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International Journal of Scientific Engineering and Research (IJSER)
ISSN (Online): 2347-3878
Impact Factor (2018): 5.426
Volume 7 Issue 2, February 2019
www.ijser.in
Licensed Under Creative Commons Attribution CC BY
Economic Benefits of Joining NATO – The Case of
New Member States and Potential Impact on
Sustainable Development in Macedonia
Shiret Elezi, PhD1, Nedzati Kurtishi, Msc2
1 International University of Struga, Faculty of Economics, Ezesrski Lozja 1, 6330 North Macedonia
2Head of Unit International Relations, Dame Gruev Nr.12North Macedonia
Abstract: The security of one country is a foundation for stability, economic growth and prosperous society. NATO’s purpose is to
guarantee the freedom and security of its members, therefore contributing to the attractiveness of a member country as a host for FDI,
which would boost investment and capital stock at the beginning and exports and potential output in the longer run. Our aim in this
study is to estimate these economic effects of joining the Alliance by observing the macroeconomic trends of the NMS before and after
their accession, which would be a basis for assessing the potential economic impact on new aspirants, such as North Macedonia. In
order to do this we employ panel data methods. Statistical analysis for the NMS makes it possible to conclude that NATO membership
leads to greater opportunities, including pick up of FDI, intensification of capital stock growth dynamic, marked increase of export
activity, productivity growth, decrease in unemployment, improvement regarding rule of law, sustainable development, etc.
JEL Classification: C23, F21, F5
Keywords: economic activity, FDI, NATO, new member states, panel data
1. Introduction
Recent NATO enlargement (post-Cold War enlargement)
Since 1949, NATO‟s membership has increased from 12 to
29 countries through seven rounds of enlargement. Based on
the findings of the Study on Enlargement, the Alliance
invited the Czech Republic, Hungary and Poland to begin
accession talks at the Alliance‟s Madrid Summit in 1997.
These three countries became the first former members of the
Warsaw Pact to join NATO in March 1999. [Based on
information published on the NATO's website]
At the 1999 Washington Summit, the Membership Action
Plan (MAP) was launched to help other aspirant countries
prepare for possible membership. Bulgaria, Estonia, Latvia,
Lithuania, Romania, Slovakia and Slovenia were invited to
begin accession talks at the Alliance‟s Prague Summit in
2002 and joined NATO in March 2004.
At the Bucharest Summit in 2008, Allied leaders took a
number of steps related to the future enlargement of the
Alliance. Several decisions concerned countries in the
Western Balkans. The Allies see the closer integration of
Western Balkan countries into Euro-Atlantic institutions as
essential to ensuring long-term self-sustaining stability in this
region, where NATO has been heavily engaged in peace-
support operations since the mid 1990s.
At the Bucharest Summit, Allied leaders invited Albania and
Croatia to start accession talks, which became members in
April 2009; assured North Macedonia that it will be invited
once a solution to the issue of the country‟s name has been
reached with Greece; invited Bosnia and Herzegovina and
Montenegro to start Intensified Dialogues; and agreed that
Georgia and Ukraine, which were already engaged in
Intensified Dialogues with NATO, will become members in
future.
In December 2015, NATO foreign ministers invited
Montenegro to start accession talks to join the Alliance,
while encouraging further progress on reforms, especially in
the area of rule of law. In a statement on NATO‟s “open
door” policy, ministers reiterate decisions made at the
Bucharest Summit concerning North Macedonia and
encourage Bosnia and Herzegovina to undertake the reforms
necessary for the country to realise its Euro-Atlantic
aspirations and to activate its participation in MAP.
In June 2017, Montenegro joined NATO, while in July 2018,
at the Brussels Summit, following the historic agreement
between Athens and Skopje on the solution of the name
issue, Allied leaders invited the government in Skopje to
begin accession talks to join NATO. Full implementation of
the agreement on the solution of the name issue is a condition
for a successful conclusion of the accession process.
2. "NATO economic effect" – What does it
entail?
NATO‟s purpose is to guarantee the freedom and security of
its members through political and military means. It promotes
democratic values and enables members to consult and
cooperate on defence and security-related issues to solve
problems, build trust and, in the long run, prevent conflict,
while economic performance and prosperity of a member
country are not the primary concern of the collective security
of NATO.
