- International Monetary Fund. European Dept.
- Published Date:
- March 2015
A standard growth accounting analysis can shed light on key drivers of growth in the Western Balkans relative to those in the New Member States. Growth accounting, based on a standard Cobb-Douglass production function, allows for decomposing real GDP growth into contributions of human capital, physical capital and total factor productivity:1
where Yt represents domestic output in period t, Kt the physical capital stock, Lt the employed labor force, ht the index of human capital per worker, and At total factor productivity. The analysis uses Penn Tables 8.0 data on capital stocks; country-specific measures of the labor share in GDP; and an index of human capital per person, based on years of schooling (Barro and Lee 2010) and returns to education (Psacharopoulos 1994; and Inklaar and Timmer 2013).2 Using (1), real GDP growth is decomposed into the contribution of physical capital accumulation, employment growth, and accumulation of human capital per worker. Total factor productivity (TFP) growth is the residual, that is, output growth not explained by either growth in capital, growth in adjusted labor, or:
Gains in TFP and capital accumulation have been major drivers of growth in the Western Balkans over the past decade. Growth in TFP, reflecting more efficient use of inputs, has long been recognized as an important source of improvements in income and welfare. Cross-country differences in income levels and growth rates are mostly due to differences in productivity (Klenow and Rodriguez-Clare 1997); and Easterly and Levine 2001). Results indicate that gains in TFP in the region—the residual in the growth accounting analysis—explain about half of annual average growth, comparable to New Member States (Annex Figure 1.1.1), in line with other studies on transition economies (Campos and Coricelli 2002; IMF 2009; and EBRD 2013). This TFP improvement has likely reflected the effects of transition to a market economy, including enterprise restructuring and privatization, and increased technology transfer from the European Union.
Annex Figure 1.1.1.Western Balkans: GDP Growth and Contributions
Sources: Inklaar and Timmer (2013); and University of Groningen Growth and Development Centre.
Note: * For Bosnia and Hertzegovina, FYI Macedonia and Montenegro employment growth, human capital per worker is estimated based on UNDP dataset on educational attainment and on the methodology from Barro and Lee (2012).
Physical investment has also expanded rapidly and contributed to solid growth performance over the past decade. For example, the massive buildup of productive capacity in Bosnia and Herzegovina—financed by foreign direct investment and an externally financed credit boom—on average accounted for about 60 percent of the observed output growth over 2001–08. Similarly, capital accumulation accounted on average for about 40 percent of the observed output growth in Montenegro and FYR Macedonia, and about 30 percent in Croatia and Albania. The contribution of capital accumulation to Western Balkan state growth is comparable, on average, with that of New Member States.
The low contribution of human capital accumulation—employment growth, adjusted for schooling—constitutes a key difference between the Western Balkans and the New Member States. The contribution of human capital accumulation to growth was more significant only in FYR Macedonia and Montenegro and negative for Albania and Serbia. In Bosnia and Herzegovina and Croatia, human capital accumulation was positive in the boom years, but since 2009 this increase was more than offset by employment losses associated with the global crisis.
Convergence is most commonly understood as the process of decreasing differences in income per capita across economies over time. Convergence happens because, in theory, poor countries should grow faster than rich countries due to decreasing returns on capital and increasing costs of productivity advancement for countries already on the production frontier. In reality, however, various structural factors may hinder convergence.
There are two commonly-used ways to test the existence of convergence among a group of countries: (1) calculating whether the dispersion of income per capita across countries is decreasing over time (Annex Figure 1.2.1); and (2) regressing GDP growth on initial income levels to see whether poorer countries grow faster than richer countries (Annex Figure 1.2.2). The literature has emphasized that the two approaches measure different phenomena (Quah 1996). We apply both methods to examine the convergence performance of Western Balkan States (WBS) and compare it with that of the New Member States (NMS).
Annex Figure 1.2.1.Dispersion of the Logarithm of GDP per Capita
Sources: Penn World Table; WEO; and IMF staff calculations.
Annex Figure 1.2.2.Catching up with Advanced Europe
Sources: Penn World Table; and IMF staff calculations.
The first method shows that the dispersion of GDP per capita across the Western Balkans and advanced EU countries (EU15) has steadily declined since 1993, especially during the second half of the 1990s and the boom years in the 2000s. Since the global crisis, however, the decline has mostly stopped. In contrast, the New Member States have continued to close the economic gap with advanced EU economies since the crisis, albeit at a slower pace than during the boom years. As a result, the gap between the Western Balkans and the New Member States has increased.
For the second approach, we estimate the following equation with NMS, WBS, and EU15 in the sample:
where growthi,t is the GDP per capita growth rate for Country i; disti, t-1 is the GDP per capita gap between the average level of EU15 and country i from the previous period; WB and NMS are dummy variables for the Western Balkan and NMS regions; and GEO is the physical distance of Country i to advanced EU economies (proxied by the distance of the capital of country i to Berlin). A larger coefficient for disti,t-1 and its interactions means poorer countries have grown faster than richer countries, that is, it provides evidence of convergence.
The regression results indicated strong convergence for the WBS during 1990–2000 due to the bounce-back and reconstruction after the regional conflict subsided, while there was little convergence during that period in the NMS (Annex Table 1.2.1). For 2000-2007, however, the convergence coefficient was small and insignificant for the WBS. This was due to the fact that the poorer countries in the region, such as Albania and Bosnia and Herzegovina, actually grew more slowly than the richer ones, such as Croatia, during this period. In contrast, the convergence coefficient was positive and highly significant for the NMS during the period. For the period since the onset of the global crisis, the convergence coefficient is positive and significant for the WBS, though it is smaller than that for the NMS.
|disti × WB||0.073***||0.090**||0.015||0.031|
|disti × NMS||0.024||0.009||0.050***||0.057**|
|N M S||−0.032**||−0.076***||0.017||−0.034**|
Next, we examine if structural factors can affect the speed of convergence in WBS and NMS (Annex Table 1.2.2). For this purpose, we adapt the convergence regression to the following:
where factori is the structural factor under examination. If a factor facilitates convergence, we shall expect the associated estimate for α2 to be positive, and vice versa. The regression is estimated using data of nonoverlapping five-year intervals after 2000. The following are the structural factors we examined and their data sources:1
Quality of governance (World Bank Governance Indicators)
Development of market-oriented institutions (EBRD Transition Indicator)
Level of human capital (Human capital indicator from the Penn World Table)
Government’s share in GDP (Penn World Table)
Unemployment rate (IMF, World Economic Outlook, cyclically adjusted)
Financial development level (credit to GDP ratio, IFS, cyclically adjusted)
|factor = governance||factor = market|
|factor = human capital|
|dist × factor||0.187***||0.286**||0.547**|
|factor = government|
|factor = unemployment||factor = financial|
|dist × factor||−0.009**||−0.011***||0.159***|
The results show that high-quality governance, market-oriented institutions, a strong human capital base, and a more developed financial system facilitate catching-up by poorer countries. In contrast, dominance of the public sector in the economy and high unemployment hinder the catching-up process.
