Page 1

Number 4 June 2011

Published by IBDE

INSIDE THIS ISSUE: Exchange interviews H.E. Dr Muhamet Hamiti H.E. Mr Andrew Page H.E. Mr Fakhraddin Gurbanov Ms Susan Haird CE, UKTI Mr Matjaz Kovacic, Nova KBM

Austria Fosters Opportunities in the Western Balkans Exclusive interview with His Excellency Dr Emil Brix Austrian Ambassador to the UK

I B D E - enhancing global business and diplomatic partnership

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CONTENTS

E x c h a n g e : The Magazine for International Business and Diplomacy

June 2011

Editor’s letter………………………………………...8 South East Europe Tracking potential: ‘Exchange’ Examines Opportunities in South Eastern Europe……………8 Austria Fosters Opportunities in the Western Balkans……..……………………………………….10 Kosovo: An Emerging Business Hub……………16 On the cover His Excellency Dr Emil Brix, Austrian Ambassador to the UK, sets out his country’s strategy in the Western Balkans.

Slovenia: Entrepreneurship to Lead Away from Crisis………………………………………………....25

International Business and Diplomatic Exchange 1 Northumberland Avenue, London, WC2N 5BW T: +44(0)2071931485 E: info@ibde.org www.ibde.org

Sustainable Energy Hotspot: SEE’s Chance to Bounce Back…………………………………….….30

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Privatization Now: Key to Slovenian Recovery..22

Middle East and North Africa No Universal Formula for After-Crisis Era……33 Arab Revolutions: Any Winners Yet?.................33 Middle East Stripped by Plenty: A Remix (or: Remake)……………………………………………..35 His Excellency Dr. Muhamet Hamiti, Ambassador of Kosovo to the UK stresses the opportunities his country offers to foreign companies, through privatisation of several currently state-owned enterprises.

International Standard Serial Number (ISSN) Exchange: ISSN 2045-3175 Editors: Rudi Guraziu Luca J. Uberti Associate Editors: Penelope Bridgers Jacques Couvas

Roadmap to Investor Returns? The Impact of Trade, Development and Foreign Investment in the Israeli-Palestinian Peace Process…………….….36

Articles, comments and letters should be sent to: exchange@ibde.org

Arab Reform: Transplanting Federalism to North Africa and the Middle East………………………...37

Permission to reprint or republish in any form must be sought from the editor: rudi@ibde.org

Spring and Federalism under the Arab Sun…39 Inter-Continent Trade, Business Diplomacy, and Fuzzy Logic ………………………………………..40 Asia A One-stop Gateway to a Better Economic Environment………………………………………..41 His Excellency Mr. Fakhraddin Gurbanov Ambassador of Azerbaijan to the UK discusses Azerbaijan’s economic success and its ambitions to further improve his countries business climate.

PUBLISHER:

Britain UKTI Partners a Nation of Entrepreneurs….....43 Africa More than just another BRIC in the Wall…...…48 Economic Diplomacy Building Bridges or Weaving Webs? The Increasing role of Fuzzy Networks in Economic Diplomacy……………………………………….......51 Society……………………………………………….52

Susan Haird, Acting CEO of UKTI sets out the strategy and the opportunities that Britain offers to do good business through enhanced foreign direct investment.

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Disclaimer: The International Business and Diplomatic Exchange (IBDE) is an independent Organisation and does not express opinions of its own. The opinions expressed in this publication are, therefore, the responsibility of the authors. Copyright is normally owned by IBDE Whilst every care has been taken in the preparation of Exchange, IBDE does not warrant the accuracy or completeness of the information in this publication and it reserves the right to alter specifications without notice. No recommendations are expressed or implied regarding the quality of services provided. The Publisher disclaims all liability for the accuracy of the information contained herein and will not be responsible for any damage or loss that may be sustained directly or indirectly by any individual, company or Organisation as a result of their reliance in whole or in part on any information contained in the publication.

© IBDE 2011

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Rudi Guraziu is Founder and CEO of the International Business and D iplomatic Exchange (IBDE) and Editor of Exchange magazine. Mr Guraziu has worked for a decade in the Balkans. Whilst in Kosovo he was one of the principals in the running of a large pharmaceutical business until the 1999 war. Since the Kosovo war, he has been actively engaged with many members of parliament, business leaders and diplomats in the UK and the Balkans as a consultant on S outheast European Affairs. His particular expertise covers EU Foreign Policy as well as Western Balkans issues. For much of that time he has worked with different parliaments particularly in the relationship between legislative bodies and economic operators. Prior to establishing IBDE, he initiated the establishment of the Centre for Business and Parliamentary Dialogue (CBPD) and serves as its Founding Director. Mr Guraziu holds an MA in International Relations (with distinction) from Middlesex University - UK. CONTRIBUTORS Jacques N. Couvas is Visiting Professor of Management at Ozyegin University, Istanbul and Senior Lecturer of Strategic Management at Bilkent University, Ankara. He has also been a visiting academic at Koç and Sabanci universities, Istanbul. He began his career as a journalist, before serving for 30 years as a CEO, executive officer and board director with Information and Communications Technologies multinational corporations in Europe, the U.S. and Asia. His teaching and research interests are in strategy, leadership, international negotiations, and EU constitutional law. He is a member of the European Corporate Governance Institute. Professor Couvas is also an Associate Editor of Exchange. H.E. Dr Emil Brix, Ambassador of Austria to the United Kingdom. Ambassador Brix is a member of the IBDE Advisory Board H.E. Dr Muhamet Hamiti, Ambassador of Kosovo to the United Kingdom. Ambassador Hamiti is a member of the IBDE Advisory Board H.E. Mr Andrew Page, British Ambassador to Slovenia H.E. Mr Fakhraddin Gurbanov, Ambassador of Azerbaijan to the United Kingdom Susan Haird is the Acting Chief Executive Officer of the UK Trade and Investment Matjaz Kovacic is the President of the Management Board, Nova Kreditna Banka Maribor, Slovenia Peter A.G. van Bergeijk is Professor of International Economics and Macroeconomics at the Institute of Social Studies, Erasmus University The Hague, The Netherlands, author of Economic Diplomacy and the Geography of International Trade and guest editor of a forthcoming special issue of The Hague Journal of Diplomacy on economic diplomacy. Dr Diana Bozhilova is Visiting Research Fellow at King’s College London, Centre for Hellenic Studies. She is an Associate of the College where she was awarded a PhD. Diana Bozhilova was previously the A.C. Laskarides Research Fellows at the London School of Economics and Political Science (LSE), Hellenic Observatory. She is an Associate Research Fellow at the Bulgarian Academy of Sciences. Major areas of research include: Energy corridors, FDI, Industrial policy and EU enlargement policy. Diana Bozhilova has published widely on these themes in refereed academic journals. She is the author of the monograph, ‘Bulgaria’s Quest for EU Membership’. Contact: diana.bozhilova@kcl.ac.uk Dr Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge. He lectures at RMIT University, Melbourne. Email: bkampmark@gmail.com Alice Campbell-Cree prior to joining IBDE worked as a Research Assistant and Political Specialist for a N ew Zealand based Research Company. She holds a Bachelor of Arts and a Masters in European Union and International Relations from Australia’s Monash University, her thesis being "the EU’s normative involvement in the Israeli-Palestinian peace process" – for which she received the highest distinction. During the course of her Masters degree Alice was invited to join the prestigious Golden Key Society; received the European Union Award of Excellence; the Dean’s Recognition Award; and became an inaugural recipient of the European and European Union Masters Degree Scholarship. Alice’s particular research interests are in the role of diplomacy and international business (including trade and investment) in conflict resolution. Nasos Mihalakas is an Assistant Professor of International Trade Law, University of New York, Tirana. He has over ten years of experience with the U.S. government as a trade policy analyst, with extensive experience in Transatlantic and U.S.-China trade relations. He has worked for both a Congressional Commission, advising Congress on the impact of trade with China and for the U.S. Department of Commerce, investigating unfair trade practices. He is a contributor to the Foreign Policy Association Blogs Network on China and global trade issues. He holds a LLM in Law and Development, University College London, UK, a JD in International Law, University of Pittsburgh School of Law, USA and a B.A. in Economics and Finance, University of Illinois, Urbana, USA. Email: nasos.mihalakas@gmail.com John Battersby is a U K Country Manager of the International Marketing Council of South Africa (IMC), a pub lic-private partnership mandated to position South Africa as one of the highly considered, non-traditional markets in terms of world trade, investment and tourism. Battersby has had a distinguished career in South African and international journalism. He spent ten years with leading American newspapers including the New York Times and the Christian Science Monitor and five years as editor of The Sunday Independent in Johannesburg (1996-2001). He is the co-author of Nelson Mandela: A Life in Photographs (Sterling, 2010). Yingni Lu is the director of London-based EcoLeap Consulting and also a senior consultant at Forbury Environmental, helping Chinese companies understand market opportunities in the UK and in Africa, especially in cleantech and renewable energy. 7 / International Business and Diplomatic Exchange – I B D E

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Who receives it? Exchange is sent to thousands of embassies worldwide including the London Diplomatic Corps as well as multinational businesses, investment agencies and universities/institutes. Readership profile Ambassadors worldwide, ambassadors and other diplomats posted to London, members of the WTOs, staff from investment agencies and chambers of commerce, politicians, business executives, international business managers, academic researchers worldwide What is in it? Exchange issues include topics covering the relationship between international business and diplomacy, International trade agreements their impact and implementation, analysis of various international financial/ economic institutions and other international organisations as well as research articles which contribute towards the understanding of the role of international business in areas such as conflict, crisis management, regional security and regional economic cooperation. In addition to our research and analysis papers we interview regularly senior diplomats and corporate executives to share their experiences and insights on business and diplomacy. Exchange also includes country reports ensuring that investment needs and opportunities in various regions are rigorously examined and promoted to the wider international business and diplomatic community. When is it published? Exchange is published four times a year, in March, June, September and December. Cost-effective As a not-for-profit organisation IBDE is able to offer our advertisers and sponsors extensive access to the International business and diplomatic market for very competitive rates.

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E x c h a n g e : The Magazine for International Business and Diplomacy

Welcome to the June 2011 Issue of EXCHANGE

Tracking potential: ‘Exchange’ Examines Opportunities in South Eastern Europe

T

Firstly, I want to thank all contributors to EXCHANGE. I am most grateful to my colleagues Luca, Jacques and Penelope for their invaluable input. The Western Balkans region clearly faces many challenges in its path towards European integration, not least its need for stronger economic development and energy security. I am pleased to report that the IBDE’s ‘EU-Balkans Discussion Group’ project - designed to support and promote regional cooperation and the socioeconomic development of the Western Balkans with the support of EU and Balkans Embassies in the UK - is providing a substantial support to the countries of the region. The project focuses on regional cooperation, providing a regional approach for trade and/or investment, in order to maximize its common regional appeal to the wider multinational business community. Exchange supports the project by dedicating a permanent section on South Eastern Europe. In this context, the first section of Exchange has been designed to reflect some of the business/ policy issues raised by public investment projects and PPPs currently under way in the region. The second section of the June issue is devoted, broadly speaking, to the interrelation of business, diplomacy and conflict. The choice of the topic appeared to us necessary in view of the on-going unrest in the Middle East/Africa and its far-reaching implications for investors in the region. International experts provide an analysis on the impact that the unrest in the “Arab Spring” countries and in particular the conflict in Libya could have on trade and foreign direct investment as well as exploring possible governance solution for these countries. Exchange values original and independent thinking; although it does not always concur with certain views. The reconstruction of the Arab world is too important an issue, for the people directly concerned, as well as for the Mediterranean, Europe and the U.S., to be rushed without fathoming the consequences of the measures proposed by the international community. Transposition of Western democratic models has worked with variable results across the world since the end of WWII. Exchange would, therefore, like to stimulate debate around this subject, in the hope that it can contribute to better understanding of the Region and the needs of its citizens, and to canvassing a pragmatic and viable solution for regime change. In other articles for Exchange, international experts cover many issues of interest to diplomats and businesspeople. Finally, we would like to hear from you, on article suggestions, submissions, comments and the national/international issues you would like us to cover. Please contact us on: exchange@ibde.org Rudi Guraziu, MA IBDE CEO, Exchange Editor

Leaders

June 2011

he first section of this issue of EXCHANGE is dedicated to the evolution of business, trade and economy in the Western Balkans and South Eastern Europe (SEE). Quite timely, as Croatia is getting closer to membership to the European Union, strongly supported by most EU Member States, particularly Austria, and the Vatican. Serbia now also sees its hopes to follow the same path as more realistic, after the extradition this month of ex Bosnian Serb Gen. Ratko Mladic to the International Criminal Tribunal for former Yugoslavia (ICTY). Opening the discussion is H.E. Dr. Emil Brix, Austrian Ambassador to the United Kingdom, who, in an exclusive interview to EXCHANGE, emphasises the role of the Austrian Development Agency in promoting business partnerships in SEE through matching funds for new ventures, and in providing local aid for education, environmental protection and good governance. Ambassador Brix also explains how the resilience of the banking system of his country, in the face of the recent crisis, has enabled Austrian banks to become key financial players in the Balkans and to significantly contribute to the region’s economic and political integration to the EU, a prerequisite, in his opinion, for completing the unification of Europe. We wholeheartedly agree with Ambassador Brix. The mission of our magazine has since its inception been to provide a vehicle for business and diplomacy to work in harmony in order to stimulate cooperation that leads to peace, sustainable development and prosperity in difficult neighbourhoods of the globe. SEE, including the Balkans and Turkey, is a case in point, as this historically troubled part of Europe has finally found stability, thanks to the determination of the EU institutions to foster democracy and economic inclusion of the emerging states. In our interview with H.E. Dr. Muhamet Hamiti, Ambassador of Kosovo to the UK, the Ambassador stresses the opportunities his country offers to foreign companies, through privatisation of several currently state-owned enterprises, and with new regulations aimed at propulsing by 2014 the young state to the top quartile of the World Bank’s list of countries easy to do business with. Having recently given a 20-year concession to a Franco-Turkish consortium to develop the airport of the capital Pristina, the government is planning to proceed with privatisations in the high-growth postal, telecommunications and energy sectors. With a stable political environment and corporate and personal income tax rates topping at 10 percent only, Kosovo is certain to be noticed by foreign investors as land of rare bargains left in Europe.

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H.E. Mr. Andrew Page, Her Majesty’s Ambassador to Ljubljana, analyses the reluctance of the Slovenian government to transfer public enterprises to the private sector and pleads for greater involvement of foreign investors, British in particular, in shaping the transportation, logistics and telecommunications industries and to improve corporate governance. “In these times of weaker economic growth, FDI is a vital ingredient in increasing Slovenia’s competitiveness within the Eurozone”, he claims. Mr. Matjaz Kovacic, President of the Management Board, Nova Kreditna Banka Maribor, Slovenia (NKBM), seems to concur with the British Ambassador’s views. The involvement of the state during the recent economic crisis has provided safety to the banking sector, but the country’s future will depend on private diversification across industries. Construction, which has fuelled strong growth since Slovenia’s independence in 1991, has reached its point of saturation, as domestic demand has declined. With foreign markets now recovering, Slovenian SMEs are increasingly looking into SEE and CEE opportunities. In spite of the crisis, many small and medium-size companies have remained competitive and developed expertise in dealing with the region. NKB, one of the two major banks of Slovenia, has taken the initiative to establish its own Entrepreneurial Centre, which advises entrepreneurs on obtaining EU funds and evaluates and finances start-up projects applying innovative business models. New ventures are particularly geared towards international cooperation, as they focus on IT, biomedicine and renewable energies -- sectors attractive to FDI. Dr. Diana Bozhilova, Visiting Research Fellow at King’s College London, goes deeper into the analysis of the needs of SEE states in terms of energy, and of their satisfactory fulfilment as a prerequisite for them to rebound after the economic crisis. Diversification of sources seems, however, indispensible, as most of the region heavily relies on Russian gas exports for its economic development. Nabucco, a regional initiative encouraged by the Commission, to create alternative distribution routes, will most likely provide the answer. Shared infrastructure and cross-border collaboration, stemming from common concerns about energy security, has certainly promoted better relations among neighbours. However, argues Dr. Bozhilova, such models are decreasingly attractive for sustainable development, and SEE’s future would be more secure if it became a hotspot for renewable energy. Geography and natural resources seem to concur with such approach. Political will, discipline and effectiveness in implementation are skills that still need s harpening among SEE’s constituents. www.ibde.org


the balkans poised for investment in the energy sector

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E x c h a n g e : The Magazine for International Business and Diplomacy

Interview

June 2011

Austria Fosters Opportunities in the Western Balkans Exclusive interview with His Excellency Dr Emil Brix Austrian Ambassador to the United Kingdom

Exchange: Your Excellency, Austria - though not one of the largest countries in the EU - is widely seen as a success story in terms of its engagement with South Eastern European countries. Indeed, Austria remains amongst the top five investors in the region. Which sectors and business opportunities are the most attractive for Austrian companies at the moment? Would you regard the privatization and unbundling of formerly state-owned public-infrastructure companies as a p otential driver of growth in Austrian FDI?

