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THE EFFECTS OF DEMOCRATIZATION ON ECONOMY: THE CASE STUDY OF THE WESTERN BALKANS

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The present study aims at tracing the correlations between the foreign direct investments (FDIs) and the key interest rates (KIRs) broken through the prism of the democratization processes in the Western Balkans. The paper represents the extension of the previous author's works dedicated on the region, and its challenges nowadays (Mancheva,
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YEARBOOK OF UNWE (2022), PUBLISHING HOUSE – UNWE
ISSN (print): 1312-5486; ISSN (online): 2534-8949; http://unwe-yearbook.org/en/
DOI: https://doi.org/10.37075/YB.2022.2.03
THE EFFECTS OF DEMOCRATIZATION ON ECONOMY:
THE CASE STUDY OF THE WESTERN BALKANS
Galya Mancheva1
e-mail: galia@mancheva.info
Abstract
The present study aims at tracing the correlations between the foreign direct invest-
ments (FDIs) and the key interest rates (KIRs) broken through the prism of the democra-
tization processes in the Western Balkans. The paper represents the extension of the pre-
vious author’s works dedicated on the region, and its challenges nowadays (Mancheva,
2015, 2016, 2018, 2019, 2021; Mancheva, Simeonova, 2019). The interest on the issue is
driven by the ongoing European Union enlargement processes. It is trying to contribute
by investigating economic growth via FDIs and KIRs trends in the context of the democ-
ratization of the region. Pearson’s bivariate correlation is used to track whether: (1)
there is a statistically signicant linear relationship between three continuous random
variables – foreign direct investments, key interest rate and democratic rating, (2) the
strength of the linear relationship between these variables and (3) the direction of this
connection. The study includes the following countries: the Republic of Albania, the Re-
public of Serbia, the Republic of Northern Macedonia, the Republic of Montenegro and
the Federation of Bosnia and Herzegovina. Republic of Kosovo and Republic of Slovenia
are excluded from the study as Kosovo is still partially recognized and Slovenia is an
EU member since 2004. A 10-year data period is covered, namely between 2010 and
2019. After the analysis, it was found that the democratization processes of the countries
included in the study do not aect their economic growth, represented by FDIs and KIRs.
Keywords: democratization, Western Balkans, foreign direct investments, key inter-
est rate, Pearson’s bilateral correlation
JEL: C01, C81, C87, O10, O40, P16
Introduction
The end of the Cold War, being accepted with hope and high expectations for
positive change in the world, did not make it more stable and peaceful. On the con-
trary, conicts are not only increasing, but even becoming particularly large-scale
and violent. The Western Balkans are no exception to this trend. Torn by wars and
conicts in the 90s of XX c., they have been called “powder keg” (Todorov, 2015,
1 PhD, Member of the Advisory Board of the Center for Political Studies and researcher at
the Research Center for Monetary and Economic Research, University of National and
World Economy
Galya Mancheva
40
p. 11). NATO’s military operations in Serbia, the war in Bosnia and Herzegovina,
the secession of Kosovo and a number of other events have sharpened the focus
on the Western Balkans and made them a region of particular importance.
On the other hand, for Europe they continue to be a zone of permanent
ethnic and political conicts, which is a prerequisite for destabilizing the continent
(Todorov, 2015, p. 12). In turn some researchers’ outcome of the events in the
Balkans as a whole is vitally important worldwide (Vaknin, 2000).
The present study is part of the author’s series dedicated to the Western
Balkans and provoked by his opportunity for eld research in the region, as
well as by changes in the geopolitical and economic aspect in recent decades.
The following hypotheses are tested:
(1) Zero hypothesis – democratization does not affect economic growth;
(2) Alternative hypothesis democratization has an impact on economic
growth.
Within the study, economic growth is represented by continuous random
variables – foreign direct investments (FDIs) and key interest rates (KIRs). The
choice of quantities is dictated by the fact that in the long run the growth of FDIs
leads to economic growth (Petkova, 2018), and low levels of KIRs in turn also
stimulate the economy (Georgiev, 2009).
The study includes the Republic of Albania, the Republic of Serbia, the Re-
public of Northern Macedonia, Montenegro and the Federation of Bosnia and
Herzegovina (FBiH). Kosovo and Croatia are excluded because Kosovo is par-
tially recognized and Croatia joins the EU in 2013.
The Western Balkans today
The Western Balkans emerges as a concept at the end of 90s of XX century,
after the disintegration of the Socialist Federal Republic of Yugoslavia
(SFRY). It refers to a group of countries in the Balkans that remain outside
NATO and the EU. Eight of the twelve countries on the peninsula are located in
the region. Virtually all countries have participated in the SFRY (Slovenia, Bosnia
and Herzegovina, Macedonia, Serbia, Montenegro, Croatia and Kosovo) and
Albania. With the exception of the Republic of Serbia, all are limited in terms of
territory and population. Their total territory within the geographical boundaries
of the peninsula is 219.7 thousand sq km or 45.2% of the total area of all Balkan
countries (Tsachevski, 2011, p. 377).
