Country Economic Memorandum
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Publication
Serbia’s New Growth Agenda: Increasing Exports
(World Bank, Washington, DC, 2020-03-26)Evidence from several countries reveals that nations that have open economies tend to enjoy higher income than those with closed economies (Lind and Ramondo 2018). Openness to hosting multinationalfirms can lead to firms in receiving countries acquiring new technology and skills (Harrison and Rodriguez-Clare 2010), and to productivity-enhancing spillovers, particularly through vertical commercial relationships between foreign and domestic suppliers. Learning by exporting offers positive knowledge externalities, and it comprises myriad ways in which exports can stimulate growth in productivity, including development of exporter capabilities, such as marketing new products; upgrading product quality; and acquiring expertise in managing customer relationships by dealing with foreign buyers. The value from knowledge spillovers and the promise of job creation are often seen as positive externalities and are usually brought in to justify policy interventions in the form of tax incentives, grants, and other concessions (access to land sites at minimal or low cost). It is often thought that spillovers from foreign firms are driven by transfers of technology and by learning about markets by exporting. Learning from foreign buyers is supposed to be channeled directly to the exporters or passed through to local suppliers and competitors in domestic markets. There is some evidence that in Serbia, the international competitiveness of domestic exporters has been diminishing, and government programs to support links with markets receive meager financial allocations. Recent successes in exports of manufactures have revealed the great potential of Serbia, but these have been driven by only a few firms, many of them foreign-owned. This has lowered expectations of inclusive and widespread growth. There is also a growing sense that government efforts to promote exports and attract export-oriented investment in Serbia have instead been directed to attracting foreign direct investment (FDI) at the expense of export promotion, which has not been particularly effective. A looming question has become whether the current policy mix for promoting competitive Serbian exports needs realignment. -
Publication
Serbia's New Growth Agenda: Removing Regulatory Barriers to Competition
(World Bank, Washington, DC, 2020-03-26)This note outlines barriers to competition in product markets based primarily on the screening of Serbian regulations using the OECD Product Market Regulation methodology and comparison to regulations in the OECD. The note focuses on topics covered by the 2018 OECD-WBG product market regulation (PMR) indicators such as regulation of network industries, professional services, state-owned enterprises, and restrictions on foreign businesses. The OECD-WBG product market regulation indicators are a screening tool that measure the degree to which regulations promote or inhibit competition. The indicators rely on qualitative information on over 1,000 features of economy-wide and sectoral regulations. The qualitative information is collected and coded based on a standardized questionnaire and later aggregated into quantitative scores that run from 0 (least restrictive) to 6 (most restrictive) using standardized weights. The analysis in this note relies on primary data for Serbia collected by the World Bank Group and comparative data for other countries collected by the OECD. To ensure comparability across countries the data is current as of January 1, 2018. The data has been collected throughout 2018 and the indicators included in this report are as of July 2019. The PMR indicators for Serbia have been calculated as part of the partnership between OECD and WBG Markets and Competition Policy Team and the primary data has been collected in collaboration with more than 30 public and private institutions in Serbia. -
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Serbia’s New Growth Agenda: Labor Market for Growth
(World Bank, Washington, DC, 2020-03-26)Addressing Serbia’s labor market problems is critical to enhancing growth and job creation. Low labor force participation, relatively high unemployment, particularly among youth and other disadvantaged groups, and rising skills gaps currently impede efficient use of human capital and the prospects for sustained economic growth and welfare improvements. Although there has been progress, more jobs are needed if Serbia is to catch up with neighboring countries in the European Union (EU). Robust growth in employment will require a comprehensive agenda: boosting private sector job creation on the demand side; reducing barriers and disincentives to work and improving worker skills on the supply side; and ensuring that labor market intermediation and institutions facilitate employer-employee matches. This note focuses on current labor market performance and on skills and labor market policies to support inclusive growth. Employment in Serbia’s formal private sector is low; the full workforce potential is underutilized; and labor productivity and real wages have been relatively flat. Improving skills and reforming labor market policies can boost both employment and productivity. This note’s focus on skills and labor taxation, regulation, and intermediation allows it to discuss specific policy actions to support Serbia’s New Growth Agenda. Tackling these issues will not only enhance Serbia’s human capital and productivity for higher growth but will also boost people’s incomes, reduce poverty, and grow the middle class. -
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Serbia’s New Growth Agenda: Job and Training-Ready
(World Bank, Washington, DC, 2020-03-26)Serbia now has an exceptional policy opportunity to promote skills development and create a productive future workforce and a prosperous economy. With its population aging and the nature of work changing in a technologically transforming and globalizing economy, a highly skilled Serbian workforce would help generate growth in productivity. A more productive economy will then help Serbia to approach the living standards of its Western European neighbors as it moves forward on the path to EU accession. For Serbia, this is a policy imperative. Serbia needs a surge in job creation, which will have to come from higher private sector dynamism and address persistent labor market challenges. Sustained employment increases will require on the demand side a boost in private sector job creation; and on the supply side reducing barriers and disincentives to work and improving worker skills. In Serbia, labor market status is associated with educational attainment (Figure 2). Higher literacy is associated with getting more skilled jobs (white-collar occupations at all skill levels) and often a job that is of higher quality. -