The strength of regional integration can be inferred from the augmentation of a standard gravity model that relates cross-border trade flows to population, economic size, and geographical distance. In particular, we follow (Paas and Tafenau 2005) and augment a standard gravity model with an indicator variable that takes the value 1 when the country pair belongs to the Western Balkans (WBS) group of countries. We also test the strength of linkages between Western Balkan and New Member States, as well as the Western Balkan States and main euro zone partners. We expect the coefficient on the dummy to be positive, indicating that belonging to the WBS group increases the size of cross-border trade.1
The following model is estimated:
where T denotes bilateral trade (exports and imports, respectively) imports in U.S. dollars, GDPpc nominal GDP per capita in U.S. dollars, POP populations, dist distance between capitals and I(WB) the Western Balkans dummy. All variables are in log form. Because the distance between countries does not vary within the panel unit, we use fixed-effects between estimators for our regressions.
Econometric estimates do not reject the hypothesis that the particular strength of linkages between WB economies is an additional explanation for the size of their cross-border trade. While similar results hold for the links between WBS and NMS, or WBS and eurozone countries, those ties appears weaker. This seems plausible given the improvement of intra-regional relations since 2000 that has led to an increase in intraregional trade on the back of historically similar institutional frameworks and languages, in addition to the growing integration into euro area supply chains.
|Fixed effects, between estimator|
|Nominal GDP per capita_country||1.16||0.00||1.18||0.00||1.14||0.00|
|Nominal GDP per capita_partner||0.82||0.00||0.84||0.00||0.81||0.00|
|Distance between capitals||−1.48||0.00||−1.47||0.00||−1.49||0.00|
|D (WBS) 1/||1.19||0.00|
|D (WBS & NMS)||0.34||0.00|
|D (WBS & Eurozone core) 2/||0.39||0.04|
|F-stat on joint signficance of panels||1,191||1,181||1,175|
|Fixed effects, between estimator|
|Nominal GDP per capita_country||0.82||0.00||0.84||0.00||0.80||0.00|
|Nominal GDP per capita_partner||1.07||0.00||1.09||0.00||1.05||0.00|
|Distance between capitals||−1.39||0.00||−1.38||0.00||−1.41||0.00|
|D (WBS) 1/||1.36||0.00|
|D (WBS & NMS)||0.40||0.00|
|D (WBS & Eurozone core) 2/||0.47||0.01|
|F-stat on joint signficance of pan||1,306||1,289||1,280|
A. Estimating Reform Gaps
For a number of indicators we estimate country-specific reform gaps by comparing Western Balkan countries with the New Member States and an average EU country, taking into account some other country-specific characteristics. For each indicator, the reform gap—the distance of the indicator’s value for country X from the NMS or the European Union average—is derived first by estimating the following regression:
The structural reform indicator gap k in country i is then simply defined as the difference between the actual indicator in country i and its predicted value for the NMS or EU average from the estimated regression (A1):
To make comparisons of indicators between countries possible, each gap is weighted by the inverse of its standard deviation. Therefore, if a k-gap in country i is Z, the indicator k in country i is Z standard deviations from the average of the comparator.
B. Ranking Structural Reforms by Their Importance for Economic Growth
To rank structural reforms in terms of their importance for economic growth, we use the results of growth regressions. The methodology does not identify the causal effect of reforms on growth and does not allow for quantifying the magnitude of the difference between reforms. However, it provides an indicative guide for government reform priorities. Ranking the reforms helps governments align the biggest policy gaps with the most important policies.
For simplicity, suppose the true data generating process for the economic growth is:
where gi is GDP per capita growth in country i over a certain period and Xt is a set of structural macroeconomic controls at the beginning of the period: GDP per capita, stance of structural reform (Global Competitiveness Index score), geographical location (e.g., a dummy for the sub-Saharan region), common historical past (e.g., Emerging Europe dummy), resource-richness. Progress (Δ) in all structural indicators
Ideally, we would like to run regression (A3) and estimate β1,…,βK, which would give guidance analyzing the reform cost-benefit ratio. However, estimating (A3) is not possible, in particular because of the very large number of indicators, and potentially omitted variables. Instead, a separate growth regression for each indicator is estimated:
where a tilde over g and I means that the variables were adjusted for constant and Xi.1 Each
Results suggest that reforms in all areas have a positive impact on growth. Reforms in institutions, financial markets, and infrastructure tend to have a somewhat higher growth impact than reforms in other areas. In addition, there is some variability in the estimated impact on growth among different income groups of countries (Annex Figure 1.4.1). While the estimates of βk may be biased because of omitted variables, the figures show under which assumption it is possible to use the estimates of βk to rank reforms according to their growth impact.
Annex Figure 1.4.1.Results of Growth Regressions: Estimates of Growth Coefficients
Proposition 1. Let
using the following assumption:
Assumption 1: Structural reform indicators that are more growth-enhancing (higher beta) are more correlated with other growth-enhancing indicators. Assumption 1 will be formulated in mathematical terms further in the proof of the proposition.
Proof of the Proposition 1
To simplify notation, and without loss of generality, let us take l=1, and m=2. From (A3) it follows that both
From the standard OLS algebra it follows that:
where γij is the probability limit of OLS coefficient in a regression of
Now, since all indicators are adjusted and have the same variance:
Using (A7) we get:
Now, in mathematical terms Assumption 1 states that:
that is indicator 1 is more correlated with the indicators, which correspond to higher betas, that is, those that are more important for growth.
Since correlation between any two random variables is bounded between -1 and 1, the two terms of the sum on the right hand side of (A8) are either both negative or both positive. Hence, we get (A5).
Under assumption 1, which seems to hold for most indicators in our dataset, it is possible to rank structural reforms by running simple regressions like (A4) and then comparing the OLS estimates. However, it is not possible to identify the true betas or the true difference between betas, because the last term in (A8) is not identified.
Classification of Reforms into Priority Classes
We classify reform areas into three classes of priorities: high, medium and low. The classification rule is based on two criteria—how large the reform gap is and how important the reform is for growth. Annex Table 1.4.1 guides our selection according to the criteria outlined below.
|Importance of reforms|
On the vertical axis of the table are the reform gaps (measured in standard deviations from the mean of the peer group), sorted from large negative gaps (bad) to large positive gaps (good). On the horizontal axis the reforms are sorted by their importance for growth, that is, by the point estimate βk of corresponding growth regression.
Reforms that we classify as high priority range from reform areas with large negative gaps but minor/medium importance for growth to reform areas where the gap is small but improving the reform area matters a lot for growth. In the lower left corner are reform areas where the country performs better than its peers (a positive gap) and reforms in this area have a low importance for growth.
