For Ivan Ostojić, one of the most influential experts in technology and innovation from this region, born in Valjevo and living in Switzerland for the past two decades, where he worked as a partner in the consulting company McKinsey establishing its Global Technology Council, it’s hard to say that he opposes technological progress and economic advancement. Especially since innovation and new technologies are the focus of his professional collaboration with leading global companies, investors, and public organizations.
Additionally, he is an advocate for accelerating Serbia’s European integration. Despite all this, in an interview with Radar, he reveals that he is deeply concerned about one of Serbia’s strategic cooperation agreements with the EU, which pertains to critical mineral resources.
“I’m concerned that, according to this document, Serbia will become a cheap destination from which natural resources will be extracted with minimal profit for the state, while posing a significant potential risk to the environment. Many experts have documented that water reserves would be the most endangered. Not only because significant amounts of water which are used for ore processing and lithium extraction, but also because the water used during processing is contaminated with toxic chemicals and heavy metals, rendering it practically unusable. On the other hand, the benefits for the state and society from the Jadar project are highly questionable,” Ostojić adds and recommends a completely different path for Serbia’s economic development.
Mining has been done in Serbia for many years, but it seems that opposition to a single mine has never been greater. Why is that?
Well, lithium has never been mined before, and this mine could destroy one of the most fertile and greenest parts of Serbia – Podrinje and Mačva. The risk is too great. As for other mines, they were established in a different economic era, were once state-owned, first by Yugoslavia and later by Serbia, so most of the profit remained with the state until they were privatized. Now, for the first time, right from the start, a mine is being handed over to a foreign company, with minimal mining royalties.
Yes, but the government argues that Mining and Smelting Basin Bor (RTB Bor), while it was a state-owned enterprise, was generating an annual loss of $150 million, and since China’s Zijin took over, it has been making huge profits.
And for whom is Zijin generating profits? I’m not saying that making a profit is wrong, as companies are established for that reason. Since this concerns natural resources, it is fundamentally important to consider what the state and society as a whole gain from it, as all mining has consequences for the environment. Would Serbia benefit from the Jadar project? Taking everything into consideration, the result of that equation would be negative.
What do you think about the alleged guarantees from the German Chancellor and the European Commission that lithium from Serbia will be used only if the highest environmental protection standards are met?
Serbia doesn’t exactly have a good track record when it comes to environmental protection. According to the Environmental Performance Index (EPI) by Yale and Columbia Universities, Serbia ranks 116th out of 180 countries in air quality, and even worse, 128th in wastewater management. Countries like Paraguay and the Philippines rank better than us, while East Timor and Senegal are just slightly worse. As if that weren’t enough, from April 10 to May 3, 2023, Serbia’s Ministry of Finance made public a draft law on amendments to the Law on Fees for the Use of Public Goods, proposing to reduce the fees for companies discharging wastewater into rivers by 1,000 times. With such a track record, it’s hard to believe that the highest environmental standards will be applied in the future.
Now the government is trying to convince us that Germany will guarantee this. With all due respect to the German state, we have to remember that our relations over the past 100-plus years haven’t exactly been stellar, starting with the First and Second World Wars, during which a third of Serbia’s population perished, the atrocities committed in Kragujevac and Kraljevo, etc. This aggressive policy continued in more recent history when Serbia became the first country to which Germany sent its military after World War II without a UN mandate. Now, they are trying to convince us that we are important to them, that lithium mining is good for us, and that they will guarantee that the highest environmental standards will be implemented. There is plenty of room for scepticism here. I’m afraid that in one or two decades, we’ll find ourselves lamenting that we went from genocide to ecocide.
Just to be clear, I am not only criticizing Germany. There are also examples of investors from the East who have targeted our natural wealth and ruthlessly exploited resources, such as the Russians with oil fields in Vojvodina and the Chinese with mines around Bor, paying little heed to the environment. As for the European Commission’s guarantees, even the best cardiologist assures the patient before surgery that it’s a routine procedure, yet sometimes the patient dies. Something similar could happen in this case. There’s no digging into the earth without some risks and environmental consequences. Instead of relying on others to protect us, we must protect ourselves. Especially since mining is to be done by a private corporation, whose primary concern is profit, and which has already caused environmental problems in other countries.
The government claims that those opposing the mine are against Serbia’s best interests, trying to halt its dynamic economic growth, and that lithium is a historic opportunity for a “quantum leap” in Serbia’s economy. How do these arguments resonate with you as an economist?
