Engines and Constraints of Growth in the Western Balkans: Insights for EU Convergence

Abstract

This paper investigates the determinants of GDP growth in nine Western Balkan countries over the period 2000 – 2023 using an unbalanced panel dataset. The analysis incorporates gross fixed capital formation, exports and imports of goods and services, final and household consumption, labor force growth, and inflation as explanatory variables. To address cross-sectional dependence and unobserved heterogeneity, the study employs a three-model econometric framework, including two-way fixed effects, correlated random effects, and random effects specifications. The results demonstrate that investment, exports, and final consumption are the most robust and statistically significant drivers of GDP growth, while imports consistently exert a negative effect. Labor force growth is positively associated with output but only becomes significant under more robust specifications, whereas inflation shows no systematic impact. The findings highlight the dual role of external competitiveness and domestic demand in sustaining growth, while underscoring structural vulnerabilities linked to import dependence and weak labor market absorption.