Competitiveness and Sustainable Economic Development in Serbia South Eastern Europe After EU Enlargement and Before Accession 4-5 April 2005 Jelena Galić Economics Institute, Belgrade

2 1. Competitiveness as a Strategy Healthy market environment suitable for a larger inflow of foreign investments and investments in general Healthy market environment suitable for a larger inflow of foreign investments and investments in general Enhancement of the competitiveness of domestic producers (by increasing value added, through the modernization of material, technological and information infrastructure, as well as an efficient allocation of economic resources) and an increase in exports Enhancement of the competitiveness of domestic producers (by increasing value added, through the modernization of material, technological and information infrastructure, as well as an efficient allocation of economic resources) and an increase in exports Sustainable economic development - servicing of foreign debt - financing of investments in new equipment and technology - increase in GDP and living standards Sustainable economic development - servicing of foreign debt - financing of investments in new equipment and technology - increase in GDP and living standards

3 2. The Results of Reforms – Demand-Based Growth  Achieving economic growth and macroeconomic stability  Large inflow of net capital Donors’ assistance (5% of GDP over the period ), Donors’ assistance (5% of GDP over the period ), Rescheduling of foreign debt (Paris and London Club and IBRD), Rescheduling of foreign debt (Paris and London Club and IBRD), Privatization revenues (4.3% of GDP in 2003 and 0.7% of GDP in 2004), Privatization revenues (4.3% of GDP in 2003 and 0.7% of GDP in 2004), Remonetization based on the inflow of foreign exchange funds, which were outside the domestic banking system, and increased intermediation resulting from an abrupt increase in foreign currency deposits (from € 1 million in 2000 to € 2.07 billion in 2004). Remonetization based on the inflow of foreign exchange funds, which were outside the domestic banking system, and increased intermediation resulting from an abrupt increase in foreign currency deposits (from € 1 million in 2000 to € 2.07 billion in 2004).  Serbia’s public debt was reduced from 119% of GDP in 2000 to 80% of GDP in 2004  Official foreign reserves increased considerably from USD 516 million (at end 2000 – 1.2 month-imports of goods and services) to USD 3.55 billion (at end 2003 – 4.4 month-exports), i.e. USD 5.15 billion (at end 2004).  Given the expected decrease in the inflow of net capital, the hitherto demand-based domestic growth and resulting high current account deficit and fiscal deficit are becoming unsustainable.

4 Main Macroeconomic Indicators

5 3. Challenges to Macroeconomic Stability in the Coming Period  The large and inefficient public sector remains a serious obstacle to growth, the agent of which is the private sector (in 2004, consolidated public consumption in Serbia amounted to 45.3% BDP).  The level of investment in Serbia is insufficient to support sustainable growth. The ratio of investment to GDP recorded a mild increase, from 14.2% in 2000 to 16.5% in However, it is still low in comparison with the regional standards (in Bulgaria and Croatia, it is about 20%).  Servicing of foreign debt – at the end of 2004, it amounted to c. USD 13.5 billion.

6 4. Competitiveness of the Domestic Economy  A steady increase in the foreign trade deficit points to the existence of long- term and structural obstacles to the revival of competitiveness of the domestic economy. Foreign trade deficit in Serbia, , in mil usd  Despite the liberalization of foreign trade, there are still certain unfavourable trends:  Unfavourable pattern of exports – dominance of low-grade finished products, i.e. labour and resource-intensive ones (agricultural products and low-grade finished manufactures),  Imports include energy products, low-grade finished textiles (intended for outward processing) and specified technology and capital-intensive products (mostly consumer goods),  Higher diversification of exports, which points to their very low specialization and a lack of the strategy of recognizable national exports.

7 SM Exports by Sector (in USD mil.) and Share in Total Exports (in %)

8 SM Imports by Sector (in USD mil) and Share in Total Exports (in %)

9 Factor Intensity of Serbia’s Trade with the EU

10 Competiveness of the Serbian Economy According to the World Economic Forum

11 5. Toward the Policy of Competitiveness/Sustainable Economic Development and EU Accession  In the coming period, sustainable economic development will be based on the export-oriented economy and exports with a higher value added.  The set of economic policy measures aimed at enhancing the global competitiveness of the Serbian economy should be geared to:  Maintenance of macroeconomic stability (by implementing monetary, fiscal and foreign exchange policies in an adequate way).  More intensive implementation of “second-generation reforms” geared to: Creation of a more attractive investment environment and larger FDI inflow; Creation of a more attractive investment environment and larger FDI inflow; MSP sector development and better performance of the export-oriented sector of the economy; MSP sector development and better performance of the export-oriented sector of the economy; Further development and strengthening of institutional infrastructure; Further development and strengthening of institutional infrastructure; Confrontation with the painful process of restructuring large public enterprises; Confrontation with the painful process of restructuring large public enterprises; Adequate trade policy and trade integration policy, including all 3 forms of integration – regional, multilateral and European. Adequate trade policy and trade integration policy, including all 3 forms of integration – regional, multilateral and European.