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Mr. Nadeem Ilahi, Mrs. Armine Khachatryan, William Lindquist, Ms. Nhu Nguyen, Ms. Faezeh Raei, and Jesmin Rahman

, income convergence with advanced Europe has been less impressive when compared to NMS, partly reflecting lower exports. Although the contribution of net exports to growth turned positive in most countries in the post-crisis years, the region is yet to experience a meaningful boost from exports. A lack of openness, reliance on low value products, and weak structural competitiveness largely explain the subdued role of exports in the region. WB countries are less open than the NMS ( Figure 2 ). Our estimates of trade openness—which control for price level and size bias

Mr. Nadeem Ilahi, Mrs. Armine Khachatryan, William Lindquist, Ms. Nhu Nguyen, Ms. Faezeh Raei, and Jesmin Rahman
In the past 25 years, exports have contributed strongly to growth and economic convergence in many small open economies. However, the Western Balkan (WB) region, consisting of small emerging market economies, has not fully availed itself of this driver of growth and convergence. A lack of openness, reliance on low value products, and weak competitiveness largely explain the insignificant role of trade and exports in the region’s economic performance. This paper focuses on how the countries in the WB could lift exports through stronger integration with global value chains (GVCs) and broadening of services exports. The experience of countries that joined the European Union in or after 2004 shows that participation in GVCs can help small economies accelerate export and income growth. WB countries are not well integrated into Europe’s vibrant GVCs. Trade within the region is also limited—it tends to be bilateral and not cluster-like. Our analysis shows that by improving infrastructure and labor skills and adopting trade policies that ensure investor protection and harmonize regulations and legal provisions, the region can greatly enhance its engagement with GVCs. Services exports are an increasingly important part of global trade, and they offer an untapped source of growth. The magnitude of services exports from the WB region compares favorably with that of peers in Europe, particularly in travel services where several of these countries have a revealed comparative advantage. But there is significant room for growth in tourism exports and an untapped potential in business and information technology services exports that these countries can materialize through policy efforts that increase openness and enhance connectivity and labor skills. Serbia offers a good example of how decisive efforts, including education policies to ensure a sustained supply of skilled labor, can help information technology services exports to take off.
Mr. Nadeem Ilahi, Mrs. Armine Khachatryan, William Lindquist, Ms. Nhu Nguyen, Ms. Faezeh Raei, and Jesmin Rahman

economies accelerate export and income growth. WB countries are not well integrated into Europe’s vibrant GVCs. Trade within the region is also limited—it tends to be bilateral and not cluster-like. Our analysis shows that by improving infrastructure and labor skills and adopting trade policies that ensure investor protection and harmonize regulations and legal provisions, the region can greatly enhance its engagement with GVCs. Services exports are an increasingly important part of global trade, and they offer an untapped source of growth. The magnitude of services

Mr. Nadeem Ilahi, Mrs. Armine Khachatryan, William Lindquist, Ms. Nhu Nguyen, Ms. Faezeh Raei, and Jesmin Rahman

(used as a proxy for country’s absorptive capacity) can affect the significance of the impact of capital goods on real growth. In other words, what is the threshold of the labor skill that makes imports of capital goods “meaningful” for economic growth. Using panel threshold model, we estimate the impact of capital goods imports (Capgoodsimp), domestic investment (DI) and absorption capacity of the country proxied with labor skill mix (Labskill) on GDPPC growth in 45 countries, including OECD, emerging Europe, NMS, and WB countries (results in Table IV.2

La-Bhus Fah Jirasavetakul and Jesmin Rahman

upper-middle income peers, the stock of FDI, both in percent of GDP and population, is noticeably higher. Foreign investment has also contributed significantly to exports, employment, and productivity growth albeit with cross-country variation ( Damijan and Rojec, 2004 , Bijsterbosch and Kolain, 2009 ). Figure 1. FDI Inflows and Stock in New Member States of the EU The Western Balkan (WB) countries, who were late to integrate with Europe and the global economy, have also embarked on a FDI-led journey to enhance exports and growth performance . These six

Mr. Ruben V Atoyan and Jesmin Rahman
The Western Balkan countries have some of the lowest female labor force participation and employment rates across Europe. Almost two-thirds of working age women in the region are either inactive or unemployed: a huge bite into human capital for a region that endures high emigration and faces declining working age population. The paper uses both macro- and micro-level data to explore what explains low participation and employment rates among women in the region. Our findings show that improving educational attainment, having a more balanced family leave policy, and reducing tax wedge help improve participation of women in the labor force. However, these measures are not enough to notably improve employability of women, which require stronger growth supported by robust institutions.
La-Bhus Fah Jirasavetakul and Jesmin Rahman
FDI has played a strong role in the export-led growth of eastern European countries that are now members of the European Union (EU). Largely sourced from advanced Europe, FDI inflows were motivated by the intention to pursue new markets and cost efficiency. Over time, foreign investment has restructured the exports sector in these countries in favor of products that are considered more technology-intensive. As these countries face skills shortage and rising wages, what is needed for FDI to continue playing a strong role? Can the Western Balkan countries, who are not yet EU members and have in recent years stepped up financial incentives and policy initiatives to court investors, emulate the experience? This paper takes stock of the FDI experience of both these groups and tries to estimate their potential gains from additional policy efforts.
La-Bhus Fah Jirasavetakul and Jesmin Rahman