Publication
Serbia’s New Growth Agenda: Investment for Growth
(World Bank, Washington, DC, 2020-03-26)Because of its difficult starting position in transitioning to a market economy, so far macroeconomic policy in Serbia has mainly been concerned with achieving stability. At the start of its transition in 2001, Serbia was practically bankrupt, burdened with old overdue debt and huge arrears in budgetary payments, especially pensions. At the end of 2000, public debt was 175 percent of GDP and external debt was 128 percent. In both 2000 and 2001, inflation was over 80 percent. High inflation and external imbalances were the main concerns all the way through the global financial crisis (GFC). The GFC (as well as external shocks) brought multiple recessions between 2009 and 2014, and a major widening of the fiscal deficit. Since 2014, the focus has been on consolidating public finances, in addition to keeping inflation low. While macroeconomic stability is a necessary precondition for growth, the question is whether Serbia can do more to create a pro-growth environment. Serbia has succeeded in keeping inflation low over recent years; the current account deficit (CAD) is now low enough to be manageable and is almost entirely financed by non-debt-creating flows; large fiscal deficits have been converted to a surplus; and public debt is heading downward. However, growth is still meager. To ensure that the Serbian economy grows more quickly, the focus should be on increasing investment—both private and public. -
Publication
Serbia’s New Growth Agenda: State Aid
(World Bank, Washington, DC, 2020-03-26)Serbia spends relatively large amounts on state aid programs, many of which will have to be phased out or restructured to comply with EU laws. There is room to restructure the existing programs to target activities that have more growth and job dividends; for example, by targeting startups and innovating firms and phasing out support for ailing industries, state-owned enterprises, and large or old private domestic firms. Although Serbia’s program to attract foreign direct investment has helped create new jobs, the focus should now shift to instruments that facilitate technology spillovers and domestic linkages. Finally, improving the scope and quality of data collection will contribute to better monitoring and more efficient targeting. The sooner Serbia starts to adjust its state aid programs, the larger the economic and fiscal benefits will be. -
Publication
Serbia’s New Growth Agenda: Forging a New Future
(World Bank, Washington, DC, 2020)Although current growth rates are improving incomes in Serbia, they are not bringing the country closer to average living standards in the European Union fast enough. To reach European levels of prosperity, Serbia must embrace a new, ambitious agenda for growth. Serbia can become a fast-growing, sophisticated modern economy, driven by its private sector, if it maintains the hard-won gains of macroeconomic stability and advances the transformation in the following seven areas: boosting investment, financing growing firms, skilling workers, raising productivity, expanding exports, enabling business, and unleashing competition. Reforms will at once promote growth and build needed resilience for the coming period and beyond. The challenge is not only economic. It requires courageous, decisive, and bold political commitment as well as strengthening government effectiveness and accountabil -
Publication
Finance for Growth: Micro, Small, and Medium Enterprise Financing
(World Bank, Washington, DC, 2019-12-18)This report provides an overview of the demand and supply side of MSME finance as well as certain aspects of the enabling environment. A detailed analysis of the financial sector infrastructure for MSME financing and the secured transactions framework was outside of the scope of this report but would be a useful complement. Equally useful would be a detailed analysis of bank efficiency, including competition and profitability aspects, and its effect on MSME finance. -
Publication
Serbia’s New Growth Agenda: FDI Spillovers
(World Bank, Washington, DC, 2019-11-28)This note examines the relationship between the presence of foreign firms and total factor productivity (TFP) growth of domestic firms (called ‘FDI, Foreign Direct Investment, spillovers’) in Serbia over the period of 2005-16. The analysis finds evidence of FDI spillovers in Serbia. Domestic firms on average enjoy higher productivity because of the presence of FDI firms in the economy. Moreover, domestic firms that supply to FDI firms or are located in the same industry as FDI firms, enjoy higher productivity. This presumably stems from technology transfer, higher quality standards, or higher competition. However, productivity of domestic firms sourcing from industries with a large share of FDI firms find their productivity reduced, likely due to markups by foreign firms. The effect of FDI on productivity of domestic firms also varies by firm size and industry. Small firms benefit more from spillovers associated with backward linkages (when they supply to an FDI firm) but are worse off with more horizontal FDI (when they compete with FDI firms in the same industry). Firms in high-tech industries benefit more from horizontal and backward FDI spillovers, but firms in low-tech industries experience no effect. Lastly, firms in the transport manufacturing industry do not enjoy any FDI spillover from foreign firms in their industry. -
Publication
Serbia's New Growth Agenda
(World Bank, Washington, DC, 2019-03)Serbia is not growing as fast it could. Investment and productivity are low and slow growing; and the continuing large role of the state in the economy makes it difficult for the private sector to accelerate economic growth. Serbia is well-positioned to turn itself into a fast-growing, sophisticated modern economy, driven by its private sector. To succeed, Serbia needs a new strategy, a New Growth Agenda (NGA) to speed up growth, enable catch-up with its peers in Central and Eastern Europe and hasten convergence with the EU.