Serbia's European Perspective

PERFORMANCE FOR PEOPLE OR EUROPEAN PERFORMANCE

By Mijat Lakicevic

The main reason why the showdown in the ruling coalition did not end up in the fall of the government is that the EU candidate status for Serbia has become crucial for Boris Tadic and his Democratic Party. True, though one should not rule out the possibility of the government's fall (at this point, late in February, when this article is about to be sent to the editor), everything indicates that Serbia's political scene is calming down now that the "disturbing factor," named Mladjan Dinkic, was removed. There is no telling how long this relaxation will last or whether some new surprises await us but the present epilogue of the deepest crisis ever of the Premier Mirko Cvetkovic cabinet leads to the conclusion that the European Union has become a "goal of goals." Actually, it is not that much of a goal as it is the means of the safeguard of power and a major argument for the upcoming election campaign. Be it as it may, Europe has become a number one topic. And mostly thanks to the opposition, to be honest, actually thanks to the Serb Progressive Party endorsing "European rhetoric" and turning almost into a mouthpiece of "the European agenda."

Well, that's not bad, but not that good either. It's not bad because, at long last, the two biggest parties will not dispute over yes or no to Europe but over who and with whom could better perform the operation. And that's progress for Serbia.

On the other hand, it's neither good news given that too many wrong moves have been made in the meantime on Serbia's "road to Europe," the moves that will be weighting the whole journey regardless of the political will and general desire - besides, neither is the former that strong nor the latter that general.

Dinkic has left, but problems have not. The whole story about the government is crucial - for, as a management of a company reflects its weaknesses or its strengths in coping with everyday challenges, especially in the times of crisis, so it is on a government to do what is being expected to do and what is has set as its tasks. This is particularly important in the case of Serbia and its movement towards European Union. For, not matter how its actual standing, measured by the so-called macroeconomic indicators, is hardly anything to boast about (though not that bad in comparison with some other countries), a look at its so-called subjective factors - meaning at its political and state leadership, and their capability to do what has to be done - makes Serbia's prospects even bleaker. Or, in other words, no matter how unfavorable quantitative indicators are, the qualitative ones are more worrisome.

Let's discuss quantitative indicators first. The most Serbia has accomplished in the past year or two - i.e. since the outbreak of the crisis - refers to its gross domestic product and the least to the employment. Two years ago, at the peak of the crisis, Serbia registered the smallest fall in the gross national product (four percent). Last year it managed to get on the list of few countries with the growth of the gross national product (1.5 - 2 percent), whereas the growth for this year is estimated at 3.5 percent. Serbia did well in this sense because its fall was the least, meaning that its recuperation was the fastest. But - and that's the other side of the coin - all this is to be attributed to its overall underdevelopment, low expenditure (per capita GDP is amongst the lowest in the region) and, particularly, to its closed economy. So the negative effects of global trade and market could not have affected it that much. But unemployment was spiraling up despite the relatively favorable growth in the gross domestic product. By the end of 2010 the unemployment rate reached 20 percent, the highest in the region. According to the Statistics Bureau, some 400,000 people have left jobless since the outbreak of the crisis, and one half of this number came from the grey economy. In 2010 Serbia's exports grew by almost one-fourth, which is a commendable achievement no doubt (7.4 billion Euro). And since the exports grew by 10 percent (12.6 billion Euros) the difference between the exports and imports were smaller (presently 58.5 percent and it used to be 52 percent). Serbia's exports are, nevertheless, still very small. The percentage of exports in Serbia's GDP was a moderate 27, whereas 47 in Bulgaria, 35 in Macedonia, 37 in Croatia, let alone Slovenia (61), Slovakia (64) or Hungary (75).

Until recently Serbia used to boast about its relatively small foreign debt. However, in the past year or two its foreign debt soared to some 23 billion Euros and soared above 70 percent of the gross domestic product. Though that's still far from Greek or Irish scenarios, the tendency itself is threatening. That's the more so since the public debt, both foreign and (in particular) domestic, is soaring too: domestic because to cover the deficit the state takes less and less foreign loans but more and more borrows at home (by selling bonds at the free market). This is evidenced by the data about the growing sums set aside for repayment of debts: in 2008 they amounted to 14 billion dinars, in 2010 to 35 billion and the plans for 2011 indicate 46 billion. The overall public debt grows rapidly. By the end of 2010 it equaled 38.5 percent of GDP, meaning about six percent points more than in late 2009. Such dynamics indicate that in 2011 the public debt will exceed the prescribed 45 percent of GDP. Finally, inflation in Serbia has been the highest in the region for years. Annual growth of prices has never been under six percent (which is twice as much as in European countries), exceeding ten percent practically every second year.

Almost by each and every of the five criteria of economic performance - inflation, employment, indebtedness, competitiveness and gross domestic product - Serbia is among the countries with worst standing. If not at the bottom of the list it ranks only above Bosnia or Albania. Anyway, a country's credit rating is telling the most of its economic performance. And Serbia's rating has been BB minus (on a scale from AAA to D) for years. This level is considered speculative rather than investment. A low credit rating indicates a high-risk country, which is, only logically, seen as undesirable (if not repulsive) by worthy, long-term investors but attracts manipulators. This, in turn, results in higher interest rates for the state and companies alike, and consequently hinders investment and development, negatively affects economic competitiveness and so it goes round in circles.

Credit rating mirrors a state. It is telling of its economic (and not only economic) policy. The state of Serbia and its (economic) policy are not reliable for foreign investors. Except in words only, we did little to attract them. They were coming more on their own initiative, on the wave of the global conjunction. When things changed, when the crisis broke out, investments dwindled. Recovered world economy and investment growth, however, did not bring investors back to Serbia. Namely, last year global investments were kept at the same level as in 2009 (some 1.100 billion dollars), while in Serbia they dropped by some 40 percent (about 900 million dollars).

To attract investors again one needs to assure them that Serbia is a stable and prosperous country where their investment will pay. That Serbia's development is sustainable in the long run. But Serbia does not leave one under such impression. What Serbia needs to do, therefore, is to change its developmental philosophy. In other words, it needs to change, as economists put it, its economic model. Up to now that "model" was marked by living on credit in every sense and the following pattern: spending what has not been earned, buying imported goods and investing modestly and mostly unproductively - in real estate and financial services. Such a lifestyle - the same as the above-mentioned macro-economic indicators - is no longer sustainable, it has come to its end, it is "done with." A new economic model implies, in short, lower spending and bigger investment, primarily in industry - but in the industry that ready for and capable of export. Serbia's industry has been almost epically destroyed. In 2009 the processing industry's participation in the gross domestic product fell from 18 (2001) to 13 percent. The number of the employed was halved: from 620,000 in 2001 to 320,000 in 2010. The worst of all, however, is that the industrial production has not reached yet one-half of what it was twenty years ago. And products themselves are nothing one can boast about. As many as 90 percent of companies are at low or near low technological level. Serbia practically has no industrial production. Raw materials make the great bulk of its exports: steel, wheat, corn, fruits, sugar.Hence, reindustrialization is the key to Serbia's future.

The story about a new economic model is not a new one. For more than a year and a half it has been discussed in length through the media. Economists are as one about it and so are members of the cabinet. And that's all to it. To all appearances, things will remain as they are although Premier Cvetkovic announced the government would be more efficient now that the Minister of Economy had gone. No one will bother with a new economic model in this and the next election year. And that's what makes the Serbian government more of a performance for the people than a European performance. And that's what moves Serbia away from European Union with or without a candidate status by the end of the year.