Ambassador Brix: Austrian enterprises were very eager to engage in new markets in South Easter Europe (SEE) from the beginning. Due to our close historic, cultural and political ties to most countries of the region, this can be seen as part of a very natural development. This early engagement of Austrian enterprises was of course accompanied and prepared by an active engagement of the political leadership of Austria. After the fall of the Iron Curtain the countries of SEE became one of the main priorities of Austrian foreign policy. And one

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of the principal objectives was – and still is -to assist these countries with their efforts in overcoming the old structures and preparing themselves for the integration in the European institutional framework. Sound economic development is of course an essential part in getting ready for accession to the European Union. Austrian companies, with their engagement and investment, play a crucial role in modernising local economies and contributing to their overall development. Austrian enterprises are engaged in almost all economic sectors in the region. It is a wellknown fact that Austrian banks are now major investors in the region with a substantial network of branches. During the financial crisis Austrian banks reiterated their long term interest in the region and did not reduce their level of activities. For the coming years I see the highest potential and interest in the field of infrastructure modernization and in developing a strong SME-structure. Privatization of state-owned entities offers of course lots of opportunities for all investors, not only for Austrian. Successful privatization of state enterprises and infrastructure must be managed in a transparent and open way as this process can politically be very sensitive. Successfully managed privatization offers some substantial benefits like transfer of know-how, improving the quality of services, creation of job and business opportunities, further integration in the European and global markets etc. Austrian enterprises are here actively engaged and have a lot to offer in sectors like telecommunication, renewable energy and transport infrastructure. But foreign investors still face from time to time difficulties in their engagement. There are still opportunities to improve the investment climate in some countries: reform of the bureaucracy, strengthening the fight against corruption and securing the role of an independent judicial system. But in general it has to be acknowledged that all countries of the region have made tremendous efforts and progress over the last decade and improved the investment climate enormously. Austrian enterprises come to the conclusion that the growth potential of the region after the financial crisis remains intact. The latest figures on the trade relations between Austria and the region seem to confirm this assessment: Austrian exports to the region and imports from the region conwww.ibde.org


Interview

Exchange: June 2011

tinue to grow and Austria remains one of the top investors in all the countries of the region. Exchange: Strengthening private-equity investment is a key pillar in the development strategy endorsed by the Austrian Development Agency (ADA). What incentives does ADA offer to the wider international business community to stimulate FDI and to further boost private-sector development in the region? Ambassador Brix: The Austrian Development Agency (ADA) is very keen in promoting business opportunities and private-equity investment in the region, especially through the so called business partnership. The region is one of priority geographic areas for the Austrian development cooperation with the aim to support the rapprochement of the countries of the region towards the European Union. Due to the fact that Austria is one of the main trading partners of the region, ADA tries to increase the effectiveness of its development aid by building close cooperation with the business community. The main priority areas of the Austrian development aid in SEE are education, economic development, environmental protection (e.g. water, renewable energy) and good governance (especially in the context of EU accession). As these countries move closer to the European Union, ADA is also shifting its focus. An increasing number of projects will not be covered by bilateral framework agre-

Austrian National Tourist Office / Popp Hackner Photo: Vienna / Skyscrapers in Kagran / Neue Donau

government has successfully responded to the global financial and economic crisis and how is banking reform in Austria going to strengthen the credit system in the Balkans? Ambassador Brix: Although the countries of the region are facing huge challenges in the short and medium term, they still represent an important growth market for banks active in the region. Austrian banks view the region as a highly prospective one where they pursue a

Austrian companies, with their engagement and investment [in SEE], play a crucial role in modernising local economies and contributing to their overall development. ements but by instruments like regional strategies, business partnerships, EU-Twinning, IPA (EU Instrument for Pre-Accession). Today Kosovo is the bilateral priority of the Austrian development cooperation in the region. In order to stimulate FDI our Development Agency promotes business partnerships, the implementation of projects and feasibility studies for projects. If enterprises do ha ve some ideas or proposals, e.g. to qualify local staff, suppliers or sale partners; improve cooperation with local governments and public institutions; strengthen quality of the local manufactured products or if they want to contribute to Fair Trade etc, then these activities can be promoted as part of a business partnership with a nonrepayable grant. The funding amounts to up to 50 percent of direct project costs (not exceeding 200.000 EUR). Such business partnerships are limited to three years. Exchange: Austrian banks (notably, Raiffeisen Bank) are key players in the region’s banking sector. In what ways would you say that your

strategy of long-term commitment. The global financial crisis induced a severe economic downturn in the countries of the region. Today all main forecasting institutions expect sound growth figures for the coming years. At the end of September 2010 the consolidated claims of Austrian banks on C ESEE countries (Central Europe and South Eastern Europe) amounted to some 209.2 billion EUR, of which around 72 percent were accounted for by EU Member States. In line with the principle of risk diversification, these claims are, however, well diversified across the region. Throughout the financial crisis, Austrian banks continued to support their subsidiaries in the region, thus making an important contribution (“Vienna Initiative”) to the stabilization of the entire region. Given their limited access to money markets, the subsidiaries grew clearly more dependent on t heir parent banks, which provided them with sufficient liquidity. At the same time, the Austrian subsidiaries managed to raise their deposit ratios, thus improving their funding. Overall, Austrian banks’ liquid-

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ity situation is sound. Yet in light of the new Base III capital requirements and their CESEE exposure, this issue will continue to be a challenge for Austrian banks in the future. The bank support package adopted by the Austrian government in the face of the financial crisis has helped raise not only banks’ capital adequacy but also confidence in the Austrian banking market, pushing down refinancing costs. The stress test of the Austrian banking sector, conducted by the Austrian central bank, once more attested to the overall crisis resilience of the Austrian banking system. Exchange: Can you discuss the highlights of the Austrian Government’s trade policies and its implications for the international business community? Ambassador Brix: Austria has a strong a vibrant economy and the exceptionally strong export sector is essential for the overall performance of the Austrian economy. The international economic conditions changed significantly with the financial crisis. Changes include a decreased availability of private finance, an increasing importance of international development banks and a reduced dynamics in important partner countries. New forms of financing and partnerships between the public and private sector will have to address these challenges. The Austrian development bank, which became operational in 2008, plays also a role in assisting companies which would like to enter high-risk markets. One consequence of the above mentioned facts will be that the contribution of foreign trade to the Austrian economic growth will probably be smaller in the past – or at least it will become more difficult to achieve. The overall objecttives of the Austrian trade policies remain unchanged: we support open markets and want to promote sustainable global growth. These principles contribute to our national interest to further increase the internationalization of the Austrian economy. Austria benefited enormously from the European integration and www.ibde.org


Interview

especially from the integration of our neighbours in Central Europe. The share of exports of Austria’s economy has risen substantially since we joined the European Union – from about 24 percent in 1995 to presently 35.8 percent (41.5 percent in 2008). In 2010, Austrian exports increased by 16.5 percent to 109.2 billion EUR. Austrian exports will soon reach their pre-crisis level, if the dynamics can be sustained – and all the indicators look very promising. This is due t o the fact that Austrian enter-

Exchange: June 2011

Ambassador Brix: Austria, together with Romania, was one of the major driving forces of the “European Union Strategy on the Danube Region”. This strategy will probably be adopted this June and it is supported by all 27 EU member states although only eight member states are directly affected. Croatia, Serbia, Bosnia and Herzegovina, Montenegro, Ukraine and Moldova are the participant non-EU countries. This shows quite clearly, that the importance of the whole region is recognized by all EU member states. The EU Danube

The integration of the countries of the Western Balkans is of fundamental importance for the European project. prises are increasingly engaged on European as well as global markets. We have identified several issues where challenges will be met. Let me address some of them: Austria should maintain and further strengthen its position as an economic hub for Central and South Eastern Europe. Austria has the best qualifications to host regional HQs or centres of competence of multinational enterprises. Here, Austria has to facilitate this process by assisting companies and by providing the required state-of-the-art infrastructure, investing in its education system and universities and attracting highly qualified workers. Another important topic is the knowhow of Austrian enterprises in high growth and knowledge based sectors of the economy, like Life Sciences, renewable energy, energy efficiency, nanotechnology etc. Small and medium sized enterprises (SMEs) are a pillar of the Austrian economy. Therefore, Austria tries to assist this vital community in expanding internationally and increasing their exports. SMEs can rely on a range of instruments, a vast network of support, information and p ersonal contacts to establish and/or strengthen their international business. A closer cooperation between the Austrian development cooperation and the business community is not only an important part of strengthening the private sector in our partner countries but also an important tool of assisting economic development. Exchange: Let us discuss for a moment the issue of regional cooperation. The strengthening of political and economic cooperation at the regional level remains essential for stability and development in the Balkans. Your government has placed the Western Balkans at the top of its agenda and has consistently shown its strong support for the integration of the Western Balkans countries into the EU. What strategies within the Austrian Government’s foreign policy do you think might make a productive contribution to regional political cooperation and European integration?

strategy involves in a unique way – and for the first time – EU member states, candidate and possible candidate countries. The strategy will focus on concrete priority action areas, such as the improvement of navigability, water quality, security cooperation and the opportunities for tourism. The strategy includes a detailed action plan based on four pillars: connecting the Danube Region (improving mobility, encouraging sustainable energy); protecting the environment (restoring water quality, preserving biodiversity); building prosperity (supporting competitiveness of enterprises and investing in people’s skills); strengthening of the Danube Region (institutional capacity, tackling organised crime). The strategy forms together with the bilateral support for countries of the region the central part of Austria’s engagement in the region. Austria will be responsible for three priority areas of the strategy: inland waterways (together with Romania), investment in people and skills (together with Moldova) and institutional capacity and cooperation (together with Slovenia). We are convinced that the EU Strategy for the Danube region can make an important contribution to the further integration of the internal market and to economic, social and territorial cohesion. Further, the strategy will contribute in fostering cooperation with third countries in the Danube river basin as well as assisting candidate and potential candidate countries on their way of European integration. Austria will make sure that vital parts of the strategy are implemented as quickly as possible. Exchange: IBDE has been working for about a year with the EU-Balkans Ambassadors in London, facilitating their regular engagement with the international business community based in the UK. You have been championing the IBDE’s EU-Balkans Discussion Group project since the very beginning. How important is this engagement between business and

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diplomacy for the Western Balkans economic/ political integration in the EU market? Ambassador Brix: The integration of the countries of the Western Balkans is of fundamental importance for the European project. The unification of Europe wouldn’t be complete without the integration of these countries into the economic and political structures of the EU. The region made tremendous progress over the last 15 years, implementing a vast variety of reforms and overcoming the legacy of war. But many challenges still remain and even more support from the international community is required. This includes not only political support from other European countries or from the European institutions, but also support from the business community. Economic development and economic progress are essential prerequisites of a sustainable future. Activities and organisations like IBDE are therefore an important part of this process as they are helping to bring together representatives from the business and diplomatic community in London with the representatives from the region. It is important to continue such activities in order to attract ongoing interest for the region from decision makers. This would help giving potential investors a clear and realistic picture of possible business opportunities and challenges in the region. And sustained foreign investments are necessary for further integration of the local economies of the Western Balkans into the European economic and political framework. Exchange: Finally, Your Excellency, as a former Director-General for Foreign Cultural Policies and current Ambassador to the UK, you are best placed to discuss briefly the issue of cultural diplomacy. Austria, through its cultural heritage (Vienna for instance is often rightly called “open-air museum”), has successfully used this important asset to promote its identity. Do you think that cultural diplomacy is as important for business as commercial diplomacy is? What would be your advice? Ambassador Brix: The Austrian experience is very clear: our companies profited during their early engagement in the new markets of Central and South Eastern Europe from the fact that all of these countries are our “cultural neighbours” where attitudes and value are at least potentially very similar and where it was thus easier for Austrian companies to become accepted and trusted partners in times of transition than for other foreign investors. For a country like Austria which bases its national identity strongly on cultural heritage and cultural assets, cultural diplomacy is one of the most effective instruments to create and strengthen trust between peoples and nations. In a globalised commercial world a better understanding of cultural differences and of the role of mentalities and value preferences is a precondition for being competitive. Especially for a highly export oriented economy an active cultural diplomacy becomes a n ecessary prerequisite to successfully realize the commercial potential which is summarized in the advice “think global, act local” www.ibde.org


Country Report

Exchange: June 2011

Photo:© Austrian National Tourist Office/ Popp Hackner

Moerbisch Operetta Festival

AUSTRIA

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Interview

Exchange: June 2011

Kosovo: An Emerging Business Hub Exchange talks to His Excellency Dr Muhamet Hamiti, Ambassador of Kosovo to the United Kingdom

Exchange: Your Excellency, today's Kosovo is a different country than it was 12 years ago in almost every respect. Since its declaration of independence in February 2008 Kosovo has been recognised by 75 countries and it has joined the World Bank and the IMF, displaying an average growth rate of 4 percent. Yet, despite quantifiable progress in terms of international recognition and private sector devel-

opment, Kosovo’s reputation still remains tainted with images of war. What do you see as the priority focus in the Embassy’s drive to enhance Kosovo’s image within the wider international business community? What efforts have been made by the Government to create a positive FDI environment and by the Embassy to market investments opportunities in Kosovo to British businesses?

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Ambassador Hamiti: Kosovo has made remarkable progress since 1999, a watershed in the modern history of our nation. We have had to undergo a range of critical transformations. We have emerged from outright Serbian occupation and war to freedom; then from freedom to independent nationhood, widely but still not universally recognized. We have embarked upon a far-reaching transformation from a Communist to a free market economy in very exacting circumstances. The occupation, the period of disinvestment in the late 20th century, the devastation of the war which left a moribund economy in ruins, as well as the UN administration from 1999 to 2008 were not conducive to fully-fledged economic development for Kosovo. The clarity, rather the finality, of status which the independence of Kosovo has brought about has generated the peace of mind that freedom and settlement bring to every soul. Indeed, freedom and independence are key ingredients of development. Kosovo has been engaged in a nationbuilding process that has entailed a profound process of transformation, of structural reforms in the system, and indeed the very fabric of society. The post-war reconstruction of Kosovo – wherein we have enjoyed the generous support of friends from all over the world, first and foremost the EU and the US – has gone hand in hand with the emergence of a representative democracy and the execution of an unprecedented economic transition. The Republic of Kosovo is engaged fully in a bid to boost its economic development. The potential is there – a country rich in human and natural resources, with a Government and Parliament working in a synergy to put Kosovo on a path to sustainable growth, wherein the economy at the end of the day is driven by private investment, foreign and domestic, rather than public investment. Kosovo has a young, entrepreneurial population, a well-educated workforce that is ready to confront the challenges of standing on its feet economically. The perceptions of foreign investors are often influenced by the strife of our country, and indeed the entire region. The money shies away from crises situations, real or perceived. Kosovo is at present a better place to live, to work and invest in than the reputation it enjoys. Kosovo is no exc eption certainly to the ailwww.ibde.org


E x c h a n g e : The Magazine for International Business and Diplomacy

ments (corruption, red tape) inherited and confronted by most of the countries that have emerged from a Communist past. But we have made progress, and made it fast. The Government of Kosovo, including our diplomatic representations abroad, is working hard to keep the international business community abreast of development opportunities in Kosovo, which is a reliable destination for foreign investment. We are in a process of redressing the situation, and promoting an investment climate that is friendly and conducive to foreign investment, including through public-private partnerships. The Government will embark upon a radical reform bid in the weeks and months to come. We plan to cut 50 percent of current licences and permissions needed to start a business. We seek to see Kosovo enter the top 40 in the “Doing Business” World Bank report by 2014, and aim at achieving the “Top Reformer Status” in 2012-13. Last but not least, the Government of Kosovo is streamlining its action and coordination in the area of Investment Promotion activities, which would include relevant institutions of Government and the business community, as well as our outposts, including the embassies of Kosovo. The new global trend is commercial diplomacy, isn’t it, amongst the economic powers, the emerging powers, but also developing countries? The Embassy of Kosovo organized a UK Investment Promotion event in London in late 2009, a very successful event, barely a year after the Embassy was set up in the UK. The

Kosovo Ambassador H.E. Dr Muhamet Hamiti, Mrs Vjosa Hamiti and Mr Lulzim Mjeku greeting guests at a reception celebrating the third Anniversary of Kosovo’s Independence, London

Photo by Sadri Hadergjonaj

Ambassador Hamiti: It is both Serbia and Bosnia and Herzegovina -- the only former Yugoslav nations that have not yet recognized the Republic of Kosovo -- that do not recognize the customs stamps of Kosovo, effectively blocking our exports to these two countries and transiting via them to other countries in Europe. This has been the case since February 2008, when we declared our independence. Serbia has been in the business of challenging the very existence of Kosovo’s independence, especially our participation in regional and international organizations, such as CEFTA, despite their protestations to the contrary. In a bid to find a way out of this impasse, the issue of Kosovo’s participation and chairmanship of CEFTA, in conjunction with the issue of the

“We have embarked upon a far-reaching transformation from a Communist to a free market economy in very exacting circumstances” Embassy is promoting Kosovo as a normal country wherein investment opportunities are ripe, despite and sometimes because of its recent tragic history of strife and destruction the 1998-99 war left behind. Exchange: Since January 2011, Kosovo has been chairing the Central European Free Trade Agreement (CEFTA). The main objectives of this comprehensive Agreement are to expand trade in goods and services, foster investment and eliminate barriers to trade between the parties. Yet, Kosovar products bearing the seal of the Republic of Kosovo are prevented from reaching their destinations when exported via Serbia. How effective can CEFTA be as a forum to negotiate equitable solutions to this impasse? What are the priority issues that Kosovo will pursue during its 2011 year-long chairmanship?