However, the security of one country is a foundation for
democratic and prosperous society. Without security, we
Paper ID: IJSER18630
45 of 53
International Journal of Scientific Engineering and Research (IJSER)
ISSN (Online): 2347-3878
Impact Factor (2018): 5.426
Volume 7 Issue 2, February 2019
www.ijser.in
Licensed Under Creative Commons Attribution CC BY
cannot speak about stability, democracy, economic growth
and prosperity. NATO membership can contribute to the
attractiveness of a member country as a host for foreign
direct investment (FDI) by reducing the country‟s (perceived)
political instability and risk in the eyes of foreign investors.
Investors are likely to respond to a reduced risk of political
instability and NATO membership should get at least part of
the credit. The real issue with respect to NATO membership
and FDI inflows, however, is the importance of a host
country‟s political instability and riskiness for the investment
decision of a foreign investor. In addition, being a NATO
member is not necessarily the main reason for foreigners to
invest. Many other factors, including things like geographic
location, labour skills, labour costs, tax incentives and
government support, macroeconomic stability and so on play
a role in a firm's decision to invest its capital in a foreign
country. Nevertheless, the ability of the country to provide
long-term security and stability, which is associated with
NATO membership, is deemed to be the most important
prerequisite in that respect.
Second-round benefits are numerous, depending on the
specifics of the country's economy and economic policies,
primarily fostering the country‟s integration into wider
international economic value chains, thus promoting
domestic economic activity. Furthermore, stronger FDI is
likely to lead to intensified economic growth, investment and
exports activity, coupled with increase in productivity and
more diversified production, as well as job creation,
unemployment and poverty reduction, improved income
distribution, better standard of living, etc. NATO
membership also contributes toward increasing public
expenditure efficiency, coupled with higher expenditure in
education and healthcare, improving institutional framework
of the economy, efficient governance system, the rule of law,
etc.
Obviously, measuring, quantifying or assessing the "NATO
economic effect" is not easy. It is rather complex and
something that we are not able to measure directly. Most of
these countries have pursued a parallel EU integration
process. Five countries (Estonia, Latvia, Lithuania, Slovakia
and Slovenia) that joined NATO in 2004 became EU
members the same year, while Bulgaria and Romania entered
EU in 2007. In addition, the pace of development of the
NMS and differences among them could be attributed to the
state of the global business cycle when the accession had
taken place, economic reforms, privatization and transition
process that was carried out with a different dynamic,
institution building, good governance practices, anti-
corruption measures, judicial reforms, etc. These aspects
should be taken into consideration to draw any strong
conclusion for a particular country, and for the NATO
membership to have maximizing economic effects.
3. Economic trends in NMS – prior and post
NATO accession
Economic figures from the new member states (NMS) before
and after joining NATO appear to substantiate claims that
membership in the Alliance in general offers economic
benefits too. In this section we take a look at economic
indicators that were mentioned earlier for the following
countries: Czech Republic, Hungary, Poland, Bulgaria,
Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia,
Albania and Croatia, before and after joining NATO.
Montenegro is not included in this analysis, as there is not
enough data following its accession.
Data show that in general there is a positive shift concerning
FDI. In most of the member states FDI jumped immediately
following their accession, while in some countries there was
a lag. During a three-year period before and after joining
NATO, total FDI in the NMS increased by 67.5%, based on
UNCTAD statistics. FDI more than doubled in Czech
Republic, Estonia, Latvia, Lithuania, Bulgaria and Romania.
FDI increased also in Poland, Slovakia and Albania, whereas
in Hungary, Slovenia and Croatia fell. Similar trends are
observed when measured in percent of GDP, with the
exception of Slovakia, the most significant increase being
registered in Bulgaria, where FDI picked up to 16.3% on
average during the three-year period after the accession, from
about 7% before it, followed by Czech Republic, Romania,
Estonia, etc. FDI per capita (Chart A) and as percentage of
GDP (Chart B) in these two periods are presented in Annex.
NATO membership and stronger FDI has been translated into
higher participation of gross fixed capital formation to GDP
and more pronounced increase of physical capital. European
Commission data [AMECO database] indicate that net
capital stock growth dynamic intensified generally in the
NMS after their accession. The strongest growth is observed
for the Baltic states, i.e. Estonia by 9.5%, Latvia by almost
9% and Lithuania by almost 7% in real terms on average in
the three-year period after the accession. In addition to the
Baltic states, the pace of acceleration was notable in Romania
and Bulgaria too (Chart C, Annex).
