**2. Literature review**

assists us to feature the efficiency of each country's public administration. On average, most of the WB 6 fare poorly on public services, implementation of policies, enforcement of property rights, and corruption. The relationship among these dimensions of economic governance and growth has been studied in recent literature [3–5]. Each of the WB 6 has tendencies to converge towards the European Union (EU), and each is expected to join the EU. Early in the 1990s, these countries started the transition mechanism. Countries with efficient institutions, welladvanced property rights, and sound public policies have stronger will to employ more efficiently physical and human capital and achieve a higher growth rate. Since each of the WB 6 has set its national development strategies, it is valuable to examine how the government efficiency indicator impacts this set of economic growth dynamics. Besides, we are interested in observing the behavior of inflation, as the new Member States eventually have to fulfill the Maastricht

*Linear and Non-Linear Financial Econometrics - Theory and Practice*

Based on the requirements of the Maastricht criteria for entering the EU, the inflation rate must be stabilized as a prerequisite to joining. The WB 6 has to bring its national legislation in line with EU law and meet price stability to ensure economic convergence. Convergence criteria explicitly report: "A price-performance that is sustainable and average inflation not more than 1.5% above the rate of the three best performing Member States [6]". The Union carefully monitors the progress in the alignment with and implementation of the *acquis* throughout the process of negotiating. For instance, in the case of Montenegro, one of the benchmarks for the chapter Economic and Monetary policy is the Country has adopted the required constitutional change. It has to ensure that the primary objective of price stability is defined in compliance with Articles 127 (1) and 282 (2) of the Treaty on the Functioning of the European Union—Article 143 of the Constitution [7]. Even though economic governance has been analyzed to a moderate extent within the EU, we find there is still sufficient space for enhancement using the WB

6 as an example. The novelty of this paper is that it uses a structural vector autoregressive approach for the economies of Albania, Bosnia and Hercegovina, Kosovo, Montenegro, North Macedonia, and Serbia to analyze the impact of economic efficiency to growth. This paper suggests examining time series data from

January 2006 to December 2018 for WB 6. It evaluates and compares the

empirical performances of forecasts of inflation, GDP, and economic governance

The annual economic reform program exercise led by the European Commission with all Western Balkan countries is a crucial tool for supporting the modernization of their economies and achieving closer economic coordination with the EU. The Commission will strengthen this exercise, bring it even closer in line with the current European semester for the EU Member States, and provide more advanced

In the context of the EU framework to support economic governance, all candidate countries and potential candidates are invited to submit a three-annual Economic Reform Programme (ERP) which comprises of the following components: macroeconomic framework, fiscal framework, and structural reforms. The ERPs contain medium-term macroeconomic projections and budgetary plans for the next 3 years, as well as a list of priority structural reform measures aiming at boosting competitiveness and inclusive growth. The ERP process has helped to focus on governments' attention to addressing urgent structural reform needs and to improve coordination. However, the tangible results of such reform efforts on people's lives still need to materialize. Awareness of the policy guidance by the relevant stakeholders and commitment to their implementation needs to be

price criteria.

effectiveness.

technical assistance.

strengthened by the WB 6.

**220**

Government effectiveness fosters growth and prosperity. The relationship between growth and government effectiveness in advanced countries has been a topic of many empirical and theoretical studies [10–19].

Papers that examine WB 6 economies are limited. To this end, various conceptual and empirical models are employed. The convergence of the WB 6 towards the EU-15 members has been examined by Siljak and Nagy, and they find the WB 6 converges faster, ranging from 1.3% to 3.6% [20]. Economic integrations, openness, and foreign direct investments impact growth based on recent literature in the EU [21]. EU membership prospect is the best trigger for foreign inflows [22]. Economic integration of CEE countries, between 1993 and 2001 and 1995–2007, revealed faster convergence towards the EU [23, 24]. The convergence patterns change across the WB 6 in different periods [25].

It looks like there is no integrated agreement in the empirical literature on the significance and the line or course on which it is moving. On the other hand, the economic catch-up integration of the WB 6 towards the EU still shows no convergence [26, 27]. Colak analyzed 33 EU (CEE 10, SEE 8, and EU 15) countries and found that economic governance has converged for each group of countries [28]. Badinger does not find a strong relationship between economic freedom and long-term growth [29]. The relationship between EU integrations and economic growth showed to be of positive and strong significance [30].

As far as the global economic crisis of 2008, different countries have had different sensitivities [31–33]. Matkowski et al. examines the convergence of EU-11 towards the EU-15 during the period 1993–2015 and reveals that a greater extent of convergence was before the financial crisis [34]. The convergence before the crisis was at a higher rate in the EU [35–37]. Western Balkans have continually underperformed compared to the average of the EU.

