76217 Serbia Country Economic Memorandum: Productivity and Exports Lazar Sestovic and Peter Miovic Figure 1: Export of Goods as Percent of GDP Key Messages 100 100  Serbia needs to redirect its growth strategy to a greater reliance on exports. 80 80  There are many promising export products dispersed across different sectors, but numerous 60 60 constraints to doing business in and exporting from Serbia remain. 40 40  In addition to the weaknesses in the business environment, there are specific problems in the 20 20 areas of labor skills, energy supply, land use, and trade facilitation. 0 0 Introduction Slovakia Czech Rep. Hungary In order to have both dynamic and better balanced Bulgaria Romania Serbia growth, Serbia needs to rely more on exports. In the last decade, Serbia’s growth has depended primarily on Source: World Bank staff calculations. demand that was fueled by excessive debt finance. In the future, the Serbian economy would be better served by Some sectors of the economy are already better increasing its reliance on exports as a new, potentially positioned than others to export. For example, sectors in powerful source of growth. Serbia’s export share of the traditional export base of Serbia, such as food and GDP is currently 25 percent, but that figure should be some chemical products, still have vast potential for closer to 50–75 percent, considering that all European growth. Others, such as the metals industry, emerged Union (EU) comparator countries1 have export shares of only more recently after a successful restructuring of the GDP of 60–80 percent (see Figure 1). A shift to a greater old socially owned enterprises. Still others, such as the export orientation, which is necessary to propel automotive sector, are reemerging after decades of economic growth to a much higher trajectory, requires decline and already offer promise of the kind of export major gains in productivity and improved growth not seen in Serbia since the 1980s. competitiveness. 1 For the purposes of this brief, the Czech Republic, Hungary, Slovakia, and Poland are used as comparator countries. ECA Knowledge Brief Serbia’s Potential Export Products shift toward products with higher value added) in order to expand their production as well. Relying on a Product Space analysis, done as part of the background work for this report, Serbia’s promising Manufacturing product export clusters were identified.2 All products that the country exported over the last 15 years were Value-chain analysis of the metals and auto industries categorized as classics, emerging champions, marginals, suggests that there continues to be a comparative and those disappearing, depending on whether these productivity and competitiveness problem in the products had and/or maintained a comparative manufacturing sector in Serbia. Low productivity is a advantage. Products that had a comparative advantage in particular problem for medium-sized enterprises. Yet the past and have maintained that advantage today are there is also considerable potential for synergies, not “classics”; products that did not have a comparative only to generate export growth but also to expand advantage in the past but display one now are “emerging domestic value chains, which could boost the growth of products”; products that are highly profitable even small and medium-sized enterprises. though there is no comparative advantage for the country Figure 2: Product Space are “marginals”; and finally, products that had a comparative advantage in the past but lost it over time are categorized as “disappearing.” Fully half of Serbia’s exports fall into the “emerging champions” category. In addition, many Serbian products are close to the center of the product space, where the more sophisticated and profitable products can be found (Figure 2). The diagnostic suggests that there are many profitable opportunities to be seized, especially in food processing and metals manufactures. Serbia’s current position in the automotive sector is considered weaker, but the recent investment in the country by Italian car manufacturer FIAT, along with a number of its suppliers, could significantly revitalize this industry. In a nutshell, an optimal export strategy for Serbia would give priority to scaling up the most profitable emerging champions (vegetables and fruits, meat, milk, and steel, iron, or aluminum manufactures), while exploring ways to build linkages for marginal products (i.e., promote a Source: World Bank staff, based on Hidalgo et al. (2007). 2 Product Space analysis offers a fact-based, data-driven evaluation of the feasibility and desirability of alternative The FIAT investment promises to be transformational sectoral and product-level transformation options. Product for Serbia’s auto industry. To take full advantage of it, Space analysis uses a concept of revealed comparative the industry will have to work aggressively to boost advantage combined with new (metrics) measures that productivity, cut and control costs, and overcome such consider how different products may be interrelated (this is constraints as slow customs and logistics and the termed “density”) and what incomes are associated with the inadequate pool of possible domestic suppliers. export of particular products (PRODY). Combined, these metrics make it possible to estimate and compare across Three policies are recommended to build the capacity of countries the sophistication of a country’s exports by the auto and metals sectors for dynamic export and calculating the composite measure termed EXPY. See R. Hausmann, J. Hwang, and D. Rodrik, “What You Export growth: Matters,” Journal of Economic Growth 12 (2007): 1–25; R. Hausmann and B. Klinger, “South Africa’s Export  Target high value-added foreign direct investment Predicament,” The Economics of Transition 16, no. 4 (2006): (FDI). 609–37; and C. A. Hidalgo et al., “The Product Space  Promote private sector partnerships and research and Conditions the Development of Nations,” Science 317, no. development (R&D) within academia. 