Reforms in Serbia: Reforms in Serbia: Achievements and Achievements and Challenges Challenges Danica Popović Danica Popović Center for Liberal Democratic Studies Center for Liberal Democratic Studies Sava Centar, September 20th, 2008 Sava Centar, September 20th, 2008
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Reforms in Serbia: Achievements and Challenges Danica Popović Center for Liberal Democratic Studies Sava Centar, September 20th, 2008.
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Reforms in Serbia: Achievements Reforms in Serbia: Achievements and Challengesand Challenges
Danica PopovićDanica PopovićCenter for Liberal Democratic StudiesCenter for Liberal Democratic Studies
Sava Centar, September 20th, 2008Sava Centar, September 20th, 2008
Izvor: Konsolidovani prihodi i rashodi države, 6.5.2008. godine, sajt MINFIN, IMF Country Report No. 08/55
Consolidated public consumption in Serbia, 2001-2008.
The Problem:The Problem:
The existing share of public spending of over 40% of GDP is too high and unsustainable
and the internal balance in the medium-term critically depends on fiscal sustainability.
The expansionist fiscal policy from the previous years led to an accelerated increase in real wages – Wages grew (15.3% per year on average in the last
five years, – while the annual GDP growth in this period was
about 5.6% on average).
Problem +Problem +
In recent years, budget capital In recent years, budget capital expenditure increased its GDP expenditure increased its GDP share share – from 1.9% in 2005 from 1.9% in 2005 – to 3% in 2006 to 3% in 2006 – and to 4% in 2007, and to 4% in 2007,
which relates to the National which relates to the National Investment Plan. Investment Plan.
Real growt of gross wages, 2004-Real growt of gross wages, 2004-20072007
95
100
105
110
115
120
125
2004 2005 2006 2007
Health
Public enterprizesAverage
Education
total
Local public companies
Administration
Gross Wages 2004-2008Gross Wages 2004-2008
All SectorsAll Sectors 2626
InsturanceInsturance 5555
HealthHealth 4242
Post and TelecomPost and Telecom 4242
EnergyEnergy 3939
ConstructionConstruction 3434
Air traficAir trafic 3030
EducationEducation 2828
BankingBanking 2626
ManufacturingManufacturing 2020
0
10000
20000
30000
40000
50000
60000
javna
drž
adm
inist
racij
a
obra
zova
nje
javna
lok
zdra
vstv
o
Srbija
2004 2005 2006 2007 2008
Pre-election wages growth,
may 2006-may 2007.
Realn growth of gross wages, 2004-2008.Realn growth of gross wages, 2004-2008.
Crowding out and slowing economic Crowding out and slowing economic growthgrowth
Too large share of privatization receipts Too large share of privatization receipts goes to consumption, as a typical case of goes to consumption, as a typical case of disinvestmentsdisinvestments
Privatisation receipts are drying outPrivatisation receipts are drying out
Fiscal deficit of 1% causes CA deficit in Fiscal deficit of 1% causes CA deficit in the same percentthe same percent
Official data indicate 2.488,800 employees 795,000 unemployed
Unlike most former socialist countries, Serbia did not Unlike most former socialist countries, Serbia did not succeed in maintaining a single digit inflation rate! succeed in maintaining a single digit inflation rate! A double digit inflation rate in A double digit inflation rate in 2007. 2007. of of 10,1%10,1% was was caused bycaused by – Electricity, public utilities, tobacco, oil –non coreElectricity, public utilities, tobacco, oil –non core– EExogeneous disturbancesxogeneous disturbances– – agflation, rise in oil pricesagflation, rise in oil prices– Growth in aggregate demand which accomodated these Growth in aggregate demand which accomodated these
shocksshocksBazna inflacija jeBazna inflacija je 5,4%, 5,4%, - - unutar predviđenog intervala 4–unutar predviđenog intervala 4–8%. 8%.
NBS was active in preventing the Dinar from nominal NBS was active in preventing the Dinar from nominal depreciationsdepreciationsAs a consequence, dinar appreciated in real termsAs a consequence, dinar appreciated in real terms
AppreciationAppreciation
Realni i nominalni devizni kurs, 2000-2008.
60
110
160
210
260
310
strong appreciation
realni devizni kurs
€/din
nominalni devizni kurs, dec.2000
And a BOP deficitAnd a BOP deficit Which rose from 10% to 16,3% GDP
[1] Marata 2008. godine devizne rezerve iznosile su 9,553 milijarde evra.