Interview

June 2011

recognition of our customs stamps, has been included in the agenda of the dialogue on practical issue between Kosovo and Serbia. This EU-facilitated process has not borne any tangible results amidst the continued intransigence of the Serbian Government in Belgrade. Tadic’s Serbia continues to be in denial of the reality of Kosovo as an independent nation that has been recognized by as many as 22 out of the 27 EU countries, and 7 out of the G-8 countries. Non-recognition of our customs stamps, and indeed Serbia’s obstructionism vis-à-vis Kosovo’s participation in the international organizations is a result of the continued state of denial the Serbian establishment continues to be in as far as Kosovo is concerned. The Government of Kosovo has been engaged in good faith in the dialogue with the Government of Serbia in a bid to resolve outstanding practical issues, such as the free

IBDE – enhancing global business and diplomatic partnership

movement of people and goods, cadastral and civil records seized illegally by Serbia 12 years ago as it withdrew its occupation forces from Kosovo, energy, as well as other issues in a bid to improve the lives of ordinary people on both sides of the border. We still hope Serbia will reciprocate our readiness and good will to engage with our neighbour and cease acting in denial of the reality of war in the past and peace in the present. The CEFTA agreement which creates a free market of some 50 million people may be endangered by Serbia, one of the members, acting in violation of the interests of another member, Kosovo. Should there be no solution to the row over the customs stamps and CEFTA, the Government of the Republic of Kosovo will have no other option left open but to a measure of last resort that it has shied away from using for three years now: reciprocating against Serbia’s and Bosnia’s blockage of Kosovo exports to and via the two countries. The decision not to recognize Kosovo’s stamps is a direct breach of the free-trade CEFTA agreement. Kosovo counts on t he EU, including the 5 out 27 countries that do not yet recognize Kosovo, to play a role in convincing aspirant country Serbia to end t he measures that are in breach of the EU aspirations of the countries in our part of the world. If not, “It is a matter of weeks before the decision for the imposition of reciprocal measures against states that haven’t recognized the Republic of Kosovo’s customs stamps. This is a decision which serves our national interest,” the Deputy Prime Minister of Kosovo, Mrs. Mimoza Kusari-Lila, said in May. The “Stone Castle” vinery from Rahovec is one of the Kosovar companies that has suffered huge losses from the non-implementation of CEFTA agreement, and the end of trade preferences by the EU. A “Stone Castle” vinery official said the company had produced up to 12 million litres of wine and used to export up to 3 million litres in Serbia and Bosnia alone. As a result, the company has lost buyers not only in Serbia and Bosnia, but also elsewhere in Europe. Exchange: The energy sector, essential for Kosovo’s economic development, is in need of www.ibde.org / 17


FREE ACCESS TO A 520 MILLION CONSUMER MARKET A GOOD STRATEGIC LOCATION LOWEST COST COUNTRY WITHIN EURO CURRENCY ZONE YOUNGEST POPULATION IN EUROPE A READILY AVAILABLE AND MOTIVATED WORKFORCE VERY LOW TAXES A GOVERNMENT HIGHLY SUPPORTIVE OF INVESTMENT GOOD INVESTMENT OPPORTUNITIES MODERN EU-COMPATIBLE LEGISLATIVE FRAMEWORK SOUND BANKING SYSTEM

Budapest

747 km

355 km

For further information please contact: Investment Promotion Agency of Kosovo Rr. Muharrem Fejza, Lagja e Spitalit 10 000 Prishtina, Republic of Kosovo Tel: +381 38 200 36 542 Web: www.invest-ks.org Email: info@invest-ks.org

390 km

Peja

279 km

Kosovo Ferizaj

Gjakova Prizren

86 km

355 km

330 km


Interview

major upgrades requiring the contribution of foreign capital. In particular, diversifying the fuel mix away from carbon-intensive energy sources was recognized as of strategic importance in a 2008 report by the International Energy Agency. Currently, lignite contributes 97 percent of the total electricity mix, with just 3 percent being based on hydropower. At 14,700 Mt, Kosovo possesses the world’s fifthlargest proven re-serves of lignite. What is the current stage of implementation of the plans for the “New Kosovo” power plant, and for the upscale of mining activities? What are the prospects of investment in electricity sources other than coal? Ambassador Hamiti: As you rightly point out, Kosovo is at present heavily dependent on lignite for electricity production. Our deposits are the third largest in Europe, enormous for a small country like ours. Mindful of the needs for an energy mix, as well as the environment (the Co2 emissions), we intend to seek the most environmentallyfriendly modes of production whilst utilizing our main asset. The planned “Kosova e Re” (New Kosovo) lignite coal-fired power plant with a capacity of

Exchange: June 2011

power generation. The Kosovo Energy Regulatory Office (ERO) has developed the Authorization Procedure for construction of new power generation capacities, including small hydro-power plants. In addition, feed-in tariffs for different renewable energy generation capacities have been put in place. Based on initial explorations, Kosovo lends itself to the possibility of producing more than 150MW of electricity by hydro power plants alone. This would not be a small feat, as Kosovo does not abound in water resources. The Authorization Procedure for construction of these plants, handled by the Kosovo Energy Regulatory Office (ERO), is very simple indeed There are certainly opportunities for investment in the generation of electricity by wind (wind farms) in Kosovo. Several companies are already working in the area. As a result of the profound transformation of the energy system in Kosovo, our country intends to privatize the electricity distribution network, currently in public ownership of Kosovo. The transmission system is managed by the Kosovo Transmission System and Market Operator (KOSTT JSC), which is a publicly owned company responsible for operating, planning,

“Kosovo has a young, entrepreneurial population, a well-educated workforce that is ready to confront the challenges of standing on its feet economically”

2x300MW units shall be up and running some time in 2017. This capacity will by and large offset the gradual decommissioning of the obsolete “Kosovo A” power plant, which is close to 50 years old. There are four prequalified bidders for the “Kosova e Re” project. The transaction is for an investment in a combined mining and generation business, as well as rehabilitation of the “Kosova B” power plant. Apart from lignite fired energy generation capacity, Kosovo can also offer vast opportunities in the renewable energy sector. As you rightly point out, currently some 97 percent of electrical energy is produced through thermal power plants. However, consistent with the obligations of the Energy Community Treaty for South Eastern Europe, where Kosovo is a signatory party, our country will have to cover eight percent of electrical energy consumption with renewable energy resources by 2016. We have conducted a pre-feasibility study for numerous new sites where hydro power plants can be constructed. The policy of the Government of Kosovo is to develop small HPPs with private investment by concessioning out the right to use water for

maintaining and developing the transmission network and its interconnections with neighbouring power systems in order to maintain security of supply in Kosovo. (In addition, KOSTT JSC is responsible for the functioning and operation of the wholesale electricity market in Kosovo.) Kosovo is a Contracting Party to the regional Energy Community. It is linked to the regional system via interconnections with Serbia, Monte-negro, Albania, and Macedonia. Kosovo is also at the center of the north-south transmission interface of the South East European market, and important for power flows to and from Serbia, Macedonia and Greece. The Kosovo transmission grid of 400 kV and 220 kV lines is an integral part of the region’s transmission system. Work on t he construction of a new 400 kV interconnection with Albania has started recently. This line will be able to facilitate electricity exchange, and will enable the optimization of two complimentary systems, Kosovo’s thermo-power based system and Albania’s hydropower based one.

Let me conclude the long answer to your

19 / International Business and Diplomatic Exchange – I B D E

question by saying that another area of potential investment is in the district heating facilities in several Kosovo cities, first and foremost in the capital, Prishtina. There is prospect of the solution coming from a project utilizing the “Kosovo B” resources toward ensuring sustainable and cost-effective public heating for Prishtina. Exchange: One of the primary objectives of the current government is the privatization of the country’s largest and most profitable public company- the Post and Telecom of Kosovo (PTK). Despite political challenges to the government’s privatisation strategy by the parliamentary opposition, it is very unlikely that the privatisation of PTK will be held back. Do you think that breaking the state’s monopoly in the telecoms sector would contribute to the development of a more competitive and efficient market? Are British companies interested in this bid? Ambassador Hamiti: The privatisation of PTK and other public assets is part of the strategy of the Government of the Republic of Kosovo to conduct structural reforms that underpin the transition from a state-controlled to a free market economy. Earlier this spring, the Prishtina International Airport was concessioned out. The private public partnership deal assigns the TurkishFrench consortium Limak the right to manage the only airport in Kosovo for the next 20 years. Limak has taken on the responsibility to modernize the infrastructure, expand the airport to 25,000 square meters, and invest €100 million. The privatisation of the PTK – namely the sale of majority shares in this publicly owned company – is designed to remove the state monopoly in the field of telecommunications, as well as to contribute to the development of competition in the market. With the entrance of new mobile operators in the Kosovo market, prices have fallen considerably, whilst the quality and diversity of services has been enhanced. Last year the Government put the PTK on sale. In early June 2011, the Government selected Croatia's Hrvatski Telekom and its parent company, Deutsche Telecom, and Telekom Austria AG as the two final bidders for the acquisition of PTK. Other contenders were Albania's Albtelekom, Egypt's Orascom Telecom Holding and Yemen's SabaFon. There were no British companies involved in this tender. Exchange: The largest publicly financed project, the motorway that links Kosovo with Albania and, eventually, Serbia is well underway. To what extent will this project further enhance economic and commercial cooperation amongst South Eastern European countries as well as the development of Kosovo’s economy? Ambassador Hamiti: The construction of the highway, which has been named after Koswww.ibde.org


E x c h a n g e : The Magazine for International Business and Diplomacy

ovo’s historic President Ibrahim Rugova, is well underway. It will be the crown jewel of the modern infrastructure in Kosovo, linking Vërmicë and Merdare, the border points with Albania and Serbia, respectively. It will turn Kosovo from a landlocked country into virtually the opposite by ensuring quick and cost-effective access to the Adriatic Sea in the Albanian seashore. It will also eventually serve as a transit road for the flow of people and goods from and to Albania and Serbia, respectively. A significant segment of the Kosovo part (Vërmicë-Merdare) of the highway will have

been completed by October 2011. The major part of the highway will be constructed in 2012. This huge structural project will cost around 700 million euro to the Kosovo taxpayers. The expansion and improvement of road infrastructure will give a huge boost to the business climate in Kosovo. Even today, when the highway is not finalised yet, trade between Macedonia, on one s ide, and Montenegro and Bosnia, on the other side, is carried out through Kosovo. Kosovo’s enhanced infrastructure is of great benefit to all countries in the region, making the flow of people and capital in the region as a whole easier. Exchange: Improving the liquidity of the SME credit market is of crucial strategic importance to sustain production in local firms. What are

Interview

June 2011

the strengths and weaknesses of the fiscal system and banking sector in Kosovo? Ambassador Hamiti: The last few years have seen substantial improvement in the business environment for SMEs in Kosovo. A major tax reform has been enacted, which has cut in half the tax burden for enterprises, and has

tially one of the most important employment sectors in Kosovo, and it accounts for a significant share of the value of exports. Kosovo is already well known as a producer of wheat, of different types of grapes, fruits and vegetables. A recently conducted study reveals new opportunities for growth: Asparagus, Saffron, and even Kiwi fruit. A lot remains to

“Kosovo’s enhanced infrastructure is of great benefit to all countries in the region, making the flow of people and capital in the region as a whole easier” streamlined VAT collection. With a 10 percent Corporate Income Tax rate and a progressive Personal Income Tax between 0 - 10 percent, the Republic of Kosovo is at present among the countries with the lowest tax burden in Europe. In a bid to formalise the economy, fiscal cash registers have been introduced across the board. Access to finance still remains one of key issues for SMEs. Efforts have been put in place by all stakeholders in a bi d to boost this access. Challenges remain towards further professionalization of the Cadastral System in order to ensure the legal security for collaterals. At the same time we need a more competitive banking sector. The financial sector in Kosovo is bank-based and all of Kosovo's banks are private. There are eight registered banks, of which six are in foreign ownership. Pro-Credit Bank, established early on at the initiative of several leading international financial institutions, and Raiffeisen Bank of Austria, hold the largest market share in the sector. With banking sector assets accounting for 55 percent of GDP at the end of 2009, Kosovo ranks well with the countries of the region. Loans granted by the banking sector of Kosovo for the same period accounted for 33.7 percent of GDP. It should be stressed that the lowering of interest rates and the shift from short-term to long-term financing in the banking sector of Kosovo has enhanced the overall economic growth, enabling intensive long-term capital investments. Exchange: Kosovo is well endowed with agricultural land. Thousands of hectares could be returned to cultivation without putting excessive pressure on natural resources. Yet the Government seems to have allocated a trivial amount of its budget towards investment in agriculture. What opportunities are there for foreign investors in the agribusiness sector? Ambassador Hamiti: Nearly half of Kosovo’s territory is cultivable land – a great asset. Currently, agriculture contributes 18 percent to the GDP, and is an important source of income for the majority of the population. It is poten-

IBDE – enhancing global business and diplomatic partnership

be done, and indeed lots of opportunities for investment await in the agricultural sector in Kosovo. Exchange: Do you think that accelerated development will follow from the privatization of state-owned enterprises in Kosovo? What strategies other than divestiture of state assets could be explored to attract FDI? Could industrial parks and free economic zones be the way-forward to attract manufacturing and service companies? Ambassador Hamiti: Kosovo is among a few countries, in Europe certainly, to have seen GDP growth of 4-6 percent in the past few years, against the backdrop of global recession. This has been growth from a low base though, and mainly driven by public investment. We are aware that the GDP growth, if it is to become sustainable, should come from the private sector. In particular, the SME sector, the back-bone of Kosovo’s economy, should remain our main focus. The SMEs are flexible enough to react to market needs, and they are critical in our bid to address challenges like unemployment and trade imbalance. The privatisation process of the state owned enterprises and assets is part of the government strategy of attracting capital investment with the aim of increasing the economic dynamism of the private sector and the unlocking of natural resources. Industrial parks and free economic zones can certainly attract more investment in the areas of specific interest. The FDI Strategy of Kosovo identifies the Business Process Outsourcing, Agriculture, Automotives and the Electronic Components as sectors of great interest. Kosovo presents sound and attractive opportunities for forward thinking companies to establish low-cost production centres, which would not only be more cost-effective in terms of manufacturing, but it would also enable regional market expansion in an environment characterised by a low level of saturation. www.ibde.org / 20


Contact: Embassy of the Republic of Kosovo 100 Pall Mall London SW1Y 5NQ United Kingdom embassy.uk@ks-gov.net


E x c h a n g e : The Magazine for International Business and Diplomacy

Interview

June 2011

Privatization Now:

Key to Slovenian Recovery Exchange talks to His Excellency Mr Andrew Page HM Ambassador to Slovenia

Exchange: The state of infrastructure development in Slovenia is generally considered to be relatively advanced for a transition economy. Yet the state has a prominent role in the ownership and provision of infrastructure services, whether directly or as minority stakeholder through investment or pension funds. In fact, in contrast to other post-socialist countries, Slovenia has traditionally approached market transition more gradually, fearing that “shock-therapy” privatisation might destabilise the economy. What kind of distortions or inefficiencies, if any, are caused by state ownership and control? What benefits are expected from asset divestiture and greater private ownership of transportation serviceproviders? Ambassador Page: Let’s take the question of inefficiencies first. You are right that Slovenia has taken a more gradualist approach to privatisation than most post-socialist countries, and on t he whole this has been popular, because it h as limited the initial shock to employment and has helped to maintain social stability. There has been relatively little public backlash against the reform process, and in the meantime Slovenia has achieved pretty strong and stable growth for most of the transition period – at least until the steep fall in 2009. Even after the economic downturn of the last two years, Slovenia remains the most prosperous of all the Central and Eastern European countries which came into the EU in 2004. But the gradualist approach to reforms has left a legacy of weaknesses in the business environment which has been shown up in the aftermath of the global financial crisis. Dispersed ownership has made it more difficult to restructure large inefficient enterprises. The State is still estimated to own about 40% of the economy – one of the highest levels of state ownership in the OECD; and a number of country’s largest listed companies the State also owns indirectly, including via parastatals. Inefficiencies arise where the State is not an effective shareholder, or avoids necessary enterprise restructuring partly for social reasons. Historically, productivity growth and foreign investment have been hindered most in

those sectors that the State most heavily influences. What would be the benefits to Slovenia of divesting more of the State’s assets? In my view, greater FDI should help to improve the efficiency and competitiveness of the enterprises concerned – and this would more than outweigh any disadvantage from the loss of State control. It would help to reshape the structure of the economy in a positive way, as it would strengthen Slovenia’s capital market. And it would improve corporate governance, which currently has weaknesses stemming from the close links in this small country that exist between the political elite and the business elite who run the majority state-owned

promoting British business in Slovenia? Ambassador Page: The involvement of British companies in the transportation and telecommunications sectors in Slovenia is, I regret to say, still limited at this stage. Vodafone has a joint marketing arrangement with Simobil, and Westica supplies radio solutions used by the Slovenian Ministry of the Interior, after winning a contract to supply Tetra in 2003. But we see real opportunities for British companies in these sectors in the future. The main strategic priorities we have identified are linked in one way or another to many of those investment opportunities that were profiled at the recent UK-Slovenia Investment Forum in The

In these times of weaker economic growth, FDI is a vital ingredient in increasing Slovenia’s competitiveness within the Eurozone

enterprises. In these times of weaker economic growth, FDI is a vital ingredient in increasing Slovenia’s competitiveness within the Eurozone, as well as the sustainability of its public finances and financial system. The recently established Agency for Management of Capital Assets is expected to play a pivotal role not only in recommending which enterprises should be privatised, but also for ensuring that those which remain majority state-owned conform to international standards of best practice, and thereby improve the quality and transparency of Slovenia’s business environment. Exchange: What is the current level of involvement of British companies in the transportation and logistics sectors in Slovenia? What are strategic priorities as envisaged by the Embassy and the Chambers of commerce

22 / International Business and Diplomatic Exchange – I B D E

City, including the Port of Koper, the Ljubljana Airport development (“Aeropolis”), the new Divaca-Koper railway line, road infrastructure linked to the 5th and 10th pan-European corridors, and of course Telecoms. Exchange: As you say, several investment opportunities are currently emerging in Slovenia’s transportation and logistics sectors, including the new planned Divaca-Koper railway line, the upgrade of container handling capacity at the Port of Koper, terminal upgrades and the development of a real-estate complex at Ljubljana Airport. Are these projects envisaged as service contracts or as “build-own-operate” concessions? Which type of public-private partnership (PPP) is usually of greater strategic interest to British firms investing in Slovenia? www.ibde.org


Interview

Ambassador Page: To date only a limited number of PPP projects have been implemented – fewer than in other CEE countries. For PPP projects there have to be three conditions – (i) the law (this came into force in 2006), (ii) political support (which has been weak to date in Slovenia) and (iii) projects must be potentially profitable enough for the private sector to be willing to get involved. The smallness of Slovenia limits the numbers of project that might be suitable for PPP. Also, Slovenia has completed a number of projects primarily with EU money. For PPP to prosper here, there needs to be an upgrading of the skills required by civil servants to be able to negotiate project implementation with the private sector. This in turn may involve more hiring of external financial, legal and tax consultants – an area where the UK is strongly placed to help. The financial crisis may have further limited the readiness of private investors to enter into PPP projects in Slovenia, while also putting added pressure on t he budgets available. A lot of projects which could have been made good PPP projects have already been implemented here with the use of public funds. So now, in areas like the motorways, only the less attracttive sections might be open for future projects. There is also discussion about using PPP in the construction of railway infrastructure, but this will require large investment and it is not clear that the yield will be commensurate. In our experience, there may be more opportunities for PPP projects in areas like healthcare and school infrastructure and sanitation services, as required by environmental directives, than in motorways, railways or airports. These could be of greater interest to UK firms if they are “build-own-operate” concessions. Exchange: Slovenia has been involved in the privatisation of the state-run motorway operator (DARS), in a EURO 3 bn deal that would offer the concessionaire management control of the network for 30 years. Mitja Gaspari, the Minister for Europe and Economic Development, described the deal as “win-win”: “We get a good operator into the market, less public debt and well-maintained public highways”. What are the recent developments? Has any British company been involved in the bid? Ambassador Page: This is a complicated issue. My understanding is that DARS will not receive financial capital, but the State will transfer the ownership of some of the motorways to DARS. DARS will take over in full the financing of construction and maintenance of highways and motorways, in return for which DARS will be the owner of almost 800 km of highways, access roads and rest areas for the next 50 years. To the best of my knowledge, no B ritish company was involved in this bid.