Export activity statistics point to the positive impact FDI had
on exports. Eurostat data on export of goods and services
show that exports grew in the NMS after the accession, with
the exception of Croatia, though the real growth intensified
only in half of them (Czech Republic, Bulgaria, Estonia,
Latvia, Slovakia and Slovenia). In spite of the slowdown of
the export activity in the rest of the NMS, it remained strong
after the accession, four of them registering a double-digit
growth (Hungary, Lithuania, Romania and Albania). As a
result, the share of exports to GDP increased from 41.5% to
47.3% on average for the NMS in a three-year period (Chart
D, Annex).
Positive trends in investment and exports led to some
acceleration of the economic activity growth. Economic
growth strengthened in most of the countries, being more
notable in Latvia, where real GDP growth reached double-
digit figures after the accession, amounting to 10.3% on
average, up by 3 percentage points (pp) compared to the
three-year period preceding its membership. Strong growth
registered the other two Baltic states as well, with growth in
Estonia picking up to 8.7%, whereas in Lithuania somewhat
Paper ID: IJSER18630
46 of 53
International Journal of Scientific Engineering and Research (IJSER)
ISSN (Online): 2347-3878
Impact Factor (2018): 5.426
Volume 7 Issue 2, February 2019
www.ijser.in
Licensed Under Creative Commons Attribution CC BY
slowing down to 7.2% on average1. Slovakia, Bulgaria and
Romania also experienced high economic growth post
accession, close to 7% on average each, with Slovakian
economy progressing mostly (Chart E, Annex). Albania and
Croatia, which joined NATO amidst the Great Recession
following global economic upswing, experienced worse
economic performance, with growth in Albania slowing
down, while in Croatia turning negative.
Along with the positive shift in FDI we observe increase of
the total factor productivity (TFP), which captures the impact
of technological change, innovation and know-how,
institutional changes and other productivity shocks. European
Commission estimations2 show that TFP increased in all
NMS following their accession (three-year period average),
the growth being intensified in Estonia, Hungary, Slovenia
and Slovakia, or turned positive in Czech Republic and
Croatia. The strongest TFP growth registered Romania and
Latvia by 5.6% and 4.5%, respectively, though having
somewhat decelerated compared to the three-year period
average prior to their accession (Chart F, Annex).
FDI and economic activity growth in general led to
favourable trends in the labour market, i.e. job creation and
unemployment rate reduction. IMF data on unemployment
rate show that it fell in most of the NMS, mostly in the Baltic
States, Bulgaria and Slovakia (by 4.3pp in Slovakia to as
much as 6.7pp in Lithuania), if we compare the year before
and three years after their accession. Unemployment also
dropped in Hungary, Slovenia and Romania (Chart G,
Annex).
All of the countries observed had/have been pursuing a
parallel EU integration path, leading to some convergence
and catching-up process with more developed EU member
states. Eurostat data on GDP per capita adjusted by
purchasing power parities show that all countries except
Croatia moved closer to the EU average. The largest progress
was made by Estonia and Latvia, which came closer by 13pp
and 10pp, reaching 64% and 53% of EU average,
respectively, three years after joining NATO. Slovenia and
Czech Republic, which had the largest share, also
experienced slight improvement, as well as Albania, Bulgaria
and Romania, which had the lowest share (Chart H, Annex).
Human Development Index (HDI) clearly reflects the
improvement in this area in all NMS. In the countries that
joined NATO in 1999, HDI increased from 0.775 one year
before to 0.798 two years after the accession on average,
while in the countries that became members in 2004,
increased from 0.781 to 0.806 on average. HDI in Croatia
increased from 0.803 to 0.815, while In Albania by about
0.03 points two years after its accession, being one of the
NMS with the largest progress in this field (Chart I, Annex).
NATO members, within the framework of Building Integrity
Programme, take steps to reduce the risk of corruption in the
1 Lithuanian economic growth was high the year before the accession
(10.5%), and reached the peak four years following its accession (11.1%).
2 AMECO database. Data for Albania is not available. For Croatia 2009
is excluded.
defence and related security sector and to embed good
governance principles and practices in their defence
establishments, potentially leading to lowering corruption as
measured by Corruption Perceptions Index (CPI) from
Transparency International. The biggest progress made NMS
that joined NATO in 2004, particularly Estonia, Slovakia,
Latvia and Slovenia (Chart J, Annex). After joining NATO
there is also a significant improvement in the NMS regarding
rule of law measured through the Rule of Law Index from the
World Bank, with nine out of twelve NMS having progressed
in this area, mostly Estonia, Slovakia and Lithuania, and the
rest despite registering some decrease their index had already
been elevated (Chart K, Annex).
