REMARKS OF ECONOMIC CO-INTEGRATION IN SOUTH EASTERN EUROPE BOGDAN DIMA, PhD Professor West University of Timişoara

The creation of the Regional Co-operation Council launched on 27 February 2008, as the successor of the Stability Pact for South Eastern Europe, promotes a new framework for regional cooperation in Southeast Europe. The sustainable regional development and trans-borders economic integration is a key factor for attain its objectives. objective of this studyThus, the objective of this study is to advance a co- integration analysis for the economic status of the region and derive some conclusions for the structural and functional economic base of the co-operation process.

Structure of the paper Section 1Section 1 – introduction / general aspects Section 2Section 2 - analytical framework Section 3Section 3 - data and research output Section 4Section 4 - conclusions and further research

Introduction A context of economic stability and a peace economic and social development are critical preconditions of a long-run political stability and cooperation in South Eastern Europe. An auto-sustainable evolution of the region, composed by countries with unequal development level and different stages of transitional institutional, functional and structural transformations as well as with different historical legacies and cultural paradigms, could be achieved only in the context of European integration.

Introduction In the same time, the search for the European integration could complete but not replace itself the regional efforts to promote the area stability and trans-frontline cooperation. The Regional Cooperation Council (RCC) is a regional cooperative network for countries in South Eastern Europe, with the stated goal of "promoting mutual cooperation and European and Euro-Atlantic integration of South East Europe in order to reinvigorate economic and social development in the region to the benefit of its people." The work of RCC focuses on six priority areas: “economic and social development, energy and infrastructure, justice and home affairs, security cooperation, building human capital, and parliamentary cooperation”.

Analytical framework In order to estimate the actual stage of the economic co- integration in the South Eastern Europe, a set of RCC member countries is selected and a two stage approach is considered: a)after preliminary covariance analysis and Granger causality tests, the principal component is applied to identify the possible grouping configuration among the emergent markets. b)pairwise Johansen co-integration tests are conducted to examine the long-run relations established between the economic dynamic of the considered countries.

Data, research design and empirical results The data consist of annually variations of the real Gross Domestic Product obtained fromhttp://web.worldbank.org/WBSITE/EXTERNAL/DATA STATISTICS/, for a time span between 1995 and 2007 for a set of seven RCC countries: STATISTICS/ »Albania, »Bosnia and Herzegovina, »Bulgaria, »Croatia, »Hungary, »Romania and »Serbia.

Table 1: The Index of Economic Freedom-2009 COUNTRY2009 Overall Business Freedom Trade Freedom Fiscal Freedom Gov't Size Monetary Freedom Albania Bosnia and Herzegovina Bulgaria Croatia Hungary Romania Serbia

Table 1: The Index of Economic Freedom-2009 (cont.) COUNTRYInvestment Freedom Financial Freedom Property Rights Freedom from Corruption Labor Freedom Albania Bosnia and Herzegovina Bulgaria Croatia Hungary Romania Serbia

Table 2: Pairwise Granger Causality Tests Sample: 1995 – 2007; Lags: 2 Null Hypothesis:ObsF-StatisticProb. BULGARIA does not Granger Cause ALBANIA ALBANIA does not Granger Cause BULGARIA BOSNIA does not Granger Cause ALBANIA ALBANIA does not Granger Cause BOSNIA CROATIA does not Granger Cause ALBANIA ALBANIA does not Granger Cause CROATIA SERBIA does not Granger Cause ALBANIA ALBANIA does not Granger Cause SERBIA

Table 2: Pairwise Granger Causality Tests Sample: 1995 – 2007; Lags: 2 (cont.) Null Hypothesis:ObsF-StatisticProb. ROMANIA does not Granger Cause ALBANIA ALBANIA does not Granger Cause ROMANIA HUNGARY does not Granger Cause ALBANIA ALBANIA does not Granger Cause HUNGARY BOSNIA does not Granger Cause BULGARIA BULGARIA does not Granger Cause BOSNIA CROATIA does not Granger Cause BULGARIA BULGARIA does not Granger Cause CROATIA E-05

Table 2: Pairwise Granger Causality Tests Sample: 1995 – 2007; Lags: 2 (cont.) Null Hypothesis:ObsF-StatisticProb. SERBIA does not Granger Cause BULGARIA BULGARIA does not Granger Cause SERBIA ROMANIA does not Granger Cause BULGARIA BULGARIA does not Granger Cause ROMANIA HUNGARY does not Granger Cause BULGARIA BULGARIA does not Granger Cause HUNGARY CROATIA does not Granger Cause BOSNIA BOSNIA does not Granger Cause CROATIA

Table 2: Pairwise Granger Causality Tests Sample: 1995 – 2007; Lags: 2 (cont.) Null Hypothesis:ObsF-StatisticProb. SERBIA does not Granger Cause BOSNIA BOSNIA does not Granger Cause SERBIA ROMANIA does not Granger Cause BOSNIA BOSNIA does not Granger Cause ROMANIA HUNGARY does not Granger Cause BOSNIA BOSNIA does not Granger Cause HUNGARY SERBIA does not Granger Cause CROATIA CROATIA does not Granger Cause SERBIA

