits deriving from trade liberalisation and from the
elimination of tariff-equivalent restrictions can be offset by the presence of non-tariff
barriers (NTBs). To date, trade experts have not reached a consensus on a classification of
NTBs (OECD, 2005). This is mainly due to the fact that, unlike tariffs, NTBs are often
difficult to identify and their effects on trade flows cannot always be quantified. In
addition, no list can be fully exhaustive, because governments are continuously designing
new laws, regulations and administrative requirements that can intentionally or
unintentionally create obstacles to trade.
The IRI assessment framework for NTBs covers three main areas: technical barriers to
trade, sanitary and phytosanitary measures, and administrative barriers to trade. CEFTA
includes provisions in these three areas.9 In addition, these non-tariff measures lie explicitly
within the mandate of the structures created under CEFTA: the Subcommittee on Technical
Barriers to Trade (TBTs) and Non-Tariff Barriers (NTBs), the Subcommittee on Agriculture and
Sanitary and Phytosanitary (SPS) Issues, and the Subcommittee on Customs and Rules of
Origin. Box 3.3 summarises the policy recommendation ensuing from a project implemented
by the OECD Investment Compact to assist the CEFTA Parties in overcoming NTBs.
Box 3.3. OECD recommendations to the CEFTA Parties on how to tackle NTBs
The immediate issues to be addressed relate to the operating procedures of CEFTA
structures, particularly the Subcommittee on TBTs and NTBs. Better co-operation and
communication among all of the Subcommittees as well as a more streamlined approach
to the functioning of the Subcommittee on TBTs and NTBs should facilitate the alignment
of work plans, agreement on topics of common interest and subsequent action.
Information exchange between the government and representatives of the private sector
needs to be upgraded in terms of systems, quality and frequency. Improving the knowledge
and capacity of private sector organisations to properly identify, document and report
different types of NTBs to their governments is vital to allow governments to address these
with the relevant trading partners, be they CEFTA Parties, the EU or third countries.
Tackling TBTs and SPS issues requires extensive co-operation between the
Subcommittee on TBTs and NTBs, and the Subcommittee on Agriculture and SPS Issues.
Assistance can be provided to the Parties to facilitate the identification of priority sectors
or product groups for trade among CEFTA Parties. Systemised sharing of existing
information, such as the individual schedules for the adoption of EU standards, will help
to identify those areas where action is required by specific Parties. Streamlining of national
contact points would also enhance information flows.
Administrative procedures are viewed by many as the most pressing causes of concerns
in terms of current trade among the CEFTA Parties. Improved co-operation and co-
ordination between the Subcommittee on TBTs and NTBs, and the Subcommittee on
Customs is called for, particularly in terms of sharing information on the results of
necessity tests and agreements on new procedures.

Box 3.3. OECD recommendations to the CEFTA Parties on how to tackle NTBs
(cont.)
Finally, monitoring progress is key for ensuring that actions are undertaken and
obstacles to implementation identified and removed. Once the Subcommittee on TBTs and
NTBs has agreed its work plan, a monitoring tool (the CEFTA Scoreboard) should be agreed
and the timing of independent monitoring identified.
Given the breadth of this subdimension, the results of the assessment will be
presented separately for each of the three themes.
Technical barriers to trade

Standards, technical regulations and conformity assessment procedures can all give
rise to technical barriers to trade (see Box 3.4 for definitions and terminology).
Box 3.4. Technical barriers to trade: Definitions

Technical regulations and standards set out the specific characteristics of a product, such as
its size, shape, design, functions and performance, or the way it is labelled or packaged before
it is put on sale. Technical regulations are mandatory by law and are set by governments. Non-
compliance implies that a product is put on the market illegally. Standards are voluntary and
are set by non-governmental bodies and associations. Products that are not compliant with a
standard can be put on sale, but their market share might be affected if consumers have a
preference for goods that meet the requirements of the standards.
Conformity assessment includes procedures (inspection, certification, calibration and
testing) that confirm that a product is compliant with the requirements laid down in
technical regulations and standards.
Source: Lesser (2007).
Technical standards and conformity assessment procedures should generate trade by

facilitating cross-border transactions between economic actors.10 If this is generally the
case, when would standards and conformity assessment procedures become a barrier to
trade, instead of facilitating it? Possible answers lie with the non-proportionality,
discriminatory application and non-transparency of the measures. For instance, the
standards, technical regulations and conformity assessment procedures might not be
justified by a legitimate objective. Even when they are, the same objective might be
achieved using less stringent requirements. In other cases, domestic legislation could
require that an imported good comply with specific standards that a similar locally
manufactured good does not have to comply with. Finally, if the standards and regulations
that a country adopts are not notified and made public, they could result in barriers against
parties that are unaware of their existence. In all these cases, international harmonisation
or mutual recognition can help overcome the potential barriers.
Indicators on technical barriers to trade used in this assessment include:
● institutional and legislative framework for standardisation;
● transposition of European and international standards;

● institutional and legislative framework for certification; and

● status and outcomes of certification arrangements.
Figure 3.7 shows the results for technical barriers to trade.
Figure 3.7. Technical barriers to trade: Average scores and scores by indicators
Average: TBT Status and outcomes of certification arrangement Institutional framework for standardisation
Transposition of European and international standards Institutional framework for certification
Score
5
0
Institutional and legislative framework for standardisation. This indicator examines:

the presence and functioning of a national standardisation body; the existence and main
characteristics of legislation on standardisation, especially in respect of EU legislation; and
the status of membership in and affiliation to European and international standardisation
bodies.11
By 2006, most SEE economies had set up national standardisation bodies. However,
national standardisation bodies appear to have capacity issues in Albania and the former
Yugoslav Republic of Macedonia (although the number of staff has been significantly
increased in the last year). The Institute for Standardisation of Bosnia and Herzegovina was
established in 2004, but only began operations in 2007. In Kosovo, a Standards Agency was
established in 2005 within the Ministry of Trade and Industry; however, it has only five
staff. In Montenegro, the Institute of Standardisation was established in 2007, and since
then the number staff has been increased. In Serbia, the Institute of Standardisation was
also established in 2007 as a non-profit and independent organisation.
Since 2006, and in order to approximate legislation to the EU acquis, a number of
economies either introduced a new law on standardisation or amended existing
legislation. This was the case in Albania (2008), the Republic of Moldova (2007), Montenegro
(2008) and Serbia (2009). In addition, significant progress was achieved in adopting other
relevant horizontal or sectoral legislation, as a majority of SEE economies adopted a
number of technical regulations and New Approach directives.12 Albania, the former
Yugoslav Republic of Macedonia and Serbia adopted laws on General Product Safety
Essential Requirements for Products and Conformity Assessment. In 2007, Croatia also
introduced a new law on technical requirements and conformity assessment, in order to
bring its legislation into line with EU requirements. Regulations on formal notification

procedures in the field of standards, technical regulations and conformity assessment

procedures were adopted in Croatia (2009) and in the former Yugoslav Republic of
Macedonia (2007). In addition, in 2008 the Republic of Moldova amended the Law on
Conformity Assessment to bring it in line with international standards.
Albania, Croatia, the former Yugoslav Republic of Macedonia and the Republic of
Moldova have already transposed a number of EU New Approach pieces of legislation. In
Bosnia and Herzegovina, and Serbia, preparations are underway to adopt their first New
Approach directives (on machinery, low-voltage equipment and electromagnetic
compatibility, among others).
Participation in the works of the main international and European standardisation
organisations has been stepped up across the region. Table 3.3 summarises the current
status of membership or affiliation of SEE economies in those bodies. Some highlights
since the 2006 assessment include:
● Albania became an associate member of IEC in 2009 (with full voting rights in four
technical committees);
● Bosnia and Herzegovina became an affiliate member of CEN in 2008;
● in June 2009, Croatia notified its intention to apply for full membership in CEN and
CENELEC;
● in 2008, the Republic of Moldova became an affiliate member of CEN; and
● Montenegro became a correspondent member of ISO in July 2007, an associate member
of IEC in January 2009 and an affiliate member of CEN in July 2008, and application for the
status of CENELEC affiliate member is currently in process.
Table 3.3. Membership in international and European standardisation

organisations
ISO IEC CEN CENELEC
Member bodies/
Full members/associate
Forms of participation correspondent members/ Members/affiliates3 Members/affiliates4
members2
subscriber members1
Albania Correspondent member Associate Affiliate Affiliate

Bosnia and Herzegovina Member body Associate Affiliate Affiliate
Croatia Member body Full Affiliate Affiliate
Kosovo n.a. n.a. n.a. n.a.
The former Yugoslav Member body Associate Affiliate Affiliate
Republic of Macedonia
Republic of Moldova Correspondent member n/a Affiliate n.a.
Montenegro Correspondent member Associate Affiliate Affiliate
Serbia Member body Full Affiliate Affiliate
1. A member body of ISO is the national body “most representative of standardization in its country”. A
correspondent member is usually an organisation in a country which does not yet have a fully developed national
standards activity. Subscriber membership has been established for countries with very small economies.
2. Full membership allows countries to participate fully in international standardisation activities. Associate
membership allows for limited participation of countries with limited resources.
3. The national standards bodies of the 27 European Union countries plus the national standards bodies of the three
European Free Trade Area countries make up CEN’s National Membership. Affiliation with CEN is available to a
national standards body, which is a member (or corresponding member) of the ISO and is the standardisation
body from an EU neighbouring country having links with the EU or the European Free Trade Association.
4. Members are national organisations entrusted with electrotechnical standardisation, recognised at national and
European levels as being able to represent all standardisation interests in their country. Affiliates become
members once they fulfil the required conditions.
Sources: Governments’ self-assessments, CEN, CENELEC, ISO, IEC.

Transposition of European and international standards. Compliance with technical

standards appears to be the single largest factor impeding the expansion of trade with the
EU, which is already the largest trading partner of the region. Not only does non-
compliance with European standards prevent growth of trade volumes, it also undercuts
the potential of SEE economies to deepen trade relations by joining more sophisticated
value chains. In addition, multi-speed adoption of European standards results in the
creation of additional technical barriers to trade among SEE economies themselves.
Products originating from the economies that are lagging cannot access the markets of
those economies that have adopted more stringent product and process requirements.
All SEE economies have made steady progress in transposing European and
international standards. Table 3.4 summarises the current status of transposition, and
compares it with the situation at the time of the IRI 2006 assessment.
Table 3.4. Number of transposed standards

2006 2009
Albania 8 348 15 029

Bosnia and Herzegovina 6 028 9 653
Croatia 8 173 21 368
Kosovo n.a. 1 200
The former Yugoslav Republic of Macedonia 855 6 011
Republic of Moldova 1831 n.a.
Montenegro n.a. 1 530
Serbia n.a. 5 072
1. As of 1 January 2007. Source: National Institute of Standardisation and Metrology of the Republic of Moldova.
Source: Information on transposition of standards was provided by governments in their self-assessments and cross-
checked with the 2009 European Commission’s reports on the progress of candidate and potential candidate
countries.
Institutional and legislative framework for certification. Fo r m a l accreditation of

conformity assessment bodies can help ensure they can deliver certifications to local
economic operators. In this context, the efficiency of the accreditation system emerges as a
significant factor in preventing potential TBTs (Fliess and Schonfeld, 2006). This indicator
examines: the presence and functioning of national accreditation bodies; the existence and
main characteristics of legislation on accreditation, especially with respect to EU legislation;
and the status of membership in international and European accreditation bodies.
Since the 2006 assessment, most SEE economies have made progress in improving the
institutional framework for certification, including the creation of a functioning
accreditation system. All economies have national accreditation bodies. In Kosovo, a
Directorate for Accreditation was established within the Ministry of Trade and Industry.
Although capacities have been strengthened, institutional frameworks for accreditation
remain weak throughout the region. In particular, these institutions require additional
human resources, except for Croatia and (to a lesser extent) Albania.
In 2008, the internal functioning of accreditation bodies in Albania, Croatia and the
former Yugoslav Republic of Macedonia was brought into line with EU requirements,
following the new legislative framework for marketing of products.13 The former Yugoslav
Republic of Macedonia and Serbia are also preparing amendments to the internal statutes
of their accreditation bodies in order to comply with new EU requirements.

With regard to the legislative framework, several economies either introduced new
legislation (Albania, Croatia and the former Yugoslav Republic of Macedonia) or are
preparing changes to legislation on accreditation to bring it into line with new EU
requirements (Serbia). In addition, the former Yugoslav Republic of Macedonia has
prepared a draft law on market surveillance. Kosovo has also introduced a law on
accreditation, and secondary legislation is being drafted.
Finally, national accreditation bodies across the region are gaining ground in
integrating into European and international accreditation organisations. In 2007, the
Albanian Directorate for Accreditation signed a contract of co-operation with the European
Co-operation for Accreditation (EA). In addition, since 2008 Albania has been a member of
the International Accreditation Forum (IAF) and an associate member of the International
Laboratory Accreditation Cooperation (ILAC). The former Yugoslav Republic of Macedonia
has been a full member of EA since 2007 and an associate member of the ILAC since 2008.
Both Montenegro and Serbia signed a contract of co-operation with EA and became
associates of ILAC. Table 3.5 gives an overview of the current membership status of SEE
economies in international and European accreditation organisations.
Table 3.5. Membership in international

and European accreditation organisations
European Co-operation International Laboratory
International Accreditation Forum
for Accreditation Accreditation Cooperation
Full members/associates/
Forms of participation Full members /co-operation1 Members
affiliates2
Albania Co-operation Associate Member

Bosnia and Herzegovina Co-operation Associate n.a.
Croatia Full member Associate n.a.
Kosovo n.a. n.a. n.a.
The former Yugoslav Republic Full member Associate n.a.
of Macedonia
Republic of Moldova Co-operation Affiliate n.a.
Montenegro Co-operation Associate n.a.
Serbia Co-operation Associate n.a.
1. Full members: The members of EA are the nationally recognised accreditation bodies of the member countries or
the candidate countries, of the European Union and EFTA. Co-operation: 18 accreditation bodies signed a contract
of co-operation with EA.
2. Full members: Accreditation bodies that meet the requirements for Associates and have also been accepted as
signatories to the ILAC Mutual Recognition Arrangement. Associates: Accreditation bodies that, while not yet
signatories to the ILAC Arrangement, comply with the requirements set out in relevant standards and are
recognised in their economies as offering accreditation services. Affiliates: Accreditation bodies that are currently
operating, being developed or intended to be developed for testing laboratories, calibration laboratories,
inspection bodies and/or other services […], and declare their intention to operate their accreditation
programmes in compliance with the requirements set out in relevant standards […].
Sources: EA, ILAC, IAF.
Status and outcomes of certification arrangements. Conformity assessment (CA) can

provide significant benefits for manufacturers, but it can also act as a technical barrier to
trade.14 OECD research shows that conformity assessment bodies (CABs) around the world
are heavily involved in activities related to international trade (Fliess and Schonfeld, 2006).
This is a consequence of the fact that for some products to be traded, there must be an
assessment of the manufacturer’s conformity by a specialised government agency or
certification body. Therefore, the local presence of accredited certification bodies is
important to ensure that firms (especially small- and medium-sized enterprises) can obtain

certification without incurring prohibitive costs. At the same time, it is not necessary that
a country (especially a small one) has enough CABs to cover all aspects of testing,
calibration, inspection and certification for all sectors of the economy. In the case of
regional co-operation arrangements, it makes sense that conformity assessment
procedures are approximated for sectors with greater actual or potential intra-regional
trade, and also harmonise conformity assessment procedures for products in the same
value chain (Aldaz-Carroll, 2006).
This indicator focuses on the number and status of accredited CABs, presence of
mutual recognition agreements and outcomes of certification arrangements (as indicated
by the number of companies certified).
SEE economies have made progress in establishing a network of independent CABs
and laboratories. However, technical and human capacities remain weak almost
everywhere in the region and in many cases companies still need to rely on foreign bodies
to obtain certification. Hence, although the situation has improved (quite significantly in
some economies) since the 2006 assessment, much effort is still needed to ensure that a
functioning CA system is in place.
Table 3.6 provides an overview of the presence of accredited CABs in SEE economies.
Table 3.6. Number of accredited conformity assessment bodies

Testing Calibration Certification Inspection
Total CABs
laboratories laboratories bodies bodies
Albania 9 2 2 3 16
Bosnia and Herzegovina 16 6 2 11 35
Croatia 92 13 14 34 1551
Kosovo 3 – – 1 4
The former Yugoslav Republic 15 4 4 20 43
of Macedonia
Republic of Moldova 128 – 32 3 163
Montenegro 3 1 – 1 7
Serbia 277 25 19 50 373
1. Includes two medical laboratories.

Source: Information on the number of accredited CABs was provided by governments in their self-assessments and
cross-checked with the 2009 European Commission’s reports on the progress of candidate and potential candidate
countries, as well as with the latest available information provided on the websites of national accreditation bodies.
Multiple conformity assessment requirements and failure to recognise certification

across borders can act as a major TBT. Results from an OECD survey of exporters show that
the inability to obtain recognition in export markets for test reports and certificates issued
in the country of origin represents a significant obstacle to trade (Fliess and Schonfeld,
2006). Among other tools, mutual recognition agreements are widely used to facilitate
trade. These consist of an agreement between two or more countries of reciprocal
acceptance of conformity assessment activities taking place in the territory of the
members concerned. Accreditation bodies have also developed mutual recognition
agreements between themselves. These agreements facilitate the reciprocal acceptance of
conformity assessment results produced by accredited CABs. The most important
arrangements have been created in the framework of the European Co-operation for
Accreditation, the International Laboratory Accreditation Forum for laboratory and
calibration testing, and the International Accreditation Forum for quality and

environmental management systems certification, inspection and product certification

(Shortall, 2007).
None of the economies under consideration is a signatory to the ILAC or IAF mutual
recognition arrangements.15 However, significant progress has been made by several
economies in aligning their conformity assessment systems with those operating in the
EU, either through the Multilateral Agreement of the European Co-operation for
Accreditation (EA MLA) or negotiations for Agreements on Conformity Assessment and
Acceptance of Industrial Products (ACAA).
The EA MLA is an agreement among EA accreditation body members to recognise the
equivalence of certifications, inspections, calibration certificates and test reports issued by
accredited bodies. The EA MLA covers all aspects of conformity assessment: testing,
calibration, certification and inspection. An accreditation body can be a signatory to all MLA
areas or only some of them. In addition, accreditation bodies that are not full members of EA
can sign a bilateral agreement with the EA. A bilateral agreement gives access to the EU
market, for products tested by laboratories accredited by non EU or EFTA accreditation bodies.
Since 2006, accreditation bodies in a number of SEE economies submitted an
application to become signatories to the EA MLA for several conformity assessment areas:
Croatia (for all areas of the agreement), the former Yugoslav Republic of Macedonia (for
testing laboratories, inspection bodies and product certification bodies) and Serbia (for
testing laboratories, calibration laboratories and inspection bodies). In addition, the
Albanian Directorate for Accreditation has submitted an application to sign a bilateral
agreement with the EA.
The Stabilisation and Association Agreements foresee that the EU and the candidate
and potential candidate countries should conclude, when appropriate, ACAAs. A
commitment to an ACAA between the EU and the Republic of Moldova is also included in
the European Neighbourhood Policy Action Plan for Moldova. An ACAA is a form of
enhanced mutual recognition agreement, whereby recognition of conformity assessment
procedures is based on the adoption of the acquis communautaire in the areas covered by the
agreement. This effectively extends the EU internal market to the signatories in the sectors
covered by the agreement. Currently, Croatia and the former Yugoslav Republic of
Macedonia are the only Western Balkan economies that have initiated negotiations on an
ACAA (European Commission, 2009; and Dodevska, Stojanovska and Shahov, 2009).16 The
Republic of Moldova is also making efforts to meet the requirements for starting
negotiations on an ACAA (Commission of the European Communities, 2009).
The diffusion of standards, measured by the number of certified firms, is also important
in facilitating intra-regional trade and trade with external partners such as the EU.
Governments need to promote the use of the newly adopted standards among companies,
with the aim of boosting their export competitiveness. Data on the number of certificates
related to technical standards are not available. Thus, statistics on ISO 9001:2000 quality
management standards are used here as a proxy to compare the diffusion of certification.
Estimating the number of certificates per person allows comparability across countries.17 As
shown in Figure 3.8, most SEE economies fare badly not only in comparison with the EU8
average, but also with Bulgaria and Romania. Only in Croatia is the number of ISO certificates
is close to the EU8 level. Albania and the Republic of Moldova are the least advanced
countries in this area. At the same time, the number of certificates has been steadily
increasing since 2003, except for Albania and the Republic of Moldova (see Figure 3.9).

Figure 3.8. Number of ISO 9001 certificates per million population

ISO 9001 certificates per million population
600
500
400
300
200
100
0
ALB BIH HRV MKD MDA MNE SRB EU8 BGR ROU
Source: OECD calculations based on ISO Survey 2007. No data are available for Kosovo.
Figure 3.9. Number of ISO 9001 certificates, 2003-07

ALB BIH HRV MKD MDA MNE SRB
ISO 9001 certificates per million population
500
400
300
200
100
0
2003 2004 2005 2006 2007
Source: OECD calculations based on ISO Survey 2007. No data are available for Kosovo.
Sanitary and phytosanitary measures

The WTO SPS Agreement is the cornerstone of international legislation in the area of
sanitary and phytosanitary measures. It also constitutes the main reference point for SPS
measures in CEFTA. Box 3.5 provides an overview of the key SPS principles and how they
have been translated in CEFTA.
Agricultural commodities and foodstuffs are important export items across SEE
economies, including for intra-regional trade. The impact of SPS measures on trade therefore
deserves special attention. An OECD study of agricultural policies in emerging and transition
economies highlights that while SPS measures may be introduced for legitimate reasons
(notably protection of human health), they can also reduce export opportunities, because
necessary institutions, infrastructure and legislation often need upgrading (OECD, 2001). In
particular, transition economies face difficulties in adapting production and marketing

Box 3.5. WTO SPS Agreement and SPS provisions in CEFTA

The WTO encourages the harmonisation of SPS measures through the adoption of
international guidelines and recommendations. In particular, in addition to harmonisation
(and the corollary principle of equivalence, which states that members have to accept SPS
measures that the exporter demonstrates as equivalent), the CEFTA Parties have
committed to respecting the other general principles of the SPS Agreement, namely:
● risk assessment (SPS measures need to be based on science, and the biological and
economic consequences of stricter regulations for animal or plant life or health);
● regional conditions (there should be allowance for differential treatment of regions, due
to low incidence of a pest or disease regardless of national borders); and
● transparency (all SPS measures need to be promptly published and made available
through Information and Enquiry Points).
Article 12 of CEFTA foresees that the Parties should abide by the provisions of the WTO
SPS Agreement and co-operate in the SPS field with the aim of applying regulations in a
non-discriminatory manner. They should also exchange information. The mandate of the
CEFTA Subcommittee on Agriculture includes sanitary and phytosanitary issues.
Sources: WTO SPS Agreement; CEFTA.
systems, investing in laboratories and research facilities, and improving communication

between government and private producers. The IRI assessment of SPS measures in SEE
confirms that these are all hurdles that need to be tackled to maximise the potential for trade
in agricultural products, both intra-regional and with external partners.
The SPS theme has been addressed here using the following indicators:
● institutional and legislative framework for SPS measures; and
● transposition of European and international SPS measures.
Figure 3.10 shows the results for sanitary and phytosanitary measures.
Figure 3.10. SPS: Average scores and scores by indicators

Average: SPS Institutional framework for SPS measures
Transposition of European and international SPS measures
Score
5
0

Institutional and legislative framework for SPS measures. This indicator examines: the
presence and functioning of national institutions in charge of SPS issues (e.g. Ministries of
Agriculture and Health, and Agencies for Food Safety, Veterinary and Plant Protection); the
existence and main characteristics of SPS framework legislation, especially with respect to
EU legislation; and the status of adherence to international organisations and conventions
in the SPS field.
All SEE economies are in the process of setting up institutional frameworks to assure
control systems and evaluate compliance with national and EU measures in the areas of
food safety and quality, animal health, animal welfare, animal nutrition and plant health.
However, a common feature across the region is the difficulty in implementing the relevant
legislation due to the lack of human and financial resources, infrastructure and
information and communication systems. In particular, there should be improvements in
inter-institutional co-ordination, implementation of food safety and veterinary legislation,
capacity of relevant structures (such as inspection bodies), training of veterinary and
phytosanitary inspectors, co-operation with the scientific community and awareness in
the public and private sectors of their roles in the implementation of the SPS Agreement.
Since 2006, good progress has been achieved in Croatia, especially in enhancing staff
numbers and qualifications as well as general administrative capacity. In Albania, the Food
Safety and Veterinary Institute is the main centre for testing the quality and safety of
foodstuffs. The Food Safety and Animal Safety Inspectorates need to be strengthened with
additional staff and training of personnel. The Food Safety Agency of Bosnia and
Herzegovina recently increased its level of activity; in March 2009 a tightening of food
safety measures was announced. In addition, efforts are being made to improve co-
ordination with the Entities and local inspection services. In the phytosanitary area, the
State Plant Health Agency only recently became operational, although it was established in
2006. Since 2006, agencies responsible for SPS matters were set up in Kosovo, the Republic
of Moldova and Montenegro, but capacities are still weak. In particular, in Kosovo progress
is slow due to the agency’s poor technical equipment and inadequate human resources.
Capacities are also weak in food safety and plant protection agencies of the former
Yugoslav Republic of Macedonia. In addition, the competencies of the bodies in charge of
SPS issues overlap, and this has a negative impact on the effectiveness of inspection
procedures. Finally in Serbia, legislation introduced in 2009 streamlines the responsibilities
of the various institutions and agencies with competencies in the area of food safety.
However, additional effort is called for to strengthen inter-institutional co-ordination in the
SPS area, as noted in the 2009 Progress Report of the European Commission. The law also
foresees the establishment of an SPS Enquiry Point, in line with WTO requirements.
All SEE economies have a legislative framework for food safety, veterinary and plant
protection. Since 2006, a number of SEE economies have made progress in adopting SPS-
related framework legislation which is aligned with the EU acquis.18 More specifically the
following framework laws were newly adopted or revised since 2006:
● Food Law: Albania (2008), Croatia (2007), Kosovo (2009), Montenegro (2008), Serbia (2009).
● Law on Animal Welfare and Protection: Bosnia and Herzegovina (2009), Croatia (2006),
the former Yugoslav Republic of Macedonia (2007), Serbia (2009).
● Veterinary Law: Croatia (2007), the former Yugoslav Republic of Macedonia (2007), the
Republic of Moldova (2008), Montenegro (2007).
● Sanitary Inspection Law: Croatia (2009).

● Livestock Law: the former Yugoslav Republic of Macedonia (2008), Serbia (2009).
● Law on Plant Health and Plant Protection Products: the former Yugoslav Republic of
Macedonia (2007), Serbia (2009).
In its SPS Agreement, the WTO promotes the participation of its members in the work of
organisations that produce international standards on food, animal feed, animal and plant
health as well as other SPS issues. These organisations include: the Codex Alimentarius
Commission (dealing with food safety), the World Organisation for Animal Health – OIE19
and the International Plant Protection Convention – IPPC (dealing with the prevention of
plant pests). All SEE economies except for Kosovo are members of these organisations. Since
the 2006 assessment, two countries became parties to the IPPC: the Republic of Moldova
(2007) and Montenegro (2009). Montenegro also became a member of the OIE in 2007.
Transposition of European and international SPS measures. This indicator examines

the status of transposition of European and international SPS measures in SEE economies.
The IRI assessment shows that across the region there is a need for further streamlining of the
legislative framework as well as adoption of implementing regulations and rulebooks, the lack
of which hampers the effective deployment of safety and health inspections and controls.
Adoption of EU-compliant implementing measures in the food safety, veterinary and
phytosanitary areas has been steadily progressing in Croatia. The country is currently
improving its system of sanitary inspection, by providing a more efficient modus operandi
and higher level of co-ordination among the different structures at the state level.
Some progress has also been made in Albania, the former Yugoslav Republic of
Macedonia and Montenegro in adopting international and European measures, especially
in the areas of food safety, animal diseases and plant protection. However, in all these
economies additional efforts need to be made in adopting animal welfare and protection
measures as well as streamlining overlapping inspection procedures. Limited
administrative capacities remain a hurdle to effective implementation. Since 2006, Bosnia
and Herzegovina has improved implementation of veterinary measures and upgraded the
quality of veterinary laboratories. However, it has not adopted a comprehensive action plan
for the implementation of the food safety law or a strategy for the control of animal
diseases. The government is preparing rulebooks to implement phytosanitary legislation.
Kosovo and the Republic of Moldova have made limited progress in adopting SPS
implementing legislation. Kosovo is currently conducting an evaluation of existing measures
and a related prioritisation of new SPS measures to be adopted. In the Republic of Moldova,
transposition of European and international SPS measures is a lengthy and cumbersome
process, due to problems in inter-institutional co-ordination. In addition, there is no clear
definition of competences among different supervisory and regulatory bodies.
Following the adoption of comprehensive SPS framework legislation in Serbia in May
2009, it is expected that related by-laws and rulebooks will be adopted in the next two
years.
Administrative barriers to trade

Administrative barriers appear to be one of the main causes of concern about trade
among SEE economies. This is hardly surprising if one considers the costs associated with
trade procedures and requirements. The OECD (2009) estimates that trade transaction
costs20 can amount to up to 15% of the value of the traded good.21 In addition, empirical

evidence suggests that these costs for agro-food products are higher than those for
manufactured goods, as agro-food shipments are often subject to special border
procedures (for example SPS controls). This is significant for SEE because agri-business is
an important export category across the region.
Results of surveys on private sector perceptions of NTBs in the region, as well as
anecdotal evidence collected through private sector focus groups conducted by the OECD
Investment Compact, conclude that enhanced trade facilitation measures could yield
significant improvements in intra-regional trade. The WTO defines trade facilitation as
“the simplification and harmonization of international trade procedures”. International
trade procedures are defined as the “activities, practices and formalities involved in
collecting, presenting, communicating and processing data required for the movement of
goods in international trade”.22
The OECD Investment Compact’s assessment does not deal directly with customs
formalities and the related burden incurred by economic operators (as measured by the
number of documents for import and export and the time for import and export). The
results of studies conducted by other international organisations (e.g. the World Bank’s
Doing Business study) and surveys that were recently carried out in the region (e.g. a GTZ
survey on business perception of NTBs as well as surveys implemented by several
chambers of commerce) pointed to conclusions on the extent to which trade-related
procedures represent a barrier to trade.23
Rules of origin represent another important aspect of trade facilitation. In particular,
implementation of a pan-European system of diagonal cumulation of origin is likely to lead
to growth in intra-regional trade volumes. These volumes are currently below their
potential (including intra-industry trade). Such a pan-European system would also be likely
to facilitate creation of new value chains, and increased FDI inflows (World Bank, 2008). For
more information, see Box 3.6.
The assessment of administrative barriers to trade explored the following indicators:
● presence of licenses;
● accessibility and transparency of customs laws and trading procedures.
Box 3.6. The Western Balkans and diagonal cumulation of origin

At the Thessaloniki European Council of June 2003, the EU member states invited the
European Commission to “prepare the extension of pan-European diagonal cumulation of
origin of goods to the countries of the region in a manner consistent with all relevant
Community policies and dependent on their administrative capacity”.
Rules of origin represent an important trade policy instrument. They allow the
identification of the origin of a product. If a good has not been wholly produced in a single
country, it is considered to originate in the country where the last substantial
transformation has occurred. Rules of origin can be non-preferential or preferential. Non-
preferential rules of origin are important in determining the regime for several commercial
policy measures, such antidumping and countervailing duties, safeguard measures, tariff
quotas and trade statistics, among others. Preferential rules of origin allow goods
originating in countries that have special arrangements with a trading partner to access
the partner’s market either duty-free or at a reduced duty rate.

Box 3.6. The Western Balkans and diagonal cumulation of origin (cont.)
Cumulation of origin allows a good originating in a country to be further processed in
another country without losing its originating status. Currently, trade relations between the
EU and the Western Balkans are based on a system of bilateral cumulation, meaning that the
economies of the Western Balkans that have an FTA with the EU can cumulate with the EU
but not among themselves. Under a system of diagonal cumulation, they would be able to
cumulate also among themselves. For a system of diagonal cumulation to be put into place,
participating countries must have FTAs containing identical rules of origin and provision for
cumulation between themselves. An example may help clarify this point. Assume that 40%
of the value added of a good is produced in Croatia and 40% of the value added is produced
in the former Yugoslav Republic of Macedonia. If the EU requires that 60% of the material
used to produce the good originates in the country, under a system of bilateral cumulation
the good will not have originating status and will not benefit from preferential access to the
EU market. However, under a system of diagonal cumulation, Croatia and the former
Yugoslav Republic of Macedonia could cumulate origin. The good would include 80% of
originating material, and therefore qualify for preferential market access.
A Pan-European Cumulation System exists between the EU, EFTA (Iceland, Liechtenstein,
Norway and Switzerland) and Turkey. An extension of the system to Mediterranean countries
is currently under way, with the aim of creating a Pan-Euro-Mediterranean Cumulation
System. The 2006 European Commission Communication on the Western Balkans states that
“inclusion of the Western Balkans into this new system is the EU’s strategic aim”. One of the
main obstacles to this approach is that currently only Croatia uses the same rules of origin as
the countries of the Pan-Euro-Med Cumulation System. The protocols of origin of the other
Western Balkan economies are different, and therefore cannot be integrated in the Pan-Euro-
Med System in their current form. Article 14 and Annex 4 of CEFTA 2006 offer a first solution
to this problem, as they include provisions for adoption of Pan-Euro-Med rules of origin. Given
the delays in bringing the system into place, the Commission is preparing a zone of diagonal
cumulation of origin between the EU and the Western Balkan economies that have a free
trade agreement with the EU, the Stabilisation and Association Process (SAP) Cumulation
Area. Another interim option that has been considered is to create a SAP+ Cumulation Area
including the EU, the Western Balkans, Turkey and EFTA. However, this would require that all
CEFTA Parties conclude bilateral FTAs with the EU, Turkey and EFTA.
Source: Centre for European Perspective (2009), Seminar Report – “Movement of Goods in the Area of the
European Union, EFTA, Turkey and CEFTA: Facilitation of Co-operation Potential”, 17-18 December 2008,
Istanbul.
Figure 3.11 shows the results of the assessment of administrative barriers to trade.
Presence of licenses. The WTO defines import licensing as “administrative procedures

requiring the submission of an application or other documentation (other than those
required for customs purposes) to the relevant administrative body as a prior condition for
importation of goods” (WTO, 2009). Licenses can be automatic or non-automatic.
Automatic licenses are granted almost immediately upon request and their main purpose
is to help compile trade statistics. Non-automatic licenses are used to control imports and
can be required for economic and non-economic purposes. Economic purposes include
control of trade flows for balance of payment problems and for industrial policy objectives.
Because of the distortions they introduce, such licenses have been steadily phased out.
Licenses can also be used for non-economic purposes such as national security, protection

Figure 3.11. Administrative barriers to trade:

Average: Administrative barriers to trade Presence of licenses

Accessibility and transparency of customs laws and trading procedures
Score
5
0
of health, safety, the environment, morality, religion, intellectual property and compliance
with international obligations. These rationales are widely used by OECD countries (Geloso
Grosso, 2005).
Most SEE economies had already abolished general import and export licenses by 2006.
Licenses are therefore only applied for non-economic purposes, in line with OECD
standards. In some instances, the implementation of a liberal licensing system is still in its
early phase. In addition, in some cases, private sector representatives report problems with
implementation of the licensing regimes. This seems to be the case for the Republic of
Moldova, especially in the trade of foodstuffs and agricultural products.
Some highlights on progress since the 2006 assessment include:
● The former Yugoslav Republic of Macedonia made significant progress in facilitating
procedures to obtain licenses, notably through the introduction in 2008 of EXIM (single
window for licenses for export, import and transit). It is expected that EXIM will help
simplify the procedures and reduce the time needed for preparation of export, import
and transit documentation where licenses apply.
● In 2009, Serbia approved a new law on foreign trade transactions, introducing automatic
licensing requirements in line with WTO rules. Based on the new law, a decision on
products subject to licensing will be adopted. Import and export licenses will be limited
to public policy exceptions. The law also introduces more transparency in licensing
procedures.
In Kosovo, there is no system of exporting licensing for dual use goods, dangerous
materials, and biological and chemical products. The government is currently drafting
legislation on export licenses.
Accessibility and transparency of customs laws and trading procedures. Transparency,

consistency and predictability of customs and other trade-related regulations and
procedures are among the core principles of trade facilitation. They are explicitly included

in WTO commitments, especially Articles VIII and X of the GATT. Regarding the
transparency principle, the OECD (2002) identified the essential elements of information
that should be made publicly available to ensure trade facilitation:
● information on the operations of customs and border agencies;
● administrative guidelines explaining how import and export requirements should be
implemented;
● information on extraordinary procedures (e.g. simplified clearance procedures); and
● motives behind administrative decisions.
Besides these, any other information that might bear significantly on trade procedures
should also be made publicly available (OECD, 2002). Such information might include, for
instance, advanced rulings, outcomes of administrative and judicial appeals, or regulatory
impact assessment reports.
Making information on customs and other trade-related rules and procedures publicly
available can help reinforce the necessary complementary principles of consistency and
predictability for all traders and other economic operators.
Relative to the 2006 IRI assessment, the quality, transparency and public availability of
information on customs and other trading operations improved significantly across all SEE
economies. This occurred, for instance, through the establishment of online single enquiry
points in local languages and in English. However, 30% of the firms surveyed by GTZ in the
CEFTA area report problems in finding information about customs and procedures due to a
lack of capacity in government authorities to provide such information, or due to
inconsistent, incomplete or delayed information. This points to a need for further
upgrading of the transparency and public availability of information on customs
regulations and procedural requirements.
Customs laws and regulations, guidelines and procedures are published in a single
website in almost all SEE economies. However, in all cases only limited amount of
information is available in English (typically only the customs law and other legislation).
This is the case in Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic
of Macedonia and the Republic of Moldova. In some cases, the information provided is not
always complete, accurate and up to date.
In Montenegro, customs legislation is currently only published in the local language in
the Official Gazette. In addition, the customs website contains some information for
economic operators and travellers. A new website providing information in English is
under construction. The customs tariff law is the only information available in English in
the Serbian customs website. However, an English version of the website is currently under
construction. There is no centralised enquiry point in the Customs Administration, but one
exists on the Ministry of Finance website, with information on customs laws and
regulations in Serbian and English.
In Kosovo, the customs website includes a link to the Kosovo Integrated Tariff and the
Customs Code, as well as other relevant legislation and regulations. Information is
available in Albanian, Serbian and English. However, the website contains very limited
electronic source of information on previous rulings on origin and classification.

Subdimension: Proactive export promotion

In some cases it might be difficult for a country to launch new exports, even in an area
where it has a comparative advantage. Hence, it is important to design and implement
effective proactive export promotion policies (OECD, 2005).
This subdimension examines the efficiency and effectiveness of a country’s
institutional and operational settings for export promotion. It is broken down into two
indicators:
● presence and operations of an export promotion agency (EPA); and
● number and characteristics of export promotion programmes.
Figure 3.12 shows the results of the assessment of proactive export promotion.
Figure 3.12. Proactive export promotion subdimension:

Subdimension average: Proactive export promotion Presence and operations of an export promotion agency
Number and characteristics of export promotion programmes
Score
5
0
Presence and operations of an export promotion agency

The presence of an effective export promotion agency can be instrumental in
improving the penetration of local companies in foreign markets. While there are major
methodological challenges in attributing increased export earnings to spending on such
agencies, some research suggests a positive and sizeable relationship (Ledermann,
Olarreaga and Payton, 2006).
This indicator assesses the following characteristics (broadly based on De Wulf, 2001
and Ledermann, Olarreaga and Payton, 2006):
● Independence and autonomy: Export promotion agencies should be flexible, autonomous
institutions operating with political support at the highest level and have links with both
the public and the private sectors. Independence also gives them the power to advocate for
public policies that favour exporters. The presence of a single and strong agency is more
effective than a plethora of trade promotion agencies, and co-ordination among different
bodies should be ensured.

● Provision of both onshore and offshore services: While agencies have traditionally
focused on offshore activities (e.g. information gathering, market research, trade
representation and trade fairs), targeted onshore services (e.g. grants that match
investments made by companies to open new markets, and support to enterprises in
obtaining certification) can also be very valuable.
● Adequate staff and funding.
● Evaluation of results: Evaluations should track the performance of exporters that benefit
from the support of an export promotion agency.
Export promotion agencies also operate as investment promotion agencies in Albania,
Croatia, the Republic of Moldova and Serbia. Both Serbia and Croatia have a well structured
and fully operational agency and offer a broad range of integrated services, including
export financing and export credit insurance. In addition, the Serbian Investment and
Export Promotion Agency (SIEPA) monitors the impacts and results of export promotion
programmes on a regular basis. Agencies in Albania and the Republic of Moldova would
benefit from stepped up human and financial resources. However, AlbInvest (Albanian
Investment and Export Promotion Agency) has made some progress in its operations and
the quality of services offered. In both countries, co-ordination with other trade promotion
organisations should be improved.
In Bosnia and Herzegovina, an Export Promotion Agency (BHEPA) was created in 2007
within the Foreign Trade Chamber. However, BHEPA suffers from a lack of resources, and its
main activities are training and dissemination of information. Since 2007, an Export Co-
ordination Council (including public and private sector representatives) is tasked with co-
ordinating export promotion activities.
There are no independent EPAs in the former Yugoslav Republic of Macedonia or
Montenegro. Currently, the Ministry of Economy implements export promotion activities in
the former Yugoslav Republic of Macedonia. The Macedonian Bank for Development
Promotion has a role in promoting exports through the provision of trade financing. Export
promotion activities are occasionally undertaken by Chambers of Commerce and Economy.
In 2009, the Conference on Enhancing Macedonian Exports (see Indicator 1.2) recommended that
an export promotion agency be established, either as an autonomous body or within another
agency (investment promotion agency or other).24 In Montenegro, the Department for Export
Promotion (within the Directorate of SME Development of the Ministry of Economy) is in
charge of trade promotion activities.
In Kosovo the investment promotion agency (IPAK) has the mandate to promote
exports. However, the activities of the agency in this sphere are very limited and there is
almost no staff dedicated to export promotion.
Number and characteristics of export promotion programmes

Export promotion services and programmes can be grouped into four broad categories:
country image-building (including promotional events and policy advocacy), expert
support services (including training and information on trade finance, customs),
marketing (including trade fairs and exporter missions), and market research and
publications (Ledermann, Olarreaga and Payton, 2006). It is important that export
promotion programmes receive adequate funding. Donor financing can be useful, but
should be temporary and gradually replaced by adequate domestic resources (De Wulf,
2001).

This indicator looks at the range of available export programmes, their

comprehensiveness and co-ordination, and the degree to which they remain funded by
donors.
Since the 2006 assessment, Albania, Croatia, the Republic of Moldova and Serbia have
approved multi-annual export promotion strategies. In Montenegro, an export strategy was
launched in 2005 and it is planned to be expanded and re-financed. In the former Yugoslav
Republic of Macedonia, a programme to support SME competitiveness (including an export
promotion component) was approved in 2009. No comprehensive export promotion
strategy has been adopted in either Bosnia and Herzegovina, or Kosovo. For Bosnia and
Herzegovina, the adoption and implementation of an export promotion strategy will be one
of the outputs of an EU-funded project that started in 2009.
With regard to the type of programmes provided, Albania, Croatia, the former
Yugoslav Republic of Macedonia, the Republic of Moldova, Montenegro and Serbia have
cost-sharing support schemes. Under these programmes, governments contribute part of
the export promotion costs sustained by exporters. Albania has been operating a cost-
sharing support scheme since 2006, following introduction of the export competitiveness
fund. Budgets are still relatively limited in Albania, the former Yugoslav Republic of
Macedonia, the Republic of Moldova and Montenegro.
SEE economies still benefit from technical assistance support to build databases,
develop contacts in foreign markets, and upgrade skills and operational tools. However, in
most cases financial resources are largely provided from state budgets.
In Bosnia and Herzegovina, export promotion activities remain fragmented, mostly
donor-supported and conducted at Entity or regional development level. In Kosovo, export
promotion is conducted on an ad hoc basis, and financial support comes almost entirely
from foreign donors.

The “Trade Policy and Facilitation” dimension of the IRI has assessed the progress
made by SEE economies in implementing an open and liberal trade regime conducive to
investment and growth. A main finding of the assessment is that since 2006, all SEE
economies have made some progress in strengthening their ties with the multilateral
trading system and in furthering intra-regional trade. Advancements in WTO negotiations
for some of the region’s economies that are still not members, entry into force of
symmetric trade arrangements with the EU and the implementation of CEFTA are all
evidence of progress. In addition, levels of applied tariffs for agricultural and non-
agricultural products are adjusted to the world average, and the regimes for other non-
tariff measures such as licenses and quantitative restrictions are very facilitatory.
However, in other areas, progress has been much more uneven. In particular, the
following policy conclusions should be taken into consideration:
● Inter-institutional co-ordination in trade policy formulation and implementation should
be strengthened in Bosnia and Herzegovina, Kosovo and the Republic of Moldova. In
Bosnia and Herzegovina, co-operation between ministries at State and Entity levels is
relatively well established in the design and formulation of foreign trade policy and
legislation. Yet the real challenge lies in implementation, due to the lack of adequate co-
ordination and co-operation mechanisms.

● In all SEE economies, mechanisms for consultation with civil society on trade issues
should be improved to include less powerful business representatives and other
stakeholders, such as trade unions, non-governmental organisations and academics.
● No SEE economy has employed analytic tools and models to systematically monitor the
impact of trade measures on the national economy. At a minimum, trade-related
regulatory impact assessments should be undertaken that include quantitative and/or
qualitative scenario analysis. Given the scarcity and high opportunity cost of resources
used for public policy purposes, it is suggested that greater use could be made of external
sources of policy analysis, such as academia.
● The majority of SEE economies (with the notable exception of Croatia and the former
Yugoslav Republic of Macedonia) should speed up the adoption of the EU sectoral acquis
for industrial products (both Old Approach and New Approach). Priority should be given
to strategic products and sectors. This is especially the case for Bosnia and Herzegovina,
Kosovo, Montenegro and Serbia.
● The institutional framework for accreditation should be strengthened, in particular by
increasing the number and qualifications of staff of national accreditation bodies. This
recommendation should be taken into consideration by all governments across the
region, with the exception of Croatia.
● Governments across the region should further support the establishment of a network of
independent conformity assessment bodies to facilitate certification for local firms,
especially SMEs. Governments should also promote the use of standards among
companies, with the aim of boosting export competitiveness. This is especially the case
in Albania, Bosnia and Herzegovina, Kosovo, the Republic of Moldova and Montenegro.
● In the sanitary and phytosanitary area, it is often difficult to implement the
legislation due to a paucity of human and financial resources, infrastructure, and
information and communication systems. In particular, improvements should target
inter-institutional co-ordination, implementation of food safety and veterinary
legislation, the capacity of relevant structures (such as inspection bodies), training of
veterinary and phytosanitary inspectors, co-operation with the scientific community,
and awareness in the public and private sectors of their role in the implementation
of the SPS Agreement.
● Despite some improvements in trade facilitation, businesses still face hurdles in finding
information about customs and trading procedures, due to a lack of capacity in
government authorities to provide such information, or due to inconsistent, incomplete
or delayed information. This finding highlights a need for further upgrading of the
transparency and public availability of customs regulations and procedural
requirements.
● Consideration needs to be given to how export promotion agencies should be
strengthened. In some instances (Albania, Bosnia and Herzegovina, Kosovo, the former
Yugoslav Republic of Macedonia and the Republic of Moldova), this would necessarily
involve an increase in the budget allocations for export promotion agencies, but such
increases would need to go hand in hand with consistent adoption of documented best
practices. Bosnia and Herzegovina, and Kosovo should rationalise their export
promotion programmes by integrating them into a comprehensive export promotion
strategy.

Table 3.7. Trade policy and facilitation: Final scores

Trade policy strategy
Institutional co-ordination 4.0 3.0 4.0 3.0 4.0 4.0 4.0 4.0
and evaluation
formulation
Public-private consultation 3.0 2.0 4.0 2.0 3.0 2.0 3.0 3.5
Monitoring and evaluation of the impacts of trade 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
policy
Subdimension average: Trade policy formulation 3.0 2.3 3.3 2.3 3.0 2.7 3.0 3.2
and evaluation
WTO 5.0 3.0 5.0 1.0 5.0 5.0 3.0 3.5
Trade liberalisation
EU 4.0 4.0 5.0 1.0 5.0 2.0 4.0 4.0

Customs duties on capital goods 4.0 3.0 4.0 2.0 3.0 4.0 4.0 3.0
Quantitative restrictions 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Subdimension average: Trade liberalisation 4.5 3.8 4.8 2.3 4.5 4.0 4.0 3.9
Institutional framework for standards 4.0 3.0 4.0 2.0 4.0 3.0 3.0 3.5
Transposition of European and international 4.0 4.0 5.0 2.0 4.0 3.0 3.0 3.5
standards
TBT
Institutional framework for certifications 3.0 2.0 4.0 3.0 4.0 2.0 3.0 3.5
Status and outputs of certifications arrangements 3.0 1.0 3.0 2.0 3.0 2.0 3.0 3.0
Average: TBT 3.5 2.5 4.0 2.3 3.8 2.5 3.0 3.4
Non-tariff barriers
SPS: institutional framework 3.0 2.0 4.0 3.0 3.0 3.0 4.0 3.0
SPS: transposition of European and international 3.0 2.0 4.0 2.0 3.0 3.0 3.0 3.0
SPS
measures
Average: SPS 3.0 2.0 4.0 2.5 3.0 3.0 3.5 3.0
Licenses 5.0 5.0 5.0 5.0 5.0 5.0 5.0 40
Administrative
barriers
to trade
Accessibility and transparency of customs laws 4.0 4.0 4.0 4.0 4.0 4.0 3.0 3.0
and regulations
Average: Administrative barriers to trade 4.5 4.5 4.5 4.5 4.5 4.5 4,0 3.5
Subdimension average: Non-tariff barriers 3.7 3.0 4.2 3.1 3.8 3.3 3.5 3.3
promotion
Export promotion agency 4.0 3.0 4.0 1.0 2.0 3.0 3.0 5.0
Proactive
export
Export promotion programmes 3.0 3.0 4.0 1.0 3.0 2.0 4.0 4.0
Subdimension average: Export promotion 3.5 3.0 4.0 1.0 2.5 2.5 3.5 4.5
Dimension average: Trade policy and faciliation 3.8 3.2 4.2 2.5 3.6 3.3 3.6 3.7
Notes
1. Accreditation is the procedure whereby a designated body evaluates and attests that testing and
calibration laboratories, certification bodies and inspection bodies are technically competent to
perform a specified task.
2. However, in some cases the lead institution is the Ministry of Economy (as in the Netherlands) or
the Ministry of Foreign Affairs (this is the case in Australia, Norway and New Zealand in the OECD,
and Estonia in Eastern Europe) (Sally, 2001).
3. For more detailed information on the adoption and use of RIA in SEE, see the chapter in this report
on regulatory reform and parliamentary processes.
4. The Republic of Moldova is an EU partner country within the European Neighbourhood Policy, and
therefore is not included in the enlargement process. A 1998 Partnership and Co-operation
Agreement provides the legal basis for political, economic and institutional co-operation between
the EU and the Republic of Moldova.
5. The government of the Republic of Moldova reports that negotiations for a new Association
Agreement (including an FTA) between the EU and the Republic of Moldova could be launched in
January 2010.
6. International trade data are constructed according to product type, not according to the use of the
good. Therefore, official statistics do not report trade flows in intermediate, consumption or
investment goods. Following Eaton and Kortum (2001), trade in capital equipment can be
approximated by trade in goods associated with major equipment-producing industries.

Accordingly, capital goods can be defined by the following categories of the International Standard
Industrial Classification: machinery (except electrical), electrical machinery, and professional and
scientific equipment.
7. According to the classification of the International Trade Centre, a country is at the lowest end of
the protection scale if its duties range between 0% and 5%.
8. Article 3 of CEFTA foresees the abolition of all existing quantitative restrictions on imports and
exports in the trade between the Parties and prohibits the introduction of new restrictions.
9. Articles 12 and 13 contain provisions on sanitary and phytosanitary measures, and technical
barriers to trade, respectively. Article 14, Rules of Origin and Co-operation in Customs
Administration, includes a provision by which the Parties “shall simplify and facilitate customs
procedures and reduce, as far as possible, the formalities imposed on trade” In addition, Article 44
introduces a general transparency principle for the publication of laws, regulations, judicial
decisions and administrative rulings, one of the cornerstones of trade facilitation as foreseen in
Article X of the GATT.
10. For example, a review of the literature on the effects of standards and regulations on exports and
imports shows that in most cases the use of international standards in a given country has a
positive and significant effect on that country’s exports and imports (Swann, 2009). However, in
most cases the presence of national standards in a given country has a negative and significant
effect on that country’s imports.
11. The main international standardisation bodies are: the International Standardisation Organisation
(ISO), the International Electrotechnical Commission (IEC), and the International
Telecommunications Union (ITU). The main European standardisation bodies are: the European
Committee for Standardisation (CEN), the European Committee for Electrotechnical
Standardisation (CENELEC) and the European Telecommunications Standards Institute (ETSI).
12. Until the 1980s, the then European Economic Community set very detailed product specifications
that had to be approved by unanimity. This slowed down considerably the elimination of non-tariff
barriers and the achievement of the single market. Hence, in 1985 the New Approach was
introduced. The New Approach is based on the following key principles: EU legislative
harmonisation is limited to essential requirements; European standardisation organisations draw
up the corresponding technical standards; standards are voluntary, but a producer is obliged to
prove that his products comply with the essential requirements; and public authorities are
responsible for market surveillance, i.e. once the product is put on the market, it has to be ensured
that it complies with the essential requirements. The Old Approach is still used in some areas,
such as cars, food and cosmetics.
13. The new EU legislative framework includes two pieces of legislation: Regulation 765/2008/EC
(requirements for accreditation and market surveillance relating to the marketing of products) and
Decision 768/2008/EC (a common framework for the marketing of products). The Regulation will
enter into force on 1 January 2010.
14. Conformity assessment “ensures that the product or process satisfies technical specifications that
are set by standards” (Vancauteren, 2009). Conformity assessment can involve the following
procedures: testing (declaration of conformity through testing conducted at the manufacturer’s
own laboratory or by a third party laboratory), inspection (independent inspection of parts,
materials and final products), certification (formal certification by a third party that a product
conforms to particular standards, which often includes the granting of a mark, certificate or label),
registration (independent audit of manufacturing quality systems that results in registration with
a quality system register, i.e. ISO 9000) and accreditation (evaluating and attesting that testing and
calibration laboratories, certification bodies and inspection bodies are technically competent to
perform a specified task). Source: Vancauteren (2009), Aldaz-Carroll (2006) and Wilson (1995).
15. Among SEE economies only Albania is a member of IAF. However, it has not yet been admitted to
the IAF Multilateral Agreement.
16. For Croatia, the first round of negotiations was held in July 2009. Negotiations between the EU and
the former Yugoslav Republic of Macedonia were initiated in May 2008 and so far four rounds of
negotiations have been held.
17. Ideally, the ratio between the number of certificates and the number of firms in the economy
should be used. However, this statistic is not readily available across countries. In addition, while
certificates used to be obtained mostly by manufacturing firms, standards have been increasingly
used in other areas such as information technology, education, health and social work.

