Serbia: That Incredible Shrinking Country

This weekend’s election results in Serbia, and in particular the gridlock state of the political process and the resilience of the vote for the nationalist Serbian Radical Party (as ably explained by Doug in the previous post), pose new, and arguably reasonably urgent questions for all those who are concerned about the future of those European countries who currently find themselves locked outside the frontiers of the European Union. What follows below the fold is a cross-post of an entry I put up earlier this afternoon on the new global economy blog: Global Economy Matters. I don’t normally like cross-posting, since I would prefer to put up original Afoe content, but my time is a bit pressed at the moment, and I feel the issues raised are important enough to merit a separate airing on this site.

Only last week GEM blogger Artim was asking the timely and important question as to whether heterodox policies were in fact compatible with the emergence of free market growth-driven economies, taking as his examples Ecuador and Thailand. Now while in the case of Thailand the situation may be debatable,and in Ecuador extremely dubious, in the case of Serbia the answer (which is one which now faces us in the light of the weekend election results) must surely be a resounding: No!

And this for two very simple reasons. In the first place Serbia is a shrinking country (not only in terms of its territorial frontiers but also in terms of its internal demographic dynamic). And in the second place since Serbia is effectively locked out of the European Union – and the recent election results will not help any here – and as such is unable to benefit from a foreseeable surge in inward investment flows of the kind which have so facilitated the growth process for the recent EU accession countries.

Now I will not dwell in too great a detail on the first point here. I have a recent post which gives a general rundown on the Demography Matters weblog, so I will restrict myself here to the basics. Serbia’s population is both ageing and declining (most probably, data are not made public by the Serbian government, but it is a reasonable deduction). Fertility at around 1.6TFR, while still above the general norm for East and Central Europe countries – which are normally hovering in the 1.2/1.3 TFR range – is still well below replacement, and, as I argue in the DM post, looks set to fall steadily as the birth postponement process gathers pace. At the same time life expectancy – at 74 – is still comparatively low (in the same range as Tunisia, Mexico and Paraguay), and this is likely now to rise significantly, thanks to the arrival of better medical technologies and medicines. But here is just one part of the problem facing a country like Serbia, since most of this increase in life expectancy will come from improving the outlook for the over 60s, and this will have a significant on-cost with little positive economic (as opposed to human) benefit.

At the same time the median age is fairly high at 40.4, and since fertility at this point is not disastrously low, and life expectancy not especially high it would seem to be a reasonable deduction that there has been a fair amount of outward migration in the 20-40 age range. Again the situation is complicated by the fact that the Serbian government has not made migration figures public since 2000 (if indeed they themselves know, as this paper on migration in the Serbian context makes clear). Indeed the whole issue of Eastern European migration is a complex one, and has been the subject of a recent World Bank report which Claus Vistesen has written a preliminary comment on (and which he will comment in more detail on later in the week). Basically there seems to be a systematic east-west migration process taking place across Europe at the present time, driven mainly by the existence of a substantial wage gradient.

So Serbia has, along with most of the rest of Eastern Europe a substantial problem in retaining its young native-born human capital. Indeed, according to the above cited paper, a staggering 70% of students indicate that they would like to leave the country on completing their studies. But on top of this Serbia – along with a whole swathe of other Eastern European countries (Croatia, Macedonia, Moldova, Ukraine, Georgia, Armenia etc.) – faces the problem of being excluded (at least in the short term) from the European Union. Unfortunately with the current climate towards enlargement inside the EU this situation is unlikely to change much in the near future, and these are likely to be critical years in the demographic history of these countries as the full weight of the second stage of the demographic transition – low fertility and medically driven extensions in life expectancy – comes increasingly to exert an effect.

