Montenegro, Macedonia and Serbia: convergent or divergent
macroeconomic paths towards European Union accession
Master Thesis
Author: Todor Milkov
Student ID: S1751565
Supervisor: Dr. Brendan Carroll
Second Reader: Ms. Elitsa Kortenska
MSc Public Administration
Economics & Governance
Leiden University
January 10, 2018
Abstract
The countries in the Western Balkans which until two decades ago formed Yugoslavia are relatively new states with apparently comparable macroeconomic development strategies. The models are predominantly based on increased Europeanization and high external trade openness. The aim is to attract foreign direct investments and to enhance economic
progression. Nevertheless, large inflation and unemployment levels, as well as budget and fiscal imbalances represent a common feature among those republics. These components are both normal in a global economy marked by a severe financial crisis and relatively abnormal and unexpected for small states that are official European Union candidates. At the moment, Albania, Macedonia, Montenegro, Serbia and Turkey are official EU candidates. As such, due to their shared territory and common historical background, Macedonia, Montenegro and Serbia are the discernible cases selected for this thesis. The available research focused mainly on similarities between those states and failed to rigorously investigate what are the factors that constitute the differences between them. One evident element that divides Montenegro from Macedonia and Serbia is that the economic and monetary transformation of the latter two countries is regarded as more sufficient by the European Commission. Thus, opposing to the universal methodology to emphasize on the similarities, the puzzle in this study aims to investigate the main elements which cause the divergence in the monetary progression of those three republics. Based on a historical cause-and-effect process-tracing reconstruction of the choices of the policy-makers in those countries through the prism of theories such as path dependence, rational choice and general macroeconomic models, the main research question is: What is the effectiveness of Montenegro in satisfying Chapter 17 (Economic and Monetary Policy) of the Copenhagen criteria compared to the other candidate members from Former Yugoslavia? The central assumption is that the difference is caused by the unfavourable government decisions during critical junctures, which established a long-term path
dependence and led to the inability of Montenegro to benefit from the provided economic opportunities. This is contrary to the universal expectation that the global economic turmoil steered the fiscal transformation in the case countries in an unfavourable manner and instigated the divergence between them.
Table of Contents
1) Introduction ... 5
1.1. Problem and Research Question ... 6
1.2. Academic and Social Relevance ... 7
1.3. Structure of the thesis... 8
2) Research Methods... 9
2.1) Research Design and Case Selection ... 9
2.2) Data Collection ... 10
2.3) Operationalization of Variables ... 12
2.4) Threats to Inference ... 13
3) Historical Background ... 15
4) EU Enlargement Process and The Euroisation Dynamics of Montenegro, Serbia and Macedonia ... 19
5) Literature Review and Theoretical Framework ... 22
5.1) Path dependence ... 23
5.2) Rational Choice ... 26
5.3) Macroeconomic theories ... 28
5.4) Application of the theories ... 32
6) Results of the economic and monetary indicators (causing the existing imbalances) . 34 6.1. Montenegro ... 34
6.1.1. Summary of the 2016 EC Report ... 34
6.1.2. Macroeconomic Framework 2006-2012 ... 35
6.1.3. Macroeconomic Framework 2013-2016 ... 41
6.1.4. Future Expectations ... 49
6.2. Macedonia ... 50
6.2.1. Summary of the 2016 EC Report ... 50
6.2.2. Macroeconomic Development ... 51
6.3 Serbia ... 56
6.3.1. Summary of the 2016 EC Report ... 56
6.3.2. Macroeconomic Development ... 56
7.2. Hypothesis 1: The short-term economic policies establish long-term fiscal and
monetary consequences in the case countries ... 64
7.3. Hypothesis 2: The decision-making agents in the case countries base their public policy actions on their self-interest as and when dictated by the events of critical junctures. ... 70
7.4. Hypothesis 3: The policy-making mechanism based on decisions unrelated to time-tested macroeconomic theories impeded the sufficient monetary development in the case countries. ... 75
8) Conclusion and Discussion: Historical lock-in and where next? ... 79
9) Bibliography ... 83
1) Introduction
The conflict in the Western Balkans supervened by the disintegration of Yugoslavia represent the most destructive episode in the European history since the cessation of the Second World War. The conflict led to numerous consequences in the countries that impeded their normal political, social and economic transition from communism to democracy (Balfour & Stratulat, 2012). In broad terms, the economies of the former Yugoslav members are characterized by large unemployment and inflation, as well as unfavourable GDP growth and living standards (Briguglio, 2016). Due to the fact that the turmoil in the Western Balkans threatened the long-lasting peace on the continent, the European Union engaged in enhanced cooperation with the affected republics. The main goal was to assist in overcoming the challenges by providing development plans based on intensified Europeanization. Moreover, after the accession of Bulgaria and Romania, the Western Balkans represented the ‘black hole’ of the European map. At the moment, Albania, Macedonia, Montenegro and Serbia are official EU candidates, while Bosnia and Herzegovina Kosovo are potential candidates (European Union Information Centre, 2014). The main goal in front of those states is to raise the investment opportunities and to stabilize the overall efficiency of their economies (Archick & Morelli, 2008). Nevertheless, there is a paradox with this enhanced Europeanization in the recent years. From one hand, the Acquis Communitaire provides clear policy guidelines and is a vital prerequisite for agile achievement of the aforementioned objectives. On the other hand, the last decade signified a period of intensive political and macroeconomic reforms in the candidate countries without a visible stabilization of their economies. This fact is illustrated in the latest progression report issued by the European Commission, stating that at large, the candidates fail to achieve the necessary development in that area. The main types of
problems, mainly related to unemployment, inflation and trade liberalization remain. As it is vastly studied in recent times, starting for the premise that the economic crisis negatively affected the sustainability of the global economy, it is straightforward to deduce that the economic inefficiencies in the former Yugoslav states are caused by this phenomenon. However, this study takes a different perspective in analysing the individual choices of the governments from the independence of the republics until the last available EC progression document in 2016. The main idea in this thesis is to fruitfully evaluate the effect of both theories, namely path dependence and rational choice, on the macroeconomic progression of the candidate states from former Yugoslavia. Lastly, it will be assessed whether and to what extent basing the monetary policies around time-tested models, such as New Classical theory,
Neo-Keynesian theory and Post-Keynesian theory, could have yielded different economic results.
