Economic performance of the North Macedonian economy and the EU integration challenges

Abstract

We investigate the performance of North Macedonian economy in terms of its capacity for acceleration of the real convergence process toward the EU living standards. The holistic growth diagnostic approach is used in order to analyze the country’s growth performance by investigating the current growth model and to identify the main source and the most binding constraint. The results show that the average growth rate of North Macedonian economy in the last two decades is relatively lower than the other countries in the region, which delayed the process of convergence of the country to the level of living standards of the EU Member States. One of the reasons is the lower economic integration of a country with the advanced EU countries in terms of trade integration (the export demand from EU and other countries) and financial integration (FDI inflows and the foreign capital share in the domestic banking sector). There have been expectations that the accession of the country into NATO and its integration in the EU processes will automatically increase the FDI inflows and the trade integration of the country. However, this claim has not been supported by any objective evidence. It is true that the EU and NATO accession may contribute to the acceleration of the country’s development process, but how that process will impact the national economy to a large extent depends on its government capacity to implement structural reforms, its ability to strengthen its institutional capacity, and its ability to design economic and industrial policies most conducive to improve its export competitiveness as a fundamental factor for sustainable economic growth for a small open economy.