Table 2: Pairwise Granger Causality Tests Sample: 1995 – 2007; Lags: 2 (cont.) Null Hypothesis:ObsF-StatisticProb. ROMANIA does not Granger Cause CROATIA CROATIA does not Granger Cause ROMANIA HUNGARY does not Granger Cause CROATIA CROATIA does not Granger Cause HUNGARY ROMANIA does not Granger Cause SERBIA SERBIA does not Granger Cause ROMANIA HUNGARY does not Granger Cause SERBIA SERBIA does not Granger Cause HUNGARY HUNGARY does not Granger Cause ROMANIA ROMANIA does not Granger Cause HUNGARY

Exogenous variables: Individual effects; Newey-West bandwidth selection using Bartlett kernel Balanced observations for each test MethodStatisticProb.** Cross- sectionsObs Null: Unit root (assumes common unit root process) Levin, Lin & Chu t* Breitung t-stat Null: Unit root (assumes individual unit root process) Im, Pesaran and Shin W-stat ADF - Fisher Chi-square PP - Fisher Chi-square Null: No unit root (assumes common unit root process) Hadri Z-stat ** Probabilities for Fisher tests are computed using an asympotic Chi -square distribution. All other tests assume asymptotic normality. Table 3: The unit root tests

Table 4: Covariance Analysis: Spearman rank-order Sample: Included observations: 13 Dunn-Sidak multiple comparison adjusted probabilities

Table 4 CovarianceCorrelationSSCPt-StatisticProbability ALBANIA BULGARIAALBANIA BULGARIA BOSNIAALBANIA BOSNIABULGARIA BOSNIA CROATIAALBANIA CROATIABULGARIA CROATIABOSNIA CROATIA SERBIAALBANIA SERBIABULGARIA

CovarianceCorrelationSSCPt-StatisticProbability SERBIABOSNIA SERBIACROATIA SERBIA ROMANIA ALBANIA ROMANIA BULGARIA ROMANIA BOSNIA ROMANIA CROATIA ROMANIA SERBIA ROMANIA HUNGARY ALBANIA HUNGARY BULGARIA HUNGARY BOSNIA HUNGARY CROATIA HUNGARY SERBIA HUNGARY ROMANIA HUNGARY

Table 5: Principal Components Analysis Sample: ; Included observations: 13 Computed using: Kendall's tau-b Extracting 7 of 7 possible components Eigenvalues: (Sum = 7, Average = 1) NumberValue DifferenceProportion Cumulative Value Cumulative Proportion

Table 5: Principal Components Analysis (cont.) Eigenvectors (loadings): Variable PC 1 PC 2 PC 3 PC 4 PC 5 PC 6 PC 7 ALBANIA BULGARIA BOSNIA CROATIA SERBIA ROMANIA HUNGARY

Table 5: Principal Components Analysis (cont.) Kendall's tau-b: ALBANIABULGARIABOSNIACROATIASERBIAROMANIAHUNGARY ALBANIA BULGARIA BOSNIA CROATIA SERBIA ROMANIA HUNGARY

Table 6: Johansen Cointegration Analysis Albania Bosnia and HerzegovinaBulgariaCroatiaHungaryRomaniaSerbia Albania -NoYes (1) Yes (1) Yes (1) Yes (2) Yes (1) Bosnia and Herzegovina No-Yes (1) Yes (1) Yes (1) Yes (1) Yes (2) Bulgaria Yes (1) Yes (1) -Yes (1) NoYes (1) Yes (1) Croatia Yes (1) Yes (1) Yes (1) -Yes (2) Yes (2) No Hungary Yes (1) Yes (1) NoYes (2) -Yes (2) Yes (4) Romania Yes (2) Yes (1) Yes (1) Yes (2) Yes (2) -Yes (1) Serbia Yes (1) Yes (2) Yes (1) NoYes (4) Yes (1) -

Data, research design and empirical results The main findings could be resumed by the thesis that this procedure supports the existence of significant interlinkages among the economic dynamic of the considered countries; With some notable exceptions of no clear evidences between Albania and Bosnia and Herzegovina, Hungary and Bulgaria; Surprisingly so Serbia and Croatia-result also confirmed by the Granger causality test.

Conclusions and further research The purpose of this study is to examine the economic dynamic cointegration status among seven SEE countries interlinked in the institutional framework of RCC. Our results suggest that in terms of cointegration relationships there could be highlighted the existence of at least two sub-groups of economic systems with non-uniform degree of cointegration. It also indicates that the regional convergence is not completed and a higher degree of the economic, social, politic, cultural and institutional integration should be achieved in the area in order to ensure its long-term stability.

Conclusions and further research Of course, it is necessary to enhance the analysis by indicating the mechanisms of economic integration and identifying the factors which are acting as stimulator / inhibitors for this process. But even such a schematic approach could highlight the necessity of more ample measures to be taken to secure the South Eastern Europe in front of a uncertain global evolution and to build up a sound common future.