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Tuesday, January 30, 2007

Serbia: That Incredible Shrinking Country

This post constitutes a brief economic review and report on Serbia to accompany Manuel's election report (see here on Global Economy Matters). (Also the ever readable Doug Muir has a further breakdown and assesment of the election results over at A Fistful of Euros).

Now 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, and 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.

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