Exchange: Investing in large-scale road interconnectors is crucial. Yet, does not the focus on higher-category roads risk eclipsing the con-

Exchange: June 2011

Photo by Besim Gerguri

cern for improving connections to marginal, underdeveloped parts of the country – thus exacerbating spatial differentiation and income inequalities? Ambassador Page: That is a good point, but there are two observations I would make in response: (i) Slovenia will be able to take advantage of EU funding in the next Financial Perspective (2014-2020), under the heading of regional funding, which should give less developed parts of Slovenia priority in terms of funds spent on infrastructure development; and (ii) Slovenia has a G overnment and a Par liament which is heavily focused on balanced regional development, as its support for poorer regions like Prekmurje and Pomurje (near the Hungarian border) shows. Some of the least developed regions in Slovenia lag behind the more developed regions by decades, and the Slovenian Government is firmly committed to rectifying that over time. Exchange: In the privatisation’s spotlight is also Telekom Slovenije, the state-controlled telecom operator. What is the current level of competition in this sector and what foreign investment opportunities lie ahead? Ambassador Page: Telekom was partly privatised in 2001, so what we are talking about here is sale of the State’s remaining share in Telekom. Together with its investment funds, the State still retains 75 percent, which makes Slovenia unique in the telecoms sector among EU Member States. In 2008 The Government cancelled the planned sale of 49 percent of Telekom to a strategic investor – the official reason being that the bids were too low. There were of course strong suspicions that politics played a major part in this eleventh hour decision, given that the majority of the Slovenian people, and indeed MPs, are against the idea of selling what they see as their “national champions” to over-

IBDE – enhancing global business and diplomatic partnership

seas investors, for fear that the country might become overrun by large multinationals. Despite the relative lack of competition, Slovenia enjoys high levels of fixed line, mobile and internet usage, comparable to that in other Western Europe countries. Telekom and its subsidiaries dominate the fixed line and ISP business, but competition is slowly entering the market. The mobile market is different: four mobile operators and a number of mobile virtual network operators are active in Slovenia, although the population is only 2 million people. Pressure has been brought to bear on operators through mandated reductions in the tariff for terminating use of mobiles. Mobile phone density is high, in Slovenia, at around 95 percent and so too is mobile phone usage is high in Slovenia, which has grown rapidly in recent years. And Slovenia is planning to bring super-fast broadband to seven in ten homes by 2015, which compares well with our own plans in the UK. In short, Telekom will be an important test case of the Slovenian Government’s professed desire to proceed with privatisation. Some who are anti-privatisation will argue again that the price is too low (at around Euros 80 per share, compared to previous highs of around Euros 400), and now is not the time to sell. Others who are pro-privatisation will wish to see Telekom’s debts reduced to make it more attractive to a potential buyer, and will argue that it is an anachronism in an EU Member State to have majority state ownership in the telecoms sector. Personally, I suspect that the Government will proceed cautiously and gradually, testing the water for the extent of interest among the major European players, and perhaps moving down the road of selling a s mall stake, to build confidence, but not a controlling stake. The risk is that this will not be enough to attract the big players or to yield a decent price. Either way, the British Embassy will watch this closely, as telecoms is a sector where we the UK has world-class companies who could have an interest in the outcome. www.ibde.org / 23


8th Vienna Economic Forum “The Economy as an Engine of Regional Development” 21st of November 2011 Palais Niederösterreich, Herrengasse 13, Vienna, Austria.

VIENNA ECONOMIC FORUM, (VEF) is an international non-profit, non-governmental organisation with headquarters in Vienna.

PRINCIPAL OBJECTIVES: •

Popularizing and promoting investment opportunities from the Adriatic to the Black Sea and Caspian Region.

Providing impetus and pointing out – on the basis of research – the joint projects required in the region for the short-term, medium-term and long-term realization, and promoting their implementation.

Becoming a place of definition, encounter, and of realizing the public and private interests in connection with the various projects in the region as part of the United Europe.

The 8th Vienna Economic Forum “The Economy as an Engine of Regional Development” takes place on 21st of November 2011 in Palais Niederösterreich, Herrengasse 13, Vienna, Austria. More information: http://www.vienna-economic-forum.com/events.html


SARAJEVO BOSNIA & HERZEGOVINA

MOSTAR – BOSNIA & HERZEGOVINA

Contact:

Embassy of Bosnia Herzegovina: 5 - 7 Lexham Gardens London W8 5JJ United Kingdom embassy@bhembassy.co.uk http://www.bhembassy.co.uk/


Interview

Exchange: June 2011

Slovenia: Entrepreneurship to Lead Away from Crisis Exchange talks to Mr. Matjaz Kovacic President of the Management Board, Nova Kreditna Banka Maribor

Exchange: The development of advanced financial intermediation is crucial to ensuring the mobilization of domestic resources, attarcting foreign capital and supporting investment. How would you describe the state of development of the financial system and banking sectors in the South East Europe, and in particular in Slovenia? M.K. The years 2009 and 2010 have c ertainly been two of the most challenging years in the history of the global capital market. The world financial crisis had a very negative effect on the Slovene financial but also real sector. Current economic indices show that the Slovene industry production and foreign trade transactions are on the rise, with Slovene exportoriented companies registering particularly good results. On the other side, however, we have the construction industry, in respect of which Slovenia has not done its homework. This industry is still sinking, thus causing the

Slovene economy to recover at a s lower pace. It is worth mentioning in this context that in the previous years the Slovene construction industry contributed a much larger share to Slovene GDP than in comparable countries. However,

We therefore have two different poles: on one side, the domestic consumption has not played its role, yet on the other side, thanks to a high demand in foreign markets, the exportoriented economy is performing well. The

If we always look for a perfect solution, all opportunities will pass by the current share is already lower than elsewhere, meaning that we are out of the balance again. The construction industry, of course, cannot function without investments, and the largest generators of investments in the construction industry are the state and the staterelated institutions.

IBDE – enhancing global business and diplomatic partnership

developed economies have actually been out of recession for some time. The trust between banks is coming back as well, which fills us with optimism. We at Nova KBM see a great potential for our growth in the markets of South Eastern Europe (SEE) which are undoubtedly still www.ibde.org / 25


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lagging behind in the development of financial systems and services. This is why we pursue the strategic objectives of expansion into the markets of SEE, which we have set out in the Strategy of the bank and the Nova KBM Group for the period 2008-2013. As Slovenia is becoming a saturated market, any acquisitions in those markets represent a realistic opportunity for increasing the volume and profitability of our business, thus contributing to the implementation of the objectives of the Nova KBM Group and to the increase in value of stakes owned by the shareholders of Nova KBM. Exchange: Despite its vibrant, export-oriented manufacturing and its well-developed infrastructure, Slovenia still suffers from shallow and illiquid capital markets, as compared with other Eurozone members. As one of Slovenia’s two major banking players, how does Nova KBM view the strategic role and penetration level of its retail operations? Are household or corporate deposits seen as the chief drivers of the bank’s future funding base? M.K. Irrespective of its small size, there are a number of successful, interesting, creative and profitable companies operating in Slovenia. It is true that the Slovene capital market experiences a crisis and that we have been two years eagerly waiting for its recovery, which, however, has not yet happened. There are several reasons for such situation, the most important being the prevailing deteriorated macroeconomic conditions, the Slovenia's attitude towards foreign investments, and the extremely weak liquidity of the Ljubljana Stock Exchange. Still, these factors cannot change the fact that we at Nova KBM have confidence in Slovene shares. We believe that our companies and individuals are the first who must have confidence in these shares; only then we can expect foreign investors to be attracted by our capital market. Nova KBM treats both legal entities and private individuals in the same way. For several years, we have been noticing a trend of an increased interest in deposits and other savings products offered by the bank, and this year is no exc eption. Customers place their funds mainly in standard deposit products provided by the bank. Yet, to a lesser extent, they invest also in mutual funds, securities or investment life insurance products. Deposits from retail customers, in particular, represent a stable funding source, which has been proved during the period of crisis. Exchange: In several Balkan countries, some sectors (chiefly agriculture) display low monetization levels. What are the opportunities and the risks for regional institutions such as Nova KBM to capture deposits from these marginalized sectors? M.K. We at Nova KBM believe that the markets of SE Europe remain interesting. This is also due to the fact that they still demonstrate a

June 2011

distinctive deficit of some of the most contemporary financial products. The agricultural sector does not deliver high returns, but it provides stability and safety of invest-ments. Exchange: In the run-up to the 2008 financial and economic crisis, the Slovenian banking sector fuelled a credit boom to an overleveraged construction industry, while becoming increasingly dependent on foreign funding. This happened against the backdrop of an export-led economy that exposed Slovenia to external shocks. To what extent was the crisis felt in the banking sector as well as in the real economy? What are the merits and the opportunities for reform in the country’s system of financial regulation? M.K. I see the main problem in a relatively slow pace of political actions, since the response time is of crucial importance in every crisis. When things aggravate, the reaction must be quick and determined, even though

Interview

for the state, since the prices of dwellings were much lower than before the crisis. This measure alone would certainly not solve the construction industry, but would help overcoming the serious liquidity problems, enabling construction companies to start working on new projects. A number of construction companies went bankrupt, so there are now practically no c ompanies capable of starting new projects. If we always look for a perfect solution, all opportunities will pass by. This is true also for the reform of the national financial supervision system. Exchange: In the face of the low liquidity of equity markets in Slovenia, what are the opportunities for SME financing, especially in sectors targeting domestic demand? M.K. We must not forget one of the supporting pillars of the Slovene economy – small and medium enterprises. At Nova KBM, we have set up our own Entrepreneurial Centre, the aim

Nova KBM treats both legal entities and private individuals in the same way.

sometimes a wrong decision may be reached. As the construction industry is the main reason for slow economic recovery, we have already at the beginning of 2009 proposed a foundation of the state-owned pool of rented dwellings, and substantiated proposals aimed at helping the construction industry. However, due t o different obstacles, also bureaucratic ones that are very typical of Slovenia, the proposals have not been implemented. I am not saying that the measure we proposed was a perfect one, but would certainly be a positive step forward. This would also be a good economic investment

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of which is to offer our customers financial and economic advice and the support with respect to obtaining EU subsidies. This Centre also helps the entrepreneurs implementing their business ideas and, on t he basis of an assessment of a competent commission, provides the best of them with loans. Moreover, we support the ideas of start-up companies, since we are of the opinion that innovative business models of these companies are their entry point to the global market. In addition, they serve as an example of how a small country can compete internationally. We are definitely fully aware of the role that the banking sector must have in overcoming the crisis and actually understand this as our responsibility. To that effect, we have maintained a stable growth in loans also during the crisis period. The sectors in which we expect to see the most significant development in the future are information technology, biomedicine, and energetics, in particular renewable energy sources. As regards the latter, we have registered an interest in investments related to these sources, both from companies and private individuals. Consequently, we have, among others, already provided loans to small and micro enterprises, as well as private citizens, for financing the construction of solar power plants. Exchange: What are the main aspects and consequences of the state’s involvement in the Slovenian banking sector? Would the country’s www.ibde.org


Interview

capital markets benefit from privatization and enhanced competition? M.K. As anything in life, the state ownership has its advantages as well as disadvantages. One of the advantages in the period of a crisis is that the state-owned banks are a priori considered to be more safe and stable. Governments would certainly provide support to all

Exchange: June 2011

PoĹĄtna banka Slovenije, the acquisition of Adria Bank in Vienna), it is clear that strategic decisions can also be reached with state as the owner. Nevertheless, we support the idea for the government to keep a substantial share in the Slovene banking system. As regards Nova KBM, this certainly provides stability and

Slovenia is very much tied to the markets of SEE, both politically and economically - we at Nova KBM understand the potentials of these markets. large banks, but the state-owned banks are the first to receive government support. This represents an additional security for our investors and customers. A strong owner has a significant role in strengthening a bank's capital adequacy, too. On the other side, a state ownership has its disadvantages as well – in case of private owners, it is probably much easier and more efficient to reach strategic decisions. However, taking a look at the development of Nova KBM over the last 15 years (the acquisition of a 50 per cent stake in Zavarovalnica Maribor, the acquisition of

markets by upscaling the international trade of Slovenian securities? M.K. Due to historical circumstances, Slovenia is very much tied to the markets of SEE, both politically and economically. We at Nova KBM understand the potentials of these markets. Therefore, an important element of our strategy for the period until 2012 is the expansion in this region. To that effect, we acquired the Serbian bank Credy banka on 31 March 2010. This bank is quickly becoming an integral part of our Group, which is a result of its successful restructuring. Without doubt, the trading in securities in the international market leads to an enhanced liquidity of the market for shares. Also, capital can be accessed easier in the international market. However, an important prerequisite for this is that companies are internationally present.

gives an assurance that the bank will continue to operate in the territory of Slovenia as a local bank, performing to the benefit of its shareholders and customers. However, no majority state ownership is required for following this policy, especially where other owners are very small and not particularly active in the management issues, as this is the case in Nova KBM. Exchange: Lastly, would Slovenia benefit from greater financial integration with other South East European countries? Is there any scope to increase the liquidity of Slovenian equity

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DUBROVNIK - Croatia

Contact: Croatian Embassy 21 Conway Street London W1T 6BN UNITED KINGDOM vrhlon@mvpei.hr http://uk.mfa.hr


E x c h a n g e : The Magazine for International Business and Diplomacy

June 2011

Analysis

Sustainable Energy Hotspot: South-East Europe’s Chance to Bounce Back

Diana Bozhilova, AKC, PhD

S

Crisis in South-East Europe tarting off as the poorest region of the Old Continent, South-Eastern Europe (SEE) has also been badly hit by the 2008 financial and economic crisis. In 2003, income per capita, adjusted for purchasing power parities, stood at 26 percent of the EU average. During the ensuing period of buoyant economic activity Gross Domestic Product (GDP) grew on a verage by 6 percent per annum (2004-2007). This situation began to change noticeably from the third quarter of 2008. By the end of 2009, GDP contraction across the region was dramatic. The crisis affected deeply Romania (-7.1 percent), Croatia (-5.8 percent) and Bulgaria (-5.5 percent), with Serbia (-3.0) and Macedonia i (-0.9) escaping relatively unscathed. With Turkey’s EU membership aspirations, economic advancement, and the increasing importance of transnational energy projects, the boundaries of SEE are being redefined. This geographic expansion reflects the currency of new cross-border linkages in the area. Turkey

has experienced an unprecedented period of political stability and economic growth over the past decade. It led the SEE region with an average GDP growth rate of 7 percent per annum during 2002-2007. In 2009, the economy contracted by 4.5 percent. However, the recovery to pre-recession levels was immediate, with GDP growing by 7.5 percent in 2010. The short-term outlook foresees Turkey emerging as a powerhouse in SEE after the crisis. The differentiated impact of the recession is accounted for by the different channels through which the global economic crisis was transmitted in SEE. These are (1) the contraction of international trade, (2) the sudden stop to credit growth, (3) the rapid fall in inflows of foreign direct investments (FDI), and (4) the reduction in remittances from migrant workers. Countries with fixed exchange rate regimes, such as Bulgaria, fall in the first camp. They will find recouping lost export markets the most difficult. The restriction on credit has affected most adversely the countries with the highest penetration of foreign banks, including Romania,

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Croatia, Serbia, and Bulgaria. The sudden withdrawal of foreign capital from highly FDIdependant economies, such as Bulgaria and Romania, compounded financial problems and, in the case of Romania, led to macroeconomic instability. The lagged effect of the recession on European labour markets has also led to a downturn in remittances in the Western Balkans.

The new realities in SEE dictate that relying on external sources to sustain domestic demand is no l onger viable, if it ever were. New paths to economic recovery must be sought out and they ought to ensure that in the future SEE is less vulnerable to external shocks. Delayed structural reforms, high export dependency from the EU and non-diversified imports of primary energy sources must be addressed through the expansion of intra-regional cooperation. Sustainable energy must be a key element of regional development, with important spill-over effects in SEE. Energy markets in SEE Energy markets in SEE are almost exclusively dependant on fossil fuel imports from the Russian Federation. Following several pipeline shut-downssince 2006, states in the region have become increasingly aware of the impor-tance of diversification in the origin of supply. This has led to a discussion of potential energy hubs with two factors challenging policy-mak-ers, namely distance to proven energy reserves and domestic implementation capacity. Geographically, Turkey and Bulgaria are the best placed. SEE lies in the vicinity of 70 percent of total proven oil and gas reserves. While Turkey is nested at the crossroads of Asia, the Middle East and Europe, Bulgaria secures market access from Asia to the EU. Unsurprisingly, Turkey and Greece have also achieved the most diversification in energy resource supply, having carefully balanced their strategic relationship with Russia against domestic security concerns. SEE countries are developing energy projects via two corridors. The East-West corridor www.ibde.org


E x c h a n g e : The Magazine for International Business and Diplomacy

carries Caspian/Persian oil and gas into the EU. The North-South corridor brings in further Russian oil and gas. The East-West corridor is most condensed with four existing lines and many more in the pipeline. Part of this network is the best example to-date of advanced regional cooperation in SEE, namely the Turkey-Greece-Italy interconnector. It links Turkey’s and Greece’s natural gas grids. This pipeline is invariably seen as a ‘bridge’ between two longstanding enemies, setting a new foundation for regional development in SEE. The idea of using energy infrastructure to enhance regional cooperation has made inroads only in the last decade. It has developed, on the one hand, through sheer necessity born out of the need for energy security. On the other hand, improved relations across the states of SEE, resulting from unprecedented economic linkages, have naturally expanded the list of joint investment opportunities. The end to conflicts in the Western Balkans, the EU integration process, intra-regional trade agreements, and improved relations between Turkey and Greece have turned SEE into a hotbed of opportunities. The strategic plans for the Southern energy ring via Nabucco and South Stream firmly placed the region on the investors’ map. Yet the recession has put the brakes on much of this for the time being. Contracted industrial output has led to reduced energy consumption. Gazprom’s aggressive strategy vis-á-vis competitors has raised questions about the project viability. Proposed energy pipelines come at a significant added cost for the consumer. Expensive projects in Turkey, such as BTC and Blue Stream, have made even recovered economies wary of new large-scale investment. The idea that individual countries can serve as energy hubs for the region appears no longer viable in SEE after the crisis. Alternate energy strategies that are more costeffective and take into account long-term consumption needs have to be deployed.

