External Debt and Economic Growth in the Western Balkan Countries, with special focus to Albania, Kosovo and North Macedonia in the course of the pandemic COVID-19

Abstract

The objective of this study is to offer an empirical valuation of the relationship between external debt and economic growth in the Western Balkan (WB) countries, focusing specifically on the countries like Albania, Kosovo and North Macedonia, combined with other WB countries like Bosnia and Herzegovina, Montenegro and Serbia. The empirical model provides the impact of external debt and other control variables like total investments, population growth, inflation, literacy ratio, trade openness on economic growth in the Western Balkan countries, using a panel level data for 6 Western Balkan countries, covering a yearly time span: 2000-2022. Different estimation methodologies like Fixed Effects with Driscol and Kraay standard errors, robust LSDV and GMM estimates, were employed for the purpose of the research. The findings of the research confirm growth-deteriorating effect of external debt for target group of countries like Albania, Kosovo and North Macedonia and growth enhancement effect of external debt for the second group of countries like Bosnia and Herzegovina, Montenegro and Serbia. Other control variables like total investments, trade openness, inflation and population growth are found as crucial factors on explaining growth performance of the WB countries. In addition, COVID-19 interacted with external debt and financial crisis interacted with external debt, appears as crucial factors explaining growth pattern of the WB countries.