Economic Governance Under Political Risk in The Western Balkans: Panel Evidence From 2002–2023

Abstract

The Western Balkans as a region of developing economies is volatile in economic development at the same time political instability which brings into attention how economic governance is being impacted by political developments and instabilities. This study aims to examine the relationship between political risk and economic governance in the Western Balkans during the period 2002–2023 by using econometric models and quantitative measurements. The investigations focus on six Western Balkan economies. Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia, utilizing annual country-level panel data from the World Bank Worldwide Governance Indicators and World Development Indicators. The paper applies Fixed Effects and Random Effects panel regression models with Government effectiveness used as the dependent variable and representing economic governance, while political stability is used as the main explanatory variable and an inverse proxy for political risk. The control variables include GDP per capita growth, inflation, foreign direct investment, and trade openness. The findings suggest that political stability is positively associated with economic governance, but the relationship is not statistically robust after controlling for country-specific and year-specific effects.