Divergence between the Economies of the (Former) Yugoslav Republics: Is It Possible to Change Direction?

ABSTRACT

This papers investigates the structural components that determine conditional convergence and the reciprocal relationship between these components and income in the (former) Yugoslav countries. Applying an ARDL model, we found that, in the long run, capital stock growth and R&D expenditures are positively dependent on GDP per capita growth, but R&D negatively depends on employment growth. R&D has an impact on GDP per capita growth in the long run, but not in the short run. Applying the OLS model, we estimated the significance of R&D and tertiary education outcomes on output growth and found it to be significant and positive. We found that convergence is a bidirectional process.

KEYWORDS:

• Conditional convergence
• ARDL
• Yugoslavia
• socialism
• research and development

JEL CLASSIFICATION:

• O47

Disclosure Statement

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

Notes

1. Kosovo unilaterally declared its independence from Serbia in 2008, but as it was not either republic or independent country for the most of the period researched in this paper, it is excluded from the analysis.

2. oatia, Macedonia and Bosnia and Herzegovina declared independence in 1991, while Serbia and Montenegro, after forming the Federal Republic of Yugoslavia and later the Union of Serbia and Montenegro, declared independence in 2006.

3. Slovenia and Croatia become members of the European Union, while Montenegro, Serbia, Bosnia and Herzegovina and Macedonia are in the process of accession, with still uncertain prospects.

4. Gross domestic product per capita in 2019: Bosnia and Herzegovina ($ 6015), Croatia ($ 14,853), Montenegro ($ 8825), North Macedonia ($ 6109), Slovenia ($ 25,992), Serbia ($ 7382). Source: IMF, World Economic Outlook Database (October 2020).

5. As in Baumol (1986), convergence was estimated as: $ln\left[{\left(\frac{Y}{N}\right)}_{i,2019}\right]-ln\left[{\left(\frac{Y}{N}\right)}_{i,1952}\right]=\text{break}a+bln\left[{\left(\frac{Y}{N}\right)}_{i,1952}\right]+{\epsilon }_i$. $ln\left(\frac{Y}{N}\right)$ is the log income per person, $\epsilon$ is an error term, and i indexes countries. Negative b indicates convergence (a value of b of −1 corresponds to perfect convergence, while a value of 0 implies that growth is uncorrelated with initial income; thus, there is no convergence).

6. According to the classification from World Bank.

7. Croatia reached high-income country level in last decade.

8. Western Balkan refers to following countries: Albania, Bosnia and Herzegovina, Montenegro, Serbia, Kosovo and North Macedonia.

9. The Federal People’s Republic of Yugoslavia (FPRY) was a socialist democratic state, formed after World War II. The Constitution of the Federal People’s Republic of Yugoslavia changed its name to the Socialist Federal Republic of Yugoslavia (SFRY) in 1963, which existed until 1991.

10. The basic characteristic of socialism as a socio-economic system is the dominance of state (social) ownership of the means of production, which “enables social influence on the operation of objective economic laws” (Lang, 1972). The key differences between enterprises as subjects of production in socialism and capitalism are reflected in relation to: the character of ownership of the means of production, decision makers, the distribution of enterprise income and the motives for decision-making.

11. In Croatia and Bosnia and Herzegovina, military conflicts arose in 1992, soon after their declaration of independence from the Socialist Federal Republic of Yugoslavia (SFRY) and lasted until 1995. Serbia and Montenegro were also involved in the military conflict in Kosovo in 1998 and 1999, although Montenegro was involved to a lesser extent. Military conflict occurred in North Macedonia in 2001. Moreover, political instability was present in Serbia and Montenegro until 2006, when Montenegro declared independence.

12. Total factor productivity growth was estimated applying growth accounting method. The output growth rate is equal to: $\frac{\mathrm{\Delta }{Y}_t}{Y_{t-1}}\approx \left(1-{\alpha }_t^k\right)\frac{\mathrm{\Delta }{L}_t}{L_{t-1}}+{\alpha }_t^k\frac{\mathrm{\Delta }{K}_t}{K_{t-1}}+\frac{\mathrm{\Delta }{A}_t}{A_{t-1}}$. The symbol ∆ denotes the first differential, ${\alpha }_t^k$ is the elasticity of output in relation to the capital used in period t. Equation (2)(2) $\mathrm{\Delta }{Y}_{l,it}={\alpha }_{li}+\sum _{j=1}^{p-1}{\beta }_{lij}\mathrm{\Delta }{Y}_{l.it-1}+\sum _{j=0}^{q-1}\sum _{l=2}^k{\beta }_{lij}\mathrm{\Delta }{Y}_{l.it-j}+{\mu }_{li}EC{T}_{l,it-1}+{\epsilon }_{l,it}$(2) allows the decomposition of the output growth rate into the following components: employment growth, capital growth, and total factor productivity growth. The elasticity of production relative to capital was assumed constant and equal to 0.33, which is a suggested typical value in accordance with the research results given in Romer (2001).

13. Data from 1990 to 1996 were not available for most countries from the sample, so this period was excluded from the analysis. It was also period of political instability, so it would bias results also.

14. The first available statistical record.

15. Sea-bound or inland water-bound ports.

16. Results are available on request.

17. Social product is indicator of production in the System of economic balances (statistical methodology mostly used in centrally planned economies). Similar to GDP – Gross Domestic Product in SNA system. For the simplicity, we will use term “GDP” in this paper.

18. Social product until mid-90-ies. It is indicator of production in System of economic balances (statistical methodology mostly used in centrally planned economies). In this study we use annual output growth rates (social product and GDP).

Additional information

Notes on contributors

Maja Bacovic

Prof. Maja Bacovic, PhD, Associate Professor at the Faculty of Economics at the University of Montenegro. Her field of interest is general macroeconomics and economic statistics. She is the author of four books and many articles published in scientific journals. Dr Bacovic received award for the outstanding contribution to the scientific research at the Faculty of Economics, University of Montenegro in 2021.

Prof. Zivko Andrijasevic, PhD, full professor at the University of Montenegro. His narrower scientific research area is the political and social history of Montenegro in the 19th and 20th centuries, as well as the history of ideas. He is the winner of the “Thirteenth of July Award” (2020), the most prominent state award in Montenegro.

Bojan Pejovic, University of Montenegro, Faculty of Economics; PhD student (University of Belgrade). His field of interest is general macroeconomics and econometrics.