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financial intermediation or tourism, or because most of the FDI flows were
acquisitions of domestic enterprises.
The influence of the GFCF on the overall growth rate in Western Balkan
economies emphases the need for further investment in fixed capital in order to
improve the overall economic performance.
GFCF = 4.11+ 0.872TFCI
3. The impact of FDI on merchandise exports
All countries in the region have experienced large and expanding trade
deficits and current account deficits in the previous period, except for Macedonia
where the current account is financed with the substantial level of remittances.
Most of the trade has been effected within the frames of bilateral free trade
agreements as well as with the EU members economies. All of the countries are
open with respect to their trade regimes. As a result of the less competitive
domestic production structure, imports have significantly surpassed exports. On the
other hand, exchange rate arrangements do not offer much flexibility for most
countries to improve their external competitiveness.
Improving export performance requires enhancing competitiveness. In the
short run, competitiveness can be associated with the level of the real exchange rate
that ensures both internal and external balance, known as the fundamental
equilibrium exchange rate (FEER). In the long run, the real exchange rate is
supposed to converge to its equilibrium level, and competitiveness is more related
to the productivity of the economy. The two concepts of competitiveness can be
referred to as “price competitiveness” and “structural competitiveness.” (Gutierrez,
2007)
Table 2: Exchange rate systems in Western Balkan economies
Country Exchange Rate System
Albania Independent floating
Bosnia and Currency board with Euro as an anchor
Herzegovina currency
Croatia Managed floating within a narrow band of
+/-2% around the euro
Montenegro Euroization
Serbia Free floating
R.Macedonia Managed floating within a narrow band of
+/-2% around the euro
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