1.1. Problem and Research Question
The common anatomy and the apparent similarity of Macedonia, Montenegro and Serbia stimulates one to deliberate why there is a significant disparity in the economic indicators according to the latest report. The reality is that considering the Economic and Monetary Chapter of the Copenhagen criteria, Macedonia and Serbia are performing slightly better than Montenegro. In broad terms, the Montenegrin government has long-standing challenges in terms of economic growth, domestic production and budget discipline. The increased Euroization after the independence stimulated certain fiscal stability in the country. In spite of the relative economic boom during this period, from 2008 onwards, this former Yugoslav republic failed to preserve the long-term development rates, mainly by increasing the external debt. Hence, despite the short-term monetary security, the symptoms of the macroeconomic imbalances still impede the further Europeanization of Montenegro. The depicted situation is not different in Macedonia and Serbia, even though their progress is regarded as more
satisfactory. Thus, this dissertation will rely on path dependence, rational choice and the aforementioned three macroeconomic theories to analyse the differences and similarities leading to the volatile monetary conditions, as well as the particular reasons as to why the other two countries satisfy the economic acquis in a better manner than Montenegro.
In sum, the high comparability level between those countries provides unique opportunity to trace the nuances of the specific choices and the reasons that led to the macroeconomic evolution in the selected former Yugoslav members. In order to accomplish this goal, the following research question is selected:
- What is the effectiveness of Montenegro in satisfying Chapter 17 (Economic and Monetary Policy) of the Copenhagen criteria compared to the other candidate members from Former Yugoslavia?
The universal assumption of this study is that the difference is caused by the unfavourable government decisions during critical junctures, which established a long-term path
dependence and led to the inability of Montenegro to benefit from the provided economic opportunities.
1.2. Academic and Social Relevance
There is a large debate regarding the causes of the general ineffectiveness of the Former Yugoslav countries to satisfy the chapters of the Acquis. The conventional method adopted by the scholars is within-case studies to depict the exact reasons as to how the insufficient government legitimacy impeded the EU accession advancement of the relevant countries. Considering this, the relevance of the thesis is threefold.
First, previous research managed to qualitatively identify the causal mechanisms for each of the case countries, but it generally failed to rigorously investigate what are the factors that constitute the differences in the effectiveness by utilizing quantitative data. The thesis fills this gap by incorporating both qualitative and quantitative data in order to map the divergent macroeconomic experiences.
Secondly, the study employs an innovative methodological and theoretical framework. The comparison between Montenegro, studied in an in-depth within-case setting, Macedonia and Serbia will be sufficient to recognize the exact pattern of deficient economic behaviour. Additionally, the interlacing of a theoretical framework, comprised of path dependence, rational choice and macroeconomic theories, provides a more holistic analysis and satisfactory explanations as to why exactly those countries have fallen short of achieving steady economic development. The discussion through the prism of those theories offers a deeper understanding as to why Macedonia and Serbia are relatively more stable than Montenegro. That is an element which has become elusive. In this regard, aside from the contribution to the academic discussion on the Western Balkans, this dissertation also intends to advance the general debate on macroeconomic state-building and the applicability of the aforementioned theories in economics.
Thirdly, this dissertation offers numeral policy implications. The academic tendency is to emphasize on the commonality of the unsatisfactory economic indicators between the former Yugoslav members, while the approach in this study is to illustrate the differences in their development paths. This method offers a crucial perspective on the divergent economic activities within states situated in a same area and the scope of the European and international economic integration when it comes to the Balkans. Thus, the comparison between the three states can also contribute to understanding the elements and methods necessary to complete
the Acquis chapters. Moreover, the dynamics established by the economic policy reforms in the post-communist states are evaluated on a short-term basis. Nevertheless, this thesis seeks to provide a long-term explanation of the persisting nature of the policy reforms in the region. In general, the appropriate problem diagnosis leads to the adoption of a suitable policy
solution. Hence, the goal is to indicate that the emphasis should not solely be on the short-term losers of the economic reform. Lastly, contrary to the general position to focus on ex-post events, this work also includes the ex-ante conditions during a critical juncture. That way, it is visible what the situation is before, during and after the onset of policy reforms and during the maintenance of the existing legislation. This offers a more comprehensive picture which can be of used in further research.
1.3. Structure of the thesis
In order to grasp and sufficiently analyse the regulatory processes and the interplay between cause and effect, aside from this brief introduction outlining the broader context of the problem, the thesis will include seven additional chapters. After exemplifying the research methods that will be employed in this work in the second section, the third and the fourth chapters will provide more background overview about the post-conflict history and the EU enlargement dynamics of the case countries. Furthermore, chapter five will illustrate the relevant literature and the theories that will be applied to evaluate the advantages and the disadvantages of the macroeconomic frameworks of the states. Chapter six will then furnish the reader with a detailed information regarding the main policy decisions of the governments as well as the outcomes of those choices by utilizing the selected macroeconomic indicators from their independence until the latest available EC report in 2016. This section will lay the foundations for the next fragment which will summarize and analyse the available
quantitative and qualitative data in order to deliver an answer to the main research objectives indicated in the second chapter. Finally, chapter eight will conclude the thesis by discussing the main points and limitations of the study and by providing grounds for further research on the topic.
2) Research Methods
The goal of this chapter is to specify the particular manner in which the thesis will be
conducted, including the research strategies, the selection of cases, the collection of data, the operationalization of the variables and the threats to inference.
2.1) Research Design and Case Selection
In order to accomplish the objectives and to sufficiently address the main research question of this thesis, it will be constructed around a Small-N comparative study and will adopt the Most Similar Systems Design (MSSD) method. MSSD requires selecting similar objects of research considering the dependent variable, while the independent variables vary between the countries. Hence, this methodological instrument is based on a stringent variable-oriented strategy with the goal of testing theories on a more systemic level (Toshkov, 2016). In this piece, the puzzle involves three similar case countries, namely Montenegro, Macedonia and Serbia, with the independent variables, government policy choices, representing the main differences between them. The aim is to identify whether a causal relationship exists between the independent and dependent variables. In this case, it is to examine the impact of the macroeconomic policy choices of the three governments on the states’ economic
development. Moreover, a deductive logic is implied in situations when the independent variable differs and all of the other variables are being constant. On the other hand, inductive method presupposes some variation in the dependent variable when analyzing similar
systems (Ragin, 1987). The blurred boundaries between both logics is believed to be the core of the contemporary MSSD studies (Anckar, 2008). One of the most essential features for a successful Most Similar Systems Design research is the proper development of the theoretical framework. As such, a group of interrelated theories will be considered in this thesis,
including path dependence, rational choice and macroeconomic theories. As suggested by Anckar (2008), the threats to validity emanating from shortcomings in the theoretical model can be remedied by selecting case counties with identical geographical and cultural
characteristics. The comparable cultural and historical background, as well as the
geographical proximity of Macedonia, Montenegro and Serbia will eliminate such risks to validity. In general, aside from the aforementioned resemblances, another fundamental correspondence between the cases is the fact that all of them are official EU candidates, signifying the analogous policy path that those states are supposed to follow. In a similar vein, the main source of disparity is the insufficient economic and monetary progression of
Montenegro compared to Macedonia and Serbia. All of this enhances the appropriateness of the methodological choices in this dissertation.
