The end of a “development” model
For a long time and even today, Serbia has been presented to investors as a country of cheap labour. This approach was justified on the grounds of deindustrialisation following the collapse of the former Yugoslavia which resulted in a high unemployment rate and the need to attract new international investors. Last but not least (at least at home), there was the bad image the country had gained (or had been labelled) during the wars of the 1990s. The minimum wage, the so-called “minimalac” (in Serbia), was designed to be applied to state-owned companies undergoing restructuring or liquidation, and well below the poverty line, but it ended up becoming the standard of reference for the basic wage framework in factories, even newly opened ones. Creation of new jobs was rewarded with generous state incentives, which also turned well-intentioned entrepreneurs into ravenous subsidy takers, a sine qua non for weighing up an investment in this Balkan country.
Such a model aimed at attracting mostly brutal relocations, subcontractors, or internal subcontracting, i.e. the relocation of one or more labour-intensive production phases and then sending the semi-finished product back to the parent company. Basically, low value-added processing, in mature and capital-intensive sectors, which often, considering the changing international market conditions, could be greatly reduced or even closed within a few weeks.
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Economy and rising wages, workers on the run
This model of rearguard development, already the object of criticism as it seemed to have no other alternatives, is now clamorously denied by the new social and economic dynamics that have characterized the Balkan country for about 30 months.
The country is experiencing a phase of macroeconomic stability that derives from regular GDP growth (4.4% in 2018, 4% in 2019 and forecasted 4% also in 2020), low inflation (2%) with a state budget surplus from 2017 of about 1% per year and foreign direct investments of 3.1 billion euros in the first ten months of 2019. These figures are also reflected in improved assessment by international rating agencies. For its part, the Bank of Serbia further lowered the discount rate to 2.25% in December, the lowest ever in its history.
Between January and November 2019, wages grew by 10% in nominal terms and 8% in real terms. Today, an average Serbian net salary is 56,731 dinars (482 euros), which with taxes and contributions reaches 77,879 (662 euros): only between October and November 2019 there was a growth in wages of 2.9%. We are therefore far from the minimum wage, which since January 1, 2020 has been increased by 11.1% to 30,022 dinars (258 euros). Even the median, that is the value of the wage that is the watershed between the lower and upper half, reaches 42.716 dinars, or 365 euros. In this context, it becomes increasingly difficult to find workers willing to work for the minimum wage even in the more backward areas and for performing less complex tasks.
Unemployment stood at 9.5% in the third quarter of 2019 while in 2012, it had reached a record 25.5%. Are we witnessing a new economic miracle? Of course not, because a growth rate of 4% for a couple of years cannot cause such a significant drop in unemployment. For sure the construction boom continues to require fresh staff, and the latest sector bulletin of the Chamber of Commerce of Serbia reports that in the first 10 months of 2019, the sector added another 10,000 employees compared to the previous year, reaching a total of 142,748 units; but it was first of all emigration, qualified and not, that emptied the country of workers and skills, taking on the appearance of a mass exodus. It is estimated that in the last 3 years alone at least 50,000 Serbs, especially in Vojvodina, have obtained a Hungarian passport. In addition to this, applications for Croatian, Bulgarian and Romanian passports bring the number of Serbs who have obtained a pass to be able to work permanently in the European Union to at least 100,000 from 2016.
There are also countries that for years have been carrying out a methodical action of scouting for the most qualified professionals, especially in certain sectors (doctors and nurses, first and foremost), with the German Embassy now even having staff who came from Berlin only to manage these channels of attracting the qualified workforce. Job advertisements for Israel can be found on the streets of Belgrade, while Croatian and Slovenian tourist companies are looking for staff in Serbia to replace those in their countries who have chosen to emigrate to wealthier countries.
Serbia has suddenly discovered that it is not only a land of emigration, but also of immigration, with Macedonians and even Albanians increasingly coming to the country to work in construction and other sectors.
A new model of internationalisation
In an environment that is undergoing such a rapid transformation, many companies that have come to Serbia in pursuit of low labour costs that they assumed would remain stable over time find themselves displaced and tend to react to these challenges with the wrong answers – namely, claiming to achieve productivity levels close to those of the parent company in only a few semesters; demanding for additional overtime from workers paid on their minimum wage; and aggressive fight against absenteeism, which is often nothing more than an individual response of non-unionized workers to low wages in the face of excessive workload.
These are short-sighted choices, which risk undermining the internal equilibrium of companies without achieving the promised productivity gains. And yet a company that has chosen Serbia for the cost of labour cannot start hiring computer scientists or creative people overnight. But it is equally true that many manufacturing companies that have focused almost exclusively on labour costs, even today fail to focus on process efficiency and training of workers, investment in modern machinery, energy efficiency, digitization, marketing of Serbian products in new markets or the development of new products. It is precisely the decline of abundant and cheap labour that makes it necessary to rethink investments in Serbia in a more modern logic; an internationalization 4.0 that can integrate the advantages that the country still offers within the Industry 4.0 paradigm launched by the German government in 2011.
Just as Serbia was a playground for many small and medium enterprises where they made their first experiences as foreign investors, facing all the complexities of the new project for the first time and on a scale sustainable for them, in the same way today Serbian subsidiaries can be a field of experimentation to test production and organizational processes that benefit from the advantages of digitization, energy efficiency (for which there are more and more incentives), new management models and access to markets and customers.
What may seem like a mere speculation to oldfashioned readers is actually already happening: companies investing in services, digitization and environmental sustainability are the ones preferred and best supported by the Serbian government. The NCR campus in Novi Beograd, worth $90 million, is an example of this, as is the digital farm near Bačka Palanka designed by the BioSense Institute and funded by the Serbian government and the EU Delegation, and again, also in the relationship with China, when during the 17+1 summit last October in Belgrade the Prime Minister Ana Brnabić said that Serbia sees China as a key partner in the development of innovation. In this vision is fully encapsulated the construction of the new national data center in Kragujevac, a State investment of 30 million euros which will fasten the digitalization of the country.
On another side, those people who think that the Emirates are investing in Serbia only in construction, agriculture and arms industry maybe are not aware that a strong collaboration is also developing in the field of artificial intelligence and robotics – a Serbian delegation will participate in the AI Everything conference in March in Dubai where the Serbian universities and the Muhammed bin Zayed University will sign a Memorandum of Understanding on Artificial Intelligence.
Serbs today, especially those who are not planning to flee abroad, aspire to a new model of development, also supported by the government with programmes such as Serbia Creates, which promotes and enhances creative and innovative, highly educated and highly paid professionals. For the government, the number of jobs created is no longer the only parametre for assessing the quality of an investment, and in some areas of the country (e.g. Šabac or the Indjija-Novi and Stari Pazar axis) it is starting to become complicated to find workforce. Companies that make finished products and have developed a network of local suppliers, those that create niche and excellent products, those that invest in the Serbian workforce, and of course, those related to the most advanced technologies, are the companies that today are courted and supported by local institutions.
Serbia is trying to point to the trends of the future. Even potential investors will have to start to understand this.
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