This thesis investigates the sources of financial system fragility in a small open economy with a traditional banking system, with a focus on Bosnia and Herzegovina. Conducting research on Western Balkan countries is challenging given the shortness of time series, unrepresentative samples, numerous structural breaks, poor quality data and the historical absence of the phenomenon that is the focus of investigation. For this reason, the common assumption that the findings associated with other regions or countries are applicable to the Western Balkans is rejected. Instead, two measures of systemic risk are constructed to assess a country’s financial system fragility that reflects the specific characteristics of a country such as Bosnia and Herzegovina. The liquidity index measures how vulnerable the financial system is to a currency crisis represented by the abandonment of the currency board arrangement. The solvency index is an indicator of banking system fragility at a point in time. Changes over time in both these measures of systemic risk are related to changes in a set of macroeconomic and banking sector specific variables. This thesis contributes to a better understanding of financial system fragility in Bosnia and Herzegovina and similar countries in several ways. It is found that both country and period specifics must be accounted for. Accordingly, each country should develop its own tailored measure of systemic risk, since some of the widely used set of indicators, such as the level of foreign reserves, may distort the perception of risk. A disaggregated approach to systemic analysis is favoured: it is more efficient to interpret two measures of systemic risk jointly rather than to merge them into a single indicator. However, there are substantial gains in modelling the risks of banking and currency crises as a system. It is demonstrated that even in a country with a simple financial system and dominant banking sector a single model cannot explain the evolution of systemic risk over the cycle. The nature of the risk factors, their relations with the perceived level of fragility, as well as the relationship between the measures of systemic risk were found to differ in pre-shock from the post-shock periods. Finally, it is shown that even simple financial systems are inherently unstable, with destabilizing relationships between the risks of banking and currency crises and developments in the real economy. It is concluded that developing a set of country-specific risk measures that indicate the evolution of the risk of banking or currency crises is an imperative.

The objective of this thesis is to investigate whether a switch from exchange-rate targeting (de-facto a fixed exchange rate) to inflation targeting will facilitate a more appropriate monetary policy and a more stable macroeconomic environment in developing economies. To achieve this objective, the thesis starts by developing the argument that the exchange-rate peg, as a nominal variable, might be unimportant for affecting long-run growth performance, but detrimental to short-run output stability, particularly in times of real shocks. By using a dynamic system-GMM panel estimator, the research finds that the exchange-rate regime is not significant in explaining growth, either overall or in developing countries. Next, the Hausman-Taylor panel method is used to investigate whether the exchange-rate regime is important in determining output volatility. To overcome the spurious-regression problem arising from the potentially persistent rolling-standard-deviation based measure of output volatility, a new measure is defined; namely, the difference between the potential and the actual output, which might arise from either economic policies or external disturbances. The empirical evidence suggests that, for the overall sample and for the developing countries, a terms-of-trade shock larger than 7 percentage points under a fixed, and larger than 9 percentage points under limited-flexible and flexible exchange-rate regimes, will give higher output volatility compared to a float. These findings are in line with the expectation that pegs provide early gains in terms of inflation stabilization, but longer pegs begin to develop into a threat for output stabilization in the aftermath of an aggregate-supply shock and as the economy becomes more financially integrated. Given these findings, the thesis suggests the exchange rate be made flexible and a new nominal anchor established. The thesis argues that the direct targeting of inflation is a rational choice in the aftermath of peg exit. To investigate whether monetary-policy responses change and produce a more stable macroeconomic environment under regime switching from exchange-rate targeting to inflation targeting, allowing for the possibility of an endogenous switch, the thesis adopts the framework of a fairly classical Taylor rule, augmented by the exchange rate. Two modelling approaches are used to undertake the empirical research: a panel switching regression; and a Markov-switching VAR. Results from both suggest that inflation targeting represented a real switch in developing countries and is characterized by a more stable economic environment, by more independent monetary-policy conduct, by policy geared to strict observation of inflation and by marginal consideration of the real fluctuations of the economy.