What is also noticeable in this thesis and important to clarify is that the Europeanization progress of the case countries is influenced by different types of factors. For instance, the main challenge of Serbia is their insufficient cooperation with the ICTY, while Macedonia is impeded by long-term disputes with Bulgaria and Greece. Nevertheless, due to the fact that the focus is delineated solely on macroeconomic development, those factors will not undermine the overall validity of this dissertation.
2.2) Data Collection
As already defined, the main objective of this thesis is to perform an in-depth study to elaborate on the chain sequence of different policy choices of Montenegro, Macedonia and Serbia in order to exemplify the effect of those choices on their macroeconomic outcomes. Thus, a process-tracing method will be utilized. This will assure the adequate testing of the theoretical framework and will induce a sufficient empirical weight. According to George and Bennett (2005), process-tracing is a ‘method that attempts to identify the intervening causal process between an independent variables and the outcome of the dependent variable’. Additionally, van Evera (1997) maintains that by dividing the process into clearly defined steps, this methodological model is highly valuable in unwrapping the interconnected causal mechanisms that trigger a certain outcome. As visible from Figure 1, these mechanisms are further believed to provide the researcher with the tools to unveil accurate inferences about the causal process in a within-case study (Beach & Pedersen, 2011; Mahoney, 2012). Thus, the process-tracing strategy will be applied for all of the case countries independently and in steps.
Figure 1: Causal Mechanisms in Process Tracing (Beach & Pedersen, 2011)
More specifically, a variation of process tracing called Explaining-outcome process tracing will be employed in this dissertation. The aim is not to construct a theory, but to analyse the effect of a theory on a specific historical outcome. Consistently with the researched case, Gerring (2006) argues that this method requires a single-outcome phenomenon, with the objective of tracing the causes of an outcome. In simple terms, the researcher is informed about the outcome, but is unaware of the underlying factors that cause it. The inclusion of both systemic and non-systemic mechanisms allows the researcher to detect the choices of the stakeholders and the critical junctures that frame the historical events (Roberts, 1996; Rueschemeyer, 2003). One of the main goals of this thesis is to analyse the outcome by using the path dependence and rational choice theories. As such, this aspect will be of particular importance. Moreover, the model will be two-tiered. In the first part, the deductive logic will be applied to test the principal mechanisms and to assess their impact on the outcome. The first part, however, will be insufficient in explaining the causal relationship between the variables. This naturally leads to the second phase where an inductive approach will be implemented to perform a backwards historical evaluation with the purpose to further uncover the causal relationship leading to the outcome (Beach & Pedersen, 2011).
In order to sufficiently analyse the case, it is also crucial to determine the starting and ending point of the examined phenomena. Naturally, it is straightforward to place the end point in 2016, being the year of the last available EU progression report. However, Falleti (2006) suggests that there is a universal debate as to where exactly the critical junctures and the other contingent incidents impact the outcome. In order to eliminate the threat of selection bias and to enhance both the reliability and validity of the study, it is important to carefully analyse the history and the political dynamics in a research (Falleti, 2006). In this study is argued that the independence proclamation date is the starting point because it presented the
case countries with the most viable opportunity to adopt drastic transformations to their economic systems.
Furthermore, the information gathering will largely involve the collection of secondary data, especially document analysis. Bowen (2009) defines this method as the systematic reviewing and evaluation of documents in order to grasp the necessary understanding of the events. The main sources of information will be historical documents, as well as reports from
non-government organizations, internon-governmental organizations and non-governments. The aim is to acquire more background information regarding the post-war political, cultural and economic development of Macedonia, Montenegro and Serbia. Lastly, some databases, such as the Eurostat and the World Bank Data, will be utilized to obtain specific macroeconomic information about the three case countries. This statistical information will be utilized to quantitatively measure and analyse the effectiveness of the states in satisfying the chapter criteria.
2.3) Operationalization of Variables
As previously mentioned, the fundamental methodological goal of this dissertation is to identify whether there is a causal relationship between the dependent variable and the independent variables. Hence, the dependent variable is largely demarcated as the overall effectiveness and progress of the case countries in fulfilling the benchmarks specified in the Economic and Monetary chapter of the Copenhagen criteria. More precisely, the progress will be measured in terms of GDP growth rate, inflation rate, unemployment rate, debt rate, foreign direct investment, and financial stability, as follows:
• GDP growth rate – the annual GDP change, signifying the total spending plus total exports minus imports;
• Consumer Price Inflation rate – specified and measured by the Harmonized Index of Consumer Prices (HICP);
• Unemployment rate – the fraction of unemployed citizens in the labor force, measured in percentage;
• Debt rate – the fraction of GDP allocated for repayment of current date;
• Foreign Direct Investment – the aggregate amount of foreign investments in a state at a fixed point in time, measured in Euros;
• Financial stability – the degree of security and profitability of the banking sector of a given country.
On the other hand, the independent variable is defined as the government macroeconomic policy choices and will be inferred as the positive or negative influence of monetary policies on the indicators specified in the dependent variable. The ordinal nature of those variables also allow the categorization of the states’ economic development to be categorically ordered as low, medium and large. Additionally, consistent with the theoretical framework, the willingness and the capacity of the national governments to adopt the necessary political transformations are also considered.
2.4) Threats to Inference
As exemplified, the core research design in this thesis consists of a Small-N research design and an in-depth case examination, being based on a Most Similar Systems Design I and especially constructed around a process-tracing method. Naturally, these methodological instruments involve numerous limitations and bear some fundamental threats to inference which necessitate further clarification.
The combination of a Small-N research methodology and an in-depth case examination is believed to enhance the general reliability and validity of a research (Toshkov, 2016). As a result, three case countries are selected and this strategy is supplemented with an in-depth analysis of Montenegro. Subsequently, the application of primary and secondary sources will reduce the threat of both measurement error and random variability (Ibid). Lastly, the
availability of numerous variables and confounders in the study will eliminate the common issue of MSSD, namely the inability of the instrument to accurately distinguish between causation and association.
Alongside the common threats to inference connected to the Small-N research, external validity is a major problem regarding the case study analysis. The occurrence of
false-positive results represents the primary analytical threat in this situation. The influence of this particular limitation can be mitigated by selecting the cases strategically. Thus, contrary to the generally accepted principle of selecting random cases, the particular choice of cases in this in-depth study is expected to have a positive impact on generalisability. The reason is that it provides more information about the choices of the actors and the cause-and-effect mechanisms in the researched phenomenon (Seawright & Gerring, 2008; Flyvbjerg, 2006).
Nevertheless, due to the limited number of cases with this methodological strategy, although insignificant, there is a perpetual risk of failing to achieve sensitive results (Hackshaw, 2008).