Now, if we turn to the economic data, we find we have a somewhat complex picture. Many are signaling the recent comparatively high GDP growth rates – which at 6% pa in 2006 is one of the fastest growing in the region – as an indicator of a robustly resurgent economy. Indeed some are even – misguidedly – lead to use the term ‘tiger’ in the Serbian context. I say misguidedly, since the term tiger was – as is well known – coined to refer to the rapid development of a limited number of SE Asian economies (S. Korea, Taiwan, Singapore, Hong Kong). Use of the term has also been extended more recently by David Bloom and David Canning to the Irish Case (see the Celtic Tiger here). But the whole point about the use of the term ‘tiger’ in the economic literature is that it is tightly related to an economic process known as the demographic dividend, which is a state of affairs wherein favorable changes in population structure facilitate both increasing labour force participation rates and rising productivity. And it is just this dividend that Serbia (along with most of the rest of Eastern Europe) is not going to be able to leverage, since the key demographic changes associated with the dividend took place without the economic growth spurt (which is why there is nothing automatic about the transmission from demography to economics).

A more sober vision of the spectacular growth rate to be seen in Serbia can be found in this article, where the author – Vesna Peric Zimonjic – is at some pains to point out that the impressive investment figure of 5.2 billion dollars of investment in Serbia in 2006 paraded by Minister for External Economic Relations Milan Parivodic is in fact a rather misleading one, since most of the money involved came through the sale of entities in the telecommunication and banking sectors to foreign companies.

Gross domestic product (GDP) has, of course, risen to 44.7 billion dollars and per capita income now exceeds 5,700 dollars, but it is well worth bearing in mind that Serbia’s economic performance is still worse than it was in the benchmark year of 1990, the last pre-war year of former Republic of Yugoslavia. On top of this unemployment currently stands at a level well in excess of 2o% of the working age population, and even more significantly, a recent study by the education ministry revealed that almost half the adult population has only elementary education. And this situation becomes even more serious when you consider that there are comparatively few children being born, and those newly educated people who can are upping and leaving.

Perhaps the final bucket of very cold water is thrown on all this by the most recent authoritative statement on the state of the Serbian economy: the October 2006 IMF selected issues Serbia paper, from which I now freely quote:

Serbia has made significant economic progress since 2000. Output is up 40 percent and the share of the private sector in non-agricultural non-budget employment has almost doubled to around 60 percent. These advances have reversed the decline of the previous two decades. In light of this progress, these notes aim to shed light on the challenges ahead.

Of course it is important to remember here that back in 2000 the Serbian economy was virtually in ruins, so climbing back up was not so difficult, it is what comes next which is important:

With capital formation rates regionally low and employment reportedly falling, much of the economic recovery since 2000 has reflected growth in total factor productivity. In part, this is the dividend of corporate reforms which have increased efficiency. But even with the exceptional steel investment in 2004, Serbia’s investment ratios are well below those in other transition countries. Even allowing for data quality uncertainties, these investment patterns raise questions about the sustainability of Serbia’s recent economic growth. The note infers that these investment patterns indicate that a significant further reform agenda—ranging from improved business and political climates, to bankruptcy and privatization—still lies ahead.

and on employment:

With the unemployment rate at 21 percent and rising, employment reportedly in trend decline, and future restructuring set to result in further layoffs, the issues are challenging. The note is exploratory, suggesting lines of enquiry rather than firm conclusions about the way ahead. It reports that the employment structure has shifted to the private sector, but cautions that data are not yet conclusive as to whether this is re-classification due to privatization or whether private firms are creating new jobs. It suggests that Serbia’s labor institutions could be reassessed in view of the high and rising unemployment, including the complex wage setting mechanisms in the public sector inherited from the Yugoslav era.

Also note the rapid growth of credit, especially to unhedged borrowers (shades of the Hungarian disease):

With rapid credit growth one of the consequences of earlier reform, notably of the banking system, the 2005 FSAP pointed to the need to strengthen banking regulation. Given that the 2005 banking law brought the legal regulatory framework largely in line with Basel Core Principles, this note emphasizes that the key challenge now is implementation. It notes that credit, which is largely fx-indexed lending to unhedged borrowers, requires strengthened regulatory capacity to monitor and manage indirect credit risk arising from foreign exchange exposures.

