South East European Economies Research Articles

Impact of Remittance Inflows on Selected South-East European Economies: A Panel Auto-Regressive Distributed Lag Approach

Impact of Remittance Inflows on Selected South-East European Economies: A Panel Auto-Regressive Distributed Lag Approach

China connecting Europe?

The significance of China’s Belt and Road Initiative (BRI) for Europe is increasing. The diplomatic initiative “16 + 1,” comprising China and 16 Central, East and Southeast European economies (CESEE), expanded to a “17 + 1” format in April 2019, when Greece officially joined the cooperation forum. This expansion revived interest in Chinese activities aimed at better physical and digital connectivity in Europe and their effects. The article descriptively shows a geographical division of Chinese infrastructure development activities in Europe: the “17 + 1” region is targeted more intensively by Chinese construction projects. Moreover, roughly 90% of all construction contracts with the “17 + 1” region are attributable to connectivity sectors, while Chinese activities in other European regions are more diversified. In Europe, the Western Balkans are expected to economically benefit the most from the BRI, as they show particularly high deficiencies in infrastructure, and so far, have limited access to EU grants. Economic effects of infrastructure projects, however, trickle through European production and supply chains, affecting a larger number of countries than information on projects would suggest. EU initiatives presented since 2018 may help to increase complementarity between Chinese and European infrastructure development plans and reduce associated risks, such as unsustainable debt or new trade barriers arising from increased competition for Chinese investments. The BRI is about to change physical and digital connectivity within Europe, while the EU has yet to become an active player engaging in the initiative, in order to enable improved connectivity in Europe to drive economic convergence and not political divergence.

Income convergence between Southeast Europe and the European Union

This paper investigates the average gross per capita income convergence of eight Southeast European economies towards the EU average. Our goal is to analyse which factors have driven that convergence in the SEE region and describe convergence paths in the 2000-2018 period, concerning two sub-periods, before and after the economic crisis. We use a combination of parametric and nonparametric methods and a fixed effects linear panel regression with robust standard errors. Results suggest that the EU integration process drove convergence, education level, investment (FDI, private domestic and public investments), and private sector lending, as well as by government expenditures. Economic crisis, unemployment, and inflation were the main factors which have influenced the divergence process. We also concluded that the post-transition growth model dominant in the SEE region, based on an FDI inflow, has not sufficient for income convergence in this region. Private domestic investments are a critical missing factor for faster income convergence.

Exchange rate pass-through and Southeast European economies

This paper investigates the exchange rate pass-through effect (ERPT) on the aggregate import prices within seven countries of Southeast Europe. The main goal is to investigate whether there is a high, as well as a complete pass-through effect in the short-term and long-term for Croatia, Bulgaria, Romania and Slovenia. Compared to the previous survey results, it is found that the “pass-through” is not reduced. On the other hand, the results confirmed the previous results, according to which pass-through effect is higher in transitional countries than in developed countries. In addition, in the short and long term, depreciation leads to the “pass through” asymmetry for Croatia, Bulgaria, FYR Macedonia and Slovenia, while appreciation leads to the “pass-through” asymmetry for Slovenia.

Assessing sustainability of the Southeast European economies

Sustainable development is development that meets the needs of the present, without compromising the ability of future generations to meet their own needs. Sustainability indicators are based on the attempt to measure or determine the path of development of the economy in two directions: sustaining human wellbeing, or preserving the capacity to provide wellbeing. The research has been conducted to assess sustainability in the Southeast Europe, represented with a group of 10 countries with the 15 multi-metric indicators. A cluster analysis was performed on the set of indices to check the formation of distinctive clusters. Albania, Bosnia and Herzegovina, Macedonia, Montenegro and Serbia constitute frst cluster, proving small differences among data. Second cluster consists of Bulgaria, Croatia and Romania, while last cluster consists of only Greece and Slovenia.

Post-crisis credit slowdown in South-East Europe: return to normality?

What explains the post-crisis slowdown in bank credit to private sector in the South-East European economies? We try to answer this question, by comparing the actual credit growth to the fundamental and equilibrium growths. The fundamental growth is defined as the growth justified by the fundamentals, the equilibrium growth—as the growth consistent with the economy being in medium-term equilibrium. Results suggest that the slowdown reflects both return of the credit activity to its fundamental value, and return of the fundamental values to their equilibrium levels, after years of excessiveness during the pre-crisis period. Rapid credit growth, as in the pre-crisis period, should not be expected in the near future.

Cobb–Douglas production function on FDI in Southeast Europe

In this research, we focus on effects of foreign direct investments in Southeast European economies. Using World Bank Microdata Library and specifically Enterprise Surveys, we take a sample of six countries. The model is based on firm-level data of a representative sample of economy’s private sectors for Albania, Bosnia and Herzegovina, Croatia, Macedonia, Serbia and Slovenia. What we are closely examining are the effects of foreign direct investments on the development of domestic firms and the overall economy. Foreign direct investment is usually defined as dominant or controlling ownership of a company in one country, by an entity based in another country. Transition economies undergo a set of structural transformations intended to develop market-based institutions through economic liberalization, where prices are set by market forces. Hence, foreign direct investments remain main concern as major source of capital utilized toward enterprise restructuring. This research is built on Cobb–Douglas production function where data are analyzed with econometric models, which as employed in this study examines the interrelationships between output and set of variables that influence foreign direct investments arrangements. Additionally, according to the results, estimates are specified on the ways foreign direct investments mold the economy.