Next to that, the autonomy of each individual case is one of the major preconditions for valid cause-and-effect assumptions in a research. The inference issue stems from the fact that the various units of analysis should be distinct and separated from one another. This is not always possible due to the fact that some phenomena, such as the operations of the EU and the increased social, political and economic interrelations between states, establish deeply rooted connection which has a direct effect on the outcome. Hence, in such circumstances, it is important to account not only for the distinctive, but also for the common features between the individual cases (Gerring, 2006).
The last threat to inference in this thesis is related to the proper application of the process tracing method. This methodological instrument necessitates a clear and well-justified departure point for the research. Falleti (2006) argues that a critical juncture represents a reasonable starting period. Although critical junctures provide a retrospective synopsis, its combination with a process tracing allows for a more holistic overview. Another possible risk connected with process tracing is that secondary sources may entail biased and selective information. Therefore, it is crucial for a researcher to reflect on a wider range of sources (Lustick, 1996). The concluding limitation of this strategy is that comparing similar units of research may cause the ‘preference issue’, characterized with a risk of tautology. In this respect, it is crucial to infer actors’ contemporary preferences based on a comparison between historical rhetoric and choices (Vennesson, 2008).
3) Historical Background
The cohesion between Montenegro, Serbia and Macedonia is rooted deeply into the history. The post-Second World War era was marked with a communist partisanship which
successfully opposed the Nazis. Due to the unstable ethnic situation in the region, the
institutionalization was important to foster cultural reconciliation. This strive for institutional development resulted in a new constitution in 1946 that signified the establishment of the Yugoslav federation consisting of six different countries, namely Bosnia and Herzegovina, Croatia, Serbia, Slovenia, Montenegro and Macedonia. The new regime vigorously promoted the cultural autonomy of the republics and prohibited the prevailing racial and religious acrimony in the area. Most specifically, the new union also aimed at more sufficient
economic integration between the members and better vertical income redistribution among the republics (Morrison, 2011). All of these nation-building approaches enhanced the peace in the Western Balkans, but from another hand provided more opportunities for antagonism. The result was increased economic grievances and a self-interest struggle towards individual growth. The vertical redistribution also established resentment in some of the wealthier countries, such as Croatia. During the 1970s, the political regime managed to achieve stability, but the economic problems in the 1980s deepened the discontent of the rich members towards the system. The political antagonisms, especially in Serbia during the governance of Slobodan Milosevic, signified the transition from communism towards democratization (Lukic, 2002). Nevertheless, the growing influence of nationalism led to ethnic confrontations in the region. In Serbia and in Montenegro, the ex-communist parties, being nationalist parties at the time, attained the ruling power, while in Macedonia there were no clear party affiliations. Moreover, the aforementioned willingness of wealthier nations to gain autonomy led to independence declarations in several states, including Slovenia and Croatia at first and Bosnia and Macedonia later. It was only Serbia and Montenegro which inclined towards maintaining the integrity of the union in its current form (Noutcheva & Huysseune, 2004).
The dissolution of Yugoslavia resulted in violent conflicts in each of the members, which prompted the international community to intervene. The internationally established transitional framework recognized the independence of the countries and assisted in normalizing the situation in the former Yugoslav territory. In the course of a few years the other members gained independence, while in 1992 Serbia and Montenegro maintained the
union by forming the Federal Republic of Yugoslavia (FRY). In its new form, the successor-state was defined as a liberal democracy and entailed a two-successor-states voluntary union (Lukic, 2002). However, it failed to establish a clear relationship between Serbia and Montenegro. In general, the constitution did not include separation procedures and was unsuccessful in allocating decision-making powers, especially because of the fact that both countries could develop their own international relations. The ambiguous legal architecture of FRY did not solely represent the main divergence aspect between the two countries. Contrary to the ethnic and cultural diversity with the other former Yugoslav states, those aspects are convergent between Serbia and Montenegro. The difference, however, emerges from the different historical development of both states (Noutcheva & Huysseune, 2004).
Due to the aforesaid discrepancies, in 1999 Montenegro commenced with steps towards independence. These efforts led to the transformation of FRY into the State Union of Serbia and Montenegro in 2003. Nonetheless, similar to its predecessor, the constitutional
framework of the new country was also relatively loose. The asymmetrical power structure and the post-conflict grievances that caused divergent economic interest between both republics embodied the major issues. (Noutcheva & Huysseune, 2004). The ever-increasing dissimilarities between the economic policies resulted in continuous confrontations within the union. During FRY, the government of Milosevic largely impeded the democratic transition. On the other hand, the State Union of Serbia and Montenegro was ruled by a pro-Western democratic government. This stimulated the dialogue with the international community, and especially with the European Union (Lukic, 2002). The international assistance produced the Belgrade Agreement, which aimed to advance institutionalism and good governance. The main elements in this framework constituted a clear power allocation between the institutions and authorities, a joint military unit, and adoption of the Euroization mechanisms (Kim, 2005). Consistently with the previous attempts, however, the Agreement failed to accomplish a viable institutional and policy development. Most specifically, because of the divergent interests between both countries, the economic policy harmonization with the European Stabilization and Association Agreement (SAA) is described as the main source of disagreement between both sides. (Roberts, 2002).
The negotiations commenced shortly after the ratification of the Belgrade Agreement and the formation of the State Union of Serbia and Montenegro. The implemented plan concerned the modernization of the internal market by allowing the free movement of goods, persons,
capital and services, as well as the establishment of a joint economic development strategy. Regarding the tariff protection, Montenegro maintained its position that increased protection will have a negative effect on the prices and on consumer welfare, while the Serbs claimed that a decrease will harm the producers because they will not be able to compete with low-priced imports (OSCE, 2006). Consequently, both governments compromised with their position in the pursuit of further European integration. Nevertheless, the positional
incompatibility hampered the confidence within the union. The growing concerns over long-term economic instability and the reoccurrence of the violent conflict forced Montenegro to seek independence. The strive for decentralization in Podgorica and centralization in
Belgrade obstruct the pre-defined Europeanization plan (Noutcheva & Huysseune, 2004). In 2004, the EU attempted to preserve the State Union of Serbia and Montenegro by recognizing the differences in the economic approaches of both countries and allowing them to implement different trade and customs policies. This accomplished a short-term stability, but the long-term progress was not achieved, mainly because of the ineffective cooperation between Serbia and the International Criminal Tribunal for the Former Yugoslavia (ICTY). The insufficient EU advancement provided arguments for the Montenegrin government to sustain its independence aspiration (Morrison, 2011).
As a result, in 2006, the ruling coalition in Montenegro initiated an independence referendum, which was intensely opposed by most of the other parties in the parliament. Later during that year, the EU and the government agreed on the conditions, with the most important criteria being the majority required for a positive decision (Kim, 2005). The significant lack of confidence between the political parties which established a highly polarized landscape at the time caused a narrow majority of 55,5% of the population supporting the referendum. A margin above 55% of the valid votes were needed for the framework to be accepted, which led to the independence declaration of Montenegro in the summer of 2006. The official dissolution of the State Union of Serbia and Montenegro implied that both states could no longer blame each other for the individual challenges that they face (OSCE, 2006).