Analysis

June 2011

Sustainable Energy Sustainable energy (wind, solar, wave and biomass) is an attractive investment opportunity in SEE. In line with the EU 2020 strategy, 20 percent of total primary energy consumption must come from renewable energy sources (RES) by 2020. While markets for renewables in Western Europe are oversaturated, SEE is the only region with significant untapped potential. The central deterrent to the region achieving the “20-20-20 targets” is efficiency. While it is a problem commonly shared across the states of SEE, the root cause varies from country to country. Grid availability is the main impediment, most acutely pronounced in Bulgaria. Regulatory support mechanisms are lacking in Romania, whilst regulatory issues are holding back both Bulgaria and Greece. Despite these stumbling blocks, the future of SEE as the next hotspot for renewable energy is undeniable. Grid capacity development can be addressed by carefully selecting viable projects and attracting EU funding. Central to any reduction in the regulatory burden is continuity in national RES strategies and fixed feed-in tariffs over an extended time period. This would ensure that, Despite the high capital costs, investment in renewables should not take more than ten years to yield attractive returns. Yet unforeseen cost accumulations and losses in feed-in tariff, even once a RES project is licensed, can dampen investor confidence. Furthermore, a restrictive domestic RES policy saturates the financial markets, causing banks to continue imposing prohibitive barriers to credit growth, as the risk in renewable project investment is deemed too high. A more open domestic RES policy typically brings about three major changes, namely energy savings on the demand side, efficient energy production, and replacement of fossil fuels with clean energy. The RES effects spill over the entire economy in that they improve

efficiency whilst serving the public good. The economic returns are shared through cost reductions for industries to comply with environmental standards. Importantly, RES can be a replacement for nuclear energy. In sum, diversity and energy security are essential advantages of RES. Looking to the Future Globally, RES has replaced ca. 15percent of fossil fuels in the total energy consumption mix. In SEE, this is much less, ca. 10 percent. The economic development benefits for the region from RES are enormous. The costs otherwise spent on i mports of fossil fuels will be kept in the region. Local support industries, such as the banking and construction sectors, will gain a new lease of life, following their dramatic contraction during the recession. This will help reduce dependence on FDI and become domestically driven. RES is also a significant source of local government tax income, now reduced by the fall in GDP. The tax burden, placed on the consumer to make up for loss of direct budgetary allocation, will be relieved. Capital investment in the region will pick up, reviving the competitiveness of SEE. The incentive to build cross-border electricity grid interconnections will not depend on economic cycles as is the case with pipelines. The energy source is indigenous and infinite, so that energy production surplus and deficit can be managed more efficiently, resulting in costsavings. The improved grid interconnection network can ease the recovery of SEE by reducing disparities through a demand-driven strategy. All players will be achieving a measure of energy security by using RES as a tool of diversification to limit dependency on energy imports. i

Recognised by some countries as FYROM

Map of the South Stream and Nabucco natural gas transportation pipelines Source: http://en.wikipedia.org/wiki/File:Nabuccostream.png IBDE – enhancing global business and diplomatic partnership

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No Universal Formula for After-Crisis Era

Leaders

June 2011

Arab Revolutions: Any Winners Yet?

The persisting conflict environment in the Middle East (ME), and its consequences, is the subject of the second section of this issue of Exchange. In his analysis of the economic perspectives for the countries in the region, Dr. Binoy Kampmark, lecturer at RMIT University, Melbourne, raises the question of the sort of ME and Northern Africa states with large oil and gas reserves. These are at risk of falling prey of former colonial powers, keen to return to the lands gained, or lost, at the end of WWI and over which they have periodically exerted political and economic influence. The degree to which new-born Arab nations will be able to embrace democracy and introduce reforms will determine their true independence and help them avoid déjà-vu scenarios. Palestine has escaped the Arab Revolt, but its recently expressed determination to become an independent state is likely to exacerbate the lack of stability in the region. Ms Alice Campbell-Cree, IBDE Researcher, in her exploration for ways and means to form a sustainable basis for peace with Israel, identifies areas where cooperation can be mutually rewarding. A common characteristic between the two countries appears to be resourcefulness that leads to entrepreneurship. Palestinian start-ups have already proven that they are capable of innovation and business performance above expectations, a factor that should attract foreign direct investment by EU and Israeli companies alike. In his quest for the right model of governance for the nations in MENA that are finding their way to freedom, Dr. Nasos Mihalakas, Associate Professor at New York University, Tirana, supports trade between parties not only for good neighbour relations, but equally for internal equilibrium. Departing from the view that federalism is the modern governance model that provides best chances for individual rights, justice, power checks and balances, and inclusion, he introduces a model that relies on multilateral internal commerce, “market promoting federalism”. He also provides a structured approach for introducing constitutional reforms in states in remaking. Federalism may not be the right recipe at this time for MENA, whose countries have a long-standing demographic deficit, reflects Jacques Couvas, Exchange Associate Editor. Democracy is a long process, sensitive to history, culture and education. Foreign-imposed governance models have met in recent history varying success in emerging markets. Diagnosing the true causes of the Arab revolutions, understanding local needs in their cultural context and applying caution should, therefore, precede the prescription of a cure.

S

ix months after Mohammed Bouazizi, an ambulant street merchant in the small Tunisian town of Sidi Bouazid set himself on fire in sign of despair from local officials’ corrupt behaviour, the Arab Spring revolution is still on in many parts of the Middle East and Northern Africa (MENA). Tunisia and Egypt may have gotten rid of their respective despots, but it is still unclear what their political and economic future will be. There is even thicker fog spread over the rest of the region. We shall not know for decades what really started the popular fires in the Arab streets, and it will certainly take a while to determine the winners and losers emerging from the political tsunami. For the moment, we can only quantify the material losses and speculate about the beneficiaries of the postSpring harvest. Freedom from tyranny was relatively peaceful in Tunisia and Egypt, but the formula did not work in Libya, Yemen, Bahrain, and Syria – not to mention attempts to revolt in Algeria, Jordan, Iran, and Saudi Arabia, suppressed either by force or by acquisition of domestic peace: US$100 million in the case of Saudi King Abdullah, invested in raising civil servant salaries and providing social benefits to his other subjects. Either because of the personality of his leader or for more mundane reasons, such as oil resources, Libya was singled out by the West to be “freed” manu militari. The operation, approved in March by the United Nations Security Council, was meant to last “days or weeks, not months”, as promised by Alain Jupé, French foreign minister on March 24. Two and a half months later, frequency and intensity of air sorties and bombarding of Tripoli are intensifying. Should the air campaign last another three months, the total cost to Britain and France is likely to be €5 billion,

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according to estimates based on UK defense sources. The U.S., which has taken a back seat in this offensive, spent US$608 million just between March 19 and April 4, according to the Pentagon. The immersed part of the mid-eastern iceberg is more worrying, as it cannot be quantified. The fall of the U.S.- and France-backed totalitarian regimes in MENA has created a vacuum in western intelligence and is also living Israel’s security at the mercy of its increasingly hostile neighbours. The cost to the world’s business community has, however, been even higher: US$8 trillion in multilateral trade and foreign direct investment (FDI) involving MENA. The countries of the region have certainly suffered most of the losses, as exports froze and FDI dried out instantly, while foreign debt has increased. Infrastructure in most of the Spring-affected nations is in shambles and huge cash injections will be needed in the years to come. The World Bank announced during the Deauville G8 meeting that it would provide aid of up to US$6 billion to Egypt and Tunisia, and the European Bank for Reconstruction and Development has been mandated to help MENA countries in their transition to stability. The funds being made available for borrowing are most likely insufficient, as western think-tanks estimate that these two countries need at least US$15 billion to return to the status at the wake of the respective revolutions. Among the wounded of the Arab Spring is Turkey. The events have reminded its public opinion how vulnerable their country is, following its rapidly growing dependence on trade with MENA. With 25,000 entrepreneurs and workers living in Libya at the end of February, Turkish companies controlled FDI and infrastructure projects totaling US$ 15 billion. Most of these assets have now turned into ashes, as recovery of investment is proving impossible for the moment and insurance companies are not willing to compensate contractors for damages and loss of revenue, evoking the contractual limitations to indemnification in case of war. There is an ongoing legal debate on whether the Libyan events fall in that category or they should be considered just as turmoil and uprising, which some foreign companies may have covered in their insurance policies. So, for these business owners the only valid option is a quick and peaceful solution in the country, preferably with Tripoli regaining control. "If Muammar (Gaddafi) falls, our contracts are worth less than tapestry paper," Murat Can, an Istanbul-based construction entrepreneur, told Exchange. This mindset and www.ibde.org


E x c h a n g e : The Magazine for International Business and Diplomacy

June 2011

Leaders

manoeuvring by the powerful construction lobby have obviously influenced Ankara’s initial stance to deflect U.N.’s resolution and NATO’s action against Gaddafi. Similar considerations have impacted on the hesitant diplomatic moves by Turkey during the Arab crisis, as well as in respect to western sanctions against Iran. Exports to MENA have exploded from US$5 billion in 2002 to 30 billion in 2010, a 600 percent increase. In contrast, outbound commerce with the EU has grown 2.5 times only, to 52.7 billion dollars over the same period, but in reality declined last year by almost 20 percent in comparison to 2007 and 2008. The shift in focus towards MENA is the result of a combination of business and political factors. New opportunities had surfaced before 2011 in the MENA emerging markets, mostly in construction, agriculture, railroads, processed foods, manufacturing, and d efence. This had given Ankara political and diplomatic ammunition to further its agenda for soft hegemony in the region, a doctrine introduced by Ahmet Davutoglu, the man who has been in command of Turkish foreign affairs since 2009. Davutoglu, 52, who joined the government in 2002 as foreign policy advisor, spent the longest part of his career as an academic in Istanbul and, more recently, with the Islamic University of Malaysia. He has developed a vision of Turkey as a regional power, whose roots and destiny lie in the Middle East, the Eurasian Turkic states and the Balkans – geographical areas that for nearly 500 years were part of the Ottoman Empire until it was dissolved in 1918. His motto, “Zero Problems with the Neighbours”, is now undergoing severe test. Turkey’s support for newly found friend Bashar al Assad is fading, while its cordial relationship with Iran is subject to western criticism. In both cases, U.S. President Barak Obama’s administration is pushing hard for clear-cut divorces, furthering American and Israeli security interests in the Middle East. Turkey is resisting, but after the parliamentary elections of June 12 it may give in. Ankara is keeping the eye on the ball. With US$60 to 80 billion estimated to be needed in the medium term for reconstructing MENA, particularly Libya, Syria and Yemen, there is too much at stake to play loyal neighbours. Turkey, after joining the missionary bandwagon put in motion by Britain, France and Italy, expects to curve out a big, if not the biggest, slice of the cake. It has already established brotherly relations with the Libyan opposition and recently hosted in Antalya a conference of the revolutionary factions of Syria. Both countries’ after-crisis needs have been the subject of official and c orridor diplomacy. As Turkish Prime Minister Recep Tayyip Erdogan anticipated at a convention last July aiming to create a Mediterranean free trade zone from the Black Sea to Morocco, “A Turk cannot live without an Arab”. And vice versa? IBDE – enhancing global business and diplomatic partnership

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E x c h a n g e : The Magazine for International Business and Diplomacy

June 2011

Analysis

Middle East Stripped by Plenty: A Remix (or: Remake)

Binoy Kampmark, PhD

T

he Middle East has been beset by the perennial curse of ample natural resources and inflexible authoritarian regimes. The curse is a cocktail of highly centralised and mismanaged governments, unstable local economies and a knack for streaming resource revenues into white-elephant projects and slush funds. No wonder, decades of this politics have resulted in a wave of unrest some have termed an ‘Arab Spring.’ But even the awakening states are still faced with a risk: being stripped by plenty. The Libyan economy prior to the NATO intervention was the 15th largest oil exporter, possessing the ninth largest proved oil reserves in the world. Its exports have, however, done much to distort the employment market, concealing the reality that domestic unemployment lies somewhere in the order of 30 percent. Natural resource figures tell a different story of wealth. In this transitional phase, the role of foreign direct investment (FDI) will have to be manifold

if it is to be effective in gaining some foothold of stability in the Middle East. Regionally, it is accepted that FDI provides a motor for job creation and sorely needed infrastructure development. Countries throughout the region acknowledge the need for diversified FDI. The statement by the Saudi government’s General Investment Authority (SEGIA) at an OECD-sponsored conference in February 2004 makes the position clear. ‘We treat [FDI] as a major tool for our country to use in spurring comprehensive

Photo EPCON

economic growth that yields social benefits in addition to economic ones. Most importantly, the resulting economic diversity will counteract the adverse effects of fluctuating oil prices on the country’s income stream.’ Yet FDI in the region has taken a battering with the credit squeeze since 2009. Significant projects such as Saudi Arabia’s $10 billion aluminium smelter – a joint project between Rio Tinto Alcan (Canada) and Maadan (Saudi Arabia) and the three-way Sumitomo (Japan)/ Malakoff (Malaysia)/Al Joamaih (Saudi Arabia) power-generation and desalination plant at Ras Al Zour – have either been scrapped or deferred. That said, companies continue to show an interest in the development of the energy sector, be it through the construction of liquefied national gas (LNG) schemes in Qatar or Syrian contracts with Petrofac, a foremost oil and gas facilities provider, to develop the energy sector. A diversified portfolio of FDI may minimise the patterns of distortion that have resulted in artificial measurements of wealth reflected in economies such as Libya’s. But that would entail making sure that FDI is not merely confined to the energy sector. The curse need not be compounded: countries such as Libya have enormous problems as it is with a rich natural resource sector that shields actual economic performance. This is not to say that suitably balanced, diverse economies cannot emerge in the Middle East. Historically, a few notable Arab states ran financial systems that proved competitive, even by European standards Research by Raghuram Rajan and Luigi Zingales on the Egyptian stock market in 1913 showed that its capitalization/GDP ratio came to 1.09The figure is impressive by any yardstick, suggesting that Egypt, in terms of economic competitiveness, was on par with foremost European examples. The key, it would seem, is balance in what companies seek to put their money into. Indeed, those in the region with long memories cannot help but be reminded that the history of investment by foreign companies in the natural resource sector is one of foreign control rather than close collaboration with local authorities. The Sykes-Picot Agreement of 1916 is exemplar, placing the control of the Ottoman territories in the hands of British and French interests. Socialisation and nationalisation were the by-products of foreign domination after the

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conclusion of the Second World War. Iran provides a classic case, when the government of Mohammed Mossadeq nationalised the AngloIranian Oil company in 1953. The move led to his overthrow by an American and British sponsored coup that installed the Shah. The socialist model of redistribution is cited as one of the problems of atrophy in most middle-eastern countries after the 1950s but socialist economic planning should be looked at in historical context. The post-colonial sentiment was angled towards redistribution and market control, though it came with various bad habits. Populism and despotism, and Western involvement, put pay to any model of governance that was anything but despotic. There is also another consideration. Whether

the ‘Arab Spring’ will actually transform successor governments into more liberal regimes remains to be seen. Scholars have previously observed that political liberalisation in the Middle East and North Africa (MENA) has already occurred, but in a contained manner that permits a degree of pluralism within a seemingly illiberal system. ‘In sum,’ argue Holger Albrecht and Oliver Schlumberger in a 2004 issue of International Political Science Review, ‘academic research on Middle Eastern political regimes throughout the 1990s can be characterised as a period of waiting for expectations to materialise that were ill-grounded from the beginning – in fact, a period of “Waiting for Godot.”’ Godot, it would seem, is arriving, but whether that elusive figure is democratic will depend, in part, on the transitional changes in the economies that underpin these regimes. Effectively, a swift change to open, competitive economies, banking on private enterprise in a de-regulated labour market, may win friendly allies in the cause of job creation. Provided that businesses are politically aware of the governments they are dealing with. Economic reform and advances in the natural resource sector, without accompanying structural reforms in the society, will not, in themselves, mean much in changing the MENA region. It was already evident prior to the Arab Spring that something had gone wrong, whether in tax reforms, or in the establishment of industrial zones favouring foreign investment. Necessity may be the mother of invention, but it could also prove to be the father of economic and social reform. www.ibde.org


OHRID LAKE - MACEDONIA

Contact: Embassy of the Republic of Macedonia Buckingham Court 75-83 Buckingham Gate London, SW1E 6PE info@macedonianembassy.org.uk

Photo: Municipality of Ohrid


E x c h a n g e : The Magazine for International Business and Diplomacy

June 2011

Analysis

Roadmap to Investor Returns? The Impact of Trade, Development and Foreign Investment in the Israeli-Palestinian Peace Process. Alice Campbell-Cree, MA

I

n an interview which featured in the March issue of IBDE’s Exchange magazine, the Rt. Hon. Alan Duncan MP, Minister of International Development, said of the Middle East peace process, “a strong Palestinian economy, underpinned by a vibrant private sector, is essential to improve the prospects for sustainable peace”. Indeed, the role of economics – in this case trade, development and foreign investment – in the context of a broader political setting, is an important one. And certainly, gaining momentum is the notion of development of the Palestinian economy and infrastructure as key to both Palestinian emancipation ahead of plans to seek independence at

Sorce:http://www.un.org/Depts/Cartographic/map/profile/israel.p df

the UN this September and fortifying Palestinian bargaining power at the negotiating table with Israel. Initially this article set out to demonstrate the importance of trade in promoting conflict resolution; however the current level of Palestinian state apparatus led the discussion of trade to a discussion of development and the progress of Palestinian politician Salam Fayyad’s reform program. This, in turn, highlighted the need for foreign investment in Palestinian infrastructure and institution building. Indeed it is concluded that if trade is key to peace; and development is key to trade; and foreign investment is key to development, then ultimately investment in the Palestinian economy is, as Minister Duncan stated, integral to the broader peace process. Essential to peaceful international relations is the promotion of dialogue and cooperation. Often peace processes between two factions initiated by a third party are inherently unstable because the dialogue and cooperation is not so much organic as it is imposed. Peace that exists or develops naturally from mutual cooperation and – as will be discussed – mutual dependence, however, can be significantly more sustainable. As Baron de Montesquieu stated “peace is the natural effect of trade” and, assuming the relatively standard post-Ricardian economic theory that countries maximise their own national material welfare by exporting goods for which they have a competitive advantage and importing goods for which they do not, one can observe how international trade patterns emerge. The understanding from here is that conflict, which can raise the cost of trade for at least one of the trading partners (through reactive trade prohibitions such as tariffs or embargoes), hinders the critical goal of nationnal prosperity and is therefore avoided in most cases of a strong trade partnership. In applying these considerations to the Israeli-Palestinian case, in an attempt to immediately infer that an increase in IsraeliPalestinian trade would decrease conflict, a number of problems arise. Firstly, countries responsible for a particularly strategic commodity can use that competitive advantage in the face of hostility. In the case of Israel-Palestine, dependence of the Palestinian territories on a number of resources and services provided by Israel – including a large portion of the Palestinian Authority’s public sector revenue and, very significantly, Israel’s water network – means Israel need not limit hostility. Until

