Serbia: A glimmer of light

Things are looking up a bit for Serbia’s economy.

The 1990s were a lost decade for Serbia. GDP declined sharply in the first half of the decade. A modest recovery in 1995-8 was wiped out by the NATO bombing. Per capita income in 2000 was just about where it had been in 1989… but the average person was much worse off, because income distribution had changed drastically, with a small caste of the rich and well connected now owning most of the country’s wealth.

The fall of Milosevic in October 2000 brought in a new government, but the economy was very slow to respond. GDP grew by only about 3.5% per year between 2001 and 2004, foreign investment was slow to show interest, and the income distribution stayed as bad as ever. I lived in Serbia during those years, and the general impression was one of dashed hopes. The assassination of Prime Minister Djindjic in March 2003 didn’t help matters.

But it looks like things may finally be changing.

— Serbia’s GDP grew by 7% in 2004, and is expected to grow by 5.5% – 6% in 2005.
— Foreign direct investment, after a dip in 2004, is now heading sharply upwards
— Exports are up by over 40% so far in 2005
— Inflation has been falling for three years, and may drop into single digits next year
— Serbia is finally getting ready to join the WTO
— There’s been a steady drumbeat of trade agreements with neighbors in the region
— Unemployment, though still painfully high (around 30%!), is finally starting to come down

And, of course, Serbia won a “Most Improved” from the World Bank earlier this year, for the business-friendly reforms enacted in 2002-4.

Now, this is a fairly fragile recovery. The growth is from a very low base; Serbia remains one of the poorest countries in Europe. Corruption is still a huge problem. Most of the country’s wealth remains in the hands of Milosevic-era elites.

Furthermore, much of the good news is payoff from the difficult reforms enacted under the late PM Djindjic. The current government, in office since March 2004, is a fragile coalition. It hasn’t done a lot but stay the course; and it can’t be pushed to do much more, because if it collapses, the xenophobic populist nationalist Radical Party (currently leading the polls) is waiting to pick up the pieces. And Serbia is about to face two major political shocks in the coming year: a referendum in Montenegro on secession, and talks that will probably lead to formal independence for the disputed province of Kosovo. Either of these could have huge knock-on effects on the economy.

On the other-other hand, the Kostunica government has put its first team on the economic side. Serbia currently has a very competent Minister of Finance in Mladjan Dinkic, while the Ministry of International Economic Affairs, under unsung hero Milan Parivodic, has been racking up a steady string of successes. So there’s that. And the country is currently “undervalued” by anyone’s standards. t has low wages, lowish costs, and a well-educated workforce; the red tape is not awful by regional standards, and it’s within an hour’s flight of Vienna and Milan.

So, if Serbia can avoid a major political crisis in the next few years, things could be looking up.


13 thoughts on “Serbia: A glimmer of light

  1. I agree with you regarding the Serbian economy currently being undervalued yet fragile. I guess most big/serious investors just aren’t ready to invest (I know, I work for one) until the Kosovo issue looks like it will be resolved reasonably amicably.

    Since Kosovo risks upsetting the whole balance in Serbia (both if it stays in and if it’s given outright independence) the EU and other responsible parties should dangle some meaty carrots in front of it. How about a promise to start EU membership negotiations along Croatia and Turkey in return for giving up Kosovo? Montenegro would have option of joining the EU alongside Serbia or Albania.

  2. As I am currently working in Kosovo, anything that gets the situation solved without violence would be welcome, so I couldn’t agree more about the EU carrot. Especially as it will mean that the special treatment of Croatia over Turkey, which wasn’t really justified, becomes more balanced.

    But I would like to know more about the concept of a meaty carrot.

  3. You’re right abot the “meaty” carrot being kind of strange. What I was thinking of was a “big and juicy” carrot and, being a carnivore, I immediately though of meat. Sorry.

    As for Kosovo, I think it’s a disaster for Serbia, has been and will continue to be until it gets rid of it. Although the there are lots of differences, I think Kosovo is for Serbia’s N. Ireland, West Bank and Chechnya.

    If Kosovo were, miraculously, stay part of a Serbia then Albanians would form the second largest party in the Serbia, which I don’t think most serbs would like. Continuing the present limbo with de facto independence but de jure status as a province of Serbia, this would be an anchor around Serbia’s foot forever.

    Better to get rid of it and focus on developing the country and focusing on EU accession. An alternative would be to keep a sliver in the north of Kosovo based around Mitrovica and resettle any populations on the ‘wrong’ side.

    My own country, Sweden, did’t take off economically until after we had lost the eastern half of the country – Finland – to the Russians in 1809. Once people had realized they weren’t going to get Finland back this started a trend of political liberalization and focus on economic development – replacing Finland with economic development within Sweden’s new borders.

  4. Although Serbia was poorer than Croatia and Slovenia already in 1990 it was in far better shape than Poland or any other Central or East European country was. Its companies had operated on the international market and many of its people had experience of Western European countries. This was definately not the case for Poland, Czechoslovakia or even Hungary.