4. FDI trends in North Macedonia3
FDI are an important source of financing and growth in the
developing and transition countries. Between 1998 and 2006,
FDI inflows in North Macedonia resulted mostly from the
privatization of State-owned enterprises, and acquisitions of
major companies and banks by foreign investors. Over the
last decade, however, North Macedonia has been attracting
more and more Greenfield investment, which are export-
oriented. In addition, investment has branched out of the
traditional export-oriented industries such as food and metal
processing, into new and higher value added industries. This
structural shift towards Greenfield investment reflected
increased macroeconomic stability, fiscal stimulus,
competitive labor costs, improved business environment4,
reform agenda coupled with Euro-Atlantic integration
process, etc.
In 2016, the structure of FDI stock by investment type shows
that equity and reinvested earnings have been the largest
component of direct investment, accounting for about 3/4 of
the total FDI stock. However, FDI on the basis of debt
instruments, which include cross-border transactions between
the related entities within the ownership structure of
transnational corporations, has played an important role in
individual years.
The stock of FDI by activity in 2016 show that FDI were
mostly concentrated in the services sector, accounting for
about 45% of total FDI, particularly in financial and
insurance activities (around 20%). Manufacturing has been
attracting more and more foreign capital recently, in
particular automotive industry, representing 36.2% of total
FDI stock in 2016. Chart 1 presents the structure of FDI
stock by activity and by country. FDI stock data by country
of origin show that the largest foreign investors in North
Macedonia have been Austria (12.2% of total FDI), United
Kingdom (11.2%), Greece (10%), the Netherlands (9.1%)
and Slovenia (8%).
3 North /before FYROM
4 Based on World Bank‟s Doing Business Rankings
Paper ID: IJSER18630
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International Journal of Scientific Engineering and Research (IJSER)
ISSN (Online): 2347-3878
Impact Factor (2018): 5.426
Volume 7 Issue 2, February 2019
www.ijser.in
Licensed Under Creative Commons Attribution CC BY
Chart 1: Structure of FDI stock by activity (left) and by
country in 2016
Source: Own calculations based on data from National Bank of the
Republic of North Macedonia
The sale of the national telecommunications operator in 2001
has so far been the largest FDI transaction, while the total
FDI inflows were the highest in 2007 amounting to EUR 506
million (8.3% of GDP). FDI in North Macedonia was strong
during the period 2006-2008, when EUR 1,251 million
(6.8% of GDP on average) entered in North Macedonia in
the form of direct investment, which have been accompanied
with a strong economic growth (see Chart 2). Unlike 2006,
when the largest part of inward FDI was due to the sale of
State-owned power distribution company, in 2007 reinvested
earnings significantly contributed to the total FDI inflows,
while in 2008 net inflows from inter-company debt, was
rather important in building up total inward FDI. Chart 2
presents the structure of inward FDI by type of investment.
In 2009 and 2010, as a result of the adverse effects of the
global financial crisis on the investors‟ confidence and global
liquidity, financial inflows in the form of FDI were reduced
to 2.1% and 2.3%, respectively. In 2011, FDI performed
particularly well, reaching 4.6% of GDP. FDI growth was
entirely due to inflows on the basis of equity and reinvested
earnings, whereas the debt component had a negative impact.
The renewed turmoil in the euro area in 2012, however, took
its toll on trade and capital flows, the latter leading to
reduced FDI inflows that amounted to 1.5% of GDP.
-3.0
-1.5
0.0
1.5
3.0
4.5
6.0
7.5
9.0
-200
-100
0
100
200
300
400
500
600
EUR million
Equity
Reinvested earnings
Debt instruments
FDI (% of GDP), rhs
Real GDP growth, rhs
Chart 2: Inward FDI by type of investment
Source: National Bank of the Republic of FYR OF North
Macedonia and State Statistical Office
In 2013, FDI doubled compared to the previous year,
reflecting increased investment in the form of reinvested
earnings and intercompany debt, mainly related to additional
investment of existing foreign investors in the country. FDI
somewhat slowed down in 2014 and 2015, amounting to
2.4% of GDP, whereby a negative value of reinvested
earnings was observed in 2014, while the following year
equity turned negative, which significantly affected the level
of FDI. In 2016, FDI picked up, reaching 3.5% of GDP, on
the back of recovering equity investment, being chiefly
"absorbed" by manufacturing, in particular automotive
industry. In 2017, FDI amounted to 2.3% of GDP, due to
inflows that did not generate additional external debt, with
intercompany debt flows contributing negatively to the total
FDI.