18. More detailed information on SPS implementing measures is provided under Indicator 3.6
(“Transposition of European and international SPS measures”).
19. The historical acronym OIE comes from the previous name of the organisation in French: Office
International des Épizooties.
20. OECD (2009) makes the distinction between directly incurred costs, such as expenses relating to
supplying information and documents to the concerned authority, and indirectly incurred costs,
such those deriving from procedural delays. Evidence suggests that both types of costs occur
frequently in intra-CEFTA trade.
21. Engman (2005) specifies that trade transaction costs related to customs and administrative
procedures range between 1% and 15% of the transaction value, with estimates for most countries
falling within the low or middle range.
22. Trade facilitation is therefore affected by several articles under the GATT (V: freedom of transit; VII:
international system of customs valuation; VIII: fees and formalities connected with importation
and exportation; and X: publication and administration of customs regulations); the Agreement on
Customs Valuation, Import Licensing, Preshipment Inspections, Rules of Origins, Technical
Barriers to Trade; and the Agreement on the Application of Sanitary and Phytosanitary Measures.
23. For example, the 2010 Doing Business study broadly confirms that SEE economies have made
progress in the area of trade facilitation. In the period 2006-09, the following improvements were
observed: time to export has been reduced by 13 days in Albania, 6 days in Bosnia and Herzegovina,
15 days in Croatia and 15 days in Macedonia (but has not changed in the Republic of Moldova,
Montenegro or Serbia); time to import has been reduced by 16 days in Albania, 9 days in Bosnia and
Herzegovina, 2 days in Croatia and 14 days in Macedonia (but has not changed in the Republic of
Moldova, Montenegro or Serbia).
24. This was the situation at the time this assessment was concluded. Subsequently the government
of the former Yugoslav Republic of Macedonia informed the OECD that in December 2009, it
adopted a law establishing an Agency for Investment and Export Promotion. According to the law,
the Investment Promotion Agency (Invest Macedonia) will also be in charge of export promotion,
as of the second half of 2010.
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© OECD 2010
Chapter 4
Access to Finance
141
I.4. ACCESS TO FINANCE
4.1. Key findings
Figure 4.1. Access to finance: Dimension average scores

Score
5
0
● Access to finance is a pressing concern for companies, and in particular small and
medium-sized enterprises (SMEs) in South-East Europe (SEE).
● Bank lending is the dominant form of external finance for firms. Development of stock
markets in the region is currently limited and private equity instruments are relatively
scarce.
● The difficulties of obtaining loans experienced by SMEs can be partly attributed to
limited competition in the banking sector.
● Following the financial crisis, SMEs in South-East Europe have found it increasingly difficult
to access finance, in particular due to the very high level of collateral required by lenders.
● In many SEE economies, credit lines dedicated to financing SMEs have been set up by the
government or by international financial institutions. However, such programmes lack
comprehensive funding and only partially bridge the finance gap.
● While all countries collect data to monitor systemic risk in their banking sectors, only
Serbia could provide evidence of data being collected for the purpose of analysing the
effectiveness and suitability of policies to improve access to finance.
● In Kosovo, more work is needed to develop fully formalised insolvency procedures.
● Measures to speed up insolvency procedures, in particular establishing out-of-court
workouts (effective in Bulgaria, in the former Yugoslav Republic of Macedonia and the
Republic of Moldova), should be promoted.
● Governments should provide sufficient support for companies to comply with disclosure
requirements, and accounting and auditing standards (e.g. support to accountancy
organisations, training in business centres).

● Credit bureaus are well developed in most South-East Europe economies. In Serbia and
Croatia, coverage is very high, both on individuals and on companies. In the other
economies, the coverage and reliability of information is not always sufficient.
● Public and/or private collateral registries exist in most South-East Europe economies.
Coverage is particularly high in Serbia and in Croatia. In other SEE economies, however,
additional work is needed.
● Cadastral registration is well established in most economies, although coverage and
reliability could be improved in rural areas. Digitisation of information is well developed
in Bosnia and Herzegovina, the Republic of Moldova, Montenegro, Romania and Serbia.
● Leasing is widespread and the legal framework for leasing has been developed in most
economies. Supervision of the leasing industry is generally performed by the central
bank, although, in many cases, monitoring appears limited.
● Outside of Croatia, factoring is not common in South-East Europe. Bulgaria, the Republic
of Moldova, Montenegro and Romania have implemented laws defining and regulating
factoring, but no such legal framework exists elsewhere.
● Venture capital and business angel activity are very scarce in the region. Croatia actively
promotes both forms of investment. Other economies might consider measures to
facilitate the emergence of a market for informal equity investments.
● Microfinance institutions have operated in South-East Europe for many years. However,
the line between their activities and standard banking operations is increasingly blurred.
Governments should consider adapting the legal and supervisory frameworks.
● Credit guarantee schemes have been launched in most SEE economies. Apart from
Croatia and Romania, however, they appear to have limited economic impact. Aspects of
their design may need to be reconsidered.
● Export guarantee schemes are well developed in Croatia, Romania and Serbia. In the
other economies of the region, however, such initiatives are still to be developed on a
large scale.
4.2. Access to finance assessment framework

In this chapter, as described in Figure 4.2, two sets of indicators have been used. These
reflect the descriptive and normative aspects of the assessment. On the descriptive side,
the assessment provides evidence on the status of access to finance for companies, and in
particular SMEs. Recognising that different economic situations call for different financial
sector designs, the goal here is not to propose a single, normative model, but instead to
analyse specific features of the financing environment in SEE.
On the normative side, the assessment seeks to provide guidance for governments on
policy measures to improve firms’ access to finance. Although the structure of the financial
sector differs by country, experience in OECD countries shows that a comprehensive legal
and regulatory framework is a pre-condition for financial sector development.
Furthermore, governments can take a number of measures to further develop credit
markets. These measures include policies promoting the development of a diverse set of
financial products, the establishment of various types of guarantee schemes and
investment readiness among companies. Figure 4.2 describes the four domains where
policy makers can contribute to improving credit environment. In each of these, best

144
I.4.
Figure 4.2. Access to finance assessment framework
ACCESS TO FINANCE
ACCESS TO FINANCE
1. Policy development
and monitoring
Descriptive overview Policies/measures affecting access to finance
2. General status 4. Legal and regulatory 5. Availability of financial

3. The banking sector 6. Loan guarantee schemes 7. Selected demand-side skills
of debt and equity finance framework instruments
2.1. Forms of financing 3.1. Loan volume 4.1. Insolvency law 5.1. Leasing 6.1. Credit guarantee schemes 7.1. Investment readiness
2.2. Identified barriers 3.2. Sector structure 4.2. Credit information services 5.2. Factoring 6.2. Mutual guarantee schemes
2.3. Equity finance 3.3. Banking regulation 4.3. Cadastre 5.3. Venture capital 6.3. Export guarantee schemes
development
3.4. Stability 4.4. Collateral and provisions 5.4. Business angel network
4.5. Registration
3.5. Access to loan facilities 5.5. Microfinance
of moveable assets
practices from both OECD and non-OECD economies have been identified. These best
practices serve as the benchmark against which SEE economies have been assessed.
4.3. Overview of access to finance in South-East Europe

Being able to access external finance is a critical component of a firm’s growth.
Without external funding, firms have limited capacity to expand operations or purchase
new equipment, and difficulties refinancing existing loans can even threaten a firm’s
sustainability. Surveys of investors and entrepreneurs in SEE show that access to finance is
a major concern.1 It is therefore important, especially in light of the current financial crisis,
that the main obstacles to accessing finance in the region are better understood and
addressed.
A main feature of the financing environment of companies in SEE is the dominance of
banking institutions. In every SEE economy, bank finance is rated by firms of all sizes as the
most used form of external finance. As can be seen from Figure 4.3, the 2009 edition of the
Business Environment and Enterprise Performance Survey (BEEPS) performed jointly by the
European Bank for Reconstruction and Development and the World Bank shows that bank
loans represent 40% to nearly 80% of external funds obtained by firms for the purchase of
new equipment in SEE economies.
Figure 4.3. Share of bank loans in external financing of new fixed assets
%
100
80 76
73 73
61
60 58
55
48 48 47
43
40
20
0
Source: BEEPS.
The dominance of the banking sector has two origins. First, for the past few years, the
banking sector in the region has been growing at a rapid pace due to increased, albeit still
limited, competition and the arrival of foreign banking institutions. Second, despite
significant recent developments equity finance, and particularly stock exchanges, remains
under-developed. This situation particularly affects SMEs as they often have risk profiles
that make equity finance more appropriate than debt finance.
This chapter first gives a general overview of the various forms of finance available to
companies. Financial products are mainly provided by banks or financial markets, and the
development of both forms is assessed. Finally, because SMEs often face particular
problems in gaining access to finance, a focus is put on their situation.

Evolution of the banking sector

The banking sector in South-East Europe has developed rapidly over the last few years.
Total assets held by the banking sector increased from EUR 112 billion in 2005 to EUR 224
billion in 2008, an average annual growth of more than 25.8%. Domestic credit provided by
banks represented 35% of GDP for the region in 2005 and 51% in 2008. Despite such brisk
growth, credit penetration in SEE still remains small compared to OECD markets. In the
OECD area, in 2008, domestic credit provided by the banking sector represented on average
194% of GDP. In parallel, interest rate spreads decreased substantially over recent years, on
average from 9.9% in 2005 to 6.4% in 2008. Lending rates which had decreased until mid-
2007 have increased since then, reflecting higher rates on deposits.
Empirical evidence on the intensity of competition in the banking sector in SEE is
ambiguous. While the decreasing interest rate spread suggests that competition has
increased, activity is still concentrated in a limited number of large banks. In all SEE
economies besides Bosnia and Herzegovina, and Serbia, the five largest banks represent
over 50% of total assets in the banking sector, a figure that has remained fairly stable since
2003. Overall, the number of banking institutions has actually decreased since 2005.2 This
reflects the focus put by regulators in SEE on maintaining the stability of the banking
system, for example through high capital requirements, even though this may limit
competition in the banking market. Private sector representatives interviewed by the OECD
project team generally point to the fact that the increasing dominance of foreign
ownership in the banking system in SEE had a positive impact on the market. Indeed,
central bank data show that foreign-owned banks issue about 70% of loans in SEE, and
their presence in the region is considered to have increased efficiency.
Consumer finance has greatly expanded in the region since 2005. Hence, there are
concerns that growth in the credit market has concentrated on personal credit at the
expense of corporate credit, as personal credit is deemed to be more profitable and less
risky. As seen in Figure 4.4, domestic credit to the private sector actually increased both to
individuals and to companies between 2005 and 2008. However, in most economies, loans
to companies represent a decreasing share of total credit to the private sector. In
economies, such as the former Yugoslav Republic of Macedonia and the Republic of
Moldova, personal credit is still limited. In the other economies, the decreased share of
credit to companies could indeed be the sign of a reduced willingness of banks to address
corporate customers.
Financial market development

Equity finance is essential for firms. A key component of equity finance is a well-
established capital market where investors can trade various types of securities. Cross-
country surveys show that transparent and liquid capital markets are instrumental in
helping companies raise funds and reduce their reliance on the banking system.
Capital markets were created in SEE to support the privatisation of large publicly
owned companies in the 1990s. However, since then these capital markets have not grown
significantly. Figure 4.5 shows that stock market capitalisation remains low, particularly in
the former Yugoslav Republic of Macedonia, the Republic of Moldova and Romania.3
Liquidity is also very limited. Both elements suggest that stock markets are currently not
sufficiently well developed to provide significant finance to companies. Initial public
offerings (IPOs) represent only a marginal part of exit transactions4 and very few IPOs have

Figure 4.4. Evolution and composition of domestic credit to the private sector
2005-2008 (in % of GDP)
Credit to companies Credit to individuals

%
90
81
80
74
70 65
60 58
53
50
44 44 44
38 38
40 36 34 37
30 28
25 24
18 20
20 15 17
10
0
05 08 05 08 05 08 05 08 05 08 05 08 05 08 05 08 05 08 05 08
Sources: World Bank World Development Indicators, Central bank data.

Figure 4.5. Size and liquidity of stock markets in South-East Europe

(2008, in % of GDP)
Market capitalisation (in % of GDP) Turnover (in % of GDP)

%
80
63
60
52
40
33
24
22
20 18
9 10
9
3 3 2 3 2 2 2
0
(2004)
Sources: Individual stock market data; World Bank, World Development Indicators.
taken place. Instead, exit occurs through outright sale to another investor or through
repurchase of its own shares by the company. Regional consolidation of stock markets (e.g.
via partnerships or mergers) could improve their relevance and growth prospects.
However, given the small sizes of the region’s economies, a consolidated regional stock
market may not be big enough to significantly improve equity finance. Policy makers
should therefore focus on measures to allow companies to list on more developed stock
exchanges. Some companies, such as A&D Pharma in Romania, or Hrvatski Telecom in
Croatia, have already done so by issuing depositary receipts on the London Stock Exchange.

Situation of small- and medium-sized enterprises

47% of SEE companies consider access to finance a significant obstacle to their growth
and development.5 Particularly hard hit are SMEs. Because the funds they need are beyond
the capacity of informal lenders (e.g. family and friends), SMEs generally obtain financing
through banks.6 However, the higher administrative costs and risks involved in lending to
SMEs reduce banks’ willingness to lend to them. Interviews and evidence collected as part
of the IRI show that, in SEE, while larger firms typically have both long- and short-term
loans, SMEs tend to use short-term loans, including credit cards and overdraft facilities.
Moreover, when large firms’ loan applications are rejected, it is generally due to low
profitability. For SMEs, however, a lack of both collateral and project/borrower information
are generally behind the rejection. These facts support the widespread view that SMEs in
SEE face an acute finance gap.
SEE banks are generally profitable, well capitalised and have good quality portfolios.
As a consequence, the banking sector was able to withstand the initial shock of the global
financial crisis. However, liquidity has suffered recently. In particular, foreign-owned banks
have had more difficulties increasing the funding provided by credit lines from foreign
parent banks. In addition, worsening economic conditions have reduced firms’
creditworthiness. Both factors have resulted in deteriorating credit conditions. Private
sector representatives have indicated that banks are demanding higher interest rates and
more collateral.7
In most economies in the region, dedicated SME credit lines have been set up. These
are funded either by the government or by international financial institutions. In Croatia, a
scheme funded by the Croatian Bank for Reconstruction and Development and the Agency
for SMEs (HAMAG) is particularly well developed. International financial institutions
including the World Bank, the European Bank for Reconstruction and Development, the
European Investment Bank and KfW have also established numerous SME-specific credit
lines in the region. While in some economies in the region these credit lines represent a
significant share of long-term funding to SMEs, they are usually still limited in size and
scope. Dedicated SME credit lines can only be one small part of the reform process. All the
more since, as rigorous impact assessment of national programmes is generally lacking,
the effectiveness of many of these schemes has not been demonstrated.
Box 4.1. Implementation of JEREMIE in Romania

The Joint European Resources for Micro to medium Enterprises (JEREMIE) is a joint
initiative of the European Commission, the European Investment Fund and the European
Investment Bank to help SMEs in the member states access finance. It consists of a set of
market-driven financial tools, financed by the European Regional Development Fund,
usually with co-financing from local authorities, and that can be deployed in each of the
economies covered, with or without the support of the European Investment Fund.
Programmes are developed based on applications by participating countries at the
national, regional and local level. Although the programme is not available to non-
members economies, some of its features could be considered in the design of support
programmes for SMEs in SEE.
As an umbrella fund, JEREMIE does not target SMEs directly. Instead, it offers financial
instruments to intermediaries who can then channel them to SMEs. The main financial

Box 4.1. Implementation of JEREMIE in Romania (cont.)

products offered by the JEREMIE Holding Fund include guarantees, co-guarantees and
counter-guarantees, equity guarantees, (micro) loans, securitisation, venture capital, and
funds to finance business angel matching activities and investments in technology
transfer. Prior to the launch of a national initiative, an investment strategy is defined and
an investment board is set up. The participating financial intermediaries in the
participating country are then selected based on a due diligence process.
Romania was one of the first EU member states to participate in the JEREMIE initiative. The
government wanted to provide financial support to SMEs. The European Investment Fund
and the government of Romania signed a funding agreement in February 2008, allocating
EUR 100 million to SME development, of which 60%-70% would be used to set up credit
guarantee facilities. The remaining 30%-40% would cover venture capital funds. Following
the agreement, an investment board composed of five representatives from the government
and from the banking sector was appointed. Quarterly and annual reports are submitted to
the investment board which takes strategic decisions regarding investment strategy and
planning, operations, reporting processes, budgets and analysis of impact on the economy.
JEREMIE has been set up to reduce the high cost of accessing financial instruments and
develop the product portfolio offered by banks to SMEs, which is still insufficiently diversified.
As the initiative has been launched only recently, it is still difficult to measure the outputs.
However, the governance structure as well as rigorous monitoring and reporting that have
been set up ensure that the scheme has a significant additional impact on the economy.

Subdimension: Policy development and monitoring
Policy aimed at facilitating companies’ access to finance must be based on sound
estimates of the size and scope of the constraints encountered. In order to have a
comprehensive understanding of the situation, governments collect data provided by the
banking sector as well as other sources. In particular, specific enterprise surveys have been
developed to assess barriers to finance and evaluate the impact of potential policy measures.
In SEE economies, there is no systematic data collection to monitor access to finance.
Individual central banks do collect information on their banking sectors. However, these
statistics are only collected for prudential supervision and assessment of the stability of
the banking system. Apart from a few donor-funded projects, no surveys targeting users of
finance are conducted. Although some data collection does occur in certain institutions
(e.g. credit registries, individual commercial banks), data related to firm financing
constraints are not systematically collected by governments in SEE. Moreover, the data
available are not analysed for policy making purposes. The sole exception to this is in
Serbia where a start-up fund was created by the Ministry of Economy and Regional
Development following a survey of potential users.
Subdimension: Legal and regulatory framework

The strength of contract law and the ability of courts to enforce contract law are key to
a sound financial industry. In SEE economies, the legal framework governing contracts in
the financial sector appears to be well developed. Evidence collected as part of the IRI
suggests that contract law is not an obstacle to the development of access to finance in SEE.

Indeed, it appears that creditor protection, credit information and collateral requirements
contribute much more to firms’ financing constraints, particularly those of SMEs.
The assessment framework relies on three indicators that evaluate the insolvency
regulatory framework, the information-sharing schemes, the cadastre, the collateral
requirements and the policy measures taken to combat their negative impact on firms, and
the registration system for movable assets. Figure 4.6 shows that, apart from Kosovo, the
legal and regulatory framework for access to finance is well developed in SEE. Serbia is the
economy with the most comprehensive framework; Croatia and Romania also have well
developed frameworks.
Figure 4.6. Legal and regulatory framework subdimension: Average scores

Score
5
0
Insolvency law
Insolvency laws contain the formal procedures to be followed when borrowers are in
default; they are therefore central to guaranteeing investor protection. The indicator on
insolvency law assesses the extent to which the current status of insolvency laws and their
implementation in SEE present a barrier to obtaining finance. A large number of empirical
studies (see for example La Porta [2000] or Levine [1998]) have shown a strong, positive
correlation between the strength of investor protection and firms’ financing constraints.
The assessment of insolvency regulation is mainly based on the following three good
practices: deadlines for dealing with insolvency cases are clearly defined in order to avoid
delays and uncertainty; insolvent companies are given a chance to reorganise, rather than
being systematically liquidated, so as not to discourage entrepreneurs from undertaking
innovative projects; and out-of-court agreements are allowed and encouraged, providing
affected parties with a potentially quicker and more efficient insolvency route and easing
the burden on the court system.
Insolvency laws in SEE are well developed. All economies have set up specific laws
governing insolvency procedures, with the exception of Kosovo where insolvency is
governed by commercial law and is not well formalised. Regulations provide for both
company liquidation and reorganisation when possible. Moratoria have been established
to enable firm management to submit a rescue plan to creditors, and clear tests for
eligibility are in place. In addition, bankruptcy administrators are well regulated and the

SEE insolvency laws stipulate the qualifications, training and certification that bankruptcy
administrators must obtain. However, despite their good design, insolvency laws are not
systematically implemented and insolvency procedures often take a long time. According
to the 2010 World Bank Doing Business Report, procedures to close a business take on
average 2.8 years, compared to 1.7 years in the OECD.
In many SEE economies, insolvency laws and their regulations have been the subject
of numerous reforms in recent years and, in many cases, implementation of the regulation
is not yet completed. Resources, particular qualified professionals, are too limited to
proceed with all the insolvency cases in due time. Accordingly, Bulgaria, Croatia, the
former Yugoslav Republic of Macedonia and the Republic of Moldova have developed a
framework for out-of-court agreements: authorities in all four economies grant an
independent body (e.g. the Chamber of Commerce) the right to undertake arbitration.
Albania, Romania and Serbia are in the process of implementing similar frameworks for
out-of-court agreements. In order to further improve implementation and the efficiency of
bankruptcy procedures, Serbia launched automatic bankruptcy filing and electronic
reporting systems in September 2009.
Information and disclosure

Literature on the efficiency of credit markets focuses on the negative impact of
information asymmetries (Stiglitz and Weiss, 1981). Financial contracts rely on
information about the quality of the project funded and the behaviour of the firm.
However, these are difficult and costly to assess. This information asymmetry gives rise to
issues of moral hazard and adverse selection of borrowers.8 Empirical studies such as
Djankov et al. (2006) have documented the strong link between private credit development
and information-sharing mechanisms. Ensuring that investors and lenders can access
timely and accurate information on borrower creditworthiness is a clear avenue for policy
makers seeking to promote access to finance.
Disclosure requirements. Setting up company disclosure requirements is a basic way to

reduce information asymmetry in the corporate capital and loan market. Disclosure
requirements have two opposing effects on companies. On the one hand, because they
establish standard sets of documents and methodology, they both improve and reduce the cost
of the loan appraisal process. On the other hand, implementation requires additional overhead
costs (e.g. hiring extra auditors or training staff in the new procedures). Such costs are often
disproportionately borne by smaller firms. Therefore, when establishing disclosure
requirements, governments must take into consideration their implementation costs,
especially those incurred by SMEs.
Issuing annual financial reports is mandatory in all SEE economies. Most economies
also require operational reports to be published, at the very least, for listed companies.
Moreover, significant efforts have been made to develop International Accounting
Standards (IAS) and International Financial Reporting Standards (IFRS), particularly among
larger firms. Not surprisingly, in Croatia, Bulgaria, Romania and Montenegro, where stock
markets are more developed, disclosure requirements tend to be more stringent than in
other economies in the region. In those four economies, listed companies must submit
quarterly financial reports and semi-annual operational reports, while unlisted companies
have to submit at least annual financial and operational reports. In the other economies,
only semi-annual financial reports and annual operational reports are required of listed

companies. Non-listed companies generally have minimal disclosure requirements.9

While requiring companies to comply with IFRS and IAS is becoming standard in SEE,
economies such as Albania, Bulgaria and Serbia provide exceptions for SMEs. Apart from
those specific exemptions, governments seem to have done little to support the adoption
of disclosure requirements and to monitor their implementation.
Credit information services. Credit information services play an important role in

reducing information asymmetries between lenders and borrowers. They can both improve
lenders’ ability to verify the indebtedness and repayment history of borrowers and also
increase borrowers’ cost of default (for a more detailed discussion of the issues, see World
Bank [2008]). Empirical studies (e.g. Brown, Jappelli and Pagano, 2006) show that more
developed information-sharing mechanisms are associated with more abundant and
cheaper credit. The indicator on credit information services therefore focuses on the
quantity of information and coverage of the credit registry. Quantity of information includes
the type of information collected on a specific lender (positive, negative or both) and the
existence of historical data. Efforts to increase the number and types of information
providers (financial institutions, utility companies, etc.) are also considered. Coverage
relates to the number of borrowers covered by the registry. The assessment also
differentiates between private and public credit bureaus. Although public credit registries
have advantages, in particular during the early phases of credit market development, the
scope and quality of information tends to be higher in private credit bureaus (see Box 4.2).
Accordingly, the assessment framework grants a higher score to economies where a private
credit bureau operates.
Box 4.2. Public and private credit bureaus

Information-sharing institutions typically take two forms: public credit registry or
private credit bureau. Public registries are generally maintained by central banks, while
private bureaus are managed by the private sector. In some countries the two types of
institution coexist. In theory, they should be perfect substitutes. However, studies show
that private credit bureaus have a much larger impact on financing conditions than public
credit registries (Love and Mylenko, 2003).
Why do public credit registries seem to have less of an impact on the credit environment
than private credit bureaus? Part of the explanation reflects the underlying purpose of the
different entities. In most cases, public registries are set up to support banking
supervision. Only later are the data made available to lenders for borrower evaluation.
According to a survey conducted by the World Bank in 2003, 46% of public credit registries
were originally established to assist bank supervision. Only 34% were set up to improve the
quality and quantity of data available to lenders (Miller, 2003). For this reason, the data
they provide are frequently more limited than data provided by private credit bureaus. In
particular, public registry data generally only come from supervised institutions and refer
to loan amounts above some given threshold. Thus, small loans and loans from non-
supervised institutions (e.g. retailers) are excluded. Furthermore, public credit registries
are usually subject to stricter privacy laws than private bureaus. For this reason, many will
only report the aggregate credit exposure of an individual or firm. Finally, most public
credit registries do not provide additional services such as credit scoring. Such services are
especially valuable to smaller lenders, which do not necessarily have the in-house
expertise to perform sophisticated borrower analysis.

Box 4.2. Public and private credit bureaus (cont.)

In one area, however, public credit registries do have an advantage over private credit
bureaus. They are able to compel participating institutions to submit reliable data in a
timely manner. Private credit bureaus do not have the legal or regulatory power to impose
significant sanctions on institutions that fail to contribute or offer unreliable data. Private
bureaus can only limit the offending institution from accessing the credit information
database. In countries where coverage of the private bureau is high, this is a sufficient to
deter lenders from submitting poor quality data. However, in countries where credit
information services are in an early stage of development, strong control of data reliability
is necessary to widen participation in the credit bureau.
Governments in South-East Europe have made significant efforts to promote credit

information services. In all economies, the legal framework for credit bureaus has been
developed. Credit bureaus are well established in every SEE economy with the exception of
the Republic of Moldova. In the Republic of Moldova, the law on credit bureaus entered into
force in March 2009 and the credit bureau only operates with a limited number of partners.
In Bosnia and Herzegovina, Bulgaria, Croatia and Romania both a private and a public credit
bureau operate,10 while Serbia only has a private credit bureau run by the Association of
Serbian Banks. In the remaining SEE economies, only a public credit registry is in place. The
breadth and depth of information collected by the credit registries is generally satisfactory,
and includes both positive and negative information on individuals and businesses over a
significant period of time. In most economies, credit information is collected solely from
banks. In a few cases, credit information is also collected from independent financial
institutions. The credit bureau of the Association of Serbian Banks and the public credit
bureau in Croatia however are making plans to diversify their information sources, and
include data from independent financial services providers, utility and phone operators.11
Currently, except in Croatia and Serbia where coverage of companies is total, SEE credit
registries’ main challenge is expanding coverage. According to the 2010 World Bank Doing
Business Report (Figure 4.7), coverage for individuals is below 40% in most South-East Europe
Figure 4.7. Coverage of public and private credit registries

2009, in % of individuals covered
% Public registry coverage Private registry coverage
100
80
60
40
20
0
Source: Doing Business 2010.

economies.12 Moreover, in some economies, credit bureaus are very much focused on
individuals rather than companies. While consumer credit information coverage is
important for expanding credit access to very small companies, larger SMEs would benefit
from a credit information environment that includes information on firms.
In conclusion, mechanisms to ensure that lenders and investors have reliable and
timely information on the creditworthiness of companies are well developed in SEE. In
particular, disclosure requirements for firms exist and are particularly well developed in
economies with established stock markets. Many economies are starting to step up
enforcement of international auditing and accounting standards. Moreover, credit bureaus
are well developed. However, additional efforts need to be made for those mechanisms to
be fully operational. Adoption of disclosure requirements is a challenge, particularly for
SMEs. The coverage and reliability of the information collected by credit registries,
particularly on firms, is still to be expanded.
Collateral requirements and registration

The rules and institutions regulating collateral play an important role in the general
environment for accessing finance. Not only does collateral reduce moral hazard among
borrowers, it also provides a signal to potential lenders that the borrower is confident about
the quality and success of the project to be financed. It is a powerful tool to limit credit
rationing when information on lenders is otherwise limited. However, high collateral
requirements may impede lending to good projects proposed by collateral-deficient
entrepreneurs. Manove et al. (2001) even show that high collateral requirements may
reduce bank incentives to screen projects, leading to non-efficient lending. Therefore,
setting up rules and institutions to ensure that a broad array of assets can effectively be
pledged as collateral is critical to improving the lending environment. The assessment
framework for collateral is composed of two indicators: a general indicator on collateral
and provisions, focusing in particular on movable asset registration; and an indicator on
cadastral development.
Fixed and movable collateral. In a well-functioning credit market, requiring collateral

allows lenders to finance projects for which they may have little information. The level of
collateral required should not represent a barrier for borrowers. For such pledges of
collateral to be effective, centralised institutions need to register them so as to ensure that
the collateral that lenders take has not already been pledged. Moreover, measures should
be in place to allow borrowers to pledge both fixed and movable assets so as not to
discriminate against firms with limited fixed capital. Taking this into account, the
indicator on collateral examines the actual level of collateral required by financial
institutions for a given loan, whether a collateral registry has been set up and the measures
taken to ensure that movable assets can be pledged.
In most SEE economies, lack of collateral appears to be the main reason why loan
applications of SMEs are rejected. This suggests that high collateral requirements are
restricting the development of otherwise viable projects. According to data collected by the
BEEPS, collateral requirements in SEE range from about 110% of the loan amount in Croatia
to over 170% in Kosovo, Bosnia and Herzegovina, and the former Yugoslav Republic of
Macedonia (see Figure 4.8).13 The average across SEE is about 150%, significantly higher
than the range of 110% to 130% observed in OECD economies. As high collateral
requirements have a greater impact on SMEs, some central banks, for example the

Figure 4.8. Collateral requirements in SEE economies

2009, in % of loan value
%
250
200
150
100
50
0
Source: BEEPS.
National Bank of Romania, are exploring more flexible rules for collateral and provisioning
for smaller loans.
Many factors contribute to the high collateral requirements in SEE. Unreliability of
collateral valuation and creditors’ rights may play important roles. To limit uncertainty
over collateral valuation and to ensure that collateral is not pledged to several lenders,
many governments have set up centralised collateral registries. These central collateral
registries collect clear information on the type of collateral being pledged and enable
lenders to effectively check if an asset has already been pledged. To illustrate their positive
effects, Fleisig, Safavian and de la Pena (2006) describe the example of Bulgaria. Before
establishing the central collateral registry, pledges were registered by almost 400
independent registries, making it almost impossible to determine who had a legal right to
pledges in the event of borrower default.
Collateral registries for fixed assets are now operational in all SEE economies except
Albania and Kosovo. While both economies gather some information on pledged collateral
through the property and credit registries, the quality, scope and reliability of the data
collected could be improved. In the region, movable assets are legally acceptable forms of
collateral. Albania is the only economy where the legal framework for pledges of movable
assets is still incomplete. As a result, certain types of movable assets cannot be pledged as
collateral. In all economies, pledge information on movable assets is collected within a
centralised registry. This is very often the same registry where pledges on fixed assets are
registered; both types of pledges are therefore documented with the same level of detail.
The only exception to this is Romania, where the pledge registry for movable assets is run
independently from the registry for fixed assets and was established only recently
Cadastre. Real estate is typically the most valuable asset of a potential borrower and is
the most common form of collateral. However (and this is often the case in emerging
economies), information on property and the characteristics of land can be lacking or
difficult to access. An accurate and comprehensive cadastre registry improves the lender’s
legal security and lowers transaction costs. As such, well-developed cadastres are a key

element of mature financial markets. Development of the cadastre system is a task where
public institutions often have a prominent role. Major considerations include the
underlying legislation governing the cadastre, whether a cadastre has been established,
and its coverage and reliability. Moreover, registration requirements for property titles
should be established to ensure high coverage, and information contained in the cadastre
should be easily accessible, at minimal cost.14
Cadastre registries operate in all SEE economies. Although full registration of property
titles, especially in rural areas, has yet to be achieved, property registration is generally
compulsory and coverage is satisfactory. In Albania and in Bosnia and Herzegovina,
although a large share of all land is registered, uncertainties over ownership continue to
plague the system, limiting the reliability of the information contained in the cadastre. In
Kosovo, buildings and apartments are not documented in the cadastre – a major
shortcoming in urban areas. In all other economies, the level and quality of information is
good, although no economy includes reliable and up-to-date information on valuation of
registered property. The biggest challenge now for the institutions in charge of maintaining
cadastres is digitisation of existing registries. The digitisation of cadastres can significantly
reduce the cost of accessing the information contained in the registration and can help
develop an efficient centralised registry. Cadastres in SEE were generally paper-based until
very recently. However, many economies have launched initiatives to fully computerise the
registry. Bosnia and Herzegovina, Croatia, Montenegro, the Republic of Moldova, Romania
and Serbia are the most advanced economies in terms of digitisation, while Bulgaria and
the former Yugoslav Republic of Macedonia are close behind. In other SEE economies
where little progress has been made to digitalise the registry, accessing information
contained in the cadastre is time- and resource-intensive.
Subdimension: Availability of financial instruments

While bank lending is the dominant form of finance to SMEs in SEE, other forms are
often better adapted to the needs of some companies. Leasing, factoring, venture capital
and microfinance can significantly assist the financing requirements of the enterprise
sector. The quantity and diversity of financing products ultimately depend on private
initiatives driven by supply and demand. However, a conducive legal framework and active
government promotion of different instruments is sometimes required, especially during
the early stages of their development.
The assessment of the availability of financial instruments relies on five indicators
evaluating the availability and development of the regulatory framework for leasing,
factoring, venture capital, business angel networks and microfinance. Figure 4.9 shows
that Croatia, followed by Bulgaria and Romania, are the SEE economies where the
availability of these financial instruments is greatest and where the regulatory framework
for their development is most conducive.
Leasing and factoring

Leasing and factoring are both financial services in which the resources provided are
not secured by the general creditworthiness of the borrower but rather by a specific asset.15
Klapper (2006) finds that such forms of finance can be particularly important when
information on lenders is difficult or costly to assess, as is often the case for SMEs. This
subdimension evaluates how developed the leasing and factoring markets in SEE are and
the maturity of the regulatory environment. Specifically, a formalised legal framework, for

Figure 4.9. Availability of alternative financial instruments subdimension:

Average scores
Score
5
0
example under the form of a specific act, can help jumpstart the development of the
leasing and factoring industries. Other issues considered include whether adequate
industry supervision is in place and the degree to which tax and other administrative
issues limit the development of specialised leasing and factoring companies.
The leasing industry is developing rapidly throughout SEE; leasing companies operate
in all SEE economies. The volume of leasing contracts has increased significantly in recent
years and now represents an important share of overall lending. Most contracts currently
relate to financial leasing as opposed to operational leasing contracts.16 However, the
operational leasing industry is slowly developing in economies such as Croatia, Serbia,
Bulgaria and Romania. In all these economies, financial leasing is already well developed.
In SEE, most leasing operations have initially developed as a service provided by
commercial banks and most leasing providers are subsidiaries of banking institutions.
With the exception of Bulgaria and Kosovo, leasing laws have been developed in all
economies. In some economies, though, the law only defines the activity and does not
impose any control on leasing activities. Given the increasing volume of leasing and the
links between leasing companies and banks, some countries have set up licensing and
monitoring mechanisms. Where the industry is monitored, licensing and supervision is
generally performed by the central bank, possibly reflecting the dominance of banking
institutions in the leasing sector in SEE. Exceptions to this are Croatia (see Box 4.3) and the
Republic of Moldova, which follow the custom in many European countries of having an
independent authority monitor the specialised financial services industry (e.g. the
Financial Services Authority in the United Kingdom).
Factoring is a fairly recent activity in South-East Europe. Because delayed payments
are a recurring issue in SEE, factoring might satisfy an unmet business need, yet in most
SEE economies factoring remains a peripheral activity. Factoring in Bulgaria, Romania and
Serbia represents 1.3%, 1.2% and 1.1% of GDP, respectively. In Croatia, it represents 4.4% of
GDP. Calculation made by Klapper (2006) show that the average for high-income countries
was 2.6%. Factoring remains a relatively marginal form of finance in most economies and
the legal framework tends to be underdeveloped. Bulgaria, Romania, the Republic of

Box 4.3. Croatian Financial Service Supervisory Agency (HANFA)

The Croatian Agency for Supervision of Financial Services was established by the Act on
Croatian Agency for Supervision of Financial Services on 1 January 2006. HANFA is an
independent authority responsible to the Croatian Parliament. The Agency replaced the
then Croatian Securities Exchange Commission, the Agency for Supervision of Pension
Funds and Insurance, and the Directorate for Supervision of Insurance Companies.
The main mission of HANFA is to supervise financial services companies. It grants
licenses for these companies to operate and subsequently ensures that operations are
conducted according to the relevant laws. When needed, it can revoke a license to operate.
Furthermore, HANFA collects and publishes key statistics on financial services providers.
HANFA also publishes monthly reports and a more detailed annual report describing the
main features of the markets for financial products, providing aggregated financial
information on stakeholders, and highlighting recent developments and supervisory
issues.
HANFA has responsibility for supervision over:
● stock exchanges and regulated public markets;
● authorised securities companies and issuers;
● investment funds (and in particular pension funds);
● brokerage companies, brokers and investment advisers;
● insurance companies, pension insurance companies, institutional investors;
● insurance brokers and representatives; and
● legal entities performing the operations of leasing and factoring.
An agreement has been signed between HANFA and the Croatian National Bank to detail
the modalities of co-operation between the two institutions. Co-operation is needed
because many financial services providers are subsidiaries of banking institutions, which
are supervised by the Croatian National Bank. The agreement formalised information
exchanges between the two institutions and created a Working Committee for Financial
System Supervision to co-ordinate the procedures and activities.
In 2008, HANFA had a budget of EUR 4.8 million. This budget can be financed by the state
budget, from fees from assets and revenue of supervised entities, as well as fees for
services provided. However, since its creation in 2006, the Agency has never used funds
from the state budget to finance its operations.
Moldova and Montenegro have specific legislation formally defining and regulating
factoring, with monitoring performed by the central bank. Croatia does not have a specific
law on factoring. Factoring companies, which are all subsidiaries of commercial banks, are
supervised by the Central Bank and HANFA (see Box 4.3).
Venture capital and business angel networks

In many countries, the supply of small volumes of equity may be more problematic
than the supply of debt, especially for new and technology-based firms. An equity gap of
this sort has been identified by analysts even in economies with a well-developed venture
capital industry. The assessment evaluates two equity finance instruments: venture
capital and business angel networks (BANs). In line with findings from empirical studies on
public policy and venture capital market, such as Da Rin et al. (2005), the indicator on

venture capital concentrates on the extent to which exit options and the tax framework
have been developed to facilitate venture capital.17 The indicator on BANs focuses on
whether any BANs operate and the strength of the links between entrepreneurs and
potential business angels, for example through local enterprise development agencies.
Only a very limited number of venture capital funds operate in SEE. Venture capital
funds operate in Croatia, Bulgaria, the former Yugoslav Republic of Macedonia and
Romania. In Croatia, the venture capital sector has begun to structure itself, forming a
professional association to promote the industry and share information. While many
governments in the region have established a legal framework for venture capital, the
framework is rarely comprehensive, even in countries where some venture capital activity
exists. In fact, of all the SEE economies, Croatia has the most comprehensive and
conducive environment for venture capital funds. In particular, the government has
spearheaded a campaign to establish a venture capital fund targeting innovative start-ups
with both public and private money.18 Romania is also starting such a venture capital fund
through the European Commission JEREMIE programme (see Box 4.1) to which Romania
has committed substantial funds. A few limited initiatives have been launched in other SEE
economies: legal frameworks have been adapted and venture capital funds are sometimes
included in the strategic development plans. However, these initiatives have been
relatively unsuccessful in eliciting venture capital activities.
Business angels are private individuals, often with high net worth and extensive
business experience. They provide funds and counselling to start-up companies. Research
suggests that, overall, business angels provide a significantly larger volume of equity
finance to start-ups than does the formal venture capital industry, even in countries where
the formal sector is highly developed. But for a number of reasons the market for informal
equity finance provided by business angels is often opaque and fragmented. To improve
their effectiveness and visibility, many business angels have grouped within formalised
networks. Such business angel networks are often the product of public policy initiatives,
although privately run BANs also operate.
BANs are even scarcer than venture capital funds in SEE: they operate only in Croatia
and Romania. In the other SEE economies, although individual business angels may be
active, no network of business angels has been established. In Romania, two BANs operate
but they are limited in scope, are not recognised legally and benefit from no support from
the government. In June 2008, the Croatian Business Angel Network (CRANE) was set up by
the national investment promotion agency, the professional association of private equity
and venture capital funds, and a few individual private investors. CRANE has established
links with local and regional enterprise development agencies to raise awareness of the
concept of business angels. In addition, CRANE co-operates with other BANs throughout
Europe and North America (e.g. EBAN, Angel Capital Association).
Microfinance
In many developing economies, microcredit has evolved from a small-scale
development experiment to a prominent source of finance for small business owners and
a significant branch of the banking sector. As the sector has matured, the line between
banks and microfinance institutions (MFIs) has become increasingly blurred. Together with
MFIs’ growing role in the economy, this changing relationship between MFIs and the
overall financial sector has led policy makers to reconsider issues of regulation and
monitoring (Hardy et al., 2002). To assess the maturity of MFIs in SEE, the indicator used

considers such factors as the volume of loans that MFIs issue, their geographical outreach
and the regulatory framework overseeing microfinance.
Microfinance institutions are well established in SEE; they are a significant source of
finance for small companies. Microfinance is especially important in SEE economies with
the most severe financing constraints. In Kosovo, Albania and the Republic of Moldova, the
volume of microfinance is significant and legal frameworks are well developed. These are
also the economies with the lowest levels of bank financing of new investment, according
to the latest BEEPS.19 Bosnia and Herzegovina also has numerous MFIs thanks to donor
commitments. A few of the older MFIs in SEE are now very profitable. The challenge for
these institutions is to increase their capital base. In some economies (such as Kosovo and
Albania) a few MFIs have started to collect deposits. In other economies (such as Bosnia
and Herzegovina, the Republic of Moldova and Romania) this is prohibited by law. Kosovo
has an ongoing project to change the status of MFIs to private limited companies so that
they can raise funds from external investors.
There is an on-going debate among practitioners on the need to further regulate the
microfinance industry. On the one hand, there is a consensus that institutions that collect
deposits need to be regulated. On the other hand, the right balance between required
regulation and administrative burden is still to be defined. In some emerging economies,
MFIs represent a large share of total lending and public authorities need to monitor their
activities. The economic viability of smaller MFIs is also often fragile. Monitoring
institutions should ensure that no fraudulent operation occurs, that systemic risk is
limited and that MFIs have sufficient basic capabilities.20 They should also ensure that
regulations and administrative burdens on small and non-bank MFIs do not represent an
unnecessary barrier to their development. In Croatia and in the former Yugoslav Republic
of Macedonia, government-funded programmes supporting microfinance have been set
up, but the legal framework is undeveloped. In the other SEE economies, governments
have defined a specific legal framework and monitor MFIs. Albania, Bosnia and
Herzegovina, the Republic of Moldova and Kosovo have set up a comprehensive legal
framework which clarifies the legal status of MFIs and sets the framework for supervision.
Romania has defined a set of legal requirements for microcredit operations. However,
only credit institutions and non-bank financial institutions can provide such services.
Similar restrictions apply in Montenegro and Serbia, where only banks are allowed to
provide microfinance services. These restrictions may limit the development of the
microfinance industry in these economies. Supervision of microfinance institutions is
generally performed by a central bank. In Kosovo, for example, microfinance institutions
are supervised by both the Central Bank, which monitors risk, and the office of the
Ministry of Public Services in charge of NGOs, which ensures that MFIs abide by the law
on non-governmental organisations.
The impact of microfinance in SEE economies is generally portrayed as positive. When
commercial banks began to downscale into household microloans, the growth in this
segment was particularly rapid. However, the long-term and developmental impact of
access to microfinance is increasingly being questioned. Some observers consider that a
focus on microfinance has supported the development of unsophisticated, mainly trade-
based microenterprises that have limited growth prospects. Practitioners note that in
economies where many MFIs operate, an increasing number of small businesses face over-
indebtedness (Bateman, 2010).

Subdimension: Loan guarantee schemes

Commercial banks are generally reluctant to provide loans to SMEs: not only are loans
to SMEs considered riskier than loans to larger firms, but administrative costs are high
compared to the size of the loans. Guarantee schemes cover a share of the default risk,
effectively behaving as insurance against a portion of the risk of lending to SMEs that
would otherwise be borne entirely by the credit institution.
The assessment here relies on three indicators evaluating the development and key
features of credit guarantee schemes, mutual guarantee schemes and export credit
guarantee schemes. Figure 4.10 shows that Croatia, Romania and Serbia are the economies
where these instruments are most widely available. Kosovo and Albania are the two
economies where guarantee schemes are least developed.
Figure 4.10. Loan guarantee schemes subdimension: Average scores

Score
5
0
Guarantee schemes
Two types of guarantee scheme are considered here: credit guarantee and mutual
guarantee schemes. Both schemes offer eligible companies insurance against credit
default. While credit guarantee schemes are generally publicly funded, mutual guarantee
schemes are formed and managed by SMEs that pool their resources. This assessment
seeks to evaluate both types of schemes in SEE on the extent to which they combine
efficiency, sustainability and attractiveness to users. In order to be attractive for lenders
and borrowers, the size of the guarantee offered by guarantee schemes needs to cover a
significant share of the loan. If a guarantee covers less than 50% of the loan amount, then
lenders typically require that additional collateral is pledged by the borrower, reducing the
attractiveness of the scheme to potential borrowers. On the other hand, a guarantee above
80% of the loan amount does not provide a sufficient incentive for discipline on the part of
borrowers as they retain only a minor share of the risk in the event of failure. International
best practices show that guarantees should be in the order of 60% to 80% and that, to
minimise moral hazard risk, loan appraisal should be performed by the bank rather than
by the guarantee institution (Levitsky, 1997). Guarantee schemes are costly instruments
whose objective is to grant finance to borrowers to whom lending would otherwise be
denied. Therefore, processes should be developed to ensure that the scheme does not

merely subsidise lending that would have occurred anyway. Ex-ante, this can be achieved
by having well-defined eligibility criteria and, ex-post, through evaluation against the
criterion of additionality. Finally, the scheme should be sustainable, meaning that fees
required and loss rates for supported loans should be compatible in the long run with the
objectives of the sponsors.
Credit guarantee schemes have been developed in a number of SEE economies,
including Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, the Republic of
Moldova, Romania and Serbia. The most developed programmes are found in Croatia and
Romania. The Croatian programme targets SMEs and is run by HAMAG. The scheme
concentrates on seven different types of guarantees (new entrepreneurs, working capital,
etc.) and covers 50% to 80% of the loan principal. Applications for guarantees are submitted
by the lending banks to HAMAG after the bank has performed an appraisal. The volume of
loans covered by the scheme totalled EUR 150 million between 2003 and 2008. In Romania,
four different credit guarantee schemes operate, two of which are privately owned, with
local banks as the main shareholders. Clear rules and procedures for application are
enforced and a significant number of loans have been issued. In other SEE economies,
although eligibility criteria and loan appraisal procedures are in place, schemes have had
limited success so far. In many cases, low coverage of risk has contributed to limited take-
up. Schemes in Bulgaria, in the former Yugoslav Republic of Macedonia and the Republic of
Moldova cover less than 50% of the principal for loans to SMEs. While donor-funded local
initiatives exist in these economies, Bosnia and Herzegovina, and Montenegro have yet to
implement a national credit guarantee scheme.21
In contrast to credit guarantee schemes, mutual guarantee schemes are extremely
scarce in the region. Only in Croatia are there schemes that bear some resemblance to
mutual guarantee schemes. The Croatian schemes are operated at the regional level and
were initially launched by regional development agencies following a pilot project led by
the Ministry of Economy, Labour and Entrepreneurship. Each scheme consists of a
consortium of companies which, together with a regional development agency, collectively
present projects to financial institutions. Entrepreneurs take an active part in the
governance of the project and determine the allocation of guarantees. However, the
majority of funds come from the local development agency. Beyond Croatia, the feasibility
of a mutual guarantee scheme has been assessed in a few economies (e.g. the former
Yugoslav Republic of Macedonia and Romania) but initiatives failed to develop due to
limited interest among private sector partners.
Export credit guarantee schemes

Export credit guarantee schemes are institutions that insure exporters against non-
payment by their foreign buyers; they can be public or private institutions. They cover
political and commercial risks associated with trade finance and help otherwise risk-
averse firms expand their activities to export markets. The indicator used in the
assessment examines the range of services offered by export credit agencies in SEE and the
availability of information on services they provide. Development of both public and
private export credit guarantee schemes is a sign that guarantees are fully accessible and
that competition on the insurance market exists for marketable risks. Therefore,
economies where both forms co-exist are given a higher score. The indicator also examines
the efforts made by authorities to comply with WTO regulations concerning public export
credit agencies.22

Most economies in SEE have developed export credit guarantee schemes. They are all
public institutions, although commercial banks offer some trade finance instruments.
Croatia, Romania and Serbia have particularly well-developed public export credit
guarantee schemes. (Albania, Bosnia and Herzegovina, Bulgaria, Montenegro and the
former Yugoslav Republic of Macedonia have also set up export credit guarantee agencies
but due to inadequate resources they have limited scope and impact.) In Croatia, the
scheme is operated by the Croatian Bank for Reconstruction and Development. It provides
a diverse array of export credit products. The Export Import Bank of Romania is a public
scheme, insuring against both marketable and non-marketable risks. While some
exporters complain that the product range is too narrow to cover their needs, the volume
is significant (covering 20% of exports in 2002). In Serbia, ECA-AOFI is the result of the
merger in 2009 of the two previously independent export guarantee schemes. ECA-AOFI
offers a large range of products for marketable and non-marketable risks. However, the
scheme has limited resources and strict company eligibility requirements, restricting the
quantity and scope of companies it insures.
Subdimension: Selected demand-side skills

In policy debates on company financing constraints, too little attention is generally
given to demand-side factors. For instance, evidence suggests that a lack of good projects
limits venture capital expansion. Venture capitalists reject a large number of all
investment proposals because the proposals are poorly documented and presented. Such
demand-side factors can also constrain firms in adopting optimal financial structures. For
instance, a greater willingness on the part of entrepreneurs to accept external equity would
facilitate growth and survival for many small firms. Consequently, in some economies,
government support programmes are increasingly emphasising issues of investment
readiness. That is, support seeks to upgrade the average quality of the proposals that
entrepreneurs put to financiers, and to increase knowledge among entrepreneurs
regarding the forms of finance best suited to their ventures.23
As Figure 4.11 shows, support to improve investment readiness has been set up in
many economies in SEE and is in general well connected to other government services
Figure 4.11. Investment readiness subdimension: Average scores

Score
5
0

provided to companies. In Bulgaria, Croatia, the Republic of Moldova, Romania and Serbia,
SME agencies and chambers of commerce operate investment readiness programmes and
provide business advisory services. The provision of such services is included in strategic
documents on SME development drafted by the government. Croatia and Serbia have
particularly strong programmes, with specific services targeting young entrepreneurs
wishing to launch their own company.24 In Croatia, Romania and Serbia, a central
institution is in charge of ensuring the co-ordination among the programmes offered by
various organisations in the economy. In Bosnia and Herzegovina, the former Yugoslav
Republic of Macedonia and Montenegro, investment readiness initiatives are offered by
some local enterprise promotion agencies and business centres. However, in those
economies, such activities are often ad hoc or ancillary in nature and there is no national
strategy for the development of SMEs.

Governments in SEE have made significant efforts to increase access to finance.
Measures have been taken to improve the legal framework and specific support programmes
have been implemented. While some instruments still need to be improved, the main
challenge faced by SEE economies is in the area of implementation. In many cases, allocated
resources and the responsiveness of the private sector have proved insufficient; further
actions to improve capacity and redesign of certain schemes may therefore be in order.
● Although some data collection does occur in certain institutions (e.g. credit registries),
data related to firm financing constraints are not systematically collected to support
policy making. Statistical tools should be developed and used to further monitor access
to finance (e.g. bankruptcy statistics, company surveys, micro data on loans).
● To promote bank lending to companies, many SEE governments have set up credit lines
and subsidised interest rates. While these measures are meant to be transitory (having
been created or expanded in the wake of the global financial crisis), assessments of costs
and impact on the financing constraints of companies should be performed.
● In order to improve firms’ access to equity finance, measures to allow firms to be listed
on foreign markets should be developed. Furthermore, links between stock markets in
the region should be favoured and partnerships with developed stock markets should be
considered.
● The regulatory framework governing insolvency is well developed in all SEE economies
(except Kosovo). But the backlog of cases is still substantial in most SEE economies.
Resources and measures to improve speed of implementation (electronic filing, out-of-
court agreements) should be further developed.
● Monitoring of adoption of international auditing and accounting standards should be
strengthened. Measures to help companies, and in particular SMEs, build capacity
should be considered.
● Credit bureaus are well developed in the region. Yet in all SEE economies except in
Croatia and Serbia, additional efforts are still needed to improve coverage and reliability
of the information collected, particularly on firms.
● Collateral and movable assets registries are also well established in the region. However,
there are a few economies, in particular Albania and Kosovo, where the reliability of the
information collected could be probably improved upon.

