The question of whether Serbia is caught in the “middle-income trap” has been a topic of debate in the economic academic community for years. Despite moderate growth, Serbia has not significantly closed the income gap with Western Europe, and it even lags behind many Central and Eastern European countries.
At a panel hosted by the World Bank, the report “Growth to High Income in Europe and Central Asia” was discussed. According to Ivajlo Izvorski, the World Bank’s chief economist for Europe and Central Asia, 27 countries worldwide have reached high-income status since 1990. Ten of these countries are from Europe and Central Asia, all of which joined the EU. Poland, Romania, and Croatia recently surpassed the World Bank’s threshold of USD 14,000 GDP per capita, marking their transition from medium to high income.
However, many countries in the region, including Serbia, have struggled to reach high-income levels due to slower reforms, a reduced role of the state in the economy, and the lack of efficient, innovative companies. Serbia’s GDP per capita currently stands at $11,447, and while its economic growth has been strong, it has stagnated since 2010. The country’s growth is far below East Asian nations and has slowed in comparison to other European countries.
Pavle Petrović, former president of the Fiscal Council, highlighted Serbia’s rapid investment growth, noting that 42% of investments come from the state or public enterprises, with a smaller share from domestic investments (19%). This state-driven growth model is unsustainable and likely to lead to a slowdown in GDP growth and income increases.
Serbia’s economic growth is also hindered by slow productivity improvements. While the productivity growth in CEE countries averages 2.8%, Serbia’s is just 2.5%. Furthermore, much of the investment is focused on traditional sectors like agriculture and trade, rather than on high-tech industries.
Cori Udovički, president of CEVES, pointed out that while Serbia has high foreign direct investment, it lacks technology transfer to domestic companies. She emphasized the need for domestic companies to invest and innovate, as only 258 new domestic companies with over 250 employees exist.
Milojko Arsić, a professor at the Faculty of Economics in Belgrade, identified several reasons for Serbia’s slow economic progress, including historically low domestic savings, weak institutions, and a history of regional instability, which has diverted resources from economic development. Arsić concluded that these factors, along with the country’s turbulent past, have significantly hindered Serbia’s growth potential.
The combination of weak institutions, slow productivity growth, and a state-led investment model suggests that Serbia faces significant challenges in breaking free from the middle-income trap and achieving high-income status.