Regarding Macedonia, after the dissolution of Yugoslavia, the country experienced numerous territorial conflicts with its neighbours. This also led to long-term recognition denials from Bulgaria and Greek, while Serbia and Montenegro eventually acknowledged the border sovereignty of Macedonia. The disputes with Greece still pose a serious challenge to the
Former Yugoslav Republic of Macedonia (FYROM). In 1992, the EU withheld their
recognition, although all of the conditions were satisfied by the state (Damyanov, 2014). The republic was internationally recognised only a few years later, after the admission to the United Nations and the recognition of the Western European countries. Subsequently, the country is multi-national with many ethnic groups. This led to the outburst of a conflict between the Albanian majority and the Macedonian army in the beginning of the 2000s (Vladisavljević, 2004). The ratification of the Ohrid Framework Agreement ceased the violence and preserved the border foundations, as well as the normal functioning of the institutions in FYROM. However, it is largely dubious whether the objectives of the
Agreement have been attained. Considering the relations with the other case countries, it can be argued that despite some disagreements with Serbia, there are no major disputes. More importantly, because of the proper infrastructural connection between them, there is a significant economic cooperation between the three countries (Marolov, 2015).
Following 2006, Macedonia, Montenegro and Serbia intensified their external relations, mainly by applying for an EU membership. At the current moment, the enlargement possibilities of the countries are still available, especially for the Balkan states. The SAA provides the necessary technical and financial to those countries in their political, economic and legal quest towards a full membership. The acceptance of the other Western Balkan republics would also contribute to solving one of the main European problems in recent times, namely the availability of aging population in the labour markets of the members (Jakovleski, 2010; Archick & Morelli, 2008). Based on all this, it can be argued that the EU adopted a more regional approach in the pursuit of peace, political and economic stability, and improved relationships between neighbours. This is important to mention as
Europeanization, also referred as Euroisation, is a contested term and typically implies different procedural process considering the various enlargement rounds. Euroisation is usually characterized as the effects of the necessary political, economic and legal
transformations required after the EU application on the relevant national systems (Subotic, 2011). Contrariwise, Radaelli (2003) defines it as “a process of construction, diffusion and implementation of formal and informal rules, procedures, policy paradigms and styles”. The author adds that Europeanization enforces a transformation in economies, politics and cultures. In a similar manner, Papadimitriou and Gateva (2009) suggest that the process can be analysed by studying the dynamics, the interconnection between the European and national systems, and the exact effect on the national politics. Applying these different
concepts on the Western Balkans, Euroisation can be comprehended as the structural modernization based on the European ideal which guarantees improved security and prosperity in the region (Vesnic-Alujevic, 2012).
As it was exemplified in this chapter, the common historical background of the discussed three countries, which until two decades ago were part of Yugoslavia, establishes an imperative contextual analysis for this research. Nevertheless, there are three additional interrelated elements that justify the case selection. Firstly, the independence declarations of one of the countries influenced the other republics in numerous ways. For instance, the autonomy of Montenegro led to a legal transformation in Serbia, mainly in terms of socio-economic policies such as citizenship rights. This fact is predominantly caused by the second aspect, namely the geographical and population proximity of the three states. More
specifically, the shared characteristics of this particular set of countries is believed to
resemble both the existing and future path dependence of the whole region (Cekik, 2015). In terms of size and post-Communist development, those three countries are similar to other recently accessed EU members such as Croatia, Bulgaria and Romania, which would provide an important basis for further research. Thirdly, the existing studies fail to research the deficiencies by comparing these particular three states which ensures a unique approach to this thesis.
The exact Europeanization path of the three case countries will be identified in the subsequent section.
4) EU Enlargement Process and The Euroisation Dynamics of Montenegro,
Serbia and Macedonia
The cessation of the Second World War symbolized the onset of the European integration process. The early form of the present European Union, the Coal and Steel Community, was ratified in 1951 and was initially composed of six Central-Western European countries, namely Belgium, the Netherlands, Luxembourg, France, Italy, and the Federal Republic of Germany. The Community was founded around a supranational convention with its own court, council and parliament, with the main goal to ensure lasting peace in the continent. In 1957, the six founding members established the European Economic Community around the same principles that guide the current EU integration dynamics. Aside from the strive for enduring peace, the European integration process also aims to achieve economic prosperity
and common values between European citizens (Phinnemore, 2006).
In 1993, the Maastricht Treaty was signed which transformed the European Economic Community to European Union around three main pillars, involving the establishment of an economic and monetary union and the adoption of a single currency, the Euro. From 1993 onwards, the EU also evaluates candidates and accesses new members based on concrete criteria, called the Copenhagen criteria (Jakovleski, 2010). The general benchmarks that are needed to be fulfilled before obtaining a full membership are constructed around three main areas: political development, economic stability and the Acquis Communitaire, mainly assessing the operation of the candidate’s legal system. From a wider view, these
requirements seek to assure that after the acceptance of new members, the Union remains both democratic and economically efficient. These accession dynamics, however, differ greatly among states and the Europeanization mechanism is depicted as either
post-communist, post-nationalist, post-imperialist or self-interest (Panebianco & Rossi, 2004). Since that period, despite the aforementioned ideological differences, the enlargement process has been regarded as an essential opportunity to enhance political and legal stability, as well as universal economic prosperity on the continent. The scholars define enlargement as the EU’s most notable instrument to invoke progress. The Union consists of 28 countries at the moment with Croatia being the latest member accessed in 2013. In general terms, accession is possible if a country satisfies the criteria, but the process nowadays is highly political, protracted and influenced by contemporary issues such as economic and migration crises (Balfour & Stratulat, 2012). Additionally, the accession is based on unanimous agreement between the members. As such, an existing tension between a candidate and a member can significantly impede the prospects of the former. In a similar vein, the analysts argue that due to financial deficiencies, long-term uncertainties and decreased external attractiveness of the union, the enlargement may have reached its climax and limit.
Nevertheless, Albania, FYROM, Montenegro, Serbia and Turkey are currently recognized as officially candidates, while Bosnia and Herzegovina, Kosovo and Turkish Cypriot
Community are potential candidates (Archick & Morelli, 2008).
The case countries are already in the process of accession. Thus, it is important to exemplify the technicalities of the procedure and the dynamics of their progress in order to evaluate the complexities in the subsequent parts of this study. In broad terms, a country is expected to submit a formal application in order to activate the procedural sequence of the criteria.