Reported scores correspond to reform priorities. We have assigned scores to the gaps (from 1 (large positive gap) to 5 (large negative gap) and to the importance of reforms for growth (from 1 (minor) to 4 (major)). The maximum would thus be 9 (a large negative gap (5) plus major importance for growth (4)). Annex Tables 1.4.2a and b report the sum of the two scores. Scores from 7-9 are classified as high priority, from 5-6 as medium priority, and 1-4 as low priority.
|Institutions||Infrastructure||Health and primary education||Higher education and training||Goods market efficiency||Labor market efficiency||Financial market development||Technological readiness||Business sophistication||Innovation|
|Institutions||Infrastructure||Health and primary education||Higher education and training||Goods market efficiency||Labor market efficiency||Financial market development||Technological readiness||Business sophistication||Innovation|
To classify reforms by the importance for growth we use estimates from the income-specific growth regressions (see above for details). We also did the exercise with the estimates from the uniform regression. The difference to our main results is minor.
Annex Figure 1.4.2.Reform Gaps: Institutions
Sources: World Economic Forum; and IMF staff calculations.
Note: Global Competitiveness Report, sub-indicators of pillar “Institutions”: 1 - Property rights, 2 -Intellectual property protection, 3 - Diversion of public funds, 4 - Public trust in politicians, 5 -Irregular payments and bribes, 6 - Judicial independence, 7 - Favoritism in gov’t decisions, 8 -Wastefullness of gov’t spending, 9 - Burden of gov’t regulation, 10 - Efficiency in setlling disputes, 11 - Efficiency in challenging regs, 12 - Transparency of policymaking, 13 - Business cost of terrorism, 14 - Business cost of crime, 15 - Organized crime, 16 - Reliability of police, 17 - Ethical behavior of firms, 18 - Strength of reporting standards, 19 - Efficacy of corp. boards, 20 - Protection of minority shareholders, 21 - Strength of investor protection.
Annex Figure 1.4.3.Reform Gaps: Infrastructure
Sources: World Economic Forum; and IMF staff calculations.
Note: Global Competitiveness Report, sub-indicators of pillar “Infrastructure”: 1 - Quality of overall infrastructure, 2 - Quality of roads, 3 - Quality of railroad, 4 - Quality of ports, 5 -Quality of air transport infrastructure, 7 - Quality of electricity supply, 8 - Mobile telephone subscriptions, 9 - Fixed telephone lines. Excluded is sub-indicator 6 - “Availability of airline seats”, as it is related to the size of a country.
Annex Figure 1.4.4.Reform Gaps: Goods Market Efficiency
Sources: World Economic Forum; and IMF staff calculations.
Note: Global Competitiveness Report, sub-indicators in pillar “Goods Markets Efficiency”: 1 - Intensity of local competition, 2 - Extent of market dominance, 3 - Effect. of anti-monopoly pol., 4 - Effect of taxation on incentives to invest, 5 - Total tax rate, 6 - # of proc. to start business, 7 - # of days to start business, 8 - Agricultural policy costs, 9 - Prevalence of trade barriers, 10 - Trade tarrifs, 11 - Prevalence of foreign ownership, 12 - Business impact of rules on FDI, 13 - Burden of customs procedures, 14 - Imports, %GDP, 15 - Degree of customer orientation, 16 - Buyer sophistication.
Annex Figure 1.4.5.Reform Gaps: Labor Market Efficiency
Sources: World Economic Forum; and IMF staff calculations.
Note: Global Competitiveness Report, sub-indicators in pillar “Labor Market Efficiency”: 1 - Cooperation in labor employer relations, 2 - Flexibility of wage determination, 3 - Hiring and firing practices, 4 - Redundancy costs, 5 - Effect of taxation on incentives to work, 6 - Pay and productivity, 7 - Reliance on professional management, 8 - Country capacity to retain talent, 9 - Country capacity to attract talent, 10 - Women in labor force.
Our empirical analysis links labor market outcomes at the individual level with a number of key macroeconomic and country-level structural and institutional indicators. Specifically, transitions between employment, unemployment, and non-participation in the labor force are linked by means of a micro-econometric multinomial logit model to various demographic characteristics of the labor force (age, disability, education, and marital status, as well as employment status from a year ago), macroeconomic factors (overall economic growth rate, investment level, credit growth, as well as indicators of fiscal stance, public expenditures, and remittances inflows), and structural factors (indicators of institutional rigidities in the labor market and those reflecting the country’s stage of transition to market economy). The micro-level data are derived from labor force surveys of four Western Balkan countries (Bosnia and Herzegovina, Kosovo, FYR Macedonia, and Serbia) as well as Bulgaria, Poland, and Romania for 2006–13, thus covering periods of the precrisis boom, the crisis bust, and the postcrisis recovery for a diverse group of countries in the region.
|BGR||POL||ROM||BIH||SRB||MKD||UKV||Pooled data 2/|
|Constant||0.216 ***||1.495 ***||2.091 ***||3.52 ***||−0.1 **||−1.167 ***||2.012 ***||2.864 ***||7.437 ***||8.289 ***||5.947 ***||10.504 ***|
|Age < 20||2.461 ***||2.027 ***||1.068 ***||0.438 ***||2.037 ***||2.208 ***||0.88 ***||1.541 ***||1.556 ***||1.554 ***||1.545 ***||1.557 ***|
|20 < Age < 25||1.015 ***||0.277 ***||0.587 ***||−0.06||0.745 ***||0.677 ***||−0.003||0.379 ***||0.414 ***||0.429 ***||0.426 ***||0.432 ***|
|45 < Age < 55||0.219 ***||0.018||0.512 ***||0.523 ***||0.927 ***||0.544 ***||0.142 ***||0.507 ***||0.528 ***||0.533 ***||0.537 ***||0.53 ***|
|Age > 55||3.049 ***||2.546 ***||3.022 ***||2.467 ***||3.624 ***||3.019 ***||1.424 ***||2.98 ***||3.04 ***||3.037 ***||3.044 ***||3.041 ***|
|Married||…||0.082 ***||−0.09 ***||−0.248 ***||−0.102 ***||−0.27 ***||0.243 ***||−0.028 **||−0.035 **||−0.023 **||−0.027 **||−0.023 **|
|Female||0.542 ***||0.504 ***||0.447 ***||0.506 ***||0.65 ***||1.293 ***||0.728 ***||0.519 ***||0.545 ***||0.554 ***||0.555 ***||0.555 ***|
|Disabled||…||1.03 ***||3.402 ***||2.06 ***||…||…||4.755 ***||1.491 ***||1.527 ***||1.528 ***||1.519 ***||1.539 ***|
