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Speeches & Transcripts

Kopaonik Business Forum 2011: Speech by Mr. Loup Brefort, Country Manager for Serbia

March 2, 2011


Mr. Loup Brefort Kopaonik, RS

As Prepared for Delivery

Your Excellencies, Ladies and Gentlemen,

Advising many countries and corporations around the globe, Joel Barker once said that:

"Vision without action is a dream. Action without vision is simply passing the time. Action with Vision is making a positive difference."

It seems to me that all of us here who are committed to Serbia should contribute to turning vision into action.

The recent times have not been easy … and that is probably a severe understatement. However, a lot was accomplished indeed in the past decade and, more recently, in response to a world crisis that hit Serbia hard.

Among the achievements, let me mention the sustained growth of the 2000s and what is widely acknowledged to be pretty deft management of the crisis, including tough but necessary fiscal adjustment.  To the authorities’ credit, effective programs to protect the poorest and prevent the erosion of crucial human capital were sustained, as social assistance transfers were not only spared, but actually boosted as the worst of the crisis unfolded. 

With support from the Government and the NBS, the banking system weathered the external shocks well.  Actions were also taken to improve the business environment for the real sector, in particular through introduction of Regulatory Impact Assessment, adoption of a new Company Law and implementation of many recommendations of the regulatory "guillotine". Much has already been done and continues to be done on a daily basis - in too many areas to list them all - to advance Serbia’s goal to be granted EU candidate member country status.

Additionally, one cannot fail to mention the authorities’ responsible, constructive, and active role in the international and regional community.

More importantly, Serbia has a vision for the future: European Union membership and reliance on a new model to drive the economy. We, at the World Bank share Serbia’s vision, which among other things aims at accelerating growth through exports and higher productivity; at improving infrastructure; at increasing employment and labor skills; at energy efficiency; at social inclusion and eradication of poverty. There is a wide consensus among professionals, policy makers, businesses and other stakeholders in the country that this is where Serbia wants to go.

However, the challenge for all of us is: How to get there? What actions to take to turn the vision into a reality?

At the World Bank we wish to contribute to shaping some of the answers to this question. Namely, every three to four years our teams produce what we call Country Economic Memorandum (in our jargon CEM). The CEM analyzes certain aspects of the economy in a country. My colleagues recently started to work on one for Serbia and already had very fruitful discussions with a number of you present in this audience. I am sure members of the team will continue this interaction and consult many more in the process in the coming months.

What issues do we propose to cover in the forthcoming CEM and why did we select these particular ones? Our starting point was to look at constrains for the future and a new model of growth.

It is clear that infrastructure is important but it is well covered in many studies. So, let me bring out areas that get less attention but represent "the vast land of opportunities" that needs to be tapped for Serbia to succeed.

One of these opportunities is the land - literally! With such good land and such a tradition it would seem a no-brainer that agriculture should be one of the key engines of export - led growth. However, at the time when food prices are skyrocketing globally, agriculture in Serbia is seriously underperforming. Between 2002 and 2010 the sector grew by only 0.6 percent annually on average!  In addition Serbia exports just USD 464 per a hectare of its arable land, while Poland exports around 950 USD, the Czech Republic and Slovenia around 1,200 USD.  Without increased competitiveness, Serbian producers will lose market share, not only in export markets but also in domestic ones, in spite of country’s high quality arable land, a favorable climate, and abundant labor.

A competitive enterprise sector is absolutely essential for improving Serbia’s export performance and thus generating rapid, sustainable growth. In today’s world being good is not good enough. One has to be better and to move faster than the others, and competitiveness is the name of the game in an increasingly open world of trade. According to the recently published Global Competitiveness Index 2010-2011, Serbia ranks only 96 among 139 countries! It scores 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). The first one is critically important. Recently, Gunnar Hökmark, Vice-Chair of the Group of the European People's Party in the European Parliament remarked that "Those economies that are not open to competition will not achieve competitiveness".

The transition has been especially hard on the manufacturing sector in Serbia. Industrial output stands at roughly 50% of what it was in the late 80s. Not all of that decrease is a bad thing since we all know that many industrial enterprises were created in the past according to a logic that was very different from that of a market economy. Nevertheless, in 2008 (let’s not look at 2009 and 2010, which were excessively tough for industry) the share of industry in value-added was just 21%, down from 27% in 2000. Even more thought-provoking is to compare this figure with the 26% in Romania, 27% in Poland and 40% in Slovakia. Also, unlike in Serbia, in most of these countries the share of industry in value added has been growing over the last decade. In Poland, for instance, the share of industry increased from 23% in 2001 to 27% in 2008 and in Slovakia from 30% to 40%.