● While difficulties in accessing the information contained in cadastre can be an obstacle,

cadastral registration is well organised in SEE. However, significant efforts are required
to ensure that data are sufficiently comprehensive and accurate. Efforts in this direction
will give lenders greater confidence in information on creditworthiness and limit the
need for collateral.
● Leasing and factoring have been developed by commercial banks in South-East Europe.
As leasing activities are widespread, the required legal framework has been developed.
Factoring is a more recent activity and a comprehensive legal framework is still missing.
● Formal venture capital is scarce in SEE and is likely to remain scarce until a larger
volume of high-quality investment opportunities arises. However, business angel
activity (and business angel networks) is also scarce. Opportunity probably exists to
facilitate development of the market for informal equity finance. Indeed, some
initiatives in the region demonstrate that policy can be helpful; this opportunity merits
further examination.
Table 4.1. Access to finance: Final scores

Building an evidence base 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 2.0
Policy
development
Policy development 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 2.0
Insolvency law 3.0 4.0 4.0 3.0 2.0 4.0 4.0 4.0 4.0 4.0
Credit information services 4.0 4.0 3.0 4.0 2.0 3.0 2.0 3.0 4.0 5.0
framework
Cadastre 3.0 3.0 3.0 4.0 2.0 4.0 4.0 4.0 3.0 4.0
Legal
Collateral and provisions 2.0 2.0 3.0 4.0 1.0 2.0 3.0 2.0 5.0 4.0
Registration of moveable assets 3.0 4.0 4.0 4.0 3.0 4.0 5.0 5.0 3.0 5.0
Legal framework 3.0 3.4 3.4 3.8 2.0 3.4 3.6 3.6 3.8 4.4
Leasing/renting 3.0 3.0 4.0 5.0 2.0 4.0 3.0 3.0 4.0 4.0
Factoring 2.0 2.0 3.0 3.0 1.0 1.0 2.0 1.0 3.0 2.0
Venture capital – Scale
of the industry 1.0 1.0 3.0 4.0 1.0 3.0 1.0 1.0 3.0 1.0
of financial instruments
Venture capital – Framework

Availability
conditions 2.0 1.0 1.0 3.0 1.0 2.0 2.0 3.0 2.0 2.0
Venture capital – Government
support 1.0 1.0 2.0 3.0 1.0 2.0 2.0 1.0 2.0 1.0
Business angel network 1.0 1.0 2.0 2.0 1.0 1.0 1.0 1.0 2.0 1.0
Microcredit 4.0 4.0 2.0 3.0 5.0 3.0 4.0 3.0 2.0 2.0
Availability of financial
instruments 2.3 2.2 2.6 3.3 2.0 2.3 2.3 1.9 2.7 2.1
Credit guarantee schemes 1.0 2.0 2.0 4.0 1.0 3.0 3.0 2.0 4.0 3.0
Loan guarantee
Mutual guarantee schemes 1.0 1.0 1.0 3.0 1.0 1.0 1.0 1.0 1.0 1.0
schemes
Export guarantee schemes 2.0 2.0 2.0 4.0 1.0 1.0 1.0 2.0 4.0 3.0
Loan guarantee schemes 1.3 1.7 1.7 3.7 1.0 1.7 1.7 1.7 3.0 2.3
Investment readiness 2.0 3.0 4.0 4.0 1.0 3.0 4.0 3.0 4.0 4.0
Selected
demand-side skills
Selected demand-side skills 2.0 3.0 4.0 4.0 1.0 3.0 4.0 3.0 4.0 4.0
Dimension weighted average: Access to finance 2.2 2.5 2.8 3.5 1.6 2.6 2.8 2.5 3.2 3.2
Note: Averages for sub-dimensions are the simple averages of the scores for the indicators. For the “availability of
financial instrument” sub-dimension, average score corresponds to the simple average of i) the average of the scores
for the three sub-indicators on venture capital and ii) the scores for the other indicators in the sub-dimension.

● The microfinance industry in SEE has evolved from donor-funded local initiatives to a
large and increasingly profitable industry. In Albania, Bosnia and Herzegovina, the
Republic of Moldova and Kosovo, a specific legal framework has been developed. In other
SEE economies, a consistent legal and regulatory framework overseeing the activities of
MFIs has yet to be established.
● Many initiatives have been undertaken in South-East Europe to develop guarantee schemes.
However, in most instances, they appear to have not delivered significant results. In many
cases, lack of funding is a critical issue here. Design and scope of the schemes should
therefore be tailored so as to get the greatest benefit from often limited resources.
● Because guarantee schemes are generally financed by public funds, impact assessment
should be systematically conducted to ensure that funds are used to their best.
● Programmes to increase the investment readiness of entrepreneurs can be found at
various levels of government (local, regional, national) throughout SEE economies.
However, in many cases, these initiatives could be better co-ordinated within an
integrated strategy. This would allow a coherent approach throughout national territory
and improve visibility of programmes for entrepreneurs.
Notes
1. One indicator of the acuteness of access to external finance problem is the share of investment in new
fixed assets financed through internal funds only. On average, in SEE, this share represents 40% of new
investments (BEEPS, 2009). Evidence suggests that this is significantly higher than countries in the
OECD (see for example EuroBarometer 2009, which shows that figure for the European Union is 16%).
2. Privatisation of the banking sector in South-East Europe since 2000 was accompanied by a
liquidation of the least solvent institutions. These two parallel processes contributed to the
relatively high concentration and important presence of foreign institutions on the market.
3. Stock markets in SEE have been affected by the global financial crisis. For example, in Bulgaria and
in Croatia, market capitalisations have dropped from 55% and 125 % of GDP respectively in 2007, to
18% and 52% in 2008. Although there are signs that markets are recovering, capitalisations remain
limited compared to stock markets in OECD countries.
4. “Exit transactions” are the transactions that private investors effect when they do not wish to
retain their stake in a company. Typical options for exit transactions include trade sale, sale to
another investor, repurchase by the company, management buy-out and IPO.
5. Simple average across economies of share of companies that consider access to finance a
“moderate” to “very severe” obstacle to their development (BEEPS, 2009).
6. Empirical studies in OECD economies show that bank finance represents the preferred source of
external finance for a majority of SMEs (e.g. 70% in the euro area according to European Central
Bank [2009]). Evidence suggests that this ratio is much smaller for companies in their earlier stages
of development.
7. Similar observations have been made for the euro area (see, e.g. European Central Bank [2009]).
8. Moral hazard occurs when a party with more information about its actions or intentions has a
tendency or incentive to behave inappropriately from the perspective of the party with less
information. For example, when outcome of projects cannot be monitored ex-ante and bankruptcy
regulation is generous, an entrepreneur can be tempted to misreport on the performance knowing
that, in case of default, he would have limited cost.
Adverse selection refers to the case when characteristics of the selection process lead to adverse
outcomes. For example, in order to make sure that only highly profitable projects are financed, a
bank with little knowledge of the nature of projects may sets very high interest rates and collateral
requirements. In such a case, good projects may be deterred and seek other forms of finance while
risky projects, which could not have access to other sources of finance, remain.
9. In Albania and Serbia, non-listed companies do not need to submit annual reports and in all
South-East Europe economies with limited stock market except in Macedonia, they do not need to
submit operational reports.

10. In Croatia, there is a clear distinction in the roles of the public and private credit bureaus. While
the private credit bureau (HROK) collects data primarily on individuals and individual
entrepreneurs, the public institution (FINA) distributes data only on firms.
11. In Serbia, companies participating in the credit bureau include all the banks, leasing companies
and government agencies engaged in lending as well as telephone operators.
12. Overall coverage would include coverage both for individual and businesses. However, as the
information for businesses is not available for most economies in SEE, coverage for individuals
needs to be used as a proxy.
13. These figures, which were collected prior to the global financial crisis, may have increased as a
consequence of the crisis. Anecdotal evidence suggests that the collateral required by lenders is
now as high as 200% in some economies.
14. The reliability of the cadastre is also a key criteria driving investor’s choice of location. The
cadastre is therefore also considered in the dimension on “Investment Policy and Promotion”, with
a particular focus on the status of the restitution process.
15. In the case of leasing, the asset is a durable good (a vehicle, machinery, a building, etc.) which is
used by the lessee for a fee while property remains with the leasing institution until, at the end of
the lease period, the lessee decides whether to exercise a buying option. In the case of factoring,
the asset is the company’s accounts receivable. The company sells this asset at a discounted price
to increase its short-term cash flow.
16. Financial leasing contracts are those in which ownership of the leased good is transferred to the
lessee at the end of the leasing period. Operational leasing contracts are those in which ownership,
during and after the leasing period, remains with the lessor and the lessee only “rents” the good
during that time period.
17. The impact of taxation on equity finance is discussed in the chapter on tax policy analysis.
18. No specific incentive has been designed for the Croatian venture capital industry. However, capital
gains are already tax-exempt in Croatia.
19. Use of bank lending for financing of new asset purchase represented in Kosovo, Albania and the
Republic of Moldova, 9%, 15% and 21% of total funds respectively, compared to an average of 30%
for the other economies in the region.
20. Because many MFIs are donor-funded, do not collect savings and are small, default would not have
important negative impacts. However, to ensure that the sector operates efficiently, public
authorities should ensure that MFIs have the required level of skills and resources, and that the
necessary operating processes are set up.
21. In Montenegro, the Law on the Investment Development Fund of Montenegro includes the
provision of credit guarantees. However, the activities of the Fund seem to be focused on providing
credit lines on preferential terms for SMEs and financing infrastructure projects.
22. WTO regulations state that public export credit guarantee schemes should not represent export
subsidies but only insurance and should therefore have the objective to break even in the long term.
23. Examples of service provided by such programmes include assistance in preparing business plans,
courses on financing opportunities and support for filing of tax forms.
24. In Croatia, e-courses on investment readiness are also being developed to improve access in rural
areas.
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© OECD 2010
Chapter 5
Regulatory Reform
and Parliamentary Processes
169
I.5. REGULATORY REFORM AND PARLIAMENTARY PROCESSES
5.1. Key findings
Figure 5.1. Regulatory reform and parliamentary processes:

Dimension average scores
Score
5
0
ALB BIH HRV XK MKD MDA MNE ROU SRB
Note: No scores were awarded to Bulgaria in this policy dimension, due to a lack of information provided by the
Bulgarian government/parliament during the assessment process.
● Most economies of South-East Europe (SEE) have made marked progress in establishing
the necessary institutional and legal frameworks for regulatory reform, and in
implementing regulatory reform programmes.
● However, significant discrepancies remain between the adoption of these programmes
and their implementation, particularly for institutions with scarce human resources.
● The majority of the SEE economies have conducted comprehensive “regulatory
guillotine” reviews, frequently with the support of international donors. These reviews
have led to extensive elimination of redundant legislation and regulations. (The main
exception is Bosnia and Herzegovina.)
● The use of regulatory impact assessment (RIA), while systematically applied to draft
legislation in the Republic of Moldova, Romania and Serbia, is still in its infancy in many SEE
economies. This is problematic for SEE economies that require extensive and rapid adoption
of European Union (EU) laws and regulations to comply with the acquis communautaire, as
this context enhances the importance of establishing a review system of draft legislation.
● SEE governments have developed the foundations of forward legislative planning.
However, progress needs to be sustained, as many parliaments are overburdened with
complex legislative proposals often submitted at short notice, and the co-ordination
between parliaments and governments remains unsystematic.
● Most parliaments in SEE have made progress in streamlining their internal procedures and
enhancing the dialogue with key stakeholders during the legislative adoption process.

● However, the dialogue with civil society is limited or occurs in an ad hoc manner. This is
in part due to the lack of unified structures representing civil society. It is also due to the
lack of a formal framework obliging parliaments to engage with civil society. These
issues are also faced by economic commissions of parliaments.
● In SEE, only the former Yugoslav Republic of Macedonia has adopted a lobby law, an
effective way to formalise lobbying during the legislative adoption process.
● Several SEE economies are envisaging the development and adoption of laws that will
enhance consultations with key stakeholders on legislative proposals.
● The limited capacity of parliaments in analysing complex economic legislative proposals
remains a problem in the region and hampers the process of adopting laws proposed by
the government. This is particularly problematic in the context of EU accession and the
global economic crisis, both of which require a swift adoption of new laws and
regulations.
5.2. Regulatory reform and parliamentary processes assessment framework

The assessment of regulatory reform and parliamentary processes1 is divided into the
following two subdimensions:
● better regulation and legislation; and
● transparency and dialogue.
Each subdimension contains a number of policy indicators as depicted in Figure 5.2.
The subdimension on better regulation and legislation contains four indicators related to
regulatory reform. While there is no single ideal model for improving legislation and
regulations, there are a number of agreed-upon mechanisms which have been tested in the
OECD area and emerging-market economies and which have proven to be effective. These
mechanisms are captured in the following four indicators:
● review and simplification of laws/regulations related to economic policy;
● use of regulatory impact assessment;
● extent of harmonisation of domestic laws with the EU acquis communautaire; and
● existence of forward-planning mechanisms between government and parliament.
Figure 5.2. Assessment framework for regulatory reform

and parliamentary processes
Better regulation and legislation Transparency and dialogue
Review and simplification of laws/regulations Adoption and implementation of a lobby law

related to economic policy
Quality of the parliamentary website
Use of regulatory impact analysis for external users
Extent of harmonisation of domestic laws Use of the transparency law by economic
with the EU acquis communautaire commissions/committees
Existence of forward-planning mechanisms Existence of a centralised system to record
between government and parliament amendments to normative acts

The transparency and dialogue subdimension aims at measuring the transparency of

parliaments and their economic commissions vis-à-vis key stakeholders, including the
private sector and civil society. It explores four indicators: the existence of a lobby law,
quality of the parliamentary website for external users, use of the transparency law by
economic commissions and the existence of a centralised system to record amendments
to normative acts.
5.3. Results by subdimensions

Subdimension: Better regulation and legislation
Figure 5.3 illustrates that most South-East European economies score above level 3 in
the subdimension on better regulation and legislation, which signifies that the legislative
framework for the elements of regulatory reform analysed in this chapter is in place. The
exceptions are Bosnia and Herzegovina, and Kosovo. Advanced levels of implementation
have been achieved by Croatia, the former Yugoslav Republic of Macedonia, the Republic of
Moldova, Romania and Serbia.
Figure 5.3. Better regulation and legislation subdimension: Average scores

Score
5
0
Note: No scores were awarded to Bulgaria in this subdimension, due to a lack of information provided by the Bulgarian
government/parliament during the assessment process.
Rationale and background for subdimension on better regulation and legislation

There is broad consensus amongst analysts that a positive correlation exists between
high-quality regulation (one result of regulatory and legislative reform) and foreign and
domestic investment, trade, and enterprise growth and creation (Busse and Groizard, 2008;
Djankov, McLiesh and Ramalho, 2006; Batra and Stone, 2008; and OECD, 2002a).
This point has been established empirically in a major study of 55 developed and
developing countries, which found that “better functioning legal systems and governance and
better enforcement appear to be more important than legal origins per se in terms of their
impact on development” (Chan-Lee and Ahn, 2001). Of particular relevance in the context of
foreign direct investment (FDI) was the measure of institutional governance used in this work.
Wide variations in inflows were seen even for countries with the same institutional
governance rating. One would expect such variation, given the multiplicity of factors behind
investment decisions. However, the overall the relationship between the quality of
institutional governance and the level of inflows was clear and positive (see Figure 5.4).

Figure 5.4. Relationship between inward FDI and quality of governance

Institutional governance
1.0
0.9
R2 = 0.4492
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0 10 000 20 000 30 000 40 000 50 000 60 000
FDI inflows, 1995-2000 (USD million)
Note: The index is calculated as a weighted average of various estimates of the extent to which the rule of law prevails
in each country, the efficiency of the judicial system, corruption, enforcement, ownership concentration (as a proxy
for political obstacles to transparency), and finally shareholders’ and creditors’ rights. The indicator is a relative
measure between 0 and 1, with the Russian Federation at the bottom and the United Kingdom at the top.
Source: OECD, 2002a, based on data provided in Chan-Lee and Ahn, 2001.
Lower legislative, regulatory and procedural burdens for businesses promote

sustainable economic development by enhancing competition, boosting efficiency, bringing
down prices and stimulating innovation (Busse and Groizard, 2008; Djankov, McLiesh, and
Ramalho, 2006; and OECD, 2002a and 2008a, in co-operation with the European Commission
and ETF). Complex procedures and heavy regulatory compliance requirements, on the other
hand, hinder private sector development by stifling enterprise growth, diverting resources
from the creation of value-added activities to non-productive ones.
In recent years, in both OECD and emerging market economies, policy makers,
economists and management experts have studied how to improve the efficiency and
quality of regulatory frameworks. Governments have understood the importance of
regulatory reform, spurred in part by a relatively new stream of analytical research and
benchmarking exercises, including the World Bank’s Doing Business monitoring surveys and
policy indices developed by the OECD.2
With regard to South-East Europe, a survey of foreign investors suggests that the
quality of the regulatory environment is a more important determinant of FDI in the region
than other criteria commonly cited, such as macroeconomic stability, GDP or cost of labour
(see Figure 5.5).
Review and simplification of laws/regulations related to economic policy3

The indicator on “review and simplification of laws/regulations related to economic
policy” examines the extent to which governments have reviewed and simplified their
legislative stock. Thorough analysis of both primary and secondary legislation will ensure
that the current set of legislation and regulations is up-to-date and consistent. Simplification
will ensure that legislation facilitates business and investors’ operations. Elimination, often
referred to as the guillotine review, aims to eliminate outdated and unnecessary laws and
regulations which are not business/investor-friendly. This entire process is particularly
crucial in economies that inherited now-obsolete legislation from the former Yugoslav

Federation. Box 5.1 describes Sweden’s guillotine review in the 1980s and highlights the
contribution of the process in streamlining the regulatory and legislative environment.
Figure 5.5. Top determinants of FDI in SEE according to foreign investors
Market size
Political stability
GDP growth
Regulatory environment
Profit repatriation
Macroeconomic stability
GDP size
Quality of business
Competitor presence
Cost/Quality of labour
0 10 20 30 40 50 60 70 80
%
Source: FDI Confidence Index, A.T. Kearney.

Box 5.1. The guillotine mechanism to reform the regulatory framework

in Sweden
Economies in transition face an enormous task of reviewing and updating the legacy of laws, rules
and other instruments dating back decades. This must be done quickly to avoid slowing economic
growth and increasing regulatory risk. The goal of this reform is to establish clear and accountable legal
structures by creating a comprehensive central regulatory registry with positive security. This can be
done using the guillotine approach, pioneered by Sweden.
In the 1980s, Sweden enacted its guillotine rule nullifying hundreds of regulations that were not
centrally registered. In 1984, the government found that it was unable to compile a list of regulations
in force. The accumulation of laws and rules from a large and poorly monitored network of regulations
meant that the government could not itself determine what it required of private citizens. To establish
a clear and accountable legal structure, it was decided to compile a comprehensive list of all agency
rules in effect. The approach proposed by the government and adopted by the Parliament of Sweden
was simple. The government instructed all government agencies to establish registries of their
ordinances by 1 July 1986. As these agencies prepared their lists (over the course of a year), they culled
unnecessary rules. Ministry officials also commented on rules that they thought were unnecessary or
outdated, effectively reversing the burden of proof for maintaining old regulations. When the
guillotine rule went into effect, hundreds of regulations not registered were automatically cancelled
without further legal action. All new regulations and changes to existing ones were henceforth to be
entered in the registry within one day of adoption. In the education field alone, 90% of rules were
eliminated. The government had for the first time a comprehensive picture of the Swedish regulatory
structure that could be used to organise and target a reform programme. Introduction of the registry
may also have had the indirect effect of slowing the rate of growth of new regulations, and by 1996 the
net number of regulations had indeed dropped substantially.
Source: OECD (2002b).

A well-advanced and structured review, simplification and elimination programme

should include the following steps:
● a concrete plan is made to review, simplify and eliminate legislation related to enterprise
policy;
● the plan is approved and institutions in charge are identified;
● the plan is implemented, beginning with a review of key primary legislation;
● the plan is extended to secondary legislation; and
● the review results in a simplification or elimination of primary and/or secondary
legislation.
In the 1 to 5 scoring scale, implementation of the above steps would lead to a score of 5.
Croatia’s progress regarding regulatory review and simplification meets all the criteria. In
2006, Croatia launched HitroRez, a project designed to significantly cut red tape in business
legislation and regulation, co-ordinated by an independent working group. The project,
conducted over a period of ten months, resulted in a rapid process of regulatory reform
using the guillotine review. The initiative benefited from high-level political commitment,
with direct support from the prime minister and proactive private sector engagement. To
achieve fast results, targets were set to reduce the number of unnecessary regulations by
up to 40%. By the end of the review process, HitroRez recommended the elimination of 425
regulations and the simplification of 374 others, accounting for approximately 55% of all
business regulations in Croatia. In May 2009, 501 recommendations were implemented
(73% of the recommendations that were made). The remaining recommendations could
not be implemented due to lack of administrative capacity and lack of training of
administrative officers, or because the respective regulatory area was already being
harmonised with the EU acquis communautaire.
Albania, the former Yugoslav Republic of Macedonia, the Republic of Moldova,
Montenegro and Serbia have engaged in comprehensive processes to simplify regulation
and legislation, albeit with differing levels of implementation to date. The Republic of
Moldova is the most advanced of this group, having conducted two comprehensive
guillotine reviews, one in 2005 focusing on government decrees and by-laws, and a second
in 2008 focusing on laws and regulations related to entrepreneurial activity.
In Bosnia and Herzegovina, no regulatory simplification process has yet taken place at
state level. The Council of Ministers, nevertheless, recently signed an agreement with the
Foreign Investment Advisory Service to engage in a partnership to launch a regulatory
guillotine review. Project details are currently being negotiated.
Regulatory impact assessment

This indicator gauges the extent to which an impact assessment is applied when legal
instruments are drafted. Doing so can help to optimise the efficiency and effectiveness of
the instrument, and ensure that it will achieve the intended objectives at minimum cost
and with the fewest unintended negative consequences.
The burden of complex regulations is disproportionally high on small companies
because administrative and managerial resources in such firms are scarcer and costs
cannot be spread over a large turnover. Box 5.2 presents a number of good practices from
OECD economies that reduce burdens and support regulatory compliance for SMEs.

Box 5.2. Lessons learned from OECD economies: Thinking small first
OECD research demonstrates that small companies often incur regulatory costs five
times higher than those borne by large companies. Reforms that reduce business burdens
and increase the transparency of regulatory regimes support entrepreneurship and market
entry, and are integral to the development of the small- and medium-sized enterprise
(SME) sector.
Creating regulatory frameworks that take the needs of SMEs into consideration is often
a difficult task. Good practice from a number of OECD economies involves special
initiatives to reduce burdens and support regulatory compliance specifically for SMEs.
Strategies to reduce administrative burdens could include the following actions:
● institutionalise SME concerns by establishing permanent or ad hoc government units
mandated to represent the views of SMEs in the regulatory process;
● require regulatory agencies to prepare Small Business Impact Statements;
● consult small businesses on regulatory proposals;
● ensure plain language drafting and specific compliance guidance for SMEs;
● establish a central registry of administrative procedures and licences, and initiate
comprehensive reviews (using RIA) to determine how to reduce regulatory burdens;
● build a system for measuring administrative burdens;
● establish a one-stop shop for regulatory information and transactions; and
● develop e-government tools to save time and resources for SMEs when dealing with
public administrations.
Sources: OECD (2003) and OECD (2005).
Cost-benefit analysis of legislation and regulation, which is usually referred to as RIA,

is a complex technique requiring considerable time and resources. Several OECD
publications provide guidance on RIA (OECD 1997 and 2008b). Ideally, RIA should be
formally introduced into the legislative system, applied to all draft legislative proposals,
and its results employed to change the draft when necessary.
The assessment suggests that Serbia is the most advanced SEE country in the application
of RIA. This is thanks to longstanding implementation of RIA, an institutional framework that
is backed at the highest political level and the transparency of the process. RIA was introduced
into the legislative system in 2005 through an amendment in the Rules of Procedure of the
government, which made the application of RIA obligatory to all draft legislation. RIA is
conducted by civil servants in the line ministry that drafts the legislation, and 250 government
officials have been trained in RIA application to date. To assist the different bodies of the
government in applying RIA, and also to ensure its implementation, the government
established the Council for Regulatory Reform and Quality Control. This Council issues
statements on all RIAs and has the authority to block legislative proposals and return them to
the relevant line ministry if it deems the RIA to have been conducted improperly or the results
of the RIA to be negative. The Council is chaired by the prime minister. Its opinions on RIAs are
posted on a publicly accessible website. There is ample evidence that its opinions have
prompted ministries to revise and improve legislative proposals.
Three other countries, Romania, the Republic of Moldova and the former Yugoslav
Republic of Macedonia, have established the legal framework for RIA and are

systematically applying the tool to draft legislation. In a manner comparable to Serbia’s

Council for Regulatory Reform, the Republic of Moldova has set up a working group
composed of public and private sector representatives, which reviews the RIAs conducted
by the line ministries. The working group does not, however, have the power to block
legislative proposals. In the former Yugoslav Republic of Macedonia, the legal framework
for RIA is in place. A pilot project has been conducted, and its full application started in
January 2009. Of the 60 laws passed in the former Yugoslav Republic of Macedonia between
1 July 2009 and 14 October 2009, 48 underwent an RIA.
Croatia introduced the application of RIA into the legislative system in 2005 through
an amendment of the Standing Orders of the government. However, implementation has
been restricted to fiscal impact assessments by line ministries, which are reviewed by the
Ministry of Finance. The government Office for the Regulatory Impact Assessment System,
which was set up in 2008 to co-ordinate and ensure RIA implementation, closed in August
2009 due to budgetary restrictions, bringing progress in RIA implementation to a halt
(European Commission, 2009).4
In Albania, Bosnia and Herzegovina, Montenegro and Kosovo, the application of RIA
remains in its infancy. Among this group, Albania has taken the most concrete steps
towards establishing a RIA process by:
● applying RIA principles in the area of business registration and licensing through an
order of the prime minister;
● developing a policy paper in co-operation with the World Bank (BERIS Project) to outline
the processes required to establish an RIA system; and
● holding awareness-raising seminars and workshops to discuss the plans to implement
RIA with the public administration.
Extent of harmonisation of domestic laws with the EU acquis communautaire

With the exception of Romania and Bulgaria (both members of the European Union)
and the Republic of Moldova (which is part of the European Neighbourhood Policy), the SEE
countries have launched their accession process to the European Union.
An essential element of the accession process is the harmonisation of a candidate
country’s stock of laws and regulations with those of the EU acquis communautaire. This
process should be carefully planned and sequenced to avoid capacity overload for public
institutions. In addition, normative acts drafted by either the government or parliament
should be verified for compatibility with the acquis communautaire.
All the examined economies have adopted legal frameworks aimed at ensuring that
draft legislation is reviewed on its compatibility, and all have engaged in programmes to
harmonise the legislative stock. However, the extent of implementation differs and
corresponds approximately to each economy’s accession status. Croatia and the former
Yugoslav Republic of Macedonia are the most advanced economies.
Existence of forward-planning mechanisms

The indicator on forward-planning mechanisms assesses the extent to which
governments in SEE are planning their legislative activity in advance. Legislative forward
planning is a means of raising awareness of newly proposed laws. Such planning has the
potential to allow more active public consultation by providing greater notice to stakeholders
and thus allowing them more time to organise and formulate their submissions. In the

context of parliament, forward planning by the government and the communication of these
plans to parliament is essential to prevent parliaments from becoming overburdened with a
sudden influx of draft laws. Proper forward planning allows parliaments to thoroughly debate
draft normative acts and to establish well-informed opinions. Usually, forward planning
includes the publication of the overall legislative agenda proposed by the government.
SEE economies have developed the foundations of forward-planning mechanisms,
although approaches vary from economy to economy.
Most governments request that a detailed programme of the draft acts that they plan
to propose during the coming year be presented by ministers to government. For instance,
the government of Kosovo established that a Legislative Strategy be prepared at the end of
each year. In Croatia and the former Yugoslav Republic of Macedonia, an annual work
programme is defined by the government. The same system is in place in Albania and
Montenegro, where the plan is divided into four quarterly sections so as to be easily
monitored. The plan indicates the working party and responsible ministers in charge of
preparing the draft law.
The Republic of Moldova and Romania have established a system of dialogue between
the government and parliament, and operate a specific structure which co-ordinates the
forward-planning process. In the Republic of Moldova, for instance, the government
prepares an annual plan indicating all acts that will be developed during the year. This plan
is revised quarterly. There is a special parliamentary commission that aims at optimising
the process of law making concerning entrepreneurial activity.
In Serbia, and in Bosnia and Herzegovina, legislative planning is directly linked to the
EU transposition process. Furthermore, in Bosnia and Herzegovina, the Law on the Council
of Ministers includes a section on the relationships between the Council of Ministers and
other bodies. It sets clear and comprehensive guidelines on communication between the
government and parliament, and encompasses the dialogue on forward planning. These
guidelines appear to be followed.
Comparison of results: IRI 2010 and IRI 2006

The indicator in the 2006 edition of the Investment Reform Index relating to RIA is
directly comparable with that used in the current exercise. Comparison shows that
progress has been achieved throughout the SEE region in establishing regulatory
frameworks for RIA and, in some cases, systematically applying the tool. The most marked
progress has been realised by:
● Serbia, which has further fine-tuned its RIA methodology, and which maintains a
conducive institutional framework, supported at the highest political level;
● the Republic of Moldova, which has institutionalised RIA and established a public-
private working group to review the RIAs conducted by line ministries; and
● The former Yugoslav Republic of Macedonia, which has formally introduced RIA into the
legislative process and applies RIA systematically to legislative proposals since January 2009.
Subdimension: Transparency and dialogue
Rationale and background for subdimension on transparency and dialogue

Parliaments have a key role to play in the process of economic reform: their task is to
enact or amend legislation that provides the legal framework for economic activities. Their

Figure 5.6. Transparency and dialogue subdimension: Average scores

Score
5
0
Note: No scores were awarded to Bulgaria in this subdimension, due to a lack of information provided by the Bulgarian
government/parliament during the assessment process.
challenge is to establish rules which are coherent, effective and stable. Yet, the study of the
role of parliaments in the economic reform process in South-East Europe is still in its infancy.
The subdimension on transparency and dialogue aims at gauging the extent to which
legislative practices of SEE parliaments (and to a lesser extent, SEE governments) are
transparent and accountable, with a focus on parliaments’ economic commissions. The
parliamentary process of adopting legislative drafts proposed by the government provides
an important quality check and window for consultation with key stakeholders concerned
with economic legislation. This subdimension focuses on the communication and dialogue
between the parliaments and their economic commissions and relevant stakeholders.
Transparency can address many causes of regulatory failure, such as bias towards
concentrated benefits, inadequate information in the public sector, inability to understand
policy risk and lack of accountability. Improving legislative transparency is therefore a key
element of sound legislative policy and is one of the most important ways to reassure
stakeholders in a supportive legal environment.
Lobby law
This indicator measures whether SEE economies have adopted and implemented a
law that formalises lobbying practices during legislative drafting and adoption. It ensures
that key stakeholders have the opportunity to lobby and it can be an effective way to
enhance regulatory transparency and ultimately improve the quality of legislative
proposals. When adopting a law on lobbying, the necessary human and institutional
capacities to implement such a law must be in place.
Drafting a lobby law is a complex task. Information that is promoted through lobby
channels may be distorted and the legitimacy of lobbying structures needs to be assured. Clear
principles on lobbying must be defined and registration and a code of conduct for lobbyists
need to be enforced in order to assure the efficient application of these principles (EC, 2006).
The former Yugoslav Republic of Macedonia is the only SEE economy to have adopted
a lobby law. The law, which was based on practices from the United Kingdom and the
United States of America, was adopted in August 2008 and published in the Official Gazette

No. 106. At a private sector focus group meeting in Skopje in June 2009, private sector
representatives expressed their satisfaction with the law and confirmed that it has
enhanced their dialogue with the parliament.
Box 5.3. Lessons learned from Poland: The adoption

and implementation of the Lobby Law
The Lobby Law was adopted by both chambers of parliament in 2005. It describes (among
others) the following principles for conducting lobbying activities:
● Lobbying consists of actions conducted by legally admissible methods that seek to
influence public authorities in the law-making process.
● All lobbyists need to be registered with the Register that is kept by the Polish Ministry of
Interior and Administration.
● Any entity that is professionally lobbying without being registered is subject to fines that
are imposed through administrative decisions.
In order to ease the communication between the entities drafting normative acts and the
interested stakeholders, every six months the government posts the programme of
legislative work on the website of the Public Information Bulletin. Notifications of interest
can be submitted after publication of the draft normative acts. These are also posted on
the website of the Public Information Bulletin. The party responsible for drafting the
normative act is entitled to organise public hearings on the draft.
Although the Republic of Moldova, Romania and Serbia have considered the adoption
of lobby laws, the legislative proposals were never adopted by parliament. In September
2009, a new proposal for a lobby law was issued by the Romanian Ministry for SMEs, Trade
and Business Environment.
The Republic of Moldova had discussions on adopting a lobby law during the 1997-2001
legislature but without concrete results. Serbia is currently considering adopting a lobby law.
The remaining SEE economies, which include Albania, Bosnia and Herzegovina,
Croatia, Kosovo and Montenegro, have not taken any steps toward adopting a lobby law.
Website of parliaments for external users

This indicator seeks to determine whether parliaments have set up a functional website
for external users and to assess the quality of that website. A well-developed website can be
an effective tool to provide information to the public on legislative procedures related to
specific normative acts and on parliamentarians themselves. It is important to update the
website on a regular basis, as this helps build a transparent relationship between the
parliaments and their electorate. The parliamentary website also serves as a point of reference
for foreign investors that are concerned about the quality of parliamentary processes in the
host country. It is therefore important that parliamentary websites be translated into English.
The website should also provide information on the legislative process (including information
on laws passed and laws in planning stages), as well as contact information on
parliamentarians. Table 5.1 summarizes the characteristics of SEE parliaments websites.
With the exception of Montenegro, all SEE economies had functioning parliamentary
websites at the time of writing. Montenegro is currently designing a new website following
its legislative elections of March 2009.

Table 5.1. Characteristics of SEE parliamentary websites

Contact details
Website translated Information
Functional website of members
into English on the legislative process
of the Parliament/Assembly
Albania ✓ ✓ – –
Bosnia and Herzegovina ✓ – ✓1 –
Croatia ✓ ✓ ✓ ✓
Kosovo ✓ ✓ ✓1 –
The former Yugoslav
✓ ✓ – ✓
Republic of Macedonia
Republic of Moldova ✓ ✓ ✓ ✓
Montenegro – – – –
Romania – Senate ✓ – ✓ ✓
Romania – Chamber
✓ ✓ ✓ ✓
of Deputies
Serbia ✓ ✓ ✓1 –
1. Bosnia and Herzegovina, Kosovo and Serbia are in an intermediary situation: detailed information on minutes of
the economic commission is posted, together with the full list of normative acts already adopted
All SEE economies that have a functioning website have established an English version
with the exception of Bosnia and Herzegovina. In most cases, the English version is
consistent with the original one. Only in Albania and Serbia was the English version
significantly simplified. Romania has two separate websites, one for each of the two
chambers of the parliament. The website of the Romanian Senate, the higher chamber of
parliament, has no English version whereas the Chamber of Deputies (the lower chamber
of parliament) website provides extensive information in English.
Regarding the availability of information on parliamentary websites, Albania and the
former Yugoslav Republic of Macedonia do not provide any information on normative acts
that entered the parliament for discussions/adoption. The Albanian Parliament provided a
specific website (www.legjislacionishqiptar.gov.al) which contains detailed information on
the legislative process. (However, the site was experiencing a technical difficulty at the
time of writing and could not be accessed by the authors.) No information on the date of
decision or on the length of time spent on discussions or adoption/rejection of these acts
is provided. An intermediary situation exists in Bosnia and Herzegovina, Serbia and
Kosovo. None gives direct access to the legislative process, however, detailed minutes of
committee meetings and lists of adopted normative acts are provided. Croatia, Romania
and the Republic of Moldova offer full access to the legislative process through a clear
description of the entry date and current status of normative acts, details of the
commissions that have been discussing the draft and next steps. Regrettably the
information is only available in the national language, restricting access for foreigners.
Romania’s parliamentary website provides a complete list of parliamentarians’ e-mail
addresses. In the Republic of Moldova only 3 out of the 101 members of parliament have
posted their email addresses. In Croatia and the former Yugoslav Republic of Macedonia
only the different committee contact details are made available. The remaining websites
do not contain contact details of parliamentarians.
Use of transparency law

This indicator measures the extent to which governments, parliaments and economic
commissions of parliaments consult with stakeholders during the legislative drafting
process and whether this process is formalised by law.

Romania is the only SEE economy to have adopted a law on consultation during the
legislative drafting process. In 2002, the government decided to make consultation with
employers’ organisations and non-governmental organisations mandatory for all proposed
regulations that may have an impact on the business environment. In particular, this
decision established a minimum period (30 days) for the authorities to withhold further
actions, in order to give the consulted parties an opportunity to comment and provide
suggestions. A year later, the government extended the consultation requirements to all
aspects of government decision making by introducing the Law on Decisional
Transparency in Public Administration.5 The Law established a framework in which
institutional dialogue and regular meetings between government officials and the private
sector take place. However, at a meeting organised by the OECD in September 2009 with
representatives of the key Romanian business associations chambers of commerce and the
private sector stated that their comments on several draft laws were not taken into account
by the government. This was the case for the Fiscal Code and the Lobby Law, which were
drafted during the summer of 2009. It was also mentioned that the timeframe for
comments on legislative proposals is sometimes as little as 24 hours, instead of the 30 days
as stipulated in the Law.
Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia and Serbia have
adopted the Freedom of Information Act, which guarantees the public access to
information of a public character, such as adopted and/or published normative acts.
However, each country determines which domains are considered classified information
and therefore not made publicly available.
Kosovo, the Republic of Moldova and Montenegro consult with stakeholders during the
legislative drafting process, although this process has not been formalised. Kosovo
generally publishes draft normative acts 10 days before adoption, allowing for prior
consultation. The Republic of Moldova and Montenegro organise consultations inter alia
with the members of the economic commission in an ad hoc way. Interestingly, Montenegro
recently adopted a strategy for co-operation between the government and non-
governmental organisations (EC, 2009).
The Parliament of the former Yugoslav Republic of Macedonia signed a protocol with the
representatives of the Economic Chamber allowing consultations on normative acts having
economic impact. The latest modifications to the government’s rulebook mention that draft
normative acts should be accessible on the websites of relevant ministries and that civil
society representatives can take part in the working group for drafting legislation (EC, 2009).
Serbia is in the process of adopting new rules and procedures for the parliament,
which clearly refer to compulsory consultations on draft normative acts. Serbian
professional associations and representatives of international organisations have criticised
the fact that they were not consulted when amendments to the law on public information
were adopted. In general, consultations in Serbia take place on an ad hoc basis. For example
the Serbian government thoroughly consulted with civil society while preparing the Law
on the Environment in May 2009 (EC, 2009).
The Croatian government hosts regular consultations with stakeholders on draft laws.
However, due to the European Union accession process, the majority of such drafts are
adopted under emergency procedure, which entails a very short consultation timeframe.
It should be noted that in addition to the consultation structures and processes
mentioned above, all assessed economies invite stakeholders to attend the meetings of

parliamentary commissions, including those of the economic commission. In Albania, for

example, the Parliament’s Rules of Procedure prescribe that committee meetings can be
attended by the media, groups of interest and registered visitors. Committees can also
organise public hearings.
Box 5.4. Parliamentary libraries

During the assessment process, information was also collected on the quality of
parliamentary libraries. A well-functioning library containing a comprehensive collection
of books and journals provides an important independent source of information for
parliamentarians. Libraries have particular importance when parliamentarians examine
legislative proposals outside of their scope of expertise and requiring extensive
background research.
All SEE economies have functioning parliamentary libraries. But the collection of
international journals and books is limited in most cases, and electronic libraries, which
accelerate search and lending operations, have not been set up.
Albania boasts a particularly modern library, which is well stocked with national and
international books and journals. This library has a number of additional features rare in
other SEE economies’ parliamentary libraries:
● a collection of the laws passed;
● an electronic library catalogue;
● a research centre, whose staff prepare summaries, studies and various publications on
demand; and
● membership in a network which links international libraries. The library also recently
benefited from an increase in its budget and further references are being added to its
already extensive catalogue.
Centralised system to record amendments to normative acts

This indicator measures the extent to which amendments made to normative acts in
parliament are recorded in a central register. It provides a proxy for the transparency and
accountability of parliamentary procedures.
All SEE economies have a system of keeping the amendments to draft normative acts.
Four economies have established departments within their parliaments that co-ordinate
the amendments to normative acts (Bosnia and Herzegovina, Kosovo, the Republic of
Moldova and Serbia). The other economies are using either the archive of the economic
commission or the general archive of the parliament (Albania, Croatia, the former Yugoslav
Republic of Macedonia, Montenegro and Romania).

A central finding of this chapter is that all economies of South-East Europe have made
progress in establishing institutional and legal frameworks for regulatory reform and in
implementing regulatory reform programmes. In some economies, this progress has been
more pronounced than in others. The overall conclusions and recommendations are as
follows:
● The majority of SEE economies have conducted comprehensive legislative reviews to
identify, simplify and eliminate obsolete legislation. The exception is Bosnia and

Table 5.2. The role of parliaments in economic reform: Weighted final scores
Better regulation and legislation ALB BIH HRV XK MK MD MNE RO SRB
Review of legislation and regulations 4 2 5 n.a. 4.5 4.5 3 n.a. 3.5

RIA 2.5 1.5 2 1.5 4.5 4.5 2 4 4.5
Harmonisation with EU Acquis 3.5 3 4 3 4 n.a. 3.5 n.a. 3.5
Forward planning mechanisms 3.5 4 3 2.5 3 3.5 3.5 4 3.5
Better regulation and legislation 3.4 2.6 3.5 2.3 4.0 4.2 3 4.0 3.8
Transparency and dialogue ALB BIH HRV XK MK MD MNE RO SRB
Lobby Law 1 1 1 1 3 1 1 1 1
Website of Parliament for external users 4 3 3.5 4 4 4 2 4.5 4
Use of Transparency law by Economic Commission 2 2 3 2.5 3 2 2 3 3
Centralised system to record amendments to normative 3.5 5 2.5 4.5 2.5 4.5 4 4 5
Transparency and dialogue 2.6 2.8 2.5 3 3.1 2.9 2.3 3.1 3.3
DIMENSION AVERAGE 2.8 2.7 3.0 2.7 3.6 3.5 2.6 3.6 3.5
Herzegovina, which needs to prioritise actions in this field at state level and further
examine and build on international best practices.
● The application of regulatory impact assessment to draft legislation is in its infancy in
most SEE economies. This constitutes a key problem because many SEE economies
require extensive and rapid adoption of EU laws and regulations to comply with the
acquis communautaire. The EU accession context underlines the importance of
establishing a review system of draft legislation and should be prioritised by
governments in the region. Several OECD publications provide guidance on RIA (OECD
1997 and 2008b). A sharing of the experiences of more advanced economies in this field,
such as Serbia, could also be of benefit to the region.
● SEE governments have developed the foundations of forward legislative planning.
However, progress needs to be sustained, as many parliaments are overburdened with
complex legislative proposals often submitted at short notice and the co-ordination
between parliaments and governments remains unsystematic.
● Few SEE economies have adopted a lobby or transparency law. There would be advantages
in formalising consultations with stakeholders during legislative drafting and adoption.
Sound consultation can address many causes of regulatory failure, such as bias towards
concentrated benefits, inadequate information in the public sector, inability to
understand policy risk and lack of accountability. Improving legislative transparency is
therefore a key element of sound legislative policy. It is also one of the most important
ways to reassure stakeholders that the legal environment is supportive. Consultations
can be facilitated by using websites or web portals. Several OECD publications provide
guidance on drafting a lobby or transparency law (OECD, 2009c, 2009d).
● The limited capacity of parliaments to analyse complex economic legislative proposals
remains a problem in the region and hampers the adoption of laws proposed by the
government. This is particularly problematic in the context of EU accession and the
economic crisis, which require swift adoption of new laws and regulations. There is a
need for parliaments to (further) build partnerships with universities, non-
governmental organisations and think tanks in order to enhance their capacity and
supplement their often modest resources.

● Most SEE economies have set up functioning parliamentary websites. However, several
websites are not available in English and provide little information on legislative
processes. Improving the quality of the website is a relatively straightforward technical
process and an effective way to increase regulatory transparency.
Notes
1. This dimension assesses the adoption and implementation status of regulatory reforms and
policies. It does not assess the effect of these reforms and policies on their stakeholders.
2. These policy indices have been tested in several assessment exercises in a number of economies,
including South-East Europe, the Middle East and North Africa. Results can be found in several
OECD publications, 2006, 2007 (published in co-operation with the EC), 2008, 2009a (published in
co-operation with the EC, EBRD and ETF), 2009b; also refer to OECD (2009b).
3. Please note that this indicator is not applied to Kosovo. Kosovo fully redesigned its legislative and
regulatory framework in 1999. There is therefore no rationale for a regulatory simplification
process and this indicator is therefore not applicable.
4. After the assessment was finalised, the OECD was informed that an RIA Department is set to be
established within the Croatian Government Office for Legislation.
5. Annex 1 contains the English version of the most relevant articles of this law.
Bibliography
Austrian Parliament (2006), “Connecting Parliaments and Citizens: Strategies and Activities of
National Parliaments and Parliamentarians”, Austrian Parliament, Vienna.
Batra, G. and A.H.W. Stone (2008), “Investment Climate, Capabilities and Firm Performance: Evidence
from the World Business Environment Survey”, OECD, Paris.
Busse, M. and J. Groizard (2008), “Foreign Direct Investment, Regulations and Growth”, World Economy,
Volume 31, Issue 7.
Chan-Lee, J. and A. Sanghoon (2001), “Informational Quality of Financial Systems and Economic
Development: An Indicators Approach for East Asia”, Working Paper, Asian Development Bank
Institute, Tokyo.
Djankov, S., C. McLiesh and R.M. Ramalho (2006), “Regulation and Growth”, Economics Letters, Vol. 92.
European Commission (2006), Green Paper on the European Transparency Initiative, European Commission,
Brussels.
European Commission (2009), Albania Progress Report 2009, European Commission, Brussels.
European Commission (2009), Bosnia and Herzegovina Progress Report 2009, European Commission,
Brussels.
European Commission (2009), Croatia Progress Report 2009, European Commission, Brussels.
European Commission (2009), Former Yugoslav Republic of Macedonia Progress Report 2009, European
Commission, Brussels.
European Commission (2009), Kosovo under UNSCR 1244/99 Progress Report 2009, European Commission,
Brussels.
European Commission (2009), Montenegro Progress Report 2009, European Commission, Brussels.
European Commission (2009), Serbia Progress Report 2009, European Commission, Brussels.
Jacobs, S. (2007), “Regulatory Reform Strategies: Converging with Europe’s Best Regulatory
Environments”, www.regulatoryreform.com.
Kallas, S., Vice-President of the European Commission and Commissioner for Administrative Affairs,
Audit and Anti-Fraud (2007), “Speech on the need for a European Transparency Initiative”, 3 March
2007, Nottingham, United Kingdom.
OECD (1997), Regulatory Impact Analysis: Best Practices in OECD Countries, OECD, Paris.

OECD (2002a), Foreign Direct Investment for Development: Maximising Benefits, Minimising Costs, OECD,
Paris.
OECD (2002b), Regulatory Policies in OEDC Countries: From Interventionism to Regulatory Governance, OECD,
Paris.
OECD (2003), From Red Tape to Smart Tape: Administrative Simplification in OECD Countries, OECD, Paris.
OECD (2003b), Policy Brief, Engaging Citizens Online for Better Policy Making, OECD, Paris.
OECD (2004), Regulatory Governance in South East European Countries: Progress and Challenges, OECD, Paris.
OECD (2005), SME and Entrepreneurship Outlook, OECD, Paris.
OECD (2006), Investment Reform Index 2006: Progress in Policy Reforms to Improve the Investment Climate in
South-East Europe, OECD, Paris.
OECD/EC (2007), SME Policy Index 2008: Report on the Implementation of the European Charter for Small
Enterprises in the Western Balkans, OECD, Paris.
OECD/EC/ETF (2008a), Report on the Implementation of the Euro-Mediterranean Charter for Enterprise, EC,
Luxembourg.
OECD (2008b), Building an Institutional Framework for Regulatory Impact Analysis: Guidance for Policy Makers,
OECD, Paris.
OECD/EC (2009a), SME Policy Index 2009: Progress in the Implementation of the European Charter for Small
Enterprises in the Western Balkans, OECD, Paris.
OECD (2009b), Overcoming Barriers to Administrative Simplification Strategies: Guidance for Policy Makers,
OECD, Paris.
OECD (2009c), Lobbyists, Government and Public Trust, Volume 1, Increasing Transparency through Legislation,
OECD, Paris.
OECD (2009c), Governance, OECD, Paris.

ANNEX 5.1
Romania’s Law on Decisional Transparency

in Public Administration
Annex 5.1 contains an English translation of Romanian’s Law on Decisional
Transparency in Public Administration. Since Romania is the only SEE economy that has
adopted such a law, its content and structure might be of interest to other SEE economies.
Box 5.A.1. Romania’s Law 52/2003 on Decisional Transparency

in Public Administration
Article 1
(1) This Law establishes the minimal procedural rules applicable to ensure decisional
transparency within central and local public administration authorities, elected or appointed,
as well as of other public institutions that use public financial resources, in the relations
established between them with the citizens and their legally established associations.
(2) The purpose of the law is:
a) to increase the responsibility degree of public administration towards the citizen, as a
beneficiary of administrative decisions;
b) to stimulate the active participation of the citizens in the administrative decision-
making process and in the process of elaborating legislative acts;
c) to increase transparency degree at the level of the whole public administration.
Article 2
The principles lying at basis of this law are the following:
a) providing beforehand, ex-officio information for the people on matters of public interest
to be debated by central and local public administration and the draft legislative acts;
b) consulting the citizens and legally established associations, at the initiative of public
authorities, in the process of elaborating draft legislative acts;
c) the active participation of citizens in administrative decision making and in the
elaboration process of draft legislative acts, with observance of the following rules:
1. the meetings of the authorities and public institutions that are subject to this law are
public, under the law;
2. the debates will be recorded and made public;
3. the minutes of these meetings will be recorded, archived and made public under the law.

Box 5.A.1. Romania’s Law 52/2003 on Decisional Transparency

in Public Administration (cont.)
Article 4
The public administration authorities obliged to observe the provisions of this law are:
a) the central public administration authorities: ministries, other central organs of public
administration under the subordination of the government or ministries, their
decentralised public services, as well as the autonomous administrative authorities;
b) local public administration authorities: county councils, local councils, mayors, public
institutions and services of local or county interest.
Article 6
(1) Within the draft legislative acts elaboration procedures, the public administration
authority has the obligation to publish an announcement on this action on its own
website, to display it at its own headquarters, within a space accessible to the public and
to transmit it to the central or local mass media, as the case may be. The public
administration authority shall send the draft legislative acts to all persons who have filed
an application to receive this information.
(2) The announcement on the elaboration of a draft legislative act shall be brought to
public knowledge, as stipulated in paragraph (1), at least 30 days before submission for
analysis, endorsement and adoption by public authorities.
The announcement shall include a substantiation note, recitals or, as the case may be,
an approval report on the necessity of adopting the proposed legislative act, the full text of
the draft of the respective act, as well as the deadline, place and manner in which those
interested might send their written proposals, suggestions or opinions with the value of
recommendations, regarding the draft legislative act.
(3) The announcement regarding the elaboration of a draft legislative act relevant for the
business environment shall be transmitted by the initiator to business associations and
other legally established associations, on specific areas of activity, within the time limit
stipulated in paragraph (2).
(4) At the publication of the announcement, the public administration authority shall set
a period of at least 10 days to receive written proposals, suggestions or opinions regarding
the draft legislation submitted to public debate.
(5) The head of the public authority shall designate a person in the organisation,
responsible for the relation with civil society, to receive proposals, suggestions and
opinions of the interested persons regarding the proposed legislative act.
(6) The draft legislative act shall be transmitted for analysis and endorsement to the
interested public authorities only after its finalisation, on the basis of the observations and
proposals made under paragraph (4).
(7) The respective public authority shall decide the organisation of a meeting where the
draft legislative act shall be publicly debated, if this was requested in writing by a legally
established association or by another public authority.
(8) In all cases when public debates are organised, they shall take place no later than 10
days from the publication of the date and place. The public authority in the cause shall
analyse all the recommendations on the draft legislative act in question.
(9) In case of regulating a situation which, due to its exceptional circumstances, requires
the adoption of immediate solutions, in order to avoid a severe prejudice to public interest,
the draft legislative acts shall be submitted to adoption under the emergency procedure
stipulated by regulations in force.

© OECD 2010
Chapter 6
Tax Policy Analysis
189
I.6. TAX POLICY ANALYSIS
6.1. Key findings
Figure 6.1. Tax policy analysis dimension and subdimension average scores
Dimension average (simple): Tax policy analysis Fiscal position and planning
Taxation, investment and employment Taxation of SMEs and MNEs
Score
5
0
ALB BGR HRV XK MKD MDA MNE ROU SRB BEL
Note: Dimension average score is a simple average of the three subdimensions. Belgium (BEL) is included as a
comparator country (see Box 6.1 for more information).
● All the economies of South-East Europe (SEE) have made important progress in recent
years in s trengthening capacity to carry out tax policy development and
implementation.
● Aggregate tax revenue forecasting models are essential for sound management of public
finances. All SEE economies maintain such models for all or most main taxes.
● Systems are in place in all SEE economies to monitor revenues and public expenditures
on a regular basis to guide management of the government’s net fiscal position.
● No SEE economy has fully implemented a corporate income tax (CIT) microsimulation
model for analysing the revenue impact of alternative tax regimes and allowing
disaggregated analysis of the current tax regime.
● Bulgaria, the Republic of Moldova and Romania periodically prepare tax expenditure
estimates of revenues foregone for each of the main corporate tax incentives for
investment. Tax expenditure estimates are considered alongside direct expenditures when
developing public expenditure and tax policies. Croatia and the former Yugoslav Republic
of Macedonia are taking steps towards implementing tax expenditure frameworks.
● Bulgaria and Romania maintain a tax wedge model to analyse how tax distortions affect
employment decisions. The former Yugoslav Republic of Macedonia and the Republic of
Moldova are taking steps to implement such a model.