Afterwards, the European Commission (EC) is supposed to deliver a formal opinion paper on the potential candidate, supervened by unanimous decision from the Council of Ministers on whether to proceed with the application. In case this decision is positive, the prospect
candidate becomes an official candidate (Balfour & Stratulat, 2012). From that moment, the actual accession negotiations commence and the chapters can be opened after the approval of both the Council of Ministers and the EC. These preconditions were satisfied by the three case countries but with slightly different dynamics (Friedrich Ebert Stiftung, 2015).
After the successful finalization of the Stabilization and Association Agreement (SAA) in 2001, Macedonia applied for a full membership in 2004 and gained candidate status in 2005. Subsequently, the Acquis chapters were opened in 2009. Since then, the EC assessed the political and economic development in the country as sufficient, however, the democratic transition has been largely obstructed by the political crisis that emerged between 2012 and 2013. Rule of law, anti-corruption measures, individual freedom and the ethnic tension towards the Albanian minority are considered as the main problems in front of the Macedonian government (Archick & Morelli, 2008; Friedrich Ebert Stiftung, 2015).
Similarly, the long-term territorial disagreement with Bulgaria and Greece blocks the further EU progression of FYROM. In an attempt to preserve the political and economic
development of Macedonia and to untangle the abiding accession stalemate, the EC established the so called High Level Accession Dialogue. The observers believe that this strategy has stimulated the policy progress in the given areas, but the accession postponement may have a negative effect on the long-term policy development in the republic (Soeren & Stahl, 2014).
In contrast, the EU accession situation of Serbia is highly problematic. The main problems that the country faces are fourfold. The first one is the universal perception that the country is solely responsible for the violent events around the dissolution of former Yugoslavia during the 1990s. Secondly, the inability of the Serbian government to accomplish durable political development. Thirdly, the insufficient cooperation with the ICTY. Lastly, the tension with Kosovo also obstructs the positive Serbian-EU relations (Noutcheva & Huysseune, 2004). Main sources of content are the modernization of the economic system in the country and the finalization of the Stabilization and Association Agreement in 2008. These aspects, as well as the increased dialogue with Kosovo and with ICTY, improved the accession possibilities of Serbia and the republic emerged as an official candidate in 2012. Moreover, between 2012
and 2013, Serbia presented the needed progress and opened the accession chapters in 2014 (Friedrich Ebert Stiftung, 2015).
Regarding Montenegro, the country commenced with the Stabilization and Association Agreement shortly after proclaiming their independence in 2006. The Agreement was ratified in 2007, the formal application was submitted in 2008 and Montenegro became candidate member in 2011. The chapters were opened in 2012 and as of 2013, two out of seven chapters are conditionally closed. The EC considers the progress of the country to be satisfactory, but still largely ineffective when it comes to macroeconomic development (Archick & Morelli, 2008; Soeren & Stahl, 2014).
Lastly, there are 35 chapters in total that a candidate country must satisfy prior to its formal accession as a full EU member. However, considering the objectives of this study, only the economic and monetary chapter needs further clarification. In general, the acquis concerning the economic and monetary policy development prescribes specific rules regarding the operation of the central banks of the countries, especially in monitoring the provision of direct financing and exclusive public access to financial institutions. Besides, the states are required to harmonise their economic policies and should comply with all criteria leading to the adoption of the Euro after obtaining a full EU membership. Prior to the adoption of the single currency, however, the countries will be involved in the collective Economic and Monetary Union and are expected to maintain their exchange rates within the allowed boundaries (European Union Information Centre, 2014).
5) Literature Review and Theoretical Framework
In broad terms, there are numerous pertinent theories that can be applied to elucidate the monetary reality in Macedonia, Montenegro and Serbia. For instance, macroeconomic theories, such as the New Classical and the Keynesian models, are commonly adopted because they offer valuable insights on the viability and appropriateness of the implemented economic policies. These theories will also be used in this study, but they alone fail to provide a holistic picture about the causal mechanisms connecting the choices with the outcome. In that sense, alongside the macroeconomic theory frameworks, the thesis will employ subsequent theories, such as path dependence and rational choice, as a central analytical tool. Those will allow for more in-depth understanding of the cause-and-effect relationship between the individual choices and variables, as well as will ensure a
well-grounded answer to the main research questions and objectives. As it will be illustrated in this chapter, the relative interconnection between those theories justifies their combination and the negligence of other institutionalism models.
5.1) Path dependence
Path dependence is a theoretical framework that has been widely applied to explain various historical, political, economic and social processes (Vergne & Durand, 2010). Nevertheless, the theory encompasses a vast conceptual disagreement among academics. The main source of incongruity is twofold, namely whether to utilize a more general and broad definition or to adopt a more narrow and explicit one (Sydow, Schreyögg & Koch, 2005).
The group promoting the broad definition is led by prominent scholars such as William Sewell. His definition of path dependence states that ‘what happened at an earlier point in time will affect the possible outcomes of a sequence of events occurring at a later point in time’ (Sewell, 1996). In general, this camp infers that history matters, especially in the explanation of contemporary events. In a similar vein, the idea that history matters is the departing point of the advocates of the narrower definition. However, they argue that this reasoning is too simplistic to explain the political and institutional development (Pierson, 2000).
In contrast, Pierson (2000) was the first to apply this specific theory into the political domain. He bases his explanation on the work of Sewell, but asserts that the exact conceptual
definition of path dependence needs to be between both archetypes. Most specifically, Pierson classifies path dependence as ‘the causal relevance of preceding stages in a temporal sequence’ (Pierson, 2000: 252). He also argues that the phenomenon represents a social self-reinforcing development with four fundamental elements. The first two represent the
importance of events, especially their timing, sequencing and contingent nature. These ideas imply that small-scale events occurring at the correct time can cause large and resilient consequences. Thirdly, a wide range of effects are possible to emerge, including multiple equilibria; and lastly, an institutional lock-in can result from a positive feedback. The last step is also largely qualified as inertia of institutional development (Pierson, 2000: 263).
Equally important to the proper theoretical development of path dependence is James Mahoney. Analogous to Pierson, Mahoney (2000) criticizes the broad conceptual definition,
but differs in the fact that he opposes the description provided by Sewell. The scholar characterizes the theory as ‘historical sequences in which contingent events set into motion institutional patterns or event chains that have deterministic properties’ (Mahoney, 2000: 507). Mahoney also depicts causality of historical events, inertia and contingency as the three core elements in the analysis of path dependence (Mahoney, 2000: 510-11). More precisely, he introduces two types of sequences that are crucial in the assessment, namely
‘self-reproducing’ and ‘reactive’. The ‘self-reproducing sequences’ is equivalent to the Pierson’s ‘increasing returns’ by the fact that they both concern the long-term establishment of
institutional patterns (Mahoney, 2000; Pierson, 2000). The principal assumption behind this specific sequence is that the initial adoption of a certain action strategy will steadily produce a particular outcome over time and will disregard more suitable and effective alternatives that arise in due course (Ibid). On the other hand, the reactive sequences are characterized with a tightly coupled events that reflect the ramifications of previous occasions and lay the
foundation regarding the implications for future episodes (Mahoney, 2000).