|Education: below high school||0.449 ***||−0.003||0.649 ***||−1.111 ***||0.351 ***||0.597 ***||0.051||−0.003||0.125 ***||0.182 ***||0.196 ***||0.182 ***|
|Education: university 1/||0.243 ***||−0.548 ***||−0.762 ***||−2.021 ***||−0.238 ***||−0.477 ***||−0.961 ***||−0.633 ***||−0.554 ***||−0.52 ***||−0.521 ***||−0.513 ***|
|Education: graduate||0.576||…||0.037||−1.629 ***||0.44 **||4.597 ***||−0.9 ***||…||…||…||…||…|
|Status one year ago: unemployed||…||−2.659 ***||−3.761 ***||−3.248 ***||−2.339 ***||…||−2.649 ***||−2.911 ***||−2.928 ***||−2.951 ***||−2.963 ***||−2.952 ***|
|Real GDP growth||…||…||…||…||…||…||…||0.113 ***||0.139 ***||0.067 ***||0.061 ***||0.055 ***|
|Investment||…||…||…||…||…||…||…||0.035 ***||0.015 ***||0.024 ***||0.029 ***||0.032 ***|
|Private sector growth||…||…||…||…||…||…||…||−0.031 ***||−0.053 ***||−0.045 ***||−0.043 ***||−0.039 ***|
|General government fiscal balance||…||…||…||…||…||…||…||0.015 ***||0.089 ***||0.145 ***||0.136 ***||0.117 ***|
|General government expenditures||…||…||…||…||…||…||…||−0.048 ***||−0.071 ***||−0.108 ***||−0.1 ***||−0.099 ***|
|Remittances||…||…||…||…||…||…||…||0.058 ***||0.171 ***||0.197 ***||0.194 ***||0.146 ***|
|Labor market: flexibility|
|Cooperation in labor-employer relations||…||…||…||…||…||…||…||…||−0.011 ***||−0.01 ***||−0.008 ***||−0.012 ***|
|Flexibility of wage determination||…||…||…||…||…||…||…||…||−0.006 ***||−0.007 ***||−0.007 ***||−0.006 ***|
|Hiring and firing practices||…||…||…||…||…||…||…||…||−0.005 ***||0.005 ***||0.004 ***||0.008 ***|
|Redundancy costs||…||…||…||…||…||…||…||…||−0.039 ***||−0.03 ***||−0.029 ***||−0.022 ***|
|Labor market: efficient use of talent|
|Pay and productivity||…||…||…||…||…||…||…||…||…||0.02 ***||0.019 ***||0.02 ***|
|Reliance on professional management||…||…||…||…||…||…||…||…||…||−0.02 ***||−0.017 ***||−0.02 ***|
|Women in labor force||…||…||…||…||…||…||…||…||…||0||0.001||0.001 *|
|Stage of transition|
|EBRD transition index||…||…||…||…||…||…||…||…||…||…||0.388 ***||…|
|FDI per capita||…||…||…||…||…||…||…||…||…||…||…||−0.401 ***|
|1=Unemployed (base outcome)|
|Constant||2.376 ***||2.818 ***||3.633 ***||2.29 ***||1.809 ***||0.558 ***||3.843 ***||3.843 ***||7.149 ***||7.575 ***||0.687 **||2.877 ***|
|Age < 20||−1.457 ***||−1.791 ***||−2.128 ***||−2.105 ***||−1.443 ***||−0.905 ***||−2.486 ***||−1.893 ***||−1.902 ***||−1.903 ***||−1.924 ***||−1.908 ***|
|20 < Age < 25||−0.826 ***||−1.057 ***||−0.878 ***||−0.625 ***||−0.753 ***||−0.667 ***||−0.833 ***||−0.929 ***||−0.925 ***||−0.926 ***||−0.932 ***||−0.931 ***|
|45 < Age < 55||0.153 ***||0.142 ***||−0.027||0.148 ***||0.283 ***||0.233 ***||0.303 ***||0.144 ***||0.135 ***||0.135 ***||0.146 ***||0.139 ***|
|Age > 55||0.186 ***||−0.216 ***||0.366 ***||−0.13 **||0.656 ***||0.17 ***||−0.472 ***||0.219 ***||0.24 ***||0.253 ***||0.262 ***||0.258 ***|
|Married||…||0.603 ***||0.304 ***||0.446 ***||0.465 ***||0.471 ***||0.51 ***||0.501 ***||0.49 ***||0.483 ***||0.475 ***||0.482 ***|
|Female||−0.014||−0.327 ***||−0.269 ***||−0.518 ***||−0.306 ***||−0.088 ***||−1.447 ***||−0.302 ***||−0.295 ***||−0.293 ***||−0.296 ***||−0.295 ***|
|Disabled||…||−0.863 ***||−1.836 **||−0.547 **||…||…||1.566 **||−0.667 ***||−0.618 ***||−0.601 ***||−0.628 ***||−0.62 ***|
|Education: below high school||−0.998 ***||0.039||0.457 ***||0.233 **||−0.12 **||−0.378 ***||−1.373 ***||0.053 ***||0.14 ***||0.15 ***||0.175 ***||0.142 ***|
|Education: university 1/||0.752 ***||0.298 ***||0.097 **||0.462 ***||0.284 ***||0.418 ***||−0.474 ***||0.268 ***||0.375 ***||0.384 ***||0.376 ***||0.361 ***|
|Education: graduate||1.531 **||…||1.361||0.617 **||1.148 ***||2.172 ***||0.191||…||…||…||…||…|
|Status one year ago: unemployed||…||−3.427 ***||−4.67 ***||−3.668 ***||−2.594 ***||…||−3.868 ***||−3.498 ***||−3.57 ***||−3.591 ***||−3.618 ***||−3.591 ***|
|Real GDP growth||…||…||…||…||…||…||…||0.06 ***||0.101 ***||0.07 ***||0.058 ***||0.103 ***|
|Investment||…||…||…||…||…||…||…||0.043 ***||0.006 **||0.014 ***||0.023 ***||−0.003|
|Private sector growth||…||…||…||…||…||…||…||−0.014 ***||−0.028 ***||−0.021 ***||−0.016 ***||−0.034 ***|
|General government fiscal balance||…||…||…||…||…||…||…||−0.058 ***||−0.041 ***||−0.041 ***||−0.07 ***||−0.006|
|General government expenditures||…||…||…||…||…||…||…||−0.051 ***||−0.083 ***||−0.105 ***||−0.082 ***||−0.126 ***|
|Remittances||…||…||…||…||…||…||…||−0.042 ***||−0.001||−0.008 *||0.016 ***||0.088 ***|
|Labor market: flexibility|
|Cooperation in labor-employer relations||…||…||…||…||…||…||…||…||0.005 ***||0.002 ***||0.008 ***||0.006 ***|
|Flexibility of wage determination||…||…||…||…||…||…||…||…||−0.008 ***||−0.009 ***||−0.009 ***||−0.013 ***|
|Hiring and firing practices||…||…||…||…||…||…||…||…||−0.008 ***||−0.004 ***||−0.008 ***||−0.012 ***|
|Redundancy costs||…||…||…||…||…||…||…||…||−0.019 ***||−0.014 ***||−0.016 ***||−0.027 ***|
|Labor market: efficient use of talent|
|Pay and productivity||…||…||…||…||…||…||…||…||…||0.009 ***||0.004 ***||0.009 ***|
|Reliance on professional management||…||…||…||…||…||…||…||…||…||−0.005 ***||0.004 ***||−0.006 ***|
|Women in labor force||…||…||…||…||…||…||…||…||…||0.003 ***||0.004 ***||0.001 **|
|Stage of transition|
|Combined EBRD transition index||…||…||…||…||…||…||…||…||…||…||1.242 ***||…|
|FDI per capita||…||…||…||…||…||…||…||…||…||…||…||0.825 ***|
|Number of observations||211,110||443,760||380,783||198,279||209,568||382,562||106,296||1,232,390||1,232,390||1,232,390||1,232,390||1,232,390|
|Years||2006-12||2006-12||2006-12||2006-13||2008-13||2006-12||2012||…||2006-13, depending on availability|
This annex examines how responsive expenditure policy is to the business cycle, how much of spending is determined by inertia (for instance, on account of mandatory spending), and how much remains unexplained after accounting for these factors. This residual—an unexplained component—could for instance reflect the political business cycle rather than economic considerations. We focus here on the expenditure side because, with the exception of discretionary tax rate changes and lump-sum receipts, revenues generally reflect their cyclical tax bases (Coricelli and Fiorito 2013).