This research investigates whether the persistent current account deficit in Bosnia and Herzegovina (BH) is sustainable. Initially current account sustainability is investigated by using the concept of a stationary condition and the mean reversion proposition. It is argued that stationarity of the current account presents a minimum requirement for current account sustainability assessment based on less strict intertemporal solvency conditions. It was found that four out of the five Western Balkan countries investigated have a stationary current account to GDP ratio and therefore met this minimum requirement for sustainability. In order to develop an empirical model to assess current account sustainability in BH, next the Fundamental Equilibrium Exchange Rate is estimated. The conclusion drawn from this analysis was that BH‟s high and persistent current account deficit was not caused by exchange rate misalignment, thus there is no need to adjust the peg. The main reason behind the BH current account deficit is its trade deficit. In the absence of previous analyses of trade deficit sustainability in the WB the next question assessed was whether forming an free trade agreement is a helpful policy for BH utilising an ex post empirical analysis. The analysis of the new Central European Free Trade Agreement concentrates upon three effects: on trade flows using gravity equations; on Bosnia and Herzegovina‟s trade potential and on future deficit sustainability in BH. It was found that although BH trade flows were affected by the CEFTA agreement, the net effect was to contribute to a further widening of the trade deficit in BH. Given the finding that BH‟s current account deficit cannot be attributed to (real) exchange rate misalignment the main conclusion is that current account sustainability analysis must be based on understanding the reasons why BH has a persistent trade deficit. The main reason behind BH current account deficit is its trade deficit. The main factor underlying trade deficit in BH is strong demand for imported goods and also BH‟s supply side weaknesses. Policy-makers need to create an environment for the private sector to develop. Hence both micro and macroeconomic conditions would have to be considered by BH policy-makers in order for this country to improve its export competitiveness and its trade position, which could reduce high BH current account deficit.

The ability of nations to grow and to provide their citizens with a better standard of living depends on the competitiveness of their firms. During the transition from a centrally-planned to a market economy firms had to face the challenging task of restructuring in order to become more competitive. It was expected that through changes in their behaviour they would be able to replace once dominant price-driven competitive profiles with quality-based profiles which can generate higher value added and can lead to higher rates of growth. The aim of this thesis is to investigate competitiveness of firms and industries in Central and East European Countries (CEECs) in general and Croatia in particular. We argue that the competitiveness of firms and industries is a dynamic process closely related to their restructuring activities, characteristics and environment. With that in mind we apply dynamic panel methodology and dynamic shift-and-share analysis to two large firm and industry level datasets for the period 2000-2007, the most recent year for which data was available to us. We compare the behaviour of Croatian firms with that of their rivals from several advanced CEECs, assess the competitive profile of Croatian exporters and examine the competitiveness of Croatian industries on the EU15 market. Our findings indicate that in an advanced stage of transition the behaviour of firms in CEECs and Croatia was typical of price competitive firms with improvements in labour productivity and cost efficiency being their most important forms of restructuring. Furthermore, we identified several agglomeration externalities and government policy measures such as free trade zones as factors which can facilitate the ability of Croatian firms to compete on international markets. We have also demonstrated that Croatian trade with EU15 is mainly of the vertical intra-industry type. Finally, stronger capital and innovation intensity in combination with higher pressure of imports have positive effects on the relative quality of exports from Croatian industries to the EU15 market. Based on these findings we have developed a set of recommendations for Croatian policy makers and managers which we hope can stimulate the innovativeness of firms and industries and increase their ability to compete through quality.

This research aims at developing and extending the theoretical and empirical literature on the extent of government sector involvement in the economy. It is primarily concerned to analyse the causes of the generally increasing size of the government sector in developed market economies. Despite the importance of this topic in the field of political economy, the literature review suggests that there is no single core theory of the size of government in the economy, only various fragmented theoretical explanations. In an attempt to bridge this analytical gap in the existing knowledge, this research offers a simple integrative theoretical framework. Within that framework, this research gathers and empirically tests the most relevant theories in this field. To that end, it makes use of data for developed market economies in the period from 1970 to 2008. The obtained results indicate that national income, a country‟s degree of modernisation, trade and financial openness, relative prices of government and private goods and government sector employment play an important role in explaining the size of government in developed market economies. In addition, this research contributes to the existing empirical literature by examining the evolution of long, historical time-series of government expenditures for the four developed market economies for which this data is available (the US, the UK, Italy and Sweden). Contrary to conventional wisdom, statistical examination of the data suggests that the major change in the underlying growth rate of government expenditures occurred around the turn of the 20th century. By contributing to a better understanding of the long-run determinants of the size of government in the economy, this research offers a basis for relevant policy proposals and also informs debate on the appropriate size and role of the public sector in a mixed economy.

