The future of Serbia’s economy

Competitiveness and economic growth are becoming increasingly challenging issues in an unstable, globalized world. In these circumstances, small economies should not strive to change the global rules of the game, but should rather aim at setting the right policies to make the most of their current areas of growth - and create new ones.

Serbia is a small and open economy in south eastern Europe. In terms of size and population, we’re in the middle of Europe, in terms of the the level of development we’re considerably below the European average, while in terms of growth factors we’re close to the top.

This suggests that the growth potential in Serbia is large. The structural economic reforms that we’re undertaking will be the key to unlocking it. If we manage this, as early results suggest we can, Serbia is expected to be the economic tiger of south eastern Europe. Although located on the crossroads between East and West, Serbia is committed to creating a social and economic system based on Western standards, at the same time further improving economic relations with our Eastern partners, both in terms of investments and trade.

A brief history of Serbia’s economy

From 2008, Serbia was facing several economic challenges, some of them driven by external factors (such as the global financial turmoil and the Eurozone crisis), but some of them being also driven by internal factors (macroeconomic instability, an incomplete economic transition, floods).

Until 2008, Serbia’s economic growth model was import and consumption driven, financed by privatization revenues and borrowings. This is why Serbia was facing large macroeconomic imbalances: including the fiscal and current account deficit, high unemployment and volatile inflation. In order to reverse the trends and put the country on a dynamic and sustainable growth path, led by investment and imports, it was necessary to carry out economic reforms consisting of macroeconomic stabilization and removing the barriers to doing business.

The reform agenda was sealed by the arrangement we struck with the IMF a year ago, and the three positive revisions suggest a successful implementation of the ambitious program. As a result, the general government deficit has been cut from 6.7% GDP in 2014 to less than 3% of GDP in 2015. Our aim is to reduce the deficit to below 2.5% GDP by 2017.

Although it was expected that the fiscal consolidation program would cause a recession in 2015, our 2015 growth rate was positive, close to 1%. We perceive this as the consequence of the efficient design and credibility of the economic reforms program. Namely, before starting the consolidation, we have started a set of competitiveness enhancing reforms, by making labour markets more flexible, tackling the shadow economy, reforming the bureaucratic procedures for construction permitting and bankruptcy legislation, introducing e-filing for tax returns, accelerating development of infrastructure, etc.

As a result of these reforms, in 2015 Serbia jumped from 91st to 59th position on the Doing Business rankings, which is the single largest change in a country’s position in our part of the world. We expect to post similar results in the World Economic Forum’s competitiveness report in 2016. Macroeconomic stabilization and competitiveness-enhancing reforms have had an impact: Foreign Direct Investments (FDIs) in Serbia posted growth of close to 30% in 2015.

The rise of FDIs in Serbia is higher than in almost any country in central and south eastern Europe, which suggests that it is not only the consequence of the expansionary monetary policies of global players, but also the result of our reforms. Therefore, due to a double-digit rise in exports and investments, the forecast negative growth rate has been converted into positive one.

Higher ambitions for the future

Although the first results are promising, our ambitious are much higher. We want to make a quantum leap in terms of growth, by unlocking and enhancing the main growth drivers – physical capital and human capital, as well as technology.

Investment in physical capital in Serbia (relative to GDP) is still one sixth lower than the rate required to achieve our targeted growth rates of over 4%. We intend to increase it by boosting public investments in infrastructure and creating a friendly environment for a considerable rise in private investments, by tackling the red tape and improving the efficiency of the legal system.

In terms of public investments, we are aimed to boost this spending from 3% of GDP in 2016 by 1-1.5% of GDP in the next few years, thus ensuring completion of the full-scale highway from Hungary to Macedonia and Bulgaria (Corridor X), the highway from Belgrade to Adriatic coast in Montenegro (Corridor XI) and the fast railways from Belgrade to Budapest, by 2018. We believe that successfully completing these projects will reinforce Serbia’s central position in terms of investments, transport and trade in this part of the world.

Our structural reforms are also aimed at the improving the availability and the quality of human capital, by conducting quality-enhancing reform of all levels of education, which have been postponed for a long time. We want not only fast growth, but also smart and sustainable growth, which would result in Serbia reaching the EU-average level of development.

The state of our institutions are fundamental to these plans. Although institutions are to some extent determined by the mentality, religion and other social properties of the nation, we believe that the introduction of good laws and their persistent and effective enforcement will result in considerable improvement of the quality and efficiency of institutions.

A package of reforms, combined with the natural advantages of our geographical position, our wide network of free trade agreements and political stability should lead us to a natural growth rate of 4-5% per year in the coming years. Successful completion of economic reforms, higher growth rates and finalization of EU accession negotiations by the end of the decade will represent the final and formal certification of Serbia’s success in economic, social and political transition to a liberal, market-oriented European democracy.

Author: Aleksandar Vučić, Prime Minister of the Republic of Serbia. He is participating in the World Economic Forum’s Annual Meeting in Davos.