Impact of Macroeconomic Determinants on Economic Growth in the Western Balkans, 2000-2017

Impact of Macroeconomic Determinants on Economic Growth in the Western Balkans, 2000-2017

Viola Alla, Eglantina Hysa, Arjona Çela
DOI: 10.4018/IJSESD.287885
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This study aims to investigate some of the main macroeconomic determinants that have influenced the economic growth in 6 Western Balkan countries (Albania, Bosnia & Herzegovina, Kosovo, Macedonia, Montenegro, and Serbia). Data are taken for 18 years (2000-2017) from the World Bank database. Determinants included are inflation, foreign direct investment, interest rate, unemployment (percentage of the total labor force) and government spending (as a percentage of GDP). In the early 2000s, the region experienced rapid growth and faced many economic challenges but it still suffers from weak institutional reforms that prevent the region to reach high living standards of European countries. Because of previous studies by different authors, it is obvious that FDI is positively and significantly correlated with economic growth while in the other hand most of the studies found a negative but significant relationship between inflation, unemployment and government spending with GDP. As the results from VAR model indicate, macroeconomic determinants affects in different ways economic growth.
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The process of economic development has been always the main requirement for human civilization. Nowadays, due to climate changes and its effect in the ecosystem this topic has gained a lot of interest, because is very important for the countries to reach and maintain a sustainable economic growth. Economic growth, even in this contemporary world of globalization, still remains for societies the center of concern and also dominates the media debates. States that exceptionally have record-high economic growth rates have been called as ‘growth miracles’. This study is organized into five sections. The first section includes the introduction part where is described briefly the region of Western Balkan. It starts with an overview including some reforms of the transformation process, objectives and reasons why this study is undertaken. The second part contains the literature review that presents theoretical and empirical studies, reports and papers available for this topic. The third section includes data and methodology, which explains in details the determinants included, while the fourth section presents the empirical findings of the study where the results of econometric models and various time series tests are explained and commented. The last section includes an overall summary that contains the conclusion remarks obtained and the limitations of the study.

Theories of macroeconomics contain a broad background of economic growth. The Solow model is defined as the most renowned model of economic growth. This model assumes that economic growth is derived from advancement in physical capital and not by labor and capital stock (Romer 1996). Other mainstream theories about economic growth state that economic growth is extended by the large progress in technology but there exist some other conclusions that do not comply with other models. For instance, Ramsey Model argues that technological progress boosts economic growth by embodying capital accumulation, which rejects the Solow Growth Theory (Groth 2011).

The so-called theories of Endogenous Growth (models by Barro (1996) and Lucas (2002)) indicate that economic growth is stimulated by physical and human capital accumulation and also actions of government among others. Therefore, in this case, where there are many postulations are needed to conduct various empirical analyzes to determine the economic growth factors in countries or regions.

This region is characterized by civil wars, conflicts, and economic and institutional instability. During the last twenty years, some significant changes have occurred regarding the social welfare and economic systems by including the transition process, European integration, and development. The economies of WB during the 2000s, followed by the end of the war in Kosovo and democratic changes that occurred in FRY (Montenegro and Serbia), entered to a period of sustained recovery. The economic situations have had relatively a strong growth compared to the previous decade performance. The process of growth has changed the economies of WB from closed to open ones (marked- based). The international aid has been a strong contributor to economic growth in all the countries but the economy dropped in 2008 during the global economic crisis. Yet, the region still has some of the poorest countries in Europe with a weak economic performance combined with high unemployment, political instability, and widespread poverty. Regarding the terms of living standards and prosperity, the region has left behind the EU comparators.

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