Alongside the unavoidable post-(pre-)election topics dictated by politicians, which dominate the media and public discourse, two issues have stirred public attention even further – the choice of the song that will represent Serbia at Eurovision, and the question of low domestic investment. To be clear right away, the latter topic regarding low domestic investment and economic growth rates is purely the author’s fiction. It is a highly specialised topic, interesting to a small group of economists, and it is not politically correct to discuss it extensively in public.
So why not use the genuinely popular topic of Eurovision and see whether one can touch the eagle’s nest of low domestic investment, and consider whether it is realistic to expect the Serbian economy to exhibit the traits of a Ramonda in the years ahead? The topic of low domestic investment should first be placed in an economic context to be understood both as a cause and a consequence of the environment in the Serbian economy and society.
This context is linked to the issues of low economic growth rates in the Republic of Serbia and the lack of convergence with the standards of European Union countries – not the most developed ones, but rather Central and Eastern European countries or the Visegrаd Four. Following the transition, the global economic crisis, the public debt crisis, and the fiscal consolidation implemented in 2014, policymakers – and thereby all economic decision-makers – faced the main challenge of high unemployment and the choice of a growth model that would address unemployment and improve living standards.
At that time, whether anyone was aware that they were choosing a model of economic growth, or whether it was considered a matter for those who would “comb their hair while the village burns” – cannot be determined. However, the model based on foreign direct investment was the simplest and politically rational solution for politicians who had to extinguish the “fire” of high unemployment. Let’s be honest, it was not easy to face unemployment above 20%, and there was little room for manoeuvre in making better decisions.
Over the years, Serbia has become an example in attracting foreign investors, achieving results in reducing unemployment. Despite all methodological changes and incomparability in Labour Force Survey data, registered employment data clearly show that from 2015 to 2023, the number of employed persons increased by 371,000. Similarly, the total amount of foreign direct investment in Serbia grows year by year, slowly approaching 5 billion euros annually.
A growth model based on foreign direct investments (FDI) was the simplest and politically rational solution for a politician who had to address high unemployment.
Yet, the growth model based on foreign direct investment, adopted to solve the problem of high unemployment, has failed to achieve high growth rates. Observed through overall GDP as well as per capita GDP, Serbia has not significantly approached the EU countries it aims to catch up with. Looking at the period from 2015 to 2023, brighter points were 2018 and 2019 when GDP growth rates were 4.5% and 4.3%, while in other years, the range was 1.8% to 3.3%. This observation excludes 2020 and 2021, which were exceptional due to the GDP drop and subsequent sharp growth caused by the coronavirus pandemic
With an understanding of this context – which moves away from current economic and political issues – the hunt for the reasons behind the failure of Serbia’s economic growth model can begin. One reason for this failure, which should be focused on, is low domestic investment. The level of domestic private investment, measured as a share of GDP, has sometimes been twice as low in Serbia compared to countries like the Czech Republic, Slovakia, and Slovenia.
Leaving room for other contributing factors, two explanations for low domestic investment are the unfavourable position of small and medium-sized enterprises relative to foreign investors and property insecurity. Due to the indirect favouring of foreign direct investors and the lack of criteria regarding what products and value-added foreign investors bring to Serbia, domestic small and medium enterprises lose incentives and opportunities to invest more.
From the perspective of their owners, increasing investment would be irrational when policymakers do not adequately listen to them. The second, more persistent reason in the Serbian economy and society, which is harder to address, is the legal insecurity of property. It is simple to explain that owners of small and medium enterprises are unwilling to invest in the further development of their businesses when institutions insufficiently protect property rights.
All achieved growth rates are far from the 5% or 6% rates that would reduce Serbia’s lag behind Europe – and even farther from the dreamed 7% growth rate that, if maintained for 10 years, would double Serbia’s GDP.
The problem of insufficient domestic investment as a reason for the failure of the current growth model will be discussed more frequently, as it is obvious that the growth model is not functioning effectively regarding growth rates. The first signals are already emerging from the Kopaonik Business Forum. However, what should not be allowed is for the explanation to remain a broad discussion of weak institutions, which is undoubtedly true, as institutions are a very broad concept.
The problem should be concretised through questions of property protection, the introduction of criteria for attracting subsidised foreign direct investment, and positive discrimination for selected sectors. All of this is necessary to prevent the resolution of the growth model problem from being delayed, as it is anticipated that policymakers’ response will be to further increase public investment spending until 2027, focusing on the Expo 2027 project, thereby boosting GDP growth.
This economic policy measure, if successful, is a short-term solution, while the core problem remains low domestic investment – a consequence of the indirect favouring of foreign direct investment – and what will be much harder to solve – property insecurity.
In the harshest terms, as long as there is fear of investing because everything can be taken away overnight, the Serbian economy will not revive like a Ramonda and emerge from the state of anabiosis it has been in for at least the last three decades.
Author: Nenad Jevtović, BSc in Economics, Institute for Development and Innovation (article published in Forbes Serbia, March 5, 2024)