And note these two points from the Main Findings section:

In Serbia, the large current account deficit has been associated with relatively low investment ratios compared to other CEECs (except Bulgaria)—although data doubts remain.

Given Serbia’s large external debt, financing its large investment needs will require achieving higher national savings and attracting larger non-debt creating flows.

and this:

Given these caveats, Serbia’s data suggests surprisingly high external deficits given lackluster fixed investment ratios. Such delinks are not without precedent—after 2001, the Czech Republic and Hungary both reported continued high external deficits while fixed investment ratios declined, in both cases reflecting weakening domestic savings rates. But overall, Serbia’s performance is unusual in degree—reporting large external deficits alongside low investment ratios.

I think the very last sentence really says it all. So not exactly an appetizing picture, and one which the rather complicated outcome of this weekends elections will doubtless make even less so.

17 thoughts on “Serbia: That Incredible Shrinking Country

  1. More railing against those who fail to submit to Procrustes’ Bed. Heterodox policies are responsible for the Asian Tigers, and don’t you forget it. Remember that South Korea once had the death penalty for financial transactions that now are considered to be a fundamental human right.

    It’s a pity that the Radical Party didn’t win outright victory. It’s a pity that G17-Plus was not obliterated. By the way, there was rebuilding going on in Serbia in 1999 and 2000, and that ended after the October coup and why? The need to conform to orthodoxy.

  2. Unlike Serbia, Montenegro, Macedonia, Moldova, Ukraine, Georgia, Armenia etc, Croatia is well on its way to the EU.

    If it wasn’t for Serbia’s (self-)destructive war of aggression in the early 1990’s, Croatia would have certainly got in with the other 10 CEE countries given its markedly higher level of development over the likes of both Romania and Bulgaria–despite the fact that it was engaged in a war of independence at this time…

  3. Serbia is incredible country, in every single way. It seems like it has a lot of issues on paper, but I think all of those can be easily fixed if there are right people sitting in the government. Even though in yesterdays elections, radicals took most votes, ‘pro European’ parties still took 2/3 of the votes. The feeling is that most people vote for Radicals, because of their populous talk and because they feel that west is constantly blackmailing Serbia. There are a lot of confusions and prejudice about this Eastern European State, but hopefully they will disappear one day, once Serbia finally truly progresses and become a part of EU.

  4. Ok.This article made few points of relevance in my opinion.Serbia has made tremendeous political and economic reforms with little to no help internationally.Many of those points made could apply accross the board of most European countries concerning population decline.As far as the economy is concerned, economic ‘tiger’ seems a fair description for a country that has seen unprecedented economic performance( have in mind that Serbia is in transition only for 6 years compared to Bulgaria and Romania which have been in ‘bussiness’ for 17).Serbia has all the problems of a transitional state coupled with recovering from 20000 tones of bombs, decade of sanctions and political demonization.But despite all this, when you visit Belgrade, one can notice the special something that sets Serbia appart from other Balkan states, that of a society that remembers economic prosperity and yearns for its return.

  5. Please, please, please. The Radical party doesn’t even know what the hell it would do with the economy.

    And the ‘pro European’ parties didn’t get 2/3 of the vote. The only true parties that I would consider ‘pro European’ are the DS and the Liberals, and together they got less than 1/3 of the vote. Kostunica is a nationalist of the type of the 1990s dressed as a democrat, while the Radicals don’t even try to dress as democrats.

    Europe should not make the mistake of underestimating Serbian nationalism, and dissmissing SRS votes as merely ‘frustration votes.’

  6. “Heterodox policies are responsible for the Asian Tigers, and don’t you forget it.”

    Well it all depends what you mean by heterodox, I suppose. There is heterodox in Thailand, and there is heterodox in Ecuador, and one may to some extent work, while the other almost certainly won’t.