● Albania, Bulgaria, the former Yugoslav Republic of Macedonia, the Republic of Moldova,
Montenegro, Romania and Kosovo are taking steps towards implementing a marginal
effective tax rate (METR) model to analyse tax distortions to investment and the
implications of alternative tax reform proposals.
● Tax officials in SEE have yet to assess possible tax distortions to earnings payout
decisions of closely held corporations.1
● Tax officials in most SEE economies have not yet undertaken studies of the potential for
loss-offset provisions2 to affect investment in early-stage high-risk companies. The
exception is Kosovo.
● Albania, Bulgaria, Croatia, Romania and Kosovo have assessed the average cost to small-
and medium-sized enterprises (SMEs) of complying with all or certain main taxes. A
number of economies have adopted simplified tax regimes.
● Bulgaria currently has a framework in place for measuring and analysing non-resident
withholding tax.3 The former Yugoslav Republic of Macedonia, the Republic of Moldova,
Montenegro, Romania and Kosovo are taking steps towards implementing such a
framework.
● Bulgaria has implemented a framework for identifying and analysing the degree of thin
capitalisation of resident foreign-controlled companies.4 The former Yugoslav Republic
of Macedonia intends to have such a framework in place within a year.
6.2. Tax policy analysis assessment framework

Tax and direct investment
Governments taxing their citizens face two competing objectives. First and foremost,
taxation is required to finance essential public goods and services. However, governments
interested in encouraging economic growth, in particular through investment, aim to
ensure that the tax burden is not impeding investment decisions of foreign and domestic
companies. Taxpayers, and especially firms, face the same dilemma: they are recipients of
public services and goods such as a sound education system, security and a stable
macroeconomic environment. At the same time, they are interested in maximising after-
tax profitability in order to effectively compete in an increasingly globalised world.
Host-country taxation impacts investment indirectly by supporting or limiting the
amount of public expenditure available. Investment can be encouraged or discouraged by
the state of the infrastructure in a country, the skills of the workforce, the quality of
governance, etc. In most economies, tax revenues are the most sustainable source of
funding for government expenditures that develop such conditions.
However, taxing profit derived from investment may directly affect the amount of
investment undertaken by influencing the investor’s after-tax rates of return. In theory, a
high effective tax rate on domestic source income is expected to discourage domestic
investment by resident investors as well as inbound foreign direct investment (FDI).
Imposing a tax burden on business that is high relative to host country advantage (political
and macroeconomic stability, access to markets, etc.) and high relative to tax burdens in
competing locations can discourage investment. This is particularly true where location-
specific profit opportunities are limited and profit margins are thin. At the same time, a
poorly designed tax system may discourage investment where the rules and their
application are non-transparent, overly complex or unpredictable. Such conditions can add

to project costs and to uncertainty over net profitability. Systems that allow excessive
administrative discretion in assigning tax relief tend to invite corruption and undermine
good governance objectives that are also fundamental to an attractive investment
environment.
Thus a focus in most economies should be on the twin goals of designing tax systems
that are attractive to investment, while not foregoing tax revenues that could more usefully
fund government expenditures critical to encouraging business activity. Policy makers
should therefore ensure that their tax system imposes an acceptable and readily calculated
tax burden on business, keeps tax compliance and tax administration costs in check and
addresses (rather than contributes to) investment risk.
Overview of tax systems in South-East Europe

SEE economies have undergone significant tax reform in recent years. All economies
have reformed their corporate tax regimes, for example, by introducing low single-rate
corporate taxes (see Table 6.1). But reform has not been limited to the statutory rates.
Bulgaria, Croatia and Serbia have also introduced accelerated depreciation. The former
Yugoslav Republic of Macedonia simplified its depreciation regime. Along with Albania and
Croatia, it also introduced a presumptive tax for small entrepreneurs.5 Serbia and the
former Yugoslav Republic of Macedonia introduced new tax incentives for business
investment, and Bulgaria recently established a special tax incentive targeted at the
agriculture sector.
Table 6.1. Recent changes in CIT rates

CIT rate reforms
Albania Effective 2008, the CIT rate decreased from 20% to 10%.
Bulgaria Effective 2007, a flat 10% CIT rate was introduced.
Croatia Effective 2001, the CIT rate decreased from 35% (calculated only on equity income)
to 20% (calculated on a broader base).
Kosovo Effective 2009, the CIT rate fell from 20% to 10%.
The former Yugoslav Republic of Macedonia Effective 2008, the CIT rate fell from 12% to 10%. Zero taxation on reinvested profits.
Republic of Moldova Effective 2008, the CIT rate decreased from 15% to 0%.
Montenegro Effective 2005, the CIT rate decreased from 20% (two-tiered system with the highest
rate 20%) to 9%.
Romania Effective 2005, the CIT rate decreased from 25% to 16%.
Serbia Effective 2004, the CIT rate decreased from 14% to 10%.
Source: Economy CIT laws.
Yet reforms have not been limited to tax policy and legislation; tax administration has
also improved. Tax administration capacity has increased almost across the board: training
for officials and auditors has begun, and programmes to fight tax evasion have yielded
benefits. The former Yugoslav Republic of Macedonia recently implemented a new
integrated collection system for social security contributions and personal income tax. It
also opened numerous regional tax offices. Albania, Croatia and Serbia have electronic tax
return filing. Albania, Croatia and Kosovo adopted new laws on tax administration and
procedures.
Improvements in legislation and tax administration have resulted in higher tax
revenues throughout SEE. For example, in Albania tax revenues increased by 230% between
2005 and 2008.6 Nominal government revenue in the SEE region increased by 48% between
2005 and 2008.7 The year-on-year growth rate of government revenues in Bulgaria was 17%

from 1997 to 2008. In Romania the figure was even higher, at 23%. However, revenues have
dipped with the global economic crisis. For example, since early 2009 Croatian tax revenues
have only been about 90% what they were during the same time the previous year.
However, despite the reforms described above, and as highlighted by the European
Commission in annual progress reports on economies in the region, further tax
administration capacity and legislative improvements are still needed.
Tax policy analysis assessment framework

At the heart of the IRI tax assessment framework8 is the general recognition that
sound tax policy development rests on information and analysis, including assessments of
the revenue, economic efficiency, equity and tax compliance cost implications of a tax
system.9 Accordingly, the assessment framework looks at how countries analyse such
factors in their current tax systems. In addition to examining the scope of analysis carried
out by tax policy officials, this assessment probes the underlying data and tax models
currently used. Such data and models to a large extent determine the overall capacity of
government to carry out economic analysis of tax policy options.
The IRI tax framework comprises three subdimensions: analysing fiscal policy and
planning; analysing taxation, investment and employment; and analysing taxation of
small- and medium-sized enterprises, and multinational enterprises. As depicted in
Figure 6.2, there are a number of indicators for each of these subdimensions.
Figure 6.2. Structure of the assessment framework
1.1. Forecasting aggregate tax revenues

1. Fiscal position and planning
1.2. Assessment of fiscal balance and policy feedback
2.1. Firm level analysis of corporate tax burden by sector

2.2. METR analysis of tax impediments to domestic investment
2. Taxation, investment and employment
2.3. Transparency in provision of corporate tax incentives for investment
2.4. Tax wedge analysis of tax impediments to employment
3.1. Analysis of tax impediments to equity financing of SMEs

3.2. Analysis of tax arbitrage by SME owners
3.3. Analysis of tax impediments to risky investment in SMEs
3. Taxation of SMEs and MNEs
3.4. Assessment of tax compliance costs and remedial measures
3.5. Analysis of non-resident withholding tax payments
3.6. Analysis of thin-capitalisation of the tax base
The first subdimension examines a country’s practices in preparing short- and

medium-term forecasts of tax revenues and fiscal policy plans. The second subdimension
addresses a country’s practices in assessing the corporate tax burden of firms across main
sectors of the economy, as well as the labour tax burden across different household
structures. It also considers the extent to which SEE economies have implemented tax
expenditure reporting to shed light on tax incentive programmes. The third subdimension
evaluates country practices in assessing a number of issues relevant to SMEs and
multinational enterprises (MNEs), such as how tax policy impacts the cost of funds for
investors, incentives for tax arbitrage behaviour,10 costs involved in complying with a tax
system and the extent to which the tax system encourages aggressive tax planning.

For each indicator, the key analytic issues and their policy importance are briefly
discussed in the text that follows. This is followed by a short description of the assessment
criteria and the situations prevailing in each of the SEE economies.11 In addition to
evaluating SEE progress in implementing tax analysis reforms, a self-assessment of
Belgium has been included to provide context and comparison (see Box 6.1 for an overview
of Belgium’s participation in the Investment Reform Index tax assessment). The chapter
concludes with a summary of policy recommendations and a table of scores.12
Box 6.1. Belgium and the Investment Reform Index tax assessment
Belgium, a co-chair of the OECD Working Party No. 2 on Tax Policy Analysis and Tax
Statistics of the OECD Committee on Fiscal Affairs, conducted a self-assessment using the
IRI tax assessment framework. This has permitted a useful benchmark for the results from
economies in the SEE region. A summary of Belgium’s assessment is as follows:
● Analysing fiscal position and planning: Similar to the situation in many SEE economies,
Belgium obtained an average score of 5 in this subdimension. In particular, it has a
macroeconomic revenue forecasting model. The estimates produced by the model are
examined monthly by the Treasury Committee (and the budget must be revised and
updated at least once a year before April 1).
● Analysing taxation, investment and employment: Belgium scores higher than any SEE
economy on this subdimension. It has implemented microsimulation models for personal
and corporate income tax, although the CIT model has limited use due to the lack of
detailed information provided in the tax returns and profit and loss accounts. In addition,
METR models have been developed, and tax expenditures are reported annually on an ex-
post basis, although they are not considered alongside direct expenditures. Belgium has also
developed a tax wedge model coherent with the OECD Taxing Wages methodology.
● Analysing taxation of SMEs and MNEs: Again, in this subdimension Belgium scores
higher than any SEE economy. Belgium has conducted analyses of tax impediments to
equity financing, tax arbitrage by SME owners, tax impediments to risky investment in
SMEs and tax compliance costs to SMEs. However, the analyses are not generally done
on a regular basis.
Source: www.oecd.org/dataoecd/7/56/43215524.pdf.

Subdimension: Analysing fiscal position and planning
The indicators under this subdimension address country practices in preparing short-
and medium-term forecasts of tax (and non-tax) revenues and fiscal policy plans (see
Figure 6.3 for an overview of scores in this subdimension). The purpose of this dimension
is to evaluate the sophistication of SEE economies’ fiscal monitoring tools.
Forecasting aggregate tax revenues

The forecasting aggregate tax revenues indicator considers whether the Ministry of
Finance maintains an aggregate tax revenue forecasting model for each main tax. 13
Aggregate tax revenue forecasting models are important for estimating future tax
revenues, thus helping to inform tax, revenue and expenditure policy making.14
All SEE economies maintain an aggregate tax revenue forecasting model for most
main taxes. Many officials have reported that over time, more sophisticated methods and

Figure 6.3. Analysing fiscal position and planning subdimension:

Average scores
Score
5
0
Note: Subdimension average is a simple average of indicator scores.
analysis are being introduced to improve the accuracy of forecasts. In Serbia, revenues
from all main taxes are projected using forecasting models based on the relationship
between adjusted tax revenue and a proxy for the relevant tax base, taken from the
National Accounts. In the Republic of Moldova, the Ministry of Finance uses a macro fiscal
model for forecasting revenues and expenditures.
Assessment of fiscal balance and policy feedback

Prudent fiscal policy management involves not only forecasting tax revenues, but also
maintaining short- and medium-term fiscal policy plans identifying current and future
revenues and public expenditures. The assessment of fiscal balance and policy feedback
indicator examines whether SEE economies regularly monitor revenue collection and
public expenditures, and whether planned public expenditures consider these estimates
and the overall fiscal balance. A top score is achieved when: expenditure items are
classified by type and prioritised on the basis of policy objectives, with budget allocations
addressing priority expenditures; and formal or informal rules are in place requiring
adjustments to government expenditure and/or tax design when the fiscal balance is
negative and exceeds some fixed percentage of GDP.
All SEE economies monitor tax revenue collection and public expenditures on a regular
basis. In Bulgaria, Croatia, Montenegro, Romania, Serbia and Kosovo, total tax and non-tax
revenues as well as overall fiscal balance are considered when making decisions about
planned public expenditures. Bulgaria, Croatia and Romania report that public expenditure
items are ranked on the basis of policy objectives, and rules are applied requiring
adjustments to government expenditure and/or tax design when the fiscal balance is
negative and exceeds a fixed percentage of GDP. Romania and Albania report that revenues
are monitored on a daily basis. In Romania, budget expenditures are also monitored on a
monthly basis.
A new initiative has recently been implemented in the Republic of Moldova to improve
the allocation of resources based on policy objectives. The Republic of Moldova also

recently introduced a mechanism to cut public expenditures so as to meet the fiscal deficit
level approved under the annual budget law. Expenditure cuts are achieved through
proportional reductions of all monthly expenditures, with the exception of expenditure
types protected by the annual budget law.15
Subdimension: Analysing taxation, investment and employment

Aggregate revenue forecasting models, described in the previous subdimension, are
capable of providing estimates of the aggregate revenue impact of certain broad-based tax
reforms. However, they are generally not capable of providing information on how a given tax
reform will affect different taxpayers. Indicators under this subdimension address country
practices in assessing the corporate tax burden of firms across main sectors of the economy
and the labour tax burden across different household structures. The indicators explore the
application of various models used by OECD and non-OECD countries, including
microsimulation models and models used to assess effective tax rates on investment and
employment. The indicators also consider the extent to which SEE economies have
implemented tax expenditure reporting to shed light on tax-based incentive programmes for
investment (see Figure 6.4 for an overview of scores in this subdimension).
Figure 6.4. Analysing taxation, investment and employment subdimension:

Average scores
Score
5
0
Note: Subdimension average is a simple average of indicator scores.
Firm-level analysis of corporate tax burden by sector

Policy makers often need to be able to identify taxpayer groups that might be made
worse off from reform, as well as those likely to benefit, in order to consider whether a
proposed tax reform is politically feasible. To achieve this, many OECD and transition
economies implement microsimulation models, so called because they rely on micro, or
taxpayer-level data (for more information on how sample data is used to construct the
database, see Box 6.2). They provide tax policy officials with the ability to:
● Estimate the distributional effects of tax reform: By assessing which taxpayer groups are
negatively or positively impacted by a tax reform, policy makers may consider how to
address distributional effects, e.g. by introducing or adjusting other tax parameters that
may provide a more balanced outcome across taxpayers.

● Generate estimates of current and future tax revenues which can be considered
alongside forecasts of public expenditures: Such comparisons are important for
managing the government’s fiscal position, and particularly for effectively monitoring
CIT revenues foregone by offering tax incentives for investment.16
● Improve the accuracy of revenue forecasts, thus limiting the need for subsequent policy
adjustments required when tax and/or other policy reforms have larger (or smaller) than
anticipated impacts on government revenue.
Box 6.2. Using a sample of data to construct

a microsimulation model database
The most important component of a microsimulation model is the data that feeds into
it. In theory, a country can construct a database of all tax returns. However, a much more
cost- and time-effective method is to create a database using only a sample of firm tax
returns. Using a representative sample saves time and resources in checking, validating
and manually entering the information provided on the tax return. When appropriate
stratification techniques are employed, it also provides an analysis that is largely
consistent with that of an analysis based on the entire population of firms.
To take an example, the Canada Revenue Agency’s sample of firms contains data on
45 000 corporations out of a population of around 1 million. Almost 2 000 different
variables are captured for each firm from the tax returns as well as from firms’ balance
sheets and income statements. The population of firms in Canada is first split into a series
of subgroups based on features of interest to the analysis (asset size, industry,
employment, etc.). Then random sampling is done within each subgroup, resulting in a
representative sample within each subgroup (e.g. the subgroup of small firms in the
woodworking industry). Once the sample is determined, the information on each of the tax
returns is checked for errors. Each subgroup is then weighted so that it reflects the weight
of that subgroup in the entire economy. In Canada, in order to reduce time and cost, the
sample is determined dynamically. As tax returns are received by the Revenue Agency they
are immediately flagged for inclusion in the sample of tax returns for microsimulation or
not. In this way, the sample file is created and validated almost as soon as all of the tax
returns have been received. This can save time and substantially decrease administrative
costs.
Source: www.oecd.org/dataoecd/9/41/43214115.pdf.
This indicator measures the extent to which SEE economies have implemented and
maintain a CIT microsimulation model, with input data drawn from a large array of
firms.17 The indicator also considers whether the model is used regularly to analyse total
and sectoral CIT revenues, CIT revenues forgone as a consequence of tax incentives,
average tax rates on corporate profits by industry and location, and to evaluate the revenue
impact of proposed reforms to the corporate income tax system. However, despite interest
throughout the region, no SEE economy has fully implemented a CIT microsimulation
model. Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, the Republic of
Moldova, Montenegro, Romania, Serbia and Kosovo each indicate that they would like to
implement a CIT microsimulation model. Bulgaria and Serbia report that they plan to have
such a model in place within a year.

METR analysis of tax impediments to domestic investment

Microsimulation models are often supplemented by marginal effective tax rate
analyses.18 As opposed to microsimulation models which rely on historical data to
estimate the impact of tax reforms, METR analyses are forward looking. Using tax
parameter information (e.g. the statutory tax rate, depreciation allowances), they help
policy makers project the impact of tax reforms across a spectrum of firm types, providing
summary tax burden indicators. For more information on effective tax rates calculated in
the European Commission, see Box 6.3.
Such analyses are vital for identifying investments which may be subject to a
particularly low or high effective tax rate. Microsimulation models are often incapable of
picking up such distortions. High effective tax rates particularly can distort economic
activity to the extent that a certain type of investment does not occur and so is not
identifiable from taxpayer level data. METR models, however, are not limited by the types
of firms already present in the economy; they can simulate the impact of various reforms
across an entire range of investment types.19
Box 6.3. The European Commission study on effective tax rates

Recognising that the statutory CIT rates in most countries provides little information on
the actual taxation of a firm, the European Commission commissioned a study in 1998 to
examine the different tax rates on firms within the European Union. The original effective
tax rates have since been routinely updated to include all new member states and some
non-member countries (including Albania, Croatia, the former Yugoslav Republic of
Macedonia and Serbia).
Over the period 1998-2007, an interesting picture of effective tax rates among EU
member states emerges. In particular, during that period most countries’ effective average
corporate tax rates decline, although they decline less than the statutory rates. This
reflects the trend in most EU countries over that period to reform corporate income tax
regimes and, especially, to abolish tax incentives.
The study also considers local taxes on business income. For example, in both France
and Germany local tax rates on business income vary significantly across regions. In
France, the average effective tax rate is 34.8% in the region with the highest local tax rate
(2.6% higher than the region with the lowest taxes). In Germany, the average effective tax
rate was 36.9%, compared to only 29.2% in the region with the lowest tax rate.
The report, which can be found online, describes the methodology used for calculating
the effective tax rates. It also breaks down effective tax rates on domestic investment,
cross-border investment within the EU and SMEs.
Sources: www.oecd.org/dataoecd/40/0/43214648.pdf;
ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/economic_studies/
effective_levels_report.pdf.
METR analysis provides a useful complement to microsimulation modelling. When

used together, the two frameworks provide a powerful tool to predict the net impact of tax
reform on revenues and the investment decisions of firms.
The indicator on METR analysis of tax impediments to domestic investment assesses
SEE economies on their implementation of a METR model that would enable analysis of the
tax effects on the size of investment. A top score is achieved where the model is

disaggregated across asset type (e.g. machinery, equipment, buildings, inventories), and
where METR results are explained in summary reports for consideration by ministers.
Among SEE economies, none maintain a METR model. Albania, Bulgaria, the former
Yugoslav Republic of Macedonia, the Republic of Moldova, Romania and Kosovo are taking
steps towards implementing a METR model. Croatia, Montenegro and Serbia have no
current plans for implementation.
Transparency in the provision of corporate tax incentives for investment

Tax expenditure accounts estimate the tax revenue foregone by the main corporate
tax incentives. This enables both improved transparency in the delivery of special tax
incentives and better monitoring of fiscal balance targets. Specifically, they can:
● help set in motion measures to contain tax expenditure costs by unambiguously
quantifying tax expenditures;20
● avoid duplicating, overlapping or conflicting expenditures by clearly identifying and
classifying both tax expenditures and direct expenditures by function; and
● improve forecasts of revenues and fiscal balance, when based on microdata, by
sharpening forecasts of tax expenditure amounts.
In general, by improving transparency in the delivery of special tax incentives, tax
expenditure frameworks can foster good governance and help build taxpayer trust and
confidence in the tax system. Often, the implementation of a CIT microsimulation model
(see Section on “Firm-level analysis of corporate tax burden by sector”) will enable the
preparation and improve the accuracy of tax expenditure estimates. For a description of
good practice in authorisation and management of tax expenditures, see Box 6.4.
Box 6.4. Authorisation and management of tax expenditures

Tax expenditures should be properly authorised and managed with the aim of ensuring
transparency and accountability. Elements of an accountable tax and tax expenditure
framework include the following:
● power exercised in imposing tax liabilities should be based on laws and consistent with
the constitution;
● power exercised in providing tax expenditures (tax concessions) should be based on
amendments to the laws imposing the initial tax liability;
● tax law-making powers, including the provision of tax expenditures, exercised by the
legislature and by the executive should be distinct and clear. Similarly, tax law-making
powers exercised by each level of government should be clear; and
● tax expenditure accounts classified by function should be produced regularly, made
available to the public and audited to ensure accountability.
The indicator for transparency in the provision of corporate tax incentives for
investment considers whether tax expenditure accounts are prepared and used to support
fiscal planning, whether the estimates are considered alongside direct expenditures when
developing government expenditure and tax policies, and how often the tax expenditure
reports are published. Bulgaria, the Republic of Moldova and Romania all report
periodically preparing estimates of tax revenues foregone by main corporate tax incentives
for investment. The estimates are considered alongside direct expenditures when

developing government expenditure and tax policies. Each year the Ministry of Finance of
the Republic of Moldova prepares estimates of tax revenues foregone as a consequence of
main tax incentives. These estimates are used in preparing the annual budget law. Croatia
and Montenegro are taking steps towards implementing such estimates, as required under
EU State Aid Regulation, while Albania, the former Yugoslav Republic of Macedonia, Serbia
and Kosovo have no current plans for preparing such estimates.21
Tax wedge analysis of tax impediments to employment

Another critical issue for policy analysis is the impact of tax systems on employment.
Personal income taxes and social security contributions have an impact on the labour
market by influencing both job market participation and decisions to work at the margin
(e.g., the decision whether to work increased hours).22 In addition, the tax wedge can
increase employment costs to employers as well as affect the decision to operate a
business in unincorporated or incorporated business form. It can even affect the decision
of potential entrepreneurs on whether to remain in dependent employment or establish
their own business.
The OECD Taxing Wages23 methodology allows policy makers to assess the impact of
the current tax system and alternative tax reforms on the average and marginal tax
rates on wage income for household types differentiated by income and family
composition.24 Average tax rates, which show the percentage of gross wage earnings
which is taken in tax (before and after cash benefits [if available]) and social security
contributions, are used to analyse the impact of taxes on job market participation
decisions. Marginal tax rates, which show the part of an increase of gross earnings or
total labour costs that is paid in these levies, are used to assess the impact of taxes on
work effort at the margin. In addition, the framework can break down both employer
and employee contributions at different income levels, allowing policy makers to see the
total labour cost incurred by each at different wage levels (for more information on the
framework, see Box 6.5).
Box 6.5. OECD Taxing Wages framework

The following lists a number of examples of different policy options that may be
assessed using the Taxing Wages framework:
● Tax effects on work effort. Reductions of marginal tax rates at the top/bottom of the
income scale may have a positive effect on the work effort of high-wage/low-wage
individuals and part-time workers. Microsimulation models allow policy makers to
identify revenue-neutral reform packages. This analysis may be complemented by a
Taxing Wages approach to assessing the net effects of tax reform adjustments on the
incentives to increase work effort by type of individuals, differing by income and
household composition.
● Tax effects on labour market participation of low-income workers. A decrease in the average
effective tax rate at the bottom of the income scale may increase the incentives of low-
skilled individuals and part-time workers to participate in the labour market. It can also
encourage companies to employ low-income workers. Using the Taxing Wages
framework, policy makers can assess which tax reforms are appropriate to encourage
labour market participation of low-income workers, taking into account both efficiency
and equity considerations.

Box 6.5. OECD Taxing Wages framework (cont.)

● Incentives for spousal (second-earner) and part-time work. One way to lower the cost to an
individual of entering the labour market and encourage the development of part-time work
may be to change the taxpayer unit used for tax purposes. In particular, this means moving
the taxpayer unit from the household to the individual. This issue is important for example
when policy makers aim to encourage women’s participation in the labour market.
● Progressivity of the tax system. A simple measure of progressivity can be obtained by
calculating differences in average effective tax burdens of individuals at different
income levels.
● Tax distortions on self-employment. The Taxing Wages framework is used to establish the tax
burden on labour income in employment and the tax burden on business income of the
self-employed which can help establish whether distortions (or incentives) to self-
employment exist.
● Tax distortions on business form. The Taxing Wages framework can help evaluate whether
the tax system is discouraging (or encouraging) to incorporation, given efficiency
considerations that arise where different business forms offer non-tax advantages/
disadvantages to specific taxpayers.
The tax wedge analysis of tax impediments to employment indicator considers these
issues by evaluating whether SEE economies maintain models measuring tax wedges and
corresponding marginal and average tax rates on labour income, as per the OECD Taxing
Wages methodology. The indicator considers whether models cover a range of possible
household structures, wage levels, part-time and spousal work arrangements and whether
the results are compared with other countries and used systematically to inform policy
making. Bulgaria and Romania each maintain a tax wedge model measuring marginal and
average tax rates on labour income. The former Yugoslav Republic of Macedonia, the Republic
of Moldova and Montenegro are currently taking steps toward implementing such a tax
wedge model, while Albania, Croatia, Serbia and Kosovo have no plans for implementation.25
(See Human Capital Development subdimension labour market settings and demand for
skills for a further discussion on labour taxes.)
Subdimension: Taxation of SMEs and MNEs

Indicators under this subdimension address country practices in assessing a number
of issues relevant to SMEs and MNEs, such as how tax policy impacts the cost of funds,
incentives for tax arbitrage behaviour, costs involved in complying with a tax system and
the extent to which the tax system encourages aggressive tax planning (see Figure 6.5 for
an overview of scores in this subdimension).
Analysis of tax impediments to equity financing of SMEs

Profits of incorporated businesses are normally subject to corporate income tax. When
the profits are distributed to shareholders, they are usually also subject to personal
shareholder income tax or final withholding tax on dividends. In the absence of some
adjustment to integrate corporate and personal taxation, firms can be exposed to double
taxation of distributed profit. Double taxation of corporate profit may limit business
creation and growth in several ways, for example:

Figure 6.5. Analysing taxation of SMEs and MNEs subdimension: Average scores
Score
5
0
Note: Subdimension average is a simple average of only those indicators answered by the economy.
● Firms can face higher hurdle rates of return26 on their investment, affecting their
investment and growth decisions.
● Dividend taxation can encourage more mature companies to retain rather than
distribute profits in order to avoid dividend taxation. This can limit the ability of
individual investors to invest directly in other businesses, possibly limiting the amount
of capital available to other firms.
Similarly, capital gains taxes encourage investors to hold onto assets producing capital
gains, because capital gains are generally taxed only once they are realised (once the
underlying asset is sold).27 This may impede efficient allocation of capital to start-up
businesses requiring external equity capital.
While such issues can frustrate the financing of both small and large firms, smaller
firms tend to have limited access to global capital markets. For large firms with such access,
domestic shareholder tax rates may not affect the cost of capital. Smaller firms tend to rely
more heavily on local financing, and thus domestic shareholder taxation tends to have a
larger effect on their ability to obtain financing and their investment and growth decisions.
The indicator on the analysis of tax impediments to equity financing of SMEs
evaluates SEE economies on the extent to which they have assessed the degree of double
taxation in their tax system, and the impact that double taxation may have on the
availability and cost of equity financing. Albania and Kosovo have conducted studies
examining the implications for enterprise financing and investment of double taxation of
distributed and retained profits. (Kosovo has supplemented its study with an analysis of
the advantages and disadvantages and the tax revenue implications of alternative
integration systems to relieve double taxation.) Bulgaria, Croatia, the former Yugoslav
Republic of Macedonia, the Republic of Moldova, Montenegro, Romania and Serbia have not
yet undertaken such studies.
Analysis of tax arbitrage by SME owners

Where different types of income are taxed at significantly different rates, owners of
businesses (in particular small, closely held private companies) may alter their decisions

over business form, capital structure, earnings distribution, etc., in order to reduce their
overall tax liability. Such arbitrage possibilities can distort the decisions of business
owners, such as the choice of business form and earnings payout policies. This can imply
revenue, efficiency and equity losses. For example, in a tax system with low corporate
income and low dividend withholding tax rates, but relatively high personal income tax
and/or social security contributions, an owner may pay him or herself less than an arm’s
length wage in order to characterise labour income as tax preferred capital income.
It is especially important that policy makers bear this and other tax avoidance
possibilities in mind when considering changes to the tax system. Tax arbitrage can result
in unintended revenue losses, and those losses should be identified and taken into account
before the alternative tax system is imposed. Moreover, such tax arbitrage raises efficiency
and equity concerns, and public awareness of the activity may contribute to a sense that
the tax system is unevenly applied, which in turn could erode voluntary compliance.
A review of income tax rates on self-employed business income, dividends, interest
and capital gains suggests that care has been taken in many SEE economies to limit tax
planning opportunities. Yet, significant differences in tax rates across income types are
observed in some cases, in particular when social security contributions levied on wage
income are taken into account. In Figure 6.6, one can see the trade off which owners of
closely held businesses in SEE face when deciding whether to allocate their income in the
form of wages or capital. In most economies, a business owner will have a lower marginal
effective tax rate on capital income than on wage income. This creates an incentive to
compensate oneself through dividends instead of wages, reducing the overall tax for which
one is liable. Indicator 3.2 scores economies on the extent to which they have assessed the
potential for differences in tax rates across types of income to create tax arbitrage
possibilities, and whether measures have been adopted to address the most common
forms of tax arbitrage. No SEE tax officials have undertaken studies on the potential for tax
arbitrage by small business owners. However, Serbia has taken some steps in this direction,
as it recently analysed the fiscal burden on different kinds of personal income.28
Analysis of tax impediments to risky investment in SMEs

Tax systems often impede investment in riskier businesses. In particular, restrictive
loss-offset rules can discourage investing in a business with an uncertain return. In the
most restrictive cases, profits are taxed as they occur, but no relief is provided when firms
make losses. This can lead to increased hurdle rates of return for investors, especially for
riskier investments which often incur significant losses in the first few years of operation,
resulting in reduced investment in the firms concerned.
On the premise that government should be an equal partner in investment, sharing
both in profits and losses, many tax systems incorporate policies to ensure a more
symmetric treatment of losses. Such policies include:
● allowing losses to be carried back to offset taxable business profit in prior years or,
equivalently, allowing losses to be carried forward for many years, or perhaps even
indefinitely; and
● permitting business losses to be deducted against other types of personal taxable
income in the case of self-employment, or other business activities in the case of
corporations which undertake a range of business activities.

Figure 6.6. Taxing owners of incorporated SMEs

Effective tax rate on wages Effective tax rate on capital
% of total income
70
60
50
40
30
20
10
0
ALB BGR HRV XK MKD MDA MNE ROU SRB
Note: All calculations are based on the tax systems in place for the 2009 fiscal year. The assumed taxpayer is resident
in the corresponding tax jurisdiction. The graph represents SEE marginal effective tax rates on high income (i.e.
income taxed at the highest personal income tax rate) distributed as either wages or capital income. The marginal
effective tax rate on wages includes the top marginal personal income tax and both employer and employee social
security contributions (deductible from taxable income, where appropriate). The marginal effective tax rate on
capital includes the corporate income tax, dividend withholding taxes and personal income taxes, where applicable.
The effective tax rate on wages is slightly overestimated in some economies, as maximum thresholds on employee
and employer social security contributions were not considered. The marginal effective tax rates also do not consider
other taxes that might be levied on income (e.g. local taxes).
Source: OECD calculations based on inputs from SEE tax administrations and ministries of finance.
Many issues come into play when considering the optimal loss-offset provisions for
a particular country. For example, more liberal and symmetric treatment of losses might
mean reduced tax revenues and can lead business owners to mischaracterise personal
expenses as business expenses. Reflecting this fact, loss-offset provisions differ
considerably across countries in terms of the types of non-business income that business
losses can be deducted against and the allowed number of carry-forward (and carry-back)
years. A comparison of policies across SEE shows considerable diversity in approaches.
For example, the former Yugoslav Republic of Macedonia has implemented relatively
flexible loss-offset provisions. With some exceptions, losses realised in one income
category may be deducted against other income categories, although only in the year the
loss occurred. Croatia also provides relatively flexible loss-offset rules and allows a five-
year window during which losses can be carried forward. In Albania, however, losses in
one income category cannot be deducted against income from another category, and loss
carry forward is limited to three years. Moreover, loss relief is only possible for firms
paying profit tax; firms subject to a patent charge (lump sum tax) are not provided with
loss relief.
The analysis of tax impediments to risky investment in SMEs indicator looks at
whether economies have assessed the impact that their loss-offset rules have had on
investment in early-stage, high-risk companies, and whether the findings have been
incorporated in tax policy. In Albania, Bulgaria, Croatia, the former Yugoslav Republic of
Macedonia, the Republic of Moldova, Montenegro and Serbia, tax officials have not yet
analysed the potential for business loss-offset provisions to influence risky investment in
small businesses. However, Kosovo has conducted such studies.

Assessment of tax compliance costs and remedial measures

Besides the actual tax liability, firms must also contend with often onerous
compliance costs. In addressing today’s complex business structures and transactions, a
certain degree of complexity in the tax system is to be expected. However, where investors
view a tax system as excessively complex, the added expense to project costs incurred in
understanding and complying with the tax system could serve to discourage business
creation, investment and full compliance with the tax system. For small business owners
in particular, compliance costs may factor importantly into a number of decisions, for
example, whether to become self-employed or to operate in the formal economy.
By reducing tax compliance costs and thereby lowering the overall tax burden on small
businesses, simplification provisions help achieve more neutral tax treatment of firms of
different sizes, implying efficiency gains (see Box 6.6). Simplification provisions can also
encourage better tax compliance and could lead to less informal economic activity.29
Box 6.6. Rationale for tax simplification for small businesses

Tax compliance costs tend to increase with the number of taxes, the frequency of filing
returns, the number of levels of government involved and the complexity of tax rules. With
a substantial fixed cost component, tax compliance costs as a percentage of sales are
relatively high for small firms. By reducing compliance costs and lowering the overall tax
burden on small business, simplification provisions and taxpayer education and
assistance programmes may help achieve more neutral treatment of firms of different
sizes. This would imply efficiency gains, and encourage full compliance with the tax laws.
A main efficiency concern associated with high tax compliance costs, regardless of firm
size, is that absorbing these costs requires a higher pre-tax return on capital, the smaller
the size of a business (measured by capital). This effect, tending to place small businesses
at a disadvantage relative to larger firms, implies an inefficient allocation of capital. A
second efficiency consideration is that increased compliance, when resulting in increased
tax revenues, may enable a government to reduce rates on other taxes. To the extent that
tax bases are sensitive to changes in the tax rate, there are possible efficiency gains.
Increased compliance may also be desirable when taking into account the benefits to
society of having all persons participate in the financing of programmes supporting
economic and social development.
Simplification provisions of various types can be expected to impact small businesses
differently, given the heterogeneity of the small business population. Certain measures
may directly encourage business creation and tax compliance for some small businesses
but not others, suggesting the need to consider a range of measures. For example,
simplified accounting or less frequent filing may not assist businesses with very low
turnover (e.g. street vendors). Such businesses may regard the tax compliance burden of
even a relatively simple regular tax system as excessive and discouraging to participation
in the formal economy. But the same measures may operate to encourage larger small
businesses to establish and comply.
When low-turnover businesses are for the most part unaffected by simplified accounting
and filing measures, tax compliance may call for the introduction of a simple replacement
tax. As an example, a turnover-based tax could replace regular income tax and/or value
added tax for firms with turnover below some threshold.
Source: OECD (2009).

The assessment of tax compliance costs and remedial measures indicator considers
efforts to assess the average cost to small businesses of complying with taxes, and the
advantages and disadvantages of simplifying certain elements of the current tax system. A
top score is achieved when studies have also been prepared that consider establishing
threshold levels determining the application of alternative regimes, and the possible
distortions those thresholds could introduce. Croatia and Romania have assessed the
average cost to SMEs of complying with certain main taxes. Albania, Bulgaria and Kosovo
have assessed the average cost to SMEs of complying with all main taxes. Following
implementation of a simplified regime for SMEs in the former Yugoslav Republic of
Macedonia, further analyses have been carried out to reassess the tax compliance burden.
Albania and Bulgaria have prepared studies to determine the advantages and
disadvantages of simplifying elements of the tax regime, and Albania now includes
compliance cost assessments when evaluating new tax policies or amendments.
Albania provides an example of a country that has introduced a lump sum tax to
alleviate tax compliance costs, while encouraging formal economic activity. In particular,
under this tax, individuals engaged in business activities but not registered for value-
added tax are subject to a local tax on small business.
Although not directly evaluated within the IRI 2010, many SEE economies have
implemented initiatives to improve taxpayer understanding of (and compliance with) the
tax system. All SEE economies disseminate relevant information and documentation with
tax returns. Albania, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia,
Montenegro, Romania and Serbia provide extensive information on websites, and have
established toll-free telephone services with trained tax specialists available to respond to
taxpayer questions. In Croatia, e-taxation has contributed to a compliance cost reduction.
The former Yugoslav Republic of Macedonia and Montenegro now have educational
outreach programmes on their tax systems. Montenegro regularly meets with local
chambers of commerce and other professional associations to consider how taxpayer
assistance and education can improve. For an overview of OECD country measures to
reduce tax compliance costs, see Box 6.7.
Box 6.7. OECD country measures to reduce tax compliance costs

A number of OECD countries have implemented different measures to reduce tax
compliance costs, particularly in the area of information technology. Examples include:
● Germany: A new software (ElsterLohn) was recently provided to employers. This
software helps employers transfer certificates of wage tax deduction to the tax
administration, which previously had to be done manually. This saves SMEs in Germany
the need to process and dispatch some 30 million hard-copy certificates, significantly
reducing tax compliance costs. Other software provided by the tax administration
includes ElsterFormular, which aids filling out the income tax return and the value-
added tax return, among others.
● Canada: My Business Account is a service provided by the tax administration that allows
firms to access their relevant tax information online. Services include electronic return
filing, making payments and registering disputes.
● New Zealand: Under recently introduced tax simplification initiatives targeted at SMEs,
subsidies are provided to small employers to help them defray the cost of using external
payroll providers to comply with certain tax obligations.

Box 6.7. OECD country measures to reduce tax compliance costs (cont.)
● Japan and Poland: In both Japan and Poland, the efforts to reduce tax compliance costs
are focused primarily on providing better access to tax information. The tax
administration in Japan has introduced tax education programmes and tax counselling.
In addition, the administration has an active public relations campaign to explain the
importance of complying with the tax system. Poland has a vast array of brochures and
websites conveying information on taxes and compliance requirements.
Source: OECD (2009).
Analysis of non-resident withholding tax payments

Governments are often under significant pressure from foreign countries, foreign
business and even local business to reduce non-resident withholding tax rates. In
unrelated-party transactions, reducing these rates can have various implications:
● Reducing non-resident withholding tax rates may lower the cost to domestic investors of
accessing licensed goods and assets when those taxes are otherwise incorporated in the
final price. This can reduce, among other things, borrowing costs for resident firms.
● In cases where withholding tax rates are not fully incorporated in the final price of a
good or asset and the foreign supplier is able to claim a foreign tax credit, reduced non-
resident withholding tax rates may only serve to increase tax revenues of the foreign
country. For example, in a perfectly competitive market, the withholding tax will be
borne by the foreign supplier of a good or service, and not passed on to the domestic
consumer. Thus, reducing the non-resident withholding tax rate will only reduce the
amount of tax that the foreign supplier can claim as a foreign tax credit, resulting in
higher tax collected by the foreign country. This is particularly important in the case of
royalties for an intangible good in a competitive market.
In related-party transactions,30 analysis of possible efficiency effects of non-resident
withholding tax rate adjustments is more complex. Possible outcomes include the
following:
● When a foreign tax credit is available, reductions in the withholding tax rate could
provide windfall gains to foreign treasuries.
● When a foreign tax credit is not available, a withholding tax rate reduction would benefit
the corporate group as a whole. While the withholding tax reduction might not directly
benefit the operating subsidiary in the host country, it may encourage FDI to the extent
that it helps the entire corporate group.
● Rate reductions can encourage the repatriation of earnings by way of inter-affiliate
interest and royalty charges, rather than dividends. Such tax planning affects the
sharing of the tax base between the host and home country, and may result in a host
country tax burden that is not consistent with an efficient allocation of capital in the
host country.
There are many problems or limitations with tax relief targeted at FDI, including
difficulties in fair and efficient implementation and questions about its effectiveness (see
OECD [2001] for a more thorough discussion). As such, policy makers may be encouraged to
consider broad-based tax relief benefiting foreign and domestic investment. This approach

avoids the distortions and compliance problems with targeting corporate income tax relief
to FDI, but is generally more expensive in terms of revenue losses for a given percentage
change in the effective tax rate. Revenue losses from a reduction in the basic statutory
corporate tax rate tend to be significant, particularly where the existing domestic capital
stock and corporate tax base is large.
This indicator considers whether a framework is maintained to enable
measurement of non-resident withholding tax on cross-border payments. A top score is
achieved when the underlying cross-border payments data are drawn from returns that
taxpayers are required to file, with information provided on payment type, amount paid,
currency, amount of tax withheld and recipient country. Bulgaria has a framework in
place for estimating and analysing non-resident withholding tax. The underlying cross-
border payments data are drawn from international balance of payments statistics and
show the payment type, amount and currency. The former Yugoslav Republic of
Macedonia, the Republic of Moldova, Montenegro, Romania and Kosovo are taking steps
towards implementing such a framework. In fact, Kosovo hopes to have it in place
within a year.
Analysis of thin capitalisation of the tax base

The treatment of the cost of debt finance is a key business tax issue. Difficult policy
issues arise because finance can take two broad legal forms: debt and equity, with debt
generally being tax-favoured. For investors, the advantages of cross-border debt rather
than equity finance are often clear:
● Interest payments are normally fully deductible from the base of the corporate income
tax and may be claimed as soon as they accrue. Dividend payments are generally not
deductible from the tax base.
● Tax treaties often provide for lower withholding tax rates for interest than for dividends.
Some countries even maintain a zero rate of withholding tax on interest, which is
usually not the case for dividends.
In order to benefit from the advantages of cross-border debt, an MNE group may face
a strong tax incentive to fund its investment in subsidiaries by issuing loans to those
subsidiaries. In many cases, such practice can wholly eliminate the taxable profits made by
the subsidiary. Because of this, many countries have acted to protect their tax base by
developing thin capitalisation rules. These rules limit the tax deductibility of interest,
especially where the debt is provided by related parties. An example of a SEE economy that
has introduced base protection rules is Serbia. Under Serbia’s Law on Corporate Profit, in
the case of a loan from a related party, interest tax deduction is limited to a prescribed
interest rate times the debt equivalent of four times the taxpayer’s equity. Excess interest
may be carried forward as a deductible expense for the following year.
This indicator considers whether steps have been taken to assess, and possibly
address, excessive leveraging of the domestic corporate income tax base of resident
foreign-controlled companies. Bulgaria has implemented a framework for identifying and
analysing, by industry, the degree of thin capitalisation of resident foreign-controlled
companies. The former Yugoslav Republic of Macedonia hopes to have such a framework
in place within one year. Croatia, Romania, Montenegro, Serbia and Kosovo have no plans
to implement such a framework.


The tax component of the IRI has aimed to assess the progress of SEE economies in
implementing various frameworks for tax policy analysis and exploring a number of issues
important to the taxation of SMEs and MNEs. The central goal of the assessment is to
promote economic development by ensuring tax treatment that is attractive to investors,
while at the same time not foregoing revenues that could more usefully fund public
expenditures critical to business activity.
A main finding of the current IRI exercise is that all SEE economies have made
important progress in recent years in strengthening their capacity to carry out tax policy
analysis. Some SEE economies have been able to progress further than others, with
capacity dependent on resources dedicated to tax policy analysis (see Table 6.2). The
following summarises the policy conclusions:
● While all SEE economies forecast all or most main tax revenues, and can generate rough
estimates of the total revenue effects of broad-based tax change, no economy has yet to
fully implement a CIT microsimulation model. It is recommended that this work be
given high priority.
● No economy has implemented a METR model. It is recommended that METR analysis be
incorporated in the SEE economies within three to five years.
Table 6.2. Tax policy analysis

ALB BGR HRV XK MKD MDA MNE ROU SRB
Indicator for forecasting aggregate

Fiscal position
and planning
tax revenues 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Indicator for assessment of fiscal balance
and policy feedback 3.0 5.0 5.0 4.0 3.0 3.0 4.0 5.0 4.0
Subdimension average: Fiscal position
and planning 4.0 5.0 5.0 4.5 4.0 4.0 4.5 5.0 4.5
Indicator for firm-level analysis of corporate
tax burden by sector 1.0 3.0 2.3 2.0 2.0 1.7 2.0 2.0 1.7
Taxation, investment
Indicator for METR analysis of

and employment
tax impediments to domestic investment 2.0 2.0 1.0 2.0 2.0 2.0 1.0 2.0 1.0
Indicator for transparency in provision
of corporate tax incentives for investment 1.0 4.0 2.0 1.0 1.0 4.0 2.0 4.0 1.0
Indicator for “tax wedge” analysis
of tax impediments to employment 1.0 3.0 1.0 1.0 2.0 2.0 2.0 3.0 1.0
Subdimension average: Taxation,
investment and employment 1.3 3.0 1.6 1.5 1.8 2.4 1.8 2.8 1.2
Indicator for analysis of tax impediments
to equity financing of SMEs 2.0 1.0 1.0 4.0 1.0 1.0 1.0 1.0 1.0
Indicator for analysis of tax arbitrage
by SME owners 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Indicator for analysis of tax impediments to
Taxation of SMEs
risky investment in SMEs 1.0 1.0 1.0 2.0 1.0 1.0 1.0 * 1.0
and MNEs
Indicator for assessment of tax compliance

costs and remedial measures 5.0 4.0 2.0 3.0 1.0 1.0 1.0 2.0 1.0
Indicator for analysis of non-resident
withholding tax payments * 4.0 1.0 3.0 2.0 2.0 2.0 2.0 1.0
Indicator for analysis of thin capitalisation
of the tax base * 4.0 1.0 1.0 3.0 1.0 1.0 1.0 1.0
Taxation of SMEs and MNEs 2.3 2.5 1.2 2.3 1.5 1.2 1.2 1.4 1.0
Dimension average (simple): Tax policy analysis 2.5 3.5 2.6 2.8 2.4 2.5 2.5 3.1 2.2
Note: Scores marked with an asterisk indicate the economy did not assess itself on that indicator. Subdimension
averages are simple averages.

● To date, relatively limited attention has been given in the SEE region to assessing the
extent and effect of the tax system on equity financing. No SEE economy has yet to
systematically carry out studies of tax arbitrage opportunities of closely held SMEs.
Additional analysis and sharing of experience across the region would be welcome.
● Detailed analyses have yet to be carried out in most SEE economies to assess the
implications of alternative tax treatment of business and capital losses on incentives to
invest in small firms with relatively high-risk business ventures. More analysis should be
attempted in this area.
● Only a few SEE economies maintain a tax wedge model to analyse tax distortions to
employment decisions. The remaining SEE economies are encouraged to incorporate in
their policy toolkit a tax wedge model within one to two years.
● Only Bulgaria currently has a framework in place for measuring and analysing non-
resident withholding tax. All other economies are encouraged to implement such a
framework, with special attention to cross-border payments to related parties.
● Bulgaria has implemented a framework for identifying and analysing the degree of thin
capitalisation of resident foreign-controlled companies. All other SEE economies are
encouraged to implement such a framework.
● SEE economies have made significant strides in addressing tax compliance costs. All
economies have assessed the implications of alternative simplified regimes to reduce
small business compliance costs. They also provide extensive services to improve
taxpayer education and facilitate access to information. Continued effort to maintain
low compliance costs should be sustained.
● The current IRI exercise concludes that ministers of finance in all SEE economies should
encourage senior tax policy officials to regularly participate in forums where
information and experience on alternative tax policies and analytical frameworks can be
shared. The South-East Europe Working Group on Tax Policy Analysis provides a forum
for such dialogue, and SEE economies are encouraged to actively participate in this
forum and develop its work agenda, taking into account the findings of this report.
Notes
1. A closely held corporation is a firm in which a small group of shareholders directly controls the
firm’s managerial, operational and financial components. In many cases, closely held corporations
are small, family-run businesses.
2. Loss-offset rules determine scope for companies to deduct losses from taxable income earned in
current or future periods. In the case of loss carryback provisions, losses may be deducted from
previous periods’ taxable income.
3. In many countries, interest, royalty or dividend income earned by a non-resident is subject to a
withholding tax (i.e. a tax that is withheld at source).
4. A firm is considered to be thinly capitalised when it has high debt relative to its equity.
5. A presumptive tax uses an income proxy as a tax base. For example, in Croatia, small entrepreneurs
and those engaged in independent agriculture or forestry activities are subject to a lump sum tax
of 15% under certain conditions. Companies are excluded from applying this tax.
6. The data are from the Albanian Ministry of Finance. The increase in revenues is largely attributed
to reforms in the personal income tax regime coupled with other administrative changes.
7. This figure is a simple average. Data for Montenegro were unavailable. The data for the former
Yugoslav Republic of Macedonia reflect tax revenues only. The change in the Republic of Moldova’s
tax revenue was calculated on data for 2005 and 2007. Government revenue figures constitute
more than tax revenue, but SEE tax and social security revenues typically make up the major part

of government revenue. In economies where tax revenue data were available, the growth rates
were slightly lower than the government revenue growth rates.
8. The work builds on an earlier formulation of the tax chapter of the IRI. See Chapter 5 (Tax Policy)
of OECD (2006), Investment Reform Index 2006: Progress in Policy Reform to Improve the Investment
Climate in South-East Europe.
9. The tax component of the IRI does not cover tax administration issues.
10. Tax arbitrage refers to a change in a firm’s behaviour (e.g. a change in a firm’s payout policies)
aimed at taking advantage of differences in tax rates.
11. The economies assessed are: Albania, Bulgaria, Croatia, Kosovo, the former Yugoslav Republic of
Macedonia, the Republic of Moldova, Montenegro, Romania and Serbia. The tax policy assessment
uses indicators that deal almost entirely with direct taxation. Direct taxation is a policy
competence that has been devolved to the entity-level in Bosnia and Herzegovina. For this reason,
Bosnia and Herzegovina has been excluded from the tax assessment.
12. The scores and policy recommendations were based on questionnaire responses provided by each
SEE economy and follow-up interviews with policy officials.
13. Main taxes are those contributing to 5% or more of total tax revenues.
14. The IRI framework adopts the OECD definition of a tax as a payment that is compulsory, paid to
general government and unrequited (i.e. no defined relationship between payments and benefits
received from government).
15. Additional expenditure cuts may be specified by the Ministry of Finance. Proposals for expenditure
cuts are accepted either with the approval of Parliament or after a 15-day period if no action from
Parliament is taken.
16. This is particularly important for EU accession economies where such monitoring is required
under state aid rules.
17. The stratified dataset should include industry, location, asset size and possibly other criteria.
18. For more on the METR model and its applications, see Boadway, R., N. Bruce and J. Mintz (1984),
“Taxation, Inflation, and the Effective Marginal Tax Rate on Capital in Canada”, Canadian Journal of
Economics, Vol. 17, pp. 262-79. The following website, www.fraserinstitute.org/Commerce.Web/
product_files/EffectiveTaxRatesEnterprises.pdf, provides a useful summary article of METR analysis
with applications for Canada.
19. The ability to measure METRs specific to a given investment-type is, however, limited by the
amount of information available on representative capital and finance weights used in such
measures.
20. This is particularly relevant for tax relief that is open-ended and non-wastable (tax relief that may
be carried forward if unused within the time period for which it is intended).
21. While Kosovo has no current plans for preparing such estimates, it does not have any national
incentives. The government is refraining from implementing an incentive scheme; rather it aims
to maintain low rates and a broad base. In Albania, tax policy makers have eliminated most tax
exemptions and tax holidays, although some preferential treatment remains for excise duties on
oil for specific sectors. The revenue impact of these exemptions has been calculated.
22. Taxes increase the cost of employing workers, particularly low-wage workers where labour
demand is more elastic; generous benefit systems can leave little incentive to work, especially
among low-wage families.
23. See Taxing Wages at www.oecd.org/document/57/0,3343,en_2649_34533_40233913_1_1_1_1,00.html.
24. Typically, these assessments focus on personal income tax and employer and employee social
security contributions, with standard tax allowances factored in. A variant of the Taxing Wages
framework introduces consumption taxes, recognising that consumption taxes, by reducing the
amount of earned income available for consumption, may reduce labour supply.
25. The Institute of Public Finance, an independent body in Croatia, does maintain a tax wedge model
and conducts relevant analyses. The Croatian Ministry of Finance has periodically used the results
of these assessments in formulating tax policy.
26. A hurdle rate of return is the minimum rate of return that a new investor is willing to accept. An
investment will not take place unless the expected rate of return is above the hurdle rate of return.

27. Taxing capital gains as they accrue rather than when realised at the time of asset sale is difficult
on a number of counts For example, assessing the current market value of assets can be difficult,
and taxing accrued income by unrealised capital gains may also introduce liquidity problems for
taxpayers with insufficient cash flow to cover the tax burden.
28. www.mfin.sr.gov.yu/eng/102.
29. Simplification measures, however, may also expand opportunities for tax evasion. Therefore,
simplification should be carefully designed, and opportunities for tax avoidance from such reform
should be evaluated and taken into account.
30. A related-party cross-border payment refers to payments between two entities that have a special
relationship when the two entities are domiciled in separate tax jurisdictions. Examples include
cross-border transactions between two firms within the same corporate group, between two firms
that share a major shareholder or between two firms owned by the same individual.
Bibliography
OECD (2001), Corporate Tax Incentives for Foreign Direct Investment, OECD Tax Policy Studies, OECD, Paris.
OECD (2009), Taxation of SMEs, OECD Tax Policy Studies, OECD, Paris.

