Does economic globalization trigger de‐industrialization in Western Balkan countries? Empirical evidence based on augmented mean group estimator

Abstract

Integration into the global economy can cause shifts in industries and decrease the industrial sector's share. Deindustrialization, which refers to declining industry share, is commonly observed in developed countries. However, many developing countries have also experienced deindustrialization without attaining a high economic level in the era of globalization. Since transitioning to a market economy and integrating with the European Union (EU), deindustrialization has become a significant issue for Western Balkan countries. Thus, our paper analyzes the impact of economic globalization on the deindustrialization process in five Western Balkan countries: Albania, Bosnia and Herzegovina, Montenegro, North Macedonia, and Serbia by using panel data spanning 2000–2019. Our study involved the creation of two models utilizing the augmented mean group (AMG) estimation method to ensure precise results. Our research shows that in model I, the economic globalization index, economic growth, capital investment, and the rule of law positively impact industry employment share. In model II, trade openness and economic growth positively affect manufacturing value‐added; however, capital investment and the rule of law have a negative impact. Our findings indicate that economic globalization promotes industrialization in the Western Balkans instead of leading to deindustrialization. The panel causality results from Dumitrescu–Hurlin indicate that in model I, there is a one‐way causal relationship going from economic globalization and capital investment to the share of industry employment. In model II, the causal relationship goes from economic growth and the rule of law to manufacturing value‐added, from manufacturing value‐added to trade openness and capital investment.