Economic Integration As Catalyst For Stability In The Balkans

(Transcript of speech given at the Conference on Security and Cooperation in the Balkans, organised by the ARI Movement in Istanbul)

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Ladies and Gentlemen,

I am very happy to be here discussing the Balkans. I have quite a lot of ancestry from the Balkans – 4 out of 8 of my great grandparents are from the Balkans: one from Kosovo, one from Skopje, Macedonia, one from Kirdzali, Bulgaria and one from Istanbul.

Let me briefly introduce myself. I am a Vice President at JPMorgan’s Istanbul office, in charge of investment banking client coverage for Turkey and Central Asia. I work on business origination for the mergers and acquisitions, equity issuance, debt issuance and derivatives businesses of the firm. I have also covered Bulgaria for JPMorgan for a year in the past.

JPMorgan is a front runner of regional economic integration. We have been very active in almost all of the Balkan countries since the fall of communism. Our most recent intra-regional deal was to represent the Bulgarian government in their sale of DSK Bank to OTP Bank of Hungary.

After this brief introduction, let me return to our topic. When we speak about economic integration as a catalyst for stability anywhere in the world, the first example that comes to mind is the European Union. A quick look at EU’s founding documents in the 1950s proves that the EU at the outset was first and foremost a project to achieve peace in the region. The best way to achieve peace was identified as economic integration. To look at where we are in 2003 proves that the insight of the EU founders was right: economic integration does indeed create stability.

What Europe has achieved in the şast 50 years is phenomenal, and the EU should be given due credit for this. To better underscore Europe’s achievements, let us look at some examples from Europe from earlier days:
- Germany had concentration camps in 1945
- France was on the verge of a military takeover in 1957
- The experiment with democracy in Italy in 1948 evoked laughter from most intellectuals of the time
- Spain faced hunger in the late 1940s
- Portugal was debating whether it belonged to Europe or Africa as late as 1965
- Greece had a brutal military regime after 140 years of liberalism in 1967
- Last but not least, the United Kingdom called in the IMF in 1976
After all, the Balkans are not doing so badly today, given all these examples from not so distant past.

Europe is clearly a different place now. Economic integration is a reality. And this integration is not only an issue for Western Europe – 14 years after the fall of the Berlin Wall, Europe now includes most of Eastern Europe. Relationships with Russia are normalised. Greece is already part of core Europe, Poland is about to become part. The integration of Turkey with Europe, which started in the early 1800s is close to its finale.

One cannot help but notice that the Habsburg Empire which collapsed in 1918 is almost back. But this time, only its positives are back – its negatives are left behind. The economic integration of Central and Eastern Europe which existed under the Empire is back, but all the peoples who wanted to be independent are independent. This shows that we have gone a long way in managing diversity.

Economic integration follows a similar pattern around the world. International trade is the backbone of integration. Trade means the division of labour. Trade increases output per resource unit spent. But trade is easiest over shorter distances. Integration starts close to home with you baby sitting for your neighbour, sharing a car with a workmate who lives nearby, contributing to a regional school. From neighbourhoods we go on to cities, provinces, countries and continents.

We are now in Istanbul, the heart of a region once called the “Near East”. For millenia, the Near East was an integrated economy. Balkan peoples traded with each other, with Istanbul, with Italy, with the Levant. Major trade routes ran from Southern Italy to Greece and Turkey, from Turkey to Russia via the Black Sea, Istanbul to Vienna via the Danube and Istanbul to Baghdad via Anatolia.

Since 1914 and 1945, most of our countries have been run as islands. Communist countries in the Balkans used to just trade with each other. Greece and Turkey traded with major Western countries but not with the Balkans or with each other. This state of affairs was clearly contrary to the usual state of affairs. We have been reversing this trend slowly since early 1990s, but we need to do more.