    But my big beef is to do with the demographic transition, and how important it is to be able to leverage the demographic dividend period to get take-off speed on sustainable growth.

    And this is where the whole of Eastern Europe is extremely handicapped, since this moment went by without arriving at a modern growth regime. And sometimes history doesn’t give you a second shot, you are simply, to some extent, constrained by your past. This isn’t fair? Of course it isn’t. But simply stamping your foot won’t help. The first step in resolving a problem involves recognizing the problem exists.

    The interesting thing about heterodox, or sub optimal, policies is that in some situations you can get away with them – India, China, Brazil, Turkey – and in some you can’t (let’s just see what happens next in Hungary).

    So what makes the difference, that is my question.

    Of course, in some sense, I myself am heterodox, since I don’t accept at all the neo-classical postulate of steady-state growth. Nations are much more like living organisms than they are like planets whizzing round on elliptical paths. That is why demographic processes do matter.

    There are two elements to economic growth, sound policy and demography. Serbia it would seem increasingly has neither to its advantage.

    This is why I think we are headed to no good place.

    Of course the strange thing about nationalism (in either capital or small case letters) is that by privileging the emotions it normally clouds judgement.

    Who cares more about the future of Serbia, those who proudly trumpet “everything is just fine”, or those who start to itemize the problems, so something can be done to try and address them.

    Any fool can drive a car straight into a brick wall. Don’t take the bleatings of all those who have “I care about my country” engraved on their forehead at face value. Normally they have no idea what they are talking about, and patriotism is the first and last resort of the scoundrel.

    “Unlike Serbia, Montenegro, Macedonia, Moldova, Ukraine, Georgia, Armenia etc, Croatia is well on its way to the EU.”

    Well I certainly hope you are right. But what I am trying to draw attention to is how the accession issue may be somewhat closed for the time being. Much hangs on the debate about Turkey, and I seriously doubt that any other candidate situations can be resolved till the Turkey issue is, and this one won’t become clear until we find out what is going to happen in Iraq.

    This is all very tricky, but if to the “we don’t want you” rebuff the response is simply “well we didn’t want to join anyway”, this will only lead things into a blind alley. It is thinking with the heart and not with the head.

    “Serbia is incredible country, in every single way. It seems like it has a lot of issues on paper, but I think all of those can be easily fixed if there are right people sitting in the government.”

    Would that this were so, and life was so simple. All men of goodwill etc. Unfortunately though it may well be that Serbia has neither the right circumstances, nor the right people in government, in which case…..

    “Ok.This article made few points of relevance in my opinion.”

    Well we are all entitled to our opinions :).

    “Many of those points made could apply accross the board of most European countries concerning population decline”

    Well it isn’t quite this simple. Serbia seems to have the worst of many worlds, and East Europe is in a much more parlous state than West Europe, if only for the reason that these societies are going to get old before they get rich. The critical years are all going to come in the next decade, which is what most people don’t seem to recognise.

    Certainly you can have a very rapid growth spurt as you converge techologically and behavioually, but then you hit capacity problems, and it is what happens then that interests me.

    “As far as the economy is concerned, economic ‘tiger’ seems a fair description”

    Well as I am saying this is not the technical meaning of the term in an economic context. On this count Nigeria would also be a tiger, and this would be ridiculous (as in just wait to see what happens next in Nigeria).

    “Europe should not make the mistake of underestimating Serbian nationalism, and dissmissing SRS votes as merely ‘frustration votes.'”

    I agree. We can easily get onto a very lose-lose path here.

  7. >>Well I certainly hope you are right. But what I am trying to draw attention to is how the accession issue may be somewhat closed for the time being. Much hangs on the debate about Turkey, and I seriously doubt that any other candidate situations can be resolved till the Turkey issue is, and this one won’t become clear until we find out what is going to happen in Iraq.

