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RESEARCH THINKTANK


Is Balkan FDI in a race to the bottom?


SUBJECT COMPETITION


BY TRYING TO OUTCOMPETE THEIR NEIGHBOURS, COUNTRIES CAN DOMORE HARMTHAN GOOD,WRITES VESNA GARVANLIEVA ANDONOVA


Typically, countries that are formerly planned economies that are transitioning to market economies use different forms of tax and non-tax breaks to attract foreign companies for foreign capital. The countries in the Western Balkans are not an exception. For over a decade, all of the coun-


tries in theWestern Balkans have adopted policies for attracting foreign investments through an abundance of breaks, reliefs and incentives. The extent of this differs, from total to partial profit tax breaks, tax-holidays foremployee benefits, subsidised sala- ries, investment grants, customtax reliefs and ‘special’ treatments in provision of public services. This is then coupled with legislative and specially designed agencies, or other forms of public entities for attracting and catering to the investors, as well as special economic zones. Most, if not all of the assistance, through public funds can be categorised as state aid, since it is made on a selec- tive basis. The justification behind it is almost exclusively that the assis- tance is aimed towards economic development. In the past decade, it seems that


the these countries have competed among themselves in who is going to provide more for the foreign investors. This ‘race to the bottom’ phenomenon occurs when a coun- try reduces taxes while increasing the state aid for foreign companies in order to attract investment. The negative consequence of such poli- cies being inadequately designed and implemented include public revenue erosion, both nationally and regionally. This phenomenon is


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especially pronounced if the foreign investments do not contribute to the economic growth and development.


Controlling state aid As the countries in the Western Balkans aspire towards full EU membership, they have largely adopted its legislation on state aid control; however, at the same time, the European Commission’s regular progress reports note the need for enhanced transparency in the process of granting state aid, as well as the need for an effective enforce- ment of the regulations. State aid control is a concept


specific to the EU, with the aim of protecting the common European internal market. As the European national economies and markets are not characterised by homogeneity, “supranational” control of state aid is more than necessary to protect the public interest. As a result, all candi- date countries be negotiate under the so called ‘Chapter 8’, which deals with competition protection and state aid control within the internal European common market.


Although the EU sets certain


limits on the amount of approved state aid for the candidate countries, the Union is not so restrictive of the forms of state aid until their full membership, which may place them in a more favorable position compared to the EU member states while attracting FDI. In addition to state aid and low


taxes, the Western Balkan countries have other benefits, such as the geographical proximity to the large European market, the free trade agreements with the EU and other major economies, and high percent- age of the highly educated unem- ployed etc. The essence of state aid is that it


must not distort competition in the internal market. State aid is only justi- fied when it is an attempt to correct market imperfections, or when it is intended to achieve certain social goals or measures aimed at protec- tion of the environment. As such, there is a risk that in the process of attracting FDI, the countriesmay reach out to discretionary, non-trans- parent and harmful decisions for


www.fDiIntelligence.com December 2020/January 2021


Illustration by John Holcroft


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