Aggregate Demand–Inflation Adjustment Model Applied to Southeast European Economies

Abstract Applying IS-MP-IA model and the Taylor rule to selected Southeast European economies (Albania, Bosnia and Herzegovina, Macedonia and Serbia) we find that the change of effective exchange rate positively affects output, while the change of the world interest rate negatively affects output or it does not affect the output at all, and additional world output would help to increase output of the selected economies. A lower ratio of government consumption spending to GDP would also increase the output of the selected economies. Hence, fiscal prudence is needed, and the conventional approach of real depreciation to stimulate exports and raise real output does not apply to the selected Southeast Europe economies. When private household consumption is employed in the model, the coefficient on government spending to nominal GDP is insignificant implying that Ricardian equivalence does hold for the selected countries.

Industrial Development in the EU: Lessons for the Future Member States?

The paper analyzes the main characteristics and major changes in manufacturing industry in the old EU member states over the past twenty years, in order to draw some lessons for the Southeast European economies in transition, often referred to as the Western Balkans (WBs) - Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Montenegro and Serbia. During the last twenty years the more developed EU member states have experienced substantial changes in the structure of their economies, with services becoming the prevalent sector in terms of the most important indicators. Nevertheless, there is great heterogeneity within the EU regarding the contribution of manufacturing to employment and value added. The global financial and economic crisis from late 2008 onwards has revived the debate about the role of industry, its importance for economic growth and for international competitiveness. In this context, there has also been a renewed interest in industrial policy and reindustrialization. The ongoing analysis of trends in the EU could be extremely relevant for the WB countries, since these countries have gone through a process of strong deindustrialization. Given that their level of economic development is still low, manufacturing industry remains indispensable for future economic growth. The EU experience could offer useful guidelines for formulating future policies in this area.

Business cycle regimes in a group of South East European Economies. Evidence from a threshold SUR approach

This study investigates the degree of economic integration that the group of selected South East European countries have achieved with the euro area. The evidence of this study suggests that all four selected South East European economies are in sync with the euro area cycle, and respectively form a homogenous group of countries. Still, as it was expected, higher implied growth rates are found in countries where greater internationalisation of enterprises and greater product and financial sector linkages to European Union (EU) markets are present. In addition, the overall findings of these countries’ business cycle synchronisation with the euro area say nothing about the desirability of these countries adopting an early peg against the Euro and joining the Eurozone, but they do raise questions of the feasibility of doing so. With respect to the patterns in business cycle co-movement before and after the beginning of the global financial crisis this study clearly shows that synchronisation of business cycles is particularly strong during the downturn, i.e., up to mid-2009. Conversely, a decline in the synchronisation is observed in the early recovery phase after a recession.

The Post Recession Growth Prospects of South East European Economies

AbstractThis paper starts with a discussion of how the world recession as an external shock influenced the already vulnerable South East European (SEE) economies. All countries except Albania and Kosovo experienced a recession as well as a termination of the foreign debt based heating-up that generated high growth rates after 2000. The paper provides an overview of states' policy responses, with individual countries surveyed in the appendix. We argue that, with the exception of Albania, all SEE economies started with a fiscal expansion, which coincided with elections in which the existing governments were not re-elected. This was followed by public finance crises, fiscal consolidation and more active monetary policy which averted a financial crisis, with only three of these economies turning to the IMF for help. Nevertheless, the cumulative effect was an extended trough. The paper then discusses the recession's impact on growth in terms of three growth projections derived from historical experience and two ad hoc benchmarks. We examine the consequences of returning to a lower post recession growth trajectory and calculate the time required to return to secular growth and achieve chosen benchmarks. The conclusion for both is that convergence time varies from less than a decade to no convergence before 2040, with the exception of Albania.

Poverty and development in Southeast Europe

The least fortunate individuals, families, social groups and regions of societies are called ‘poor’, as are the least developed economies. Today, societies recognize five important features of poverty. First, it is widespread, existing even in the richest societies. Second, the poor are usually considered neither responsible for their state of poverty nor able to extricate themselves without help. Third, economic development does not solve economic poverty. Without intervention, poverty may change with economic development, but it does not disappear. Fourth, poverty's far‐reaching impact on the economy is negative and large enough so that it cannot be disregarded; this makes poverty a social problem. As a result, all societies have a system of redistribution to help their poorest members. In modern societies, this redistribution occurs through a transparent institutionalized system of transfers, which leads to the fifth feature: the system of redistribution is a policy choice that is never neutral. The way society helps its poorest members also significantly influences society and the economy. Under different circumstances and for different policy goals, different systems may be most appropriate. These features make a discussion of poverty especially important for Southeast European economies in transition. In this poorest region of Europe, poverty is the main generator of instability, and the transition process generates extensive poverty. An understanding of poverty is crucial to understanding the future of Southeast Europe. This paper attempts to untangle aspects of this complicated issue in the context of contemporary Southeast European economies. The first section discusses the relationship of economic transition to poverty and economic inequality in the region. The second surveys the limited available data that supports these links. The third discusses the unavoidable ambiguities of poverty in an economic policy context, followed by a section that treats poverty issues in Southeast European transition economies in light of their growth perspectives. The final section offers some tentative conclusions on the role poverty issues will play in the future of these economies.