Front Matter Page
INTERNATIONAL MONETARY FUND
European Department
Lifting Growth in the Western Balkans
The Role of Global Value Chains and Services Exports
Prepared by an IMF staff team comprising Nadeem Ilahi, Armine Khachatryan, William Lindquist, Nhu Nguyen, Faezeh Raei, and Jesmin Rahman
No. 19/13
Front Matter Page
European Department
Lifting Growth in the Western Balkans
The Role of Global Value Chains and Services Exports
Nadeem Ilahi, Armine Khachatryan, William Lindquist, Nhu Nguyen, Faezeh Raei, and Jesmin Rahman
INTERNATIONAL MONETARY FUND
Front Matter Page
Copyright ©2019 International Monetary Fund
Cataloging-in-Publication Data IMF Library
Names: Ilahi, Nadeem, author. | Khachatryan, Armine, author. | Lindquist, William J., author. | Nguyen, Nhu (Research Analyst), author. | Raei, Faezeh, author. | Rahman, Jesmin, author. | International Monetary Fund. European Department, issuing body. | International Monetary Fund, publisher.
Title: Lifting growth in the Western Balkans : the role of global value chains and services exports / Nadeem Ilahi, Armine Khachatryan, William Lindquist, Nhu Nguyen, Faezeh Raei and Jesmin Rahman.
Other titles: Role of global value chains and services exports. | International Monetary Fund. European Department (Series).
Description: Washington, DC : International Monetary Fund, 2019. | At head of title: European Department. | European Departmental Paper Series. | No. 19 | Includes bibliographical references.
Identifiers: ISBN 9781498314916 (paper)
Subjects: LCSH: Economic development—Balkan Peninsula. | Balkan Peninsula—Economic conditions. | Exports—Balkan Peninsula. | Investments, Foreign—Balkan Peninsula.
Classification: LCC HC401.I43 2019
The Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Contents
Acknowledgments
Executive Summary
1. Motivation
2. Enhancing Integration with Global Value Chains
Background
Survey Findings
Survey Findings
3. Expanding Services Exports
Background
Empirical Results
4. Raising Imports’ Contributions to Growth
Background
Empirical Results
5. Conclusions and Policy Recommendations.
Annex I. Analysis of GVC Trade Flows
Annex II. Regression Analysis for Determinants of GVC Flows
Annex III. Regression Analysis for Determinants of Services Exports
Annex IV. Regression Analysis for Imports
Annex V. Questionnaire for Survey of Export and GVC Companies in WB
References
Boxes
Box 1. Deep Trade Agreements: Why and How They Matter
Box 2. Serbia’s IT Success
Box 3. Tourism Performance: A Comparison of Albania and Croatia
Box 4. What Explains a Country’s Import Structure?
Figures
Figure 1. Exports, Real GDP Growth and Income Convergence
Figure 2. Trade Openness and Labor Intensity of Exports
Figure 3. GVC Participation Index: Western Balkans and New Member States
Figure 4. GVC Participation and Income
Figure 5. GVC Participation: Western Balkan Countries and New Member States
Figure 6. GVC Links to European Hubs, WB and NMS-7
Figure 7. Determinants of GVC Participation
Figure 8. How Deep are Western Balkans Trade Agreements?
Figure 9. Gains from Bridging the Policy Gaps
Figure 10. Summary of Findings from Survey of Export and GVC Companies in WB
Figure 11. GVC Connectivity in the WB
Figure 12. Exports of Services
Figure 13. Services Exports in the Western Balkans and NMS-7
Figure 14. Revealed Comparative Advantage in Services Exports: WB and NMS-7
Figure 15. Travel and Tourism Competitiveness Index Ranking
Figure 16. Contributions to Services Exports
Figure 17. Simulated Gains to Services Exports from Policy Improvements
Figure 18. Gross Value Added – Manufacturing
Figure 19. Composition of Capital Goods Imports
Figure 20. Gains from Higher Labor Skills and Capital Goods Imports in the Western Balkans
Figure 21. Infrastructure Gaps
Figure 22. Trade Facilitation Indicators
Acknowledgments
This paper was completed under the overall guidance of Jörg Decressin. The authors are grateful for helpful comments and suggestions from IMF colleagues, and from seminar participants at the European Commission on an earlier version of the paper. The authors would also like to thank Indra Mahadewa and Aniko Madaraszova for editorial assistance, and Houda Berrada of the Communications Department for leading the editorial and production process.
Executive Summary
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.
The slowdown in income convergence of WB countries with advanced Europe over the past decade calls for a rethink on policies and structural reforms. Exports have to play a key role. First-generation trade reforms in the WB, including tariff reduction, are advanced but deeper institutional, legal and trade logistics reforms are needed to fully integrate these economies into export supply chains. These “deep” reforms will also be required as these countries pursue EU membership. Frontloading some of the key legal and regulatory changes to facilitate trade and investment may start to pay dividends well in advance of actual membership through faster economic growth.