© OECD 2010
Chapter 7
Infrastructure for Investment
213
I.7. INFRASTRUCTURE FOR INVESTMENT
7.1. Key findings

Economies in South-East Europe (SEE) have considerably improved their legal
frameworks on infrastructure. Recent reforms are largely in compliance with European
Union (EU) standards and aim at fulfilling the acquis requirements (EBRD, 2008). However,
some issues in implementation and efficient regulation need to be addressed. SEE
governments recognise the weaknesses of their national regulation systems and appear
ready to undertake reforms. A number of important challenges remain:
● Broadband Internet penetration rate is low in most of the SEE economies. Studies show that
the quality of business e-services and the price operators charge their consumers depend on
broadband connection availability. Hence, there is a need to promote and facilitate access to
higher value-added broadband Internet services.
● In some SEE economies, a long-term telecommunications strategy is still under
development. Information availability and transparency concerning telecommunications
strategy are paramount in order to stimulate private sector investment. To improve
transparency in the telecommunications market, public-private consultations should be
organised more regularly.
● Even where a separate communications’ regulatory authority exists, in some instances
the authority does not have the power to set tariffs.
● Some SEE economies have not adhered to the World Trade Organization 1997 Basic
Communications Agreement. Countries that have signed the Agreement are
characterised by more competitive telecommunications markets with lower service
prices and a higher volume of international calls.
● The presence of motorways, even among the most advanced economies of the region, is
limited. Cross-border and intra-regional co-operation in developing road infrastructure
countries and the entire region.
● Underdeveloped rail networks characterise the SEE region. In some economies,
expenditures on rail maintenance are insufficient and construction of new rail corridors
is almost nonexistent. The development of rail infrastructure as a more environment-
friendly alternative to road traffic has been recommended by EU representatives.
● Co-operation at the intra-regional level and in conformity with the Trans-European Rail
Network Guidelines would benefit the entire region.
● Airfreight and overall airport facilities are still relatively underdeveloped in the SEE
region.
● In some countries, interruptions in power supplies are still frequent. The lack of stable
power systems constrains the private sector. For example, some firms purchase their
own power generators, thereby increasing their operational costs and reducing
profitability.

7.2. Infrastructure for Investment assessment framework

A robust body of international evidence demonstrates that infrastructure is essential
f o r e c o n o m i c a n d s o c i a l d ev e l o p m e n t . I n f r a s t r u c t u r e s e r v i c e s ( s u c h a s
telecommunications, transport and electricity) are crucial for the efficiency,
competitiveness and growth of an economy (UNCTAD, 2008). Infrastructure is also a key to
integration in the world economy (OECD, 2006a).
This chapter presents a set of descriptive statistics covering the following forms of
infrastructure in the SEE region: telecommunications, transport and electricity. The
indicators used produced information on infrastructure stocks, access, reliability and
affordability. Emphasis is placed on the infrastructure conditions faced by businesses.
The findings at national level are also relevant for regional analyses because the
development of infrastructure networks in one country may affect economic outcomes
and opportunities for trade in adjacent countries. Exporting firms depend not only on the
quality of domestic infrastructure, but also on that of neighbouring countries through
which goods must transit. This is particularly so for road and rail networks.1
As depicted in Figure 7.1, the assessment framework has three main subdimensions:
telecommunications, transport and energy.
Figure 7.1. Infrastructure for investment assessment framework
INFRASTRUCTURE
FOR INVESTMENT
TRANSPORT:
TELECOMMUNICATIONS ENERGY
ROAD, RAIL, AIR
• Getting connected • Supply, density • Getting connected
• Telephony and Internet and quality • Service cost
penetration • Expenditure • Service reliability
• Service quality on networks
• Service cost • Service cost
Supplementary Supplementary Supplementary

questions questions questions
The telecommunications subdimension covers a set of conditions, including: time

required to obtain phone connection, telephony and Internet penetration rates, quality
issues (telephone faults) and costs of telecommunication services.
The transport subdimension is divided into indicators covering road, rail and air.
These three sections assess the supply, density and quality of the network as well as
expenditure on construction and maintenance. Evaluation of air transport performance is
based on using a service cost approach.2
Finally, the energy subdimension considers average time and number of steps to
obtain an energy connection, energy services costs and reliability expressed in terms of
frequency of electrical power failures.
Each of these three subdimensions also includes a set of supplementary questions
that enable a qualitative description of the state of strategy development, sector regulation,
and regulatory authority status and prerogatives.

Given the complexity of issues linked to infrastructure topics and their broad, multi-
sectoral nature, this work is not exhaustive. The aim of the framework is rather to provide
a general outlook on infrastructure performance in SEE, identifying major gaps and
challenges facing the region.

Subdimension: Telecommunications
Telecommunications infrastructure is vital for the investment environment. A
developed telecommunications infrastructure enables firms to communicate rapidly and
cheaply with distant suppliers and customers (OECD, 2006a). Facilitating access to
telecommunications services has become a priority for decision makers around the globe.
Ever greater resources are being invested in upgrading and developing telecommunications
infrastructure.3 Internet usage is associated with superior performance in small firms.
Internet-using firms report higher revenue per salaried person, higher added value,
superior job creation and a proportionately greater number of registered patents (OECD,
2000). Furthermore, much new service-sector business activity is dependent on
telecommunications infrastructure, while high bandwidth connectivity can also enhance a
location’s attractiveness for key knowledge workers.
Regional overview
The telecommunications network in the SEE region significantly lags behind that in OECD
countries. Improvement is needed in the penetration of broadband Internet services. Fixed-
line penetration rates are all below Germany’s levels.4, 5 In contrast, in many SEE economies,
mobile line penetration seems to exceed the German benchmark rate. However, caution is
necessary when interpreting this result as the sector in the SEE region is dominated by services
requiring prepaid cards and multiple card holders (Cullen International, 2008).
The time required to get connected to the fixed-line network in some SEE economies
is comparable to that in Germany. However, other SEE economies still experience long
delays. Information on service quality is scarce. Finally, differences between SEE
economies in service costs are also quite large. In Montenegro, a peak-rate fixed-line call to
Germany costs on average EUR 2.25 per 3 minutes, compared to only EUR 0.14 per 3 minutes
in Bosnia and Herzegovina.
EU accession requires compliance with the EU telecommunications network. To
efficiently implement EU legislation on the information society, the region established the
eSEE Initiative. While legislation has been largely implemented (EBRD, 2008), the region
still faces challenges in implementation.
Getting connected
The time to get connected to the telecommunications network is measured by the
days required to obtain a new telephone line for a business.
The time needed to obtain a fixed telephone line differs considerably among SEE
economies. Only two to three days are needed to get connected to the network in Kosovo6
and Romania (Germany’s benchmark figure is 6.49 days). The time required in Albania, the
former Yugoslav Republic of Macedonia, the Republic of Moldova and Montenegro is
comparable with Germany. But, access to the network takes 17 days in Bosnia and
Herzegovina, 20 days in Bulgaria and 30 days in Croatia.

Box 7.1. eSEE Initiative: Electronic South-East Europe Initiative

The Stability Pact Electronic South-East Europe (eSEE) Initiative was set up in 2002 by
Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia,
Montenegro, Serbia and UNMIK/Kosovo in accordance with UNSCR 1244. Today, the eSEE is
overseen by the Regional Co-operation Council, and strongly supported by the European
Commission. The goal of the eSEE Initiative is to help SEE economies establish an
appropriate regulatory basis for the development of an information society. The eSEE
Initiative recognises a number of fields in which concrete actions are necessary, including:
adoption of policy and strategy for the information society; adoption and implementation of
a legal infrastructure for an information society, according to the EU acquis communautaire;
and establishment of regional co-operation and national implementation mechanisms.
A Memorandum of Understanding was signed in 2005 on the Development of Unified
Market of Broadband Networks Fully Interconnected to the European and Global Networks
Initiative for bSEE – Broadband South-Eastern Europe. This Memorandum contains a
strategy to improve the implementation of broadband networks in SEE.
The results of regional co-operation are positive. Significant improvements have been made
in the regulatory environment. The ERBD Transition Report 2008 shows that all SEE economies
score relatively highly on the quality of their telecommunications regulatory framework. Only
Serbia seems to lag, especially in the area of licensing and competitive safeguards.
A renewal of the Initiative was signed on 29 October 2007 and was named the eSEE
Agenda Plus for the Development of Information in SEE 2007-12. This revised version is
based on the priorities indicated in the i2010 Initiative of the European Commission. The
new priority areas are:
● setting up a Single SEE Information Space;
● stimulating innovation and investment in ICT Research and Education; and
● developing an inclusive information society.
Source: www.eseeinitiative.org.
Figure 7.2. Indicator 1.1:

Time required to obtain a new telephone line for a business
Days
35
30
25
20
15
10
0
ALB BIH BGR HRV XK MKD MDA MNE ROU SRB DEU

Telephony and Internet penetration

Internet penetration is measured here by the number of persons with broadband
access per 100 inhabitants.
Figure 7.3. Indicator 1.2: Persons with broadband access

(per 100 inhabitants)
Number of persons
30
25
20
15
10
0
The results show that the SEE economies are still far from Germany’s benchmark.
Access to broadband Internet connection is particularly low in Albania and the Republic of
Moldova. The European Commission notes that in Albania, while some progress has been
made since 2008 in the liberalisation and adoption of the EU acquis communautaire, the
process is still at an early stage (Cullen International, 2009).7 Moreover, service tariffs for
individual subscribers are too expensive for many Albanians (EIU, 2009). Internet
penetration in the other economies, especially Croatia, Bulgaria and Romania, is higher,
but still does not reach the benchmark level.
Figure 7.4. Indicator 1.3: Fixed line and mobile penetration rate
(per 100 inhabitants)
Fixed-line rate (per 100 inhabitants) Mobile penetration rate (per 100 inhabitants)
Number of lines
200
150
100
50
0

Indicator 1.3 measures telephone network penetration. Penetration levels differ

considerably among the types of connections. In general, fixed-line penetration rates are
low, while levels of mobile penetration are high. Rates for fixed-line penetration are all
below Germany’s benchmark of 62 lines per 100 persons. Kosovo has the lowest score at
only 4.56 lines. Croatia and Serbia share the highest score of 41 lines per 100 inhabitants.
In contrast, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia,
Montenegro, Romania and Serbia all have a higher mobile penetration than Germany.
The increased presence of plastic roamers8 contributes to rising penetration rates. In
these economies, many people have multiple mobile phone cards to ensure coverage or
to benefit from different rates. The dominance of prepaid cards could present
difficulties when preparing a move to mobile broadband (Cullen International, 2008).
Albania, Bosnia and Herzegovina, Kosovo and the Republic of Moldova remain below
the benchmark rate.
Service quality
The quality of telecommunication infrastructure is measured here by the number of
telephone faults per 100 main lines.9
Figure 7.5. Indicator 1.4: Telephone faults

(per 100 main lines)
Number of faults
50
45
40
35
30
25
20
15
10
5
0
ALB BIH BGR MKD MDA SRB
Note: Data validation was incomplete for Croatia. Data were not available for Kosovo, Montenegro and Romania.
The number of faults per 100 main lines is very low in Bosnia and Herzegovina (1.75),
Albania (2) and Bulgaria (2.90). In contrast, the Republic of Moldova has a high fault rate at
44.38, with Serbia at 31.19. The former Yugoslav Republic of Macedonia falls in between
these groups at 13 faults.
Service cost
Service cost is measured by the average cost of a peak-rate fixed-line call from SEE
economies to Germany (EUR/3minutes). This cost was compared to the average cost of a
peak-rate fixed-line call from Germany to the United States (EUR/3 minutes).

Figure 7.6. Indicator 1.5: Average cost of a peak rate fixed-line call to Germany
(EUR/3 minutes)
Euros
2.5
2.0
1.5
1.0
0.5
0
ALB BIH BGR HRV XK MKD MDA MNE SRB DEU
Note: Average cost of a peak-rate fixed-line call from Germany to the United States.
Data not available for Romania.
Bosnia and Herzegovina has the lowest cost among the SEE economies at EUR 0.14 per
3 minutes. In contrast, Montenegro has an average cost of EUR 2.25, almost five times the aver-
age cost in the median economy (Kosovo, at EUR 0.47 per 3 minutes). This significantly higher
cost in Montenegro could be explained by the lack of competition in the fixed-line market.10
The average cost in the other SEE economies varies between EUR 0.28 per 3 minutes in
Bulgaria and EUR 1.21 per 3 minutes in the Republic of Moldova.
Serbia and Croatia have similar average costs of EUR 0.72 and EUR 0.79 per 3 minutes,
while Kosovo, the former Yugoslav Republic of Macedonia, Bulgaria, Bosnia and
Herzegovina, and Albania all have average costs below the rate in Germany. Costs are
higher in the Republic of Moldova and, as explained above, much higher in Montenegro.
Figure 7.7. Indicator 1.6:

Active operators providing fixed-line telephony services
Number of active operators
70
60
50
40
30
20
10
0

Indicator 1.6 gives an overview of the number of active operators providing fixed-line
telephony services. The number of providers is another indication of the degree of
competition in the market and is also related to the average cost of service.
The number of operators differs across the region. Albania has 64 operators, while
Serbia has only 1. The remaining economies vary between 33 operators in Romania and 2
in Kosovo and Montenegro. The significantly higher number in Albania may be explained
by the presence of several small operators in rural areas (Cullen International, 2008).
Regulatory framework11
● Most SEE economies have developed a telecommunications strategy aimed at further
liberalising telecommunications services.
● All telecommunications utilities have been commercialised. However, in a few cases, the
state still remains the major stakeholder.12 In many instances, governments still need to
oversee newly privatised operators and guarantee sector liberalisation.
● In most of the assessed economies, a separate and independent regulatory authority
has been established. The agency is established as a public entity with precisely
defined rules setting the regulator’s appointment as well as independent resources
mostly coming from licensing fees and supervision services. The regulatory authority
usually has full tariff-setting powers. However, in some countries this prerogative is
limited only to significant market powers and needs preliminary consultations with
the government.
● In all economies, decisions of the regulatory authority are typically published and
available online. In all cases, governments assert that the private sector is consulted
during the elaboration of new regulations. However, it appears that public-private
consultations are not yet held on a regular basis. More standardised sector monitoring,
based on systematic public-private consultations, is necessary.
Box 7.2. Case study: Romania

By 1 January 2003, the telecommunications sector in Romania was fully liberalised. This was followed by
a rapid expansion and modernisation of the market. In the mobile telephone market, saturation coverage
of 140 subscriptions per 100 inhabitants is expected in a few years. Romania is now trying to expand the
network to more remote rural areas using telecentres.
The accession of Romania to the EU in 2007 meant that the EU acquis communautaire had largely been
adopted. The ERBD Transition Report shows that Romania scores very highly on the quality of its
telecommunications regulatory framework. However, it still lags significantly in the area of dispute
resolution and appeal. As an EU member, Romania also participates in i2010, the European Commission
initiative to develop a policy framework for the information society. Furthermore, Romania has signed the
eSEE Agenda Plus for the Development of Information Society in SEE 2007-12.
Sources: ERBD (2008), EIU (2008b).
Subdimension: Transport
Transport infrastructure links regions and countries and integrates them into the
global economy. Improvements in transport infrastructure not only save travel time but
also influence land values and the choice of modes of travel and shipment (e.g. using public
transportation rather than the family car) (OECD, 2006b). In addition, the quality and

Box 7.3. Case study: The former Yugoslav Republic of Macedonia

The ERBD Transition Report 2008 shows that the telecommunications regulatory framework in the former
Yugoslav Republic of Macedonia is comprehensive. There is full compliance with the EU acquis communautaire.
In the calculation of the quality of the telecommunications regulatory framework in transition countries, the
former Yugoslav Republic of Macedonia received the highest possible score in four subsections: regulatory
independence, dispute resolution and appeal, market access wired, and market access radio. The former
Yugoslav Republic of Macedonia received high scores in the other two categories: significant market powers
and safeguards, and interconnection and special action. The country has perhaps the strongest regulatory
basis among the SEE economies.
Nevertheless, competition is still low. The dominant player is MakTel, which was formerly state-owned.
In 2004, MakTel’s legal monopoly expired after the sale of the majority stake by the government to a
consortium led by Matov, in which Deutsche Telekom has a majority share. However, as MakTel is still the
dominant player in the market, a de facto monopoly continues to exist. The EU has stated that full
liberalisation of the fixed-line market is a requirement for the start of accession negotiations. Furthermore,
the International Monetary Fund has reviewed its three-year arrangement with the former Yugoslav
Republic of Macedonia and has included a clause that conditions the entrance of new players in both the
fixed-line market and the mobile market. Recently, the European Commission’s 2009 Progress Report showed
that the former Yugoslav Republic of Macedonia is trying to improve competition by introducing several
reforms and ending concession contracts with dominant players. Moreover, Deutsche Telekom was forced
to sell Cosmofon, a mobile operator, in an attempt to decrease its dominant position.
Sources: ERBD (2008), EIU (2008a), European Commission (2009).
coverage of transport networks influence the costs of inputs, production and distribution,
and therefore national competitiveness (Aoki and Roberts, 2006).
Furthermore, decreasing international transport costs fosters trade, acting as an
incentive for investment (OECD, 2006b). Transport infrastructure increases prosperity,
income and employment throughout the economy by raising the productivity of labour and
capital, playing an important role in GDP growth (OECD/ECMT, 2002).
The road network

High quality road infrastructure encourages investment.13 Transport delays owing to
poor quality road infrastructure can have major impacts on exports and in particular on
exports of time-sensitive goods such as perishable agricultural products (Djankov et al.,
2007). Through road infrastructure, faster access for workers to their places of work
contributes to the productivity of the area concerned (Prud’homme and Lee, 1999).
Regional overview. In 2008 a new multi-annual plan was developed by the South-East
Europe Transport Observatory for the period 2009-14.14 According to the plan, 49% of the
core road network has no major problems, while 13% is still of poor quality.
While the road network is extensive in the region, with an average of 517.54 km/1 000
km2 (only 20% less dense than the German network), road quality is deficient. For instance,
Romania has the largest road network in SEE. However, the proportion of motorways,
highways, main and national roads is the lowest of the region at 69 km/1 000 km2.15
More than 70% of roads in the SEE region are paved, 16 a figure close to the German
case. Nevertheless, this indicator only measures the most basic state of road
development. Taking into account the type of roads comprised in the network, the SEE

region falls short. In SEE, the average share of motorways, highways, main or national
roads in national road networks represents only about one-third of the share seen in
Germany.
Annual expenditures on road maintenance differ greatly among the region’s
economies. Serbia has the highest maintenance expenditure, while Albania has the
highest expenditure on new road construction.
Box 7.4. South-East Europe Transport Observatory

The South-East Europe Transport Observatory was established in the Memorandum of
Understanding for the Development of the Core Regional Transport Network,17 signed by
Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia,
Kosovo, Montenegro, Serbia and the European Commission on 11 June 2004. The
Observatory was created to facilitate implementation of the Core Regional Transport
Network. Its task is to co-ordinate and encourage co-operation and information transfers.
As such, it collects data, prepares multi-annual plans, provides a platform for know-how
transfers and also assists in the regional planning if requested.
The Memorandum of Understanding also specified the transport network to be
developed and/or improved. The Core Regional Transport Network is based on the 10 Pan-
European transport corridors and roads connecting the different capital cities and other
strategic points. Rail, waterway links and ports are also included. In total, the network is
10 590 km long (5 975 km roads, 4 615 km rail). Multi-annual plans indicate priorities and
the status of implementation.
Source: www.seetoint.org.
Road supply, density and quality. Indicator 2.1.1 measures the length of the road
network relative to the size of the country. The average road network in SEE contains
517.54 km of road per 1 000 km2.
Figure 7.8. Indicator 2.1.1: Length of road network

(per 1 000 km2)
Km per 1 000 km2

900
800
700
600
500
400
300
200
100
0
ALB BIH BGR HRV MKD MDA MNE ROU SRB DEU
Note: Data validation was incomplete for Kosovo.

Romania has a denser network than Germany (836 km/1 000 km2) while Albania’s
network density (640 km/1 000 km2) is approximately the same as Germany. The remaining
SEE economies have a lower road density: the former Yugoslav Republic of Macedonia
(534.2 km/1 000 km2), Bosnia and Herzegovina (515.9 km/1 000 km2), Montenegro (510 km/
1 000 km2) and Serbia (483 km/1 000 km2). Bosnia and Herzegovina, Bulgaria and the
Republic of Moldova have the least dense networks in the SEE region, at 443 km, 350 km
and 311.3 km per 1 000 km2 respectively.
Paved roads. This indicator measures the percentage of all roads that are surfaced with
crushed stone (macadam) and hydrocarbon binder or bituminised agents, with concrete or
with cobblestones.
Four out of nine economies in the SEE region have a ratio of paved roads similar to the
comparator Germany (100%).18 In Bulgaria, Bosnia and Herzegovina, the Republic of
Moldova and Croatia, over 90% of the road network is paved. Serbia, with 60% and
Montenegro with 36% have the lowest ratios of paved roads in the region.
Figure 7.9. Indicator 2.1.2:

Paved roads as a percentage of total road length
%
100
90
80
70
60
50
40
30
20
10
0
ALB BIH BGR HRV XK MKD MDA MNE SRB DEU
Note: Data validation was incomplete for Romania. For Albania, rural roads are not included.
Length of motorways and highways. The total length of motorways, highways, main or
national roads gives an indication of the level of development of the road network.19
On average the total length of motorways, highways, main or national roads in the
region is 142 km/1 000 km2. Romania lags behind the rest of the region with only 69 km/
1 000 km2. The largest network of motorways, highways, main and national roads is found
in the former Yugoslav Republic of Macedonia, at 193 km/1 000 km2.
Public expenditure on road construction and maintenance.20 Indicator 2.1.4 gauges

total public expenditure on new construction and extension of existing roads (including
reconstruction, renewal and major repairs of roads per year).


Total length of motorways, highways, main or national roads
(per 1 000 km2)
Km per 1 000 km2

450
400
350
300
250
200
150
100
50
0
ALB BIH BGR HRV MKD MDA MNE ROU SRB DEU
Note: Data for Kosovo were not available.
Figure 7.11. Indicator 2.1.4: Annual expenditure on road construction

(2008)
Euros (millions)
450
400
350
300
250
200
150
100
50
0
ALB BIH BGR XK MKD MDA MNE ROU SRB
Note: Data validation was incomplete for Croatia. Data for Albania correspond to 2009. Data are period average
averages for Romania (2006-08) and Serbia (2005-08).
Annual expenditure on road construction varies significantly among SEE economies.

Albania spends the most with an average expenditure of EUR 415 million.21 The Republic
of Moldova spends the least on road construction (EUR 25.5 million). Average annual SEE
expenditure (excluding Albania) is EUR 91 million.
Indicator 2.1.5 compares total annual expenditure for keeping roads in working order.
This includes maintenance, patching and running repairs. The amount is expressed in
euros per km of road.
Expenditure on road maintenance differs across the region. Romania spends the most
(EUR 12 310 per km of road), followed by Serbia (EUR 9 504 per km of road).The SEE average
is EUR 5 667 per km of road.22


Annual expenditure on road maintenance
(per km of road 2008)
Euros per km of road

14 000
12 000
10 000
8 000
6 000
4 000
2 000
0
Note: Data for Albania correspond to 2009. Data are period averages for Bosnia and Herzegovina (2006-08) and
Romania (2005-08).
Bosnia and Herzegovina, and Croatia have expenditure levels above the SEE average:
EUR 8 000 and EUR 5 677 per km of road respectively. The other economies are below the
SEE average. The former Yugoslav Republic of Macedonia has the lowest rate in the region
with only EUR 1 148 spent per km of road.
Regulatory framework. Public-private consultations with stakeholders are often

organised prior to important decisions on road policy. However, in some economies,
consultations have a limited impact due to low number of participants. A lack of public
commitment to dialogue has been reported in some countries. No public-private
consultations are held in Bosnia and Herzegovina. In all economies, there is a high level of
awareness of the need to take into account social and environmental issues while building
new roads. By law, authorities need to submit an appraisal of the environmental and social
impacts of road construction works.
The main national road agencies publish their work-in-progress reports on an annual
basis. In Romania, despite the lack of annual reports, all important decisions are available
to the public and are regularly updated on the agency website. More comprehensive reports
can be obtained upon request. No reporting on work-in-progress was seen in Albania.
Almost all economies award contracts for road maintenance using a system of open
tenders. Hence, road maintenance is performed by a large number of public and private
companies. However, in the Republic of Moldova and the former Yugoslav Republic of
Macedonia road maintenance activity is limited to public companies. In these two cases,
further liberalisation of road maintenance contracts and creation of competitive systems
based on open tender procedures would be appropriate.
The rail network

In SEE, train passenger numbers have declined over the last 20 years, going from 10
billion passengers-km in 1990 to 2.5 billion passengers-km in 2004 (World Bank, 2005). In

terms of freight, traffic stands at only a third of the level in 1990. Annual growth in rail
traffic between 2001 and 2025 is projected to be 2.5% to 5.8% (World Bank, 2005). Important
reforms in the region have been implemented. The institutional framework is being
harmonised with the requirements of the acquis communautaire. Most countries have (or
will soon adopt) policies that separate the state’s role from commercial functions and will
open the access regimes for rail infrastructure. Significant reductions in costs have been
achieved and substantial labour restructuring has started in many economies.
Regional overview. According to the South-East Europe Transport Observatory, the

quality of the core rail network in SEE is not as high as the road network, with only 15%
considered to be in good condition, while 24% is seen as being of poor quality. For the next
five years, 46 projects to improve the quality of the rail network are classified as a priority,
and 31 of these projects will be new.
The average density of the rail network in SEE is 70% lower than in Germany, while the
number of trains operating per kilometre of railway is 80% lower.
Annual expenditure on maintenance of rail networks differs throughout the region.
Montenegro, Bosnia and Herzegovina, and the former Yugoslav Republic of Macedonia
have the highest expenditure rates for rail maintenance, accounting for almost 70% of the
regional total.
Rail supply and density. Indicator 2.2.1 measures the density of the rail network.

Total length of rail network/country area
Km per 1 000 km2
120
100
80
60
40
20
0
Germany (at 107 km/1 000 km2) has a rail network density well above the SEE average
(32.07 km/1 000 km2). Only three economies (Croatia, Romania and Serbia) reach levels above
36 km/1 000 km2. Albania records the lowest rail density in the region, with 15.1 km/
1 000 km2.
Indicator 2.2.2 estimates the density of trains operating per day in the totality of the
rail network. The number of trains per km of railway is obtained by dividing the total
number of trains by the total length of the rail network. Using this method, the average
number of operating trains in SEE per km of railway is 0.16, compared to 0.81 in Germany.


Number of trains operating per km of railway
Number of trains
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
ALB BIH BGR XK ROU SRB DEU
Note: Data validation was incomplete for Croatia and Montenegro. Data were not available for the former Yugoslav
Republic of Macedonia and the Republic of Moldova.
Romania is the SEE economy with the highest number of trains per kilometre of
railway (0.29), followed by Bulgaria (0.23), Bosnia and Herzegovina (0.19) and Albania (0.16).
Kosovo and Serbia have the lowest numbers in the region: 0.09 and 0.03 respectively.
Public expenditure on the rail network. I n d i c a t o r 2 . 2 . 3 r e f e r s t o a n n u a l p u b l i c

expenditure on keeping the rail network in working order.23 Montenegro (EUR 38 800),
Bosnia and Herzegovina (EUR 26 188), and the former Yugoslav Republic of Macedonia
(EUR 16 514) raise the average of the region to EUR 14 872.83 per kilometre of rail network.
Bulgaria has the highest expenditure on maintenance per kilometre of rail network with
EUR 13 942, while Romania has the lowest expenditure at EUR 3 006.
Public expenditure on new construction and extension of existing rail infrastructure,
including reconstruction, renewal and major repairs differs widely through the region.24
Figure 7.15. Indicator 2.2.3: Annual expenditure on maintenance of rail network

(euros per km)
Euros
45 000
40 000
35 000
30 000
25 000
20 000
15 000
10 000
5 000
0
ALB BIH BGR XK MKD MNE ROU SRB
Note: Data validation was incomplete for Croatia and the Republic of Moldova.

Bulgaria and Romania have the highest expenditures on construction of new rail infrastructure
(EUR 13 729 420 and EUR 12 404 146 respectively) followed by Albania at EUR 572 000.
The Republic of Moldova (EUR 23 360) and Croatia (EUR 4 294.8) have the lowest annual
expenditure on rail network construction in the SEE region.
Regulatory framework. All economies, except Kosovo, have developed a specific set of
regulations dealing with the rail network. However, in some economies there is no
independent agency responsible for rail regulation.
In economies where a separate rail agency has been established, sector reports are
published on an annual basis. Albania and Kosovo, which have not yet created
independent agencies and where the regulatory activity is still performed by the assigned
ministries, do not publish regular reports on rail sector performance.
Air transport
The South-East Europe Transport Observatory distinguishes 11 core network airports
in the region: Banja Luka, Belgrade, Dubrovnik, Nis, Podgorica, Pristina, Sarajevo, Skopje,
Split, Tirana and Pristina. All airports have one runway, but most are not able to handle
long-haul aircraft. Relatively small terminal buildings, inadequate equipment related to
navigation, landing and takeoff procedures are some of the major constraints to airport
capacity (SEETO, 2008).
Indicators for air transport reflect traffic volumes in terms of flights, tonnes
transported and costs.
Aircraft departures per day differ greatly across SEE economies. The most departures
are recorded in Romania (99.57 departures), Bulgaria (67), Serbia (61) and the Republic of
Moldova (34).
Box 7.5. Single European Sky in South-East Europe

Improvement of civil aviation and air traffic in SEE first became a priority through the 2005
South-East Europe Functional Airspace Block Approach. However, countries wanted to go beyond
this first step and join the Single European Sky Initiative set up by the European Commission.
The Single European Sky in South-East Europe support programme was signed in April 2008 by
Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Serbia, Montenegro, the former Yugoslav
Republic of Macedonia, the UN Mission in Kosovo, the European Commission, the Stability Pact for
South-East Europe and the Regional Co-operation Council.
The main objectives are to: enhance the current safety standards for general air traffic in the area;
optimise capacity, flight efficiency, cost effectiveness, while taking into account environmental issues
and defence requirements; address operational and technical matters in order to facilitate the
implementation of the Single European Sky; create regulations in the area and to co-ordinate with
adjacent similar initiatives; enhance the level of staffing in national organisations when required and
harmonise their level of knowledge in accordance with Single European Sky standards; and co-ordinate
and harmonise the work.
This initiative aims to create the legal framework to enhance and consolidate SEE co-operation.
In addition, it should result in increased airspace capacity such that users can benefit from greater
flexibility and enterprises from cost savings through a more integrated regional air traffic system.
Source: Stability Pact for South-East Europe, www.stabilitypact.org.


Aircraft departure per day at the country’s largest airport
Aircraft departures
120
100
80
60
40
20
0
Albania, Bosnia and Herzegovina, Kosovo, the former Yugoslav Republic of Macedonia
and Montenegro have fewer than 20 departures per day. Bosnia and Herzegovina has 10
departures per day.
Figure 7.17. Indicator 2.3.2: Average annual air cargo transported

(tonnes)
Tonnes
30 000
25 000
20 000
15 000
10 000
5 000
0
In the SEE region, average annual air cargo transported is 4 061.12 tonnes.25 Romania
and Serbia have the highest average of annual air cargo volumes, at 25 000 and 10 000 tonnes
respectively.
The lowest cargo volumes in the region occur in Montenegro (858 tonnes) and Kosovo
(183 tonnes).
Indicator 2.3.3 compares the average cost in SEE of sending a tonne of airfreight to
Frankfurt. Frankfurt Airport is the busiest airport by passenger traffic in Germany, the third


Average cost of a tonne of airfreight to Frankfurt
Euros
2 500
2 000
1 500
1 000
500
0
ALB BIH HRV XK MKD SRB
busiest in Europe and the ninth busiest worldwide. It is among the largest airports in terms
of tonnes of airfreight.
There are no significant discrepancies between SEE economies concerning the average
cost of a tonne of airfreight to Frankfurt. Sending a tonne of airfreight to Frankfurt costs on
average EUR 1 695 in the region. Albania, Croatia and Kosovo have above-average airfreight
costs while the former Yugoslav Republic of Macedonia, Serbia, and Bosnia and
Herzegovina report costs somewhat below the regional average.
Subdimension: Energy (electricity)

According to the International Energy Agency’s World Energy Outlook 2008, worldwide
energy demand in non-OECD countries is projected to grow at an annual rate of 3.8% in the
period 2006-30 (IEA, 2008). In the World Bank Enterprise Surveys 2009, five out of ten SEE
economies identified electricity as one of the 10 main obstacles to enterprise investment,
and an average of 34% of firms identified electricity as a major constraint (World Bank,
2009a). This subdimension examines three issues: access to electricity, availability of
electricity and cost of service.
Getting connected
Indicators 3.1 and 3.2 measure the time and number of procedures needed to receive
an electricity connection for a business. In Germany, 17 days are required for acquiring an
electricity connection (World Bank, 2009b). In contrast, for SEE economies, it takes on
average 109.2 days to get connected.
In Kosovo, the number of days required to obtain a connection is only 60 (the lowest in
the region) closely followed by Montenegro and Croatia with 67 and 70 days respectively.
Albania and Romania report the longest delay in getting a connection, at 162 days and 207
days respectively.
The more procedures are required, the more a firm will have to wait until it receives
the service. According to the World Bank’s Doing Business pilot study Getting Electricity, firms
having to go through 6-10 procedures receive an electricity connection in 144 days on
average. In the case of 3-5 procedures, the process will take 104 days on average. Finally, for

Figure 7.19. Indicators 3.1 and 3.2:

Average time required to obtain an electricity connection for a business
(calendar days) and necessary steps/documentation to get a connection
ALB BIH BGR DEU HRV XK MKD MDA MNE ROU SRB
Number of days
250
200
150
100
50
0
0 2 4 6 8 10 12
Number of procedures
Source: World Bank Doing Business pilot indicator “Getting Electricity”, with the exception of Kosovo for which
responses from the IRI questionnaire were used.
economies with fewer than two procedures, the average time is only 56 days (World Bank,
2009b).
On average, a business must follow 5.7 procedures to obtain electricity in SEE. Only in
Romania, the Republic of Moldova, and Bosnia and Herzegovina are more than six
procedures needed.
Service cost
Indicator 3.3 assesses the average industrial electricity tariff measured in EUR per kWh.
Figure 7.20. Indicator 3.3: Average industrial electricity tariff

(per kWh)
Euros per kWh

0.12
0.10
0.08
0.06
0.04
0.02
0
ALB BIH XK MKD MDA MNE ROU SRB DEU
Note: There was no response from Bulgaria and Croatia regarding this indicator.

In the region, the average industrial electricity tariff (EUR 0.079) is lower than in
Germany (EUR 0.097 per kWh).26 Nevertheless, caution is advised in interpreting these
results, as underlying factors27 and different exchange rates among SEE economies could
influence the recorded tariffs.
Service reliability
Service reliability is measured by the frequency of electrical power failures in the
capital city during the past year.28 The World Bank’s Enterprise Survey estimates that on
average, electrical power failures in SEE economies represent a loss of 5.4% of sales (World
Bank, 2009a).
Regulatory framework
All economies except Bosnia and Herzegovina have recently published an energy
strategy or will do so very soon. A long-term strategy aiming at liberalisation in electricity
generation and distribution would be welcome in Bosnia and Herzegovina.
Energy utilities have not yet been commercialised in either Bosnia and Herzegovina, or
Serbia. In other economies, although the commercialisation process has commenced, the
state still remains a dominant actor on the market, and frequently an owner of the energy
utility subsidiaries.
All the assessed economies have established independent regulatory authorities with
a legal mandate and clear rules for appointing regulators. Agency resources come from
licensing fees and other levies on regulated enterprises.
Box 7.6. Energy Community

In November 2002, the Athens Memorandum was developed by South-East European
economies to create modern and efficient energy infrastructure networks (for electricity,
oil and gas). The strategy also sought to ensure that the energy system of the region could
meet the energy demands of each economy through a regional electricity market.
The Athens Memorandum set up the Ministerial Council and a Permanent High Level
Group composed of representatives of the Ministers of Energy from member economies
and the European Commission (collectively known as the Athens Process).
This process aimed at creating opportunities for investment in the energy sector by
encouraging efficient use of existing infrastructure, ensuring long-term viability of the system
and better integration of energy systems and practices with those of the European Union.
The Energy Community was established in October 2005, following the previously signed,
preparatory Athens Memorandum. The contracting parties are Albania, Bosnia and
Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, Kosovo, Montenegro and
Serbia, supported by the European Union. Its mission is to extend the EU internal energy
market to South-East Europe. The Energy Community aims at guaranteeing a steady and
continuous energy supply by setting up a stable regulatory and market environment.
The Contracting Parties have committed to implement the EU acquis communautaire on
energy within a specified timeframe. They have set deadlines for specific directives. In
particular they have agreed to finalise liberalisation of both electricity and gas markets by
January 2015. However, in December 2007 the implementation of Directives 2003/54 (on
electricity) and 2003/55 (on gas), initially to be completed before July 2007, was postponed
to 31 December 2009.

Box 7.6. Energy Community (cont.)

Besides Contracting Parties and the EU, the Energy Community includes 14 participants.
All EU member states may obtain the status of participant. As participants, they have a
right to take part in all meetings. Also, five observers, namely Georgia, Norway, Turkey,
Ukraine and the Republic of Moldova may attend meetings of the institutions, without
participating in discussions. Third neighbouring countries act as observers.
Source: www.energy-community.org.
Notes
1. For instance, using a database on road routes connecting 138 cities in 27 countries across Europe
and central Asia, Shepherd and Wilson (2006) show that improved road quality is strongly
associated with higher intra-regional trade flows. Cross-country spillovers from overland transit
are seen to be sizeable, with the authors estimating that total intra-regional trade could be
increased by 30% if roads were upgraded in just three countries: Albania, Hungary and Romania.
Moreover, the data suggest that a feasible programme of road upgrading could bring increases in
trade that exceed the expected gains from tariff reductions or trade facilitation programmes.
2. Average airfreight costs are compared among SEE economies.
3. For instance, investments in telecom projects with private participation in developing countries in
2008 was EUR 48.8 billion (World Bank/PPIAF, 2008).
4. According to the World Economic Forum, Germany ranked first in the infrastructure pillar of the
Global Competitiveness Index (CGI) 2009-10 and is therefore considered as the country displaying
the most developed and extensive infrastructure in the world. Germany will be used as a
benchmark comparator for infrastructure in the SEE region. For more on the CGI, see World
Economic Forum (2009).
5. Data reported for the indicators in this dimension derive from responses to the IRI questionnaire
unless otherwise stated.
6. For areas where line infrastructure is already present. Where this is not the case, five days are
needed.
7. The EU has established a fund of EUR 78 million for technical assistance in the telecommunication
sector in Albania. Furthermore, in order to accord with the acquis communautaire, new
amendments to the Law 9918 on “Electronic Communication” are being prepared.
8. People with multiple SIM cards who switch to a local operator when moving between entities.
9. The total number of reported faults for the year is divided by the total number of main lines in
operation and multiplied by 100.
10. Despite formal liberalisation of the market in 2004, barriers to entry, in particular licencing fees of
EUR 100 000, have hindered competition in Montenegro. In 2007, this fee was reduced to EUR 1 000
(Cullen International, 2008).
11. Information on the regulatory framework presented here and elsewhere in this chapter was
collected as part of the IRI assessment.
12. This is the case for: Bulgaria, Kosovo, the Republic of Moldova and Serbia.
13. For example, illustrating the positive association with investment demand, Egeln et al. (1997) show
that public traffic infrastructure has been important in determining the distribution of start-up
activity across Germany’s regions.
14. In December 2009 a new multi-annual plan has been established for the period 2010-15.
15. A national strategy on the motorways network focuses on new road construction.
16. For Albania rural roads are not included.
17. In June 2008, the European Commission started negotiations on a Treaty Establishing a Transport
Community with the Western Balkans. This will replace the previous Memorandum of
Understanding.

18. Source: CIA World Fact Book 2009.
19. Motorways include roads specifically designed and built for motor traffic, which: do not serve
bordering properties and which: have separate carriageways for the two directions of traffic; do not
cross at level with any road, railway, tramway track or footpath; and are signposted as a motorway
and reserved for specific categories of motor vehicles. In most countries, such roads are financed
by the federal or national government.
20. Data on private expenditures were not provided by any government.
21. Note that this large expenditure figure reflects a major construction project on the Durrës-Kukës-
Morinë Highway, which connects the Albanian sea port with Kosovo.
22. In Germany, EUR 150 billion is set to be invested for the period 2001-15 as part of the Federal
Transport Master Plan. Additional to this Plan, investment of at least EUR 7.1 billion has already
been made for improvement of road infrastructure (Gühneman, 2006).
23. Data on private expenditures was not provided by any government.
24. Data on public expenditure was not available for Montenegro and Kosovo. In Serbia, Bosnia and
Herzegovina, and the former Yugoslav Republic of Macedonia there has not been any new
investment on new rail infrastructure in the past years. Data on private expenditures was not
provided by any government.
25. Excluding Romania.
26. Industrial customers in the former Yugoslav Republic of Macedonia are divided in two categories:
tariff customers (at 0.035 euros per kWh) and eligible customers (0.06 euros per kWh).
27. For example, generating capacity, different cost of generation of electricity, competition in the
energy market and cross subsidies between different consumer groups can play a role in price
differences.
28. Country responses for this indicator were minimal, therefore no comparison of electrical power
failures among the region is made. Data validation was incomplete for Albania and Kosovo. Data
ware not available for the former Yugoslav Republic of Macedonia, Montenegro and Serbia.
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© OECD 2010
Chapter 8
SME Policy
237
I.8. SME POLICY
8.1. Introduction
Small enterprises are the backbone of South-East European (SEE) economies. The
small- and medium-sized enterprise (SME) sector is the largest provider of employment in
the region, especially of new jobs. SMEs underpin the expansion of the services,
construction and transport sectors that are driving economic growth. Clusters of SMEs
moving into higher value-added operations are emerging.
This chapter presents a summary of the SME Policy Index 2009 (OECD, European
Commission, European Training Foundation (ETF), and European Bank for Reconstruction and
Development (EBRD), 2009), a report published in June 2009.1 The SME Policy Index 2009 is an
assessment of the quality and the level of implementation of SME policy in the Western
Balkans. It examines Albania, Bosnia and Herzegovina, Croatia, Kosovo, the former
Yugoslav Republic of Macedonia, Montenegro and Serbia. The assessment was conducted
by the OECD, the European Commission, the ETF and the EBRD between June and
December 2008. The final report was launched at a high-level meeting in Brussels on
17 June 2009.
The assessment framework of the SME Policy Index 2009 is based on the European
Charter for Small Enterprises (the Charter), a set of policy guidelines endorsed by the
European Union member states and a key component of the European Union Lisbon
Agenda. Western Balkan governments adopted the Charter in 2003. The SME Policy Index 2009
assesses the implementation of the European Charter for Small Enterprises in the Western
Balkans. The report presents a synthesis of two parallel assessment processes: a self-
evaluation conducted by the Western Balkan governments and an independent evaluation
conducted by the four partner organisations (OECD, European Commission, ETF and EBRD),
with inputs from the private sector and other SME stakeholders.
The SME Policy Index 2009 covers the ten policy areas included in the Charter. As in the
Investment Reform Index, each area has been broken down into sub-areas and policy
indicators. Each indicator is based on a five-step policy development path ranging from a
level 1 (lack of policy) to a level 5 (implementation close to the good practices collected in
the Charter and in the OECD SME Bologna Process).
This chapter presents the key findings of the SME Policy Index 2009 per economy and
per policy area.
8.2. Key findings on progress in policy elaboration and implementation

in the Western Balkan region
The key finding of the 2010 report is that over the last two years there has been good
progress in elaborating and implementing policies supporting small enterprises across the
Western Balkans. There is clear convergence towards adoption of the policy guidelines set
in the Charter. However, progress has been uneven across the ten areas and seven
economies covered by the report.

I.8. SME POLICY
In particular, Western Balkan governments have generally made good progress in

policy areas that directly affect the operational environment for small enterprises. For
instance, the company registration process has significantly improved in terms of time,
costs and steps required, with the only exception of Bosnia and Herzegovina. A wide range
of regulatory reform programmes have been launched and are currently implemented in
most Western Balkan economies. The credit environment and the range of financial
products available to SMEs have also improved.
On the other hand, most Western Balkan governments are at a relatively early stage in
introducing targeted policies for relevant types of SMEs, such start-ups, export-oriented
and high-growth companies. For instance, few governments have introduced measures
targeting start-ups (positive examples are Croatia and Serbia) or targeting innovative
enterprises.
Even when policies have been formulated and specific measures have been
introduced, as in the cases of Croatia, Serbia and to a lesser extent the former Yugoslav
Republic of Macedonia and Albania, the available resources are still a fraction of what is
available in the new European Union (EU) member states. Most of the programmes
launched in the areas of technological export promotion or competitiveness either do not
reach the critical level needed to have a positive impact on company behaviour, or are
structured in a way that fails to generate positive synergies with other measures.
The contribution of human capital to enterprise performance remains a particular
constraint to the economies of the region. More effort is required to ensure that education
and training is strategically linked to the wider competitiveness drive within each country.
Enterprises, in partnership with the public sector, will need to assume more responsibility
in defining training requirements and ensuring that these are systematically articulated
with the training market. Greater recognition of EU recommendations for promotion of
entrepreneurship at all levels of education is required, with particular emphasis on
entrepreneurship promotion in early education.
The 2010 report shows that a two-year policy horizon can be sufficient for elaborating
and implementing policy reforms with clearly defined objectives that can be monitored.
These reforms should have relatively limited state-budget implications and should involve
few institutional and legislative changes. Implementation can be delegated to executive
agencies, and approaches can be modelled on existing good practices.
However, reforms can take place only if the government provides strong political
backing, secures the consensus of stakeholders, ensures good planning and effectively
manages external technical assistance.
Good examples in the region are the successful restructuring of the company
registration process in Albania, which has introduced a state-of-the-art registration system
in less than two years, and the launching of the one-stop shop system in the former
Yugoslav Republic of Macedonia. A negative example for the same area is the stalling of
company registration reform in Bosnia and Herzegovina, under consideration since 2003.
Other more complex reforms that call for institution building, extensive inter-
ministerial co-ordination and legislative changes (and have wider budget implications),
such as those related to human capital development and regulatory reform, require
longer elaboration and implementation times, hence a five-year horizon is more
common.

I.8. SME POLICY
8.3. Key findings of the SME Policy Index 2010 by economy

The SME Policy Index 2007 divided the Western Balkan economies according to the level
reached in terms of policy performance.
A first group, made up of Albania, Bosnia and Herzegovina, and Kosovo, was
characterised by a level of performance around level 2 across the ten areas, denoting an
institutional and legal framework underpinning SME policy still largely reliant on ad hoc
intervention and pilot projects.
A second group, made up of the former Yugoslav Republic of Macedonia, Montenegro
and Serbia, comprised economies that had largely completed the legislative and
institutional framework supporting SME policy and had just begun policy implementation.
Their performance level was between level 2 and level 3 in most areas.
The 2010 report confirms Croatia as the region’s most advanced economy in terms of SME
policy elaboration and implementation in the Western Balkans. In each policy-area, excluding
the human capital areas and tax policy, Croatia has recorded a performance well above level 3.
Two areas (Getting more out of the single market and Successful e-business models and top-class
business support) indicate that a sound policy framework is in place and the country is moving
well ahead with policy implementation. Policy improvements were widespread but incremental.
No major policy initiatives were launched over the last two years, as the country has focused on
the implementation of existing policies and completion of the EU accession process.
The 2010 report shows that there have been significant changes in the dynamic and
the composition of the second group. There have been significant policy developments in
Serbia across a wide range of areas. The country has moved rapidly from the phase of
policy elaboration and definition of strategy objectives to policy implementation in areas
such as support to innovative companies, start-ups, provision of business services and
information dissemination through online services. It has significantly improved its record
on public-private policy dialogue. In addition, Serbia has improved its performance, in an
incremental way, in a number of areas where it already had a positive implementation
record, such as in company registration and export promotion.
There were limited improvements in the overall performance of the former Yugoslav
Republic of Macedonia and Montenegro: few policy initiatives were launched over the last
two years. Both economies made significant progress in areas relating to human capital
development and, to a lesser extent, the provision of business support services. However,
both economies are relatively weak in the key areas of supporting SME competitiveness
and technological capacity, as well as in export promotion.
Albania’s policy performance over the last two years has been remarkable and has
allowed the country to join the second group. Albania’s record of policy implementation
has improved in all ten areas; in particular, in all the policy areas linked to the general
operational environment (such as company registration and regulatory reform). The weak
points in Albania’s performance remain human capital development and the technological
capacity of SMEs.
The 2010 report shows that there are two economies in the region that, for a variety of
reasons, are still completing the basic institutional, legal and regulatory requirements
underpinning SME policy: Kosovo, and Bosnia and Herzegovina. However, while the former
has shown significant progress over the last two years, SME policy implementation in
Bosnia and Herzegovina has largely stagnated. Inside Bosnia and Herzegovina, there have

I.8. SME POLICY
been differences in performance across the two Entities (the Federation of Bosnia and
Herzegovina, and the Republika Srpska) and the District of Brcko. Progress has been more
marked in the District of Brcko and the Republika Srpska, which is engaged in a regulatory
reform and has an active policy towards the small enterprise sector conducted through the
Entity’s SME Development Agency.
In Kosovo, there has been progress on the institutional front, with the establishment of
an SME Development Agency, the assignment of the export promotion task to the Investment
Promotion Agency, and improvement of the legal and regulatory framework related to access
to finance. The provision of services to SMEs is still performed mostly through donor-funded
projects, as the newly established SME Development Agency is still building capacity and
developing its own tools. Kosovo has developed a good lifelong entrepreneurial learning
strategy with a range of institutional partners having signed up to its implementation.
In Bosnia and Herzegovina, there is still room for progress in the SME policy area at
state level. Policy elaboration and implementation is highly decentralised, with the two
Table 8.1. Key SME policy reform initiatives launched in the Western Balkans
since the 2007 SME Policy Index Report
ALB Over the last two years, Albania has radically reformed the company registration process, with the financial and technical
support of the Millennium Challenge Corporation, and co-ordinated by the Ministry of Energy, Economy and Trade.
The reform is remarkable for its scope, speed of implementation and the quality of the results. The starting point of the reform
process was the passing in May 2007 of the Law on National Registration Centre that transferred competence over company
registration from the Tirana court to a new dedicated public agency. In the year after the establishment of the Centre, there
has been a significant surge of new company registrations. The Centre is also updating the records of existing companies
and includes those records in the new electronic register.
BIH The definition of collateral is encouragingly flexible in Bosnia and Herzegovina. USAID sponsored a project to set up a registry
for movable assets, which became operational three years ago, on a state-wide basis and regulated by a state-level law. In
this registry anyone in Bosnia and Herzegovina can enter information about pledged movable assets. A credit registry exists
and functions well, although individuals’ access to their own credit data is not guaranteed by law.
HRV Croatia has been the first Western Balkan country to rigorously tackle competitiveness issues among SMEs. BICRO, the
Business Innovation Centre of Croatia, plays a central role in supporting innovative SMEs: it runs a number of programmes,
ranging from R&D support to equity financing. The Koncro Programme strengthens the technical and managerial skills of
innovative SMEs through the co-funding of consultancy services. Meanwhile, the institutional support for promoting
entrepreneurship key competence by the National Curriculum Council and education authorities provides an important basis
for mainstreaming entrepreneurship promotion in formal education. Finally, the Croatian-led project to establish a South-
Eastern Europe Centre for Entrepreneurial Learning demonstrates further commitment to regional co-operation.
XK Kosovo has established the SME Support Agency, which is the institution responsible for the elaboration
and implementation of SME policy. The Agency’s responsibilities include: developing a policy framework for SMEs;
initiating legislation concerning SMEs and making recommendations on legislation that affects the business environment;
proposing and compiling plans for better co-ordination and co-operation between domestic and foreign organisations working for
the development of SMEs; and implementing programmes related to the creation and development of SMEs.In 2008, the Agency
had 12 employees and a budget of approximately EUR 2.3 million to allocate to projects. Meanwhile, a lifelong entrepreneurial
learning strategy provides a solid basis for a range of partners to move forward with entrepreneurial learning initiatives.
MKD Since the entry into force of the Law on One-Stop Shop System in 2006 and the maintenance of the trade register and
the register of other legal entities, the former Yugoslav Republic of Macedonia has further improved the efficiency of its company
registration system and reduced company registration fees. The Central Registry can currently process a company registration
application in less than one day, down from five days in 2006, for a fee of approximately EUR 57.
As typical of a one-stop shop system, the Central Registry issues the unique company registration number and obtains, on behalf
of the new company the tax registration number, normally in a matter of a few hours. To further reduce start-up costs, the former
Yugoslav Republic of Macedonia recently waived the minimum capital requirement for limited liability companies.
MNE Montenegro has made particular strides to develop entrepreneurship education with an intensive pilot project within one
municipality (Berane) in the country’s least developed northern region. The strategic piloting effort follows the elaboration of a
lifelong entrepreneurial learning strategy and action plan. The challenge for the education and training authorities is to move the
strategy and its steps forward and to build on the policy learning and momentum developed through the “Berane process”.
SRB The Serbian government has made significant progress to promote competitiveness and support the technological capacity
of SMEs. In January 2008, the government formally established the National Competitiveness Council.
Its membership includes all key economic ministries, the Central Bank, the main private sector associations, leading
academics and business leaders. Its mandate is to conduct analysis on competitiveness issues, elaborate policy proposals,
monitor policy development and foster programme co-operation; it is expected to become a key policy forum.

