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The rule of thumb: Private consumption as a driving force of the economic growth of Western Balkan countries
Abstract
Private consumption is considered one of the main drivers of economic growth in Western Balkan countries. The main aim of this study is to estimate the impact of private consumption on the economic growth of the Western Balkans, including the North Macedonia, Kosovo, Albania, Montenegro, Bosnia and Herzegovina, and Serbia. Housing wealth was even the main driver of total private consumption in the European Union (EU) countries as a whole (Barradas, 2017). Based on an extensive literature review for panel data, this study uses econometric models with fixed effect, random effect, and Hausman-Taylor test. The data are taken from the World Development Indicators by country (The World Bank, n.d.) and cover the period 2010–2019. Based on the Hausman-Taylor test, the model that fits a small sample as in our case is chosen as the fixed effect. The results of the estimator show that a 1% increase in final consumption leads to a 0.43% increase in gross domestic product (GDP) growth and that, on the other hand, a 1% increase in the employment rate increases GDP by 0.11%. The most important domestic factor continues to be private consumption, driven by record levels in the labour market and further strengthening of household purchasing power (Bank of Slovenia, 2020). The study concludes that private consumption is the main driver of economic growth and sustainability in the case of the Western Balkans.
The primary factors that were initially assumed to contribute to a decline in household income were job losses, which affect the decrease in consumption (Organisation for Economic Co-operation and Development [OECD], 2020; Doerr & Gambacorta, 2020). Kosovo’s government has taken measures of social distancing, having a major impact on households such as the impact of dismissal due to the closure of businesses indefinitely. This regime is continuing from the different waves of COVID-19 variants and the family income as it goes and decreases. Therefore, the purpose of this study is to measure the impact of the COVID-19 pandemic on household income including household consumption and savings for the years 2020–2021. The study uses a quantitative research method, thus, for primary data collection, the online questionnaire is used. The latent variable in this paper is the COVID-19 pandemic, while the factors that determine the latent variable are: savings, job loss, family income before the pandemic, and consumption expenditures. The study concludes that COVID-19 has a negative and significant impact on family income, saving, job loss, and consumption expenditures. The results from the structural equation modeling (SEM) are significant and the likelihood ratio (LR) test is 47.46. These findings and those of Martin, Hallegatte, and Walsh (2020), Dossche, Kolndrekaj, and Slacalek (2021), and Bundervoet, Davalos, and Garcia (2021) are consistent.
This paper investigates how typical macroeconomic indicators affect the economic growth of Western Balkans countries. A static panel empirical investigation for the period 2010 to 2019 has been conducted using GDP growth rate as the dependent variable, while independent variables in focus include foreign direct investments, remittances, unemployment rate, population growth rate, and control of corruption. The most interesting finding is that a rising share of remittances positively affects economic growth. This might indicate that even when remittances are used for non-investment purposes, they might increase domestic production of consumption and intermediate goods. There is also evidence of a non-linear relationship between FDI and economic growth, which may be a consequence of undeveloped capacities to use the positive side of FDI. To foster economic growth policy-makers should focus on reforms that target sectors that show sharp declines in FDI and remittances inflows, including also a need for better control of corruption in the region.
The main aim of this paper is to analyze the impact of the COVID-19
pandemic on personal consumption expenditures (PCE) in the case
of Kosovo. Labor factor has been considered as the holder of
the economic activity, however, manpower, namely its broader
term population is at the same time the user of the product and
the services, i.e., the result of the economic activity (Škuflić &
Šokčević, 2010) Taking into consideration that COVID-19 is
harming the labor market and in economic activity in general,
we also consider that this situation is affecting the personal
consumption expenditures in case of Kosovo, domestic demand,
supported by low-interest rates and strong employment growth,
will remain the main driver of growth (OECD, 2018). To analyze
the importance of personal consumption expenditure in the case of
Kosovo during the COVID-19 pandemic we used secondary data
from World Bank documents and primary data collected via
an online questionnaire that was randomly distributed using social
media with a sample of 233 respondents. The data analysis
concludes descriptive statistics, frequency tables and charts,
Pearson correlation, Cronbach’s alpha, and Chi-square test.
To conduct the results, the SPSS program is used. The study
concludes that the COVID-19 pandemic has impacted personal
consumption expenditures and shifted the consumption from
luxury to essential products. The study also concludes that citizens
will realize the pre-planned expenditures as soon as the antiCOVID-19 measures will be released.
The aim of this study, using Egyptian data from 1970 to 2016, is to explore the relationship between government spending and private consumption spending and to understand whether the relationship between the two is symmetric. The study uses the autoregressive distributed lag (ARDL) approach to explore a cointegration relationship between the two variables, and the nonlinear autoregressive distributed lag (NARDL) approach to test the hypothesis of a symmetric relationship between the two variables. By applying the ARDL approach, the study concludes that the effect of government spending on consumption spending is not significant in the long term. By applying the NARDL approach, the study concludes that: the hypothesis of the presence of a symmetric relationship is not accepted, there is a crowding-out relationship from the positive shocks of government spending and the substitutability coefficient between the two types of spending is 0.8699.
