Is Serbia today, when it is at about 50 percent of the development of the countries of Central and Eastern Europe and only 33 percent of the level of Western Europe, approaching them thanks to the “advantages of lagging behind” or is the gap still widening?
What are the reasons why this gap, like the productivity gap, is not shrinking relative to CEE or at least not shrinking fast enough? What do we need to do to finally start using our potentials?
These are the questions to which Pavle Petrovic, Professor of the Faculty of Economics in Belgrade and Corresponding Member of SANU, and Mirjana Gligoric Matic, Assistant Professor at the Faculty of Economics in Belgrade, tried to provide answers based on extensive comparative econometric analysis of indicators in Serbia, CEE and Western Europe in the book “Convergence of the periphery towards the developed EU and the factors that determine it: Empirical research and implications for Serbia”.
According to the analysis based on data from 2015 to 2019, Serbia does not converge in per capita income and productivity of the processing industry towards comparable CEE countries.
The initial finding is that “the corresponding growth rates in Serbia are lower than the CEE average, which means that it lags behind them instead of catching up.”
On the other hand, Serbia, as one of the least developed European countries, should use the “lag advantage” and achieve higher rates of economic growth in the long run than the CEE countries, which are on average almost twice as economically developed.”
Using econometric models, they conclude that the main factors lagging behind are the poor quality of institutions reflected in the rule of law, corruption, efficiency of public administration, quality of public sector services, low level of investment and poorer quality of education.
“We have shown that Serbia, if it reforms its institutions, and at the same time improves education and increases investments, would be able to initiate relatively fast convergence towards developed European countries. This specifically means that GDP growth could increase from the current three to 3.5 percent to almost five percent. The driver of such GDP growth would be the rapid growth of productivity in the manufacturing industry, which would accelerate from the current four to about 5.5 percent. If, along with the improvement of institutions and other reforms (public enterprises, education), an economic policy stimulating the development of the tradable part of the economy (eg a stimulating dinar exchange rate) would be pursued – GDP growth could be higher than five percent, and productivity growth in the processing industry, it could be around six percent,” state the authors of this book, which will be presented at SANU.
In more detail, Serbia loses about 1.6 points of economic growth every year, and the lion’s share refers to the quality of institutions – as much as 1.1 points. The remaining 0.5 points relate to higher investment and improved education.
“Strong institutions have a direct positive effect on productivity growth, but also an important indirect effect through the impact on increasing investment. Therefore, if Serbia improves the rule of law and reduces corruption, it could accelerate the growth of productivity in the manufacturing industry from the current four to about 5.5 percent, simulations based on the productivity model show.”
If we divide Europe into three parts, the most developed Western Europe, southern Europe consisting of Portugal, Spain, Italy and Greece and CEE, we see that the last and closest group of countries is rapidly approaching Western Europe with a GDP growth rate twice that of developed Europe in the previous five years.
The authors conclude that CEE countries make extensive use of the “lagging advantage” as they are at 60 percent of per capita income in Western Europe.
Otherwise, the “advantage of lagging behind” translates into high economic growth so that less developed countries can take over (buy) ready-made technologies and knowledge that advanced countries have already developed and thus relatively quickly improve their productivity and economic growth based on it.
On the other hand, developed countries can use this channel of productivity growth to a much lesser extent, and they must rely predominantly on their own innovations.
On the other hand, the south of the EU, which is at 77 percent of the average in Western Europe, is growing at the same pace as it is, so there is no convergence.
“Although Serbia is only half the per capita income of the CEE countries, its economic growth is a quarter lower than in CEE, instead of significantly exceeding it. It follows that the Serbian economy not only does not converge towards a doubly developed CEE, but is increasingly lagging behind those countries,” the book states, concluding that Serbia is not even close to using its potential for convergence towards developed European countries due to bad institutions, non-existence of the rule of law, corruption, as well as due to investments smaller than in CEE.
When it comes to investments in the period from 2015 to 2019, the investment rate in Serbia was 18.8 percent, compared to 21.6 percent in CEE and 22.5 percent in Western Europe.
If we go back to the period of development in which Serbia is today, CEE countries have invested an average of 24 percent of their GDP.
It is also important whether these investments in the processing industry, which is the carrier of foreign trade, or in services, are also non-tradable goods.
In Serbia, about five percent of GDP is missing, and two percent of that in industry, although in 2018 and 2019, there is an increase in these investments.
Also, one of the reasons for the lack of investments is the public sector, and above all public companies.
The state and public companies should increase investments by 1.5 points of GDP, of which only EPS 0.5 points.
“In recent years, a fifth of the total state investments (almost one percent of GDP) go to investments for the army and police, which is about three times more than in other CEE countries. These investments hardly have any positive impact on economic growth. Instead, it is necessary to increase investments in infrastructure, especially in health, education and environmental protection, where the needs are huge and investments are insufficient,” conclude Petrovic and Gligoric.
However, the main structural problem hampering economic growth in Serbia is the poor quality of institutions.
“The overall quality of institutions in CEE is almost 30 percent better than in Serbia, and when you look at corruption control and the rule of law, CEE is 35 percent better than Serbia,” the analysis said, noting that the quality has been declining over the past five years, Danas reports.
