Serbia between souverainism and globalization 4.0

For a country like Serbia, which has focused its development strategy on attracting labour-intensive foreign investments, the new scenario of globalization 4.0, centred no longer on the relocation of manufacturing activities but on the development of transnational networks for the creation of value in services, poses relevant issues for politicians and investors themselves.

The last Davos Forum definitively launched the concept of “globalization 4.0“, the acknowledgement of a transformation of international economic relations with the relocation of manufacturing activities that slows down and gives way to shorter value chains, while moving closer to the final markets, based on digital services and processes.

This new form of digital globalization is much more driven by knowledge than by capital or labour costs. In this regard, the McKinsey Institute report on which much of the debate that emerged from the last Davos Forum is based shows that less than 20% of the exchange of physical goods is now determined by low labour costs. We are therefore approaching new global economic processes that will require more broadband than the high capacity of physical traffic; the key factor of development will be the specialist skills of workers able to contribute with a high added value to the processes and much less the workforce receiving wages sufficient for mere survival.

There are two prominent factors at the base of this transformation: the economic growth of emerging countries (which can hardly be defined as still developing), which have consolidated the national markets and value chains in the last decade, reducing the export of finished goods and the import of intermediate goods; transnational digital flows, both as services and as data, which relate to digital platforms, the Internet of Things, automation and artificial intelligence.  

The slowdown in trade in physical goods following the re-balancing of global consumption has alarmed the Economist, which has called this phase “Slowbalization”, but the phenomenon precedes the current tensions created by Trump’s protectionism.

If anything, the reasoning behind these fears is more subtle: if globalization and the global spread of forms of liberal democracy have gone hand-in-hand, at least in the hopes of those who promoted the phenomena in the 1990s, today there may be a real risk that the sovereign wave, that is sweeping through so many countries, may subvert or weaken the principles of global trade as defined in recent decades by the World Trade Organization. The founder of the Davos World Economic Forum, Klaus Schwab himself stressed the need for a more inclusive model of globalization, also in order to face sovereign drift.

The question we, as a management consulting firm based in Belgrade, are trying to answer is: what place can Serbia have in this transformation, as a country that is still suspended between a direction of greater global integration and the constant fascination with sovereign political and economic proposals?

What globalization has Serbia experienced so far?

To tackle high unemployment and relieve the state from paying tens of thousands of wages in state-owned companies in liquidation, since 2001, successive Serbian politicians have aimed to attract labour-intensive investments by offering low wages, significant state incentives and weak unionisation. The country has thus tried to borrow some aspects of Macedonia’s economic model, which, however, started from a much lower level of human, social and economic development.

The country has been chasing foreign investors by offering low wages and non-repayable incentives, often attracting mature industrial chains with little innovation and low investment in fixed assets. The strategic direction of the country in the chessboard of globalization was aimed at producing labour-intensive goods, such as textiles-clothing-socks, with low-cost workers and weak qualifications, in order also to increase exports and reduce the heavy trade deficit. Beyond the many uncertainties of the future, the arrival of Fiat in 2008 was a turning point that testified to the country’s ability to attract a complex and innovative industrial chain such as the automotive one.

Despite various investments in the most advanced sectors, for many people, Serbia is still a country of relocations: after all, the typical, common-sense definition of globalization says that it globalization actually encompasses only 3% of global production and employs only 3% of the global workforce. In terms of average wages in the manufacturing sector, Serbia is now more comparable with some African countries, such as Tunisia, with about 250 euro of average wages, or Egypt, with about 130 dollars, than with China, where wages have tripled in the last decade reaching an average of 629 euro per month.

In 2016 a worker in the coastal province of Jiangsu could expect an average annual wage of 67,000 renminbi, equal to about one million dinars, or 8,600 euro (so about 720 euro per month), while in the internal provinces of Jiangxi and Yunnan, the wage stopped was about 50,000 renminbi, or 770,000 Serbian dinars, or 6,500 euro (so 540 euro per month). The net wage of a Serbian textile worker in the last quarter of 2018 was, on average, equal to 38,883 dinars or about 330 euro.

According to the latest data from the Serbian Chamber of Commerce, wage growth in the last 12 months has affected all productive sectors and is well above the inflation rate (in January 2019, it fell to 2.7%). A more in-depth analysis of six sub-sectors (agriculture, food, construction, automotive, clothing and software development) reveals some interesting dynamics. Between 2017 and 2018, wages in textile and clothing and construction grew by 10%, but still remain between 39,000 and 40,000 dinars, below 340 euro per month net. The food processing sector is no better (+6.4%), which with 39,800 dinars remains in the same range, along with agriculture (+5.4%), which with 42,469 dinars of average salary translates into about 360 euro per month. These numbers are surpassed by the wages of those who work in information technology, which has not only grown by 16% in the space of only one year but also in terms of employees (surpassed only by the growth in the number of automotive workers).  Also, the average net salary in the IT sector is 915 euro. The 28,158 people officially employed in the sector total every month a total of about 3 billion dinars in salaries, almost 20% higher than the total net salaries of the 64,146 employees in the clothing sector.

If we add to the bill also the wages of some creative industry groups and those of R&D staff, we reach about 60,000 jobs in the field of research, innovation and digital development with an average wage level (between 65,000 and 90,000 dinars net per month) or higher, over 90,000 dinars net. Wage analysis is essential to understanding not only the demand for stable (real estate) assets that this social group can generate but also define the thresholds above which talent could decide to stay in the country and contribute to its development.