5837 (2007): 482–87. ECA Knowledge Brief  Ensure that the relevant institutions align quality Serbia needs to rethink the scale and nature of its active standards with those of the EU. labor market programs (ALMPs). At 0.1 percent of GDP, Serbia spends much less on ALMPs than most Agriculture neighboring countries and EU member states. If the country were to reach the Organization for Economic Agriculture is widely considered to have significant Co-operation and Development (OECD) average of just potential for improvement. Although Serbia has recently 0.4 percent of GDP, it would allow 100,000–180,000 become a net food exporter, these exports could be more people to receive training annually. substantially higher. There are various reasons for the suboptimal performance of this sector. Extension With regard to education policy, it is recommended that services, which are essentially a transfer of know-how to Serbia: farmers, could be much more effective, for example, and some segments of the supply chains do not function well  Continue to implement a comprehensive reform of or are missing altogether. Moreover, trade liberalization the education system, starting with the expansion of is not fully completed, the costs of trade (customs, early childhood education all the way through to the logistics) are still relatively high, and the budget’s introduction of an appropriate life-long learning structure does not reflect the sector’s priorities. Finally, system. unpredictable policies and a lack of attention to  Reduce dropout rates in secondary and tertiary structural reforms are making it difficult for farmers, education and equip students with more relevant processors, and traders to plan ahead. labor market skills.  Evaluate both current and planned activities of its The key recommendations for the agriculture sector to: ALMPs in order to improve their outcomes. Eventually, budgets for these programs could be  Establish a more predictable agriculture policy scaled up. process.  Build an effective extension service. Energy  Continue with and expand trade liberalization.  Rethink the agricultural budget by reallocating A power sector crisis looms in Serbia. Generating resources away from ineffective support measures capacity already cannot meet the peak demand, and and gradually increasing the budget envelope. projections of consumption and new capacity show the problem worsening after 2015. Serbia consumes considerable amounts of energy, and the country’s Impediments to Export-Led Growth energy intensity is substantially higher than in other Balkan and EU countries. The high energy intensity The Serbian government’s number one task is to reflects the consequences of policies over the last several accelerate reforms to create an environment that is decades that directly and indirectly promoted energy highly conducive to export-led growth. The report consumption by subsidizing prices and tolerating identifies four main constraints to private sector growth, nonpayment. The energy sector also needs to reduce citing problems with available labor skills, the electric commercial losses, build new capacity, and rehabilitate power supply, access to land and property rights, and the transmission and distribution network. trade facilitation. In all these areas, there are many remaining obstacles that hamper prospects for private To implement the needed reforms in this sector, the businesses and discourage more significant inflows of following measures are recommended: FDI.  Adjust tariffs, cut unjustifiable costs, and improve Skills the poor payment discipline.  Take measures to protect the poor from the adverse In Serbia, the skills produced by the educational system effects of price increases. are often not those most in demand by the economy. The  Improve energy efficiency, particularly in exporting mismatch results simultaneously in high unemployment industries. and shortages of specific skills. Over the long run,  Reinvigorate energy sector reform by implementing solving the skills problem will take a set of fully the new energy law. comprehensive reforms across the board. In addition, ECA Knowledge Brief Land Recommendations to enhance trade facilitation include: Serbia has significant land policy issues that include insecure property rights, poor land management, and  Give the Customs Administration a greater role in institutional inefficiencies. Specific hindrances to the customs policy design. efficient use of land and thus economic growth include  Rethink Integrated Border Management that calls for bottlenecks in the issuance of permits, the complexity of close inter-agency integration and cooperation, the process of regularizing illegally built buildings, and compatible IT systems, and strong compliance. land fragmentation. Institutional inefficiencies, such as  Consider juxtaposed border facilities with the poor management of state assets and tax collection, neighboring countries. also lower government revenue.  Finish the development of an inland customs clearance process. To address these issues, Serbia should consider the  Improve product quality standards and the tariff following measures: system so that they are consistent with those of the EU member states.  Property Rights: continue with the restitution process of properties that were nationalized after Conclusion World War II and train local governments to deal with applications for the conversion of use rights to Serbia will need to fundamentally alter its growth model ownership rights over urban land. in order to compete effectively in world markets. The  Land Management: streamline the process for the past model of relying on excessive inflows of capital and issuance of construction permits and assign a team to credit coupled with a consumption boom has run its monitor the implementation of the new construction course in all European countries, including Serbia. The law. In addition, complete the cadastre in which country should now shift to a greater export orientation every building is recorded and its status (legal or so that it can attain the significant gains in productivity illegal) identified. and competitiveness necessary to advance economic  Institutions: improve the management of state- growth to a much higher level. This cannot occur owned property by creating an up-to-date inventory without an explicit export strategy that attracts of state properties. In addition, train local tax commitment and coordination at the highest political administrations in the proper valuation of properties. level and promotes reforms to remove constraints and bottlenecks in a number of areas, including those Trade Facilitation: Customs and Logistics outlined in this brief. Serbia is ranked 83rd out of 155 countries in the World Bank’s Logistics Performance Index (LPI), and it ranks even worse on timeliness (137th). Thus, improvements About the Authors in the targeted areas of transport and trade facilitation could yield substantial gains in terms of more efficient Lazar Sestovic is an economist in the Poverty economic activity in Serbia. While the Customs Reduction an Economic Management Sector Unit of the Administration had at one point become significantly Europe and Central Asia Region of the World Bank. more productive, in recent years progress has slowed. International comparisons of the quality of Serbia’s Peter Miovic is a former World Bank staff member who transport infrastructure also confirm significant was co-Task Team Leader (TTL) on this report. shortcomings. “ECA Knowledge Brief” is a regular series of notes highlighting recent analyses, good practices, and lessons learned from the development work program of the Worl d Bank’s Europe and Central Asia Region http://www.worldbank.org/eca