The rule of thumb: Private consumption as a driving force of the economic growth of Western Balkan countries

Abstract

Private consumption is considered one of the main drivers of economic growth in Western Balkan countries. The main aim of this study is to estimate the impact of private consumption on the economic growth of the Western Balkans, including the North Macedonia, Kosovo, Albania, Montenegro, Bosnia and Herzegovina, and Serbia. Housing wealth was even the main driver of total private consumption in the European Union (EU) countries as a whole (Barradas, 2017). Based on an extensive literature review for panel data, this study uses econometric models with fixed effect, random effect, and Hausman-Taylor test. The data are taken from the World Development Indicators by country (The World Bank, n.d.) and cover the period 2010–2019. Based on the Hausman-Taylor test, the model that fits a small sample as in our case is chosen as the fixed effect. The results of the estimator show that a 1% increase in final consumption leads to a 0.43% increase in gross domestic product (GDP) growth and that, on the other hand, a 1% increase in the employment rate increases GDP by 0.11%. The most important domestic factor continues to be private consumption, driven by record levels in the labour market and further strengthening of household purchasing power (Bank of Slovenia, 2020). The study concludes that private consumption is the main driver of economic growth and sustainability in the case of the Western Balkans.