The literature on the economics of migration is immense and it provides three different conceptual frameworks to model the decision to emigrate. In addition to differences among these three models, there are inconsistencies between previous studies within each approach in terms of theoretical rationales for inclusion of variables and their main empirical results. Recently, the literature has focussed more on the effects of migration from the perspective of the home countries, with efforts towards seeking a consensus on the appropriate model of migration decision-making left aside. This thesis is an attempt to fill this gap in the literature. Given the importance of social relations and the system of values, the household is arguably the most appropriate decision-making unit among KS- Albanian households. This thesis tests the applicability of a household perspective in modelling Kosovan migration behaviour. A theoretical framework is outlined where the household as the decision-making unit is modelled as maximising the sum of total expected present value of utilities from current and future household consumption at home and abroad. This theoretical framework is transformed into an empirical proposition that investigates the determinants of whether households plan to send at least one member abroad using a Kosova data set of 2007. This does not cover the second stage of decision making, of which household member(s) will be send. The empirical results are broadly in line with the theoretical expectations of this conceptual framework. The results from the propensity to emigrate suggest that the attitudinal variable, which is unique to this thesis and controls for whether the household head perceives that household income has decreased, is an important determinant. This household perspective is developed to consider the decision on the duration of emigration. The empirical results provide fairly broad support for the theoretical expectations of the model. Additionally, the results indicate that, in addition to economic factors, the prevailing political situation may be important in determining the probability of return conditional on migration duration. Given the major political change in Kosova in 2008, the model developed is further tested by considering its stability over time. The empirical results suggest that the model structure has remained stable over the period of investigation. A further examination based on data from the Albanian LSMS 2008 suggests that the household approach may have greater applicability to migration behaviour in that country. In summary, notwithstanding the countries were chosen to favour the household approach, the results obtained provide broad support for the extended formulation of the household approach.

The aim of this thesis is to explore growth processes in transition economies (TEs) by analysing differences between growth patterns in the course of transition and the smooth growth paths characteristic of developed market economies. Accordingly, the thesis builds upon the neoclassical growth theory 10 the transition context to develop a modified theoretical model that conceptualizes transition as a non~linear process consisting of three distinct stages or regimes of growth: the crash or adjustment stage; the recovery stage; and the take~off stage. Namely, instead of describing transition as a movement along one steady state linear growth path, this new approach depicts transition as a process of radical adjournments or shifts between growth paths caused by big structural changes in the economy. This theoretical model is tested not only informally against the observed growth patterns under transition, but also through a series of econometric investigations: (1) Perron's procedure for testing for structural breaks in the presence of a unit root in the data series; (2) a univariate Markov Switching Model (MSM) for assessing (a) whether or not the different hypothesized regimes exist in the data an~ (b) if different growth regimes do exist, both the instability between and volatility within growth regimes; and (3), a multivariate MS VAR model estimated as a small vector autoregression that repeats the univariate MSM investigation into growth regimes but conditional on both physical and human capital variables. The empirical evidence supports the concept of non~linear growth characterised by structural changes and regime shifts. In particular, the univariate MS analysis suggests that most TEs (19 from 26) have passed through all three regimes or stages of transition, with variations across groups in terms of the recorded mean GDP growth rates and the volatility in each regime. Conversely, the multivariate analysis brings forward a somewhat different depiction. Namely, although generally confirming the idea of instability and volatility, the MS VAR analysis suggests that only an elite "few", the five most developed TEs, now EU members have managed to pass through all three stages of transition, as identified in our theoretical model. They can be regarded as having completed their journey by becoming developed market economies In contrast; all the others recorded only two distinct regimes. This result is consistent with our theoretical model in identifying three main stages or growth regimes in the transition process. Finally, the thesis appraises a new notion of transition as a process of dramatic non ~ linear changes that require correspondingly bold policies, particularly if the third regime leading to the developed market economy status is to be attained. Although this thesis does not prescribe specific policy recommendations, it does provide a particular perspective for policymaking, namely one oriented to long-run supply-side reforms.