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Palestinian infrastructure and state apparatus is developed enough to change it, this dynamic will prove a significant barrier to a mutually dependent trade partnership. Secondly, most quantitative analyses demonstrating the correlation between an increase in trade and a decrease in conflict focus on two states, not instances where one actor has yet to achieve political independence. And so it seems that in order to increase trade and therefore decrease conflict, development of Palestinian governance

and economy is necessary. Such reasoning underlies Palestinian politician – and former disputed Prime Minister – Salam Fayyad’s August 2009 reform program. The agenda, which has been dubbed Fayyadism, calls for the creation of more effective and efficient central and local government institutions and the development of the region’s infrastructure, paving the way for increased foreign investment and the beginnings of a market economy. All of this will go some way towards establishing what Fayyad has referred to as a “de facto state apparatus”, relying less on Israeli administration and preparing for a declaration of independence before the end of this year. Some critics argue Fayyad’s strategy is simply another version of Israeli Prime Minister Benjamin Netanyahu’s Economic Peace, focused on improving Palestinian quality of life at the expense of firstly addressing greater political questions and progress. This is, in some

way, entirely the point, however. Israeli-Palestinian negotiations centred around the larger issues – such as pre-1967 borders, Palestinian right of return and the question of Jerusalem – have hitherto failed to bring about any real peace to the region. The tensions surrounding Netanyahu’s visit to the US late last month, his and American President Barak Obama’s discordant public addresses regarding their respective policies and their seemingly fruitless peace negotiations are testament to this. Rather, creating “institutional facts on the ground” may lead Palestinians to a better place from which to negotiate. Certainly, progress has been made in the West Bank. In the last two years, more than 120 schools have been constructed, 1,100 miles of new road laid, and 900 miles of new water networks established. Improved tax collection rates meant tax revenues were 15 percent higher than budgetary projections in 2010 and official IMF figures place economic growth in the West Bank at 8.5 percent in 2009 and 9.3 percent in 2010. Indeed, Fayyad told www.ibde.org / 36


BOKA BAY – MONTENEGRO

Contact:

Embassy of Montenegro:

18 Callcott Street London W8 7SU United Kingdom

UNITEDKINGDOM@mfa.gov.me


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Israeli newspaper Haaretz that “already on April 13 [2011]… the UN, the World Bank and the International Monetary Fund stated that we crossed the statehood line”. Still, up until the beginning of May this year, a significant criticism levied against the Fayyad strategy could have been the place – or lack thereof – of Gaza in this future Palestinian state. But, with the recent signing of the landmark unity deal between Hamas and Fatah, and talks of the formation of a new government comprised of independent Palestinian representatives, it seems

progress on Palestinian governance and statehood is multi-faceted. The most pressing problem may now be the private sector deficit – the need for foreign investment to further progress on infrastructure and institution building and economic development. These in turn will bring about the burgeoning market economy necessary to gain some competitive advantage from which a mutually dependent trade partnership with Israel

June 2011

can form, decreasing the impetus for, and likelihood of, conflict between the two parties. Indeed, basic SWOT analysis of recent investment opportunities in the Palestinian territories demonstrates the major weakness of most ventures is simply the lack of capital. Incidentally, the strengths of most ventures – not at all unsurprising for a developing economy – include, almost always, the first mover advantage as well as significant projections for return on equity. An example of this is, amongst many opportunities in the manufacturing sector, an opening for investment in what would be the first and only iron pipe manufacturer in the Palestinian territories, which would supply the thousands of tonnes of steel piping consumed by developing Palestinian infrastructure, as well as the Israeli real estate development and construction boom which currently exceeds its own domestic supply, offers an estimated 34 percent return on equity by 2012. In the real estate and construction industry, one of many

Analysis

residential developments in the West Bank is a project in its second phase of construction which gives a predicted a 95 percent return on equity by 2012. Amid numerous openings in the information and communication technology sector is for investment in an online shopping mall which, again, enjoys relative inimitability in its industry, offering an estimated 190 percent return on equity by 2014. These cases provide only a very small insight into what is a vast array of investment opportunities in the Palestinian territories. Certainly, for a region that relies very heavily on international aid, whose current – and so recently unified – agenda is so strongly focused on development, there is only one way forward. This is an opportunity for investors to gain a first mover advantage and significant return on equity, be a part of Palestinian development and statehood, and the beginning of what could, one day, be a very strong and positive Israeli-Palestinian trade partnership.

Arab Reform: Transplanting Federalism to North Africa and the Middle East.

Nasos Mihalakas

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ecent events in North Africa and the Middle East have brought to the forefront the fragility of government institutions and have questioned the legitimacy of authoritarian regimes in a number of developing nations. The right form of governance for the right society has never been easy to identify. Many times, societies have adopted forms of governance that were imposed on them by past colonial masters or short sighted revolutionary uprisings. Therefore, the revolutionary people of the ‘Arab Spring’ need to be very careful when it comes to choosing their new forms of governance. However, the right system of governance is needed not only in order to safeguard civil liberties and the peoples’ hard fought rights, but also to promote much needed economic growth and development for the region. After all, it was persistent unemployment and rising

food prices which caused people throughout the Arab world to take to the streets. Economic development should be just as important as democratic values and civil liberties. The people of the ‘Arab Spring’ need a vision for the future, complete with a new form of governance. The instability and unpredictability of the street revolution needs a vision of what life could look like after the dictators are toppled that addresses both the political and economic needs of the people. There is only one system of governance, which both safeguards pluralism, guarantees democracy, protects minority rights, promotes commerce and facilitates a market economy, and that is Federalism. Federalism, with its separation of powers, checks and balances, devolution of powers, and economic competition at the local level could provide an excellent framework for the people on the street to aspire to and strive for. Political Benefits from Federalism As a system of governance, federalism dispenses political power from the centre level to the lower levels in a beneficial way to a society because it brings the government closer to the people; enhances participation; fosters a more egalitarian society; promotes more effective community involvement; and in-

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creases solidarity by empowering ordinary people to make decisions for their communities. However, most developing nations fall into the trap of believing that the accumulation of power at the centre is required to stabilize the system; provide greater security in their territory; integrate markets for more rapid growth; or to merge the political system to become more unified. Although undoubtedly there is need for a hierarchy and a bureaucracy to provide order to a society and fortify national interests, the difficulty for most developing nations has been that of balancing ‘order and efficiency’ with enhanced participation and autonomy in lower levels of government. When power and authority are the prerogatives of local government, the people become motivated to share concerns and responsibilities. The more a state becomes centralized, the more controlling and even authoritarian it becomes since power aggregates into the hands of a few. Nowhere is this more obvious than in North Africa and the Middle East. Not only has centralization in the name of efficiency or expediency become an excuse for abuse, but also there is a proliferation of favouritism of certain ethnic/religious groups over others. www.ibde.org


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Market Promoting Federalism In the context of developing countries, decentralization of political power is not enough unless it yields some economic benefits. When trade with the outside world is not possible or profitable, developing countries need economic growth to come from within. Therefore, what Arab nations need the most is a system of governance that encourages and promotes economic and commercial activity at the local level.

This is where ‘market promoting federalism’ (MPF) comes into play. Decentralized control over the economy by subnational governments within the common market prevents the central government from interfering with markets. Decentralization under MPF allows for diversity of policy choices and experimenttation by local governments, thus creating a feedback to the central government and other local governments. The central feature of MPF is that it imposes limits on the exercise of authority by all levels of government. Contrary to a system with a centralized unitary government, MPF limits the central government directly by placing particular areas of public policy beyond that government’s reach. Furthermore, the lower governments are also limited, not only by the central governments supervision of the common market, but also by the competition they face from each other. Nowhere is this more evident than in the U.S. and China, where states and provinces have been competing with each other and growing the national economy in the process. Constitutional Reform for the ‘Arab Spring’ When federalism at the national level is applied properly it leads to multiple centres of power (and thus multiple leaders), not just one strongman (a president or a prime minister

June 2011

with all the power). What could be more appropriate for the people of North Africa and the Middle East, which have suffered so much at the hands of a few dictators, than to adopt a political system that does not deify one person or one family? The U.S. federal system of governance provides an excellent starting point for any discussion about constitutional reform in the region. The most fundamental tenant of the U.S. federal system of governance is the complete institutional separation of powers at the national level, while at the same time every decision at the national level requires the consent of all the branches of government. Therefore, Legislative (Congress), Executive (President) and Judiciary (Supreme Court) branches are completely separate, but laws passed by the legislature need t he approval of the President, and are subject to review by the Courts. Second, the legislative process is performed by a bi-cameral legislature, where one chamber represents the people (House of Representatives) while the other (Senate) represents the sub-national units (States), and both chambers are equal in power and responsibility. Furthermore, by staggering the terms of legislators (2 years for House members, 6 years for Senate members) and staggering the election of Senators (one third up for re-election every two years), the legislature is renewed every two years while being insulated from dramatic swings in popular opinion. Third, Cabinet and sub-Cabinet officials, Ambassadors, and Judges have to be considered and approved by the legislature. This oversight role of Congress continues after Cabinet members are appointed, when they are required by law to appear in front of select legislative committees and report on their

The Institute for Democracy and Conflict Resolution (IDCR) draws on the research, training, and practical expertise developed over the last 40 years at the University of Essex in the areas of democracy, conflict, human rights, justice, and governance to provide a wide range of knowledge transfer activities that will be of interest to policymakers, think tanks, non-governmental organisations, and private companies. Directed by Professor Todd Landman, it works on forging and maintaining sustainable democratic institutions and preventing and resolving conflicts through academic analysis, training, outreach and knowledge transfer across a wide range of issue areas. The Institute will be housed in a flagship building in the University’s new Knowledge Gateway and will be designed by renowned architect Daniel Libeskind. It currently has a series of programmes and activities in the areas of parliamentary strengthening, democratic accountability, and security budgeting, and has developed a set of new relationships with public and private sector organisations.

Analysis

departments activities, answer questions, and make available to legislators any and all information legislators deem relevant. Finally, the independence of the judiciary branch is guaranteed through life-time appointments. Although judges are selected by the President and approved by the legislature, they are appointed for life, and their removal is exceptional and very hard to achieve. Furthermore, judges have the power to review the constitutionality of laws, and through the years have many times struck down laws which were not consistent with the letter or the spirit of the Constitution. Add to these fundamental elements of the U.S. system term limits for politician, clear provisions for amending the constitution and removing the President, an independent Electoral Commission, and an independent and competent Office for the protection of Human Rights, and you have a recipe for political stability and economic success. The Right Form of Governance The history of modern economic development is full of successes and failures. The failures appear to be more than the successes; from the many African nations that have never truly improved their condition since independence 60 years ago, to the Middle East, rich with oil but stagnant economically and democratically. Now, the nations of North Africa and the Middle East are going through some major changes to their regimes and future systems of governance. Identifying the right form of governance for the right society has never been easy, but federalism could be the most appropriate of all possible choices for the nations of the ‘Arab Spring’!

As the first exclusively graduate school of international affairs in the United States, The Fletcher School of Law and Diplomacy at Tufts University (The Fletcher School) has prepared leaders with a global perspective since 1933. The Fletcher School offers a collaborative, flexible, and interdisciplinary approach to the study of international affairs, featuring a distinguished faculty and accomplished community of alumni. The Fletcher School awards professional degrees, including a two-year Master of Arts in Law and Diplomacy (MALD); a one-year Master of Arts for mid-career professionals; a one-year, mid-career combined Internet-mediated/residential Global Master of Arts (GMAP); a Ph.D. program; a Master of Arts in International Business (MIB); and a Master of Laws in International Law (LL.M.), as well as joint degree, summer school and certificate programs. For more information, please visit The Fletcher School website at: www.fletcher.tufts.edu

For more information, please visit www.idcr.org.uk or email info@idcr.org.uk

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June 2011

Spring and Federalism under the Arab Sun

Analysis

Jacques Couvas

Jacques Couvas

T

he Deauville G8 at the end of May has deluded the expectations of the Arab world, both political and economic. The World Bank’s pledge to an aid of US$ 6 billion to Egypt and Tunisia fell short of the actual needs of these countries and of the commitment of the developed nations in 2005 to allocate 0.7 percent of their Gross National Income (GNI) in assisting the globe’s emerging nations. The EU’s shortfall is € 19 billion, more than one-third of the total aid pledged by its Member States. In the political sphere, the super-Powers eschewed taking a firm position on the formation of a Palestinian state drawn on pre-1967 borders with Israel. The leaders of the octet have, however, faithfully recited the mantra of democracy and economic development for the Middle East, under the direction of U.S. President Barak Obama, whom both British Premier David Cameron and French President Nicolas Sarkozy elevated to the rank of conductor throughout his stay in Europe. As the Middle East is disintegrating, constitutionalists from all quarters furiously sketch out the future political shape of the region. Obama’s baguette points them towards a familiar design pattern: today’s democracy means American-style democracy, which in turn implies the “F” word: Federalism. And, as American academia, media and think-tanks dominate the globe’s modus pensandi, or way of thinking, the vision of governance increaseingly proposed for the post-Spring era (that is, the Arab Summer) contemplates federal structures for the Middle East and Northern Africa (MENA). Visions in the desert may become illusory, because of mirage effects. Federalism, like democracy in any form, is not an off-the-shelf model that can be cut and pasted anywhere and everywhere at will. It requires progressive cultural transformation, political maturity—which, evidently, is also progressive—and education. Legal education, to be precise. Democracy is the consequence of fair laws and unbiased judiciary--the design, implementation and absorption of which is a long path, fraught with difficulty and often conflict. It took a century

for Solon’s reforms to result in the ideal democratic model of Pericles’ Athens. With today’s communications and educational advances, the process can be shortened, but not compressed beyond people’s natural speed of adaptation and understanding. A forced governance model, adopted because it is fashionable or sounds promising, will inevitably lead to backlash whenever its underlying principles and rules will be confronted with contradictory interpretations. The Middle East is particularly vulnerable to these aspects. Its states are coming out of half a century of serial dictatorships, which succeeded the colonial regimes of Britain and France, themselves successors in the region to a monarchy with no democratic precedents, the Ottoman Empire. Both Britain and France are still the strongholds of anti-federalism in the construct of the EU. Their legal concepts, literature and education, which influence lawmaking in MENA, as well as Africa, are not conducive to the engineering of federal states. Europe and the Middle East have made attempts at introducing federalism in the past sixty years, with variable success. Germany has been successful as a federation, although its system was imported from the United States, victor of WWII. It is the strongest proponent of a similar model for the EU and is partially getting ahead with its plan. The euro is a manifestation of federalism, for instance. But other European states have not had a lucky hand when signing off on federal constitutions in the 20th century. The Soviet Union, Yugoslavia, Belgium, Czechoslovakia, SerbiaMontenegro are cases-in-point. In the Middle East, pan-Arabism has been used as a motto since the Arab Revolt of 1916 against the Turks, but every attempt to create a large federal Arab state ended up in discord and sometimes bloodbath. Political scientists wonder how a group of 22 states with 320 million people, sharing a common language and religion, have not only been unable to form a strong interactive network, but on the contrary continue to display distance and suspicion with each other. Egypt and Syria formed in 1958 the United Arab Republic, which lasted three years. Egypt and Libya had over time an accordion-like relationship, ranging from military alliance in 1973 to a war, in 1977. The relations were restored to friendlier levels in 2005, and in 2006 Muammar al-Gaddafi, whose youth idol was the legendary Egyptian leader Gamal Abdel Nasser, proposed a

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tripartite union between Libya, Egypt and Sudan. The union’s constitution draft was never seriously discussed. The political system of a nation is generally consistent with the nation’s cultural characteristics and its external environment, regardless of the name given to the governance model. Sudan, Yemen, Lebanon and Somalia have tried internal federal solutions, with the known results. The United Arab Emirates are a federation of absolute monarchies, with a cosmetic federal council, half of whose members are appointed by the rulers of the member emirates, while the other half are indirectly elected. A common denominator in cultural styles in the region is power distance, which is readily exploited by monarchs and other heads of state and accepted with fatalism by the subjects of these countries. This seems to be equally true for Iran and Turkey, although democracy is better understood there by an educated part of the population. A major issue with federalism is where to draw the boundaries between federated states. In most former colonies, national borders where drawn precipitously by the outgoing powers, without too much concern for potential consequences. As a result, heterogeneous groups were put under one flag. Should the separation lines be around geographical areas, or rather be plotted to unite religious, ethnic and cultural communities regardless of their location? A nd, if a geography approach were adopted, how minority rights could be protected in a s tructure where the decentralized entity might be controlled by one dominant ethnic or religious group? In a unitarian regime, it is the duty of the central government to treat all its citizens equitably. Member states of a merging federal democracy may be inclined to disregard their obligations towards their minorities. These questions have not been answered satisfactorily in many so-called federations, like Sudan, Yemen, Somalia, Lebanon, or Nigeria. Federalism may be a vehicle for positive autonomous governance within a frame that fosters a common national identity; or it can become the source of ethnic and religious communitarism and polarization, and pave the road to secession. Democratic tradition and legal education are, therefore, prerequisites to such experiments. The West’s laboratory of the Arab peoples’ future governance is a risky venture. The desert sun is not an ally to complex chemistry. www.ibde.org


