1. REMARKS OF ECONOMIC CO-INTEGRATION IN SOUTH EASTERN EUROPE BOGDAN DIMA, PhD Professor West University of Timişoara bogdandima2001@gmail.com

2. 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.

3. 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

4. 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.

5. 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”.

6. 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.

7. 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:http://web.worldbank.org/WBSITE/EXTERNAL/DATA STATISTICS/ »Albania, »Bosnia and Herzegovina, »Bulgaria, »Croatia, »Hungary, »Romania and »Serbia.

8. Table 1: The Index of Economic Freedom-2009 COUNTRY2009 Overall Business Freedom Trade Freedom Fiscal Freedom Gov't Size Monetary Freedom Albania 63.767.075.892.875.679.6 Bosnia and Herzegovina 53.159.977.271.837.679.0 Bulgaria 64.673.585.886.258.772.8 Croatia 55.159.987.668.731.779.0 Hungary 66.877.485.870.619.273.8 Romania 63.274.985.887.070.075.0 Serbia 56.656.07885.946.365.8

9. Table 1: The Index of Economic Freedom-2009 (cont.) COUNTRYInvestment Freedom Financial Freedom Property Rights Freedom from Corruption Labor Freedom Albania 70 302947.2 Bosnia and Herzegovina 5060103352.1 Bulgaria 60 304178.4 Croatia 5060304143.4 Hungary 8070 5368.4 Romania 6050353757.1 Serbia 4050403470.0

10. Table 2: Pairwise Granger Causality Tests Sample: 1995 – 2007; Lags: 2 Null Hypothesis:ObsF-StatisticProb. BULGARIA does not Granger Cause ALBANIA11 28.97570.0008 ALBANIA does not Granger Cause BULGARIA 6.662420.0299 BOSNIA does not Granger Cause ALBANIA11 58.23510.0001 ALBANIA does not Granger Cause BOSNIA 1.813010.2422 CROATIA does not Granger Cause ALBANIA11 31.17750.0007 ALBANIA does not Granger Cause CROATIA 24.12640.0014 SERBIA does not Granger Cause ALBANIA11 8.339510.0185 ALBANIA does not Granger Cause SERBIA 9.141630.0151

11. Table 2: Pairwise Granger Causality Tests Sample: 1995 – 2007; Lags: 2 (cont.) Null Hypothesis:ObsF-StatisticProb. ROMANIA does not Granger Cause ALBANIA11 4.945950.0538 ALBANIA does not Granger Cause ROMANIA 0.254960.7829 HUNGARY does not Granger Cause ALBANIA11 15.53540.0042 ALBANIA does not Granger Cause HUNGARY 0.106560.9006 BOSNIA does not Granger Cause BULGARIA11 26.54510.0010 BULGARIA does not Granger Cause BOSNIA 1.084590.3962 CROATIA does not Granger Cause BULGARIA11 0.132080.8788 BULGARIA does not Granger Cause CROATIA 126.4071.E-05

12. Table 2: Pairwise Granger Causality Tests Sample: 1995 – 2007; Lags: 2 (cont.) Null Hypothesis:ObsF-StatisticProb. SERBIA does not Granger Cause BULGARIA11 0.161130.8547 BULGARIA does not Granger Cause SERBIA 5.734750.0405 ROMANIA does not Granger Cause BULGARIA11 1.020100.4156 BULGARIA does not Granger Cause ROMANIA 19.13390.0025 HUNGARY does not Granger Cause BULGARIA11 1.589210.2794 BULGARIA does not Granger Cause HUNGARY 2.759040.1414 CROATIA does not Granger Cause BOSNIA11 1.385040.3202 BOSNIA does not Granger Cause CROATIA 7.097420.0262

13. Table 2: Pairwise Granger Causality Tests Sample: 1995 – 2007; Lags: 2 (cont.) Null Hypothesis:ObsF-StatisticProb. SERBIA does not Granger Cause BOSNIA11 2.016720.2138 BOSNIA does not Granger Cause SERBIA 0.666730.5477 ROMANIA does not Granger Cause BOSNIA11 0.310120.7444 BOSNIA does not Granger Cause ROMANIA 32.29650.0006 HUNGARY does not Granger Cause BOSNIA11 0.433740.6669 BOSNIA does not Granger Cause HUNGARY 0.615310.5714 SERBIA does not Granger Cause CROATIA11 0.370280.7053 CROATIA does not Granger Cause SERBIA 1.955030.2219

14. Table 2: Pairwise Granger Causality Tests Sample: 1995 – 2007; Lags: 2 (cont.) Null Hypothesis:ObsF-StatisticProb. ROMANIA does not Granger Cause CROATIA11 6.369210.0328 CROATIA does not Granger Cause ROMANIA 0.761760.5072 HUNGARY does not Granger Cause CROATIA11 8.846820.0162 CROATIA does not Granger Cause HUNGARY 0.370270.7053 ROMANIA does not Granger Cause SERBIA11 13.62330.0059 SERBIA does not Granger Cause ROMANIA 0.216370.8115 HUNGARY does not Granger Cause SERBIA11 1.200950.3642 SERBIA does not Granger Cause HUNGARY 0.659870.5508 HUNGARY does not Granger Cause ROMANIA11 10.58100.0108 ROMANIA does not Granger Cause HUNGARY 1.146930.3786