We extract this unexplained component of fiscal policy by estimating a fiscal policy rule, quantifying the unexpected variation in fiscal policy. In line with the work of Fatás and Mihov (2003, 2006), Afonso, Agnello and Furceri (2010), and Agnello, Furceri, and Sousa (2013), we estimate the following rule for each country i (i = 1,… N):
where g is the logarithm of real government spending, y is the logarithm of real GDP and X is a set of controls including inflation and the logarithm of real public debt. We then examine how much of government spending is explained by persistence (captured using lagged spending), how responsive it is to the business cycle (captured using current and lagged GDP growth), inflation and the level of debt, and how much of it remains unexplained. Thus λi is a measure of persistence; βi and Υi gauge the responsiveness of fiscal policy to the business cycle; and εit is the unexpected variation in fiscal policy that could capture the impact of, for example, elections. We include country fixed effects to account for the impact of country-specific factors. We use a panel dataset including 34 countries (Western Balkans, EU).
Across all countries, government spending exhibits a high degree of persistence, with lagged expenditure explaining most of the variation in current expenditure. Current GDP growth has a negative impact on spending, possibly capturing effects through lower revenues requiring corresponding spending cuts. Debt has a significant constraining impact on spending only in the Advanced EU economies and the Baltics, but not in the Western Balkans and Central Europe. The Western Balkans appear to be less responsive to the business cycle than the New Member States or Advanced EU economies. In fact, the unexpected variation appears to be somewhat larger for the Western Balkans, as less of the variation in spending over time for a given country is explained by cyclical factors and inertia.
|Log real expenditure (lagged)||0.911***||0.872***||0.919***||0.898***||0.935***|
|Change in log real GDP||−0.843***||−0.336||−0.523**||−0.984***||−1.140***|
|Change in log real GDP (lagged)||0.172*||0.203||0.189||0.333*||0.068|
|Log real debt||−0.031***||−0.012||−0.013||−0.062*||−0.043***|
|Number of obs.||631||95||119||49||336|
|Number of fixed effects (countries)||34||7||7||3||15|
We estimate a cross-sectional regression of the size of the peak-to-trough decline in real GDP on explanatory factors designed to measure the degree of overheating and imbalances in the boom period (Annex Table 2.2.1).1 We find that having a fixed exchange rate (captured by using a dummy variable) is associated with a larger decline in growth. Wider current account deficits in the boom years are also associated with bigger recessions. Higher precrisis capital inflows, however, appear to moderate the drop, possibly reflecting the beneficial effects of predominately foreign direct investment inflows during the early boom years. The regression does not yield significant coefficients on the variables for fiscal policies, wage growth, and credit.2 Western Balkan economies experienced a smaller fall than New Member States (as captured using a dummy variable), even with other conditioning factors.
|Dependent variable: Size of peak to trough fall in real GDP growth||Coef.||Std. Err.|
|Fixed exchange rate||8.26**||2.46|
|Primary deficit (2006-2008 avg)||0.52||0.56|
|CA deficit (2006-2008 avg)||0.6*||0.23|
|Wage growth (2006-2008 avg)||0.07||0.21|
|Increase in credit (as % of GDP, 2008 rel. to 2003)||0.02||0.06|
|Capital inflows (2006-2008 avg)||−1 09***||0.25|
|Western Balkans||−7 01***||1.76|
|Number of obs||16|
|Dependent variable: Trough to 2013 increase in real GDP growth||Coef.||Std. Err.|
|Fixed exchange rate||6.87***||1.21|
|Change in credit (as % of GDP, 2013 rel. to 2008)||−0.26***||0.06|
|Capital inflows (2009-2013 avg)||−0.31||0.25|
|Extent of import compression||−0.05||0.15|
|Extent of export boost||0.37*||0.14|
|Discretionary fiscal policy (2009-2013 avg)||1.43||2.32|
|Number of obs||16|
We also examine the determinants of postcrisis recovery using a cross-sectional regression of real GDP growth since the trough (Annex Table 2.2.2).3 A fixed exchange rate is found to support the recovery, as does stronger export performance. Surprisingly, stronger deleveraging also appears to be associated with stronger growth. Discretionary fiscal policy (as constructed in Annex 2.1) again does not have a significant effect, and neither do capital inflows.
Looking forward, the Western Balkan countries face important structural challenges as they strive to adjust to a postboom environment. Annex Table 2.3.1 summarizes some of the challenges and presents policy recommendations. Efforts aimed at containing deficits and debt levels are also needed in light of aging populations, which over time will add to expenditure pressures. And while in some countries substantial adjustment has already taken place, additional consolidation would be needed to achieve further deficit reduction. Crucially, fiscal consolidation should be complemented by compositional changes, reducing in particular the share of current expenditures. Controls in the broader public sector should also be improved as off-budget operations and the legacy of social and subsidy spending continue to complicate budget planning in several Western Balkans countries. In most countries revenue measures should be seen as a complement to adjustment on the expenditure side. Structural fiscal reforms should focus on broadening the tax base and fighting the grey economy.
|Albania||High debt and financing needs, heavily dependent on banks||Fiscal consolidation largely through revenue measures and phasing out energy subsidies|
|Bosnia and Herzegovina||Balance the need for further fiscal consolidation with supporting growth; composition of spending||Contain current, non-disaster related spending, notably wages and benefits; improve the quality and targeting of public spending; continue ongoing efforts to improve revenue collection and administration|
|Croatia||High fiscal deficits, rapidly increasing public debt and elevated risk spreads||Emphasis on revenue measures in near term in view of already fragile growth; gradual switch to expenditure consolidation in subsequent years|
|Kosovo||Safeguard fiscal sustainability, arrest the worsening composition of the budget||Wage and benefit moderation; improve tax compliance; shift tax policy gradually towards domestically collected taxes|
|Macedonia, FYR||Rebuild buffers and safeguard sustainability of public finances and the exchange rate peg||Fiscal consolidation embedded in a comprehensive spending review|
|Montenegro||High and rising debt, preserving market access||Fundamental expenditure reform, including on the pension system and public sector wages|
|Serbia||High debt, increasing debt dynamics||Ambitious and sustained fiscal adjustment through curtailing mandatory spending (wages and pensions), reducing state aid to weak state-owned enterprises|
High persistence reflects a common practice of incremental budgeting with a one-year time horizon. Longer budgeting horizons and fiscal rules can help contain spending pressures during good times and a medium-term strategy would also facilitate the planning of large investment projects. Empirical studies suggest that fiscal rules have been generally associated with improved fiscal performance (IMF 2009), though of course they are only successful if there is sufficient political commitment to adhere to them. While some countries in the region have recently adopted fiscal rules (Croatia, Kosovo, Montenegro, and Serbia), enforcement is weak in some of them. It should be acknowledged that running large surpluses during boom times may be politically difficult, in particular in catch-up economies, with large demands for improvements in infrastructure (particularly Albania, Kosovo, FYR Macedonia, and Montenegro).