    Turkey and Croatia have been on separate paths to the EU since mid-late 2006 as Croatia’s accession negotiations have continued apace while Turkey’s have abruptly stalled over Cyprus etc.; the two accession candidates in other words are no longer correlated.

    Indeed, a greater concern for the Croats is the nature and extent of the current round of EU Constitutional “body-work” that is currently being addressed by Germany in its role as current rotating EU president country…that said, unlike all of the other countries mentioned previously, only Croatia carries a significant net-positive support/approval rating from existing EU members for accession into the EU. Despite the threat of setbacks within the EU, the momentum for its accession negotiations deservedly continues to build as per the following quote found in today’s Helsingen Sanomat:

    http://www.hs.fi/english/article/Difficult+task+of+reviving+EU+constitution/1135224513377

    “On the other hand, supporters of a mini
    agreement know that Germany is less than convincing when it emphasises that the EU cannot expand beyond its current size, if no comprehensive agreement is not reached. The EU’s 28th member could be Germany’s long-standing friend and EU ward Croatia, whose moves into the EU will certainly not be blocked by Germany, regardless of whether or not there is a treaty.”

  8. Thanks for taking the time out to address these issues.

    Of course I would add that the IMF is hardly a neutral party without an agenda but many of their concerns are well taken. Above all Serbia lacks investment, it also trails behind other countries in terms of infrastructure.

    I hope that the National Investment Plan is put to better use by the next government. Whilst on this point if anybody is wondering what I meant by the IMF comment this is pertinent. The IMF and other world financial institutions dont much like state investment as, according to their economic philosophy, it crowds out private investment (or to be more precise crowds out potential investors from countries that are influential at institutions such as the IMF et al).

    My reply (and those econonmists similarly minded) is that state investment can be economically useful although it tends to be abused by short-termist politicians who want to buy votes.

    Oh and I agree that investment revenues are overstated. Firstly, not much of it was greenfield, secondly as you pointed out Serbia’s starting point is much lower, thirdly for some perspective Romanias investment revenue last year was almost double this total. Still, economic performance wasnt bad but could be better.

    I think that the next government’s economic policies will be crucial. Oh, it might interest you to know that the democratic party became the first party in Serbia to advocate policy ensuring that ordinary shareholders will be able to participate in state privatisations. This I think is a positive, although it drew a negative response from other parties for the usual reasons – the average Serb doesnt have enough money etc etc.

    In my opinion the key indicator to how serious / succesful this government will be is how long we will have to wait for a new government to be formed. Anything more than a month and I’ll be increasingly pesimistic.

    ‘Europe should not make the mistake of underestimating Serbian nationalism, and dissmissing SRS votes as merely ‘frustration votes.’

    Disagree. The danger lies in making the mistake of overestimating votes for SRS as being for nationalism when they are also votes for social populism. When you are uneducated, working for a loss making state industry it makes perfect sense to vote for the radical party whether you are a nationalist or not.

    The same is true if you are unemployed or indeed a refugee or displaced person. If you have no tomorrow a sentiment of ‘To hell with the system, lets make everybody suffer’ – might be stupid but it isnt necessarily nationalism.

    As somebody who closely observed the election on that level what worries me more is DSS lurch to the right to try to capture radical party voters.

  9. R:

    It’s a pity that the Radical Party didn’t win outright victory. It’s a pity that G17-Plus was not obliterated. By the way, there was rebuilding going on in Serbia in 1999 and 2000, and that ended after the October coup and why? The need to conform to orthodoxy.

    Did you post as Ricardus several months ago? If so, we had this discussion before.

    At any rate, in 1999-2000, in the absence of foreign investment on any scale Serbia under Milosevic was exhausting its last sources of domestic capital, including the capital funds needed to maintain its infrastructure. Had Milosevic stayed in power, Serbia would have adopted something worrisomely close to a North Korean growth trajectory.