    Although the 1990s were a lost decade for Serbia while the others steamed ahead, it should be able to catch up quite quickly once the Kosovo issue is solved. They’re not starting from scratch like post-communist countries were in the 1990s. Although the situation in Serbia is not good today, it’s still much better than Poland was in 1990.

  5. “undervalued”
    Yes…At Lunov Agency we work hard to improve the image of Serbia in the world.

    @Oskar Lindström
    I guess most big/serious investors just aren’t ready to invest (I know, I work for one)…

  6. I work with strategy and investment planning for a Swedish multinational. We currently do not have any business in Serbia (or any other part of the former Yugoslavia for that matter) but I know that we’ve got a couple of local companies, also in Serbia, on our watch list.

    In Sweden the former Yugoslavia is not such an exotic place and people are quite well informed. Yugoslavs have been moving to Sweden since the 1960s and are a well integrated community. Many Swedes have been to the Adriatic coast. So at least Swedish executives will typically know a lot more about the countries of the region than your average American, or, even, British excutive.

    From my own perspective, the main drawback of Serbia is that it’s neither a large market (compared to f.ex. Poland or Russia) or close enough to serve as a good base for servicing the major West European markets (as say Poland, Hungary or Slovakia). On the other hand the Balkans have some of the highest growth in Europe right now.

  7. From my own perspective, the main drawback of Serbia is that it’s neither a large market (compared to f.ex. Poland or Russia) or close enough to serve as a good base for servicing the major West European markets (as say Poland, Hungary or Slovakia).

    Italy is just a ferry trip from Montenegro. Doesn’t that count?

  8. In Europe road and rail is what counts for transporting consumer products. Montenegro is probably the worst location for this. And southern Italy is not a big market (comapred to NW Europe). And road links from Serbia to Montenegro are pretty bad (I’ve travelled there). I’d say Vojvodina is best placed. If Serbia and the EU could get the transeuropean highway to Greece and Turkey upgraded that would be a big boon.

  9. Italy is just a ferry trip from Montenegro. Doesn’t that count?

    Nah, not really. For the reasons Oskar gives. Southeastern Italy is pretty peripheral, and Montenegro has an inconvenient mountain range between it and the rest of Serbia. And, yeah, bad roads.

    Oskar also points out that Serbia is not a large market. True, but it’s an excellent jumping-off point for the rest of the former Yugoslavia… five countries (soon to be six or seven), totalling over 20 million people.

    There’s quite a lot of investment between the FY countries, though most of it is flowing south from Slovenia and Croatia. Same or similar language, same or similar culture, shared history. A Slovene can do business in Serbia much more easily than an Italian or German.

    McKinsey just opened an office in Zagreb, BTW. This is /not/ because Croatia’s economy is big enough to support a major consultancy. No, it’s because Zagreb is within easy striking distance of that whole former YU market. They’re buying market share in five countries at once. I think it’s rather clever of them, myself.

    Doug M.

  10. It’s always nice to know the facts. Here we go (from the World Bank):

    Total GDP (current usd) for the Balkans, excluding Greece, is about 210 billion. This is split just about evently between the former Yugoslavia and the rest. Romania accounts for 75 billion, Croatia and Slovenia for 30-35 billion each and Serbia and Bulgaria for about 25 billion each.

    This is about the same as the total GDP of Greece (200 billion in current usd) and somewhat less than Denmark (235 billion usd) and, I’d guess it’s also somewhat lower than the GDP of the US state of Maryland.

    So, the size of the Balkan (ex Greece) market isn’t huge. What’s interesting is that it’s today one of the most rapidly growing markets in Europe and it’s pretty virgin territory.

    Although Serbia is neither the largest market nor has the largest population in the region, I think it could use its central geographic location to attract investments looking to service the ‘Balkans’ (though I doubt Slovenia or, even, Croatia, would be too happy about being seen as part of the Balkans).

  11. As you say, Oskar — small, but growing fast. Serbia grew at 7% in 2004, while Romania grew at 8.3%. If current trends hold, the region will double its GDP well before 2020.

    Belgrade should be the regional hub for a variety of things, from financial services to air transport. (Right now, to fly between any two Balkan capitals, you have to go through some airport in central Europe, usually Vienna. C’est whack.) Unfortunately, Slobo trashed that too. Belgrade may eventually grow back into that role, but it’s going to take a long time.

    Doug M.

  12. Hm. Just about every place in Serbia-Montenegro south of Belgrade (except for the very coast by ship, which it seems nobody likes), unless it is near the single motorway, is hard to reach. So aiming for the yugoslav market, why Serbia and not Croatia? Lower wages? That is not a comfortable competitive advantage. Bosnia is even worse, but that is a bitter solace.

  13. I’ve been to factories (E. Slovakia, W. Ukraine, NW Romania, Tukrey, Poland) where the roads are very bad and there is no rail connection. So roads aren’t everything, though it helps.

    The main highway through Serbia (E75) is actually not that bad and very nicely located as a transport link to Turkey. I guess today most of the Turkish imports are going via Italy. If they could improve this highway all the way down to Istanbul that should be very helpful.

    Not to get too locked into geographic location, the most important factor will always be economic reform and institution building. Hopefully Serbia will have the stamina to pull through on this.

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