I.8. SME POLICY
entities and the District of Brcko having direct responsibility for most of the ten policy
areas covered by the Charter. In addition, the ten cantons in the Federation of Bosnia and
Herzegovina have legislative and regulatory powers in SME policy areas, while the five local
development agencies play a stronger role in SME support. The result is a fragmented and
often uncoordinated policy framework in which a relatively large number of projects and
initiatives are launched. While these respond to local needs, they lack mechanisms for
policy co-ordination, development of synergies among projects, and a productive exchange
of experience among policy makers and stakeholders. The failure to fully implement
company registration reform nation-wide, and the lack of common SME strategy and policy
co-ordination institutions (already highlighted in the previous report) demonstrate how
the situation is stalled. On the other hand, the country has made good progress on access
to finance, an area less subject to policy fragmentation.
8.4. Key findings by area of the European Charter for Small Enterprises2
Entrepreneurship education and training
M o s t e c o n o m i e s h ave d eve l op e d p o l ic ie s a n d s t ra t eg i e s i n t h e a re a o f
entrepreneurship education and training. Several economies have already elaborated
perspectives for lifelong entrepreneurial learning. However, there is a need for more
systematic monitoring and evaluation of the activities in this area.
While non-formal entrepreneurship education and training (activities outside the
school curriculum) is well developed, more efforts at building synergy with formal
education could be explored. Although the Charter encourages more systematic co-
operation among the parties involved in entrepreneurship education and training, the
exchange of information and know-how is generally confined to loose networks with little
ambition amongst practitioners to make their achievements known. More developed
networks could inspire confidence and trust amongst practitioners to publicise their work,
allowing others to borrow from tried-and-tested ventures.
The assessment concludes with recommendations for more structured co-operation
among education policy makers to step up lifelong entrepreneurship education and training. It
also calls for more focused efforts to raise understanding of entrepreneurship competencies
among education communities in terms of, for instance, curriculum and teacher training.
Cheaper and faster start-up

The 2010 report shows that there has been significant progress across the region in
promoting faster and cheaper start-up. Progress has been more impressive in the registration
phase. In all the Western Balkan economies, excluding Bosnia and Herzegovina,
entrepreneurs can complete registration procedures with company registers (specialised
agency or commercial court) in less than five days on average from the time of application.
In most economies, it takes a day to obtain the company registration certificate from the
time of application, for a fee of less than EUR 60. The pre-application steps have also been
streamlined. However, progress in the notification phase has been less marked. Two
economies (Croatia, the former Yugoslav Republic of Macedonia) are moving towards the
one-stop shop model. Progress has been patchy and slow in the compliance phase, with
intervention focusing on the elimination or reduction of minimum capital requirements for
start-ups (the former Yugoslav Republic of Macedonia and Kosovo). Over the last two years,
Albania and Serbia were the most successful reformers in this area, while Bosnia and

I.8. SME POLICY
Herzegovina lagged behind the regional average. Overall, the priorities set out in the 2007
report were only partially tackled. Governments should find the right balance between: the
need to conduct checks and thorough inspections, and secure compliance with laws and
regulations concerning health, security and environmental risks; and the desire not to put
excessive burden on new businesses. The 2007 report also suggested, as a medium-term
objective, transforming the company registration body into a centre for collection and
dissemination of company data for the public administration (tax administration, office of
statistics and employment office) and the private sector, within the limits set by
confidentiality rules and regulations. This would require the establishment of an electronic
data bank covering the entire population of registered enterprises (not only the latest entries)
and the integration of a number of new functions.
Figure 8.1. Scores in Charter Area 2 – Cheaper and faster start-up
2007 2009
Score
5
0
ALB BIH HRV XK MKD MNE SRB
Better legislation and regulation

Area 3 assesses three important elements for a stable and clear regulatory
environment, namely regulatory reform, institutional framework and regulatory impact
assessment. Since the 2007 report, the overall average score for the Western Balkans has
increased significantly. Currently all but two economies (Bosnia and Herzegovina, and
Kosovo), are above level 3, considered a threshold at which a solid legal and/or institutional
framework is in place. While these two economies still have to adopt their strategic
framework and start implementing it, the other five economies should make further
efforts to implement the action plans of their strategies in this area.
Availability of skills
The Charter assessment considered training availability, with particular emphasis on
training for new ventures and expanding businesses. Overall, there is a lack of
comprehensive data on enterprise training, including training for start-ups and growing
enterprises. Data are invariably spread across different organisations and serve different
purposes, making the task of quantitative assessment difficult. Nonetheless, there is
evidence of a growing recognition of the importance of reliable data for more targeted
policy developments.

I.8. SME POLICY
Figure 8.2. Scores in Charter Area 3 – Better legislation and regulation
2007 2009
Score
5
0
Data aside, the assessment identified considerable efforts to promote training in all
economies through networks of training providers (for the most part, public training
services), although the extent to which this training is directly accessible by enterprises is
not clear. Similarly, information on private training providers is generally not readily
available, suggesting an under-developed training market. The assessment also points to
the need for more development in the area of quality assurance in training. Improved
quality assurance will generate confidence in, and demand for, training by enterprises.
Improving online access

E-government services for SMEs have emerged in the Western Balkans, but only
Croatia has a clear e-government strategy. Albania, Montenegro and Serbia have made
great strides in making government services more accessible online (including the
provision of relevant online business information and the introduction of online services
for filing tax returns or social security). The key weakness in this area remains the lack of
SME-dedicated online portals, which would make searching for information less
cumbersome by bundling SME-relevant information and links (that are regularly updated),
and allowing for interaction between SMEs and public administrations.
Getting more out of the Single Market

Progress on the two indicators related to export promotion and enhancing SME
competitiveness has been limited across the region. Only Albania and Serbia recorded
significant improvement in their performance on both indicators and only three countries
(Albania, Croatia and Serbia) have a structured export support scheme, covering export
promotion, export insurance and export financing.
On enhancing competitiveness, economies that have already launched support
programmes (such Albania, Croatia, the former Yugoslav Republic of Macedonia and Serbia)
should closely monitor the impact of those programmes and adapt the range of support tools
to the differentiated needs of SMEs. Given the significant contribution of donor-funded
programmes in these areas, all the Western Balkan economies need donor-supported
programmes that are integrated and co-ordinated into a medium-term strategy for

I.8. SME POLICY
Figure 8.3. Scores in Charter Area 5 – Improving online access

2007 2009
Score
5
0
Figure 8.4. Scores in Charter Area 6 – Getting more out of the Single Market
2007 2009
Score
5
0
competitiveness and support to high-growth enterprises. It is also essential that lessons

learned across various business support programmes are reviewed, then integrated into policy
and action.
Taxation
The assessment in this area aims to score the seven economies in the Western Balkans on
the basis of rough measures of progress to date in implementing various analytic frameworks
and in exploring a number of aspects of the tax treatment of small businesses, given policy
interest in assessments of the tax burden on small businesses and in understanding possible
tax effects on the cost of funds, tax arbitrage behaviour and risk-taking, and tax compliance
costs. Limited analysis has been undertaken of effects on the cost of capital of small business
of double taxation of profits of incorporated firms through the region. Nevertheless, in Kosovo
and Montenegro, studies have been undertaken to examine potential effects of double taxation
on equity financing, and alternative integration systems have been examined. Throughout the

I.8. SME POLICY
Western Balkans, no economy has yet to systematically carry out studies of tax arbitrage by
small business owners. A review of income tax rates on self-employed business income,
dividends, interest and capital gains suggests that care has been taken in many economies to
limit tax planning opportunities of owner/workers of closely held companies. Yet significant
rate differences are observed in some cases, in particular when account is taken of social
security contributions levied on wage income. Additional analysis and sharing of experience
across the region would be welcome. In Albania, Bosnia and Herzegovina, Croatia and the
former Yugoslav Republic of Macedonia, detailed analyses have not yet been carried out to
assess implications of alternative loss treatment on investment in small firms, and on scope
for tax avoidance. Montenegro has analysed the potential for its business loss-offset provisions
to influence risky investment in small businesses. Kosovo has also recently assessed its
business loss-offset rules. Finally, a number of Western Balkan economies (Albania, Croatia,
Bosnia and Herzegovina and Kosovo), have made significant strides in addressing tax
compliance costs, arguably the most important impediment to address.
Access to finance
The access to finance area is made up of 2 sub-areas: credit environment and financial
products for SMEs. Across the region, there has been substantial progress in improving the
credit environment. Registration systems for movable assets and credit information services
are in place in most of the economies, with the exception of Kosovo and the former Yugoslav
Republic of Macedonia (for credit information services). Since the 2007 assessment, asset-
backed bank lending has increased in importance, while the reliance on internal funds and
retained earnings has decreased. Credit information services are in place in all economies,
however, not yet fully developed. The global financial downturn furthermore encourages
banks’ conservative lending policies. Access to (and reliability of) information from cadastres
is still limited and has not improved since the 2007 assessment.
Strengthening the technological capacity of small enterprises

Across the region, policies to strengthen the technological capacities of SMEs are at an
early stage of development. Croatia is the most advanced in the three areas of technology
dissemination, technology co-operation, research and development of inter-firm clusters. It
has launched a comprehensive technological development programme. In a number of other
economies (Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia and Serbia),
technology support programmes are mostly in a pilot phase, although progress has been
recorded in Bosnia and Herzegovina, as well as Serbia in the cluster development area. Albania,
Kosovo and Montenegro are at a very early stage of policy elaboration. There have been positive
signs regarding intellectual property rights (in terms of institutional development and
legislative upgrading and, to a lesser extent, policy enforcement) in economies such as Croatia,
the former Yugoslav Republic of Macedonia and Serbia. As a way forward, governments should
further extend the support to initiatives establishing inter-firm networks, integrating these
with other enterprise-supporting schemes (voucher schemes, business incubators, innovation
supporting schemes, etc.). In order to forge an environment that encourages innovation and
growth, it is important to move forward on diverse yet complementary areas (intellectual
property rights, business incubators, cluster development and skills development). As noted in
the 2007 report, it is vital to ensure a high level of co-ordination among the Ministries of
Economy, Education and Science, the private sector, universities and research institutes.
Finally, governments need to devote more resources to the enforcement of intellectual

I.8. SME POLICY
Figure 8.5. Scores in Charter Area 8 – Strengthening the technical capacity

of small enterprises
2007 2009
Score
5
0
property rights (IPR) legislation through communication campaigns, training of officials and
monitoring of IPR cases, particularly in economies with weak IPR enforcement records.
Successful e-business models and top-class business support

Although the range and quality of business services have generally improved over the
last two years (due in part to the arrival of renown international business service providers),
there is still a strong need for greater clarity, quality service standards and better co-
ordination of business support strategies. Most business incubators, for example, are still the
product of ad hoc initiatives that disappear once funding ceases. There is thus a continuing
need in the Western Balkans to establish national strategies for the development of business
incubators, linking these with measures to encourage innovation and ensuring that clear
funding and performance measures are in place. Furthermore, there is an urgent need in
most Western Balkan economies to complete the regulatory framework for introducing the
electronic signature, and to establish a functional and legitimate accreditation body. This is
a precondition to developing electronic commerce and more advanced online business-to-
business functions, as well as for making the most of online government services.
Developing stronger and more effective representation of small enterprises’ interests

Area 10 deals with the effectiveness of SME representation and the involvement of the
public administration and the business community in public-private dialogue. The overall
situation improved in most of the economies in the region since the 2007 report, due
mainly to two reasons: the reforms of the chambers of commerce and improved
frameworks for public-private dialogue.
Both the public administration and the private sector need to step up both the scope
of public-private dialogue and its quality. The main challenge for governments is to consult
the business community systematically and early in the process, while the business
community must build the necessary capacity to conduct consultations within the
different business associations and to provide well-documented proposals and comments.
Although there are numerous business associations and a system of chambers of

I.8. SME POLICY
Figure 8.6. Score in Charter Area 9 – Successful e-business models

and top-class business support
2007 2009
Score
5
0
commerce in each economy, this capacity is still relatively limited. Regarding the format of
public-private dialogue, only Bosnia and Herzegovina is missing a body for this purpose at
national level. However, all the other economies need to hold regular meetings and to
increase the transparency of the system.
Figure 8.7. Scores in Charter Area 10 – Developing stronger

and more effective representation of small enterprises’ interests
2007 2009
Score
5
0
Notes
1. A large part of this summary is quoted directly from the SME Policy Index 2009.
2. Note: for Charter areas 1, 4 and 7a, comparison to the scores of 2007 has not been possible because
the indicators within these dimensions were altered in the 2010 report. Regarding the graphs in
this chapter, please note that all SME Policy Index scores have been rounded up or down to the
nearest 0.25.

PART II
Chapters by South-East
European Economy

© OECD 2010
Albania
Economic environment
Albania has experienced strong economic growth in recent years. This occurred
alongside a shift in national output from agriculture and industry to services and
construction. Despite being one of the poorest SEE economies, the country has weathered
the global financial crisis quite well. It is the only South-East Europe (SEE) economy where
real GDP growth is expected to remain positive in 2009. Real GDP had increased at an
average rate of 6.2% between 2005 and 2008, one of the highest rates in the region. The
International Monetary Fund and the European Bank for Reconstruction and Development
(EBRD) both forecast positive real GDP growth in 2009 of 1.8% and 3% respectively (IMF,
2009; EBRD, 2009).
One of the main impacts of the crisis so far has been a sharp contraction of
remittances, which play a significant role in the economy. According to government data,
these fell by 6% year on year in the first half of 2009, exacerbating an already observed
downward trend.
The crisis also resulted in lower trade volumes. According to the Bank of Albania,
exports and imports fell by 20.5% and 6.5% respectively in the first half of 2009. The trade
deficit remains high; combined with the decline in remittances, this has caused the
current account deficit to widen.
Since 2003, the government has successfully maintained the rate of inflation within a
2% to 4% target range (EBRD, 2009). The latest European Commission Progress Report finds
that overall monetary policy remains sound while fiscal policy continues to sustain growth
but will need to be reassessed to ensure long-term sustainability of public finance.
Unemployment fell from 15% in 2003 to an estimated 12.7% in 2008 (EBRD, 2009). The
availability and quality of labour market data remains poor, thereby hindering proper
analysis and policy development.
Investment climate
Attracting higher levels of foreign direct investment is still a challenge for Albania.
Foreign direct investment (FDI) inflows have grown in recent years but remain among the
lowest in SEE. Nevertheless, net FDI increased significantly in the first half of 2009,
reaching 10% of GDP, up from 7% in 2008. The government has implemented a number of
fiscal and legislative reforms and this is reflected in an improving business environment.
According to the World Bank Doing Business 2010 report, Albania is now ranked 82 out of 183
economies for investment climate, compared to 89th in the 2009 report.
Major improvements have been achieved in the areas of right of establishment,
starting a business and paying tax. Five procedures are required to start a business, and
251
II. ALBANIA
completing these procedures requires on average five days. No minimum capital is needed.
These indicators are significantly below OECD averages.1 Important steps have been taken
to establish a more liberal fiscal environment, and taxation of profit has reached OECD
average levels.
However, significant efforts are still required. Among other findings, the World Bank
(2010) notes the following, with regard to construction permits and registering property:
● Construction permits: Albania ranks 173 out of 183 economies in the 2010 Doing Business
report on this dimension. Now, 24 procedures are necessary to obtain a permit, compared to
15 in the OECD area. Conducting these procedures takes on average 331 days in Albania.
● Registering property: This has been one of the areas where little progress has been seen,
with Albania moving from the 62nd to the 70th rank in the Doing Business 2010 report. A
business will require 6 steps and 42 days to register property. While lower than the
regional average, this is still considerably above OECD norms.
The 2009 World Bank Enterprise Survey also identified instability of electric power
supply and inadequate infrastructure as major constraints. The European Commission
Progress Report 2009 notes that Albania made good progress in terms of reducing the level
of state ownership in the economy but also highlights the slow pace of reform of the
judicial system, weak enforcement of legislation and limited administrative capacity as
obstacles to economic growth.
Investment Reform Index 2010: Progress since 2006 and ways forward
Albania has a legal framework on FDI which largely respects the principle of national
treatment. Restrictions to national treatment appear to be at a minimum, transfers of FDI-
related capital are not unnecessarily impeded, and the government has signed and ratified
numerous bilateral investment treaties and other international instruments that permit
arbitration of investment disputes. Since the previous IRI, Albania has adopted a new
investment promotion strategy for the period 2007-13.
Albania needs to make progress on improving its record of intellectual property
enforcement. Estimated software piracy has actually increased in Albania from 2005 to
2008 from 76% to 77%. Albania should also consider eliminating the condition imposed
upon foreign investors with respect to purchases of land plots, whereby the value of
investment made must surpass by three times the value of the respective plot.
In the area of investment promotion, Albania will need to focus on improving services
to investors in both the pre and post-establishment phase. With respect to one-stop shop
services, Albania should explore the possibility of AlbInvest having authority to approve
some permits or licenses. Although the investment promotion agency tracks basic
corporate data, a more sophisticated approach to client relationship management (CRM) is
needed. A previous CARDS UNDP project tried to develop CRM software but was halted
after a change in management. The results of that project should be reviewed and
implemented where possible to improve AlbInvest’s system of CRM.
While Albania undertakes consultations with stakeholders on investment policy, the
government might wish to review the process of prior notification, as stakeholder groups
have indicated that they are not given enough time to comment on draft measures.

II. ALBANIA

Since 2006, Albania has registered important progress in various areas of policy
bearing on human capital development. For instance, a Sectoral Strategy for Employment
and Vocational Training has been developed, which is linked to workforce skills needs and
based on input from 36 labour offices across the country. A new vocational education and
training agency was also created in 2006, addressing curriculum development and teacher
training. A state budget line has been allocated to building new vocational training centres,
and policy settings relevant to development of the teaching workforce appear well
designed. In this latter connection, a National Strategy for Training Teachers and Principals
has been prepared by the Institute for Curriculum and Training (www.ikt.edu.al). In
addition, a National Strategy of Pre-University Education has been created (for the period
2009-13), and the education sector overall is undergoing a major process of reform.
Consultative processes also appear relatively well structured. Albania is in the early stages
of developing a comprehensive education management information system (data are
currently collected by regional education authorities).
While these developments are all positive, it is still the case that education and skills
represent a major challenge for Albania. Representatives of the private sector noted a large
gap between their needs and the skills of recent graduates, although some stated that the
problems are less acute in Tirana than other parts of the country. In the view of employers,
as in many countries of the region, there is a particularly marked shortage of engineers and
professional technicians.
The government has given incentives to employers for 6-month to 1-year internships.
Employers are obliged to pay interns, while social insurance is covered by the State. In the
view of representatives of the private sector, the programme is well conceived, but
implementation could be strengthened.
Subdimensions in which Albania’s scores are particularly low, relative to other SEE
economies, concern overall strategy formulation on workforce skills and the system of
work-related training. At present, the Ministry of Labour appears not to have the capacity
to conduct medium- and long-term analyses of skills needs, and workforce skills are not
surveyed systematically. No strategy currently exists on work-related training, and further
attention to this area appears warranted.

Since 2006, Albania has made significant progress in streamlining trade policy
formulation mechanisms. Somewhat more than in other Western Balkan economies, the EU
accession process has been the main driving force for these improvements. In 2007, a
network of institutions and agencies with trade-related portfolios was created to ensure the
consistency of government policy in this area. In addition, in 2008 the Ministry of Economy,
Trade and Energy launched a work programme to assess the government’s internal capacity
to institute proper mechanisms for trade policy making and implementation (mainly in
preparation for participation in the EU Common Commercial Policy). Albania’s integration in
the multilateral trading system has been steadily increasing. The entry into force of a free
trade agreement with Turkey in 2008, and of the Stabilisation and Association Agreement
with the EU in 2009, represent important landmarks in this respect.
Since 2006, significant progress has also been seen in the areas of standards and
conformity assessment. In 2008, Albania adopted new Laws on Standardisation and on

II. ALBANIA
General Products Safety and Conformity Assessment. Both pieces of legislation are
harmonised with the EU acquis. Several New Approach directives have been adopted, and
the number of adopted European standards has almost doubled since 2006. As a result,
Albania has the second highest number of European standards in the region, after Croatia.
In the area of accreditation, in 2008 Albania introduced new legislation in order to bring its
legislative framework into line with new EU requirements for accreditation and market
surveillance. In 2007, the Albanian Directorate for Accreditation signed a contract of co-
operation with the European Cooperation for Accreditation and in December 2008, it
submitted an application to sign a bilateral agreement. Albania has been a member of the
International Accreditation Forum and an associate member of the International
Laboratory Accreditation Cooperation since 2008. With regards to the sanitary and
phytosanitary area, a framework Food Law was introduced in 2008, and some progress
(albeit limited) has also been made in adopting international and European measures,
especially in the areas of food safety, animal diseases and plant protection.
In the area of export promotion, there have been significant improvements since 2006.
A multi-annual export promotion strategy has been adopted. In addition, AlbInvest has
made progress in its operations and the quality of services offered.
Albania should ensure that public consultation on trade policy issues becomes a
permanent feature of the decision-making process. The Business Advisory Council
convened only twice in 2008, although according to its statute its members should meet at
least four times a year. In addition, civil society should be consulted at sufficiently early
stages of the decision-making process.
In the area of standardisation, the capacities of the General Directorate for
Standardisation could be strengthened. The degree of diffusion of quality management
certification in Albania is among the lowest in the Western Balkans. The government
should raise awareness of the importance of standards among firms by promoting the use
of certification. To maximise the benefits of free access to the EU market for foodstuffs and
agricultural products, Albania could improve the implementation of veterinary legislation,
training and qualifications of veterinary and phytosanitary inspectors. The efficiency of
phytosanitary laboratories also needs to be upgraded. Additional efforts are in order in
adopting animal welfare and protection measures, as well as streamlining overlapping
inspection procedures.
Finally, in spite of improvements since 2006, the export promotion agency would
benefit from increased human and financial resources.
Access to finance
Despite efforts to improve the financing environment, Albania is among the SEE
countries where firms’ access to external finance is most difficult. Indeed, the 2009 BEEP
survey shows that 75% of companies use internal funds to finance new investments
compared to an average of 56% for SEE economies.
The assessment shows that in Albania, microcredit and credit information services
are particularly well developed. A large number of microcredit institutions operate and
cover the majority of the territory. The Bank of Albania licences microfinance institutions
and supervises those that collect savings. While substantial monitoring occurs, regulation
is not considered excessively restrictive by the institutions themselves. In January 2008, in
order to ease access to finance, Albania also set up a public credit registry operated by the

II. ALBANIA
central bank. The registry collects data from banking institutions and makes them
available to potential lenders. Both positive and negative data, on individuals and on firms,
are covered by the register. Despite the fact that coverage is still limited, this initiative
should contribute to improving the credit environment.
The assessment shows that arrangements for providing credit guarantees, along with
cadastre registration and the registration of movable assets, could all be improved. Apart
from donor-funded programmes, no national-scale credit guarantee scheme exists in
Albania. The only credit guarantee programme referred to the OECD team was a
programme run by the Italian government. However, this is reported to be restricted to
Albanian SMEs that use Italian equipment. Although an export guarantee scheme is run by
AlbInvest, the scope of the programme and its impact are limited. While cadastre
registration is systematic, ownership disputes are frequent and heavily affect the
functioning of the cadastre. Finally, while an immovable asset registry is in place and can
be used to access information on fixed collateral, pledges on movable assets are only
partially covered by legislation. The registration system for movable collateral is also not
fully operational. Such a situation tends to be particularly detrimental for SMEs, which
often lack fixed collateral.

In recent years, Albania has made important progress in reforming its regulatory
environment. Albania has engaged in a comprehensive programme to simplify its stock of
regulations and legislation, structured around a well-defined regulatory simplification
strategy and implemented through a clear institutional framework. The implementation of
the strategy is most advanced in the areas of business registration and licensing, but
further efforts are necessary to simplify other areas of legislation.
Albania has made little progress in implementing regulatory impact assessment (RIA)
since the 2006 IRI assessment. The application of RIA on draft legislative instruments has
not been formalised by law. Nevertheless, a number of concrete steps have been
undertaken to towards establishing a RIA process. RIA can be an effective tool to optimise
the efficiency and effectiveness of legislative instruments and ensure that they will achieve
intended objectives at minimum cost and with the fewest negative consequences. In the
EU accession context, which requires extensive and rapid adoption of EU laws and
regulations, the benefits of RIA can be particularly important.
The Albanian parliament and government’s dialogue with stakeholders during the
legislative drafting and adoption process remains unstructured, although public hearings
are organised regularly by the parliament. Benefits would be had from further formalising
the dialogue and increasing communication with key stakeholders, through the adoption
of a lobby or transparency law.
A well-developed parliamentary website can be an effective tool to provide
information to the public on legislative procedures related to specific normative acts and
on parliamentarians themselves. Albania has established a functioning parliamentary
website. However, this could be improved by providing information on the adoption
status of legislative proposals and by providing the contact details of parliamentarians. A
separate website, which provides detailed information on the legislative process
(www.legjislacionishqiptar.gov.al) was experiencing a technical difficulty at the time of
writing and could not be accessed by the authors.

II. ALBANIA
Tax policy analysis

In recent years, Albania has made important progress in strengthening its capacity
to carry out tax policy development and implementation. Currently, the Ministry of
Finance maintains a tax revenue forecasting model for each main tax. This model takes
account of GDP growth, inflation and policy changes. A project is underway to build a
macroeconomic model that will also assist revenue projection. Tax revenue collection
and public expenditures are monitored on a regular basis. Revenues are monitored on a
daily basis. On the expenditure side, Albania implements a medium-term budget
programme, a public expenditure management programme based on national objectives
and priorities.
Albania has yet to implement a corporate income tax microsimulation model, a
marginal effective tax rate model or a tax wedge model. The development and use of such
models would help to analyse the distributional impacts of the tax system and the effects
of proposed tax reforms. In addition, while Albania provides few tax incentives for
companies, some specific incentives do exist. The impact of these incentives is generally
assessed ex-post. The Albanian authorities do not prepare regular estimates of the tax
revenues forgone as a consequence of offering tax incentives; yet the calculation of such
estimates could improve both transparency and budget monitoring.
Tax authorities in Albania now perform compliance cost assessments when
considering tax reforms. Albania also routinely assesses potential policy measures to
reduce compliance costs. One such study led to the recent implementation of a 1.5%
turnover tax for small and medium-sized enterprises (SMEs). Albania has also assessed the
impact of the tax system on equity financing.
Albania has yet to implement assessments that consider the impact the tax system
has on investment in riskier SMEs. Nor, at the time of writing, had systematic
consideration been given to how tax settings affect the earnings payout decisions of closely
held corporations. Such assessments can provide tax officials with a clear picture of how
the tax system either facilitates or distorts economic activity. Moreover, when applied to
proposed tax reforms, such assessments can highlight potential negative or unintended
consequences of reforms prior to implementation.
Infrastructure
In the telecommunications subdimension Albania has the lowest Internet penetration
rate of the SEE region, with only one person with broadband access per 100 inhabitants.
Furthermore, although there are only two telephone faults per 100 main lines, the fixed
line penetration per 100 inhabitants is the second lowest in the region.
On the other hand, in transport, the density of the road network is the second highest
in the region, with a level comparable to that in Germany. Furthermore, annual
expenditure on road construction is currently the highest in SEE. In contrast, the rail
network is the least dense in the region, at 15.1 km/1 000 km2. Albania also records one of
the lowest levels of annual expenditure on rail maintenance in SEE, at EUR 3 336. The costs
of air transport are above the regional average, at EUR 2 000 for a tonne of airfreight to
Frankfurt.
The time needed to get an electricity connection is 162 days, the second longest wait
in the region.

II. ALBANIA
Note
1. In the OECD, starting a business requires on average 5.7 procedures, 13 days and a minimum
capital of 15.5% of income per capita.
Bibliography
BEEPS (2009), World Bank Enterprise Surveys, World Bank Group, Washington DC.
Commission of the European Communities (2009), Albania Progress Report, Commission of the
European Communities.
EBRD (2009), Transition Report 2009, European Bank for Reconstruction and Development.
EIU (2009a), Albania Country Profile, Economist Intelligence Unit, 2009.
EIU (2009b), Albania Country Report, Economist Intelligence Unit, August 2009.
IMF (2009), World Economic Outlook – Sustaining the Recovery, International Monetary Fund, October 2009.
Sustainable Development Sector Unit and Central Asia (2007), Albania Strategic Policies for a More
Competitive Agriculture Sector Europe, World Bank, Washington DC.
UNCTAD (2009), World Investment Report 2009, United Nations Conference on Trade and Development,
Geneva.
World Bank (2007), Albania Access to Finance for Enterprise Sector, Finance and Private Sector
Development Department Europe and Central Asia Region, World Bank, Washington DC.
World Bank (2006d), Status of Land Reform and Real Property Markets in Albania, World Bank,
Washington DC.
World Bank (2010), Albania Doing Business Report 2010, World Bank, Washington DC.

© OECD 2010
Bosnia and Herzegovina
Bosnia and Herzegovina entered a recession in 2009. In order to mitigate the effects of the
global crisis, the government has sought support from the International Monetary Fund. On
8 July 2009, the executive board of the International Monetary Fund approved a 36-Month
Stand-By Arrangement amounting to EUR 1.1 billion for Bosnia and Herzegovina. In line with
many economies in South-East Europe (SEE), the crisis exposed Bosnia and Herzegovina’s
dependence on high domestic demand fuelled by rapid credit growth and external financing.
GDP per capita in purchasing power parity in 2008 was USD 7 623, slightly above
Albania and significantly below the SEE average of USD 11 460. Real GDP is expected to
contract by 3% in 2009. The annual inflation rate has been volatile since 2005, ranging from
1.5% in 2007 to above 6% in 2006 and 2008 (IMF, 2009). However, inflation became negative
in May 2009 (EIU, 2009). The currency board, with the euro as the anchor currency, is widely
considered to have functioned well during the crisis. A decline in trade (imports dropped
by 35% year on year in the first half of 2009 while exports dropped by 33.5% in the same
period), combined with falling remittances, has contributed to a narrowing of the current
account deficit. Public finances are deteriorating.
The structure of Bosnia and Herzegovina’s economy has experienced a significant
decline in industry alongside a growth in services. Services now represent about 65% of
GDP while industry represents less than 20% of GDP (European Commission, 2009). The
unemployment rate in Bosnia and Herzegovina was estimated to be 40.6% in 2008 (EBRD,
2009), one of the highest rates among SEE economies.
From 2011 on, economic growth in Bosnia and Herzegovina is expected to benefit from
a gradual pick-up in demand from the country’s main trading partners in the European
Union (EU) and Central European Free Trade Agreement.
Investment climate
Inflows of foreign direct investment to Bosnia and Herzegovina increased significantly
from EUR 493 million in 2005 to EUR 689 million in 2008, peaking at more than EUR 1 545
billion in 2007 (UNCTAD, 2009). Inflows of foreign investment for the first six months of
2009 declined by 32% compared to the same period in 2008, because of the global financial
crisis (European Commission, 2009). The largest single investor in the first three quarters
of 2009 was the Austrian Raiffeisen Bank, which invested EUR 25.5 million in a new
business facility in Sarajevo, followed by a Slovenian hotel company Energogrup, with an
investment of EUR 20 million (Nezavisne Novine and SEEbiz.eu, 21.10.2009).
The broad policy framework affecting the investment climate has been set by the
Stabilisation and Association Agreement with the EU signed in June 2008, and by the terms
259
II. BOSNIA AND HERZEGOVINA
of the three-year stand-by arrangement with the International Monetary Fund signed in
July 2009. However, the overall investment climate is severely affected by complex,
cumbersome and often fragmented policy making between the state and the entities. In
general, a single economic space does not exist in Bosnia and Herzegovina and as noted by
the European Commission in its 2009 Progress Report, this leads, inter alia, to slow decision
making, duplication and an unclear division of powers.
In the latest World Bank Doing Business report, Bosnia and Herzegovina was ranked 116
out of a total of 183 countries in terms of offering a favourable business environment. The
country thus had the lowest ranking among its neighbours in South-East Europe. However,
some improvements have been made to the business environment. Following the
signature of the Stabilisation and Association Agreement, significant steps have been
made to reduce or abolish customs duties on a wide range of imports from the EU.
Furthermore, as part of the stand-by agreement with the International Monetary Fund, and
with the support of the World Bank, Bosnia and Herzegovina has launched a programme of
reform in the areas of tax and public administration. According to the World Bank Doing
Business 2010 report, Bosnia and Herzegovina has also taken some effective measures to
reduce the cost of starting a business and the time needed to register property. The profit
tax for companies was also sharply reduced from 21.5% to 4.9% between 2009 and 2010.
Nevertheless, many challenges remain. For instance, delays for business licensing are
significant and the frequency of tax payment is high. Rules and procedures for firms
operating in free trade zones, and for exporters, are considered burdensome. Observers
have also pointed to the need to harmonise taxation of dividends and capital gains in the
two entities (World Bank, 2008).
Reforms are needed for Bosnia and Herzegovina to compete with other transition
economies, as it strives for deeper integration into European and global markets.
Neighbouring countries are making faster changes in improving their business
environment, and Bosnia and Herzegovina should accelerate its reform process.
The Investment Climate Assessment performed by the World Bank in 2008 highlighted
the slow progress in restructuring of underperforming state-owned companies (World
Bank, 2008). This was reiterated in the recent European Commission Progress Report. The
report also noted the lack of progress in the privatisation process and the unsatisfactory
nature of judicial reform that has resulted in a substantial backlog of cases, unreliable
contract enforcement and slow processing times (European Commission, 2009).
Bosnia and Herzegovina has a legal framework on foreign direct investment which
respects the principle of national treatment. Restrictions to national treatment appear to
be minimal, foreign investors are permitted to bring in specialised labour in support of
their business operations, and the government has signed and ratified numerous bilateral
investment treaties and other international instruments that permit arbitration of
investment disputes.
Bosnia and Herzegovina should continue to focus on improving property enforcement.
Estimated software piracy decreased in Bosnia and Herzegovina between 2005 and 2008
from 69% to 67%. Bosnia and Herzegovina should also focus on ensuring the accuracy of
land title registries, since property transactions are not recorded due to evasion of property

transfer taxes. A 2008 International Monetary Fund report noted that Bosnia and
Herzegovina still does not adhere to the provisions of Article VIII of its articles of
agreement; Bosnia and Herzegovina should consider reviewing its position on adhering to
these provisions as soon as possible.
In the area of investment promotion, Bosnia and Herzegovina could do more to
actively build commercial relationships between foreign investments and local firms. A
pilot initiative would be worth exploring possibly in one or more sectors. Given that Bosnia
and Herzegovina’s investment promotion agency has frequent contact with foreign
investors and businesses, the government could consider actively consulting the agency on
bringing in new investment-related regulations. Although it does not act as a one-stop
shop, the government could review the possibility of having some license and permits
approved by the agency.
In the area of public-private partnerships, the Republika Srpska has created a unit
within its Ministry of Finance and has already undertaken one project (the International
Dialysis Centre in Banja Luka). It will be important for the Entities and any unit at the
central level to share best practices in this area. Sharing of best practices would be
especially useful in areas of cost-benefit analysis and the development of tools to monitor
project performance.

Since 2006, progress has occurred in secondary and higher education, spurred by
acceptance of the Bologna Process and the Lisbon Strategy. In the area of higher education,
the Education Credit Transfer System has been adopted, which should aid student
mobility. A number of institutions have also been established that should reinforce the
education system. One of these is the Agency for Quality Assurance in Higher Education,
established in Banja Luka in 2009, that addresses diploma recognition. A second is the
Agency on Pre-Primary, Primary and Secondary Education, which began operating in June
2009 and which is mainly responsible for curriculum development, evaluation, quality
assurance, teacher training, certification and recognition. During the last ten years, much
effort has also been invested in development of the vocational education and training
system, based in particular on European Commission projects and other donor support.
A number of relevant strategy statements have also been issued recently. The State
Strategy on Employment and the State Workforce Skills Strategy were expected to be
finalised in late 2009. Teacher recruitment is at the forefront in the Strategic Directions of
Education Development and implementation plan 2008-15. Preparation of a National
Qualification Framework is underway (at the time of writing, a draft was available for
consultation). And a Framework Law will also be prepared on adult learning, addressing
statistics and grant schemes, among other issues. A tripartite council of unions, education
sector representatives and employers has been created and now has to be established at
all levels of government. The state-level body was expected to be operational by
September 2009.
Notwithstanding the above areas of progress, Bosnia and Herzegovina faces serious
challenges in terms of human capital development. Overall, on this dimension, the country
has the lowest score in the region. The loss of skilled workers through emigration is
evident, and there has been little success in encouraging reverse migration.
Representatives of the private sector hold that the education system is not sufficiently

relevant to their needs. Issues of inadequate labour mobility, and the fact that payment of
social contributions differs between Entities, were also raised by the private sector.
Subdimensions in this assessment where Bosnia and Herzegovina registers notably low
scores include strategy formulation and inputs to initial education (development of the
teaching workforce), but challenges exist on all fronts. Technical education is considered
poor by the many representatives of business. And communication between government,
the private sector and universities could be strengthened. There would also be merit in
examining the creation of incentives and the institutional conditions needed to support
work-related training. Critically, there is no unique system of data collection and educational
statistics are not in line with EUROSTAT or the International System for the Classification of
Education. Various observers have also pointed to the need to reform education financing,
and the excessive number of universities (eight) in such a small country.
Institutional fragmentation is of course highly problematic, with 12 Ministries of
Education operating in Bosnia and Herzegovina, each with full competences over financing
in education.

Since 2006, Bosnia and Herzegovina has made some progress in integrating in the
multilateral trading system. The latest round of WTO negotiations was held in March 2009.
Bosnia and Herzegovina introduced a number of important institutional reforms required
to implement WTO provisions, such as setting up agencies for food safety, plant health
protection and protection of intellectual property rights. A Stabilisation and Association
Agreement with the EU was signed in June 2009. Pending ratification of the agreement,
interim trade measures entered into force in July 2008.
Bosnia and Herzegovina has made efforts to eliminate potential sources of technical
barriers to trade. The Institute of Standardisation began operations in 2007 (although it was
formally established in 2004). The country is also preparing to adopt its first New Approach
directives. Progress has been made in participating in the works of European
standardisation bodies, as the Institute of Standardisation became an affiliate member of
the European Committee for Standardisation in 2008.
In the sanitary and phytosanitary area, the Food Safety Agency of Bosnia and
Herzegovina recently increased its level of activity: in March 2009 a tightening of food safety
measures was announced. The State Plant Health Agency only recently became operational,
although it was established in 2006. In 2009 EU-compliant framework legislation on animal
welfare and protection was adopted. Since 2006, Bosnia and Herzegovina improved
implementation of veterinary measures and upgraded the quality of veterinary laboratories.
The government is preparing rulebooks to implement phytosanitary legislation.
An export promotion agency was created in 2007 within the Foreign Trade Chamber.
Since 2007, an Export Co-ordination Council (including public and private sector
representatives) has been tasked with co-ordinating export promotion activities.
Strengthened co-ordination between State and Entities would improve the
implementation of trade-related measures. Public consultation should become a routine
part of trade policy making. Bosnia and Herzegovina is the only economy in the region
where a specific government unit is in charge of analysing the impact of trade measures on
the national economy; this unit would benefit from increased staff and the necessary
analytical tools.

In order to enhance its export competitiveness, Bosnia and Herzegovina should

significantly upgrade the institutional framework for accreditation and conformity
assessment, which would benefit from strengthened resources and capacities. Faster
adoption of implementing measures in the sanitary and phytosanitary area would improve
opportunities for exporters under current preferential arrangements (especially with the
EU). For example, a comprehensive action plan for the implementation of the food safety
law and a strategy for the control of animal diseases should be adopted on a priority basis.
In the area of trade facilitation, more information on customs and other trading
procedures, as well as relevant legislation and jurisprudence, should be made available in
English.
The export promotion agency and related programmes would benefit from increased
resources and funding, and this should go hand in hand with consistent adoption of
documented best practices.
Access to finance
Bosnia and Herzegovina is one of the economies of SEE where access to finance
environment is most problematic. In fact, more than half of companies in Bosnia and
Herzegovina identify access to finance as an obstacle to their development (BEEPS, 2009).
The legal framework for access to finance is fairly well developed. Insolvency and
bankruptcy legislation is more developed than in the average SEE economy. The law offers
the possibility of corporate reorganisation as an alternative to liquidation, and
commencement criteria are reasonably simple. However, constraints on resources render
efficient implementation challenging. Credit information services are well established.
Both a public and a private credit registry operate, collecting data from financial
institutions on both individuals and companies. Both registries have achieved significant
coverage. Furthermore, registries for pledges on fixed and movable assets have been
developed. Many microfinance institutions operate in Bosnia and Herzegovina, and are
regulated by a specific law that encompasses audits by banking agencies in each Entity.
While not allowed to collect deposits – a restriction on their capacity to grow their capital
base – some are highly profitable. This suggests that the line between microfinance and
traditional banking may be blurred.
To further improve access to finance, there could be greater emphasis on the
strengthening of credit and export guarantees and the development of alternative sources of
finance. Although some limited projects exist, at the regional level and/or funded by donors,
no significant implementation of credit guarantee schemes has taken place at the national
level so far. A national export guarantee scheme is run by the Export Credit Agency. However,
its resources are limited, as is its impact on the market. Because collateral requirements are
high in Bosnia and Herzegovina, financial instruments such as leasing and factoring could
help to improve enterprise finance. While the legal framework for leasing is currently
developed and the market is expanding rapidly. No specific regulation covers factoring.
Hence only limited factoring activity is reported in Bosnia and Herzegovina.

In recent years Bosnia and Herzegovina has made limited progress in reforming its
regulatory environment.

Bosnia and Herzegovina has made little progress in implementing regulatory impact
assessment (RIA) since the 2006 IRI assessment. The application of RIA on draft legislative
instruments has not been formalised by law. RIA can be an effective tool to optimise the
efficiency and effectiveness of legislative instruments and ensure that they will achieve
intended objectives at minimum cost and with fewest negative consequences. In the EU
accession context, which requires extensive and rapid adoption of EU laws and regulations,
the benefits of RIA can be particularly important. Several OECD publications provide
guidance on RIA (OECD 1997 and 2008b). Ideally, RIA should be formally introduced into the
legislative system, applied to all draft legislative proposals, and its results employed to
change the draft when necessary.
The Bosnian parliament and government’s dialogue with stakeholders during the
legislative drafting and adoption process remains unstructured and occurs in an ad hoc way.
Benefits would be had from further formalising the dialogue and increasing communication
with key stakeholders, through the adoption of a lobby or transparency law.
on parliamentarians themselves. Although Bosnia and Herzegovina has established a
functioning parliamentary website, this website is not available in English and does not
contain any information on the adoption status of laws.
Infrastructure
In telecommunications, the quality of telephony services is high in Bosnia and
Herzegovina compared with the region. Moreover, it has the lowest service cost in the
region.
Regarding the transport subdimension, 96% of the roads are paved, which is high in
comparison with the region and nears the 100% benchmark set by Germany. However, total
road density is below the SEE average. Furthermore, air transport lags behind the rest of the
SEE region. Only 10 aircraft depart per day at the largest airport, the lowest number of aircraft
departures in the region. Also, average annual air cargo transported is just 2 000 tonnes,
compared with the SEE average of 6 166.15 tonnes.
Ten procedures and 127 days are needed for a business to get connected to the
electricity network in Bosnia and Herzegovina. This is above the SEE average of 109.2 days
and 5.7 procedures. Moreover, Bosnia and Herzegovina is the only SEE economy that has
not yet developed a strategy on energy, and is the only economy where the energy utility
has not yet been commercialised or corporatised.
Bibliography
EBRD (2009), Transition Report, European Bank for Reconstruction and Development, London.
EIU (2009), Country Report Bosnia and Herzegovina, The Economist Intelligence Unit, London.
Foreign Investor Council (2008), White Paper Bosnia and Herzegovina.
IMF (2009), World Economic Outlook, International Monetary Fund, Washington DC.
UNCTAD (2009), World Investment Report 2009: Transnational Corporations, Agricultural Production and
Development, United Nations Conference on Trade and Development, Geneva.
World Bank (2008), Investment Climate Assessment Bosnia and Herzegovina, World Bank, Washington DC.
World Bank (2009), Doing Business 2010, World Bank, Washington DC.

© OECD 2010
Bulgaria
Political and economic environment

Bulgaria’s accession to the European Union (EU), which it formally joined on 1 January
2007, allowed for a gradual convergence with the EU common market, fiscal prudence and
a national currency pegged to the euro, and has provided macroeconomic stability.
Improved growth was accompanied by a decrease in the rate of unemployment from 12.7%
in 2003 to an estimated 5.1% in 2008 (EBRD, 2009), although this had risen to 7.4% in the
third quarter of 2009 as a result of the global economic crisis (EIU, 2009). In 2008, GDP per
capita purchasing power parity was at USD 12 322, slightly above the regional average of
USD 11 460 (IMF, 2009). Construction and services have been the most dynamic sectors in
Bulgaria in recent years. The service sector has developed rapidly, reaching a 61.8% share
of GDP in 2007 (EIU, 2008). The inflation rate has been high, above 6%, since 2004, and
reached 12% in 2008. However, inflation is expected to drop significantly to 2.7% in 2009
(IMF, 2009). As a result of the EU accession process, Bulgaria became part of the EU customs
union and national customs provisions were replaced by the corresponding EU regulations.
Bulgaria has been hit hard by the global financial crisis, which has particularly
affected the manufacturing and construction sectors. As demand from Bulgaria’s export
markets (primarily the EU) declined, exports fell by 30% in the first half of 2009, with
negative impacts on industrial output and domestic demand. The financial sector has
managed to handle the crisis, even if for many small and medium-sized enterprises (SMEs)
tapping into credit has been difficult and provisions for non-performing loans has risen
(EBRD, 2009). Strong banking supervision and relatively strong fiscal reserves have helped
the banking sector. The International Monetary Fund forecasts real GDP will contract by
6.5% in 2009, after growth of 6.0% in 2008 (IMF, 2009). Recovery of GDP growth is expected
to be limited in 2010. The Fund forecasts a fall of 2.5% while the Economist Intelligence
Unit forecasts a fall of 1%.
FDI flows have increased progressively in recent years. However, FDI slowed
significantly in the wake of the global financial and economic crisis. According to
preliminary Bulgaria National Bank data, foreign direct investment (FDI) for the period
January-September 2009 amounted to EUR 2.1 billion (6.3% of GDP), compared to EUR 5.1
billion (14.9% of GDP) for the same period in 2008. The current account deficit in 2009 is
projected to grow from 11% of GDP (official government forecasts as of 20 October 2009) to
11.4% of GDP (IMF estimates).
Investment climate
According to the latest World Bank Doing Business report, Bulgaria is ranked 44 out of
183 economies in 2010, ahead of all SEE economies except the former Yugoslav Republic of
Macedonia. Major improvements have been achieved in areas such as starting a business,
265
II. BULGARIA
registering property and paying taxes. Access to finance has significantly improved,
although further progress is needed in financing of SMEs (World Bank, 2008) and credit
conditions have deteriorated following the global financial crisis. For instance, according to
the World Bank Enterprise Survey, only 35% of firms reported using bank finance in 2009,
as compared to 40.5% in 2007. Loan maturities were also reported to be shortening. Access
to finance has also been reported as a major issue in the Global Competitiveness Report 2009-
2010 (World Economic Forum, 2009).
Corruption and competition from informal sector firms are still problematic. In 2007,
over 45% of firms covered by the World Bank Enterprise Survey affirmed that corruption is
a serious problem for their business. In 2009, one out of three firms made the same
assertion.
Bulgaria moved from the 81st to the 50th rank on the ease of creating a business
according to the 2010 Doing Business report. This was achieved by reducing the paid-in
minimum capital requirement to about 21% of per capita GNI and making the company
registry more efficient.
Reforms introduced by the recently elected government have further improved the
situation, with a reduction in the initial capital subscription for commercial firms, and
with the time required to start a business set to fall from 18 to 4 days.
The creation of a central electronic database for commercial registration has
consolidated and reduced the number of registration procedures and other registration
formalities. Registering a business now entails only four procedures and costs 1.7% of income
per capita. These levels are lower than the average in the OECD area.1 Tax rates have been cut,
reaching levels below the OECD average.2 An integrated web-based property registery has
provided online access, reducing the time required to register property (World Bank, 2009).
Although Bulgaria’s business environment is improving, important reforms are
required. Despite modest progress, concerns remain about the functioning of the judicial
system and the extent of organised crime and corruption. The following areas have been
highlighted by various commentators as priorities for policy reforms:
● Regulatory environment: Bulgaria has made significant progress in regulatory reform by
adopting European legislation. However, instability in the policy and regulatory
environment has been a concern for firms due to rapid changes in regulation and
economic policy over a relatively short period (World Bank, 2008). The government
adopted a Better Regulation Programme (2008-10), which needs to be updated and
extended to 2013.
● Entry and exit costs for businesses: Such costs are still relatively high, thereby
discouraging competition. The World Bank underlines that lack of competition results in
slow progress in adopting new technologies and developing high technology companies,
a priority for the country (World Bank, 2009).
● Construction permits: The cost and number of procedures to obtain a construction
permit are higher in Bulgaria than in other SEE countries. On average 24 procedures need
to be completed to obtain a permit. The cost of doing so is equivalent to 436.5% of
country income per capita (World Bank, 2009).
● Tax administration: Development of online services has improved tax administration.
However, it still takes 616 hours per year for a business to prepare, fill and pay taxes
while in the region an average of 280 hours is needed (World Bank, 2009).

II. BULGARIA
As an EU member, Bulgaria has a legal framework on FDI founded on transparency and
non-discrimination. Restrictions to national treatment are transparent and kept to a
minimum. Among other things, Bulgaria’s investment regime facilitates transfers of
capital and the entry of specialised personnel in support of FDI. Bulgaria has a wide
network of bilateral investment treaties with its neighbours and OECD countries.
In investment promotion, Bulgaria has the necessary institutional support to facilitate
the entry and operation of foreign investors. However, Bulgaria could do better to improve
the quality of facilitation services at the pre-and post-entry phase. Bulgaria should
consider implementing a programme to facilitate greater commercial linkages between
foreign investors and local firms. The Investment Promotion Agency (IPA) has indicated
that one-stop shop services are under development, yet little is known about where things
currently stand. Bulgaria’s IPA was only rated as average in its ability to handle investor
inquiries in the most recent Global IPA Benchmarking Survey released by the World Bank.
Greater emphasis is needed to develop a client relationship management system.
Bulgaria scores relatively well in the area of transparency. In April 2008 the
government set up a web portal for online consultations. Thirty days are allowed for
consultations related to regulations, as per the Better Regulation Program 2008-2010.
Regarding other forms of legislation, the Law on Normative Acts provides 14 days for
consultations. Nevertheless, private sector representatives expressed disappointment,
stating that the government initiates consultations in such a manner that not enough time
is available to comment on new legislation or amendments to existing laws.

Numerous skills development initiatives are underway in Bulgaria, largely driven by
the EU. A National Programme on School Education Development and Pre-school
Upbringing and Education (2006-15) has been established. The development of a system for
educational services quality assessment is envisaged by 2010. Development of a National
Qualifications Framework is the responsibility of the Ministry of Education, Youth and
Science, and it should be adopted by the end of 2010 (fully in line with the European
Qualifications Framework).
There are regular consultations between ministries and other stakeholders in
education and employment. Strategies are reported to have been developed with key
stakeholders, including representatives of social partners, research institutes and the
national statistical office.
Bulgaria’s scores are high on all the indicators used in this assessment, with the sole
exceptions of teacher recruitment and retention and work-related continuing education
and training. According to the Ministry of Labour and Social Policy, training for adults has
improved considerably in recent years. The Ministry of Labour and others indicate that co-
ordination between universities and the needs of the labour market could be
strengthened. Indeed, linkages between the education system overall and the needs of the
labour market more generally might need further policy focus. The earlier chapter on
human capital development reported a recently compiled index, based on data from the
OECD’s Programme for International Student Assessment, which scores the strength of
school–business linkages. Of the five South-East European countries included in the index,

II. BULGARIA
Bulgaria’s score was the lowest, at 50 (the mean was 59). Policy attention might also be
given to whether the number of professional schools should be increased.
Access to finance
The scores on the assessment of the environment for accessing finance in Bulgaria is
within the average range of SEE economies overall. Although the legal framework and
alternatives to bank financing are well developed, some reforms are still needed for
Bulgaria to align with OECD best practices.
In Bulgaria, insolvency law allows for both liquidation and the reorganisation of the
debtor. Out-of-court agreement between the debtor and the creditor is also possible.
Furthermore, a maximum delay is set by law between the beginning of the procedure and
official filing for bankruptcy. The Special Pledge Registry, maintained by the Ministry of
Justice, registers pledges on both immovable and movable assets and its information is
publicly available. Substantial effort has also been made to increase the range of financial
instruments available. Leasing and factoring are explicitly mentioned in regulation and the
Bulgarian National Bank monitors leasing companies. Venture capital funds and business
angel networks are reported in Bulgaria, although on a very limited scale. The development
of these forms of equity finance should benefit from implementation of EU-funded
programmes such as the Joint European Resources for Micro to medium Enterprises.
To further improve access to finance in Bulgaria, a number of reforms should be
explored. The government has taken important steps to strengthen guarantee schemes. The
framework for microfinance might also be further developed. Two credit guarantee schemes
operate in Bulgaria. The National Guarantee Fund operated by the Bulgarian Development
Bank, and a separate initiative launched in 2009 and funded by the European Investment
Fund. Both initiatives are relatively young, and their effectiveness has yet to be fully
evaluated. Export guarantee schemes seem relatively undeveloped in Bulgaria. Only one
scheme operates in Bulgaria run by the public company, the Bulgarian Export Insurance
Agency. Finally, the microfinance sector is limited in Bulgaria. The Joint European Resources
for Micro to medium Enterprises initiative addresses some aspects of microfinance.
However, in Bulgaria, regulation that restricts lending activities to banks may be a significant
barrier for further development of this sector.
Tax policy analysis

Bulgaria is one of the more advanced SEE economies in terms of tax policy analysis. It
maintains an aggregate tax revenue forecasting model for all main taxes. Moreover, it
regularly monitors revenue collection and planned expenditures. It is one of the few SEE
economies to prioritise expenditures on the basis of policy objectives and to apply rules
requiring government action when the fiscal deficit exceeds a certain amount. Bulgaria was
also ranked among the top ten reformers in Doing Business 2008 because of its tax reforms.
Bulgaria has yet to implement a corporate income tax microsimulation model or a
marginal effective tax rate model. As mentioned earlier, such models can help to analyse
the distributional impact of the tax system. They are particularly valuable for monitoring
implementation of EU state aid rules. Bulgaria, however, does maintain a tax wedge model.
Additionally, Bulgaria periodically prepares tax expenditure estimates.
Bulgaria does not assess the impact the tax system has on equity financing or
investment in riskier SMEs. No consideration has been given to how taxes affect the

II. BULGARIA
earnings payout decisions of closely held corporations. Bulgaria has made more progress in
assessing the average cost to SMEs of complying with various taxes. It has also assessed
the feasibility of various tax simplification measures.
Frameworks are in place for analysing non-resident withholding tax and thin
capitalisation of companies. The former, however, could benefit from more comprehensive
firm-level data.3 As mentioned earlier, such assessments can illustrate both the efficiency
of the tax system and the scope it gives for tax planning.
Infrastructure
In telecommunications, Bulgaria has the second most dense Internet penetration in
SEE: 11.9 out of 100 persons have access to broadband Internet connection (although this is
well below the rate in Germany). Bulgaria also has the second highest mobile penetration
rate in the region, 138 lines per 100 inhabitants, surpassing .Germany’s benchmark rate.
Furthermore, service cost is low, at EUR 0.28/3 minutes. Only Bosnia and Herzegovina has
a lower average cost.
Regarding transport, 98.6% of roads are paved in Bulgaria, the highest figure in the region.
Nevertheless, total road density is only 350 km/1 000 km2 which is below the 517.54 km/
1 000 km2 average for the SEE region. In air transport, Bulgaria has 67 aircraft departures from
the country’s largest airport every day, more than all other SEE economies except Romania.
Getting connected to the electricity network takes 6 procedures and 102 days, figures
that are broadly in line with the SEE average.
Notes
1. In the OECD area, 5.7 procedures and 4.7% of income per capita is required.
2. In the OECD area, the total tax rate is 44.5% of profit while in Bulgaria it is only 31.4% of profit (World
Bank, 2009).
3. In the ideal case, the underlying cross-border payments data should be drawn from returns that
taxpayers are required to provide when making such payments. These returns include data on the
type and amount of income paid, the recipient country and the amount of tax withheld.
Bibliography
BEEPS (2009), World Bank Business Environment and Enterprise Performance Survey, World Bank Group,
Washington DC.
EIU (2008), Bulgaria Country Profile 2008, The Economist Intelligent Unit, London.
EIU (2009), Bulgaria Country Report, October 2009, The Economist Intelligence Unit, London.
UNCTAD (2009), World Investment Report 2009, United Nations Conference on Trade and Development,
Geneva.
World Bank Enterprise Survey (2007-2009), www.enterprisesurveys.org.
World Bank (2008), Bulgaria Investment Climate Assessment, October 2008, The World Bank,
Washington DC.
World Bank (2009), Bulgaria Doing Business Report 2010, The World Bank, Washington DC.
World Economic Forum (2009), Global Competitiveness Report, 2009-2010, Geneva, Switzerland
(www.weforum.org).

