The Binding Constraint on Growth in Less Developed Western Balkan Countries

Abstract

The study applies an adjusted growth diagnostic approach to identify the actual binding constraint on financing growth in the West Balkan countries. This group of economies includes combined structural and systemic transformation problems. The results of the analysis indicate that the binding constraint on credit and investment growth in the region is the high and still increasing share of non-performing loans primarily in the private household sector due to policy failures. The analysis is performed in comparison with a group of advanced transition economies. Single-country and panel regressions indicate that demand side factors do not play a constraining role in the West Balkan countries but in the advanced transition economies.