Effects of Services on Economic Growth in Albania: An ARDL Approach

Abstract

Using annual data for the period 2000–2018, the study employed an autoregressive distributed lag (ARDL) methodology to examine the long-run cointegrating relations between service subsectors and economic growth in Albania. Results are presented both for the short run and long run. Findings indicate that the transport sector, communication and financial services have a positive impact on economic growth. However, the manufacturing sector has a negative impact. This confirms Baumol’s theory on cost disease but does not corroborate Kaldor’s theory. Furthermore, agriculture and industry stimulate the Albanian economy whilst expenditure on health have a limited impact. In addition, the Granger causality test indicates a bidirectional causality from transport, communication and financial services to GDP per capita. Lastly, our models are robust to all the conventional battery of tests.

KEYWORDS:

• Economic growth
• services sector
• Albania
• ARDL

JEL Classifications:

• F43
• F63
• C01
• C32
• N14

Acknowledgements

The authors received valuable insights from fellow PhD students and researchers. However, all errors remain the authors responsibility.

Disclosure statement

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

Notes

1 OECD, ‘The Service Economy,’ 2000.

2 World Bank, https://www.worldbank.org, accessed on 13 November 2020.

3 Aktiviteti i inovacionit në ndërmarrje, http://www.instat.gov.al/media/7688/inovacioni_2017-2019.pdf, accessed on 13 November 2020.

4 ‘Famous law’ 7501 which is still causing high debates among inhabitants.

5 Sector-Specific Sources of Competitiveness in the Western Balkans, Key Conclusions and Next Steps, OECD, https://www.oecd.org/global-relations/45375074.pdf, accessed on 4 November 2020.

6 The European Investment Bank in the Western Balkans, https://www.eib.org/attachments/country/the_eib_in_the_western_balkans_en.pdf, accessed on 4 November 2020.

7 The World Bank in Albania, Country Snapshot, Report, 15 April 2019, accessed on 15 October 2019.

8 To the best of our knowledge, there is no existing work on services impact on economic growth in Albania. So, this is the first work which investigates the impact of a set of service subsectors on economic growth.

9 Likelihood ration (LR), final prediction error (FPE), Akaike information criterion (AIC), Schwarz information criterion (SC) and Hannan–Quinn information criterion (HQ).

10 We are highly grateful to Reviewer 1 who suggested the estimation of a multivariate model instead of bivariate one.

11 All models are estimated for the trend specification: constant (Level) with the number of lags 1.

12 We are really grateful to Reviewer 1 in the second stage of the review for the suggestion to disaggregate the service sector variable.