Based on the work of Pierson and Mahoney, Capoccia and Kelemen (2007) further develop an equally important aspect of path dependence, the so called ‘critical junctures’. These junctures are described as ‘relatively short periods of time during which there is a
substantially heightened probability that agents’ choices will affect the outcome of interest” (Capoccia & Kelemen, 2007: 348). These episodes are defined as causally decisive when it comes to assessing alternative courses of action and amending the current path. Nevertheless, inclination towards one approach over another may lead to long-lasting complications until a new juncture occurs and provides another opportunity to alternate paths (Ibid). Hence, while path dependence is vital for causality, critical junctures are central to identify the concrete commencement moment of path dependency (Pierson, 2000). Mahoney enriches the theory of critical junctures by demarcating the periods between critical junctures as a lock-in effect. He also argues that the selection procedure is stochastically determined (Mahoney, 2000).
Furthermore, parallel with the institutional development, the normative implication of path dependence theory is also utilized to clarify economic events. The scholars concerned with economic path dependence argue that market failure occurs when the state is producing at a low productivity level and this inefficiency in economic governance results in welfare loss to the society. Nevertheless, the academics disagree on the extent to which the market is able to regulate the failures on its own (Vergne & Durand, 2010). The classic school of thoughts
suggests that the positive feedback allows the free market to produce a suboptimal equilibrium in the long-run (Sydow, Schreyögg, & Koch, 2005). Similarly, Allyn Young (1928) claims that not only the negative, but also the positive externalities, pose a problem because with multiple equilibrium it is unclear which particular course of action should be implemented. It is widely maintained that David (2001) and Arthur (1990) have the largest influence on the theory. In their studies, both authors analyze the effect of random events, such as economic crisis, on the lock-in to a certain equilibrium and path dependency. Their main contribution is to demonstrate that it is not viable to anticipate which is the most suboptimal equilibrium, even in highly competitive markets. The conclusion is that ineffective paths are caused by the failure of the political agents to fully benefit from the available economic prospects (Altman, 2000). Hence, when an economy is locked-in to an unproductive path, the market cannot be expected to solve the inefficiencies on its own. In this case, the political agents can influence the ability to which the economy can achieve its objectives or to shift to a more beneficial path (Liebowitz & Margolis, 1995). Lastly, David and Arthur assert that the institutional dynamics and the poorly designed policies can also position the economic agents on an inefficient path.
Sub-conclusion
Path dependence is an imperative theory for analysing institutional development. The reason is that this model provides crucial information about the mechanisms of the development process, the sequence of events that inflict change and the temporality of those events. All of this assists scholars in understanding the contingent nature of the available choices and the impact of the related decisions. Nevertheless, there is a considerable debate surrounding the theory, as the concepts are utilized in a variety of manners. In general, there are two general definitions of path dependence. The broad one suggests that history matters because previous decisions have a large impact on the present, implying that they lock institutions into a path that is unlikely to change. On the other hand, the narrow one perceives this definition as vague and provides a more nuanced explanation. In economic terms, the theory entails that the failure of the decision-makers to fully grasp the economic opportunities locks the economy into an unproductive path-dependence equilibrium.
5.2) Rational Choice
Building further upon the path dependence theory, in a situation when a policy-maker has to determine the best course of action out of a set of alternatives, the process involves a
sequence of sub-choices. Additionally, due to the fact that the selection procedure entangles a process, the effect of those choices is not always possible to be predicted. This mechanism encouraged an array of scholars to analyse the exact relationship between path dependence and rational choice. Those academics indicate that in order of a path to be independent, the selection should be based on a stringent assessment of the available alternatives, rather than on a result of a process (Bandyopadhyay & Sengupta, 2002).
In a similar manner to the path dependence theory, the rational choice involves a considerable debate concerning the assumptions of the model (Quackenbush, 2004). The first set of
thoughts consists of the classical rational choice theorists. Thomas Hobbes (1651), later followed by Adam Smith and John Stuart Mill, argue that the choices of the policy-making agents are based solely on ‘appetite’ and ‘aversions’. This idea symbolises the core of the classical rational choice paradigm. On the other hand, the experimentalists utilized non-market behavioural tests to examine the classical argumentation (Oppenheimer, 2008). As a result, Maynard Smith (1978) concluded that the constant interaction between agents
stimulates strategic development by increasing the ‘rewards’ and the probability of selecting the most appropriate alternative. Hence, he argued that the choice model is probabilistic and more flexible than the one promoted by the classical rational choice theorists (Smith, 1978). In sum, the theory is fundamentally about assumptions and its practicality and
generalizability to real-world issues is dictated by the logic of the empirical observations (Bueno de Mesquita, 1981). The assumptions universally concern the actors, their preferences, and their choices. Therefore, the theory presupposes that the actors are self-interested, aim to maximize their own utility, and choose independently by relying on complete information (Quackenbush, 2004).
The rational choice theory is highly applicable to sociological events, however its utilization for economic problems is mostly limited. Boudon (2003), Buchanan (1991), Olson (1971), and Ostrom (2010) suggest that the approach of the universal rational choice model simply involves the broad societal economics, including the political-economic analysis, collective action problem and public choice theory. The general reason why the rational choice theory is
not a prominent instrument in the economic realm is the substantial debate surrounding whether socio-economics are a part of the rational choice or an entirely separate domain.
The proponents of the separation between both methodologies argue that rational choice undervalues the social composition, and especially the individual values, behaviours and preferences when it comes to maximizing utility. On the contrary, socio-economics are believed to provide a more holistic picture regarding all of these elements of economic development. The scholars in favour of socio-economic doctrine claim that the theory detects the relationship between social effect and preferences in a better manner (Coleman, 1990; Hechter, 1992). Additionally, Friedman (1995) and Hardin (1997) demonstrate that any socio-economic issue can be sufficiently explained by the model alone because the individuals are perceived as rational utility maximization egoists and self-interested rent-seekers. The fact that people are classified as ‘two-legged calculators’ that operate in a
societal setting, instead of observing the world solely by the economic framework, represents the main difference between both theories (Etzioni, 1991). On the other side, the neoclassical understanding of economic problems is purely constructed around the rational choice in the sense that economic problems are analysed through the prism of social economic behaviour. Thus, the scholars who combine both approaches argue that there is a strong interrelation between economic non-economic behaviour (Zafirovski, 1998).
Diermeier (2015) assumes that in contrast to the electorate, the political agents are acting more rationally as their aim is to enhance their opportunity of being re-elected. In a similar vein, Bejakovic and Meinardus (2011) conclude that the economies of the former Yugoslav states are constructed around the “winner-takes-all” idea, characterized by the pursuit of utility maximization, which resulted in market and state failures.