Fixed exchange rates and a high dependence on external financing make fiscal consolidation even more crucial. Fiscal consolidation and fiscal buffers are particularly important in the context of unilaterally euroized economies (Montenegro, Kosovo), currency boards (Bosnia and Herzegovina) and exchange rate pegs (Croatia, FYR Macedonia). The prospect of tighter global financing conditions ahead could increase vulnerabilities in countries with a high reliance on external financing.
When comparing levels of financial development across countries, it is useful to take into account the level of economic development and structural characteristics, regardless of the policies or institutions of a country (Beck and others, 2008). In particular, structural characteristics such as income per capita, population (or market) size, population density and age profile, and whether the country is a transition economy, fuel exporter or offshore financial center, have generally been found to be associated with indicators of financial development.1
Controlling for these structural, or policy-invariant, variables in a regression provides us with a country’s structural “benchmark,” that is, an expected average (if using least-squares regressions) or median (or other percentile, if using quantile regressions). The World Bank’s Finstat database provides estimates of these benchmarked indicators for 183 countries. The pooled regression assumes a common path of development (as financial systems fulfill similar functions and face similar frictions) and includes time dummies to control for the effect of global conditions on all countries.
The empirical estimates for bank deposit and private credit depth show a positive relationship between income per capita (though it levels off at high income levels) as well as size of market. In contrast, age dependency (i.e., in particular a relatively greater share of young people in population), and being a transition economy tends to be associated with lower depth. Population density is associated with higher deposit depth but lower credit depth.
|Statistically significant coefficients in bold (p-value<0.1)|
|Log GDP per capita||Log GDP per capita squared||Log Popuation size||Log Population density||Log Age Dependency, young||Log Age Dependency, old||Offshore dummy||Transition dummy||Fuel exporter||Pseudo R2|
|Domestic Bank Deposits/GDP||0.990||-0.0485||0.0360||0.0965||-0.484||−0.0461||0.378||-0.736||0.351||0.45|
It is important to note that that the structural depth is not the “frontier,”2 as it does not take into account institutional and other long-term policy variables that can affect depth either positively or negatively. Rather, the gap between actual and benchmark levels of financial depth can be compared to institutional and policy factors to see if these explain either an overperformance or underperformance gap.3 Thus, it may be possible to assess why a county has an overperforming gap even though it has a lower absolute level of an indicator than another country—for example compare Country A, at point A, with Country B, at point B.
The position of B (underperformance) may be because of policy (macroeconomic) instability or institutional weaknesses (for example, the result of weak information or protection for creditors). In contrast, the position of A may indicate a relatively stronger macroeconomic or market structure environment. However, if there is a very large gap that cannot be well explained by policies, then this gap could indicate an “excess” or “boom” that may eventually be followed by a bust (for example point C in Annex Figure 3.1.1 above).
Annex Figure 3.1.1.Stylized Financial Possibility Frontier
Source: Barajas and others (2013).
Recent work has found that gaps, or changes in them, can be affected by macro-financial variables (such as inflation rates, remittances, and growth) as well as by the enabling or institutional environment, including market structure (such as foreign bank entry and competition) in addition to regulatory factors (such as strength of banking regulation and supervision) and institutional factors, particularly creditor rights and enforcement costs.
|Authors||Cottarelli and others||De la Torre, Feyen,||Barajas and others|
|(2003)1||and Ize (2011)2||(2013)3|
|Country||24 nontransition||118 observations||57 observations2|
|Estimation||Random effects GLS||Median regression||OLS regression|
|Public debt to GDP||−0.164***|
|High inflation dummy|
|Credit crash/banking crisis6||−111.3***||0.964|
|Exchange rate regime||2.437**7|
|Gross capital inflows|
|Bank entry requirements10||−0.031||−9.404**|
|German legal origin||0.266**|
|Lerner index (competition)||−59.488*11|
|Institutional risk||0.326 13|
Afonso, Antonio, LucaAgnello, and DavideFurceri.2010. “Fiscal Policy Responsiveness, Persistence and Discretion.” Public Choice145 (3): 503–30.
Aghion, Philippe, PeterHowitt, and DavidMayer-Foulkes.2005. “The Effect of Financial Development on Convergence: Theory and Evidence.” The Quarterly Journal of Economics (February): 173–222.
Agnello, Luca, DavideFurceri, and Ricardo M.Sousa.2013. “How Best to Measure Discretionary Fiscal Policy? Assessing its Impact on Private Spending.” Economic Modelling34: 15–24.
Bakker, Bas, and ChristophKlingen, eds. 2012. “How Emerging Europe Came Through the 2008/09 Crisis, An Account by the Staff of the IMF’s European Department.” International Monetary Fund, Washington.
Barajas, Adolfo, ThorstenBeck, EraDabla-Norris, and RezaYousefi.2013. “Too Cold, Too Hot, Or Just Right? Assessing Financial Sector Development Across the Globe.” Working Paper No. 13/81, International Monetary Fund, Washington.
Barisitz, Stephan. 2009. “Banking Transformation 1980-2006 in Central and Eastern Europe—From Communism to Capitalism.” South-Eastern Europe Journal of Economics2: 161–80.
Barro, Robert and Jong-WhaLee (2013), “A New Data Set of Educational Attainment in the World, 1950–2010.” Journal of Development Economics, 104: 184–198.
Bartlett, W., and M.Xhumari. 2007. “Social Security Policy and Pension Reforms in the Western Balkans.” European Journal of Social Security9 (4).
Beck, Thorsten, and ErikFeyen. 2013. “Benchmarking Financial Systems: Introducing the Financial Possibility Frontier.” World Bank Policy Research Working Paper 6615. Washington: World Bank.
Beck, Thorsten, AsliDemirguc-Kunt, and PatrickHonohan. 2008. Finance for All? Policies and Pitfalls in Expanding Access. Washington: World Bank.
Beck, Thorsten, AsliDemirguc-Kunt, and PatrickHonohan. 2009. Access to Financial Services: Measurement, Impact and Policies. Washington: World Bank.
Beck, Thorsten, AsliDemirguc-Kunt, and MariaSoledad Martinez Peria. 2006. “Banking Services for Everyone? Barriers to Bank Access and Use around the World.” World Bank Policy Research Paper 4079. Washington: World Bank.
Beck, Thorsten, ErikFeyen, AlainIze, and FlorenciaMoizezowicz. 2008. “Benchmarking Financial Development.” World Bank Policy Research Working Paper 4638. Washington: World Bank.
