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Mr. Nadeem Ilahi, Mrs. Armine Khachatryan, William Lindquist, Ms. Nhu Nguyen, Ms. Faezeh Raei, and Jesmin Rahman
In the past 25 years, exports have contributed strongly to growth and economic convergence in many small open economies. However, the Western Balkan (WB) region, consisting of small emerging market economies, has not fully availed itself of this driver of growth and convergence. A lack of openness, reliance on low value products, and weak competitiveness largely explain the insignificant role of trade and exports in the region’s economic performance. This paper focuses on how the countries in the WB could lift exports through stronger integration with global value chains (GVCs) and broadening of services exports. The experience of countries that joined the European Union in or after 2004 shows that participation in GVCs can help small economies accelerate export and income growth. WB countries are not well integrated into Europe’s vibrant GVCs. Trade within the region is also limited—it tends to be bilateral and not cluster-like. Our analysis shows that by improving infrastructure and labor skills and adopting trade policies that ensure investor protection and harmonize regulations and legal provisions, the region can greatly enhance its engagement with GVCs. Services exports are an increasingly important part of global trade, and they offer an untapped source of growth. The magnitude of services exports from the WB region compares favorably with that of peers in Europe, particularly in travel services where several of these countries have a revealed comparative advantage. But there is significant room for growth in tourism exports and an untapped potential in business and information technology services exports that these countries can materialize through policy efforts that increase openness and enhance connectivity and labor skills. Serbia offers a good example of how decisive efforts, including education policies to ensure a sustained supply of skilled labor, can help information technology services exports to take off.
International Monetary Fund. European Dept.
This 2015 Article IV Consultation highlights that the economic recovery of Former Yugoslav Republic of Macedonia has strengthened. Real GDP growth accelerated to 3.8 percent in 2014, from 2.7 percent in 2013. Strong growth was attributed to double-digit growth in investment driven by activities in the Technological Industrial Development Zones and public infrastructure, as well as strong private consumption supported by robust credit growth and improving labor market conditions. GDP growth in 2015 is expected to moderate to 3.2 percent, with significant downside risks. A derailment of recent political agreement could negatively impact economic sentiment and growth.
International Monetary Fund. European Dept.
This Selected Issues paper on the Republic of Kosovo’s 2013 Article IV Consultation highlights growth and Kosovo’s external environment. In the wake of the global financial crisis, Kosovo’s economic growth slowed but remained positive, while most other Western Balkans slipped into recession. Moreover, the annual average growth rate has been among the highest in the Western Balkans since the onset of the financial crisis in 2007. Kosovo’s tax-to-GDP ratio is comparable to the average of Southeastern Europe, although its tax system relies significantly more on indirect taxation—including a high share of trade taxes. Kosovo’s reliance on trade taxes may create budgetary pressures in the event of further trade liberalization.
Mr. Serhan Cevik and Mr. Mohammad Rahmati
This paper provides a broad empirical analysis of the determinants of post-conflict economic transitions across the world during the period 1960–2010, using a dynamic panel estimation approach based on the system-generalized method of moments. In addition to an array of demographic, economic, geographic, and institutional variables, we introduce an estimated risk of conflict recurrence as an explanatory variable in the growth regression, because post-conflict countries have a tendency to relapse into subsequent conflicts even years after the cessation of violence. The empirical results show that domestic factors, including the estimated probability of conflict recurrence, as well as a range of external variables, contribute to post-conflict economic performance.
Bas B. Bakker and Mr. Christoph A Klingen

By combating malaria with mosquito nets or building schools and providing basic sanitation, philanthropy is helping transform the developing world. Rich donors are devoting fortunes—many of them earned through computer software, entertainment, and venture capitalism— to defeating poverty and improving lives, supplementing and in some cases surpassing official aid channels.From billionaires Bill and Melinda Gates and Warren Buffett to Aliko Dangote and George Soros, the titans of capitalism are backing good causes with their cash. Whether financing new vaccines, building libraries, or buying up Amazon rain forest to protect the environment, philanthropists are supporting innovations and new approaches that are changing lives and building dreams.This issue of F&D looks at the world of targeted giving and social entrepreneurship.“ Philanthropy’s role is to get things started,” says Microsoft co-founder Bill Gates, who is the world’s most generous giver. “We used foundation funds to set up a system to make market forces work in favor of the poor.” He says that catalytic philanthropy can make a big difference. “Good ideas need evangelists. Forgotten communities need advocates.” Former U.S. President Bill Clinton tells us that networks of creative cooperation between government, business, and civil society can get things done better to solve the world’s most pressing problems.Also in this issue, Prakash Loungani profiles superstar economist Jeffrey Sachs, who helped campaign for debt relief for developing economies and championed the Millennium Development Goals. We look at how, instead of spending commodity price windfalls on physical investments, which are often sources of corruption, governments of poor countries are sometimes well advised to hand some of the income over to their citizens. We examine moves by major central banks to ease our way out of the crisis enveloping advanced economies in our Data Spotlight column, and we hear about how China’s growth inspires creativity in the West.

Yuko Kinoshita
In the run up to the global crisis, countries in Central Eastern and Southeastern Europe attracted large capital inflows and some of them built up large external imbalances. This paper investigates whether these imbalances are linked to the sectoral composition of FDI. It shows that FDI in the tradable sectors leads to an improvement of the external balance. We also find that the countries with large market size, good infrastructure, greater trade integration, and educated labor force are more likely to receive more FDI in the tradable sectors.
International Monetary Fund

Threats to external stability in the pre-crisis period have now been reduced substantially and foreign non-debt creating flows have declined, sufficient to support external stability. The global economic downturn has raised challenges for evaluating the countries’ fiscal stance and fiscal policy focus should be lowering support to debt sustainability, private sector development, and the currency board stability. The two entity pension funds have been under increasing financial pressures. Putting the public pension systems on a sound footing will encompass a number of complementary steps.

International Monetary Fund
This Selected Issues paper for Bosnia and Herzegovina (BiH) reports that GDP per capita in BiH is similar to that in neighboring Balkan countries. BiH risks are falling behind rather than catching up with other transition economies in terms of its economic development. This could delay the process of convergence to and integration with the European Union, including its ambitions to eventually adopt the euro. Accelerated structural reforms and macroeconomic stability remain key to achieving higher and sustained growth rates.
International Monetary Fund
The current account deficit by the Central Bank of Bosnia and Herzegovina in recent years has fluctuated to about 20 percent of GDP. But official current account statistics suffer from several shortcomings. Possible sources of the savings required to achieve a fiscal position consistent with long-term fiscal sustainability is discussed. A theoretical model of the trade balance has been developed and used as the basis for estimating a quarterly regression model of Bosnia and Herzegovina’s trade balance. Effective fiscal coordination is essential in Bosnia and Herzegovina.
International Monetary Fund

Bosnia and Herzegovina’s 2005 Article IV Consultation reports that inflation has stabilized at industrial country rates, anchored by the currency board. About half of activity is accounted for by the private sector and banks have been almost completely privatized to nonresidents. The fiscal system, though fractured, has delivered a fiscal consolidation of 8 percentage points of GDP in four years, taking the balance to a deficit of 0.6 percent of GDP in 2004.