The economic effect is measured through GDP growth, which represents the value of all goods and services produced in a country in one year. It is expected that GDP growth will also lead to an increase in wealth and that these two things are directly correlated. The government puts the lithium mine and the associated industry in this context, but it’s not quite so simple.
Can you explain that in more detail?
To make it easier to understand, I’ll present two scenarios. In the first, 100 dinars of GDP is generated by a company under foreign ownership, which has 60 dinars of profit that it will take out of the country and direct to investment projects in other countries where it can bring a higher return to the owner. Additionally, it will optimize its tax burden to four or five percent, so at most, 5 dinars will remain in the Serbian system from the generated 100, and another 5 dinars from the mining royalty. The remaining 30 dinars will be paid to employees, half of which will go to foreigners who hold key positions in the company. When all is said and done, only 25 dinars out of 100 will remain in Serbia, so the benefit to society and the state is minimal. This scenario is characteristic of African countries, which are rich in natural resources, but they only get crumbs from the table while foreign companies extract all the profits.
In the second scenario, if those 100 dinars are generated by a company owned by a local businessman, all 100 dinars remain in Serbia, as the company predominantly employs Serbian workers who will spend all 30 dinars of their wages here. Additionally, a domestic company in Serbia pays a 15% corporate tax, significantly higher than foreign companies that are often registered in countries with lower tax rates. Moreover, local owners are less likely to take their profits out of the country like foreign owners do. A good example is Norway, which extracts oil from its seabed, and all the profit goes into a state fund that reinvests that money into development. I fear that our government is making moves that place Serbia much closer to the first scenario than the second.
It seems that the structure of GDP growth might be more important than the growth rate itself.
Many overlook that the market value of a company engaged in artificial intelligence is determined by multiplying its revenue by a coefficient of 25.8. This means that a company with 100 dinars of revenue is worth 2,580 dinars. In contrast, for mining companies, this multiplier is 0.8, so if they generate 100 dinars in revenue, their value is only 80 dinars. Mining, therefore, is not as attractive an industry as some in Serbia try to portray it, especially compared to new technologies. Furthermore, the economic benefits of mining are also questionable. The importance of the quality of GDP growth is also evident from the example of the USA. Although in the first half of 2024, the U.S. GDP grew by 2.8%, more than the expected 2%, it did not generate enthusiasm but rather caused suspicion among investors on the stock markets because the growth was not the result of organic and sustainable economic growth. Instead, it was driven by increased government spending, fiscal incentives, and higher healthcare costs due to an ageing population. Therefore, such GDP growth was not rewarded by the markets but penalized.
Since you emphasize the quality of growth, how do you interpret the fact that Serbia has been allocating 7-8% of GDP for public investments for years, yet achieves much lower GDP growth rates? What does this say about the efficiency of those investments, which are also financed through new borrowing?
To be fair, the effects of infrastructure investments on economic growth cannot be felt in the short term. However, given that a significant portion of GDP has been allocated to infrastructure for five years, it is evident that the government is attempting to accelerate growth through increased investments, with a negative return on the invested funds. Essentially, this is a well-known strategy in economics for creating a short-term economic boom by having the government generate demand by spending more than it collects in taxes. According to the Fiscal Council’s report, from 2020 to date, the total deficit, or budget shortfall, in Serbia is 21.4% of GDP, while GDP has increased by 15.3%. With such a negative return, this measure has short-term effects, but in the long term, the result is very questionable, often negative.
I assume that a private company owner would immediately fire a director who invested money under such conditions?
Certainly, without hesitation, because it is not sustainable in the long run to invest money with a negative return. This is definitely not growth based on solid foundations.
Does this mean that Serbia faces long-term problems, even though now, at least on paper, everything seems fine?
By nature, I am an optimist, but the structure of our economic growth is far from ideal. Especially since it is based on fiscal stimuli and increased government investments, as in the USA, and there, investors are not thrilled with such growth.
Minister Tomislav Momirović says that Germany and some other developed countries are facing the threat of recession and that it is “Serbia’s duty to help them.” How does that sound to you?
There should be a clear distinction between political marketing and real economics. It is true that Europe is facing significant problems, and dark clouds are looming over it. Its automotive industry, in particular, is under pressure, having been technologically surpassed by China. The U.S. has taken the lead in artificial intelligence, and other industries, initiated in Europe, such as quantum computing, are also relocating to America. Europe is grappling with many structural issues, unemployment is rising, and the growth rate is below expectations, so I fear that the danger of recession in some countries is real, but I don’t see how Serbia can help anyone – especially not Germany, which has an economy 59 times larger than Serbia’s. Therefore, this statement by the minister is part of political marketing with shades of the Dunning-Kruger effect, where you don’t know how much you don’t know, and where the best students underestimate their abilities, while the worst ones greatly overestimate theirs.