With the exception of Slovenia the Western Balkans have a special place
in politics and the EU. Slovenia became a member of the EU in the fth
enlargement, as it easily and quickly overcame difculties and undertook
successful reforms, and is also the most economically developed country. For the
rest of the region, European integration is more difcult and long-lasting. The
The Effects of Democratization on Economy: the Case Study of the Western Balkans
41
main reasons are the military conicts, the unstable political situation and the
slow pace of change (Tsatsevski, 2011, p. 379).
The Republic of Serbia and the Republic of Montenegro are the “leaders” in the
pre-accession process and the only countries in the process of negotiations with
the Union. Bosnia and Herzegovina is the last country to apply for accession. In
articles on the subject, the author of the present paper proves that the Republic
of Albania is a serious “competitor” of the so-called “leaders” Serbia and
Montenegro, as it manages to achieve a relatively stable political environment
and levels of political risk (Mancheva, Simeonova, 2019).
Research methodology and application
Methodology and data
A Pearson bilateral correlation is used for the study. It makes it possible to
check:
whether there is a statistically signicant linear relationship between two or
more continuous random variables;
power of the linear minutes link between them;
the direction of this connection (increasing or decreasing).
The formula of bilateral Pearson Correlation is, as follows:
(1)
Where:
cov (x, y) is the exemplary covariance of x and y;
var (x) is the variance of x;
var (y) is a dispersion minutes for y.
The data used for the purposes of the survey cover the period 2010 2019
and are presented on an annual basis. Their source is a non-governmental orga-
nization “Freedom House”, the World Bank and regional central banks of the
countries concerned.
Application of the methodology and results
For the purposes of the study, Pearson’s bilateral correlation was applied to
three continuous random variables – foreign direct investments, key interest rates
and democratic rating.
Galya Mancheva
42
Foreign direct investments are investments made by a company in one coun-
try in a business located in another country. According to the economic theory
and practice of the last few decades, FDIs have a signicant role as an engine of
growth in the host countries (Mihailova, 2019). Moreover, they inuence the dy-
namics of economic growth through the so-called “levels of distribution” (Now-
butsing, 2009).
2009
2012
2015
2018
0
2
4
6
8
10
12
14
16
18
16-18
14-16
12-14
10-12
8-10
6-8
4-6
2-4
0-2
Source: Figure of the author.
Figure 1: Dynamics of the variables (2010 – 2019)
The key interest rate is set by the central bank of each country. In an independent
monetary policy (i.e. without a currency board), it is one of the instruments with
which the central bank conducts this policy. In market-developed economies,
its movement is used as a direct tool to regulate the economy. KIR is a form of
communication from the central bank to commercial banks on the exchange rate
of monetary policy to loosen or shrink the money supply, which respectively
results in an increase or decrease in ination.
The Democratic rating is compiled by the non-governmental organization
Freedom House and is a scale from 1 to 7, with 1 being the highest level of
democratic progress and 7 being the lowest.
Figure 1 presents the dynamics of the continuous random variables used in
the study foreign direct investment, key interest rates and democratic rating.
According to it, the dynamics of the variable “democratic rating” is relatively
The Effects of Democratization on Economy: the Case Study of the Western Balkans
43
the most stable compared to the other two variables. In all the countries
considered, they accept a value between 3.5 and 4.5, which puts them in the
categories of hybrid regime and semi-consolidated democracies of the non-
governmental organization Freedom House. The former are electoral democracies
that meet only minimum standards for the election of national leaders, and the
latter are electoral democracies that meet relatively high standards for the election
of national leaders, but show some weaknesses in the protection of political rights
and civil liberties. Of the countries represented, the Republic of Serbia and the
Republic of Montenegro are semi-consolidated democracies, and all others are
countries with a hybrid regime.
The next continuous and random variable is “foreign direct investments”. There is
a certain dynamics in it. This is also the variable that has been most affected
by the global economic crisis. During the period under review, the magnitude
was affected by the “second wave” of the crisis in 2012. As can be seen, this is
the period in which there is a sharp decline in FDIS, with the most signicant
decrease in the Republic of Serbia. This is normal because it is the country with
the largest economy leading in the region.
The last continuous random variable is the “key interest rate”. It is also
experiencing dynamics, as in the Republic of Albania and the Republic of
Northern Macedonia there is a decline in its values, which is a signal of the
attempts of these countries to maintain a stable economic environment.
