Corruption and Trade in the Western Balkans

Abstract: Corruption has for long been considered a major constraint on economic growth and international trade. In protectionist countries however, it has been shown that corruption can have a trade enhancing effect. By measuring corruption’s influence on the trade levels of the countries in the Western Balkans, I have in this thesis aimed to test the extent to which corruption hinders trade, and whether corruption’s negative effects amplify when countries lower their level of trade protection. In connection to this, I also account for how much the countries of Western Balkans could gain in trade value if they managed to lower their levels of corruption. This relationship was estimated empirically by using panel data covering 27 importers and 17 exporters across years 2002 to 2012. My baseline regression was estimated with the OLS estimator and includes time and importer fixed effects. Other techniques have also been applied as robustness tests. My results imply that corruption has a significant negative effect on trade levels, a result significant in all of my regressions. I also find that once countries sign Free Trade Agreements, corruption’s negative effects become significantly larger. These results are however less robust and should be interpreted with care. Finally, the results imply that the countries of the Western Balkan region would gain much by committing to fight corruption.