Trade openness, institutions and economic growth of the Western Balkans countries

Abstract

The Western Balkans Countries (WBC) represent a specific geoeco-nomic region. In the last three decades their economies have been affected by transition processes and opening. Progress of institutions implementing deep social reforms followed market reforms. The basic hypothesis is: independent variables Trade openness and Quality of institutions impact GDP growth. Dummy variables are also included in the paper (signing SAA and Candidate status), and so is the control variable (FDI inflow). The research covers 2005-2017. Panel analysis and Impulse response function in VAR model were applied. The results indicate statistically significant impact of the most variables on WBC economic growth. However, only the trade openness parameter shows positive direction. This implies that quality of institution was not sufficient to stimulate economic growth; it slowed down the growth. Impulse response function in Quality of institutions and GDP growth shows that, impulse growth “shock” of one standard deviation in Quality of institutions had positive effect on GDP growth in the first two years, whereas growth stagnated around initial level from year four. Impulse growth “shock” of one standard deviation of Trade openness caused GDP oscillations. It had negative effect on GDP up to year three, growth until year four and was around balanced from year five.