The WB 6 are heterogeneous, lacking similar convergence. Based on Zuk and Savelin (2018) the most successful central, eastern, and southeastern Europe

(CESEE) economic governances, in terms of the pace of convergence, share standard features such as, among other things, a sharp improvement in institutional efficiency and human capital, more outward-oriented economic policies, favorable demographic-economic developments, and the quick reallocation of labor from agriculture into other sectors [38]. Forward-looking, speeding-up, and sustaining convergence in the WB 6 requires in-depth efforts to improve institutional quality and innovation, reinvigorate foreign investment, and address the adverse impact of population aging seriously.

characteristics as a univariate AR model. Zivot and Wang emphasize that forecasting future values of a matrix *Yt*, when the parameters Π of the Var(p) process are assumed to be known and there are no deterministic terms of exogenous variables, the best linear predictor, in terms of minimum mean squared error (MSE) of *Yt*þ<sup>1</sup> or

and forecasts for longer horizons h (h-step forecasts) may be obtained using the

*YT*þ*<sup>h</sup>* � *<sup>Y</sup>*ð Þ *<sup>T</sup>*þ*h*j*<sup>T</sup>* <sup>¼</sup> <sup>X</sup>

<sup>Ψ</sup>*<sup>s</sup>* <sup>¼</sup> <sup>X</sup> *p*�1

*j*¼1

All variables are stationary based on unit root tests of ADF, PP, and KPSS stationary test. Visual inspection and statistical correlograms portray and confirm stationarity. Test results of *t-*statistics and *p* values reject the null hypothesis of a

We proceed with empirical construction and testing for potential structural breaks, which are crucial to identify for forecasting purposes as well as confidence bounds. Stability diagnostics, under recursive estimates, show that all coefficients have a lot of instability, indicating structural breaks. Chow breakpoint test confirms the above indication, having *F*-statistics and *p* values smaller than 5%, meaning to reject the null hypothesis of no breakpoints at 5% significance level. The Quandt-Andrews test indicates for rejecting the null hypothesis of no break. It reveals breaks for all cases Albania, Bosnia and Hercegovina, Kosovo, Montenegro, North Macedonia, and Serbia. Testing for multiple breaks in intercept and coefficients using Bai-Perron to sequentially test the hypothesis of L + 1 vs. L sequentially determined breaks. The Bai-Perron test recommends that there are breaks. We can conclude that all four tests indicate that there is a switch of parameters at 5% significance level, and we are dealing with multiple breaks in parameters. We will

As already emphasized in the literature review, the logic behind employing these variables is clear: in an economically free societal environment, people and companies are free to work, manufacture, utilize their disposable income, and make investments in any way they please, with that liberty both ensured and protected by the state and unconstrained by the state [41]. Besides, low and stabilized inflation

where the matrices Ψ*<sup>s</sup>* are determined by recursive substitution:

significantly indicates faster and mounting economic growth.

add the following dichotomous variables (**Table 1**):

*Y*ð Þ *<sup>T</sup>*þ1j*<sup>T</sup>* ¼ *c* þ *Π*1*YT* þ … þ *ΠpYT*�*p*þ<sup>1</sup> (3)

*Y*ð Þ *<sup>T</sup>*þ*h*j*<sup>T</sup>* ¼ *c* þ Π1*Y*ð Þ *<sup>T</sup>*þ*h*�1j*<sup>T</sup>* þ … þ Π*pY*ð Þ *<sup>T</sup>*þ*h*�*p*j*<sup>T</sup>* (4)

Ψ*sε<sup>T</sup>*þ*h*�*<sup>s</sup>* (5)

Ψ*<sup>s</sup>*�*<sup>j</sup>*Π *<sup>j</sup>* (6)

*h*�1

*s*¼0

one-step forecast, is [40]:

chain rule of forecasting as:

and h-step forecast error may be expressed as:

*Governance and Growth in the Western Balkans: A SVAR Approach*

*DOI: http://dx.doi.org/10.5772/intechopen.91731*

with Ψ<sup>0</sup> ¼ *In* and Π *<sup>j</sup>* ¼ 0 for j>p.

**4. Empirical results**

unit root.

**223**

Stabilizing policies and implementation of reforms are the vital drivers of WB 6 growth, in the meantime declining the impact of initial conditions of the 1990s. Since the government efficiency indicator reflects perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies, we give special attention to this indicator in explaining the growth differences among the WB 6 (through GDP) and macroeconomic stability (through inflation).