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June 2011

Leaders

Inter-Continent Trade, Business Diplomacy, and Fuzzy Logic

S

tate and private sector involvement in diversifying domestic economies, promoting international trade, accelerating FDI, bridging continents to create sustainability, and coping with the perverse side of social networks and media combine in the third section of this issue of Exchange to take us from Britain, to South Africa then to China through the Internet Cloud. Azerbaijan is one of the former Soviet republics that have adjusted fast to the international economic system. Its solid economic annual growth of 9 percent (World Bank, 2009) could provide lessons for emerging markets. True, Azerbaijan owes its success to its abundant hydrocarbon resources. But not only, contends H.E. Fakhraddin Gurbanov, its Ambassador in London. “Political stability, order and measures to facilitate business and trade have been key to attracting billions of foreign direct investment into the country”, he explains. Use of revenues from gas and oil exports is now being channelled to new areas of strategic development, such as agriculture, tourism, IT, and financial services. Close collaboration with the European Commission and a plethora of bilateral agreements with EU Member States are taking high priority in the country’s ambition to become a trade hub between South-East Europe, Russia and Central Asia. Governments will never be the single answer to increasing trade and investment, but they do have an important role to play in supporting businesses and making sure the conditions are right for them to flourish, says Ms. Susan Haird, Acting Chief Executive of UK Trade

Source: http://ec.europa.eu/enterprise/policies/raw-materials/international-aspects/index_en.htm#

and Investment (UKTI) in her interview to Exchange. Britain has over the years secured leading position among exporting countries, becoming an attractive destination for foreign investors. Today, the UK is the easiest country to set up and run a business in Europe, according to the World Bank, and among the top three countries in the world attracting inward investment. In exports, Britain holds top rankings in several industries, thanks to a strategy that associates state diplomacy and industry drive to conquer foreign markets. Mission accomplished but not ended, according to Ms. Haird. The British government announced an aggressive fiscal policy to reduce corporate tax rates and boost R&D by SMEs. To sustain

South Africa's President Jacob Zuma at the Brics meeting in Hainan. Photograph: Pool/REUTERS 40 / International Business and Diplomatic Exchange – I B D E

exports increase, the Foreign and Commonwealth Office launched this year a “Business Charter” aiming at enhancing state-private sector

economic and commercial diplomacy, a theme dear to Exchange. South Africa recently surprised the international community, when joined BRIC (Brazil, Russia, India, and China) to form BRICS. Mr. John Battersby, UK Country Manager of the International Marketing Council of South Africa, and Ms. Yingni Lu, Director of EcoLeap Consulting tell Exchange how South African President Jacob Zuma paved the way to this achievement for his country. In their article, they put light on the privileged relationship President Zuma and his Chinese counterpart Hu Jintao are in the process of cultivating, and its potential impact on future growth of the African Continent. Erasmus University, The Hague, Professor Peter A.G. van Bergeijk analyses the positive effects of international trade on peace, as past and current history demonstrate. Globalization has many pros, but new technologies and laymen awareness of them is becoming a threat to cross-border relations and to companies’ global brands, since uncontrolled use by formally unrelated groups around the Globe, instantly interacting, is capable of tarnishing corporate, individual and state reputations at will, stirring hostile reactions and sentiments. Citing examples from recent events, he p rovides ideas for better use of, and protection from fuzzy networks www.ibde.org


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June 2011

Interview

A One-stop Gateway to a Better Economic Environment Exchange talks to His Excellency Mr. Fakhraddin Gurbanov Ambassador of Azerbaijan to the United Kingdom

Exchange: Your Excellency, Azerbaijan could be taken as the exemplary case of an economy driven by a natural resource boom. Since 2007, Azerbaijan has grown at a staggering average annual rate of 14.8%, according to the EBRD. As a result of successful public investment strategies, the non-oil economy has also benefited from spill-over effects. Can you tell us how the improvement of governance standards and political stability have contributed to these positive results? What aspects of the institutional and political systems should be strengthened in the future to further consolidate the efficacy of economic policy? Ambassador Gurbanov: Azerbaijan’s economy has witnessed an astonishing performance over the last few years. This is mainly due to the commissioning of regional energy projects and

from establishing a one-stop registration system to taxing regulations and strong property protection legislation. The Government’s economic policy envisages diversification of economy into non-oil sectors, diverting energy revenues towards strategic projects, alleviation of poverty which has been brought down to less than 10 percent and creating employment opportunities countrywide. Exchange: The natural gas sector represents the next frontier of extractive development in Azerbaijan. In January, the President of the European Commission José Manuel Barroso concluded a landmark deal with Azerbaijan to secure access to the country’s gas supply. The planned Nabucco pipeline, involving a consortium of European energy companies, is envisaged as the flagship interconnector with

The current economic environment in Azerbaijan has been further bettered with a number of measures, ranging from establishing a one-stop registration system to taxing regulations and strong property protection legislation. the Government’s long-term solid economic policy. As you rightly noted political stability has made enormous contribution to the economic development. It would be impossible to undertake economic reforms and attract billions of foreign direct investment in a politically unstable environment. Political environment is key in every potential investor’s decision to involve in business operations in a foreign country. Although political stability lays foundation to further build on, without a proper, long-term and strategic economic policy it is not viable to secure economic development. The current economic environment in Azerbaijan has been further bettered with a num ber of measures, ranging

the Western consumer markets. However, with a capacity of roughly three times the amount of gas on offer in Azerbaijan, Nabucco would have to strike unlikely deals with neighbouring gas-rich countries in order to offer a competitive tariff to Azerbaijani exporters. What steps are being taken by the Government to tackle the challenges posed by gas transportation infrastructure? What other markets, if not the EU, could absorb the future boom of Azerbaijani gas production? Ambassador Gurbanov: Azerbaijan has managed to build a diversified export structure for its hydrocarbon resources. This involves both oil and gas export facilities towards

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many directions. Azerbaijan exports natural gas towards Russia, Iran, Georgia, Turkey and Greece. A range of contracts are being discussed with European countries that would further strengthen Azerbaijan’s position in international energy market. It goes without saying that we can not afford to rely solely on one route to export our gas resources as this poses risks to the energy security and uninterrupted flow of energy. A lthough Azerbaijan has always rendered its support to the proposed Nabucco gas pipeline, the project itself was not initiated by Azerbaijan. In order to go ahead with this project Azerbaijan has signed a deal with the EU earlier this year which has certainly boosted the opportunities to implement the project. Furthermore, Azerbaijan has also concluded an agreement with Georgia, Romania and Hungary to build LNG facilities and allow export of Azerbaijani gas through Georgia-Black Sea towards Romania and Hungary. Exchange: The British oil and gas industry boasts a distinguished presence in Azerbaijan. Both the Azeri-Çirag-Güneşli oil field and the Baku-Tbilisi-Ceyhan oil pipeline are operated by BP-led consortiums. The British giant also holds a leading share in the Shah Deniz field expected to feed the Nabucco pipeline, as well as a production-sharing agreement with Azerbaijan’s state-owned SOCAR for the Shafag-Asiman gas field. What makes Azerbaijan so attractive for the British oil and gas industry? What future collaborations lie ahead? Ambassador Gurbanov: Indeed Britain has a long-standing and strong presence in Azerbaijan’s oil and gas sector. Our countries have a long tradition of mutually beneficial cooperation in exploration and export of Azerbaijan’s hydrocarbon resources. British Petroleum is the main operator of Baku-TbilisiCeyhan regional oil pipeline and is also present in other Production Sharing Agreements. The last agreement was singed in July 2009 in the course of President Aliyev’s official visit to www.ibde.org


Interview

London and we are hoping that we will continue to work together with British companies in oil and gas sector. We see Britain a key country to cooperate in energy sector and we are looking forward to bring in British investments towards non-oil sectors such as financial services, project management, agriculture, ICT etc. Exchange: With the country’s oil reserves expected to run out as early as 2028, what are the saving policies that the State Oil Fund (SOFAZ) is currently adhering to in order to ensure the continued availability of investment funds when the oil fields are decommissioned? Ambassador Gurbanov: The energy revenues accumulated at the Oil Fund is of strategic significance for the future. It is partly diverted towards financing significant projects. So f ar The Oil Fund ha s supported the financing of resettlement of IDPs and refugees, education of Azerbaijani students’ abroad, construction of Baku-Tbilisi-Ceyhan oil pipeline and OguzGabala-Baku water pipeline. Its funds are mainly placed at foreign monetary markets and through this instrument it brings in additional revenues to the country. Financially it pursues a very conservative policy and its funds are placed in a range of international currencies to ensure financial profitability of the funds. Exchange: Despite an emergent political will to pursue economic diversification, the economy remains natural resource-centred. Oil and gas receipts account for 70% of the country’s exports, nearly 50% of budget revenues and an astonishing 55% of GDP, according to the EITI and The Economist. What are the success stories of economic diversification? What are the ways forward? Ambassador Gurbanov: Yes, our economy heavily relies on the hydrocarbon resources and revenues accumulated through the export of gas and oil make up most of the state budget. However we realize that in order to build a sustainable economy for future generations we need to carry out an extensive programme of economic diversification. This is exactly what is being done now in the country. A number of non-oil sectors, namely IT, agriculture, tourism, financial services have been identified as key non-oil sectors to further develop. As I noted before one of the main reasons behind establishing Azerbaijan’s sovereign wealth fund State Oil Fund was to ensure that oil and gas revenues are diverted to improve non-oil sectors. Furthermore Azerbaijan Investment Company has also been set up with a view to supporting private entrepreneurship and initiatives in the country. This helps medium and small sized companies which are critically important to create jobs and sustainable economy. I could tell you just a small example. The biggest winter sports complex in the Caucasus is now under construction in Azerbaijan and once completed we hope it will turn my country into one of leading winter

Exchange: June 2011

sports destination in the region. This in turn would boost Azerbaijan’s tourism potential, a sector with huge opportunities for further development. Exchange: Given Azerbaijan’s strategic location as a gateway to the Middle East and Central Asia, what can be done to improve its attractiveness as a potential agribusiness and food processing hub? Ambassador Gurbanov: As you rightly stated Azerbaijan has a potential to become a centre for food processing and agribusiness. Indeed improvement and bringing in high-tech practices into agriculture and securing food security is a priority. There is a huge potential out there as the country is very rich in agricultural resources. We are now setting up

This again showcases the opportunities for cooperation with foreign investors in agricultural sector. Exchange: Following your country's recent triumph in the Eurovision Song Contest, what other developments might be in Azerbaijan's "vision" so as to make your country a chosen tourist destination in the Caucasus. Ambassador Gurbanov: Taking this opportunity I would like to congratulate the people of Azerbaijan and to all those who have supported Azerbaijan in 2011 Eurovision Song Contest. That was a deserved win and we are very proud of this. Indeed this a great chance for my country to showcase its rich culture, hospitability and traditions to Europe. I am pretty sure Azerbaijani authorities and people

One of the main reasons behind establishing Azerbaijan’s sovereign wealth fund State Oil Fund was to ensure that oil and gas revenues are diverted to improve non-oil sectors. agricultural facilities, including food warehouses to contain collected fruits which are mainly exported towards Russian and Central Asian markets. I am hoping that these measures will assist further develop agriculture sector in the country. Britain-Azerbaijan Business Council is involved in arranging trade missions to Azerbaijan to explore further opportunities for economic cooperation. Last year on t heir mission to Azerbaijan a B ritish agricultural company has decided to set up a business with a local company in Azerbaijan.

will try their best efforts to make sure that Eurovision finals in Baku next year is fascinating and memorable. This in turn will bring in many people from across Europe to Azerbaijan and will surely boost tourism. Even this year is pronounced as Year of Tourism in Azerbaijan. Five top five-star hotels will be opened in Baku later this year. These efforts will be further strengthened in the years ahead with the view to expanding tourism opportunities in the country.

The Central Bank building in downtown Baku Source: http://commons.wikimedia.org/wiki/File:Azeri_Square.JPG

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E x c h a n g e : The Magazine for International Business and Diplomacy

Interview

June 2011

UKTI Partners a Nation of Entrepreneurs Exchange interviews Susan Haird Acting Chief Executive of UK Trade & Investment

Exchange: Averting future financial and economic crises will involve, at a minimum, improving global economic cooperation. In your opinion, what are the strategic policy principles that domestic and supranational institutions should sign on to in order to leverage trade and investment as drivers of growth, and neutralize their potentially destabilizing aspects? S.H. Governments will never be the single answer to increasing trade and investment, but they do have an important role to play in supporting businesses and making sure the conditions are right for them to flourish. This means putting processes in place to make it easier for companies to develop and then have the confidence to export. The World Bank named the UK the easiest place to set up and run a business in Europe and we have many advantages which ensure we remain a strong contender internationally. Not only are we the number one gateway to Europe, but we are the number one location for European headquarters and we have some of the most well-respected universities in the world. The Government here wants to build on that though, and has announced a reduction in Corporation Tax to 23 percent by 2014. There will also be an increase in the tax credit rate for research and development in small and medium-sized enterprises (SMEs) to 200 percent from April 2011 and 225 percent from April 2012.

So both domestically and across the world Governments can improve the conditions that exist for companies, and help to ensure growth by having their interests at heart and supporting them where necessary. This is both the role and responsibility of global institutions in keeping economies stable and growth secure. Exchange: The UK is currently the world’s sixth largest exporter and second largest investor in foreign markets. Where do British intrinsic comparative advantages lie? Can you briefly map out the sectors and regions where British FDI and exports can boast success stories?

To realise our potential we know that we must commit to open markets globally and never slip back into protectionism. S.H. Our position amongst the top ten global exporters is testament to the wealth of talent and expertise the UK possesses across a range of sectors. We have far-reaching capabilities that show we are punching above our weight in the global marketplace and having an impact in some of the fastest-growing countries. We need to nurture this talent and we need

This is a nation of entrepreneurs and we have a lot to be proud of Internationally, Governments can work together to encourage open competition in trade and investment, breaking down barriers and avoiding protectionism. An increase in Free Trade Agreements has a key role to play here, especially with developing countries.

USA, and our companies contribute to many significant defence contracts. We also have a strong creative industries sector, with capabilities in video games, film, music and much more. I n fact this industry accounts for over 5 percent of the UK economy, employing 1.3 million people and with exports totalling £17.3 billion. UKTI works with companies from across the board to encourage exporting. For example, we have helped the chocolatier Chokolit to secure a US distributor after a trade fair in New York. And we supported Fivium, an IT firm, as it sought to enter the Australian market. The company has since won a prestigious contract

to be more vocal in promoting what we have to offer. Lord Green describes a lack of selfbelief, and this is often true. We must highlight the areas where we are successful. For instance, we are the world’s second largest defence exporter, second only to the

43 / International Business and Diplomatic Exchange – I B D E

with Australia’s Department of Health and Ageing. We are doing good work in high growth markets as well. Tradall SA, which is part of the Bacardi Limited group, was given help to export to Turkey. And the renewable technology firm Regenatec has used UKTI assistance to move into China and Brazil. These are just some of the areas where the UK is excelling. We do have advantages, as I have said, across many sectors and r egions. This is a nation of entrepreneurs and we have a lot to be proud of. Exchange: The White Paper detailing the Government’s strategy on trade was introduced in February. What are the key lineaments of this strategy and what key sectors are at the top of the trade and investment agenda? S.H. We launched a White Paper on trade and investment for growth in February, aimed at www.ibde.org


Interview

developing and nurturing our international relationships. It is important for our economy that we work closely with partners overseas, removing trade barriers where they exist and s trengthening the multilateral system. To realise our potential we know that we must commit to open markets globally and never slip back into protectionism. Our White Paper is ambitious. It recognises that trade and investment are critical if the UK is to see strong, sustainable and balanced growth. It also recognises the importance of developing countries and the role they have to play. So the Paper sets out our hopes for a swift conclusion of the Doha trade negotiations, which would bring about enormous benefits. This would be seen nowhere in sharper definition than in Africa, where we are supporting Free Trade Areas in each regional economic community. We want to provide greater market access for the poorest, and we have urged all G20 countries to provide Duty Free Quota Free access to their markets for least developed countries. This could increase their exports by over 40 percent. At home the White Paper committed us to improve the trade finance and insurance available to UK businesses, especially small and medium-sized companies. We set up a new Export Finance Guarantee Scheme with the Government providing guarantees to lenders, and we increased the short-term credit insurance on offer to companies in the UK.

Exchange: June 2011

Together these measures will give businesses greater confidence to export and in turn make this country more competitive on the global stage. This is what we are aiming for and what we will dedicate ourselves to achieving. Exchange: What flagship policies and initiatives is UKTI planning to implement to deliver on this strategic document?

enhancing our performance. We will become a more entrepreneurial organisation, offering a more bespoke service to small and medium-sized businesses in particular, and helping companies to win large scale projects. For individual companies, we will develop an improved online network of connections so that leading business figures can share best

In 2010 we were named the Best Trade Promotion Organisation from a Developed Country

S.H. Our White Paper was only the first step in our plans to enhance the UK’s trade and investment. Now we have launched a new UKTI strategy. UKTI is the organisation at the heart of the Government’s international growth plans. The strategy sets out how we plan to work over the next five years and what we are going to do to ensure we remain at the very top of our game. We currently generate £22 in additional profit for firms for every £1 spent on exp ort promotion, and in 2010 we were named the Best Trade Promotion Organisation from a Developed Country. But we have to keep

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practice and can help one another. We will also focus on hi gh value opportunities and aim to have 750 new foreign direct investment projects into the UK each year. Together with the Foreign and Commonwealth Office, we will promote the UK offer overseas and we will make sure that the UK is somewhere businesses want to call home. It is essential that our business environment meets the needs of companies both now and in the years to come. Exchange: Through the Defence and Security Organization (DSO), the UKTI’s mandate covers export promotion for the British defence industry. How can Government promote a socially and politically responsible military

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E x c h a n g e : The Magazine for International Business and Diplomacy

June 2011

Interview

industry? What measures are in place to enable defence and security companies to fulfil their commercial mandate in compliance with principles of responsible trade? S.H. The UN agrees that every country has the right to defend itself. Not every country has its own defence industry and so some level of international trade in defence goods is essential. This government takes its arms export responsibilities very seriously and we operate one of the most robust and transparent arms exports control systems in the world. It is this system that helps to ensure that UK goods are used for legitimate purposes. When deciding whether to approve a licence controlled goods are assessed on a case-by-case basis. They are assessed against the Consolidated EU and National Arms Export Licensing Criteria, in light of the prevailing circumstances in the destination country and depending on the end use. Respect for human rights and fundamental freedoms are mandatory considerations for all export licence applications. W e do not export equipment where there is a clear risk it could be used for internal repression. Exchange: Part of the UKTI’s mandate is the promotion of inward investment. Where is the UK poised to benefit the most from the inflow of foreign capital? S.H. The UK remains among the top three destinations in the world for inward investment; it is something we do extremely well and which we encourage and nurture. UKTI is heavily involved with almost half of inward investment projects coming to the UK, and our main focus is on hi gh quality projects with the potential to yield a high return. These come from a wide range of sectors, from ICT to advanced engineering, construction, life sciences, research and development.