JEL Classification: E12, E21, F62, H50
The aim of this paper is to find out if the high economic growth rates achieved by the CEE countries are based either on consumption or on investments, considering many exogenous factors that impact on the economic growth and how these factors can contribute to the employment process in the CEE economies to stress if these trends of economic growth and employment are sustainable in the long run. We performed two Panel Least Squares and Pool Least Squares estimations to determine the impact of the exogenous variables on the economic growth (as GDP per capita growth) and on the unemployment rate in the short and long run, depending on the lags of the exogenous variables used in the analysis. We used yearly data series during 2004–2017 for eight selected CEE countries. Our results show that private consumption is positively related with economic growth in the short run, but it doesn’t support the job creation process, in the same way as the savings rate can’t determine positive effects on the employment. Public spending is strongly and negatively correlated with economic growth and positively correlated with the unemployment rate in the CEE region, while the net export is weakly impacting on the economic growth in the CEE region and doesn’t support the employment process in this area. The impact of the domestic investments on the economic growth is weaker in the CEE area than the impact of both private and public spending, but they are positively correlated with the economic growth and negatively correlated with the unemployment rate, while the correlation of the foreign direct investments (FDIs) with both economic growth and unemployment is very weak, as it is the case of net exports. We conclude that the economic growth in the CEE area is mainly based on the private consumption in the short run but the private consumption doesn’t support the job creation process either in the long run or in the short run. The qualitative factors included in the analysis by using global competitiveness index (corruption control, bureaucracy, infrastructure quality, governance effectiveness, political stability, rule of law factors, property rights, markets efficiency, etc.) and corruption perception index are strongly and positively correlated with the economic growth and negatively correlated with the unemployment rate.
This research is important because the commencement of the Asean Economic Community (MEA) has a positive impact that is spurring the growth of investment from within and outside the country, so that domestic investment has the potential to increase which will increase the number of employment for Indonesian workers especially in province of North Sumatera.This study aims to: identify the effect of household consumption on economic growth, identify the effect of investment on economic growth, identify the influence of Labor on economic growth, and identify the effect of interest rate on economic growth . The data used in this research were secondary data in 2006-2016 in Province of North Sumatera. Data obtained from various agencies, namely: Department of Labor and Transmigration, Central Statistics Agency of Province of North Sumatra, some other sources such as journals and relevant research results. Methods of analysis using Two Stage Least Square method (TSLS). The results of this study found that: Household consumption has a positive and significant effect to economic growth, Investment has positive and significant effect to economic growth, Labor has positive and significant impact to economic growth, and Interest rate has a negative and significant effect on economic growth.
The Keynesian macroeconomic model implies that household expenditures, investments, and savings have
significant impacts on economic growth by affecting total expenditures. Therefore, policymakers should determine
and apply appropriate policies to maintain these variables. For this purpose, the relationship of economic growth
with consumption, investment, unemployment, portfolio investments and saving rates in the Brazil, Russia, India,
South Africa and Turkey are analyzed with the panel data method using annual data for the period 2005-2016.
Saving rates appear to have the most impact on economic growth in accordance with the estimation results of
Prais-Winsten Panel Correlated Standard Errors and Feasible Generalized Least Squares which take cross-section
dependence into consideration. A 1% increase in saving rates increases economic growth by 0.50%. An increase
of 1% in consumption expenditures increases economic growth by 0.41%. While an increase of 1% in investment
expenditures increases economic growth by 0.25%, the increase in portfolio investments is insignificant,
eventhough its impact on economic growth is positive. An increase in unemployment rates negatively affects
economic growth in compliance with the theory.
This chapter:
• explains the role of consumption expenditures in modern economies and their significance for the determination of the level of output and employment in an economy;
• presents the theory of intertemporal choice that forms the basis of mainstream consumption functions;
• discusses Keynes’s approach to consumption, and particularly his criticism of the standard model of consumer behaviour, his emphasis on the role of consumption for the level of employment, and his analysis of aggregate consumption patterns;
• describes the main mainstream theories of consumption, which are the life cycle income hypothesis, the permanent income hypothesis and the random walk theory of consumption;
• explores the heterodox approaches to consumption, focusing mainly on the relative income hypothesis;
• shows the consequences of consumption theories for the effectiveness of economic policies towards unemployment and economic downturns.
In the past 25 years, exports have contributed strongly to growth and economic convergence in many small open economies. However, the Western Balkan (WB) region, consisting of small emerging market economies, has not fully availed itself of this driver of growth and convergence. A lack of openness, reliance on low value products, and weak competitiveness largely explain the insignificant role of trade and exports in the region’s economic performance. This paper focuses on how the countries in the WB could lift exports through stronger integration with global value chains (GVCs) and broadening of services exports. The experience of countries that joined the European Union in or after 2004 shows that participation in GVCs can help small economies accelerate export and income growth. WB countries are not well integrated into Europe’s vibrant GVCs. Trade within the region is also limited—it tends to be bilateral and not cluster-like. Our analysis shows that by improving infrastructure and labor skills and adopting trade policies that ensure investor protection and harmonize regulations and legal provisions, the region can greatly enhance its engagement with GVCs. Services exports are an increasingly important part of global trade, and they offer an untapped source of growth. The magnitude of services exports from the WB region compares favorably with that of peers in Europe, particularly in travel services where several of these countries have a revealed comparative advantage. But there is significant room for growth in tourism exports and an untapped potential in business and information technology services exports that these countries can materialize through policy efforts that increase openness and enhance connectivity and labor skills. Serbia offers a good example of how decisive efforts, including education policies to ensure a sustained supply of skilled labor, can help information technology services exports to take off.
GDP growth has increasingly been led by consumption. However, consumption-led expansions tend to be significantly weaker than when growth is driven by other components of aggregate demand, often because of the build-up of imbalances. We show that while factors such as credit growth and rising house prices can boost consumption in the short run, the incidence of consumption-led growth and rising debt service ratios significantly dampen growth in the medium to long run. Policies that address the build-up of imbalances and strengthen investment are therefore central to fostering durable growth.