Tweaks not U-turns: how to future-proof Serbia’s growth?

An economic issue that drew the most attention during the just past presidential election campaign was whether Serbian government’s reliance on foreign direct investment (FDI) is a sustainable strategy to develop the economy.  

Attracting foreign investment and removal of state influence in the economy has been a dominant approach to Serbian development since Milošević was toppled in 2000. During the presidential campaign PM Aleksandar Vučić highlighted his government’s achievements in drawing in foreign investment. Government-reported level of FDI last year was around € 2 billion, the highest since Vučić’s Serbian Progressive Party (SNS) took power in 2012, but below the FDI inflows before the global crisis of 2008. A significant part of the investments went into labour-intensive industries, where the government subsidies for are high, and has led to the increase in the employment rate from around 35% in 2012 to around 45% in 2017.  

Opposition candidates, including Vuk Jeremić and Saša Radulović, argued for greater state involvement in the economy and reduction of subsidies to foreign investors, which they see as excessive and even disadvantageous to local investors. Their criticism of Serbia’s development strategy is that the growth in foreign investment is unsustainable because it relies on attracting investors through low labour costs and provision of high subsidies. Another major concern with FDI-driven development is erosion of workers’ rights in order to appease investors, like in the case of the Leskovac factory of South Korean cable manufacturer Yura where workers were allegedly asked not to take toilet breaks during entirety of their shifts.

Additional concerns were previously voiced by several economists, most notably by economic commentator Milan Kovačević and Uroš Delević from Universty of Reading, who argue that rather than focusing on labour-intensive FDI, Serbian state should instead focus on securing FDI in more advanced, high-tech industries and intervene in the economy to ensure technological development. The scale of involvement these commentators suggest ranges from limiting subsidies to more sophisticated sectors and insisting that foreign companies use more Serbian inputs in production, to direct government investment in industries and protection of strategic sectors like telecommunication.

Even the most obvious benefit of current development model, higher employment, is potentially unsustainable given that most of the low-skilled jobs, like assembly of car parts or work in call centres, can be moved to a different country or automated away, if labour costs increase.

All of these issues highlight the need for Serbia to future-proof its economy, by focusing on quality of new jobs created and potential transfers of technology to the wider economy, rather than indiscriminately attracting investment.

This, however, is a difficult task for a relatively small middle-income country with high unemployment.

Highly activist industrial policy, like significant stimulation of high-tech sectors and creating state owned national champions, is not a possibility due to financial, political and governance constraints. Support of industries requires a large amount of capital and given that Serbia only recently stabilised its national debt, it is difficult to see how such an endeavour could be financed. Serbia’s relationship with the IMF as well as the EU would deteriorate in case the government decides on any protections policies, as they run counter to the still dominant liberal approach to economic policy. Finally, even if the financial and political constraints are discounted, given the extent of political interference in the Serbian public sector and state-owned companies, it is difficult to imagine that any new body responsible for activist development policy would be safe from political encroachment and corruption.

Stimulating local investment and entrepreneurship is necessary, but has limited effects, given the low level of wealth in Serbia. It is also a question of how much more innovation would local companies be able to create if not exposed to global trends. Foreign investment also means import of foreign technologies and work practices, even if relatively basic, which are sorely needed given that Serbia still lags in both due to a decade of isolation in 1990s.

For all these limitations Serbia’s primarily FDI-driven development model is most probably here to stay, although it could be tweaked and improved. The priority for the government should be ensuring improvements in education, infrastructure, rule of law and bureaucratic efficiency to make the economy more robust and attractive to all investors.

Nevertheless, there are a few strategies that the government could pursue to boost innovative, high-skill sectors in Serbia, while pursuing FDI-driven development strategy to ensure higher employment.

Taking a leaf from diaspora-driven development of India’s tech-centres like Bangalore, Serbia could take better advantage of its large brain drain and ensure our ex-pats look back home when they consider opening new ventures. There have already been some notable examples of diaspore creating great companies. Seven Bridges Genomics, which made it to MIT Technological Review’s list of world’s smartest companies last year, was co-founded by a Serb and has a Belgrade operation. A greater promotional effort among the diaspora to highlight improvements in the political and business climate, as well as setting up dedicated units to support re-pats could incetivise them to bring innovations from global centers back home.

Secondly, the government could promote Belgrade as a destination for nomadic creatives and digital entrepreneurs from around the world. The capital’s low cost of living, vibrant cosmopolitan culture and good location have already made it rank high on the best destination lists for digital nomads. If Serbia focused on stimulating venture capital in the city, whose lack is cited as a major downside, Belgrade could start nurturing a cosmopolitan creative-ecosystem. Having a concentration of innovators would leak good new ideas into the wider economy and ensure Serbia is closer to newest technological developments.

Finally, the boom of Serbia’s IT industry should serve as an example for the government on how to approach developing innovative industries from the bottom up. The industry managed to grow because of a good quality of engineering programmes in Serbia, decent IT infrastructure, and, most importantly lack of activist regulatory or financial involvement from the state. This allowed Serbian IT professionals to innovate and create companies that can compete globally rather than concern themselves with gaming the system in Serbia. Although increasing responsiveness of the state to innovative industries is important, the involvement needs to suit the needs of the industry rather than be top-down and should focus on enabling, rather than channeling growth.

 

A version of this article appeared in Belgrade Insight in April 2017

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