Foreign trade deficitForeign trade deficit
The key source of large foreign trade deficit consists The key source of large foreign trade deficit consists of (still) low exports, of (still) low exports, – at the beginning of the transition were barely 15% of at the beginning of the transition were barely 15% of GDPGDP– In 2007 the exports reached a third, imports reached a half In 2007 the exports reached a third, imports reached a half
of GDP of GDP – normal values in the countries of similar size are between normal values in the countries of similar size are between
50 and 80% of GDP), 50 and 80% of GDP),
which means that the exports do not reach half the which means that the exports do not reach half the share in GDP that would be necessary in a growing, share in GDP that would be necessary in a growing, open economy. open economy. Growing deficit is financed by foreing savings, partly via Growing deficit is financed by foreing savings, partly via rise in indebtness, and the rest is covered by foreing rise in indebtness, and the rest is covered by foreing direct investments. direct investments.
Is this deficit OK?Is this deficit OK? The balance of payments current account deficit, which in the last
twelve months increased from 3 to 5 billion euros (from 12.6% to 16.3% GDP) is NOT an a priori ultimate sign of economic deterioration.
Y Y is GDPis GDP (BDP), (BDP), asterisk – long term level of the variableasterisk – long term level of the variable promenljive (up. Obstfeld i Rogoff, 1996). promenljive (up. Obstfeld i Rogoff, 1996).
All three phenomena are related to the first phases of transition, where both domestic product, investments and public consumption stay above their long term level.
DEBTDEBT - m- mааyy 2008. 17 2008. 17..6 6 bil bil €€
Serbian foreign reserves exceed manytimes the amount of short-term debt (the situation is at least threetimes worse in all other countries observed) and foreign reserves are higher by as much as 25% than the sum of the short-term debt andtotal current account deficit. Therefore, this risk may not be consid-ered significant in Serbia, although any further deceleration of foreign reserves growth would present a very serious signal of increase in vul-nerability of the Serbian economy.
Greenfield Greenfield FDIs could FDIs could
helphelp
Foreign Direct Investmentsin the Western Balkans, 1997- 2004
ALBBIHMAC
CRO
Serbia
0
500
1000
1500
2000
2500
3000
3500
1997 1998 1999 2000 2001 2002 2003 2004 2005
FDIs per capita and share in GDP
252 256479
350
1777
0
500
1000
1500
2000
ALB BIH CRO MAC Serbia
0,00%
1,00%
2,00%
3,00%
4,00%
5,00%
6,00%
cumulative FDIper capita FDI/GDP
Key determinants for attracting FDIs
39%
42%
48%
49%
53%
57%
58%
61%
65%
68%
0% 10% 20% 30% 40% 50% 60% 70%
Price/quality of labor
Presence of competition
Business climate
Market size
Macroeconomic stability
Profit repatriation
Institutional framework
GDP growth
Political stability
Market size
Izvor: FDI Confidence Index, AT Kerney 2002
The experience of Portugal can be The experience of Portugal can be very indicative when discussing very indicative when discussing
vulterabilities of Serbian economyvulterabilities of Serbian economy
Investing in non-tradables – real estate,Investing in non-tradables – real estate,
High growth of wages, highly above TFPHigh growth of wages, highly above TFP
The Serbian economic policy seems to have adjusted the entire set of measures precisely
to populist goals : :
the overvalued exchange rate enabled higher imports of consumer goods and a higher standard of living, high public spending, which enabled to a great extent the wage increase to exceed by far the increase in labor productivity and delay in implementation of bankruptcy legislation enabled– a number of unproductive jobs, with unearned wages
received, to be kept.
Foreign debt crisis?Foreign debt crisis?
Public debt repayments, 2001-2010.
218 675 1076 1034 1658 2182 2609 2754656 745815
897960 1065
2970
Izvor: MMF, na dan 31.12 04. Iznos zavise od vrednosti kursa USD
Golden ruleGolden rule: : for keeping the same level of competitiveness for keeping the same level of competitiveness productivity growthproductivity growth = = growth in real wages + currency growth in real wages + currency
appreciationappreciation
Wages, productivity, appreciation, 2001-2007.
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
2001 2002 2003 2004 2005 2006 2007
grow th in w ages
appreciation grow th
producitivity grow th
Conclusion IConclusion I
Macroeconomic imbalances in the economy of Serbia threaten to hinder further accelerated economic growth. For the purpose of lessening the key vulnerabilities, it is therefore necessary to: – (1) reduce public spending, especially current expenditure, which would
make room for an increase in capital expenditure at the expense of subsidies and wage increases in the state sector,
– (2) privatize public companies and, wherever possible, stimulate new entries in order forthe party-based management structure of these companies to be replaced with private owners, and for the competition to enable an increase in the quality of their products and services along with a price decrease,
– (3) continue attracting foreign direct investments to the tradables sector, primarily by controlling wages in the state-owned sector, by avoiding any further appreciation of the dinar and by continuing the reforms that will increase the competitiveness of the economic environment in Serbia
Conclusion IIConclusion II
In addition to reducing public spending, most of the conditions that should be met for the maintenance of macroeconomic stability are clearly in the area of microeconomy and reform of government administration.