Greenfield investment in North Macedonia has had a
significant impact in terms of increasing export activity and
diversification of the export structure. As a result of the
activity of new production capacities and to a lesser extent
increased utilization of the existing capacities, exports
contributed significantly to economic growth, registering a
real increase of close to 8% on average during the period
2007-17, its participation to GDP reaching about 55% in
2017.
During this period, the share of export of goods that have
higher technological value, such as machinery, equipment
and chemical products, has increased considerably, at the
expense of lowering the share of export of goods with a
lower degree of finalisation, such as iron and steel, wearing
apparel and raw materials. Chart 3 shows plainly the
restructuring of the North Macedonian export sector,
reflecting the entry of foreign capital.
0
20
40
60
80
100
Other goods
Wearing apparel
Machinery & equipment
Iron & steel
Chemical produc ts
Crude materials
Beverages & Tobacco
Food
Chart 3: Structure of goods export by category (%)
Source: Own calculations based on data from State
Statistical Office
North Macedonia relies largely on exports to spur economic
growth, given that country's internal market is not large
enough to sustain high rates of growth for a long period.
However, we should have in mind that high import
dependence of exports could mitigate or offset the positive
contribution of exports to overall economic growth.
5. Potential impact on North Macedonian5
economy
FDI inflows boost investment and capital stock at the
beginning and exports and potential output in the longer run.
North Macedonia is a small and open economy and its
5North Macedonia/before FYROM Macedonia
Paper ID: IJSER18630
48 of 53
International Journal of Scientific Engineering and Research (IJSER)
ISSN (Online): 2347-3878
Impact Factor (2018): 5.426
Volume 7 Issue 2, February 2019
www.ijser.in
Licensed Under Creative Commons Attribution CC BY
economic growth, among other things, is contingent upon
increase of the volume of external trade, and in particular the
volume of exports. Positive changes in the export structure in
recent years are very important in terms of strengthening the
flexibility of the economy in relation to external shocks and
achieving high and sustainable growth of exports and
economic activity.
The question that arises is by how much NATO accession
would affect FDI inflow in North Macedonia and what would
that mean for the economy? In order to answer this question
we go back to the NMS experience as a group and using
panel data for these countries we tend to provide estimates of
the potential impact on North Macedonian economy.
Panel data is structured in a way that economic developments
of the NMS are observed together and across time, i.e. three
years before and three years after their accession. Primary
motivation for using panel data is to solve the omitted
variables problem. Unobserved factors affecting the
dependent variable consist of two types: those that are
constant and those that vary over time (Wooldridge, 2013).
The model being used is the following:
itiittit vXDy
'
(1)
where
i
denote the member state and
t
the time interval.
The variable
t
D
is a dummy variable that equals zero for the
time period before the accession and one after the accession.
It is a variable that is assumed to have time-varying effects.
it
X
is a vector of observed explanatory variables
(regressors). The variable
i
captures all unobserved, time-
constant factors that affect the dependent variable (
it
y
) and
is referred to as unobserved (member state) heterogeneity.
it
v
is called the idiosyncratic error or time-varying error,
since it represents unobserved factors that change over time
not captured (controlled for) in the model.
,
and
are
parameters to be estimated, the main focus being on
, in
order to assess the possible NATO effect or see whether and
by how much it affects the respective dependent variable. In
general, there are two methods to analyze panel data: fixed-
effects (FE) method and random-effects (RE) method (see
Baltagi, 2005). Considering that our aim is to study the
variability within countries of interest across the time period
being observed, rather than the variability across member
states, as we have three different time periods/rounds of
NATO accession, FE method may be preferable. RE method
may still be desirable under some circumstances. The key
issue is whether the unobserved effect (
i
) is (un)correlated
with the explanatory variables. Hausman test could help us
make the decision, but we believe that the presence of our
dummy variable is likely to affect the results6. Therefore, we
implicitly allow for
i
to be correlated with the regressors.
FE models are less vulnerable to omitted variable bias
(Allison, 2009). The FE method controls for time-constant
6 Allison (2009) suggests some alternative tests that may be better than
the Hausman test.