The fact remains that Serbia is entering its future in globalization 4.0 with about 60,000 people who could be the driving force in terms of value creation in knowledge-intensive services. This is less than 3% of the country’s total workforce, a totally inadequate number. Even if we consider all those who work as freelancers, this social class of innovators does not exceed 5% of the total.

This number is totally insufficient in order to successfully cope with the five changes of the new digital globalization.

The five transformations of globalization

The McKinsey report identified five transformations in global value chains that can be summarized as follows:

  1. The commodity production chains grow more slowly;
  2. Services play an increasingly important role but only partially detected;
  3. In some supply chains, labour costs are a less decisive factor;
  4. Global supply chains are increasingly knowledge-intensive;
  5. Supply chains are becoming more regional and less global

How will these five transformations affect Serbia and what processes are already underway?

In tending and non-absolute terms, you will see less labour-intensive investments than in the past. Automation and process innovations, also driven by the wage dynamics that, as we have seen for textiles, begin to be relatively important, and will also be introduced in mature productions. Already in November, there were lectures on these issues at Zrenjanin, promoted by the Turkish University of Denizli, and in Varazdin, Croatia, specifically dedicated to textiles.

In the regionalization of the production chains, Serbia should compete with the countries that owe a large part of their development to the German industry, namely Poland and Slovakia.

While it is likely that Serbia will become more economically integrated with the European Union on the basis of new production chains with Germany and Italy, the other axis of industrial development will be the location in Serbia of Asian investments to serve the EU market more closely. In fact, it has already been evident for some time that countries such as South Korea, India and Indonesia want to focus on Serbia in order to reach European consumers at lower costs. Therefore, Serbia will be interpreted more and more as a bridge to the European Union and less and less as a bridge to the Russian Federation, as the Development Agency of Serbia – RAS still persists in presenting the country as such.

In the analysis of these future trends, which naturally do not supplant the widespread investment logic, perhaps even more fascinating question is whether Serbia knows how to develop a solid digital services economy?

Agenda for Serbia 4.0

A Serbia fully integrated into global digital transformation should be a priority not only for local political leadership but also for European countries wishing to persuade the country not to pursue sovereignty sirens.

The digital economy is described as the new frontier of the country. Certainly, the positive examples of innovative Serbian start-ups and foreign investments in the digital economy are not lacking: it would be cloying to present a list, but at least the artificial intelligence solutions applied to agriculture by the Biosense Institute of Novi Sad and the internet of things by Schneider Electric deserve to be mentioned, which exceeded 40 million euro in turnover in 2017. Equally significant is the effort to dematerialize and digitize the public administration, which has led to tangible results in many areas, from the tax authorities to the cadastre, from the registry office to health services.

Despite all this, the fact remains that Serbian creative and innovators do not exceed the threshold of 60,000 units: just over 3% of the national workforce and no more than 4% of GDP. This is a limit that is rarely discussed but it is not realistic to think of developing a true digital economy and of value-added services based on knowledge and creativity until this professional class is dimensionally so negligible.

According to the data of the World Bank report titled Creative Industry – Policy Note drawn up in December 2017 at the direct request of Prime Minister Brnabic, the export of this economic sector of Serbia in 2016 amounted to 356 million dollars, 2.13% of the total export of this sector of the countries of South-Eastern Europe, which in turn represents 3.2% of world exports. The data also refers to a “broad” interpretation of the sector, which also includes sectors such as publishing or the entire advertising chain. To these numerical limits, we add the paradox of potential employment, with the search for talent that becomes increasingly tiring and expensive even in the face of such small numbers. However, we do not want to use the sector simply for promotional purposes, but to highlight the urgent need for the country to have a robust industrial policy in the field of creativity and innovation. In this sense, the Digital Serbia Initiative was established, the first lobby structure for greater digitization of the country.  But the question that remains central is: is there a broad enough social base and a strong enough political will to support the digital (and implicitly cultural) transformation of the country?

The Serbia Creates platform, promoted by Prime Minister Ana Brnabic, is the first real attempt to reposition the country’s image on the chessboard of the knowledge economy, but it also faces the limits of being more a showcase and an aspiration than an organic set of measures to steer economic policy. In this sense, the European Union could be a source of inspiration and direction by focusing its Digital Agenda on Serbian urgencies, such as investments in research and development, the creation of an ultra-fast Internet accessible to all, digital literacy, the development of an economy of data and innovation. Although it should be celebrated, the latest data on the boom in Serbian ICT service export, which has reached the value of 1,153 billion euro, up 26% relative to 2017, should also make us reflect because it is a result achieved almost without the use of public incentives (except for NCR), by a sector that could do even better if supported by a consistent national industrial policy.

Italy could do its part too. The National Enterprise 4.0 Plan could be a strong inspiration for Serbian legislators. The over-abatement of industrial automation could help Serbia to break out of its status as an archaeological park for European industrial machinery. The credit for innovation could help the classic dilemma between working capital supply and investment in research and development. Innovation agreements could be transnational in nature to share the results of applied research projects. Even the Patent Box (which in Italy has given rise to a tax exemption of the company’s real assets in fields such as fashion) could encourage the promotion of a more favourable context for the protection of intellectual property.

Realistically speaking, today’s Serbia, suspended between immediate employment emergencies and aspirations to develop a knowledge-based society, is not yet a country ready for a transformation of its economy in the digital sense. But the challenge is not just economic. If Western countries want to dialogue with a modern and civilized country, capable of curbing the brain drain and producing more and more technological innovation and social advancement, they will have to commit themselves to grow and prosper a class of innovators with the autonomy of portfolio and, above all, of thought.

Biagio Carrano

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