Can SEE economies grow stronger together? Empirical evidence from the CEFTA region

ABSTRACT

This article investigates the trade and growth benefits of the CEFTA agreement for its members using panel econometric techniques and analysis of backward and forward linkages with the CEFTA and the European economies. Although the countries have not reached their end goal of membership of the European Union, the research shows that CEFTA has supported their economic growth. However, there is trade heterogeneity in terms of the extent to which individual countries use CEFTA value added in their manufacturing exports. Less-developed economies seem to rely more on regional (CEFTA) supply chains, while manufacturing-based economies are increasingly coming to rely on EU supply chains. The countries have not built a strong export advantage abroad, as very little of their value added is used in EU exports.

KEYWORDS:

• CEFTA
• trade
• supply chains
• growth

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Notes

1. For more information, see www.cefta.int

2. *This designation is without prejudice to positions on status and is in line with UNSCR 1244 and the ICJ Opinion on the Kosovo declaration of independence.

3. We compare 2006 to 2020/2019 to understand how RCE evolved over the 15-year period, since the formation of CEFTA in December 2006. However, in 2020 COVID-19 hit the trade unprecedentedly and for that reason we present 2019 RCA values alongside 2020 RCA values. In this way, we are more likely to make plausible ‘before-after’ comparisons.

4. Eurostat High-tech classification: https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Glossary:High-tech_classification_of_manufacturing_industries

5. Source: central banks of corresponding economies.

6. According to Eurostat, the knowledge-intensive two-digit services are (based on the NACE Rev. 2 classification system): water transport (50), publishing activities (58), motor picture, video and television programme production, sound recording and music publishing activities (59), programming and broadcasting activities (60), telecommunications (61), computer programming, consultancy and related activities (62), information service activities (63), financial service activities, except insurance and pension funding (64), activities auxiliary to financial service and insurance activities (66), legal and accounting activities (69), activities of head offices; management consultancy activities (70), scientific research and development (72) and advertising and market research (73).

7. Comparing the RCA indicators for 2019 and 2020, we can see that some industries lost their competitiveness in 2020, such as electricity, gas, steam and air-conditioning supply in Kosovo. A decline in export competitiveness is also noticed in agriculture, fishery and forestry in Moldova, in mining and quarrying in Albania and Kosovo, etc.

8. Data for Kosovo, Montenegro and Bosnia and Herzegovina in this dataset were approximated with the use of benchmarks. For Kosovo, benchmark countries were Serbia and North Macedonia; for Montenegro, Croatia and North Macedonia and for Bosnia and Herzegovina, benchmark countries were Croatia and Serbia. Using benchmark is a classical way of approximating input output missing datasets, in the empirical literature too (Gorodnichenko et al., 2014). For more details on the calculation, see Reiter and Stehrer (2021).

9. For more details on the methodology, see Koopman et al. (2014) and Z. Wang et al. (2013).

10. These industries are manufacturing of food products, beverages and tobacco products; manufacturing of textiles, apparel, leather and related products; manufacturing of wood and paper products, and printing; manufacturing of coke and refined petroleum products; manufacturing of chemicals and chemical products; manufacturing of basic pharmaceutical products and pharmaceutical preparations; manufacturing of rubber and plastic products and other non-metallic mineral products; manufacturing of basic metals; manufacturing of computer, electronic and optical products; manufacturing of electrical equipment; manufacturing of machinery and equipment not elsewhere classified; manufacturing of motor vehicles, trailers and semi-trailers; manufacturing of furniture; repair and installation of machinery and equipment.

11. These figures refer to greenfield FDI and mergers and acquisitions (M&A), which take up the largest shares of total FDI.

12. The data represent the share of inward FDI stock in services as a percentage of total FDI for Albania, Bosnia and Herzegovina, North Macedonia, Moldova and Kosovo. FDI shares in services for Serbia are approximated based on FDI inflows, while data for Montenegro are missing.

13. In the year of the pandemic, 2020, trade in services was badly affected globally (see section 6), which is why 2019 is more presentable and thus included in figures.

14. https://www.rug.nl/ggdc/productivity/pwt/?lang=en

15. The inclusion of time dummies accounts for serial correlation; the inclusion of economy dummies accounts for spatial correlation.

16. For the purpose of this report, a simplified method is applied. A further in-depth exploration of the effects of CEFTA on growth requires additional model estimations.

17. The data on services disaggregated by trade partners is not available.

Additional information

Funding

This report was commissioned by the Central European Free Trade Agreement (CEFTA) Secretariat and co-funded by the European Union.