Determinants of the Trade Balance in the Western Balkan Countries: A Panel Data Approach

This study investigates the economic factors affecting the trade balance of six Western Balkan countries: Albania, Kosovo, Serbia, North Macedonia, Montenegro, and Bosnia Herzegovina, using data from 2000 to 2021. Key variables such as GDP growth rate, foreign direct investment (FDI), remittances, inflation rate, consumption, real effective exchange rate (REER), and fiscal balance are analyzed. The objective is to evaluate how these macroeconomic indicators influence the trade balance, providing insights for economic policies in the region to enhance competitiveness globally. Four econometric models, OLS, OLSR, RE, and FE, are employed, with the fixed effects (FE) model identified as the most appropriate. Results indicate that consumption, remittances, inflation rate, and foreign direct investments have a negative and significant impact on the trade balance of Western Balkan countries. To tackle trade deficits, the study suggests implementing structural economic reforms, increasing investment in sectors where comparative advantages exist, diversifying exports, and emphasizing higher value-added goods and services in the global value chain.