variables that affect the dependent variable, although the
effects cannot actually be estimated. FE models do not
control for time-varying variables, i.e. unobserved variables
that change over time, but such variables are explicitly
included in the model, e.g. output gap, savings, GDP growth,
foreign demand, etc (see Tables 1 to 4). In addition, FE
models allow for endogeneity of the regressors with
unobserved effects, whereas the RE model assumes
exogeneity of the regressors with the random unobserved
effects. Table 1: Estimated impact on FDI
Regressors Dependent variables
1/ FDI in USD
mil. (log) 2/ FDI (per capita) 3/ FDI (% of
GDP)
Constant 7.086
[0.000] 7.038
[0.000] 314.5
[0.000] 316.7
[ 0.000] 5.562
[0.000] 5.368
[0.000]
NMS
dummy 0.503
[0.000] 0.565
[0.000] 107.9
[0.075] 120.7
[0.000] 1.246
[0.144] 1.436
[0.000]
GDP gap
(%) 0.118
[0.000] 0.138
[0.000] 51.9
[0.000] 41.9
[0.000] 0.277
[0.110] 0.391
[0.000]
R2 0.832 0.912 0.604 0.736 0.513 0.704
Panel
method
[6x12 obs.]
Least
Squares
FE
GLS
(Cross-
section)
Least
Squares
FE
GLS
(Cross-
section)
Least
Squares
FE
GLS
(Cross-
section)
P-values in square brackets
GDP gap data are from AMECO database, except for Albania, which
are from Economic Reform Programme 2018-2020
Specification (1) is estimated several times using different
explained (
it
y
) and explanatory (
it
X
) variables, depending
on the question being analyzed. Given that FE estimates use
only within-country differences, essentially discarding any
information about differences between countries, each
specification is "double" estimated via Generalized Least
Squares (GLS) using cross-section weights to account for
those differences.
The impact on FDI is assessed controlling for the business
cycle in the country, whereby three different series of FDI
were utilized (Table 1). In the first equation, where the
absolute value of FDI is used as a dependent variable,
(NMS dummy) is statistically significant at 1% level,
indicating that FDI was higher by about 50% on average after
the accession. When FDI per capita is used as a dependent
variable (second equation),
suggests that FDI was higher
by 108 USD per inhabitant after the accession on average,
although the statistical significance of
is lower (10%
level). This implies that FDI in North Macedonia would rise
by additional 224 million USD per annum following its
membership. In the third equation, where FDI is expressed as
a percentage of GDP,
is not significant, though we get
better results when estimated with the GLS method, i.e.
NATO membership "adds" 1.4pp of FDI. In all equations
„GDP gap‟ is significant, meaning that FDI was positively
associated with the business cycle.
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Table 2: Estimated impact on investment and productivity
Regressors Dependent variables
Total investment (% of GDP) Capital stock (% change) TFP index (log)
Constant 17.186
[0.001] 16.276
[0.000] 2.393
[0.000] 2.770
[0.000] 4.239
[0.000] 4.301
[0.000]
NMS dummy 1.738
[0.016] 2.087
[0.000] 1.365
[0.004] 1.248
[0.000] 0.0474
[0.000] 0.0534
[0.000]
Control
variable
Gross nat. savings (% of GDP) FDI (% of GDP) FDI per capita (log)
0.466
[0.031] 0.500
[0.000] 0.170
[0.015] 0.121
[0.005] 0.0489
[0.000] 0.0374
[0.000]
R2 0.729 0.837 0.608 0.762 0.884 0.924
Panel method Least Squares
FE [6x12 obs.] GLS (Cross-section)
[6x12 obs.] Least Squares FE
[6x11 obs.] GLS (Cross-section)
[6x11 obs.] Least Squares FE
[6x11 obs.] GLS (Cross-section)
[6x11 obs.]
P-values in square brackets
The impact on total investment is assessed controlling for
gross national savings in the country that is significant with a
positive impact on investment. During the post-accession
period being observed, total investment in percent of GDP
had been higher by about 1.7pp on average (Table 2). This is
confirmed when testing the impact on capital accumulation,
whereby the results indicate that capital stock growth
dynamic intensified by around 1.4pp in the NMS after their
accession on average, controlling for the level of FDI that has
a positive impact on physical capital changes.
Productivity, proxied by TFP, seems to be positively affected
by NATO accession. The results show that TFP growth is
higher by 4.7% after countries joined the Alliance, capturing
the impact FDI has on productivity, which to some extent
reflects the technology spillover effects.