Competition will always be fierce, but UKTI will lead Government efforts to keep investment flowing into the UK. We will concentrate on t he very real advantages we have, such as a stable legal system, the ease with which companies can set up, our world class universities, and access to a network of influential global connections. Exchange: Business diplomacy is becoming ever more important in the current international business climate. The FCO have placed commercial diplomacy at the heart of

UKTI is the organisation at the heart of the Government’s international growth plans When overseas investors choose the UK they bring with them a wealth of opportunities for this country. Not only do they open up new jobs, but they bring new ideas and w ays of working as well as valuable knowledge and technologies. We can learn from these and develop our own economy, as we take advantage of the breakthroughs they offer. For Government, and for UKTI in particular, our job is to make our country an attractive prospect for investment. We must make sure that companies have access to the tools they need to succeed, from contacts to finance when that is appropriate.

their international trade agenda. Against this backdrop, you will be leading two new bodies: the Council of Business Ambassadors, introduced by the Prime Minister, and a Commercial and Economic Diplomacy Group, tasked with delivering “a more commercial FCO”. How important is this to British business and how are firms going to benefit from these new initiatives?

putting the UK’s commercial interests at the front and centre of foreign policy. The FCO has long supported British business overseas, and flown the flag for the UK as an investment destination, but this decision marked a step change in the depth and breadth of support on offer. The recent launch of the FCO ‘Charter for Business’ reiterated this commitment, and is the first time that the department has made an explicit commitment on the support it w ill provide to business. To deliver the charter, government departments will need to work much more closely together in this way, economic and commercial diplomacy have to be prioritised (alongside security and consular objectives) and the FCO will ensure more of a commercial culture day-to-day. The benefit for British businesses is an international network geared up to help them capitalise on op portunities overseas with the support and advice necessary for success, and to promote the UK overseas to attract investment here. The new commercial and economic diplomacy department in the FCO will help deliver this agenda, in close partnership with UKTI colleagues and with partners across government, but ultimately it is the role of every overseas post and every department in London to ensure that the charter commitments are delivered.

S.H. When the Foreign Secretary was appointed in May last year, he made building Britain’s prosperity one of his three main objectives for the Foreign Office’s work,

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E x c h a n g e : The Magazine for International Business and Diplomacy

June 2011

Analysis

More than just another BRIC in the Wall By John Battersby and Yingni Lu

S

outh Africa is set to benefit in the next 10 to 15 years from major investment in infrastructure and manufacturing from the BRICS – Brazil, Russia, India, and China which represent 42 percent of the world’s population and 18 percent of its GDP. South Africa’s invitation to join the group last

September – and its high-profile inclusion at a well-orchestrated summit in Beijing in midApril - has put South Africa in the league of the world’s fastest-growing and potentially most influential group of nations. The four founding BRICS differ widely in their economic indicators and demographics but they all share a need t o see a successful conclusion of the Doha round and the removal of barriers between the BRICS themselves to promote more open trade and investment. South Africa’s inclusion is a recognition of its strategic role in Africa and its ability to act as an interlocutor between Africa and the international community rather than because of its population or GDP. The BRICS – the sobriquet coined in the aftershock of the 9/11 attack on t he World Trade Centre by Goldman Sachs banker Jim O’Neill in search for the next “big thing” – have gained a momentum of their own in the past decade which means that in addition to reflecting the changing global economic landscape they are playing an increasing role in shaping it.

The recent united insistence by the BRICS that the next chair of the International Monetary Fund should be chosen on competence alone rather than according to a region, indicates a political maturity. It is the first time that a group of developing nations have put pressure on a leading international organisation to select a chief executive who reflects the increasing importance of emerging markets in the global economy. The rising power of the BRICS lobby holds potentially far-reaching consequences for the relationship between China and Africa in general and between South Africa and China in particular and is likely to have a profound impact on C hina’s rapidly growing trade and investment relationship with South Africa. President Jacob Zuma has worked strategically to build the relationship with China and argued persuasively for Africa’s inclusion in the BRICS group through South Africa’s membership. He has already paid a state visit to China, hosted President Hu Jintao in South Africa and attended the BRICS summit in Beijing in April. For Zuma, it is not a question of South Africa boxing above its weight. It is just basic logic that a continent central to sustainable global growth should be included in the club Zuma has already overseen a rapid deepening of South Africa’s relationship with China. Zuma’s leadership stands to win major

Brazil's Acu Superport off the Atlantic coast will be one of the biggest ports in the world when it's completed in 2012. Photo CNN 48 / International Business and Diplomatic Exchange – I B D E

contracts for South African companies and para-statal corporations in developing African infrastructure in what has become the world’s third-fastest growing market after China and India. Africa grew at 4.5 percent last year and is expected to reach 5.2 percent this year. South Africa is set for a more modest 4 percent. South Africa is also a benefactor of better access to BRICS markets and, at the same time, it is a competitor or joint venture partner in the development of Africa. Aware of the massive savings pool that China and other BRICS nations are sitting on, Zuma is inviting investors from BRICS countries to take up the major infrastructure and manufacturing opportunities in South Africa and on t he African continent. Both the private and public sectors of the country stand to be leading beneficiaries of this offer. The BRICS have decided in principle to establish mutual credit lines denominated in local currencies rather than US dollars, a move that is seen to promote cooperation between countries over a wide range of projects, and has proven to be able to facilitate trade and investment between these countries. Such arrangements are already working to the mutual benefit of China and Brazil which has deepened China’s relationship with Brazil’s state-owned oil company, Petrobras. Recently, China Development Bank’s Chairman Chen Yuan has said that the bank is prepared to lend up to US$1.5-bn in local currency to fellow BRICS, in particular, for oil and gas projects. Last year Zuma was appointed to head the African Union’s high-level sub-committee on infrastructure which will oversee an estimated US$480-bn of infrastructure investment on the continent in the next decade. But Zuma’s influence will extend far beyond infrastructure into the vital areas of food production and environment. The realpolitik of the situation is that the bulk of this work is likely to be awarded to China, South Africa and other BRICS. With South Africa serving its second term as a non-permanent member of the UN Security Council and Zuma’s appointment as cochair of the COP-17 climate change summit to be held in Durban in December, the South www.ibde.org


E x c h a n g e : The Magazine for International Business and Diplomacy

African President is well-placed to help forge a grand trade-off between the industrialised and developing worlds. If South Africa can help broker a breakthrough in the global trade-off between environment and development it could give a much-needed boost to South Africa’s own renewable energy and clean technology industries. This COP 17 will have made major progress by establishing either a reformed global market mechanism to regulate emissions or by extending the current one t o include the United States and China. China, both because of necessity and its history of pragmatic adjustment, is well-placed to become the world leader in developing cleaner and more sustainable technologies which will supplement and ultimately replace fossil fuels as the world’s primary source of energy. South Africa is ideally placed to contribute to this global priority. After hosting the World Summit on Sustainable Development in 2002 and more recently committing to the Clean Development Mechanism South Africa has vowed to reach its targets on reducing emissions and carbon management. But in a country with high unemployment and underdevelopment it has to continually weigh the dictates of environmental management with those of developmental priorities. As the pace of regional integration within the Southern African Development Community (SADC) quickens – a goal that Zuma has put at the top of his priorities list – the economic rewards for South Africa will come in the form of increased foreign direct investment and expanding trade relations. The evolving free trade agreement between the overlapping regional economic communities of SADC, the Common Market of East and Southern Africa (COMESA) and t he East African Community (EAC) is likely to give further impetus to this process. South Africa is already thinking BRICS. It is upgrading flight connections and tourism offerings to the BRICS nations as well as tailoring investment opportunities and conditions to meet the requirements of its new-found strategic partners. President Zuma has pointed out that South Africa’s membership of BRICS will open access to the markets of the world’s highgrowth developing economies as well as heralding new and exciting opportunities for South African companies to develop new business and partnerships. South Africa’s robust private sector is gradually waking up to these opportunities and some – such as Standard Bank – were ahead of the game when they sold 20 percent of the bank to International Commercial Bank of China three years ago in what was China’s largest-ever foreign investment at the time. Since then, several key Chinese companies have opened offices in the country and Beijing has located the Africa headquarters of the China-Africa Development Fund in Johannesburg.

June 2011

BRICS, with Africa now represented in “the club”, will deepen south-south co-operation and have the potential to change the game rules of international finance and trade and give a voice to developing countries on a whole range of issues ranging from climate change to development. The main priority of the BRICS is to ensure that the Doha round is completed and that the industrialised countries scrap subsidies and protectionist measures to allow the developing world better access to global markets. Such a move would boost the level of international trade although it would shift the balance towards the markets of the south and THE east. This shift is already taking place and will gain momentum but an orderly transition via the WTO would be less disruptive. Africa is set to achieve growth levels which will empower its 1-billion citizens and enable the continent to elevate millions from poverty as China has done for some 400-million poor in the past 30 years. South Africa’s inclusion in the BRICS in December last year, largely as a result of strong lobbying by China, came as a surprise to many – not least to O’Neill who argued that countries such as Indonesia, Turkey and South Korea were far stronger contenders. But such notions underestimate South Africa’s strategic importance to Africa, China and the industrialised world and its unique potential in acting as a bridge between them. South Africa will continue with its membership of the trilateral commission comprising India, Brazil and South Africa (IBSA) as well as its key membership of the G20 group of nations. But there are hurdles on the road ahead. The China-South Africa trade relationship is heavily in China’s favour and it will take some skilful political arm-twisting to achieve a more sustainable trade balance by getting the Chinese engaged in more joint ventures, manufacturing and beneficiation in line with the country’s recently released economic roadmap, the National Growth Path, which seeks to

IBDE – enhancing global business and diplomatic partnership

Analysis

ensure more leave-behind from foreign investors. Despite China’s position as South Africa’s biggest two-way trade partner based on South African exports of mineral resources, the European Union remains South Africa’s most important export market and responsible for 40% of foreign investment. But it is probably inevitable in the medium to long-term that China will become a more important export market for South Africa goods. While the United States is set to remain by far the most powerful global economy in the next two decades – the changes now underway and symbolised by the BRICS group will prepare the ground for profound changes in the global order in the next 20 to 25 years. South Africa and China – and the other BRICS nations – will be key players in the forging of a more interdependent, sustainable and equitable world.

South Africa's excellent road infrastructure © South African Tourism www.ibde.org / 49


E x c h a n g e : The Magazine for International Business and Diplomacy

June 2011

Analysis

Building Bridges or Weaving Webs? The Increasing role of Fuzzy Networks in Economic Diplomacy

Peter A.G. van Bergeijk

A

lready in 1840 the British economist John Stuart Mill argued that “It is commerce which is rendering war obsolete, by strengthening and multiplying the personal interests which are in natural opposition to it”. One of the key economic messages regarding the prevention of international conflict is indeed that international business relationships create a basis for mutual trust and cooperation. This insight has been echoed by the founding fathers of the Bretton Woods institutions and the European Union. Indeed, it is hardly contested that international trade and investment provide important incentives for stable international political relationships. These incentives are provided by the high costs associated with disruption of these international economic flows. Export, import and foreign direct investment also act as important channels to meet and appreciate other cultures and peoples. Importantly, however, our knowledge about these empirical regularities by and large has only been established at the traditional macro level of Nation to Nation interactions. This article therefore discusses important elements at the micro level of individual consumers and business firms that need further analysis. Globalization has extended the informal and formal networks of all actors and accordingly made them both more influential and more vulnerable with regard to behavior in other jurisdictions. Even actors with geographically limited direct networks and activities (so remaining in the purely domestic or national realms) have increasingly become linked across borders through upstream or downstream activities in their formal and informal networks and through the internationalization of the activities of other nearby actors. The increasing importance of activity that goes beyond borders (that is, beyond the geographic location of the State) has substantial implications for the State, as the stakeholders of such activity get fragmented across jurisdictions. A business firm sells in many markets so that it’s consumer base does no longer reflect the frontiers of States. Traditionally, the State had to deal only with its own citizens as they constitute the franchise, but due to the increasing numbers of cross

border linkages non s tate actors in other jurisdictions can influence the State and its interactions with other States and thus need further reconsideration. It is well known that the very big multinational corporations create as much value at the firm level as many small and medium income countries at the national level. This is why multinational companies are increasingly being recognized as important actors in the field of the ‘new’ economic diplomacy and targeted as such by consumer groups and NonGovernmental Organizations (NGOs). The behaviour of multinational companies, indeed, can have a dramatic impact on the policy space of developing and emerging economies, because divestment can act as a negative sanction. More importantly, multinational enterprises do not only have a lot of political clout, they are also more vulnerable to political pressure when their trade mark and/or reputation are being attacked. The politico-economic pressure that was exercised in the case of the South African Apartheid regime in the 1970s and 1980s provides a clear and early example of this phenomenon. Whereas the official government-to-government sanctions against South African Apartheid for decades where ineffectual, it was the withdrawal of international investors, in particular of Barclays, that made the difference setting the stage for the end of Apartheid. The transnational anti Apartheid movement had organized consumer boycotts of South African export products (agricultural products, Kruger Rands) early on, but the movement became effective only once it targeted banks and institutional investors. The consumer and shareholder pressure on b anks and investors severed the financial ties with the Apartheid government in the mid 1980s leading to actual and substantial divestment from South Africa of some $20 billion and finally to the ending of Apartheid. This case clearly illustrates how transnational action by NGOs via the ‘vulnerable’ multinational can effectively achieve goals that other more traditional methods of economic diplomacy were unable to secure.

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Indeed, transnational consumer activism has achieved remarkable results in all relevant policy arenas – human rights, environment, social conditions and religion – and often on the basis of fuzzy and individual-based mechanisms, rather than institutional and organizational movements. Greenpeace, for example, never called for a consumer boycott against Shell’s dumping of the Brent Spar oil platform. Likewise the Danish cartoon crisis involved a consumer boycott from Muslims in many countries in several continents. Importantly, the Internet provides the means to organize (‘twitter’) a concern of consumers across jurisdictions also in cases where that voice cannot be expressed formally at the international level (for example, when consumers have a minority in each jurisdiction and will thus tend to be ignored in the traditional domestic political channels). In that case the vulnerability of international value chains so to say provides a counter balance to the fragmentation of the franchise of issues that are considered to be important at the international level but not at the national level. One important implication of the trademark-related vulnerability of large multinational corporations is that governments may be reluctant to build economic relationships on these enterprises (especially if their value added is large in relation to national income) and rather will prefer a substantial involvement of Small and Medium-sized Enterprises. That preference is also understandable in view of the fuzzy non-organization of many consumer actions. The only way to counterbalance these fuzzy networks is by means of networks of local consumers, business men, etc. Chambers of commerce, commercial organizations of immigrants and alumni could be instrumental to such a strategy. Typically, balances of mutual benefits should increasingly be built at these micro levels. Rather than crossing the official bridges of government to government activities, the ‘new’ economic diplomacy should seek innovative ways to weave the webs of informal networks that can bind the citizen and firms of nations in order to stimulate peace and international cooperation. www.ibde.org


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E x c h a n g e : The Magazine for International Business and Diplomacy

June 2011

Society

Farewell Reception – Albanian Embassy - 24 March 2011

A farewell reception was held to pay tribute to His Excellency Mr Zef Mazi, Ambassador of Albania to the UK. His Excellency's absence in London is being noticed considering his popularity amongst his contemporaries. Ambassador Mazi ( a member of IBDE Advisory Board) is now back in Vienna where he served for 15 years as ambassador of Albania to many international organisations. He has been appointed in an important role at the International Atomic Energy Agency. The IBDE wishes to pay a public tribute to the Ambassador for his invaluable support and advice whilst in London! Photos by Alban Bytyqi

Foreign and Commonwealth Office Director for Western Balkans Mr Daniel Fearn and Mr Mazi

IBDE CEO Mr Rudi Guraziu, High Commissioner of Belize H.E. Ms Kamela Palma, Ambassador of Bosnia & Herzegovina H.E. Ms Jadranka Negodic, Ambassador of Kosovo H.E. Dr Muhamet Hamiti

ECFR Senior Policy Fellow Mr Daniel Korski

52 / International Business and Diplomatic Exchange – I B D E

Ambassador of Albania H.E. Mr Zef Mazi, Mrs Brigjida Mazi, Ambassador of Kuwait and Dean of Diplomatic Corps H.E Mr Khaled Al-Duwaisan, Mrs Mirian Nasser-Romero and Ambassador of Honduras H.E. Mr Ivan Romero-Martinez

Ambassador of Bulgaria H.E. Mr Lyubomir Kyuchukov and Mr Mazi

Mrs Mazi, Mrs Nasser-Romero, Mrs Francisca Wurth, Ambassador of Luxembourg H.E. Mr Hubert Wurth and Ambassador RomeroMartinez

Ambassador of Belgium H.E. Mr Johan Verbeke and Mr MAzi

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E x c h a n g e : The Magazine for International Business and Diplomacy

Royal Garden Hotel Diplomatic Consultant Mr Christopher Goodwin, H.E. Ms Kamela Palma, Rudi Guraziu

June 2011

Society

H.E. Mr Lyubomir Kyuchokov, Embassy Magazine Editor Elizabeth Stewart and Macedonian Ambassador H.E. Mrs Marija Efremova

H.E. Mr Zef Mazi, Mrs Vjosa Hamiti, Mrs Brigjida Mazi and H.E. Dr Muhamet Hamiti

From Right, Mrs Teuta Starova, Charge d’affairs Albanian Rmbassy London

A group of Diplomats in London

Daniel Fairn, FCO, Urs Schmid Swiss Embassy, Oleg Levitin, EBRD & IBDE Advisory Board Member

Dr Gezim Alpion, Birmingham University, H.E. Muhamet Hamiti and Mrs Hamiti

A group of Guests

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Exchange Issue 4 June 2011  

"Exchange: The Magazine for International Business and Diplomacy" - published by IBDE www.ibde.org If you have difficulty reading the magazi...