Analysis of Albania’s Trade Direction: Is the Open Balkan a New Center of Gravity?

Abstract

Trade is considered one of the main drivers of a country’s economic growth and development. Therefore, a successful analysis that identifies the bilateral trade flows, their determinants, and the regional integration costs and benefits opens new horizons for international trade perspectives. This study examines the effects of new and existing regional agreements on the international trade patterns of Western Balkan countries based on the Albanian case. In this regard, an extended trade gravity model is applied with a panel data set of trade flows between Albania and 43 of its regional strategic partners during the period of 2008 to 2022. This work considers two different similarity indexes to explain the effect of the economic structures of partner countries on their trade volumes: the relative factor endowment and the absolute factor endowment. The first is used to test the Linder Hypothesis, and the latter is used to test the effect of similarity in economic size between trading partners. Empirical results indicate that the effect of the selected explanatory variables, such as transportation costs, economic size, economic strength, exchange rate, and their relative as well as absolute endowment, is within expectations. Unexpectedly, the domestic economic size and strength are found to be insignificant in explaining the import flows and inversely proportional to the exports of Albania. Finally, it is indicated that trade flows are clearly dependent on traditional ties rather than on new incentives like the Open Balkan, which cannot offer a new regional center of gravity. To the best of our knowledge, this is the first time that the gravity of the Open Balkan initiative has been tested for one of the participating countries. The study concludes that while the Open Balkan initiative shows potential, the Berlin Process remains a more reliable path toward EU integration for Albania.