Table 3: Estimated impact on exports
Regressors Dependent variable: Exports value (log)
(1) (2) (3)
Constant -12.270
[0.000] -13.852
[0.000] -7.584
[0.094] -15.467
[0.000] 1.357
[0.404] -1.312
[0.269]
NMS dummy 0.223
[0.000] 0.182
[0.000] 0.218
[0.002] 0.175
[0.000] 0.211
[0.004] 0.154
[0.003]
Control variables
EA GDP value (log) EA GDP volume index (log) EA imports volume index (log)
1.356
[0.000] 1.456
[0.000] 2.964
[0.015] 4.687
[0.000] 1.015
[0.024] 1.554
[0.000]
/ Exports deflator index (log)
/ 0.822
[0.056] 0.846
[0.001] 0.833
[0.059] 0.912
[0.001]
R2 0.982 0.988 0.959 0.984 0.959 0.981
Panel method
[6x12 obs.] Least Squares FE GLS (Cross-section) Least Squares FE GLS (Cross-section) Least Squares FE GLS (Cross-section)
P-values in square brackets
In order to assess the impact on export of goods and services,
we ran three different equations using different
explanatory/control variables that reflect the foreign demand
trends (Table 3). Estimates of
coefficient are statistically
significant in all three equations (between 0.223 and 0.211
with LS-FE, and between 0.182 and 0.154 with GLS
estimator), pointing out that on average exports grew with a
higher pace after the accession (by around 20%). In the first
equation, the foreign demand is proxied by the nominal GDP
growth in euro area (EA). In the second and third equation
we add another explanatory variable to disentangle the effect
of prices on exports, whereby the foreign demand is reflected
by the euro area real GDP growth in the second equation, and
euro area real imports growth in the third equation.
Table 4: Estimated impact on unemployment and GDP
Regressors Dependent variables
Unemployment
rate GDP per capita in
PPS (EU28=100) HDI CPI
Constant 13.797
[0.000] 13.983
[0.000] 36.118
[0.000] 34.427
[0.000] 0.769
[0.000] 43.489
[0.000]
NMS
dummy -1.096
[0.030] -1.024
[0.000] 3.344
[0.000] 2.955
[0.000] 0.0236
[0.000] 1.372
[0.124]
Control
variable
Real growth of
GDP FDI per capita
(log) / /
-0.408
[0.002] -0.452
[0.000] 2.307
[0.001] 2.637
[0.000] / /
R2 0.787 0.951 0.975 0.992 0.953 0.884
Panel
method
[6x12 obs.]
Least
Squares
FE
GLS
(Cross-
section)
Least
Squares
FE
GLS
(Cross-
section)
Least
Squares
FE
Least
Squares
FE
P-values in square brackets
Positive effects on investment and exports apparently had
been translated into stronger economic growth relative to the
EU average. Estimates show that the convergence towards
the EU GDP per capita was by 3.3pp faster after the
accession on average, capturing the impact of FDI (Table 4).
Unemployment rate in the NMS had been decreasing by
1.1pp more on average following their accession, controlling
for the impact of real GDP growth on unemployment, which
is significant. HDI improved during the period under
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consideration, most notably after the accession, while as
regards CPI,
coefficient is not statistically significant, i.e.
on average the improvement of this index is not significantly
different after the accession.
6. Conclusion
To speed up economic growth in the region and North
Macedonia and make it more sustainable, higher levels of
investment and exports will be needed, thus joining NATO is
one way to achieve that, given the experience from the NMS.
Statistical analysis of NMS makes it possible to conclude that
NATO membership leads to greater opportunities for short
and long-term economic growth, including an immediate
increase of FDI, intensification of capital stock growth
dynamic, marked increase of export activity, total factor
productivity growth, decrease in unemployment, significant
improvement regarding rule of law, reduced risk of
corruption, etc.
In general, estimated results give positive signals for
pursuing NATO integration process and further
implementation of the FDI attracting policies. NATO
membership, however, should not be regarded as the only
tool for lifting a country out of poverty and ensuring its long-
term economic prosperity. Economic performance and
prosperity of a member country are not its primary concern.
NATO membership and the accompanying integration
process help ensure that the member country remains
politically strong and secure from external shocks.
References
[1] Allison, Paul D. (2009), Fixed Effects Regression
Models, SAGE Publications, Inc.
[2] Baltagi, Badi H. (2005), Econometric Analysis of Panel
Data, John Wiley & Sons Ltd.
[3] Kutelia, B., Evgenidze, N., Guruli, I. and Khurtsilav,
M. (2016), “The NATO Effect - On the Economic
Trends of its New Member Countries and Potential
Projection on Georgian Context”, Research Paper,
Economic Policy Research Center.
[4] Bucevska, V. (2014), “Assessing the Impact of Foreign
Direct Investments on Export Performance of North
Macedonia and Turkey”, International Conference on
Eurasian Economies.
[5] Shaqiri, J. (2017), “The Impact of Export and Foreign
Direct Investments on North Macedonian GDP Growth
- Empirical Analysis”, European Scientific Journal.