Sub-conclusion
In a broader view, rational choice signifies the process of analysing the available alternatives and the selection of the most preferred one. The core of the theory is that policy-makers have inclinations towards a certain set of actions and choose in relation to those. Based on this, the model holds that the outcome cannot be entirely predicted. Generally, the concept involves two distinct school of thoughts. The Classical rational choice theory is predominantly based around the appetites and the aversions of the actors, while the experimentalists claim that the strategic interaction between the policy agents is the element which stimulates the affiliation
towards an alternative over another. Although highly applicable in political science and sociology, the theory entails a large debate when applied in economic settings. From one hand, socio-economics are perceived as an individual theory which is sufficient to explain the behaviour of the actors on its own. On the other hand, socio-economics are seen as an
integral part of the rational choice model because combining both principles provides a more holistic picture of the outcome of the choices and the available alternatives. As such, in order to enhance the academic relevance of the study, it is crucial to describe whether those
theories will be combined or used in a separate way.
5.3) Macroeconomic theories
The modern theory that studies the behaviour of political actors and the consequences of their actions is called institutionalism. It is also based on tracing a policy process and the result of the political struggle rather than on analysing policy measures. According to the
contemporary political institutionalism, the major normative standard for examining the institutionalism is the welfare efficiency, especially the Pareto efficiency under the Kaldor-Hicks principle (Stringham, 2001). The Pareto assumption is that a policy should be implemented only in a situation when someone is benefiting without making someone else worse off. On the other hand, the Kaldor-Hicks efficiency suggests that the individuals benefiting from the policy should compensate those who are made worse off, so that a Pareto efficiency could be reached. This constitutes an imperative outcome of institutional policy choice due to several reasons. Firstly, institutions compel cooperation between multiple self-interested actors which results in a suboptimal policy formulation (Ibid). Diermeier (2015) concludes that the flaw in that case is not caused by information asymmetries or high transaction costs, but stems from the fact that self-interested choices restricted by a certain institutional structure lead to inefficiencies. Secondly, regulations based on normative values tend to induce ineffective governance. Thus, these institutional inefficiencies suggest that political agents should possess a clear comprehension of policy procedures, which is the core of the analytical shift from measures to processes (Diermeier, 2015).
Deriving from this basic economic system, it is widely argued that monetary policies are a fundamental prerequisite for macroeconomic efficiency. However, there is a widespread disagreement regarding the exact manner in which those legislations should be drafted. The traditional method for achieving optimal monetary policy consists of several factors that define the jurisdictional constraints of the political actors. Those factors generally comprise
of clarifying the objectives of the policy-makers within the particular economic structure, the available instruments and choices, the existence of uncertainties and information asymmetries (Orphanides, 2004).
The debate regarding the aforementioned factors emerges from the early 1970s. During that time, macroeconomic policies were aimed at regulating the interest rate and the fiscal supply (Palley, 2007). Nevertheless, the scholars utilized different conceptual models in order to rationalise the monetary opportunities of the states. For instance, Poole (1970) adopts the neo-Keynesian model, while Sargent and Wallace (1975) opt for the Classical economic model. Naturally, those theories inflicted continuous criticisms, until the beginning of 1980s which marked a vivid transformation of the macroeconomic problem. Kydland and Prescott (1977), Barro and Gordon (1983) and Taylor (1993) are a part of the influential academics who studied the economic policies during that time. Their focus was more towards the historical learning, time-consistency and the self-interested gaming among economic policy actors that introduced the discussion between discretion and rules. Hence, the exact structure of the economy signifies the main source of disagreement between the researchers on
monetary policy, while the rational choices and the learning habits of the actors, as well as the presence of information asymmetries are inferior (Palley, 2007).
In general, the interaction between models and the significant amount of literature regarding the monetary choices and the economic outcomes led to the establishment of three opposing macroeconomic models, namely New Classical, Neo-Keynesian and Post-Keynesian. Those archetypes assess the structure of the economy and the restrictions that it attaches on the decision-making parties. In general, macroeconomic aspects such as unemployment, inflation, economic growth and income redistribution are in the centre of each model, but their logic is the main source of difference. Due to the fact that those elements represent the core of this dissertation, the exact distinction between the three types necessitate further elaboration (Ibid).
Firstly, Friedman (1968), Solow (1956) and Lucas (1973) developed the fundamental elements of the New Classical macroeconomics such as the Philips curve, neo-classical growth rate and neo-classical wage curve. According to the New Classical model, monetary policy is concerned with the stabilization of the nominal interest rate which would result in an optimal nominal demand growth rate. In a nutshell, this theory suggests that monetary
interest rate which will result in a raise of the nominal demand growth rate. Therefore, it is maintained that in the short-term, unforeseen macroeconomic legislations have implications on inflation, unemployment, growth and income redistribution, while the foreseen ones are influential only with inflation. On the contrary, in the long-term, macroeconomic policies are contemplated and affect only inflation levels. Considering all of this, the logic of the New Classical macroeconomics is straightforward (Friedman, 1968; Solow, 1956; Lucas, 1973). The unforeseen macroeconomic growth stimulates an upwards shift in the Philips curve, which results in a decrease in both the inflation level and the unemployment rate. The decline in unemployment is caused by the short-term increase in nominal wages which stimulates individuals to participate actively in the labour market. However, the real wage decreases producing an increase in the profit rates which also stimulates the investments and the economic growth. Nevertheless, in the long-term, the profit, as well as the proportion of investments and growth decreases, which restores the initial equilibrium, but with a higher inflation. This forces the policy-makers to strive for price stability and less inflation. The downside of this is that individuals and companies are pushed towards unproductive investments and ineffective labour supply (Ibid).
Secondly, Neo-Keynesian macroeconomic model differs from the New Classical model in two ways, namely the patterns in the Philips curve and the long-term profit consequences. Considering the short-term, expansionary policies raise the Philips curve, which signifies increase in inflation and profit levels, as well as decrease in the real wage. The result is a raise in the desired capital of the companies which increases wages. On the other hand, in the long-term, there is a decrease in the unemployment and profit levels and an increase in real wages, while the growth rate remains unaffected. Based on this, the macroeconomic policies can result in both short- and long-term implications to the elements. Thus, the Neo-Keynesian macroeconomic scholars conclude that the optimal macroeconomic policy is highly
dependent on the preferences of the policy-making agents (Palley, 2007).
Lastly, while there are certain similarities between the New Classical model and the Neo-Keynesian model, the Post-Neo-Keynesian type incorporates a profoundly different approach. The main characteristic is the trade-off between inflation rate and unemployment level. Tobin (1972) and Palley (1994) focus on the demand-pull economies and argue that inflation is important in regulating the labour market. In a similar vein, Myatt (1986) and Palley (1996) conclude that in a cost-push and conflict economies, the movement of the Philips curve is