This thesis aims to critically examine the development of Community Development Finance Institutions (CDFIs) in the UK: organisations that lend to businesses unable to access finance from mainstream sources. The overall aim of the research is to capture the development of a proto-type sector into a recognisable and fully-fledged financial sector. The research found there was considerable interest in CDFIs in the late 1990s fuelled by research reports published by the New Economics Foundation. Ideas and influences were being transferred to the UK from North American CDFIs and from micro-finance lenders in the developing world. While a few CDFIs had existed in the UK since the 1970s, from the late 1990s a new generation of organisations were being established to help combat what New Labour had defined as financial exclusion. The thesis identifies this group of CDFIs the ‘British New Wave’, because they were developing their own products and services to meet local needs. After 1997, New Labour ideas about a potential Third Way and Communitarianism were increasingly influential. This thesis argues that the subsequent development of CDFIs can be strongly interpreted as offering a Third Way between the market and the state. Their links with local communities or sectors (such as social enterprise) also enhanced their importance at district, regional and national levels. The research also analyses a number of individual case studies such as the Aston Reinvestment Trust and Street UK, the CDFI sector and government policy to highlight the complexity of the challenges facing CFDIs particularly the range of issues relating to funding. The thesis argues that the government’s initial interest in the sector has waned over time and some of New Labour policies aimed at promoting localism have in practice restricted the growth of CDFIs. At the end of the first decade of the twenty first century, the UK CDFI sector is surviving and offering loans to businesses excluded from finance and offering social and economic benefits that should be recognised and supported through social investment. However, despite the optimistic note in some areas of the thesis, it will be argued many CDFIs remain financially unsustainable precisely because they offer small business loans and work with their borrowers.

This thesis seeks to explore the changes of the Libyan economy, which began in the mid-1980s. The core of this research is to examine the influence of these changes on the course of the state and the implementation of the economic reform programmes. The relevant theoretical literature is based upon the relationship between the international and internal factors leading up the economic reform. The globalisation and state power are reviewed. The theory of rentier state and also the discussion of the most relevant aspects of the privatisation process were considered. The contribution of the thesis is its sustained analysis of the Libyan economic policies and, more importantly, its response to the neglect of the international and domestic influences of the economic reform process particularly in oil states. In addition, the literature on Libya and its structural and economic reform suffers from a lack of theoretically-grounded analysis. The methodology of this study is based upon combination of both interviews and questionnaires seemed the ideal methods in examining the economic reform and the privatisation programmes. The documentary research was also an important element for this study. In order to identify the determinants of the changes of the Libyan economy and the implementation process, it employs a variety of Libyan official documents and economic data. In general the study reveals that the relationship and the interaction between the international and domestic factors is extremely vital to understand the economic reform and privatisation programmes in Libya. Despite the significance of the international arena, its impacts are mitigated through the domestic context. Moreover, the previous state policies, the role of the state institutions and the interaction between the state apparatus and the Libyan society are important in understanding the Libyan economy.

The main aim of this thesis is to analyze the economic consequences of ethnic cleansing in the countries affected, with particular focus on Bosnia and Herzegovina. As one of the key distinguishing characteristics of ethnic cleansing is mass displacement of people, it focuses its investigation on the impact of ethnic cleansing on the stock of human capital in the country affected. Using the framework of the analysis of brain drain developed for voluntary migration, the further analysis is divided into two parts: the first part deals with the negative consequences of ethnic cleansing for human capital through emigration of highly educated (brain drain), while the second part deals with positive reverse effects of such emigration (brain gain). This should eventually allow us to estimate the net effect of migration on the stock of human capital in the country affected by ethnic cleansing. The analysis of the brain drain caused by ethnic cleansing starts with the development of a theoretical model that explains the impact of ethnic cleansing on emigration of highly educated individuals. The model is based on the models of self-selection and amended by incorporating a ―restoration‖ hypothesis, originally developed in this thesis. This model is then tested by two different empirical studies. In the first study, a household level data from Bosnia-Herzegovina was used in order to measure the impact of different factors affecting the household‘s decision to migrate. In the second empirical study, country level data were used to measure the difference in the magnitude of brain drain between countries with different histories of conflict. The second part of the thesis provides the empirical evidence on brain gain by using two different studies. In the first study, country level data were used to analyze the possibility of the ―incentive effect‖ that increases the stock of human capital in the country as a result of migration. In the second study, household level data were used to analyze the effect of remittances inflows on the increase of human capital through increased educational investments by households receiving remittances. By providing evidence on both brain drain and brain gain effects, this thesis gives comprehensive insight into the impact of ethnic cleansing on the stock of human capital in a country. The main findings of these studies are that the negative effects are stronger, while positive effects are weaker compared to the voluntary migration. This suggests that the net effect of ethnic cleansing on human capital stock in a country is likely to be negative. In addition, the thesis offers a new theoretical model of ethnic cleansing which can also, with minor amendments, be used in the context of natural disasters induced and development induced displacement.