Table 4 shows the Pearson correlation with respect to the variables cor-
related with democratic rating. It is clear that there is a correlation in several
directions. In the rst place – in terms of the democratic rating – the ratings of
most countries (highlighted ones) have a strong linear relationship. For ex-
ample, when the democratic rating of the Republic of Albania increases or
decreases, those in BiH and Montenegro also increase or decrease. The case
is similar with the other highlighted cells, namely: when the rating of the
Republic of Northern Macedonia changes, those of the Republic of Serbia
and the Republic of Montenegro change in the same direction; Serbia’s rating
inuences Macedonia’s; that of BiH affects Albania and Montenegro, and that
of Montenegro affects Albanian, Macedonian and Bosnian.
Galya Mancheva
44
Table 4: Bilateral Pearson correlation
Source: Figure of the author.
Next – in terms of FDIs – there is only one correlation, namely the democrat-
ic rating of the Republic of Albania correlates negatively with FDIs in the Repub-
lic of Montenegro, i.e. with an increase in the democratic rating of the Republic
of Albania there is a decline in FDIs in the Republic of Montenegro. Finally – in
respect of the KIR democratic rating has a negative correlation with KIRs to
some of the countries. For example, the increase in the values of the democratic
rating of the Republic of Albania leads to a decrease in the values of the KIR in
the Republic of Serbia and BiH; raising the rating of the Republic of Macedonia
correlates negatively with the KIR in Albania, Macedonia, BiH and Montenegro;
when Serbia’s democratic rating changes, the KIR in Macedonia and Montenegro
decreases.
To summarize, we can say that after the applied methodology Pearson’s
bilateral correlation, there is a strong linear relationship between the
democratic ratings of the countries in question in the Western Balkans. Conversely,
with regard to FDIs and KIRs, there is a strong linear relationship only between
the democratic rating and the KIRs, and only in some of the countries concerned.
Conclusion
The Western Balkans continue to be a problematic region in Europe, re-
quiring active international engagement. Difculties in their Europeanization
increased further in the context of the nancial and economic crisis in 2008
The Effects of Democratization on Economy: the Case Study of the Western Balkans
45
2012. The countries of this region face a number of political, economic
and social challenges, which slows down their reforms and Europeaniza-
tion (Tsachevski, 2011, p. 501).
For this reason, this study aims to check whether the processes of democ-
ratization in selected countries of the Western Balkans inuence economic
growth. To achieve the set objective the methodology that was used was the
bilateral correlation of Pearson applied to three continuous random vari-
ables: democratic rating, FDIs and KIRs.
The following hypotheses were tested:
(1) Zero hypothesis – democratization does not affect economic growth;
(2) Alternative hypothesis democratization has an impact on economic
growth.
With a risk of error 5% a zero hypothesis is accepted, meaning democra-
tization does not aect economic growth. The main arguments are the lack of
correlation with one of the selected continuous random variables – FDIs and
partial correlation with the second continuous random variable – KIRs.
In this sense, the study contributes with providing an update on democra-
tization processes and economic growth after the global crises 2018 – 2012,
and in the context of EU accession process. It raises the question on the types
of appetites of EU on WB – political or economic, the future role of the region
both – in the Balkans and in EU, etc.
Despite the progress made in the integration of the Western Balkan coun-
tries into the EU, the global economic crisis of 2008 – 2012 had a detrimental
effect on the pace and effect of the ongoing reforms. In addition, the region
must comply with stricter requirements set by the Union. All this poses a
number of challenges that the region has to deal in the coming years.
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Битката за Балканите е жизнено важна за света, Сентрал юропиън ривю, 23 юни
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Вакнин, С. (2000). Битката за Балканите е жизнено важна за света, Сентрал юропиън ривю, 23 юни, с. 12. (Vaknin, S., 2000, Bitkata za Balkanite e zhizneno vazhna za sveta, Sentral yuropian rivyu, 23 yuni, s. 12.).
Механизмът на лихвените проценти и кризата, Народостопански архив, 4, с. 5-20
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Георгиев, Р. (2009). Механизмът на лихвените проценти и кризата, Народостопански архив, 4, с. 5-20. (Georgiev, R., 2009, Mehanizmat na lihvenite protsenti i krizata, Narodostopanski arhiv, 4, s. 5-20).
Korelativni zavisimosti mezhdu demokratizatsiata I prirasta na BVP v darzhavi ot Zapadnite Balkani
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България и Балканите в началото на XXI в
  • В Цачевски
Цачевски, В. (2011). България и Балканите в началото на XXI в., "Изток -Запад", София. (Tsachevski, V., 2011, Bulgaria i Balkanite v nachaloto na XXI v., "Iztok-Zapad", Sofia).