15. 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* -3.47306 0.0003 6 72 Breitung t-stat -1.13966 0.1272 6 66 Null: Unit root (assumes individual unit root process) Im, Pesaran and Shin W-stat -2.35528 0.0093 6 72 ADF - Fisher Chi-square 24.4238 0.0178 6 72 PP - Fisher Chi-square 36.3031 0.0003 6 72 Null: No unit root (assumes common unit root process) Hadri Z-stat 1.53998 0.0618 6 78 ** Probabilities for Fisher tests are computed using an asympotic Chi -square distribution. All other tests assume asymptotic normality. Table 3: The unit root tests

16. Table 4: Covariance Analysis: Spearman rank-order Sample: 1995 2007 Included observations: 13 Dunn-Sidak multiple comparison adjusted probabilities

17. Table 4 CovarianceCorrelationSSCPt-StatisticProbability ALBANIA 14.000001.000000182.0000----- BULGARIAALBANIA-5.423077-0.387896-70.50000-1.3957910.9881 BULGARIA 13.961541.000000181.5000----- BOSNIAALBANIA5.0000000.35714365.000001.2681430.9960 BOSNIABULGARIA-8.346154-0.596974-108.5000-2.4679520.4864 BOSNIA 14.000001.000000182.0000----- CROATIAALBANIA-5.961538-0.426410-77.50000-1.5635120.9638 CROATIABULGARIA-4.461538-0.319559-58.00000-1.1185050.9992 CROATIABOSNIA4.4230770.31636957.500001.1060900.9993 CROATIA 13.961541.000000181.5000----- SERBIAALBANIA-4.769231-0.340659-62.00000-1.2017180.9979 SERBIABULGARIA1.1153850.07978014.500000.2654461.0000

18. CovarianceCorrelationSSCPt-StatisticProbability SERBIABOSNIA5.5384620.39560472.000001.4286160.9849 SERBIACROATIA7.1153850.50894192.500001.9609260.8085 SERBIA 14.000001.000000182.0000----- ROMANIA ALBANIA-3.000000-0.214286-39.00000-0.7276071.0000 ROMANIA BULGARIA9.0000000.643742117.00002.7900310.3110 ROMANIA BOSNIA-4.461538-0.318681-58.00000-1.1150850.9992 ROMANIA CROATIA2.3846150.17056431.000000.5741101.0000 ROMANIA SERBIA3.0769230.21978040.000000.7471981.0000 ROMANIA 14.000001.000000182.0000----- HUNGARY ALBANIA0.3846150.0274735.0000000.0911501.0000 HUNGARY BULGARIA0.8076920.05777210.500000.1919281.0000 HUNGARY BOSNIA-2.384615-0.170330-31.00000-0.5732971.0000 HUNGARY CROATIA-7.346154-0.525448-95.50000-2.0482590.7571 HUNGARY SERBIA-4.384615-0.313187-57.00000-1.0937480.9994 HUNGARY ROMANIA-5.538462-0.395604-72.00000-1.4286160.9849 HUNGARY 14.000001.000000182.0000-----

19. Table 5: Principal Components Analysis Sample: 1995 2007 ; 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 12.0361030.1217290.29092.0361030.2909 21.9143740.8877120.27353.9504770.5644 31.0266620.2006900.14674.9771390.7110 40.8259720.3173690.11805.8031110.8290 50.5086030.1188020.07276.3117140.9017 60.3898000.0913150.05576.7015140.9574 70.298486--- 0.04267.0000001.0000

20. Table 5: Principal Components Analysis (cont.) Eigenvectors (loadings): Variable PC 1 PC 2 PC 3 PC 4 PC 5 PC 6 PC 7 ALBANIA -0.4413880.1159900.6525810.0107960.1736480.5205670.254165 BULGARIA 0.352694-0.4873940.1516680.382160-0.189074-0.0478610.656480 BOSNIA -0.1420890.5574030.1272630.4579310.218751-0.5912080.214095 CROATIA 0.3831360.411356-0.330582-0.3275600.3731180.2882210.495100 SERBIA 0.4241310.3402100.0261600.572177-0.2006590.471049-0.337859 ROMANIA 0.472786-0.2245820.442127-0.0670860.634291-0.160768-0.312871 HUNGARY -0.332245-0.320784-0.4790550.4527190.5517600.215376-0.037913

21. Table 5: Principal Components Analysis (cont.) Kendall's tau-b: ALBANIABULGARIABOSNIACROATIASERBIAROMANIAHUNGARY ALBANIA1.000000 BULGARIA-0.2967801.000000 BOSNIA0.256410-0.4258151.000000 CROATIA-0.348394-0.2077920.1677451.000000 SERBIA-0.2307690.1161310.3076920.4000081.000000 ROMANIA-0.1794870.477429-0.2564100.1161310.1794871.000000 HUNGARY0.0000000.064517-0.128205-0.348394-0.307692-0.2564101.000000

22. 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) -

23. 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.

24. 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.

25. 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.