External Financial Flows and GDP Growth in Kosovo

Abstract

This article examines the impact that external financial flows have on gross domestic product (GDP) growth in a new, small, and open economy—the Republic of Kosovo. Remittances, foreign direct investment (FDI), foreign debt, and net exports may affect GDP in different ways. In the context of a new, small, and open economy, these factors can be important determinants of economic development. This article examines the direct effect of these factors on economic development as represented by GDP growth in Kosovo, covering the period of 2012–2018. The relationships between remittances, net exports, FDI, external debt, and GDP are modeled based on theoretical arguments and empirical evidence. The results suggest that in Kosovo, remittances are the leading contributor to GDP growth. This contribution could be more valuable if remittances were invested in the manufacturing sector. These investments could have positive effects on job creation, thereby reducing the unemployment rate and Kosovo’s dependence on imports.