About the positive influence of external factors, ie. large offers of cheap capital on world markets, the inflow of FDI is evidenced by the fact that other countries in the Western Balkans in the past few years have achieved relatively large inflows on this basis. Thus, in the previous three years, the average amount of FDI inflows in the Western Balkans was over 6% of GDP, while in Serbia it averaged close to 7% of GDP.
In order for the Serbian economy to grow at a rate of about 4-5% per year for a longer period, it is necessary for total investments to be at the level of about 25% of GDP. Since foreign investments are already high, in order to achieve this goal, it is necessary to significantly increase domestic private investments, which are low due to small domestic savings and distrust of domestic entrepreneurs in business conditions, explains Sasa Randjelovic, professor at the Faculty of Economics, University of Belgrade.
Foreign direct investment reached about 3.8 billion euros last year. What do you think is the main reason for high FDI inflows?
The large inflow of foreign direct investment (FDI) in Serbia was influenced by both external and internal factors. About the positive influence of external factors, ie. large offers of cheap capital on world markets, the inflow of FDI is evidenced by the fact that other Western Balkan countries in the past few years have achieved relatively large inflows on this basis.
Thus, in the previous three years, the average amount of FDI inflows in the Western Balkans was over 6% of GDP, while in Serbia it averaged close to 7% of GDP.
On the other hand, when it comes to internal factors, the strong inflow of FDI in Serbia was positively affected by the reduction of macroeconomic risks, due to successful fiscal consolidation, as well as the existence of a very generous system of financial and non-financial incentives for foreign investment.
When the investor chooses the country in which he will realize his investment, he takes into account the expected return, as well as the expected costs, ie. risks arising from that investment. Considering that generous financial incentives are awarded for attracting investments in Serbia, this may mean that the general business conditions, ie. risks related to doing business in Serbia (legal uncertainty, corruption, inefficiency of the administration, etc.) are still high, which is why it is necessary for the state to grant subsidies, so that the investor’s return on investment is higher than the risk.
This would mean that the amount of subsidies that need to be allocated in order for the investment to be realized is inversely proportional to the quality of the business environment.
Also, it can be noticed that the inflow of FDI in Serbia and other countries of the Western Balkans, in relative terms, is many times higher than in the countries of Central and Eastern Europe (CEE), which can be partly explained by the difference in wage costs. Thus, the average nominal net salary in the CEE countries is about 80% higher than in Serbia, while in relation to the average of Western Europe, the difference is significantly higher (over 5 times).
How do you assess the current model of attracting FDI?
When it comes to attracting investment, the state should make greater efforts to eliminate key sources of business risks, such as the inefficiency of the judiciary and administration, as well as corruption. However, in the conditions when most countries of the Western Balkans and CEE grant certain incentives for investments, it is probably necessary that some system of incentives exists in Serbia as well.
The existing model of attracting FDI is designed to encourage mass employment of middle and lower skilled workers, since the incentives are focused primarily on projects that create jobs for relatively low-paid manual jobs, which create relatively little added value.
Given that unemployment among this group of people in Serbia is significantly reduced, due to emigration and employment, in the coming period the focus should be on encouraging investments that generate positive external effects for society as a whole.
This primarily refers to investments that lead to the employment of a highly qualified workforce, which will be engaged in more complex jobs and as a result of which higher added value created in Serbia will result from that activity. In addition, a certain type of incentive is justified for larger investments, which will entail a cluster of smaller investments, as well as for research and development, and the generation of innovations.
In that sense, the introduction of tax incentives in the field of corporate income tax in 2019, aimed at encouraging research, development and innovation, is assessed as one of the possible courses of action.
Is there still room for public investment growth in GDP?
After a long period of low public investments, they have grown in Serbia in the past few years, so that in 2019 they amounted to 4.9% of GDP, which is assessed as adequate, given the budget situation and infrastructure development. The acute problems that the Serbian economy is facing due to the outbreak of the pandemic will affect the decline in tax revenues and the growth of current expenditures (health care, subsidies, social assistance, etc.), which will inevitably increase the fiscal deficit.
In this regard, the priority of the state in the distribution of funds will justifiably be on current expenditures, so it is possible that due to this, as well as due to the impossibility of physically performing some works in conditions of movement restrictions, the level of public investment in Serbia in 2020 and smaller. However, after the end of this crisis, which is expected to be temporary, public investments should return to the level of about 4.55% of GDP next year, which enables the connection with CEE countries in terms of infrastructure development.
To what extent is public investment management important and is there room for improvement?
To have a positive impact on economic growth, public investment policy must be sustainable and efficient. Sustainability means the requirement that public investments, amounting to 4.5-5% of GDP, be incorporated into a sustainable level of fiscal deficit, which in the medium term should not exceed 1% of GDP.
On the other hand, in order for public investments to be efficient, they need to be focused on the most socially profitable projects and to be realized in an efficient way. This means that it is necessary to introduce a meritorious system of cost-effectiveness assessment and selection of projects to be financed by the state, contracting works in a transparent and open manner, through tenders, and improving the system of monitoring the quality and speed of project implementation.
In addition, it is necessary to introduce systemic incentives (and penalties) for municipalities and cities, which would make local governments increase the amount and efficiency of investments in local infrastructure, Nova Ekonomija reports.
