BANKING SECTOR DEVELOPMENT AND ECONOMIC GROWTH IN WESTERN BALKAN COUNTRIES

Abstract

Since the collapse of the centrally-planned system, countries in transition have walked a rough road to recovery. Almost instantly, national economies opened to global markets, enforced price liberalization measures, combined with macroeconomic stabilization policies and structural reforms. At the beginning of the 1990s, they experienced a fall in output, accompanied by other deteriorating features, such as high unemployment, emigration, high level of informal economy, deteriorating balance of payments, growing debt, wars, ethnic problems etc. The annual real GDP per capita growth of most transitive economies during the early periods of transition (1990-1993) was. A major caveat in assessing the depth of the output fall is that it refers to official estimates and thus ignores the shadow economy or informal sector, which has grown very rapidly in the early transition years. The South-East European countries, additionally affected by the wars of Yugoslav secession, recorded notably larger output losses at the beginning of the transition than Central-East European Countries, reaching a negative peak of -20%, and an average decline of 10.90%, but exhibited high growth rates in the mid and late 1990s, as hostilities ended, macroeconomic stabilization took hold and structural reforms advanced. The speed of recovery differed significantly across countries, particularly in the period 1994-2001.This is particuly case in countries from Western Balkan where they were faceing and still face many economic problems like as prolonged recessions, due to differing reform progress, varying impact of the war, unemployment, poverty, low living standards and inflation. Thus, these countries always try to increase their national income and hence create more jobs with maintained economic growth. Bearing this in mind it is essential the countries from this region consider steps towards financial liberalization and deregulation which will help open the borders for capital flows and attract new investments. In fact, financial and banking sector development leads to the increase in economic growth in any economy through financing economic development.Banking system is important to the economic growth through its ability in gathering and attracting deposits from savers. Secondly, its role in providing loans to encourage investment and production. Thirdly, its ability in creating economic expansion to the most of economic sectors such as; Agriculture, industry and trade sector. Fourthly, its intermarry role between savers and borrowers. Finally, banking industry provide entrepreneurs with required loans in order to finance the adoption of new production techniques. This paper examines the question whether in 6 countries from Western Balkan the banking sector influences economic growth. The empirical investigation was carried out using fixed effect model. In this study we use two measures for the level of banking development bank credit to private sector in relation to GDP (private credit) and interst margin. Namely, private credit still appears a superior option to the pure ratio of broad money to GDP used in some studies, because it excludes credits by development banks and loans to the government and public enterprises. We expect positive relationship between private credit and economic growth. The second variable is interest margin is likely a good estimator for efficiency in the banking sector as it describes transaction costs within the sector. If the margin declines due to a decrease in transaction costs, the share of savings going to investments increases. As growth is positively linked to investment, a decrease in transaction costs should accelerate economic growth. The results suggests that credit to the private sector is positively and significant, while interes margin is negatively and insignificant related to economic growth.