Serbia heading towards a new development model?

Anyone arriving in Belgrade these days can see new buildings everywhere and senses an air of economic boom: more and more cars, ever newer and more luxurious, caught up in ever more frequent traffic jams; crowded restaurants, with a very flexible interpretation of the rules of physical distancing, which on weekends only accept those guests who have booked days in advance; stationary and free taxis on the verge of extinction, compulsively sought out with parallel telephone calls to several company switchboards and hunted down in the streets as if they were white rhinoceroses; shopping centres overflowing with window shoppers as well as international clients, challenging Covid by brandishing credit cards, daringly and without protection.

Official figures confirm this sense of growth: after having managed twelve months earlier to contain the economic shock of the pandemic to -6.3%, (while countries like Italy and France sank to -18%), in the second quarter of 2021, the Serbian economy grew by 13.7%. This is the highest growth rate since the distant fourth quarter of 2001, when the liberalizations and privatizations that followed Milosevic’s fall seemed to set the country on a fast track back to the global economy. This has not been the case, however, and the country has instead endured almost two decades in which hopes of growth were postponed while the impacts of global crises were punctually felt. Could this be the right time, and could Serbia really embark on a phase of sustainable economic expansion?

Serbia as ‘the new economic tiger of the Balkans’?

The tower of the West65 complex in Novi Beograd is 155 metres high and has 40 storeys.

What is certainly striking is that the economy that for years has been “export-driven”, i.e. based on attracting foreign industrial investments in manufacturing industries and the related exports, has recorded an increase in household consumption of 17.6% in the second quarter of 2021 (-1.7% in the first quarter of 2021), which matches the jump in fixed investments to 22.5% (+9% three months earlier), while public spending fell by 3.8% (-0.6% in the first quarter). If we delve into the sectors that make up this growth, we immediately notice that commerce grew by 33.3% compared to Q2 2020, when it dropped by 15.9%. Professional services (+30.9%) and recreation (+35%) recorded increases that were broadly equivalent to the roughly similar decline in the same period last year.

But the real driving force is still construction, which in the second quarter of 2020, declined by only 2%, while in the first two quarters of the year, it held at 17.7%. In September 2021, 3,455 building permits were issued (85% of which for buildings), 39.4% more than the 2,479 issued twelve months earlier. It goes without saying that Belgrade dominates the sector: about 16.25 billion dinars (about 138 million euro) is the expected value of the construction works authorized during September 2021, equal to 30.7% of the total of about 460 million euros.  These numbers seem to reinforce optimism about the ability of the Serbian construction sector to react to Covid and indeed to attract foreign capital to fuel this growth.

The robust recovery of trade between January and September 2021 amounted to €36.031 billion, an increase of 25.4% compared to the same period in 2020, with the trade deficit growing by 10.3%, the result of €15.63 billion in exports (+28.1%) and €20.39 billion in imports (+23.4). Expressed in the euro, the deficit grew by 10.3% to €4.7 billion over the observed period, with the export to import ratio rising from 73.9% to 76.4%, an indication that the country is managing to export higher value-added goods.

The 6.5% growth forecast by the EBRD for this year now seems prudent and preliminary figures, while a +7.4% GDP forecast in the third quarter seem to confirm new ambitions. Serbia has become the most dynamic economy in South-Eastern Europe and intends to remain so for years to come. Could the hidden dream of many Serbian politicians, to reach Croatia’s GDP in 2023, really be within reach?

Growth that also raises concerns 

In fact, this unprecedented growth, at least in size and intensity, is also causing new anxiety in the country. What worries Serbian citizens most is inflation. What worries entrepreneurs is the shortage of workforce.

Let’s start with the former. In October, consumer prices rose by 6.6% compared to twelve months earlier, the highest value since 2013, with an increase of even 0.9% compared to the previous month. The cost of transport is growing too (+1.8% in one month), as are the prices of footwear and clothing (+1.6%) and food (+1.3%). In 2021, groceries have so far become 8.7% more expensive than the previous year, and it is easy to imagine that the 10% threshold will be exceeded, mainly as a result of increases in meat, fruit and vegetable prices.

In the capital, the values are much amplified compared to the rest of the country and a price increase even above 10% is more than a widespread perception, in the absence of official data. The trend in the prices of agricultural products of Serbian origin is also impressive, rising by 24% in twelve months, with a peak of 58% for fruit and 29% for vegetables produced in the country. In July, the average monthly expenditure of a Serbian family was estimated at 76,689.07 dinars (+4% in a year) compared to an average net national salary of 64,731 dinars. The rise in inflation obviously has an impact on wages, which have been going up for years. While between 2009 and 2016, the Serbian gross minimum wage, which so many companies in search of cheap labour are attracted to, was stable (€233 in December 2008, €230 in December 2016), in the last five years it has risen by more than 50% to €370. The surge in this minimum value propagated to all wage brackets. In Belgrade, the average net wage has been around 15,000 dinars higher than the national average for years, thus reaching almost 80,000 dinars net.

Foreign entrepreneurs, especially the small and medium-sized ones who have opened up production facilities in the past years, attracted by low wages, are looking around and in certain areas of the country, they can no longer find workers. In a country that for years has been promoted and sold by the Serbian Chamber of Commerce for its “high-quality and cheap” workforce, it is now difficult to find “affordable” employees. With many construction sites in Belgrade offering specialized workers 900 euros net, foreign entrepreneurs and managers end up resorting to workers from the south of the country who are willing to work for food, accommodation and minimum wage, or else they try to set up a subcontracting system, tracking down factories in the most depressed areas that can guarantee certain basic operations at competitive costs. The fact is that the country is seeing a steady reduction in the unemployment rate, which has fallen below 10%.

Development of the unemployment rate in Serbia. Source: World Bank

To superficial observers, the situation seems reminiscent of the Italian economic boom of the 1960s and 1970s, when, alongside the large national and foreign companies that dominated the high-technology sectors (automotive, chemical, metallurgy, etc.), small and extremely flexible family businesses flourished and therefore were able to respond rapidly to the delivery and cost requirements of their clients. But it is always a mistake to compare different historical periods: relying on a few analogies is both a mistake and a sign of laziness because the economic development of a country does not follow specific phases or periods.

The hyper-technological structure of the Serbian pavilion at the Expo is intended to recall the constructions of the prehistoric site of Vinca.

Heading towards a new development model?

There are serious doubts about the duration and robustness of this growth. The current rate of growth is driven by the construction sector, a typical driver of economic development which in turn drives manufacturing, imports and therefore logistics. But this is a highly cyclical sector, which often suffers strong recessions that burn up much of the value of real estate. The Serbian government is trying to make this construction boom, concentrated mainly in the capital and in Novi Sad, last as long as possible by adopting a strategy of attracting investments in the sector that is as “easy-going” as Dubai. In some ways, this is a compulsory choice, not only to sustain the current rate of growth but also to allow more time for the attempt to transform the national production structure, so as to accredit itself as a country of innovative production and technology and no longer as a country of labor-intensive production and screwdriver factories. The same effort has been made at the Dubai Expo, under the slogan ‘Connecting minds, creating the future‘, aimed at presenting a country on the road to digitalisation, creative businesses and high added value production. In essence, the challenge is to move from an exogenous development model, based on attracting foreign investment in search of cheap labor, to an endogenous development model, through technologically advanced companies founded in the country and closely connected to global innovation hubs.

But intellectual emigration, the demographic crisis and the crisis in public education are some of the factors that can undermine this vision.

(End of part 1)

By Biagio Carrano, translated by Snezana Rakic

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