Calvo, Guillermo A., FabrizioCoricelli, and PabloOttonello. 2012. “The Labor Market Consequences of Financial Crises with or without Inflation: Jobless and Wageless Recoveries.” NBER Working Paper No. 18480. Cambridge, Massachusetts: National Bureau of Economic Research.
Campos, Nauro F., and FabrizioCoricelli. 2002. “Growth in Transition: What We Know, What We Don’t, and What We Should.” Journal of Economic Literature11: 783–836.
Che, Natasha, and AntonioSpilimbergo. 2012. “Structural Reforms and Regional Convergence.” Working Paper No. 12/106, International Monetary Fund, Washington.
Ciccone, Antonio, and EliasPapaioannou. 2009. “Human Capital, the Structure of Production, and Growth.” Review of Economics and Statistics91(1): 66–82
Consultative Group to Assist the Poorest (CGAP). 2012. Financial Access 2011: An Overview of the Supply-Side Data Landscape. Washington: CGAP and International Finance Corporation.
Consultative Group to Assist the Poorest (CGAP). 2013. Financial Access 2012: Getting to a More Comprehensive Picture. Washington: CGAP and International Finance Corporation.
Coricelli, Fabrizio, and RiccardoFiorito. 2013. “Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure.” http://works.bepress.com/riccardo_fiorito/2.
Cottarellli, Carlo, GiovanniDell’Arrica, and IvannaVladkova-Hollar. 2003. “Early Birds, Late Risers, and Sleeping Beauties: Bank Credit Growth to the Private Sector in Central and Eastern Europe and the Balkans.” Working Paper No. 03/213. International Monetary Fund, Washington.
Dabla-Norris, Era, GiangHo, KalpanaKochhar, AnnetteKyobe, and RobertTchaidze. 2013. “Anchoring Growth: The Importance of Productivity-Enhancing Reforms in Emerging Market and Developing Economies.” Staff Discussion Note 13/08, International Monetary Fund, Washington.
De la Torre, Augusto, ErikFeyen, and AlainIze. 2011. “Financial Development: Structure and Dynamics.” World Bank Policy Research Working Paper 5854. Washington: World Bank.
Demirguc-Kunt, Asli, and LeoraKlapper. 2012. “Measuring Financial Inclusion: The Global Findex.” World Bank Policy Research Working Paper 6025. Washington: World Bank.
Demirguc-Kunt, Asli, and LeoraKlapper. 2013. “Measuring Financial Inclusion: Explaining Variation in Use of Financial Services Across and Within Countries.” Brookings Papers on Economic Activity (Spring). Washington: The Brookings Institution.
Dewatripont, M., and E.Maskin. 1995. “Credit and Efficiency in Centralized and Decentralized Economies.” Review of Economic Studies62 (4): 541–55.
Easterly, William, and RossLevine. 2001. “It’s Not Factor Accumulation: Stylized Facts and Growth Models.” World Bank Economic Review15 (2): 177–219.
Easterly, William, and RossLevine, and SergioRebelo. 1993. “Fiscal Policy and Economic Growth: An Empirical Investigation.” Journal of Monetary Economics32: 417–458.
European Bank for Reconstruction and Development (EBRD). 2013. Transition Report. London: European Bank for Reconstruction and Development.
European Banking Coordination Vienna Initiative. 2012. “Report from the Working Group on NPLs in Central, Eastern and Southeastern Europe.”
European Investment Bank. 2014. CESEE Bank Lending Survey, H1-2014.
Fatás, Antonio, and IlianMihov. 2003. “The Case for Restricting Discretionary Fiscal Policy.” Quarterly Journal of Economics118: 1419–447.
Fatás, Antonio, and IlianMihov. 2006. “The Macroeconomic Effects of Fiscal Rules in the US States.” Journal of Public Economics90: 101–17.
Feyen, Erik, KatieKibuuka, and DiegoSourroullie. 2013. FinStat 2014: A Ready-to-Use Tool to Benchmark Financial Sectors across Countries—User Guide and Benchmarking Methodology (Version 1.0), World Bank, Washington, November.
Fung, Michael K.2009. “Financial Development and Economic Growth: Convergence or Divergence?” Journal of International Money and Finance28: 56–67.
Gerard, Marc, and AlexanderTieman. 2013. “Financing Convergence”, FYR Macedonia Selected Issues Paper, IMF Country Report 13/279. International Monetary Fund, Washington, June.
Gerxhani, Klarita. 2004. “The Informal Sector in Developed and Less Developed Countries: A Literature Survey.” Public Choice120: 267–300.
GligorovVladimir, AnnaIara, MichaelLandesmann, RobertStehrer, and HermineVidovic. 2008. “Western Balkan Countries: Adjustment Capacity to External Shocks, with a Focus on Labor Markets.” Wiiw Research Report No. 352. Vienna: The Vienna Institute for International Economic Studies.
Inklaar, Robert, and Marcel P.Timmer. 2013. “Capital, Labor and TFP in PWT8.0.” Groningen Growth and Development Centre. The Netherlands: University of Groningen.
International Labour Organization (ILO). 2012. Global Employment Trend: Preventing a Deeper Job Crisis. Geneva: International Labour Organization.
International Labour Organization (ILO). 2013. Global Employment Trends, Recovering from a Second Jobs Dip. Geneva: International Labour Organization.
International Monetary Fund (IMF). 2009. “What’s the Damage? Medium-Term Output Dynamics after Financial Crises.” World Economic Outlook, International Monetary Fund, Washington, October.
International Monetary Fund (IMF). 2010. Global Financial Stability Report, International Monetary Fund, Washington, April.
International Monetary Fund (IMF). 2010a. “Managing Capital Flows.” Regional Economic Outlook: Europe—Fostering Sustainability. International Monetary Fund, Washington, May.
International Monetary Fund (IMF). 2010b. “Emerging Europe and the Global Crisis: Lessons from the Boom and the Bust.” Regional Economic Outlook: Europe—Building Confidence. International Monetary Fund, Washington, October.
International Monetary Fund (IMF). 2012. “Enhancing Financial Sector Surveillance in Low-Income Countries: Financial Deepening and Macroeconomic Stability.” International Monetary Fund, Washington.
International Monetary Fund (IMF). 2013. “Faster, Higher, Stronger—Raising the Growth Potential of CESEE.” Regional Economic Issues October 2013—Central, Eastern, and Southeastern Europe (Washington: IMF).
International Monetary Fund (IMF). 2013. “Financing Future Growth: The Evolving Role of Banking Systems in CESEE,” Regional Economic Issues April 2013—Central, Eastern, and Southeastern Europe. International Monetary Fund, Washington.
International Organization of Securities Commissions (IOSCO). 2011. “Development of Corporate Bond Markets in the Emerging Markets.” November
ITUC-PERC. 2012. Pension Reforms in the Countries of the Western Balkans from a EuropeanPerspective. Brussels: The International Trade Union Confederation & Pan-European Regional Council.
Kalluci, Irini. 2010. “Determinants of Net Interest Margin in the Albanian Banking System.” Bank of Albania, Tirana.
Kaminsky, Graciela, and CarmenReinhart. 1999. “The Twin Crises: The Causes of Banking and Balance-of-Payments Problems.” American Economic Review89 (3): 473–500.
