The challenge of low domestic investments needs to be dissected within an economic framework to comprehend its role as both a cause and consequence of Serbia’s economic and societal landscape. This context is intricately linked to the persistently low rates of economic growth in the Republic of Serbia, failing to align with the standards set by European Union countries—not the most advanced ones, but rather the countries of Central and Eastern Europe or the Visegrád Group.
Following the transition, global economic crises, debt crises, and the fiscal consolidations of 2014, decision-makers were confronted with the primary issue of high unemployment. They were tasked with choosing an economic growth model that would effectively address unemployment and uplift the standard of living.
Whether there was a conscious decision-making process regarding the selection of an economic growth model at that juncture or if it was perceived as a dilemma to be dealt with as the village burned down remains unclear.
Nonetheless, the model anchored in foreign direct investments emerged as the simplest and politically rational solution for policymakers grappling with the urgent need to curb high unemployment. Admittedly, contending with unemployment exceeding 20% left little room for more favorable alternatives.
Over the years, Serbia has become an exemplar in attracting foreign investors, yielding results in unemployment reduction. Despite the methodological changes and data discrepancies in the Labor Force Survey, a clear increase in employed individuals by 371,000 was evident from 2015 to 2023, based on registered employment data.
Concurrently, the total sum of foreign direct investments in Serbia has been gradually decreasing, inching towards an annual figure of five billion euros.
However, the economic growth model reliant on foreign direct investments, adopted to combat high unemployment, has fallen short in achieving robust growth rates. When examining the overall GDP, both per capita, Serbia has failed to make significant strides towards the levels of European Union countries. The period from 2015 to 2023 highlights brighter spots in 2018 and 2019, with GDP growth rates of 4.5% and 4.3%, while other years witnessed a range from 1.8% to 3.3%. This assessment omits 2020 and 2021, characterized by specificities such as GDP decline and subsequent rapid growth in the following year, all attributable to the COVID-19 pandemic.
All attained growth rates fall considerably short of the 5% or 6% benchmarks that would narrow the gap with Europe. They are even more distant from the aspired 7% growth rate, capable of doubling Serbia’s GDP if sustained for a decade.
With an understanding of this context, deviating from current economic and political discourse, the quest for unraveling the shortcomings of Serbia’s economic growth model, whether a conscious or unconscious choice, can commence.
One primary factor demanding focus is the issue of low domestic investments. The proportion of domestic private investments to GDP in Serbia is sometimes twice as low as that of countries such as the Czech Republic, Slovakia, and Slovenia. While acknowledging the presence of other contributing factors, two reasons explaining the low domestic investments are the unfavorable position of small and medium-sized enterprises compared to foreign investors and property insecurity.
Due to the indirect favoring of foreign direct investors and the lack of criteria governing the products and added value brought by foreign investors to Serbia, domestic small and medium-sized enterprises find themselves deprived of incentives and opportunities for increased investment.
From the perspective of business owners, the prospect of heightened investments becomes irrational when decision-makers lack the necessary understanding.
Another enduring challenge within the Serbian economy and society, likely to pose a greater struggle, is the legal insecurity surrounding property rights. Owners of small and medium-sized enterprises are understandably reluctant to invest in the further development of their companies when institutions inadequately safeguard property rights.
The issue of insufficient domestic investments as a catalyst for the failure of the current economic growth model is gaining increasing attention. It is evident that the existing model is falling short in achieving the desired growth rates. The initial signals from the Kopaonik Business Forum support this notion. However, it is crucial not to let the discussion rest solely on the broad explanation of institutional inadequacies, a fact undoubtedly true given the broad scope of institutions.
Concrete steps should be taken to address the problem, focusing on issues of property protection and the introduction of criteria governing subsidized foreign direct investments. Positive discrimination in favor of selected sectors should also be considered. These measures are essential to prevent the resolution of the economic growth model’s problems from being postponed. There is an indication that policymakers might respond by intensifying public investment spending by 2027, with a specific focus on the Expo 2027 project, thus enhancing the GDP growth rate.
While this economic policy measure might offer a short-term solution, the fundamental problem remains low domestic investments, resulting from the indirect favoritism towards foreign direct investments and the more challenging issue of property insecurity.
Until the fear of investment dissipates—fear that everything could be taken away overnight—the Serbian economy is unlikely to rejuvenate, emerging from a state of stagnation present for at least the last three decades.