I believe that the future of entrepreneurship lies in regional trade. We can not insist on having national economies that trade only with the US, UK and Germany, thousands of miles away. Regional trade creates momentum for all our economies. We can give two examples of this, one good and one bad. Southeastern Turkey between 1990 and 1995 is the bad example. With the Iraqi border closing, and the Syrian border already closed for decades, the local economy collapsed. Terrorism was the result. Cyprus 2003 is the good example. The border between the Republic of Cyprus and the Turkish Republic of Northern Cyprus was opened in early 2003. While most people thought the political impact would be the dominant one, the economic impact turned out to be more immediate and more beneficial. Conversation with businessmen from the north and the south show that business is great.

We should remember that the idea of Balkan integration is not new. In the 1930s, at a time when Turkey, Greece and Yugoslavia had visionary leadership simultaneously, Balkan integration was on the agenda. Less than 20 years after the Balkan wars of 1912-1913, which created huge population movements and economic dislocations, leaders of Turkey, Greece and Yugoslavia managed to pursuade their countrymen of the benefits of regional solidarity. With the example of the EU in front of us, we should be able to do better than our grandfathers’ generation. France and Germany now are as integrated as Texas and California, and there is no reasons why Turkey and Greece, or Bulgaria and Serbia cannot do the same.

However, EU accession is the driving force that will help us achieve regional integration faster. The most important impact of the EU will be in the field of law. Judging by the experience of many countries around the world, economic forces alone take a long time to achieve by themselves. This is mainly because of the differences between the legal systems. Differences accross legal systems cause uncertainty when dealing accross borders, and uncertainty slows down integration. Adopting an EU-made legal framework will allow all of our countries to proceed further in integration with each other. The EU has institutionalised integration over two generations, and we can benefit from the experience of current EU members for free.

Having reviewed the philosphical and historical side of regional trade, we can now move on to its tangible benefits. The first key issue is specific synergies accross the Balkans. Ex-communist states have a surplus of professionals, but a deficit of entrepreneurs. Turkey has just the opposite: a deficit of professionals and a surplus of entrepreneurs. On the other hand, Greece has a lot of capital, especially in the hand of its ex-patriots, but very little land. The rest of the region has a lot of available land but a need for capital. Creating an integrated economic area out of the region will put all the available resources in the region to better use.

The second key issue is economies of scale. Why do China and India matter a lot in the world economy despite very low per capita incomes while Arab nations do not? One reason is that China and India are large, intergated economies while the 200 million Arabs are split into 20 countries who have closed their borders to each other. The Balkans should draw a lesson from this.

The Balkan GDP (including Greece and Turkey) in PPP adjusted terms is over 800 billion dollars. This is an economy larger than Spain and almost as large as France or Italy. A GSM operator with 25 million customers accross the Balkans would be a global entity. A Balkan utility with power, gas and water assets accross 5-6 countries would become a European major.

How will regional integration develop? I foresee a four step process. The first step will be corporate integration. Banks, manufacturers and utilities of the region would merge with or acquire each other to create larger entities. We have already started to see this kind of activity, the best examples being the purchase of Bulgarian DSK Bank by Hungarian OTP Bank and the investments of Greek OTE into Bulgaria and Romania.

The second step will be intellectual integration, driven primarily by academia. This conference is a great example of this.

The third step will be increased cooperation between NGOs, especially issue based civil organisations. Cooperation on concrete issues such as the environment, tourism or road traffic accross the Balkans could be followed by cooperation on longer term issues such as local development, participatory democracy or training the youth.

The fourth step is increased trade in goods and services. EU accession will solve problems on this front on paper, but entrepreneurs in all of our countries need to be vigilant to make sure that borders are lifted practically as well as on paper.

On Balkan integration, especially on the economic front, the door is open due to a combination of the fall of communism, pragmatism of regional politicans, and far sightedness of the EU. Perhaps we can even say that the floodgates are open. Integration has started and it is rapidly gaining momentum. The states no longer need to drive the process from now on – they just need to encourage their citizens and corporations working towards this goal and remove the hurdles in front of them.

Thank you all for taking the time to be here. I am looking forward to living in a united Balkan region in a united Europe, hopefully very soon.