  10. “The danger lies in making the mistake of overestimating votes for SRS as being for nationalism when they are also votes for social populism”

    Good point. But just how can you seperate the ‘nationalism’ votes from the ‘social populism’ votes? And, in essence these two things are very similar. They can do about the same amount of damage to a country and its neighbours. The point is destructive forces in Serbia are still strong. Although, the improvement of DS is encouraging.

  11. @Randy: Everyone now forgets that Milosevic wasn’t quite as copperbottomed a socialist when he was in charge as in retrospect. After all, he privatised Telekom Srpska in, what, 1996 – in a deal involving NatWest, who at the time had a former British Foreign Secretary on their board who had something of a reputation for being nice to him.

  12. Alex:

    Everyone now forgets that Milosevic wasn’t quite as copperbottomed a socialist when he was in charge as in retrospect. After all, he privatised Telekom Srpska in, what, 1996 – in a deal involving NatWest, who at the time had a former British Foreign Secretary on their board who had something of a reputation for being nice to him.

    If he’s a socialist, then, well …

  13. Slobo a socialist? Pft. Slobo had no politics beyond opportunism. His ideology consisted of “stay in power” and “self, friends and family get rich”.

    The privatization of Telekom Srpska was quite remarkably corrupt (I know you’ll be shocked to hear). Nor was it exceptional. Slobo privatized a number of state-owned firms, almost all to friends and cronies.

    Mid-1990s Serbia was not “socialist” in any meaningful sense. It was “the elite have decided to steal everything that’s not nailed down, under cover of a war and national emergency -ist”.

    Doug M.

  14. Depends on what you consider a socialist really. But no Milosevic wasnt really a socialist, he wasnt really anything apart from a power hungry, pragmatic, populist demagogue.

    ‘The privatization of Telekom Srpska was quite remarkably corrupt ‘

    As Vuk would say you are mixing grandmothers and frogs – well not really. Remember Telekom Srpska has only just been sold. Telekom Srbija is what you meant!

    bytcci ‘how can you seperate the ‘nationalism’ votes from the ‘social populism’ votes? ‘

    You cant of course – with much accuracy. But as an individual you can talk to these people – away from the rallies and so on. In another period some of these people (believe it or not) were followers of Titoism. What happened – their ability to be manipulated remained but they fell prey to bombastic rhetoric and empty promises.

    Yes, as a whole they are destructive but they (unable to look at the big picture) would say that it is people like you and me that are the destructive ones. Not only do we want them to lose their jobs (effectively) we want rid of them or at least somehow to sweep them under the carpet.

    Something has to happen – those more educated who vote radical and less tribal in their support need to be given a realistic alternative party to support their social concerns. The most realistic prospect is DSS and DS as both moderate their reform mindedness with social policies – the later because they are more sadly conservative and the former because of their social democratic philosophy. Let me give you another example remember how high businessman Karic was riding? All social demagogy and he was regularly recording support of 15 percent.

    Of course the more machiavelian method of dealing with this is divide and rule. Its not my job but by far the most effective thing to do would be to ‘encourage’ part of the Radical Party to break away. Bear this little fact in mind DSS, G17, LDP are all break offs from the Democratic Party (although admittedly about half of todays supporters of DSS are as close to the radical party).

    It doesnt take a MENSA member to work out what a serious split in SRS would do. It could destroy them as a serious political force.

    But to return to your question – as I said there is no way of truly knowing. But then I’d if people should automatically assume its just because of nationalism if we really dont know. Of course I know there are a wide range of motives for thinking it is just nationalism above all its the easy explanation whenever words like Balkan come up people expect the n word to follow.

  15. Oops I made a gaffe there. It is DSS who have a sad conservative philosophy and DS that are members of Socialist Internacionale…

  16. All FRY States had a huge brain drain. Those were mostly the younger generation.

    The government is aware that the population is in decline.

    The road will be difficult. Agriculture, will be the asset that keeps them a float until they can secure contracts for light industrial work. It’s location is not bad…definitely better than some of the others.

    NATO sure put a bunch of civilians out of work though.

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