This paper explores the economic implications and identifies potential winners and losers from the EU-Albania Stabilization and Association Agreement (SAA). Signed in June 2006, the EU-Albania SAA forms part of a broader regional process (the Stabilization and Association Process) and aims to support Albania’s economic transition, as well as to strengthen its integration into the EU Single Market. Albania’s reform agenda under the SAA is impressive, covering areas ranging from political dialogue and regional cooperation to Community freedoms in the movement of goods, services, workers and capital, and mutual co-operation in justice and home affairs. It requires extensive trade liberalization vis-à-vis both the EU and other countries in the region and provides for substantial non-tariff liberalization through the gradual harmonization with EU structures and directives in the areas of standards, certification, customs administration, competition, and intellectual property rights.

The paper focuses on the trade–related aspects of the EU-Albania SAA to analyze how bilateral liberalization with the EU, regional co-operation with other countries in the Stabilization and Association Process and harmonization with the relevant EU rules and regulations will affect the country’s efforts for pro-poor growth and socio-economic development. It therefore, aims to identify both the overall welfare effects of the EUAlbania SAA on the Albanian economy and its impact on sensitive sectors/industries and the more vulnerable groups in the economy. To address these questions, the study employs a multi-country, multi-sector computable general equilibrium model based on the standard the GTAP v.6 model. The methodological framework of GTAP allows us to perform various trade-policy simulations and analyze their effect throughout the whole of the Albanian economy. A distinguishing feature of the modelling exercise is the incorporation of the unemployment of Albanian unskilled workers. This allows us to go beyond the trade, production and welfare impact of the policy reforms, and explore the

impact of liberalization on employment in Albania, both in aggregate and between skilled and unskilled workers. Given that poverty in Albania tends to dominate across the unemployed, and especially the unskilled, the exercise allows us to identify some of the groups that are more vulnerable to liberalization.

Our findings suggest that regional integration under the SAA can bring significant benefits

to the Albanian economy. These are not as substantial as what could potentially be

achieved through unilateral liberalization, if Albania were to open its markets to all

regions. Nevertheless the welfare impact of the EU-Albania Stabilization Agreement and

the Albanian FTAs with the rest of SE Europe is notable, achieving a combined 1.5% of GDP. Given Albania’s increased trade dependence on the EU, the results also suggest that it is trade with the Community that will drive welfare gains rather than trade with other countries in SE Europe. Non-tariff liberalization under the EU-Albania SAA is also found to bring notable gains, albeit smaller than those of traditional liberalization. If Albania were to modernise its customs administration and harmonize fully with EU legislation on standards and related technical barriers to trade, this could bring an additional gain of 0.46% of GDP. Since harmonization will proceed gradually, these gains will not be realized immediately, but as regulatory integration progresses.

While the impact on overall welfare is found to be positive throughout, we also find that

the benefits are not evenly distributed between sectors and workers. There are both winners and losers from regional liberalization. The impact on overall employment is positive, but there are notable variations by sector. Sectors like agriculture, apparel and other manufacturing appear to benefit more, while textiles, metals, chemicals and minerals lose out. In declining sectors it is the unskilled workers rather than the skilled who are more adversely affected and are therefore more vulnerable to liberalization. Our analysis therefore reveals that liberalization can lead to greater unemployment inequality between skilled and unskilled workers in certain sectors. This is particularly evident in textiles, metals, chemicals, minerals and some services like utilities and public services. It is important therefore that liberalization in these sectors should proceed with caution and that the Albanian government with the support of the donor community should identify appropriate support policies. Given that overall demand for unskilled labour is expanding, it is important that the Albanian government should focus mainly on those employed in the vulnerable sectors.