© OECD 2010
Croatia
Croatia has the highest GDP per capita (based on purchasing power parity) in SEE at
USD 18 575 in 2008. This compares to an average for the SEE region of USD 11 460. Real GDP
growth in 2005-08 was 4.2% on average. Despite a surge to 6.1% in 2008, inflation remained
limited between 2005 and 2008, at an average rate of 4% (IMF, 2009).
The Croatian economy has been hard hit by the fallout from the global financial crisis.
GDP is expected to fall by 5.4% in 2009 and to grow at a very slow pace in 2010 (EIU, 2009).
A more significant expansion is forecast for 2011 (EIU, 2009). Industrial production declined
by 9.5% year-on-year in the second quarter of 2009. Like most SEE economies, Croatia’s
exports to the European Union (EU) declined due to lower demand. However, according to
the recent European Commission Progress Report, a stronger than expected performance by
the tourism sector in the summer of 2009 has somewhat cushioned the recession.
Concerns remain regarding the high external debt burden and in particular the exposure of
the domestic non-tradable sector.
As part of its response to the global economic crisis, the government launched a series
of emergency budget revisions. An income surcharge tax was introduced from the
beginning of August 2009, along with an increase in value added tax from 22% to 23%, as
well as an excise tax on mobile telecommunications. In parallel, the Croatian National
Bank has taken measures to increase the level of domestic liquidity. Measures include
intervening in the currency market to minimise the volatility of the Kuna, improving
commercial bank liquidity and controlling interest rates (EIU, 2009).
The government has announced further expenditure cuts for 2010 in the form of
reduced salaries to employees of state-owned companies. The crisis tax measures
introduced in 2009 are set to remain in place through 2010, as the government plans to
keep total public expenditure around the 2009 level.
Unemployment increased during 2009 and in July stood at 14% (EIU, 2009). Croatia
faces high rates of youth and long-term unemployment. The relatively rigid employment
protection system is seen as contributing to these difficulties (European Commission,
2009).
Foreign direct investment (FDI) inflows in Croatia amounted to EUR 2.99 billion in 2008
(UNCTAD, 2009). This was 12% below the level of 2007 (UNCTAD, 2009). An estimated 93% of
FDI is from EU member states. In terms of foreign direct investment per capita, Croatia took
third place among all transition countries, behind Estonia and Bulgaria. Major investments
either initiated or completed in 2009 include Kempinski Hotel Adriatic (EUR 55 million),
Carlsberg Croatia (EUR 21 million), Vetropack Straža (EUR 28 million) and Valamar Lacroma
Resort (EUR 7 million).
271
II. CROATIA
Investment climate
The investment climate in Croatia is open to foreign investors but suffers from several
shortcomings. According to the World Bank’s study Doing Business 2010, Croatia progressed
from 110th to 103rd place, behind several of its neighbours in South-East Europe. There was
progress in the area of taxation, with Croatia rising from the 39th to 33rd position. There was
significant progress in the area of construction permits, when a new building code came
into force in January 2008 that eliminated several procedures previously required to obtain
a construction permit. Finally, improvements in port infrastructure and in terminal
handling for exports contributed to the capacity to trade across borders.
On the other hand, Croatia was reported to have regressed significantly in the areas of
business registration and operation start-up procedures, falling from the 100th to 101st
position. Rigid legislation and employment protection deters the recruitment of new
workers and the country ranked only 163 on this criterion (World Bank, 2009).
According to the European Commission, the state still maintains a significant role in
the economy and the privatisation process has slowed (EC, 2009). The judicial system is
improving, but the time taken to process cases is still slow and the issue of enforcement
continues to be problematic.
In a report published in September 2009, the World Bank notes that, in order to sustain
the social and economic development experienced over the last decade, Croatia needs to
step up the contribution of labour, raise productivity, deepen trade integration and foster
innovation (World Bank, 2009).
Croatia has a legal framework on FDI which incorporates the principle of national
treatment. Restrictions to national treatment appear to be at a minimum, transfers of
capital can be made freely and the government has signed and ratified numerous bilateral
investment treaties and other international instruments that permit arbitration of
investment disputes. Croatia has also made considerable progress in implementing and
enforcing intellectual property rights laws. Croatia’s estimated software piracy rate is the
lowest in the SEE region at 54%.
Croatia is in the process of developing a new investment promotion strategy, and the
investment promotion agency offers high-quality services. Nevertheless, one area where
improvement could be made is in the approval of licenses and permits: Croatia should
examine the possibility of allowing its investment promotion agency to perform a limited
number of approvals for business licenses and permits. The level of transparency is high in
Croatia. However, when new legislation or amendments to existing legislation are
proposed, private sector representatives have felt they are not given adequate time to
provide comments. The government should consider prolonging the period for interested
stakeholders to provide comments on proposed investment-related measures.

In recent years, Croatia has seen many areas of progress in education and training.
The creation of a National Qualifications Framework is underway. A national strategy on
teacher development is also under preparation. The new Vocational Education and Training
(VET) Act, adopted in February 2009 by the Croatian Parliament, is the first legal document

II. CROATIA
in Croatia that exclusively regulates the VET system. In July 2008, the government adopted
the Development Strategy of the Vocational Education System in the Republic of Croatia for
2008-13. This strategy sets out the ways in which aspects of the VET system could develop
in the medium term. During 2005-08, the Agency for VET built a new system of
qualifications based on learning outcomes that better reflect labour market needs. The
development and strengthening of a quality assurance system in education (and especially
in VET) is also gaining ground, the process having begun with the establishment of a
National Centre for External Evaluation of Education. And Croatia’s scores are the highest
among the countries in SEE that participated in the 2006 Programme for International
Student Assessment.
While Croatia does not register notably low scores on any of the indicators used in this
assessment, the pace of progress should be maintained. Representatives of the private
sector deemed curricula to be outdated. The internship system was also reported not to be
functioning well. Policy needs to focus on strengthening mutually beneficial linkages
between schools and the business community. Among the many steps that could be
considered are systematic development of counselling services (advisory boards) for young
people in all levels of education, and the expansion of recruitment events at schools and
universities. Public funding of tertiary-level education is extremely low by international
standards. And various strands of evidence suggest that universities could be more
responsive to market needs, which will require reform of university governance and the
ways in which individual faculties operate within universities.

Given the close link between the institutional and legislative framework for trade
policy and progress in the EU accession process, it is not surprising that Croatia is the
Western Balkan economy where trade policy reforms are most advanced. Already at the
time of the 2006 IRI assessment, Croatia had implemented a liberal trade regime and was
well integrated in the multilateral trading system.
Since 2006, progress has been made in enhancing trade and free movement of
industrial goods. In 2007, Croatia introduced a new law on technical requirements and
conformity assessment, in order to bring its legislation into line with EU requirements.
Further progress was seen in 2009 with the adoption of the regulation on formal
notification procedures in the field of standards, technical regulations and conformity
assessment procedures. Since 2006, Croatia has also made significant strides in adopting
Old Approach and New Approach Legislation. The near totality of European standards had
been adopted at the time of writing. In June 2009 Croatia notified its intention to apply for
full membership in the European Committee for Standardisation and the European
Committee for Electrotechnical Standardisation. In the area of accreditation, Croatia
introduced amendments to its legislation in order to bring this into line with new EU
requirements for the marketing of products. Croatia submitted an application to become a
signatory to the Multilateral Agreement of the European Co-operation for Accreditation for
all areas covered by the agreement. In addition, negotiations with the EU began on an
Agreement on Conformity Assessment and Acceptance of Industrial Products and the first
negotiating round was held in July 2009.
In the sanitary and phytosanitary area, Croatia made gained substantial ground in
enhancing staff numbers and qualifications as well as general administrative capacity.
Since 2006, Croatia also adopted or revised several pieces of sanitary and phytosanitary-

II. CROATIA
related framework legislation on animal welfare and protection (2006), food (2007),
veterinary issues (2007) and sanitary inspection (2009). Adoption of EU-compliant
implementing measures in the food safety, veterinary and phytosanitary areas has also
been steadily moving forward in Croatia. The country is currently improving its system of
sanitary inspection, by providing a more efficient modus operandi and higher level of co-
ordination among the different structures at the state level.
In the area of export promotion, in 2007 Croatia launched a new comprehensive and
integrated export promotion strategy.
In order to fully exploit its export potential with the EU and other third markets,
Croatia should complete the adoption of Old and New Approach acquis. Further
strengthening of administrative capacities in this area would also foster implementation of
the legislation. In the sanitary and phytosanitary area, more energy should be put into
reinforcing the administrative capacity for inspections, which would ensure the effective
implementation of the already adopted EU-compliant legislation.
The export promotion agency could also consider taking a more structured approach
to evaluating the performance of exporters that have benefited from its support services.
Access to finance
Croatia is one of the SEE economies where firms’ access to external finance is least
problematic. A number of successful measures have been taken by the government. While
there is always room for improvement, bank finance and its alternatives are very well
developed.
The overall regulatory framework and non-bank forms of finance are particularly well
developed in Croatia. Both a private and a public credit registry operate in Croatia. While
the private credit registry deals mainly with data on individuals, the public registry covers
only businesses. Both registries collect both positive and negative data and information is
available online. Data collection by the public registry is based on regulatory disclosure by
companies, therefore, all incorporated businesses in Croatia are covered. The private credit
registry provides a broad coverage of individuals, including private entrepreneurs.
Collateral requirements in Croatia are among the lowest in SEE and a central collateral
registry has been in operation since 2006. Croatia is also the country in SEE where leasing
and factoring are most developed. Leasing companies are licensed and monitored by the
Croatian Financial Services Supervisory Agency. Although the legal framework for
factoring is lacking, Croatia is the only SEE economy where factoring represents more than
3% of GDP. It is also the only economy where venture capital and business angel networks
operate on a significant scale, due in particular to significant public support. Credit
guarantee and export guarantee schemes are also solid and effectively provide support to
companies, in particular SMEs. Finally, Croatia is a country where the government has set
up a consistent strategy to promote investment readiness among entrepreneurs through a
wide-reaching network of local agencies.
Nevertheless, there are areas where further achievements could be pursued. The
results of the assessment suggest that evidence-based policy making and the insolvency
law could be improved upon. As in most SEE economies, no systematic use of data on
access to finance for policy purposes is reported. Apart from a few donor-funded projects,
data on access to finance is mainly collected for monitoring purposes by the Central Bank
and the Croatian Financial Services Supervisory Agency. The data on access to finance,

II. CROATIA
while available through various public bodies (Central Bank, public registry, etc.), are not
used to design policies. Insolvency law is generally considered to be in line with best
practices, providing in particular clear regulation of bankruptcy managers, and deadlines
for handling cases; nevertheless, implementation could be improved. In its 2010 report on
Doing Business, the World Bank estimates that closing a business takes 3.1 years in Croatia,
slightly above the average for the region.

Croatia has made steady progress in the area of regulatory reform. It has implemented
a comprehensive regulatory simplification programme, HitroRez (co-ordinated by an
independent working group) that spurred the elimination of many items of legislation.
HitroRez is regarded as an international best practice.
Croatia introduced the application of regulatory impact assessment (RIA) into the
legislative system in 2005 through an amendment of the Standing Orders of the
government. However, the government Office for the Regulatory Impact Assessment
System, which was set up in 2008 to co-ordinate and ensure RIA implementation, closed
in August 2009 due to budg etary restrictions. This brought progress in RIA
implementation to a halt. Yet RIA can be an effective tool to optimise the efficiency and
effectiveness of legislative instruments and ensure that they will achieve intended
objectives at minimum cost and with fewest negative consequences. In the EU accession
context, which requires extensive and rapid adoption of EU laws and regulations, the
benefits of RIA can be high.
The Croatian government and parliament would benefit from further formalising
dialogue and communication with key stakeholders, through the adoption of a lobby or
transparency law. The adoption of such a law would give key stakeholders the opportunity
to lobby and be directly involved in the decision-making process. This can be an effective
way to enhance regulatory transparency and ultimately improve the quality of legislative
proposals.
on parliamentarians themselves. Croatia has established a functioning parliamentary
website. However, this website could be improved by providing contact details of
parliamentarians.
Tax policy analysis

Croatia excels in the fiscal position and planning dimension. In line with other SEE
economies, Croatia maintains an aggregate tax revenue forecasting model for all main
taxes. It also regularly monitors revenue collection and planned expenditures. It is one of
only three SEE economies to prioritise expenditures by policy objectives and require
adjustments when the deficit grows too large.
Like many SEE economies, Croatia has yet to implement a corporate income tax (CIT)
microsimulation model, a marginal effective tax rate model or a tax wedge model. As an EU
candidate country, a CIT microsimulation model would be particularly beneficial for
monitoring EU state aid rules. This can also improve tax expenditure estimates, although
Croatia has yet to implement such estimates.

II. CROATIA
Croatia conducts tax compliance cost assessments on an ad hoc basis. As mentioned

in Chapter 6, more routine compliance cost assessments can highlight where the tax
system or proposed tax reforms discourage business creation.
Little attention has been given to the impact of the tax system on equity financing,
investment in riskier small- and medium-sized enterprises (SMEs) or tax arbitrage by SMEs.
Neither have the efficiency and revenue impact of non-resident withholding taxes and thin
capitalisation rules been assessed.
Infrastructure
For a business to get connected to the fixed-line telephony network in Croatia takes
30 days on average. This is the longest delay for a fixed-line connection for a business in
the SEE region. However, penetration rates for telecommunication services are fairly high.
In particular, Croatia records the top score of the region in broadband access, at 15.4 lines
per 100 inhabitants (still far from the benchmark set by Germany).
In transportation, Croatia has the highest rail network density of the region at 47.8 km/
1 000 km2. In contrast, road density is in line with the region’s average. Regarding air cargo,
approximately 11 966 tonnes are transported to and from Croatia, the second highest
volume in the region. The average cost of exporting a tonne of airfreight is EUR 2 125,
slightly above the cost in the other SEE economies.
In Croatia, it takes 5 procedures and 70 days to obtain an electricity connection, which
falls below the average procedures and time in the region.
Bibliography
EC (2009), Croatia 2009 Progress Report, Commission of the European Communities.
EIU (2009), Country Report: Croatia, The Economist Intelligence Unit, London.
World Bank (2009), Doing Business 2009 Report, World Bank, Washington DC.
World Bank (2008), Croatia’s EU Convergence: Reaching and Sustaining Higher Rates of Economic Growth,
Country Economic Memorandum, World Bank, Washington DC.

© OECD 2010
Kosovo under UNSCR 1244/99
While robust statistics are not available in Kosovo, it is clear that this is one of the
poorest economies in South-East Europe. Approximately 45% of the population lives in
poverty and 15% in extreme poverty1 (World Bank, 2007). The IMF estimates that, in 2008,
GDP per capita was EUR 1 726, while real GDP growth reached 5.4%. Remittances and
international aid are estimated to represent approximately 12.1% of GDP and 7.7% of GDP
respectively. Inflation rose to 9.4% in 2008 from 4.3% in 2007 due to global food and fuel
price increases (European Commission, 2009a).
In part due to limited integration into the global economy, the economic crisis has had
a minimal economic impact. In fact, GDP is still expected to grow by 3.5% in 2009. Exports
and remittances have decreased since 2008. However, stable domestic demand for goods
and services and a significant increase in public expenditures have helped limit the impact
of the crisis. The International Monetary Fund forecasts that real GDP growth will remain
around 4% in 2010 (World Bank, 2009c).
Exports increased by 20.2% in 2008, mostly driven by base metal products.
Nonetheless, volume is still low and exports represent only 5.3% of GDP. In 2008, imports of
goods increased by 22.1% (and represent 50.2% of GDP). As a consequence, the trade deficit
is high, equivalent to 46% of GDP in the first half of 2009. Main trading partners are the
European Union and the Central European Free Trade Agreement Parties, which each
account for 40% of total trade (European Commission, 2009a).
Net foreign direct investment in Kosovo is estimated to be EUR 340 million in 2008.
This decreased from 16.7% of GDP in 2007 to 13.1% in 2008, mostly because of a slowdown
in the privatisation process. This is partially compensated by the increasing number of
foreign firms operating in Kosovo (European Commission, 2009a).
Unemployment, and particularly long-term unemployment, remains a critical
challenge. The lack of reliable statistics is notable, but the official rate of unemployment
stood at 43% in 2008. 90% of those unemployed are classed as long-term unemployed and
the level of economic activity is insufficient to absorb the 30 000 young people entering the
labour market each year. Emigration is significant (European Commission, 2009a).
Investment climate
The legal system in Kosovo is a complex mixture of legislation from Yugoslavia prior
to 1999, legislation put in place by the United Nations Interim Administrative Mission in
Kosovo (UNMIK) between 2000 and 2008, and that put in place since the adoption of the
Constitution in mid-2008. While those laws adopted since 2000 are in line with free market
principles, there are many gaps and contradictions.
277
II. KOSOVO UNDER UNSCR 1244/99
Overall, administrative capacity in Kosovo is extremely weak, hindering

implementation of economic policies and strategies. The judicial system is being
supported by the EULEX mission but progress is extremely slow and the European
Commission (2009a) has criticised the politicisation of appointments in both the civil
service and government agencies.
Some progress has been made in regulatory reform, e.g. in lowering tax compliance
costs and simplifying the process of paying taxes. According to the 2010 Doing Business
report, it takes 163 hours per year to prepare and file taxes, significantly less than the
average of 280 hours for SEE economies overall. Major cuts have been made in the
corporate income tax rate. The total tax2 rate in Kosovo now represents 28.3% of profit, one
of the lowest rates in SEE (World Bank, 2009b).
However, the business environment is one of the most difficult in SEE. According to
the World Bank (2009b) Doing Business2010 report, Kosovo is ranked 113 out of
183 economies. Further improvements are required in areas such as:
● Business registration: Starting a business in Kosovo takes 52 days and capital equivalent
to at least 169.5% of income per capita is required, significantly above levels in the OECD
area (World Bank, 2009b).
● Construction permits: Obtaining a construction permit requires 320 days. It costs 1 291%
of income per capita, compared to 56.1% of income per capita in the OECD area (World
Bank, 2009b).
● Informal sector: The large informal sector is exacerbated by weaknesses in tax and
expenditure policies, but also by weak law enforcement. The legal system remains an
important challenge and formal contract enforcement needs to be further strengthened
(European Commission, 2009a).
Although not previously a part of the IRI process, this assessment finds that Kosovo
has taken steps to incorporate the principle of national treatment in its primary
regulations governing foreign direct investment. Formal restrictions to national treatment
are applied to the arms manufacturing sector, transfers of capital can be made freely and
foreign investors may bring in specialised personnel to support their business operations.
Securing tangible and intangible property rights in Kosovo is a significant hurdle.
Although the law permits foreign ownership and purchase of urban and rural land along
with real property, the accuracy of land title registers and cadastral maps has been
questioned by the private sector and international organisations. International donor
assistance and technical support will be in order to ensure property transfers are
conducted in accordance with law and registered accurately. Intangible property, such as
intellectual property rights, does not receive adequate protection. Technical assistance is
needed to support implementation and enforcement of laws.
The Investment Promotion Agency (IPA) in Kosovo is weak. The IPA should consider
balancing its staff with individuals from both the public and private sectors, especially those
with proficiency in foreign languages. The IPA should focus on delivering high-quality
service to investors at the pre- and post-establishment phase of investment, particularly in
navigating business licenses and permits at the municipal level. Private sector

representatives were disappointed in the level of aftercare services provided by the IPA. Much
like the other SEE economies, Kosovo would benefit from exchanges of information and best
practices in PPP project design and implementation.

Representatives of the private sector interviewed during the assessment missions
held the view that education in Kosovo is gradually improving.
The information received on Kosovo indicates a notably cohesive and comprehensive
system for teacher development. A National Council for Teacher Licensing was established
in January 2009, comprising representatives from the Ministry of Education, teachers’
unions, universities, the non-governmental organisation sector and independent experts.
The Strategy of Development of Pre-University Education in Kosovo 2007-17 also addresses
professional training of the teacher workforce (and underlines the need to create a
mechanism for rewarding teachers, requalification and licensing for the teaching
workforce). It includes specific objectives and an action plan with a time frame.
Notwithstanding the above areas of progress, serious obstacles exist for human capital
development. Overall, on this dimension, Kosovo has the second lowest score in the region.
There are complaints from the private sector about the appropriateness of curricula. For
instance, students from the University of Pristina were considered less employable than
students from private universities. The private sector representatives reported seeking
graduates of the American University in Pristina, with graduates from the University of
Pristina said to possess too little practical knowledge.
Ongoing attention is needed to ensuring that vocational education matches the
requirements of employers.
A project sponsored by USAID offers a limited number of internships for business
schools, through which part of the costs are covered by businesses and part by USAID. The
private sector has been enthusiastic about this initiative and is willing to organise
internships. However, the unemployment rate of around 40% makes it more profitable for
companies to hire full-time employees than to host three-month interns. The Ministry of
Trade and Industry tries to promote internships, but these are limited in number. The
private sector cites the lack of legislation, lack of a tradition and a dearth of incentives for
internships as obstacles to developing such programmes.
The paucity of data in Kosovo was particularly striking. This is an area that requires
urgent attention, since without a solid informational foundation, policy making (and
analysis) is problematic.

Kosovo is slowly but steadily integrating into the multilateral trading system. While
Kosovo has not yet formally applied to become a World Trade Organization (WTO) member,
it has started to prepare the necessary documentation and to implement the institutional
and legislative requirements. The European Union (EU) has granted Kosovo autonomous
trade measures, but no steps have been taken towards initiation of a Stabilisation and
Association Agreement (SAA).
Kosovo has made institutional and legislative reforms to counter the emergence of
potential technical barriers to trade. A Standards Agency and a Directorate for
Accreditation were created within the Ministry of Trade and Industry. Kosovo has also

introduced a law on accreditation, and secondary legislation is being drafted. Kosovo has
also started to adopt European standards. At the time of writing around 1 200 standards
had been adopted.
Since 2006, Kosovo has set up agencies responsible for sanitary and phytosanitary
(SPS) matters. A Framework Food Law aligned with the EU acquis was approved in 2009. In
addition, Kosovo is currently conducting an evaluation of existing measures as well as a
related prioritisation of new SPS measures to be adopted.
In order to improve the transparency and public availability of customs and other-
trade related procedures, Kosovo created a customs website including a link to the Kosovo
Integrated Tariff and the Customs Code, as well as other relevant legislation and
regulations. Information is available in Albanian, Serbian and English.
In Kosovo, there is no system of exporting licensing for dual use goods, dangerous
materials, and biological and chemical products. The government is currently drafting
legislation on export licenses.
Kosovo could take some additional measures that would improve the formulation and
implementation of trade policy. In this connection, inter-institutional co-ordination in the
overall conduct of trade policy should be strengthened. Public consultations should
become a permanent feature of trade policy making and the inclusiveness of the
consultations could be broadened.
The lack of progress in initiating negotiations for WTO membership and an SAA
partially reflects the unresolved international status of Kosovo. However, in terms of a
series of institutional and policy settings, Kosovo is not yet ready for WTO membership or
for implementing a free trade agreement with the EU. Thus, it should strive to continue
implementing the necessary reforms that would eventually allow it to fully integrate in the
multilateral trading system.
Average applied customs duties on capital goods in Kosovo are significantly higher
than in the other Western Balkan economies. As such, consideration could be given to
reducing the level of the duties.
In the technical barriers to trade area, capacities need to be ramped up both in
standardisation and in conformity assessment. Although data on the diffusion of
standards and quality certificates among companies are not available, anecdotal evidence
points to a need for promoting the use of certification in order to increase exporters’
competitiveness. In the SPS area, Kosovo should upgrade the technical equipment and
increase the human resources of the responsible agencies. Adoption of SPS framework
legislation and implementing measures should be sped up. Kosovo is not participating in
the work of any international or European body in the areas of standardisation,
accreditation and SPS issues. This is in part a consequence of its international legal status.
However, Kosovo should continue to take steps to meet the international standards
required by those organisations.
In the area of trade facilitation, the licensing system is still in an early phase of
implementation. The government should speed up the adoption of legislation on export
licenses for dual use goods, dangerous materials, and biological and chemical products.
The activities of the Investment Promotion Agency in the sphere of export promotion
could also be refined. For instance, more staff should be dedicated to work on export

promotion. Kosovo should also adopt a comprehensive export promotion strategy, and
seek to dedicate resources necessary to implement such a strategy.
Access to finance
Kosovo is one of the SEE economies where access to finance is the most problematic.
While positive steps have been taken, a significant number of reforms are still needed.
Significant measures have been developed to establish the registration of pledges as
well as a microcredit sector. A credit registry operates and is maintained by the Central
Bank, accessible to banks. The registry includes in particular information on collateral
pledged. Both immovable and movable collateral are considered within the registry. While
collecting information on credit, fixed and movable collateral within a single registry is a
positive development, the registry is still hampered by shortcomings. The registry was set
up in 2006 and lacks information on loans contracted prior to this date. Furthermore,
information on collateral is sometimes unreliable and there are reports of the same asset
being pledged by different borrowers.
Some 16 microfinance institutions operate in Kosovo. According to information
provided by the government, these institutions represent about 7% of loans issued by the
financial sector. The industry is monitored by the Central Bank which systematically
collects data and can also conduct on-site visits. Microcredit institutions currently have the
status of non-governmental organisations (NGOs), regulated by an office in charge of NGO
supervision within the Ministry of Civil Affairs. However, an ongoing project should allow
them to register as private limited companies in the near future.
In order to improve access to finance, several policy reforms could be considered. In
particular, a robust insolvency law, credit guarantee schemes and a regulatory framework
for leasing and factoring could be further developed. In contrast to the other SEE
economies, no specific regulatory framework for insolvency exists in Kosovo. Insolvency
procedures are still governed by commercial law and are not fully formalised. This
represents a significant impediment to the development of investors’ confidence. Kosovo
is also one of the few SEE economies where no national credit guarantee scheme operates
and is the only one where no export guarantee system exists. While the creation of a credit
guarantee scheme is currently being discussed, it is reported that its scope would be
limited to the agricultural sector. This is also the economy in SEE where leasing and
factoring activities are the least developed. While a project for a law on leasing has been
conducted, with the support the World Bank, the law has not yet been approved and the
legal framework for leasing and factoring services is lacking.

In recent years, Kosovo has made limited progress in reforming its regulatory and
legislative environment. Progress has been achieved in streamlining parliamentary
procedures. A centralised register to record amendments to normative acts and a well-
designed parliamentary website have also been set up.
However, Kosovo has made little progress in implementing regulatory impact
assessment (RIA) since the 2006 IRI assessment. The application of RIA to draft legislative

the benefits of RIA can be high.
Dialogue with stakeholders during the legislative drafting and adoption process
remains unstructured and occurs in an ad hoc way. The government is currently working on
adopting new rules and procedures that will allow for regular consultations with
stakeholders. Consultation can address many causes of regulatory failure, such as bias
towards concentrated benefits, inadequate information in the public sector, inability to
understand policy risk and lack of accountability. Improving legislative transparency
through consultation is therefore a key element of sound legislative policy and is one of the
most important ways to reassure stakeholders that there is a supportive legal
environment.
Tax policy analysis

Kosovo has implemented an aggregate tax revenue forecasting model for its main
taxes and it regularly monitors revenue collection and expenditures. However,
expenditures are not yet ranked on the basis of policy objectives and no rules require
specific action to be taken when the fiscal deficit exceeds a certain amount. Such
provisions can minimise discretionary spending and keep the fiscal balance in check.
As is the case in many SEE economies, Kosovo does not have a tax wedge, marginal
effective tax rate or microsimulation model, although it is taking steps to implement the
latter two. According to the Ministry of Finance, because Kosovo lacks national-level tax
incentives, it does not calculate tax expenditure estimates.3 But tax expenditure accounts
can be useful not only for quantifying obvious tax incentives, but also for quantifying less
obvious incentives (e.g. tax-exempt dividends or accelerated depreciation).
Among SEE economies, Kosovo has implemented many assessments on tax issues
specific to small- and medium-sized enterprises (SMEs), and multinational enterprises:
● It is one of only two economies to examine how its tax system impacts equity financing.
It has even investigated tax measures to alleviate identified negative effects.
● It is the only SEE economy to look into how its tax system discourages investment in
high-risk SMEs.
● It has conducted numerous compliance costs assessments.
Tax arbitrage, thin capitalisation rules and non-resident withholding taxes are not
assessed.
Infrastructure
Information provided for the assessment indicates that it is relatively easy to get
connected to the telephone network in Kosovo compared to the other SEE economies and
even the benchmark set by Germany. Nevertheless, the economy has the lowest rates of
fixed-line and mobile penetration in the region. Fixed-line penetration is reported to stand
at only 4.56 lines per 100 inhabitants. The next closest economy is Albania, with 10 lines
per 100 inhabitants.
Kosovo spent EUR 123.2 million on road construction in 2008, ranking it third among
the SEE economies. The density of the rail network is on a par with the regional average,
although the number of trains operating per kilometre of railway is 0.09, below the SEE
average of 0.16 and far from the benchmark set by Germany of 0.81 trains per km of railway.

Over 83% of firms have identified unreliable supply of electricity as a major constraint.
Companies are reported to experience approximately 43 power outages per month with an
average duration of two hours. These outages have been estimated to result in an annual
loss of 17.1% of sales (Enterprise Surveys, 2009).
Notes
1. People living in poverty include adults with consumption levels below EUR 43 per adult per month
(2002 prices). People living in extreme poverty are individuals who have difficulties meeting their
basic nutritional needs.
2. Total tax is defined as the sum of profit tax, labour tax and other mandatory contributions payable
by a company in its second year of operation.
3. Some tax holidays are provided at the municipal level. For more information, please refer to
Chapter 1: Investment Policy and Promotion.
Bibliography
European Commission (2009a), Kosovo under UNSCR 1244/99, 2009 Progress Report, European
European Commission (2009b), Kosovo under UNSCR 1244/99 – Fulfilling its European Perspective, European
World Bank (2007), Kosovo Poverty Assessment Volume I: Accelerating Inclusive Growth to Reduce Widespread
Poverty, Europe and Central Asia Region Poverty Reduction and Economic Management Unit, World Bank
Group, Washington DC.
World Bank (2009a), World Bank Enterprise Surveys, World Bank Group, Washington DC.
World Bank (2009b), Kosovo – Doing Business 2010, World Bank Group, Washington DC.
World Bank (2009c), Kosovo country brief 2009, World Bank Group, Washington DC.

© OECD 2010
The Former Yugoslav Republic

of Macedonia
The former Yugoslav Republic of Macedonia experienced average annual real GDP
growth of 4.9% between 2005 and 2008. Growth has been driven by investment and private
consumption. While inflation had remained below 4% since 2002, it increased rapidly in
2007-08 due to higher food and energy prices, reaching 8.3% in 2008 (IMF, 2009). However,
inflation sharply decreased in 2009 (European Commission, 2009).
The global financial crisis has significantly affected the former Yugoslav Republic of
Macedonia. Growth has turned negative and is forecast to be –1.6% in 2009 (EBRD, 2009).
During the first half of 2009, foreign trade fell sharply, remittances declined, foreign direct
investment (FDI) decreased by about 50% and industrial production dropped by 11% (EBRD,
2009). However, some recovery of remittances has been reported for the second half of
2009. The country’s dependence on a limited range of exports (namely textiles and clothing
and manufactured iron) has been highlighted by the crisis.
While the impact of the crisis on the banking sector has been modest, bank lending
has become more restrictive. Growth in bank lending to the private sector contracted from
34% year-on-year at the end of 2008 to 11.2% year-on-year in July 2009. The government
announced a series of crisis-related packages since December 2008. They include a
payment amnesty on tax arrears, tax exemptions for reinvested profits and some public
spending cuts. A large spending programme at the end of 2008 combined with falling
revenues has increased public debt (EBRD, 2009). According to the European Commission’s
most recent Progress Report, the quality of public spending was low and not well targeted.
Overall, however macroeconomic stability has been maintained
The unemployment rate in the former Yugoslav Republic of Macedonia has remained
extremely high. A slight drop was registered between 2007 and 2008 to 33.8% of the active
population, but the impact of the crisis has generated further increases. A small reduction
in the unemployment rate was registered in the second half of 2009. Youth unemployment
is particularly high: the unemployment rate of persons under 25 is 56.4% (European
Commission, 2008).
Privatisation has been largely completed and the state has a relatively small role in the
economy, although this has increased slightly due to some of the anti-crisis measures. In
general, the role of agriculture in the economy has declined and there has been a marked
shift to manufacturing, construction and trade in services (European Commission, 2009).
Foreign direct investment inflows have decreased from EUR 511 million in 2007 to
EUR 408 million in 2008. This represents 6.2% of GDP, compared to 8.8% of GDP from the
285
II. THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA
previous year (UNCTAD, 2009). The European Union (EU) and the Central European Free
Trade Agreement members are the main trading partners (European Commission, 2009).
Investment climate
The former Yugoslav Republic of Macedonia has made significant progress in
improving the business environment. In the 2010 Doing Business report, the country ranks
32 out of 183 economies for ease of doing business (up from the 69th rank) and became one
of the top 10 overall reformers for 2010. Major improvements have been made in areas such
as labour law, property rights registration and tax rates legislation (World Bank, 2009a).
In January 2009, the government made important changes to the labour law. The main
reforms included a reduction of minimum social contributions and the introduction of
measures to ease hiring of workers. As a result, the rigidity of employment index declined
to 14 from 40 (on a scale 0 to 100) in the Doing Business Report 2010 (World Bank, 2009a).
Progress on the land cadastre is evident and the time required for property registration
is now only 8 days, down from 66 days in 2008. Changes in tax policy have also benefited
companies by reducing tax rates. The total tax rate1 now represents 16.4% of companies’
profit, compared to 44.5% in the OECD area, with labour taxes and contributions only
representing 0.8% of profit. The bases for social security contributions and personal
income tax have been harmonised (World Bank, 2009a).
In November 2008, the Law on Technological Industrial Development Zones was
amended, providing for a 0% personal income tax for the first ten years of operations in the
zones. This change equalises personal income tax and profit tax. Prior to the change in the
Law, investors were expected to pay 5% personal income tax for the first five years of
operation.
The index of the strength of investor protection was estimated at 6.7 in the Doing
Business Report 2010, compared to 5.0 in the previous year.
Despite these positive changes, international organisations which monitor the
economy highlight a number of additional areas for reform:
● Informal economy: While steps have been taken to reduce the extent of the informal
sector, around 30% of firms have identified practices of informal sector competitors as a
major constraint. The informal economy has also been identified as first among the top
ten constraints to firm investment (BEEPS, 2009).
● Judicial system: Despite some reforms to increase the efficiency and independence of
the judicial system, some concerns remain. Slow procedures and insufficient resources
are important problems that contribute to legal uncertainty (European Commission,
2009).
The former Yugoslav Republic of Macedonia has a legal framework on FDI which
incorporates the principle of national treatment. Restrictions to national treatment appear
to be minimal, transfers of capital can be made freely and the government has signed and
ratified numerous bilateral investment treaties and other international instruments that
permit arbitration of investment disputes.

The former Yugoslav Republic of Macedonia should focus on improving its record of
intellectual property enforcement. Estimated software piracy decreased marginally from
2005 to 2008 from 70% to 68%. In the area of investment promotion, the former Yugoslav
Republic of Macedonia has an active investment promotion agency (IPA). However it
could do more to facilitate commercial relationships between foreign investments and
local enterprises. In this connection, a pilot initiative would be worth exploring in one or
more sectors. The government should carefully investigate options for the IPA to be
granted some authority to assist with obtaining or to approve certain licenses and
permits.
In the area of public-private partnerships, the former Yugoslav Republic of Macedonia
has designated a unit in the Ministry of Economy to implement policy. The government is
in the process of adopting a new law intended to cover all sectors, providing a legal and
regulatory framework for these partnerships. However, in the recent European
Commission country report, the existing law is criticised as not matching international
best practice; the government should review the law to ensure it meets international
standards.

Progress since 2006 on human capital development has been seen in a number of
areas. In 2007 secondary-level education became compulsory for every citizen. A
Vocational Education and Training (VET) Council was formed in September 2008, and plays
an advisory role to the VET Centres. Plans are in the making to establish a database on
shortages of teachers. And the first complete evaluation of teachers (according to changes
of the Law in 2008) was set to be conducted in 2009.
The adoption of the Law on Education of Adults in 2008 brought significant changes to
adult education. An Adult Education Centre was established at the end of 2008, which
covers formal and informal learning for adults. A Council for Education of Adults was
established in 2009, along with a State Examination Centre.
Consultative processes also appear to be well developed, and the “National
Programme for Development of Education in the Republic of Macedonia 2005-2015” was
adopted after broad debate in the country. The Ministry of Economy prepares sectoral
strategies (strategy for the textile industry, for tourism, for industry overall, etc.), with the
systematic involvement of all interested parties.
A well-functioning skills needs analysis model for short-term labour market forecasts
was established in 2006 and has been a regular activity of the Employment Service Agency
since 2007. This analysis identifies specific skills requirements in eight sectors once every
year.
And in 2008, a National Agency for European Educational Programmes and Mobility
was founded, to promote and implement the European Educational Programmes in the
former Yugoslav Republic of Macedonia.
The scores received on the indicators of policy settings used in this assessment are the
highest in the Western Balkans. However, important challenges exist. Addressing skills
shortages is currently a critical area of policy development in the former Yugoslav Republic
of Macedonia, and a wide gap exists between the supply and demand for skills. The loss of
skilled labour to emigration has been severe. Quality issues in education require continued
attention (the scores received on the 2002 Programme for International Student

Assessment were in some cases more than 100 points below the OECD average score). And
reported spending on secondary students as a share of income per capita is the lowest
among those SEE countries for which data were available. Raising the investment in
education and increasing quality will be critical.
The country’s score on the indicator of development of the system of work-related
continuing education and training was also relatively low. Further examination could be
valuable to develop an effective CET strategy and incentive system.

The former Yugoslav Republic of Macedonia has achieved some progress in the area of
technical barriers to trade since 2006. The country is preparing changes to legislation on
accreditation to bring it into line with new EU requirements in the field of accreditation
and market surveillance. In addition, the former Yugoslav Republic of Macedonia has been
a full member of the European Co-operation for Accreditation since 2007 and an associate
member of the International Laboratory Accreditation Cooperation since 2008. Since 2006
the country has also submitted an application to become a signatory to the Multilateral
Agreement of the European Co-operation for Accreditation in several conformity
assessment areas: testing laboratories, inspection bodies and product certification bodies.
Negotiations for an Agreement on Conformity Assessment and Acceptance of Industrial
Products with the EU were initiated in May 2008 and at the time of writing four rounds of
negotiations have been held.
In the sanitary and phytosanitary (SPS) area, since 2006 the former Yugoslav Republic
of Macedonia adopted several important framework laws which are aligned with the EU
acquis. These address animal welfare and protection (2007), veterinary issues (2007), plant
health and plant protection products (2007) and livestock (2008). Some progress has also
been made in adopting implementing measures in the area of food safety, animal diseases
and plant protection.
Significant progress has also been made in facilitating procedures to obtain licenses,
notably through the introduction in 2008 of EXIM (single window for licenses for export,
import and transit). It is expected that EXIM will contribute to the simplification of the
procedures and to a reduction of the time needed for preparation of export, import and
transit documentation where licenses apply.
With regards to export promotion, a programme to support small and medium-sized
enterprise competitiveness, including an export promotion component, was approved in
2009.
Some additional measures could be taken to more effectively tackle potential sources
of technical barriers to trade. The capacities of the Institute for Standardisation should be
strengthened, although the number of staff has recently been increased. Conflicts between
New Approach standards and old mandatory standards need to be resolved and the
dynamic of standard transposition accelerated.
With regards to the SPS area, capacities in food safety and plant protection agencies
also need to be strengthened. In addition, the former Yugoslav Republic of Macedonia
should streamline competencies and increase co-ordination among SPS bodies to reduce
overlapping among inspection procedures. Additional efforts also need to be made in
adopting animal welfare and protection measures.

The establishment of an export promotion agency with autonomous staff and

financial resources would improve the effectiveness of promotion activities.
Access to finance
The scores registered on the access to finance dimension for the former Yugoslav
Republic of Macedonia are near to the average for all SEE economies. While a supportive
legal framework is in place, some specific instruments need to be further enhanced to align
with OECD best practices.
The insolvency law, the cadastre and the regulatory framework governing leasing are
better developed in the former Yugoslav Republic of Macedonia than in most other SEE
economies. The insolvency law allows for liquidation and reorganisation of companies as
well as for out-of-court agreement between the parties. Furthermore, bankruptcy
administrators are supervised and need to take regular training. The law sets a maximum
of eight days between filing and the first court hearing. However, insolvency procedure
itself tends to be long-lasting. According to the Doing Business survey, closing a business
takes longer and is more costly in the former Yugoslav Republic of Macedonia than in the
average SEE economy. The coverage of the cadastre is almost complete and information on
the characteristics of land is collected. Digitisation of the registry is well under way and
should be completed in 2010. The regulatory framework for leasing in the former Yugoslav
Republic of Macedonia was developed in 2002: both financial and operational leasing are
now possible. The Ministry of Finance regulates and supervises leasing companies and can
perform on-site visits if necessary.
Collateral requirements in the former Yugoslav Republic of Macedonia are among the
highest in the SEE region. Specific instruments that can contribute to improving the
financing environment should be further developed. In particular, the assessment suggests
that attention might be given to credit information services, export guarantee schemes and
the development of factoring.
A public credit bureau has been collecting bank information on individuals and
companies since 1998. Regulation on private credit bureaus was enacted in 2008 but has
not yet been implemented. This limits the potential for development of the sole existing
private credit bureau. Export guarantee schemes are relatively under-developed in the
former Yugoslav Republic of Macedonia. The Macedonian Bank for Development operates
such a scheme. However, the scheme is extremely limited in coverage and the OECD team
was informed that most firms do not use it. While factoring services can prove particularly
useful in a context where collateral requirements are high, the supply of factoring services
is not significant in the former Yugoslav Republic of Macedonia. A legal framework is
lacking and most financial institutions do not provide factoring services.

In recent years, the former Yugoslav Republic of Macedonia has made substantial
progress in implementing regulatory reform programmes.
The former Yugoslav Republic of Macedonia is amongst the most advanced SEE
countries in the application of regulatory impact assessment (RIA) to draft legislation.
Since the 2006 IRI assessment, the legal framework for RIA was adopted, a pilot project was
conducted and its full application started in January 2009. The former Yugoslav Republic of
Macedonia has also conducted a comprehensive legislative simplification process,

eliminating much obsolete legislation. Furthermore, the former Yugoslav Republic of

Macedonia is the only economy in SEE to have adopted a lobby law, formalising lobbying
practices during legislative drafting and adoption. It also adopted new rules for
parliamentary procedures recently, which allow civil society representatives to take part in
working group meetings to discuss legislative drafts. The implementation of these new
rules needs to be monitored. The same is true for the Strategy for Co-operation with Civil
Society, which was adopted in 2007.
on parliamentarians themselves. The former Yugoslav Republic of Macedonia has
established a functioning parliamentary website. However, this website could be improved
by providing information on the adoption status of legislative proposals and by providing
contact details of parliamentarians.
Tax policy analysis

Like all SEE economies, the former Yugoslav Republic of Macedonia has an aggregate
tax revenue forecasting model for all taxes. It also regularly monitors revenues and
expenditures. However, expenditures should be prioritised based on policy objectives and
strict rules should require government action when the fiscal deficit grows too large.
While no marginal effective tax rate, corporate income tax (CIT) microsimulation or
tax wedge models exist, the former Yugoslav Republic of Macedonia is one of the few
countries taking steps to implement all three. It has no plans, however, to implement tax
expenditure estimates. Because it does have some tax incentives for companies in
designated free zones, these estimates should be made top priority. They can improve both
transparency and budget monitoring, especially when implemented in conjunction with a
CIT microsimulation model.
Minimal progress has been made on assessing tax issues specific to small- and
medium-sized enterprises and multinational enterprises. The former Yugoslav Republic of
Macedonia has not performed any of the assessments evaluated in this subdimension. It
is, however, taking steps to implement frameworks for analysing thin capitalisation rules
and non-resident withholding taxes.
Infrastructure
In telecommunications, the former Yugoslav Republic of Macedonia has excelled in
the adoption of the EU acquis communautaire. But challenges remain in implementation.
The country received scores on all telecommunications indicators close to the regional
average.
The former Yugoslav Republic of Macedonia has a dense network of motorways,
highways, main or national roads. However, reported expenditures on road maintenance
are only EUR 1 148 per km of road, the lowest in the region. In air transport, the country
registered the lowest average cost of a tonne of airfreight in the region. However, air
transport is limited overall, with only 17 aircraft departures per day and only 2 400 tonnes
air cargo transported a year on average, both figures falling below the SEE averages.
Notable in the energy subdimension is that the average industrial electricity tariff is
EUR 0.2 per kWh, significantly higher than in other SEE economies. It takes 4 procedures

and 67 days to obtain an electricity connection in the former Yugoslav Republic of

Macedonia, figures below the averages in the region.
Note
1. Total tax rate as a percentage of profit is the sum of profit tax, labour tax and contribution and
other taxes.
Bibliography
EBRD (2009), Transition Report, European Bank for Reconstruction and Development, London.
Economist Intelligence Unit (EIU) (2008a), Country Report Macedonia – October 2008, Economic
Intelligence Unit, London.
EIU (2008b), Country Report Macedonia – November 2008, Economic Intelligence Unit, London.
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World Bank (2009a), Doing Business Report 2010, World Bank and International Finance Corporation,
Washington DC.

© OECD 2010
The Republic of Moldova
In 2008, the GDP per capita at purchasing power parity was USD 2 986, significantly
below the average of USD 11 460 for the region. The economy experienced annual real GDP
growth of 5.6% between 2005 and 2008, below the average of 6.1% for SEE economies1 (IMF,
2009). Emigration has emerged as a significant phenomenon and has resulted in a reduced
workforce. As a consequence, while in 2000 the existence of a low-cost and abundant
workforce was a factor attracting foreign investments in the Republic of Moldova, this is no
longer the case (Foreign Investors Association of the Republic of Moldova, 2009).
In the first half of 2009, real GDP is reported to have decreased by 7.8% year on year.
Furthermore, unemployment rose sharply from 3% in the second quarter 2008 to 6.1% in
the second quarter of 2009. Inflation has fallen sharply from a peak of around 17% in May
2008 (EIU, 2009).
The government stepped up spending in 2009 to sustain economic growth. However,
the expanding budget deficit leaves little room for further intervention. High levels of
emigration have led to a heavy dependence on remittances from migrants to sustain
consumption. Due to worsening economic conditions in western Europe and the Russian
Federation, remittance flows have decreased significantly, depressing real incomes
(European Commission, 2009).
The trade deficit equalled 53% of GDP in 2008. Exports have deteriorated further, given
falling demand in the Republic of Moldova’s traditional trading partners, the European
Union (EU) and the Commonwealth of Independent States. However, the decline in imports
is more significant, due to a fall in domestic demand. As a result, in the first half of 2009
the trade deficit fell to 35% of GDP.
Annual inward foreign direct investment (FDI) flows increased from EUR 154 million in
2005 to EUR 483 million in 2008. FDI represents about one third of the gross fixed capital
formation, while the average for the South-East Europe (SEE) and Commonwealth of
Independent States countries is below 22%. The total stock of FDI in the Republic of
Moldova (since independence) amounted to EUR 1.76 billion at the end of 2008 (compared
to only EUR 0.5 billion in 2000) (UNCTAD, 2009). The government has designed a number of
incentives to attract foreign investors.
Investment climate
The government is taking steps to develop a stronger economy and adopt reforms
aimed at improving the business climate. In accordance with the 2005 Action Plan with the
EU, the Republic of Moldova has begun to harmonise its laws with those of the EU.
Implementation of guillotine laws has helped reduce unnecessary legislation and policy
293
II. THE REPUBLIC OF MOLDOVA
directives that have hampered investment and business development. In particular, the
government has made significant efforts to streamline business registration. A “one
window” approach has been implemented to simplify document submission. The process
reduced both the number of documents and the time necessary for business registration.
In addition, on 1 January 2008, a 0% tax rate on reinvested corporate income entered into
force. Fixed assets contributed in-kind to the charter capital are exempted from value-
added tax and customs duties (European Commission, 2008). Accordingly, in the World
Bank’s (2009a) Doing Business 2010, the Republic of Moldova ranked 6 out of 183 countries in
terms of recent progress and 94 in the global ranking (up from 108 in the previous year).
Despite these significant improvements, a number of issues are still highlighted by the
various institutions assessing the investment climate in the Republic of Moldova. In
particular:
● Corruption: Transparency International (2009) downgraded the ranking of the Republic
of Moldova in its Corruption Perception Index to 112th place in 2008, down from 81st place
out of 163 countries in 2006.
● Labour regulation: Doing Business describes how labour regulations have become more
rigid (World Bank, 2009a).
● Lack of transparency: The Heritage Foundation considers that, too often, regulatory
administration is non-transparent, burdensome and inconsistent. The country’s
economic freedom is ranked 120 in the Heritage Foundation’s 2009 Index of Economic
Freedom. This view is supported by the World Bank (2009b) which highlights the
institutional flaws and invasive special interests that distort the policy-making
environment.
The Republic of Moldova has a legal framework on FDI which incorporates the
principle of national treatment. Restrictions to national treatment have been progressively
reduced, transfers of FDI-related capital can be made freely and foreign investors are
allowed to own urban and residential land. However, in its White Book 2009, the Foreign
Investors Association underline that discrimination towards foreign investors has been
persistent, especially in its regulations on land purchase.
The Republic of Moldova has a weak record of enforcing intellectual property rights.
Although estimated software piracy has decreased from 96% to 90% (2005 to 2008), the level
of piracy is extremely high. The Republic of Moldova is also encouraged to reconsider its
position on adhering to the ICSID convention on arbitration of international investment
disputes.
In the area of investment promotion, the Republic of Moldova is in the process of
developing its investment promotion agency and associated capabilities. Key issues to
concentrate on include: facilitation services at the pre-and post-entry phase of investment,
developing a client relationship management system and a process of monitoring the
performance of its investment promotion agency. With regard to public-private
partnerships, the Republic of Moldova has passed a new law and is in the initial phases of
creating a unit with the assistance of the UNDP. Much like other SEE economies, the
Republic of Moldova would benefit from exchanges of best practice in this area.


For the dimension on human capital development, no response to the assessment was
received from the government. The assessment has therefore been based on interviews
with representatives of the private sector and with independent experts.
In the Republic of Moldova, the assessment found positive features in the
development of policy and programmes on vocational education and training (VET). The
structure of the VET system is maintained by the Education Code, adopted by Parliament
in December 2008. Activities have been launched to establish a National Centre for
Vocational Education Development. Among other things, the Centre will be responsible for
lifelong education of teaching and managerial staff. Progress in the VET system has also
occurred in the context of projects financed by international donors. Attention needs to be
given to the sustainability of activities after donor support comes to an end. The assessors
were also informed that the overall number of vocational training institutions has fallen
significantly during the past 10 years, in part due to a fall in demand for vocational
training. Various strands of evidence indicate that attention is required to ensuring
matches between vocational training and labour market requirements.
A consultative body (the National Council for Occupational Standards and
Certification of Professional Skills) has been set up under the Ministry of Economy, while a
Council for Participation was established during preparation of the National Development
Strategy for 2008-11.
The country has experienced large-scale emigration of skilled workers. To this is
added a problem of regional skills shortages (doctors, teachers, engineers, etc.),
exacerbated by sizeable internal migration to the capital Chisinau. While education
spending has recently risen as a share of national income, infrastructure in the education
system is reported to be deteriorating rapidly, and teacher numbers have fallen (UNESCO,
2007). The review mission was also informed that the teaching workforce is experiencing
losses through retirement that are not offset by the number of new recruits to the teaching
profession.
There are reportedly no significant incentives for work-related training (employers for
instance cannot deduct training outlays from taxable income). The government may wish
to consider examining the steps required to develop a robust system of work-related
continuing education and training.