[6] Tülücea, N. S. and Doğan, I. (2014), “The Impact of
Foreign Direct Investments on SMEs‟ Development”,
Procedia - Social and Behavioral Sciences, Elsevier
Ltd.
[7] Wooldridge, Jeffrey M. (2010), Econometric Analysis
of Cross Section and Panel Data, The MIT Press.
[8] Wooldridge, Jeffrey M. (2013), Introductory
Econometrics: A Modern Approach, South-Western,
Cengage Learning.
[9] http://ec.europa.eu/economy_finance/ameco
[accessed:Dec,12, 2018].( ec.europa.eu)
[10] https://ec.europa.eu/eurostat/data/database
[accessed:Aug,02, 2018].( ec.europa.eu)
[11] https://www.imf.org/en/data [accessed: Sept 30,2018].(
www.imf.org)
[12] http://nbrm.mk/statistika-en.nspx [accessed: Oct 15,
2018].( www.nbrm.mk/)
[13] http://unctadstat.unctad.org [accessed: Dec 15, 2018].
[14] https://data.worldbank.org [accessed: Dec 15, 2018].(
www.worldbank.org)
Author Profile
Shiret Elezi, PhD was born on 20.03.1981 in Frankfurt, Germany.
Before being Deputy Minister of Finance, Shiret Elezi was Minister
of Local self-Government (2016-2017). Her working experience
started at Municipality of Gostivar, Head of Uinit for Financial
Issues (2005-2016); Elezi is part time professor at the International
University of Struga since 2013, before that she was a part-time
professor at Tetovo State University (2012).
She received her PhD for Economic Sciences from the „‟SS.Cyril
and Methodius‟‟ University Skopje North Macedonia7 (2011), and
her M.Sc. in Economics at „‟SS.Cyril and Methodius‟‟. Author of
scientific works published in scientific journals in area of: Public
finance, Management of Local Finances ,Experience and practice in
the budgeting process in Local Government, Fiscal Decentralization
and planning of stable Municipal Budgets, equalization framework
for municipalities through grants, Fiscal decentralization indicators
in South East Europe, property taxes in transition countries, etc.
Nedzati Kurtishi received the Msc. degree in Economic Sciences
from the „‟SS.Cyril and Methodius‟‟ University in Skopje.
Working experience in the Ministry of Finance from 2008. He is
actually Head of the Unit for international releations.
7 North Macedonia /before FYR Macedonia
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Annexure
Chart A: Inward FDI (US Dollars, per capita), TYA* Chart B: Inward FDI (% of GDP), TYA
0
200
400
600
800
1000
1200
1400
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
ALB
before
after
0
2
4
6
8
10
12
14
16
18
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
ALB
before
after
Source: UNCTAD statistics Source: UNCTAD statistics
Chart B: Capital stock (real growth rates), TYA Chart D: Export of goods and services (% of GDP), TYA
0.0
1.5
3.0
4.5
6.0
7.5
9.0
10.5
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
before
after
0
10
20
30
40
50
60
70
80
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
ALB
before
after
Source: AMECO database Source: Eurostat database
Chart E: GDP (real growth rate), TYA Chart F: TFP (growth rate), TYA
-4
-2
0
2
4
6
8
10
12
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
ALB
before
after
-1
0
1
2
3
4
5
6
7
8
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
before
after
Source: Eurostat database Source: AMECO database
Note: For Croatia 2009 is excluded, not available for Albania
Chart G: Unemployment rate, -1Y vs. +2Y** Chart H: GDP per capita in PPS (EU28=100), -3Y vs. +2Y
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0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
ALB
before
after
0
10
20
30
40
50
60
70
80
90
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
ALB
before
after
Source: International Monetary Fund Database Source: Eurostat database
Chart I
: Human Development Index, -1Y vs. +2Y Chart J:
Corruption Perceptions Index, -1Y vs. +2Y
0.60
0.65
0.70
0.75
0.80
0.85
0.90
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
ALB
before
after
0
10
20
30
40
50
60
70
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
ALB
before
after
Source: UNDP Source: Transparency International
Chart K: Rule of Law Index, -1Y vs. +2Y
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
CZE
HUN
POL
EST
LVA
LTU
SVK
SVN
BGR
ROU
HRV
ALB
before
after
Source: World Bank
Note: For Czech Republic, Hungary and Poland +2Y data are not available, hence +3Y is used
* TYA = three-year average
** -1Y vs. +2Y = one year before versus two years after accession (0 = accession year)
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