As a crucial period approaches, Serbia’s political and economic leaders face some stark choices. One choice is to step up efforts at fiscal consolidation, cleaning up the state and socially owned part of the economy and adopt policies that will make Serbia a prime place to invest. The other is to procrastinate, continuing to use scarce budget resources to prop up unviable enterprises and cater to narrow interests and, as a consequence, keep running up the debt bill until it chokes the economy.
While to many of us the desirable path is obvious, it is nevertheless not an easy one to make. There are strong vested interests and connections that militate against specific parts of the reform package. Unfortunately, postponing reforms is no longer an option: as Serbia no longer has (fiscal) space for maneuver.
From the perspective of the World Bank, Serbia should be a leader of reform in the region, not a follower. Yet, on business environment it is Macedonia that has gained the headlines, and on service delivery improvements and fiscal consolidation it is currently Albania that has taken the limelight. Slovenia and Croatia are already EU member states, even if the face considerable reform challenges. While the start of the EU membership negotiation process has captured some headlines, and rightly so, it is time to get some more positive attention drawn to Serbia.
There are a few elements to the policy agenda that, in our view, are critical as we move forward together:
Strategic tradeoffs on public sector employment are needed: Serbia employs close to 800,000 people in the public sector, or 26 percent of active working age population, and more than 600,000 of these are in what we call ‘general government’. Work that we have been doing together with the government has identified numerous anomalies in the public sector wage and employment system, while at the same time performance is dismal. Serbia is among the worst performers in Europe when it comes to health outcomes (scoring last in Europe on health outcomes compared to expenditure); Serbia keeps hiring more teachers though it has less and less school age children (the number of children in primary education dropped 22 percent since 2000, while the number of teachers increased by 15 percent over the same period) and nevertheless does not score well on PISA outcomes (on PISA scores Serbia ranks as follows: math 43; reading 45 and science 46th) nor on delivering the skills investors need. While there have been efforts to right size security sector staffing (in particular through army reform), work remains to be done also in this area. In addition, Serbia pays quite exorbitant wages to regulatory agencies and some of the state owned companies.
In our view, as regards service delivery quality, fiscal consolidation is an opportunity that allows for strategic trade-offs; the across the board measures that have been taken so far are as necessary as they are blunt, but the next phase of reform has to have stronger strategic elements. For example; how do we get quality education rather than an overstaffed education sector that does not produce; how do we get to better health outcomes and what re-orientation in staffing and spending is needed, and how do we right size parts of the public sector that grew exponentially in the past. How do we move towards a system where there is accountability for performance and where money follows performance rather than entitlement? Other countries have met and responded to such challenges, including some quite close by.
On the second element of the agenda; a rapid completion of the overdue public and socially owned enterprise reform agenda imposes as the only real choice. Too few Serbian tax payers have been carrying for too long the burden of this very expensive part of the economy that only in 2012 cost almost one billion Euro. Instead of contributing to growth and ‘good’ employment, many of the 1000+ remaining enterprises in this part of the economy are sucking the lifeblood out of Serbia’s budget, banking sector and broader economy. Worse, some of them sit on prime land and real estate that is not being productively used, hence posing an additional opportunity cost on the economy. With legal deadlines looming, the time to act on this is now, and we are convinced Serbia will be much the better for it.
The third and most critical element of the agenda, and the one that needs most reflection, is ‘what next’; once large fictive ‘employment’ in public sector enterprises is taken out of the equation, how will the labor force be absorbed?
There are some short term fixes to look into. For starters, Serbia sits on a large public works agenda that is currently locked up in undisbursed loans, amounting to close to 3 billion Euro. Getting these loans contracted and works conducted will, hopefully, absorb some of the labor force, at least temporarily. Again, the underperformance of public sector agencies is a critical factor in why this has not happened before, and getting accountability and performance frameworks in place that works for agencies such as Roads of Serbia, Corridors of Serbia, the Railways etc. would likely go a long way towards addressing this. We know that this is at best a partial and temporary fix, but nevertheless one that deserves looking into.
At a structural level, however, much more thinking is needed on job creation. The puzzle in this respect is not so much where job creation could come from. Unlocking the assets from the current moribund SOEs will likely generate some new brown field investment, especially if construction permitting legislation is successfully reformed, this again is a start. Promoting and supporting innovative potential is another element. If the relative success of the Innovation Fund in generating good proposals for innovative start-ups is effectively combined with tapping the currently isolated potential of Serbia’s large state funded research sector, this could help breed more home grown competitive businesses. For the third part, strategically attracting investment partners, efforts to rebuild old ‘non-aligned’ alliances appears to be paying off. It is the traditional partners of old Yugoslavia that these days have funds to invest and spend, and Serbia, as not yet a member state of the EU but being close, is very well placed to capitalize on this. However, regulatory and policy-level obstacles to the realization of this potential remain and they are mostly the result of the inaction by successive governments in creating the right conditions. This begs the question why it is that these obstacles could be removed in countries like Macedonia and Albania but not in Serbia.
Some of the policy measures to make this a more attractive proposition deserve further thinking. For example; easing the regulatory framework for employment is a second element, and already being considered; investing in re-skilling workers (rather than sinking scarce resources into an overstaff teaching contingent) for the kind of demand that these potential investors have; addressing other constraints in the business environment that are well publicized and technically easy to resolve will help as well. Completing the infrastructure projects that have been already committed is a further important condition for success.
If Serbian leaders have the courage and vision to take on this, undoubtedly difficult, agenda, the odds for Serbia being a success story when it joins the EU are considerable. If the opposite is the case, one does not have to look too far south to see the potential consequences which, for a country still outside the EU, are extremely dire.