Can Serbia jump over the trap of medium development and enter the club of countries with high income, where several countries of Central and Eastern Europe (CEE) have already joined?
This was the topic of the panel “Can Serbia get on the path of rapid growth” at the Kopaonik Business Forum.
The answers mostly revolve around investments. Only, unlike previous years, it is not so much a question of the amount of investments, but of their structure.
Pavle Petrović, president of the Fiscal Council, presented an analysis according to which less developed countries have the potential for faster growth than developed countries, since they can buy technology and knowledge, while developed countries have to innovate, which is known to be more expensive and slower.
Proof of this is the CEE countries, which are about half of the level of development of Western Europe, but they are approaching it by growing twice as fast as developed countries for a long time.
Those CEE countries are to us what Western Europe is to them. We are about half of their development. It’s just that we are not growing faster than them, says Petrović.
“Serbia’s GDP per capita is slightly above half of CEE and it is to be expected that it will grow much faster, but it is growing at the same pace.” We’re not catching up. Our economy grows by 3.5 to 4.5 percent per year, and it has the potential of 5-5.5% per year,” notes Petrović, adding that in 2005 we were at 55 percent of CEE development, and in 2022 at 56 percent.
In his analysis, he reveals that several factors are why we are not catching up with countries such as the Czech Republic, Poland, Slovakia or Slovenia.
First of all, the reason is that the share of branches of the processing industry with high added value, with high technologies in our country is stagnating or even declining, while their share in GDP has almost reached the same as in developed countries.
Also, he points out that there is a perception that our IT sector is developing God knows how fast, but in fact it is just keeping up with the region. It is experiencing significant growth, but so are other countries.
On the other hand, most of the growth in IT is exported.
“This indicates that the IT sector in Serbia is like an island that only exports and is not integrated into the economy.” Can it continue to grow without the support of the domestic economy?”, notes Petrović.
Ultimately, the cause of the stagnation lies in the investment. Serbia records very high foreign direct investments (FDI) and public investments. But only 30 percent of investment in the manufacturing industry goes to advanced branches, and in CEE over half.
On the other hand, domestic private investments are too low.
“The development of the economy so far is based on traditional sectors and cheaper labor force.” That growth model will soon be exhausted and growth will stall – that’s the trap of middle development.
The previous growth model has led to a drop in unemployment to nine percent, to an increase in wages, but the traditional sectors cannot sustain further growth in those wages. It cannot compete with Asia.
We have to turn to more advanced sectors that can pay those high wages,” says Petrović.
He concludes that we can avoid the trap of medium development only if the domestic private sector, especially small and medium enterprises, invests strongly.
“That’s what neophono is for, the improvement of institutions, the rule of law, and the reduction of corruption.” Since 2014, the quality of institutions has been systematically declining, according to international sources. The destruction of insistence must stop,” Petrović said, adding that in order to take advantage of the geographical proximity to the EU and “nearshoring”, Serbia must actively show that it is for the EU and Euro-Atlantic integration, “and not maneuver between different worlds.”
Dušan Vujović, member of the Association of Serbian Economists and former Minister of Finance, specified the problem of domestic private investments.
“Why are domestic private investments small, why do banks invest large sums of money in government bonds, and not finance the investments of companies?”
You can’t get a loan, you can’t get a building permit.
FDI is high because it is not affected by corruption. We tear our own, and we let the foreigners go.
And they should be released, but why can’t our entrepreneur get a loan and do something?
Not every municipal official can decide who will invest. He will stop a million euro project for 1,000 euros. In such a system, the decision-making level is raised, so the president of the mall decides whether there will be bread in the store. It is the system that brought down the USSR,” said Vujović.
He also referred to those high public investments.
“In America, private individuals build private stadiums where people come and spend billions and then pay athletes millions. It has nothing to do with the economic growth strategy. What does it mean for us to invest an additional five billion euros in something that will bring benefits in 20 years.
It’s a matter of management, and not on paper, but in real life,” said Vujović, adding that the share of investments of 22.6 percent of GDP “doesn’t mean anything if we’re going to spend it that way.”
Milan Nedeljković, dean of FEFA, pointed out that SMEs cannot drag down the economy, but large domestic companies can.
“In Serbia, we have centers for research and development of foreign companies. They employ our people who acquire knowledge. But that knowledge remains closed if those people don’t go out afterwards and start their own companies or go to domestic companies and apply it. That is why the policy of subsidies should stimulate foreign companies to connect research and development with domestic companies”, said Nedeljković, adding that the Serbian economy lags behind the region in terms of patents and commercialization of ideas.