Since 2006, there have been important developments in the regime governing the
Republic of Moldova’s trade relations with the EU. In 2008, the EU granted autonomous
trade preferences to the Republic of Moldova, providing for duty-free access to all goods
except for certain agricultural products. Further integration is foreseen in the Partnership
and Co-operation Agreement, under the form of a comprehensive free trade agreement
(FTA). The European Commission has launched a feasibility study on the possibility of
negotiating an FTA when the Republic of Moldova meets a number of basic pre-conditions.
Some progress has also been seen in adopting measures to overcome technical
barriers to trade. Both the law on standardisation and the law on conformity assessment
were amended and aligned with the EU acquis and international standards. In addition,
several EU New Approach directives were adopted. In 2008, the Republic of Moldova
became an affiliate member in the European Committee for Standardisation. In the

sanitary and phytosanitary (SPS) area, since 2006 a new Law on Sanitary and Veterinary
Activities entered into force. A Sanitary Veterinary Agency for Safety of Products of Animal
Origin was established in 2008. In addition, the Republic of Moldova became a member of
the International Plant Protection Convention in 2007. In November 2006, the Republic of
Moldova adopted a new Export Promotion Strategy for the period 2006-15.
The Republic of Moldova should ensure that consultation with civil society becomes a
routine part of trade policy making and is extended beyond business representatives.
In the technical barriers to trade area, some key processes could be enhanced to
eliminate possible barriers to trade. The process of transition to European standards could
be ramped up. In addition, the Republic of Moldova should step up the efforts to meet the
requirements for starting negotiations of an Agreement on Conformity Assessment and
Acceptance of Industrial Products with the EU.2 The conclusion of such an agreement
would effectively extend the EU internal market to the Republic of Moldova in the sectors
covered by the agreement. Improving the awareness among business of the importance of
certification would also have a positive effect on export competitiveness.
With regards to SPS issues, the capacities of the relevant agencies need to be
upgraded. In addition, the Republic of Moldova could streamline inter-institutional co-
ordination and better define competences among different SPS supervisory and regulatory
bodies. This would allow a speeding up of the adoption of international and European SPS
measures.
In the area of trade facilitation, implementation of the licensing regime should be
improved, especially for trade in foodstuffs and agricultural products.
The export promotion agency of the Republic of Moldova would benefit from increased
resources.
Access to finance
The scores registered on the access to finance dimension in the Republic of Moldova
are near the average of scores for the SEE region overall. Although the relevant legal
framework is more developed that in most SEE economies, non-bank sources of finance
could be further developed nonetheless.
The legal and regulatory framework for access to finance in the Republic of Moldova is
largely in place. In particular, insolvency law, the cadastre and registration of movable
assets are well developed. The insolvency law is in line with international best practices,
according to the conclusion of the EBRD’s Insolvency Sector Assessment project.
Regulation allows for both liquidation and reorganisation, criteria for commencement are
clearly defined and administrators are well regulated. Furthermore, out-of-court
agreements between parties are possible. The cadastre documents all property titles. The
full register is available online free of charge. A central registry for collateral, both movable
and fixed, is in place and fully functioning. The system has proved efficient in allowing
firms to use movable collateral. However, the registry is not yet available online, and it
reportedly takes up to 30 days to obtain an answer.
A number of reforms are needed to further improve access to finance in the Republic
of Moldova. In particular, credit bureaus and export guarantee schemes could be further
developed. The Republic of Moldova is one of the few SEE economies that does not have a
functioning credit bureau. In fact, the law establishing credit bureaus only entered into
force in March 2009 and only one private credit bureau operates as yet. It has a limited

number of partners and collects only negative data on borrowers. No export credit
guarantee scheme operates in the Republic of Moldova. A project was initiated by the
government to set up a guarantee fund in 2007 but it was not successful. The Guarantee
Society, a programme supported by the United Kingdom and Ireland, currently offers credit
guarantees and plans to launch specific guarantees for exporters in the near future; this
development should improve the situation for exporting companies.

In recent years, the Republic of Moldova has made important progress in
implementing regulatory reform programmes. It is one of the most advanced SEE
economies in the application of regulatory impact assessment to draft legislation. Two
comprehensive regulatory guillotine reviews eliminated much obsolete legislation.
The Republic of Moldova’s government and parliament would benefit from further
formalising dialogue and communication with key stakeholders, through the adoption of a
lobby or transparency law. The adoption of such a law would ensure that key stakeholders
have the opportunity to lobby and be directly involved in the decision-making process. A
lobby or transparency law can be an effective way to enhance regulatory transparency and
ultimately improve the quality of legislative proposals.
information to the public on legislative procedures related to specific normative acts as
well as on parliamentarians themselves. The Republic of Moldova has established a
functioning parliamentary website and is one of only two SEE economies to provide
detailed information on the adoption status of laws on a website. However, the website
could be made more useful by providing contact details of parliamentarians.
Tax policy analysis

The Republic of Moldova has made significant reforms in its fiscal monitoring
programme. In 2003 it implemented a Macro Fiscal Model, an Excel-based tax revenue
forecasting model based on National Accounts statistics and official macroeconomic
forecasts. Other recent initiatives include allocating resources based on policy objectives
and setting formal rules for bringing down public expenditures. These expenditure cuts are
achieved by proportionally reducing all monthly expenditures.3
The Republic of Moldova does not have corporate income tax (CIT) microsimulation,
marginal effective tax rate or tax wedge models, although it is taking steps to implement
all three. Periodic tax expenditure estimates are prepared by the Ministry of Finance. More
regular estimates of tax expenditures, especially in conjunction with a CIT
microsimulation model, would promote transparency.
The Republic of Moldova has yet to consider any of the issues covered under the
taxation of small and medium-sized enterprises and multinational enterprises
subdimension. It would like to analyse non-resident withholding taxes, but is hampered by
resource constraints in the ministry.
Infrastructure
The Republic of Moldova has the second lowest broadband Internet penetration rate in
the region: 3.2 persons per 100 inhabitants. In mobile telephony, the penetration rate is the
second lowest in the region, with 67.8 mobile lines per 100 inhabitants, below the regional

average of 1 14.3 lines. The cost and quality of telephony services in the Republic of
Moldova also lag behind the regional averages. The country has the highest reported
incidence of telephone faults in SEE and the second highest cost for placing a three-minute
call to Germany.
On transportation, the density of the road network is below the regional average.
However, 94.8% the roads are paved. Expenditure on road construction and maintenance is
below the regional average.
The cost for electricity services is comparable to the regional average. However, the
time and documents required to secure an electricity connection are among the longest
and most numerous in the region.
Notes
1. Simple average of GDP growth rates of SEE economies.
2. A commitment to an Agreement on Conformity Assessment and Acceptance of Industrial Products
between the EU and the Republic of Moldova is included in the European Neighbourhood Policy
Action Plan for Moldova.
3. Certain expenditure types are protected by the annual budget law, and are thus not subject to the
new provision. Additional expenditure cuts may be specified by the Ministry of Finance. Proposals
for expenditure cuts are accepted either with the approval of Parliament, or after a 15-day period
if no action from Parliament is taken.
Bibliography
Economist Intelligence Unit (2009), Country Report October 2009: Republic of Moldova, The Economist
Intelligence Unit Limited, London.
European Commission (2009), Implementation of the European Neighbourhood Policy in 2008: Republic of
Moldova, European Commission, Brussels.
Foreign Investment Advisory Service (2007), Attracting Investment to South East Europe: Survey of FDI
Trends and Investors Perceptions, FIAS.
Foreign Investors Association of the Republic of Moldova (2009), White Book 2009, World Bank Group,
Washington DC.
Freedom House (2009), Freedom in the World 2009: Republic of Moldova, Freedom House, Washington DC.
Heritage Foundation (2009), 2009 Index of Economic Freedom: Republic of Moldova, Heritage Foundation,
Washington DC.
IMF (2009), World Economic Outlook, International Monetary Fund, 2009.
National Bank of the Republic of Moldova (2008), Annual Report 2008, National Bank of the Republic of
Moldova, Chisinau.
Transparency International (2009), Global Corruption Report 2009: Republic of Moldova, Transparency
International, Berlin.
UNCTAD (2009), The World Investment Report 2009: Transnational Corporations, Agricultural Production and
UNESCO (2007), Republic of Moldova: World Data on Education, 6th edition, 2006/2007.
US State Department, Bureau of Economic and Business Affairs (2009), 2009 Investment Climate
Statement: Republic of Moldova, US State Department, Washington DC.
World Bank (2009a), Doing Business 2010: Republic of Moldova, World Bank Group, Washi1ngton DC.
World Bank (2009b), Country Partnership Strategy: Republic of Moldova 2009-2012, World Bank Group,
Washington DC.
World Bank (2009c), Enterprise Surveys 2009: Republic of Moldova, World Bank Group, Washington DC.

© OECD 2010
Montenegro
Montenegro was the fastest growing economy in South-East Europe (SEE) between
2005 and 2008. Real GDP grew on average by 8.9% annually during this period. In 2008,
GDP per capita based on purchasing power parity was USD 11 111, close to the average
for SEE economies of USD 11 460. The average annual inflation rate between 2005 and
2008 was 4.8%, lower than the average of 6.1% for SEE economies during the same
period1 (IMF, 2009).
Real GDP is expected to contract by 5% in 2009. This follows a sharp drop in
Montenegro’s trade flows and industrial output. Manufacturing output dropped by 36% in
the first eight months of 2009 and the severe contraction of the base metals industry
globally reduced the volume of Montenegro’s main export (EIU, 2009). However, tourism
has held up better than expected and has helped reduce the impact of the crisis. In
general, the European Commission finds that Montenegro responded quickly to the
economic crisis and managed to stabilise the financial system and limit the emerging
deficit by curtailing spending, increasing borrowing and selling assets (European
Commission, 2009).
Growth is expected to rebound modestly in 2010, at 0.5%, and accelerate to 3.5% in
2011, as demand for Montenegro’s exports pick up. The expected return of economic
growth will have a positive impact on retail sales and will increase the largest source of
budget income (value-added tax receipts). However, the rebound in real GDP growth may
be insufficient to produce a budget surplus until 2011 (EIU, 2009).
The unemployment rate in Montenegro was 16.8% in 2008, down from 19.3% in 2007
(European Commission, 2009). Regional skills shortages and limited labour mobility led to
a reliance on foreign workers, particularly temporary non-resident workers (European
Commission, 2009).
Montenegro has been successful in attracting foreign direct investment (FDI). FDI
inflows amounted to EUR 641 million in 2008 and FDI represents 19% of GDP. FDI grew at an
average annual rate of 25% between 2005 and 2008 (UNCTAD, 2009). This positive trend has
continued in 2009 and, net FDI reached a record quarterly level in April-June 2009 of
EUR 235 million (EIU, 2009). This followed the sale of shares in the power utility EPCG to
A2A (Italy). The privatisation of EPCG entered a new phase in September with the sale of an
additional 18.3% stake in the company. The share of the private sector in the economy is
large but the privatisation process has slowed. Several privatisations will have to be re-
launched, possibly on new terms. The pace of privatisation will be an indicator of the
authorities’ willingness to carry out reforms (EIU, 2009).
299
II. MONTENEGRO
Investment climate
Montenegro has undertaken a number of reforms that have increased its
attractiveness as a destination for FDI. Particular efforts have been made to improve
business-related administration and labour regulation. Starting a business now takes 13
days and costs the equivalent of 2.58% of annual income per capita. These indicators are
below the average in the OECD area.2 Procedures to obtain import licences, operating
licenses and construction permits have significantly decreased. Reforms were also made to
bring labour laws in line with EU requirements. Employment regulations have been made
more flexible, with restrictions eased on redundancy dismissals and the notice period for
redundancy shortened (World Bank, 2009a).
Montenegro has kept up its efforts to improve infrastructure. In October 2009 the
government signed agreements with private companies to build the Bar-Boljare highway
(for a total investment of EUR 2.8 billion) as well as the touristic complex of Luštice (for a
total investment of EUR 1.1 billion) (MIPA, 2009).
Rapid adoption of the acquis communautaire has meant a very dynamic legislative
environment for business. In line with the experience of other SEE economies, the speed of
preparation and adoption of laws means that thorough analysis of their potential impact
on the economy is often not undertaken and duplication and contradiction with other laws
can impede business activity (European Commission, 2009).
Overall, there have been improvements in public administration and these have also
improved procedures for dealing with investment. However, the effects of cost cutting in
the public service as part of the government’s response to the global crisis remain to be
seen (European Commission, 2009). The business community notes that increases in para-
fiscal charges at local government level are a concern and the European Commission (2009)
has highlighted the need to move ahead with local government reforms.
Despite efforts to improve the investment climate, in particular through the
establishment of an FDI incentive strategy in 2006 and a council for the elimination of
business barriers, some additional measures are still needed. Montenegro was rated 131
out of 183 economies as regards property registration by the World Bank Doing Business
report (2009a). Registering property in Montenegro takes 86 days and costs 3.3% of the
property value. On average, in SEE economies, the equivalent statistics are 59 days and
2.8% of the property value.
Despite a favourable tax rate for companies, the administrative burden of paying tax is
a major constraint for companies. Indeed, companies in Montenegro dedicate 372 hours
per year to this activity, compared to 280 hours in the average SEE economy (World Bank,
2009a).
In addition, investors also point to electric power supply and the prevalence of the
informal sector as barriers to competitiveness (World Bank, 2009a). While progress has
been made in establishing the institutions and legislation to combat corruption,
enforcement remains weak (European Commission, 2009).
Montenegro has a legal framework for FDI which incorporates the principle of national

II. MONTENEGRO
capital can be made freely and the government has signed numerous bilateral investment
treaties to reinforce its commitments to openness and non-discrimination.
Intellectual property law enforcement remains a hurdle for Montenegro, as noted in
the European Commission’s annual Progress Report. Some private sector estimates place
software piracy in Montenegro at nearly 83%. Montenegro is also encouraged to ratify the
ICSID Convention on Arbitration of International Investment Disputes.
In the area of investment promotion, Montenegro has a small but active investment
promotion agency (IPA). However, staff appears to lack private sector experience. The IPA
should consider balancing its staff with individuals from both the public and private
sectors. In addition, the IPA might do more to facilitate commercial relationships between
foreign investments and local enterprises. A pilot initiative would be worth exploring in
one or two priority sectors. Private sector representatives voiced frustration with
inconsistent license and permit procedures at the municipal level. The IPA should consider
reviewing these procedures with municipal officials to ensure a greater degree of
predictability for investors.
In the area of public-private partnerships, Montenegro has expanded its concession
law to include these projects. As this is a new policy field for Montenegro and other SEE
economies as well, the government should consider exchanges of best practice in design
and implementation.

Members of the private sector commended significant positive changes made in the
educational system in some fields, including the structure of educational institutions,
curriculum development and the training of educational staff and teachers.
Montenegro’s scores were high on the use of evidence in strategy development, and on
the inclusiveness of strategy formulation, with multifaceted consultative practices being
employed. Montenegro is one of the few countries in the region to participate in the
Programme for International Student Assessment.
The Updated National Employment Strategy and Human Resources Development
2007-11 was adopted at the end of July 2008 together with the corresponding National
Action Plan for Employment 2008-09. A Strategy for Lifelong Entrepreneurship Learning
2008-13 has been passed, and a Strategy for Human Resource Development in the Tourism
Sector of Montenegro has also been prepared. The government is currently in the process
of creating the National Qualifications Framework.
The indicator scores suggest that attention should be given to policy settings affecting
teacher recruitment and retention. Some important education-related data are also
deficient, and support to build capacities in this area is needed (the review mission was
informed however that Montenegro has begun a project funded from the Instrument for
Pre-Accession to collect data on annual expenditure per pupil). Data collected from the
Ministry of Education were found not to match data from the Statistical Office.
The reported annual public expenditure on education as percentage of total
government expenditure was the lowest reported among the countries returning data. As
with other economies in SEE, a key strategic challenge will be to raise investment in
education and to do so while raising efficiency. Indeed, quality issues in education require
continued attention (the scores received on the 2006 PISA were significantly below the
OECD average score).

II. MONTENEGRO
Students in their last year of university are reported to have the opportunity to work in
a company for up to 30 days. Further attention could be given to the issue of business
linkages with schools and universities. A pilot project currently promotes internship
programmes to help students gain more practical experience. The review mission was
informed that the programme has been conducted in two occupations: hair dressing and car
mechanics. The scheme was reported to be particularly successful for the prospective car
mechanics. However, there are no internship programmes for more technical disciplines,
and consideration could be given to enlarging the scope of this or similar schemes.

Since 2006, Montenegro has come a long way in its efforts to integrate into the
multilateral trading system. It has concluded bilateral market access negotiations with
almost all World Trade Organization (WTO) members that requested them, including the
EU (2008) and the United States (2009). A Stabilisation and Association Agreement with the
EU was signed in 2007. Pending full ratification, interim trade and trade-related measures
have been in force since January 2008.
Since 2006, some progress has been made in removing potential sources of technical
barriers to trade (TBTs). In 2007 Montenegro established an Institute for Standardisation
and a Law on Standardisation aligned with WTO and EU requirements was adopted in
2008. Montenegro also became a correspondent member of the International
Standardisation Organisation in July 2007, an associate member of the International
Electrotechnical Commission in January 2009 and an affiliate member of the European
Committee for Standardisation in July 2008. Application for the status of affiliate member
of the European Committee for Electrotechnical Standardisation is currently in process. In
the field of conformity assessment, since 2006 Montenegro signed a contract of co-
operation with the European Co-operation for Accreditation and became an associate of
the International Laboratory Accreditation Cooperation.
Furthermore, since 2006 Montenegro set up a number of agencies responsible for
sanitary and phytosanitary (SPS) matters. It also adopted veterinary and food framework
legislation, in 2007 and in 2008 respectively. Further progress has been made in
participation in the work of organisations setting international SPS measures. For instance,
Montenegro became a member of the World Organisation for Animal Health in 2007 and a
member of the International Plant Protection Convention in 2009.
In order to tackle TBTs, Montenegro should improve the capacities of the accreditation
body. This would improve the functioning of the conformity assessment and quality
infrastructure. Montenegro should also ensure that the accreditation body aims to conform
to the internationally recognised criteria needed to allow it to become a signatory to the
Multilateral Agreement of the European Co-operation for Accreditation. In the SPS area,
Montenegro should strengthen the administrative capacities of the relevant bodies in order
to guarantee adequate implementation of food safety, sanitary and plant protection
controls.
In the area of trade facilitation, Montenegro should improve the public availability of
information on trading operations. This could be done by speeding up the creation of an
online single customs enquiry point providing information in English.
Finally, Montenegro should continue supporting the implementation of the 2005
export promotion strategy, and consider expanding and re-financing it. The Department

II. MONTENEGRO
for Export Promotion could be strengthened. This might also involve an increase in budget
allocation for export promotion activities.
Access to finance
Montenegro is one of the economies in the SEE region where access to finance is least
favourable. According to the World Bank Enterprise Survey 2009, companies in Montenegro
identify access to finance as their second most important constraint to their development.
The legal framework for access to finance in Montenegro compares favourably to the
average in the SEE region. The regulation of insolvency and the cadastre are satisfactory.
Registration of movable assets is also well developed. Assessment of insolvency measures
(by both the European Bank for Reconstruction and Development and the World Bank)
shows that Montenegro fares better than other SEE economies. Regulation is in place,
administrators are well regulated and cases are settled with acceptable delay. However, no
outside court workout possibility seems to exist. The cadastre in Montenegro is reliable
and accessing the information is reported to be easy. The coverage of the cadastre is high
in urban areas but more limited in rural areas. The information has been digitised and is
available online. The register for pledges on movable assets, operational since 2003, is also
available online. The system likewise allows for pledges to be registered online.
The level of collateral required by banks in Montenegro represents 151% of loan value,
according to the World Bank Enterprise Survey 2009. In order to further ease access to
finance, Montenegro could seek to further develop the framework for leasing and factoring.
It could also examine options to strengthen guarantee arrangements and investment
readiness services. While there are legal definitions of leasing and factoring, no specific
regulation applies to these activities. In particular, in contrast with the situation in SEE
economies where leasing is most developed, no specific monitoring of leasing activities
occurs. Given the increasing importance of leasing companies and their strong links with
the banking sector, strengthening of the monitoring framework may be considered. Credit
guarantee schemes are currently under-developed in Montenegro. Although provision of
credit guarantees is within the scope of activities of the Investment Development Fund of
Montenegro, the fund seems to be very much focused on providing credit lines on
preferential terms for small and medium-sized enterprises and financing infrastructure
projects. Specific legislation governing credit guarantee operations was developed and is in
place. Furthermore, steps have been taken by the government to set up a fund dedicated to
credit guarantees. However, participation of the private sector, a prerequisite for the
government, has been limited, effectively blocking the project so far. Export credit
guarantees are provided by the Serbia and Montenegro Export Credit Agency. However, the
scope of the programme appears limited, as does its impact. Montenegro is also among the
SEE economies that have not developed a consistent programme to increase the
investment readiness of entrepreneurs. Although some programmes have been
implemented at the local level, there is limited co-ordination.

In recent years, Montenegro has made progress in reforming its regulatory
environment. Montenegro has adopted a comprehensive programme to simplify its stock
of regulations and legislation and has started to implement this programme.
However, Montenegro has made little progress in implementing regulatory impact
assessments (RIA) since the 2006 IRI assessment. The application of RIA to draft legislative

II. MONTENEGRO
the benefits of RIA can be particularly great.
Parliamentary and governmental dialogue with stakeholders during the legislative
drafting and adoption process remains unstructured and occurs in an ad hoc way. Benefits
would be had from further formalising the process of dialogue and increasing
communication with key stakeholders, through the adoption of a lobby or transparency
law.
on parliamentarians themselves. At the time of writing, Montenegro had not established a
functioning parliamentary website. Parliamentary websites from other SEE economies
could be used as a reference.
Tax policy analysis

Montenegro regularly monitors revenues and expenditures, and has in place aggregate
tax revenue forecasting models. As of yet, however, planned expenditures are not explicitly
linked to revenue estimates, and no mechanism exists to reign in expenditures or increase
taxes when the deficit gets too big.
At the time of writing, Montenegro did not have any of the items assessed under the
“taxation, investment and employment” or “taxation of SMEs and MNEs” subdimensions.
It is, however, taking steps to implement a corporate income tax (CIT) microsimulation
model, a tax wedge model, tax expenditure estimates and evaluations of non-resident
withholding taxes. In particular, the implementation of a CIT microsimulation model will
not only help to analyse the distributional impact of the tax system, but it can be a big help
in calculating tax expenditure estimates. Moreover, CIT microsimulation models are
valuable for monitoring EU state aid rules, something Montenegro will have to do once it is
an EU candidate country.
Infrastructure
While fixed-line penetration in Montenegro is near the regional average, the mobile
penetration rate is the highest in SEE, at almost 180 lines per 100 inhabitants. The reported
cost of a fixed-line international call is the highest in the region and the number of fixed-
line operators is one of the lowest.
In transport, the road conditions lag behind those of neighbouring countries. The
network density is close to the regional average. However, expenditure on new road
construction is below the SEE average. The rail network, despite having the lowest density
in the region, has the highest annual maintenance expenditure. Air transport both in terms
of aircraft departures and transported cargo are among the lowest in the region.
In the area of electricity infrastructure Montenegro’s results exceed those in the other
infrastructure subdimensions. Four procedures and 64 days are needed to obtain an
electricity connection, the second best results in the region.

II. MONTENEGRO
Notes
1. Simple average of GDP growth rates of SEE economies.
2. OECD averages: 13 days and a cost equal to 4.7% of annual income per capita.
Bibliography
Economist Intelligence Unit (2009), Country Report: Montenegro, October 2009, EIU, London.
European Commission (2009), Progress Report 2009: Montenegro, European Commission, Brussels.
International Monetary Fund (2009), World Economic Outlook Database, IMF, Washington DC.
Montenegrin Investment Promotion Agency (MIPA/FDI) (2009), Foreign Direct Investments in Montenegro,
Quarter Report, MIPA, Podgorica.
UNCTAD (2009), The World Investment Report 2009: Transnational Corporations, Agricultural Production and
World Bank (2009a), Doing Business 2010 Report: Montenegro, World Bank Group, Washington DC.
World Bank (2009b), Enterprise Surveys: Montenegro 2009, World Bank Group, Washington DC.
Statements from government of Montenegro on future investment plans.

© OECD 2010
Romania
The process of European Union (EU) accession supported a lengthy period of economic
growth in Romania and it is the country with the second highest GDP per capita in
purchasing power parity in South-East Europe (SEE) at USD 12 600. Romania experienced
average annual real GDP growth of more than 6% during 2003-07, increasing to 7.1% in 2008
(IMF, 2009). Growth has been particularly fuelled by strong domestic demand and
investment. The annual average rate of inflation fell from 9% in 2005 to 4.8% in 2007. In 2008,
as a result of rising world food and energy prices and rapid wage growth, inflation rose to
7.9%, although this is expected to drop sharply due to the economic crisis (IMF, 2009).
According to the latest World Bank Country Partnership Strategy, weak economic
management and an unfinished agenda of public sector and governance reforms led to
growing imbalances and economic vulnerabilities, and thus reduced the ability of the
economy to withstand the impact of the global economic crisis. The strategy highlights the
substantial increase in government expenditure, including a doubling of the public sector
wage bill due to salary increases and a substantial increase in the number of staff employed.
Economic growth has slowed significantly. According to European Commission
forecasts, real GDP is expected to contract by around 8% in 2009 (EBRD, 2009). The
Romanian government negotiated a Stand-By Arrangement with the International
Monetary Fund for EUR 12.3 billion. This was approved in May 2009 and is being drawn
down in tranches (IMF, 2009). As part of the agreed fiscal measures, the government has
instigated a pay freeze for all state employees and is reducing the number of public
employees. It has also sanctioned increases in property taxes and social contributions as
well as spending cuts. The crisis has left its mark on the financial sector, which was heavily
exposed to foreign borrowing. During 2009, most banks stopped expansion plans and the
regulatory framework became more restrictive.
Unemployment declined steadily as Romania advanced along the EU accession path
and reached 4.4% in 2008. Nevertheless, the unemployment rate is expected to rise to 8.9%
in 2009 (IMF, 2009). Youth unemployment remains significantly higher than the EU average
(EIU, 2009).
Romania has been attractive for foreign investors due to its low labour costs and taxes,
its large and growing market and its access to the EU single market. In 2008, inflows of
foreign direct investment (FDI) reached EUR 9.1 billion, or 6.7% of GDP (UNCTAD, 2009). The
main sectors receiving FDI are construction, real estate, manufacturing, financial services
and insurance (FIC, 2009). In 2008, exports of goods accounted for 24.7% of GDP while imports
of goods accounted for 38.1% of GDP. Government data indicate that combined exports of
machinery, equipment and motor vehicles made up 36.2% of total exports in 2008.
307
II. ROMANIA
Investment climate
The Romanian business environment has improved significantly in recent years,
driven in particular by EU accession. In the period 2004-06, several important reforms were
undertaken including a new Labour Code and the adoption of a policy of inflation targeting
managed by the Central Bank. According to the World Bank Doing Business report, Romania
ranks 55 among 183 economies, second among the SEE economies. However Romania fell
10 places from its 2009 rank of 45.
Major progress has been recorded in areas such as the fiscal environment, rule of law,
the fight against corruption and property registration. Harmonisation of the fiscal system
with EU legislation and norms has brought about a modern and predictable tax system.
Moreover, lower corporate and personal tax rates have contributed to improving the fiscal
environment. Strengthening the rule of law has also been a priority. New legislation was
passed in 2006 to improve transparency, and a National Integrity Agency was established
in 2007. Public awareness campaigns to fight corruption in public administration and the
judiciary have been carried out over the past two years (FIC, 2009).
However, many observers point out that the pace of reforms has slowed down
considerably following EU accession on 1 January 2007. A number of policy areas require
additional reforms including:
● Corporate governance: Legislation affecting corporate governance requires further
improvement and enforcement is considered weak (FIC, 2009).
● Enforcing contracts: Enforcing contracts is a time-consuming task in Romania. It takes
512 days and costs 28.9% of the underlying claim. This is significantly higher than in the
OECD area (World Bank, 2009). The slow pace of judicial reform contributes to this constraint.
As an EU member, Romania has a legal framework on FDI that is founded on
transparency and non-discrimination. Restrictions to national treatment are transparent
and kept to a minimum. Romania’s investment regime facilitates transfers of capital and
entry of specialised personnel in support of FDI. Romania has a wide network of bilateral
investment treaties with its neighbours and OECD countries. Romania is the only SEE
economy which is an adherent to the OECD Declaration on International Investment.
Regarding investment promotion, Romania is reviewing the operation of its
investment promotion agency (IPA). Romania could do more to improve the quality of
facilitation services at the pre-and post-entry phase. It should consider implementing a
programme to facilitate greater commercial linkages between foreign investors and local
firms. The Romanian IPA could also consider improving the quality of aftercare services it
offers to foreign investors, such as obtaining business registration, licenses and work
permits.
Although Romania scored relatively well in transparency, private sector
representatives felt that the government initiates consultations in such a manner that the
private sector is not given enough time to comment on new legislation or amendments to
existing laws. Romania could review how far in advance it sends draft investment-related
legislation for comment to the private sector and other interested stakeholders.

II. ROMANIA

Romania receives the highest overall scores in SEE on the indicators of policy settings
affecting human capital dimension. Numerous skills initiatives are underway, spurred and
assisted by the EU. Since 2006, reports on the status of the national education system are
published every year. A Presidential initiative was finalised and a strategy developed for
research and education in the period 2009-2015.
In early 2009 the Ministry of Education, Research and Innovation set up working
groups with social partners. The aim of the working groups is to draft a new set of
educational laws and to identify lines of action for the pre-university educational system,
especially in terms of its decentralisation.
The National Centre for Pre-University Teaching Staff Training has defined a series of
general and specific skills in order to measure the quality of teaching. In the period 2007 to
2008, more than 82 000 teachers benefited from more than 1 500 courses designed to meet
their skills development needs as identified at the local level.
However, despite much positive policy development, shortages of skilled employees
are persistent in Romania. The construction, textiles, restaurant and hotel, banking and
financial sectors are reported to be particularly affected (FIC, 2009). As a result, employers
consider the lack of skilled workers one of the ten major constraints to the development of
their companies (World Bank, 2009). More flexible and efficient internship systems for
students might be developed and more detailed analyses could be undertaken to reveal the
skills required by employers to adjust the educational opportunities and training offered to
meet those needs. Quality issues in education warrant continued attention (the scores
received on the Programme for International Student Assessment 2006 were significantly
below the OECD average score).
While consultative and co-ordination mechanisms have been in place for several
years, there is reported to be room for improvement in terms of the effectiveness of the
process. Business sector participation appears muted. The reasons for this reported
passivity need to be explored.
Access to finance
Romania is among the SEE economies where access to finance for firms is most
developed. A number of successful measures have been taken by the government and
numerous instruments exist to support companies.
Policy reforms have been enacted in all aspects of access to finance. The results of this
assessment suggest that leasing, factoring and venture capital services are well developed
and that guarantee programmes are particularly successful. Leasing and factoring
activities are widespread in Romania and specific regulation has been developed. Leasing
and factoring companies are monitored by the National Bank of Romania. Romania is one
of the few SEE economies where significant venture capital activity is reported. Some 16
funds operate, although no specific regulation has been established. Credit guarantees for
business are provided by four different companies. The customer base and scope of
services offered are large. However, no impact assessment has been performed to evaluate
the effectiveness of the programmes. The export credit guarantee scheme provided by the
Export Import Bank of Romania is well developed. The bank covers a wide range of
marketable and non-marketable risks and stands behind a large share of exports.

II. ROMANIA
Despite its favourable financing environment, a number of reforms could still be

pursued in Romania. In particular, the cadastre, the registration of movable assets and the
framework for microcredit could be further improved. Cadastre registration is systematic
and information collected covers the whole national territory, yet no data on the valuation
of land are collected. Furthermore, Romania seems to be lagging behind some SEE
economies in digitising the cadastre registry. As a consequence, accessing information can
take time and be costly. The system for registering pledges on movable assets seems to be
less developed than in most SEE economies; the system is reportedly still in its infancy and
not yet fully operational. The regulatory framework for microfinance in Romania was
defined through a specific law in 2005. While they are regulated, the government does not
support or supervise microfinance institutions, even though some of them do collect
deposits (a usual criteria necessitating supervision).

In recent years, Romania has made progress in reforming its regulatory environment.
Romania is one of the few SEE economies to apply regulatory impact assessment to draft
legislation. It also operates a well-structured parliamentary website. Romania is also the
only SEE economy to have adopted a law that establishes a framework in which both
institutional dialogue and regular meetings between government officials and private
sector take place during the legislative drafting process.
However, at a meeting with representatives of the key Romanian business associations
and chambers of commerce organised by the OECD in September 2009, it was stated that
the views of the private sector on draft laws are rarely taken into account by the
government. It was also noted that the timeframe given for receipt of comments on
legislative proposals is often significantly shorter than stipulated in the law. Sound
consultation can address many causes of regulatory failure, such as bias towards
concentrated benefits, inadequate information in the public sector, inability to understand
policy risk and lack of accountability.
Tax policy analysis

Romania has a well-developed fiscal monitoring programme. Similar to other SEE
economies, it maintains an aggregate tax revenue forecasting model. Expenditures are
monitored on a monthly basis, and revenues are monitored daily. In addition, Romania
automatically blocks 10% of the spending envelope to keep the fiscal deficit in check.
No marginal effective tax rate or corporate income tax microsimulation models exist.
However, Romania does have a tax wedge model and the Ministry of Finance is interested
in implementing the other two. Along with Bulgaria and the Republic of Moldova, Romania
also produces fairly sophisticated tax expenditure estimates.
With the exception of compliance costs, Romania has yet to implement any of the
items considered under the subdimension taxation of small- and medium-sized
enterprises and multinational enterprises. However, even the compliance cost
assessments were conducted on an ad hoc basis and were limited in scope. As mentioned
earlier, all of the assessments considered under this subdimension are important to
illustrate both the efficiency of the tax system and the scope it gives for tax planning.
While important for all tax systems, these are especially pertinent issues for more
developed and open economies: this includes countries like Romania where globalisation
introduces increasingly complicated tax scenarios.

II. ROMANIA
Infrastructure
Mobile telephony and Internet penetration in Romania are among the most developed
in the region. In addition, getting connected to the fixed-line network takes only three
days.
The Romanian road network is the most extensive in SEE. However, the density of the
network is low, at only 69 km/1 000 km2. Romania has the lowest reported expenditure in
the SEE region on maintenance of the rail network, although the rail network density is the
highest in the region. In terms of air transport, aircraft departures and transported cargo
record the highest levels in the region.
In the electricity subdimension, the industrial electricity tariff is comparable to the
region’s average. However, the time and procedures required to get connected are among
the highest in SEE.
Bibliography
EIU (2009), Romania Country Profile, Economist Intelligence Unit, London.
FIC (2009), The White Book 2009: Maintaining Growth, The Foreign Investors Council, Bucharest, Romania.
IMF (2009), IMF Executive Board Approves [euro] 12.9 Billion Stand-By Arrangement for Romania, Press
Release No. 09/148, 4 May 2009, International Monetary Fund, Washington DC.
World Bank (2009), Enterprise Survey: Country Profile 2009: Romania, World Bank Group, Washington DC.
World Bank (2010), Romania Doing Business Report 2010, World Bank, Washington DC.

© OECD 2010
Serbia
The economy of Serbia has experienced steady growth since 2005. Real GDP grew at an
annual rate of 6.2% between 2005 and 2008. GDP per capita in purchasing power parity was
USD 10 810 in 2008, in line with the average for South-East Europe (SEE) economies.
According to government figures, the rate of inflation decreased from 14.5% in 2005 to
10.3% in 2008.
However, the Serbian economy has been substantially affected by the global economic
crisis. As noted by the most recent European Commission Progress Report, Serbia has been
in recession during the first half of 2009. Industrial production declined by 17.4% in the first
half of 2009. During the first quarter of 2009 exports contracted by 23.8% year-on-year
(European Commission, 2009). An expansionary fiscal policy in 2008 and a substantial
current account deficit left Serbia particularly vulnerable to the crisis.
As part of its efforts to withstand the impact of the global crisis, the Serbian
government negotiated a Stand-By Arrangement with the International Monetary Fund in
January 2009. This was subsequently revised and extended in April 2009 and is now being
drawn down in tranches. As part of its agreement, the government has agreed a series of
fiscal measures including salary cuts in the public sector, a significant downsizing of the
public administration in 2010 and a redirection of budget spending to the development of
infrastructure. The government has also focused on taking measures to support the
domestic business sector.
While the rate of unemployment fell from 18.3% in 2007 to 14.8% in 2008, it recently
rose due to the economic crisis and in April 2009 stood at 16.4% (European Commission,
2008).
Foreign direct investment (FDI) in Serbia represents an increasing share of GDP. FDI
inflows increased by 20.5% annually between 2005 and 2008 and now amount to EUR 2.0
billion (UNCTAD, 2009). Most of the FDI has been linked to privatisation of state-owned
companies (nevertheless, Ernst & Young [2008] found that over 100 greenfield projects in
manufacturing had been announced in 2007 and 2008, the second highest number in the
SEE region). In particular, in February 2008, Serbia completed privatisation of the oil
company NIS Jugopetrol, which was sold to the Russian Federation’s Gazprom for EUR 400
million. Several privatisations initially planned in 2008 (e.g. JAT Airways and JAT Tehnika)
were postponed or cancelled due to poor market conditions. The crisis has slowed the
overall rate of privatisation of state-owned enterprises.
A number of international investors, among them Ikea, Boston-Power, Pharma-Sphere
LLC, Metric Engineering and Teknuvo, have shown increased interest in investing in Serbia.
The investment climate has benefited from free trade agreements with the Central
313
II. SERBIA
European Free Trade Agreement countries, the Russian Federation, Belarus and Turkey, as
well as improving relations with the European Union (EU), including the signing of a
Stabilisation and Association Agreement.
Investment climate
Over the past few years, Serbia has made important reforms to improve the business
environment. The World Bank Doing Business report for 2010 ranked Serbia 88 out of 183
economies in terms of its business environment. Business registration has greatly
improved, thanks to the introduction of a one-stop shop. Owing to new provisions in the
law on personal data protection, access to credit information has also improved.
However, further reforms are needed. The Economist Intelligence Unit considers that
the pace of reforms has stalled since 2007 (EIU, 2009). Serbia is rated by the World Bank as
174 out of 183 economies in the area of construction permits. Procedures are extremely
complicated and require an average of 279 days to complete. Moreover, the cost of
procedures reaches 1 907% of income per capita, far more than in any SEE economy (World
Bank, 2009). In response, a new Law on Urban Planning and Construction was adopted in
early September 2009. The Law is harmonised with EU legislation in this area, creating legal
conditions for simplified construction procedures.
The informal economy is quite extensive in Serbia: more than half of Serbian firms
face competition from unregistered or informal firms (BEEPS, 2009). Other obstacles to
competitiveness reported by private companies in Serbia include access to finance, the
slow restructuring of state-owned companies, subsidies/unfair competition, tax rates and
development of human capital.
The slow pace of reform in the judicial sector is also a cause of concern. While
progress has been made in terms of the legislative framework and creation of appropriate
institutions, issues relating to the independence and efficiency of the judiciary have to be
fully addressed. The level of corruption remains high (European Commission, 2009).
Serbia has a legal framework for FDI which incorporates the principle of national
capital can be made freely and the government has signed numerous bilateral investment
treaties with neighbouring and OECD member countries. Serbia has taken steps to improve
its enforcement of intellectual property rights (IPRs) such as establishing a functioning IPR
office and providing law enforcement authorities with new powers to conduct inspections
of suspected violators of IPRs. Estimated software piracy has declined since 2005 from 80%
to 74% in 2008. Nevertheless, this figure is still high. Serbia’s investment promotion agency
(IPA) is considered a leader in the region in terms of its services to foreign investors.
Serbia has not yet reformed its laws regarding ownership of urban construction land
(i.e. urban construction land is still owned by the state). However, the recently enacted Law
on Urban Planning and Construction will allow for foreign ownership of urban
construction land, which is expected to become fully operational upon the adoption of
specific legislation on land privatisation in 2010. The government should move quickly to
pass a new law on denationalisation to expedite the restitution process. In investment
promotion, the government should carefully consider options for the IPA to be granted

II. SERBIA
some authority to assist with obtaining or approving license and permits for foreign
investors. Currently, the IPA only acts as a facilitator between the investor and central and
local authorities responsible for approving business licenses and permits. Private sector
representatives voiced concern that licenses and permits at the local level can vary across
municipalities. The government should initiate a review of local level permits and license
procedures to find opportunities for harmonisation.
Serbia is developing a law on public-private partnerships. However, the existing
framework is based on separate pieces of legislation concerning concessions. As this is a
new policy field for Serbia, the government should carefully examine international best
practices as it moves forward with a new legal framework and implementation.

Serbia has seen significant policy progress in the area of human capital development
since the IRI in 2006. For instance, Serbia adopted the Strategy for Development of
Vocational Education and Training in 2006. An action plan for implementation of the
strategy was introduced in March 2009 to define the activities to be completed and the tools
for financing and monitoring the strategy.
Serbia scores highly in this assessment for inclusiveness of strategy development on
workforce skills. For instance, the Serbian Ministry of Education invites private sector
representatives to participate in drafting laws. Drafts also go to public hearings.
Representatives from the ministry travel throughout the country to present draft laws to
local governments, scientific institutions, teacher-training centres, parents and other
groups. However, work to prepare the National Qualification Framework was reported to be
progressing slowly, and this was attributed to a lack of co-operation among some key
institutions involved.
The Serbian government adopted the Strategy for Development of Adult Education in
the Republic of Serbia in 2006. In March 2009, the action plan for the implementation of the
strategy was also introduced.
Serbia scores well on the indicator of development of the teaching workforce.
However, the low score on the indicator of teacher recruitment and retention suggests that
further policy attention could be warranted in this area.
Employers interviewed during the assessment missions noted that the education
system tends to provide much theoretical knowledge. A representative of one of the largest
private-sector employers in the country stated a preference for recruiting Serbian students
who have graduated abroad. Indeed, as with other economies in the region, more needs to
be done to align education and training systems with the needs of employers. The chapter
on human capital development reports on an index based on five Programme for
International Student Assessment (PISA) background questions, and which relates to the
degree of school exposure to business. This index has a range from 79, for Germany, with
the strongest links between business and lower secondary education, to the lowest scorers,
Macau and Israel, with a score of 45. The mean score is 59. Serbia’s score is 52. In Serbia,
internships have usually been the result of individual initiative. However the government
has decided to finance a programme of internships for 90 000 young people.
Serbia is also one of the five SEE countries that participated in PISA 2006. The results
of that assessment, which yielded scores significantly below OECD average scores, indicate
the need for ongoing attention to the quality of investments in education.

II. SERBIA

Since 2006 Serbia has made important progress in liberalising its trade regime and
integrating in the multilateral system. A Stabilisation and Association Agreement
including provisions for symmetric liberalisation with the EU was signed in 2008, and
pending its entry into force, Serbia is unilaterally implementing interim trade measures. In
addition, an FTA with Turkey was signed in 2009. Serbia has also made important progress
in World Trade Organization (WTO) negotiations, in particular by adopting legislation on
product and food safety, as well as foreign trade, fully in line with WTO requirements.
Serbia has taken some important steps in tackling technical barriers to trade (TBTs). In
the area of standardisation, important achievements include the establishment of the
Institute of Standardisation as a non-profit organisation in 2007, as well as adoption in
2009 of new laws on standardisation, general product safety, technical requirements for
products and conformity assessment. Some progress has also been noted in the area of
accreditation. At the time of writing, Serbia was preparing changes to legislation on
accreditation as well as amendments to the internal statutes of the Accreditation Board to
bring these into line with new EU requirements on accreditation and market surveillance.
Furthermore, since 2006 Serbia has signed a contract of co-operation with the European
Co-operation for Accreditation and became an associate of the International Laboratory
Accreditation Cooperation. Serbia has also submitted an application to become a signatory
to the Multilateral Agreement of the European Cooperation for Agreement for testing
laboratories, calibration laboratories and inspection bodies.
With regards to the sanitary and phytosanitary (SPS) area, legislation adopted in 2009
streamlines the responsibilities of the various institutions and agencies with competencies
in the area of food safety. Framework laws on food safety, animal welfare, livestock, plant
health, plant protection products and fertilisers were adopted. Legislation also foresees the
establishment of an SPS Enquiry Point, in line with WTO requirements.
Since 2006, Serbia has also taken steps to facilitate trade, notably by adopting a new
law on foreign trade transactions in 2009. The law introduces automatic licensing
requirement in line with WTO rules and makes licensing procedures more transparent.
Although formal public consultation mechanisms are in place, Serbia should broaden
the inclusiveness of the consultation beyond business representatives.
With respect to TBTs, the administrative capacities of both the Institute for
Standardisation and the Accreditation Board could be strengthened. The adoption of
sectoral acquis for industrial products could be sped up.
In the SPS area, additional efforts need to be made in strengthening inter-institutional
co-ordination. Serbia should also speed up the adoption of by-laws and rulebooks
implementing SPS framework legislation.
In order to further improve the public availability and transparency of information on
customs and other trade-related procedures, Serbia should create a single enquiry point
with some information in English.
Access to finance
Serbia is among the SEE economies that register the highest scores on the access to
finance dimension. A number of successful measures have been taken by the government
and numerous instruments exist to support companies.

II. SERBIA
The legal framework and credit guarantee schemes are particularly well developed. A
clear framework for insolvency exists and its compliance with international norms is high.
While the delay for filing for insolvency is often longer than the legal maximum of 40 days,
the possibility for out-of-court agreement between parties should help to speed up the
process. Credit information is widespread in Serbia. The credit bureau of the Association of
Serbian Banks provides credit information on all companies operating in Serbia. Data are
collected from financial institutions and may eventually be collected from telecom and
utilities companies. Online registry for the cadastre is available and approximately 80% of
the national territory is currently covered by the register. A new version of the cadastre is
currently being developed that will include data on the valuation of property. Pledges on
collateral, both movable and fixed, are recorded within a central registry that is accessible
online and free of charge. Serbia also seems to be the only SEE economy where micro-data
on access to finance have been collected by the public authorities to support policy making.
Despite its favourable legal framework, though, a number of instruments could be
further developed. In particular, the results of the Investment Reform Index suggest that
improving aspects of the support programmes for early-stage equity finance and
microcredit could be considered. Currently, no business angel activity is reported in Serbia.
However, in many economies this form of finance is quantitatively important as a source
of equity-based start-up finance. Similarly, although a few venture capital funds operate in
Serbia, none specifically target early-stage companies. Legislation does not appear to
address venture capital funds in detail. Microcredit services in Serbia are assimilated in the
banking sector. Organisations looking to offer microcredit need to be registered as banks
and therefore abide by the same rules of operation. As supervision of banking institutions
is generally costly, this represents a major constraint for small microfinance institutions.
Currently, only large organisations, such as Procredit, have operations in Serbia.

In recent years Serbia has made important progress in implementing regulatory
reform programmes. Serbia is the most advanced SEE country in the application of
regulatory impact assessment (RIA) to draft legislation, which reflects longstanding
implementation of RIA, an institutional framework that is backed at the highest political
level and the overall transparency of the process. Since the 2006 assessment, the RIA
methodology has been fine-tuned and a supportive institutional framework has been
maintained. Serbia has also launched a regulatory and legislative simplification process,
structured around a comprehensive strategy. An inventory of all active laws and
regulations has been established and an analysis of their relevance is currently being
finalised. Momentum in this area needs to be sustained to ensure that the final phase of
the strategy (the elimination of redundant laws and regulations) is completed.
The Serbian government and parliament would benefit from further formalising
dialogue and communication with key stakeholders, through the adoption of a lobby or
transparency law. This would ensure that key stakeholders have the opportunity to lobby
and get directly involved in the decision making process. A lobby or transparency law can
be an effective way to enhance regulatory transparency and ultimately improve the quality
of legislative proposals. The new Law on Parliaments, which is currently being developed,
is expected to restructure and formalise the consultation process during legislative
drafting.

II. SERBIA

on parliamentarians themselves. Serbia has established a functioning parliamentary
website. However, it could deliver more by providing information on the adoption status of
legislative proposals and contact details of parliamentarians.
Tax policy analysis

Serbia is undergoing significant tax policy reforms. It currently maintains separate tax
revenue forecasting models for all main taxes, but plans are underway to consolidate them
into one general model. Revenues and expenditures are regularly monitored and
projections of both are revised on a quarterly basis. Expenditures, however, are not clearly
linked to revenue estimates. No rules are in place either that limit expenditures or increase
taxes when the fiscal deficit drops below a certain point, although there are medium-term
plans to introduce them.
Serbia has not implemented any of the models or assessments considered under the
subdimensions “taxation of small- and medium-sized enterprises and multinational
enterprises” and “taxation, investment and employment”, nor does it have any plans to do
so. As mentioned previously, such models and assessments can provide substantial insight
on the tax system, from its distributional impact to the scope it provides for tax planning,
or even tax evasion. As with Montenegro, a corporate income tax microsimulation model
can strengthen tax expenditure reporting, the accuracy of aggregate tax revenue
forecasting models and the measurement of firms’ effective tax rates. Moreover, it can be
a valuable tool for fulfilling EU tax reporting requirements.
Infrastructure
In Serbia, Internet and telephony penetration, as well as the cost of service for fixed-
line telephony, are close to the SEE average. However, for fixed-line services, Serbia records
the second highest rate of telephone faults per 100 main lines (31.19) and the lowest
number of operators providing fixed-line services (1).
For transport, the percentage of paved roads is below the region’s average, but the
density of motorways, highways, main or national roads within the network is similar to
the SEE average. Reported average annual expenditure on road maintenance is the highest
in the region. The rail network has the lowest number of trains per kilometre of railway in
SEE. In air transport, Serbia stands amongst the three economies in the region with the
highest number of aircraft departures per day and the greatest annual volume of air cargo
transported.
In the electricity subdimension, time and procedures to obtain an electricity
connection are among the highest in the region: it takes 7 procedures and 207 days to
obtain an electricity connection for a business.
Bibliography
BEEPS (2009), Enterprise Surveys – Serbia Country Profile 2009, June 2009, International Finance
Corporation, World Bank, Washington DC.
EBRD (2008), Transition Report 2008: Growth in Transition, European Bank for Reconstruction and
Development.

II. SERBIA
Ernst and Young (2008), SEE Attractiveness Survey – Southeast Europe: A Growing FDI Destination in Europe,
April 2008.
EUI (2009), Country Report for Serbia, October 2009, Economist Intelligence Unit, London.
European Commission (2009), Serbia 2009 Progress Report, Commission of the European Communities.
European Commission (2008), Serbia 2009 Progress Report, Commission of the European Communities.
FIC (2008), White Book 2008, Foreign Investors Council, Belgrade.
Government of Serbia (2009), Communications, 4 November 2009.
National Bank of Serbia (2009), Monetary and Forex Statistics, www.nbs.rs/export/internet/english/80/
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OECD PUBLISHING, 2, rue André-Pascal, 75775 PARIS CEDEX 16
PRINTED IN FRANCE
(25 2010 01 1 P) ISBN 978-92-64-07957-1 – No. 57269 2010
MONITORING POLICIES AND INSTITUTIONS Investment
FOR DIRECT INVESTMENT IN SOUTH-EAST EUROPE
Reform

Improving the climate for investment is a strategic economic priority for South-East Europe. The
global economic crisis has highlighted the importance to the region’s long-term prosperity of
generating higher levels of direct investment. Many of the policy reforms needed to strengthen the
Index 2010
investment climate are also necessary for membership of the European Union, to which countries MONITORING POLICIES AND
in the region generally aspire.
INSTITUTIONS FOR DIRECT INVESTMENT
Using an innovative methodology, the Investment Reform Index 2010 (IRI 2010) monitors
investment-related policy reforms in the economies of South-East Europe and compares these
to best practices in the OECD area. Based on inputs from governments, the private sector,
independent experts and multilateral organisations active in the region, the IRI 2010 assesses
policies and institutional settings in eight fields of policy critical to domestic and foreign investors.
MONITORING POLICIES AND INSTITUTIONS FOR DIRECT INVESTMENT IN SOUTH-EAST EUROPE

These are: investment policy and promotion; human capital development; trade policy and
facilitation; access to finance; regulatory reform and parliamentary processes; infrastructure
for investment; tax policy analysis; and SME policy. For the economies examined, the IRI 2010
provides:
• A
n independent and rigorous assessment of investment-related policy settings and reform against
international good practice.
• Guidance for policy reform and development.
• An evidence base with which to facilitate prioritisation of donor activities supporting investment
and growth.
The full text of this book is available on line via this link:
www.sourceoecd.org/finance/9789264079571
Those with access to all OECD books on line should use this link:
www.sourceoecd.org/9789264079571
SourceOECD is the OECD online library of books, periodicals and statistical databases. For more
information about this award-winning service and free trials ask your librarian, or write to us at
SourceOECD@oecd.org.
With the financial assistance

of the European Union www.oecd.org/publishing
ISBN 978-92-64-07957-1
25 2010 01 1 P -:HSTCQE=U\^Z\V:

Investment Reform Index 2010: - :HSTCQE U/ Z/V

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Investment Reform Index 2010

MONITORING POLICIES AND INSTITUTIONS Investment

Investment Reform Index 2010

MONITORING POLICIES AND INSTITUTIONS FOR DIRECT INVESTMENT IN SOUTH-EAST EUROPE

With the financial assistance

ISBN 978-92-64-07957-1 (print)

Photo credits: Cover © Image by Michael Sullivan/Flickr/Getty Images.

Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda.

Mr. Anthony O’Sullivan

INVESTMENT REFORM INDEX 2010 © OECD 2010 3

4 INVESTMENT REFORM INDEX 2010 © OECD 2010

INVESTMENT REFORM INDEX 2010 © OECD 2010 5

This book has...

Chapter 1. Investment Policy and Promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Chapter 2. Human Capital Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Chapter 3. Trade Policy and Facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Chapter 4. Access to Finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

INVESTMENT REFORM INDEX 2010 © OECD 2010 7

4.3. Overview of access to finance in South-East Europe . . . . . . . . . . . . . . . . . . . . 145

Chapter 5. Regulatory Reform and Parliamentary Processes . . . . . . . . . . . . . . . . . . . . 169

Chapter 6. Tax Policy Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

Chapter 7. Infrastructure for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

Chapter 8. SME Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

8 INVESTMENT REFORM INDEX 2010 © OECD 2010

INVESTMENT REFORM INDEX 2010 © OECD 2010 9

1.8. Transparency subdimension: Average scores . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

10 INVESTMENT REFORM INDEX 2010 © OECD 2010

6.4. Analysing taxation, investment and employment subdimension:

INVESTMENT REFORM INDEX 2010 © OECD 2010 11

ACAA Agreement on Conformity Assessment and Acceptance of Industrial Products

INVESTMENT REFORM INDEX 2010 © OECD 2010 13

FTA Free trade agreement

14 INVESTMENT REFORM INDEX 2010 © OECD 2010

Investment Policy and Promotion

Human capital development

Trade policy and facilitation

16 INVESTMENT REFORM INDEX 2010 © OECD 2010

Regulatory reform and parliamentary processes

Tax policy analysis

INVESTMENT REFORM INDEX 2010 © OECD 2010 17

Infrastructure for investment

SEE economies have considerably improved their legal frameworks on infrastructure.

18 INVESTMENT REFORM INDEX 2010 © OECD 2010

The critical role of direct investment for the SEE region

The global economic crisis in South-East Europe

20 INVESTMENT REFORM INDEX 2010 © OECD 2010

INVESTMENT REFORM INDEX 2010 © OECD 2010 21

Investment Reform Index 2010: The method used

22 INVESTMENT REFORM INDEX 2010 © OECD 2010

Investment Reform Index 2010: The method used (cont.)

INVESTMENT REFORM INDEX 2010 © OECD 2010 23

24 INVESTMENT REFORM INDEX 2010 © OECD 2010

IRI 2010: Summary of Findings

Investment policy and promotion

Human capital development

26 INVESTMENT REFORM INDEX 2010 © OECD 2010

Trade policy and facilitation

INVESTMENT REFORM INDEX 2010 © OECD 2010 27

28 INVESTMENT REFORM INDEX 2010 © OECD 2010

Regulatory reform and parliamentary processes

Tax policy analysis