Kannan, Prakash, PauRabanal, and AlasdairScott. 2011. “Recurring Patterns in the Run-up to House Price Busts.” Applied Economics Letters18: 107–13.
Karlan, Dean, and JonathanMorduch. 2009. “Access to Finance.” In Handbook of Development Economics, Volume 5, edited by DaniRodrik and MarkRosenzweig. Amsterdam: North Holland.
Kaufmann, Daniel, and AartKraay. 2002. “Growth without Governance.” World Bank Policy Research Working Paper No. 2928. Washington: World Bank.
Kinoshita, Yuko. 2011. “Sectoral Composition of FDI and External Vulnerability in Eastern Europe.” Working Paper No. 11/123, International Monetary Fund, Washington.
Klenow, Peter and AndresRodriguez-Clare. 1997. “The Neoclassical Revival in Growth Economics: Has it Gone Too Far?” NBER Macroeconomics Annual12: 73–103.
Koo, Richard. 2011. “The World in Balance Sheet Recession: Causes, Cure, and Politics.” Real-World Economics Review58: 19–37.
Kovtun, Dmitriy, AlexisMeyer Cirkel, ZuzanaMurgasova, DustinSmith, and SuchananTambunlertchai. 2014. “Challenges and Solutions for Fostering Job Creation in the Balkans.” In Jobs and Growth: Supporting the European Recovery. Washington: IMF.
Kraft, Evan, and TamislavGalac. 2011. “Macroprudential Regulation of Credit Booms and Busts: The Case of Croatia.” World Bank Policy Research Working Paper 5772. Washington: World Bank.
Kuddo, Arvo. 2013. “South East Europe Six: A Comparative Analysis of Labor Regulations.” Technical Note (August). World Bank, Washington.
Laeven, Luc, and FabianValencia. 2012. “Systemic Banking Crises Database: An Update.” Working Paper No. 12/163, International Monetary Fund, Washington.
Levine, Ross. 2005. “Finance and Growth: Theory and Evidence.” In Handbook of Economic Growth, Vol. 1A, edited by PhilippeAghion and StevenDurlauf. Amsterdam: Elsevier.
Liu, Yan, and ChristophRosenburg. 2013. “Dealing with Private Debt Distress in the Wake of the European Financial Crisis.” Working Paper No. 13/44, International Monetary Fund, Washington.
Loayza, Norman, and RomainRanciere. 2006. “Financial Development, Financial Fragility, and Growth.” Working Paper No. 05/170, International Monetary Fund, Washington.
McNeilly, Caryl J., and DorisScheisser-Gachnang. 1998. ”Reducing Inflation: Lessons from Albania’s Early Success,” Working Paper No. 98/78, International Monetary Fund, Washington.
Mendoza, Enrique G. and Marco E.Terrones. 2008. “An Anatomy of Credit Booms: Evidence from Macro Aggregates and Micro Data.” NBER Working Paper No. 14049.
Mitra, Pritha. 2011. “Capital Flows to EU New Member States: Does Sector Destination Matter?” Working Paper No. 11/67, International Monetary Fund, Washington.
Obstfeld, Maurice and KennethRogoff. 1996. Foundations of International Macroeconomics. Cambridge, Massachusetts: The MIT Press.
Paas, Tiiu, and EgleTafenau. 2005. “European Trade Integration in the Baltic Sea Region—A Gravity Model Based Analysis.” Hamburg Institute of International Economics Discussion Paper No. 331. Hamburg: Hamburg Institute of International Economics.
Pagano, Marco. 1993. “Financial Markets and Growth: An Overview.” European Economic Review37: 613–22.
Pissarides, Francesca, PeterSanfey, and S.Tashchilova. 2006. “Financing Transition through Remittances in South-eastern Europe: The Case of Serbia,” European Bank for Reconstruction and Development, London.
Psacharopoulos, George. 1994. “Returns to Investments in Education: A Global Update.” World Development22(9): 132.5–I–343.
Quah, Danny. 1996. “Empirics for Economic Growth and Convergence.” European Economic Review40: 1353–375.
Roaf, James, RubenAtoyan, BikasJoshi, and KrzysztofKrogulski. 2014. “25 Years of Transition. Post-communist Europe and the IMF.” Regional Economics Issues Special Report. International Monetary Fund, Washington.
Rousseau, Peter L., and PaulWachtel. 2011. “What Is Happening to the Impact of Financial Deepening on Economic Growth.” Economic Inquiry49 (1): 276–88.
Slavov, Slavi T.2009. “Do Common Currencies Facilitate the Net Flow of Capital Among Countries?” The North American Journal of Economics and Finance20 (2): 124–44.
Tsounta, Evridiki. 2014. “Slowdown in Emerging Markets: Sign of a Bumpy Road Ahead?” Working Paper No. 14/2015, International Monetary Fund, Washington.
World Economic Forum (WEF). 2014Global Competitiveness Report 2013–2014. Zurich: World Economic Forum.
Growth accounting exercises are commonly based on two simplifying assumptions: (i) the form of the production function (a Cobb- Douglas with unitary elasticity of substitution being the norm) and (ii) the elasticities of output with respect to labor and capital. Due to this, caution is required when interpreting results. First, any measurement errors in factor inputs are automatically attributed to TFP growth—the residual between measured output growth and growth of factors of production. Moreover, estimates of TFP growth are also sensitive to production function assumptions, and the interpretation of measured TFP growth can be problematic as it can reflect factors other than purely technical change—for example, increasing returns to scale or markups due to imperfect competition.
For Bosnia and Herzegovina, FYR Macedonia, and Montenegro, human capital is estimated based on UNDP data on educational attainment and on the methodology from Barro and Lee (2010).
We also looked at factors such as FDI and government capital expenditure. We only included factors that show a significant effect on convergence in the table.
Data are taken from various sources: DOTS, CEPII, and IMF, WEO; the coverage includes EU27 and selected OECD countries and a time span of 2000–13.
“Adjusted” means that we use the residuals from regressions of g and ΔI on constant and Xi. With that adjustment, beta in regression (A1) is numerically equivalent to the coefficient on ΔI in a regression of g on constant, X and ΔI.
The year of the trough is 2009. Peak years (2006, 2007, or 2008) vary by country.
Note, however, that wage growth and credit growth are significantly negatively correlated with the size of the peak to trough decline (that is, the stronger wage and credit increases, the more severe the downturn that followed) and are also correlated with current account deficits. Hence, the current account variable is effectively “knocking out” the wage and credit variables in the regression, but that does not imply that wages and credit were not economically significant. Primary deficits are uncorrelated with the size of the subsequent downturn.
The sample period is 2009 to 2013 across all countries.
See Beck, Feyen, Ize, and Moizezowicz (2008). Maximizing model fit was used as a criterion to select the final set of controls from the large set of potential controlling factors.
The frontier would be the constrained optimum at which there would be a trade-off between more depth and less financial stability, or vice versa. See Beck and Feyen (2013).
Including institutional factors directly into the benchmarking regression would raise the issue of endogenous variables.