Could Serbia become collateral damage in the global conflict between the European and Chinese automotive industries?
There is a real danger that Serbia could become a country from which cheap mineral resources are extracted for the needs of industries in developed countries. On the other hand, the question is how much longer lithium will be used for electric batteries. Currently, such batteries are dominant, but research into a dozen alternative battery technologies is already well underway, with some companies planning to start mass production as early as 2028, which would certainly further reduce demand for lithium. Besides the problems with lithium production, recycling lithium-ion batteries is also quite expensive and environmentally demanding. Finally, no matter how much electric cars can contribute to environmental protection, the weakest link in that chain is that the electricity they use also needs to be “green.”
In terms of electricity needed to run electric cars, could you comment on the fact that EPS (the Electric Power Industry of Serbia) in July failed to produce enough electricity for domestic needs and had to import huge amounts of electricity at fairly high prices?
For electric cars to be beneficial, the share of electricity production from renewable sources, which do not emit greenhouse gases, must increase. Otherwise, they are not cost-effective. Specifically, if it consumes energy generated from coal, an electric car would have to travel 150,000 kilometers to be environmentally “worth it” compared to conventional cars. Moreover, if everyone in Serbia switched to electric cars, the question is whether we would have enough infrastructure to charge them. And a separate issue is that most of the electricity here is still produced from coal.
On what should Serbia’s economic development be based, then?
Serbia still has exceptional human potential, which I hope the system will not completely destroy. Industries in which the state has not interfered too much and where free competition has been allowed are essentially at the global level in terms of quality. The two best examples of this are IT and private dental practices. Many IT companies owned by Serbians are worth hundreds of millions of euros, making excellent deals worldwide, and some are preparing to float their shares on the American stock exchange. In addition to these, industries of medium and high technology should be developed, including artificial intelligence, which creates great added value. It’s time to transition from services to technological products and platforms, as this would ensure much faster and cleaner development.
Much greater value can also be created in agriculture, the food, and processing industries, whose final product would be the increasingly sought-after healthy food globally. Finally, the third direction of development should be based on medium-sized manufacturing enterprises that have already positioned themselves and are now supplying large multinational companies like Coca-Cola and globally known refrigerator manufacturers like Liebherr and Haier. There are quite a few such small and medium-sized “gems” of companies that should be supported and strengthened to more quickly develop the next generation of products and become an important cog in global supply chains. Along with these sectors, which already exist in Serbia, two or three more future technologies should be chosen, such as quantum computing. In the coming period, the country’s development should be based on that.
How long will agriculture remain an untapped opportunity, given that the Netherlands exports 20 times more food than Serbia from smaller arable areas?
Land consolidation and free export must be enabled, with the focus on exporting processed goods with higher added value rather than frozen raw products. Recently, I’ve spent a lot of time in America and realized how crucial the system is for business success, especially for new technologies, as it influences the inflow of capital and talent, as well as educated labour. Part of that system is investor protection, encouraging competition, preventing dirty tricks, and avoiding monopolistic abuses, as the penalties for that are very severe. The other part includes incentives, a developed capital market, and public-private partnerships, which aim to contribute to the development of new technologies. Once such a system is established, you can expect the development of a sector.
And what about countries like Serbia, where the system boils down to a quote from the movie The Elusive Summer of ’68: “In this system, it’s you, me, and dad”?
That’s a very bad system. Instead, Serbia should look up to Switzerland and Ireland, where institutions function flawlessly, the economy is very free, the state does not directly interfere in the economy, and no one has a privileged position, so in fair competition, the best win. Unfortunately, that is not the case in Serbia. Our fundamental problem is that the well-connected, rather than the best, prevail, and because of that, we are doomed to a gradual decline. The well-connected can only win in the domestic competition but consistently lose on the international stage. Just like our football clubs. Some have been at the top of the domestic league for years, but can’t even pass the first round of qualifications for European competitions.
Are you saying that we need to conquer the international stage because the domestic market is too small and that those who want to develop faster must export?
Yes, Serbia is too small to be self-sufficient, and every company that wants to expand its business is simply forced to seek customers in other foreign markets. Otherwise, they will stagnate, and some will even fail.
(Radar, 13.08.2024)
https://radar.nova.rs/ekonomija/ivan-ostojic-intrevju-za-radar/