Serbia's Road to Unleashing Prosperity

October 21, 2010

Loup Brefort, Country Manager for Serbia, The World Bank

This article was published in NIN weekly magazine on September 16, 2010
Author: Loup Brefort, Country Manager for Serbia, The World Bank

They say that a competitive world offers two possibilities: You can lose. Or, if you want to win, you can change. I suppose no one would challenge the fact that the world we live in is extremely competitive. But where does Serbia stand? Can it do better? And what can be done to improve its position?

Let’s start with defining what we are talking about. Competitiveness is something that gives someone (a person, a company, a country) an edge over a rival. While no one questions that competitiveness is critical when Novak Djokovic plays Roger Federer or Rafael Nadal, or when Toyota and Ford fight for market share, some respected economists claim that it does not apply to countries.

“Real economists don’t talk about competitiveness”, said Paul Krugman. Real politicians talk about it all the time, however. Indeed, a country’s future prosperity very much depends on increase in productivity that drives sustainable growth, which government policies influence. Yet, assessing a country’s competitiveness is a tricky task because of the sheer number and variety of influences. However, the academics reached a consensus that competitiveness is best measured by national productivity. Countries do compete in that their policy-makers choose policies that create the conditions – or not – for productivity improvements that translates into faster rather than slower growth and, ultimately, higher living standards.

Experts have developed a global competitiveness index to measure the relative position of countries. It takes into account things such as fiscal and monetary policy, social infrastructure and political institutions, quality of business environment, the impact of red tape (the bureaucratic burden), basic education, health care, a clean environment, the rule of law, the level of competition on local markets... One can always argue whether these global indices are valid and fair but they nonetheless are indicators of general perceptions which influence business decisions.

So, how does Serbia score? The news is not yet good enough. According to the latest Global Competitiveness Index 2010-2011, Serbia ranks only 96 among 139 countries! Progress has been made in some areas but Serbia continues to score rather badly in two important areas: its local market is not competitive enough (ranked 125) and its institutions need to be much improved (ranked 120). Serbia introduced some major improvement in business registration, dramatically lowering the speed and cost of setting up a new business activity. This is important and welcome but a business will oftentimes need to create new facilities out of which to operate: a warehouse, a factory, etc… On that count, however, Serbia’s system of issuing construction permits is one of the most complicated and lengthy in the world, thus inducing huge costs for would-be investors and lowering its international competitiveness. Indeed, Serbia only scores 174 out of 183 countries in dealing with construction permits in the World Bank “Doing Business 2010”! Obviously, creating an overall environment that gives Serbia a significant edge over its competitors remains very much an unfinished agenda.  This calls not just for decision-makers in central as well as local governments to act, but also for managers of relevant government entities and civil servants tasked with implementation of the regulatory framework to play their part. For instance, do inspection agencies need to wait for legislative change to better coordinate their inspections or move to a risk-based system, thus making their interventions more market-friendly but most likely as effective?

High levels of competition on a local market prove to be especially crucial. Competition drives excellence and has a pervasive and long-lasting impact on economic performance. Serbia already has a competition law; but is it implemented vigorously enough? Removing the obstacles that limit competition is usually a far more effective productivity-improving and ultimately sustainable growth-generating strategy than offering direct incentives to specific businesses and sectors in an otherwise mediocre business environment.

In this regard, the nature of political institutions and behavior of their actors is important because it affects the content and predictability of rules and regulations. The rule of law and intolerance of corruption lower transaction costs among firms by protecting and enforcing property rights, curbing burdensome administrative and judicial rulings, and ensuring good regulatory quality. A natural, first step for Serbia should be to complete the so called “guillotine” as fast as possible.

Tackling these issues is the way for Serbia to unleash prosperity.