Beyond agriculture and industry, what are some cross-cutting issues of competitiveness that the CEM proposes to look at?


" First are skills. A well educated workforce is critical to attract investment and develop an enterprise sector that builds on knowledge and innovation, rather than just on the low cost of factors of production, particularly low labor costs, to drive its competitiveness. "

Loup Brefort

Country Manager for Serbia

But I was astounded to learn that two-thirds of the university-educated employees in Serbia work in the state sector. At the same time, private employers report that they find it difficult to find the top and middle managers they need to run medium-sized and large-sized firms. Does it tell us something about the capacity of the education system to meet the needs of the labor market in the real sector?

But this is only part of the issue. Modern technologies are changing very fast, so are the mix of jobs and mix of tasks within jobs. It is no surprise then that investment climate surveys show employers are looking less for specific knowledge and more for flexible, analytical and teamwork and team leadership skills. If we believe in the research that concludes that effective skills for an evolving labor market come from 70% experience, 20% relationship abilities and 10% education, lifelong learning is one of the ways to achieve this. In Denmark, one of the leading innovators in labor market policies, 32% of the adults are engaged in lifelong learning. In other Scandinavian countries this is true for around 20% of the adults. In the countries of our region the figure is below 5%. There are no official figures for Serbia, but I hear that one of our colleagues here - Svetlana Kisic - found out that even among the managers, lifelong learning is not a common practice: less than half of them do so.

Education of the labor force plays an important role in attracting or discouraging investment. But so does "red tape". In obtaining construction permits, Serbia is ranked 176th in the World, while it ranks 71st in GDP per capita. There is something wrong there! Another area we would like to explore is the mix and balance of subsidies and/or guillotine that is most effective to attract investment?  And, since guillotine is - unfortunately - inevitably associated with French history, let me refer to Beaumarchais, the French author of the opera libretto "The Barber of Seville" in 1775: "A great man does enough for us when he refrains from doing us harm." Maybe, to attract investment, a higher level of subsidies is the price to pay to compensate for the perceived red tape harm in the mind of potential investors? Maybe a great bureaucracy should be like Beaumarchais’ great man?

We also would like to look at Trade & Logistics. Serbia is in the middle of Europe and occupies a strategic position as a transit country; but is it capitalizing enough on this advantage? The average speed of trains in Serbia is around 34 km/h; in EU it is around 80 km/h. The average train delay in Serbia is around 54 minutes/100 km in commercial transport, almost one hour per every 100 kms!  It is probably not all on account of the quality of the tracks, the instrumentation or the rolling stock! If you were an exporter, would you rely on train transport for your critical logistical needs? Import, export, transit and other logistical procedures linked to trade also count. On the Bank’s Logistics Performance Index Serbia scores only 2.69 out of a possible 5, in the same group as many African countries and well below Turkey at 3.22 and Slovak Republic at 3.24. Eliminating non-physical barriers is critical to reduce the economic distance to markets, and to making Serbia an attractive destination to set up an export-oriented factory.

And last, but not least, Serbia could face an energy crunch within the next 5 years. Energy is increasingly reported as a constraint to growth in investor surveys and the outlook for electricity is indeed a concern for the future. In 2008, generating capacity was only just able to meet peak demand, and going forward the country will need to comply with strict environmental requirements. Medium term projections show that, if no significant new capacity is built, electricity consumption will outstrip generation capacity sometime between 2015 and 2017 and Serbia may need to rely more and more on imports. As a country hoping to reindustrialize, this must be unnerving!  No reassurance comes from looking at the structure of the current generating capacity: 53% of generation facilities have been operational since before 1979. Only 5% of the facilities are younger than 20 years. Significant investments will be required, amounting to as much as 4% of GDP annually until 2020. The public sector alone obviously will not be able to finance these investments. Tariff levels are currently well below long run marginal costs and collection rates from industry have been falling. To attract private investment, Serbia will need to create a more competitive investment climate in the sector, including ensuring a reasonable rate of return on capital for the investors, while taking care to continue protecting the vulnerable groups.

In parallel, there are measures that don’t cost much BUT have a high economic and/or financial rate of return - such as investment in energy efficiency improvements. If every household in a country the population of Serbia replaced one 75-watt incandescent light bulb with a 20-watt compact fluorescent bulb, enough electricity would be saved that a 500-megawatt coal-fired plant could be retired, or a new one would not need to be built. The crisis and low growth of turnover has focused the minds of many entrepreneurs to cost-cutting measures, including through energy saving. But surely, there must be a role for public policy to accelerate the transition from a hugely energy-inefficient to an energy-efficient, and thus more competitive, economy.

In six months we hope to be able to share the CEM report with the Serbian government, academia, business community, and Serbian public society. We won’t have all the answers, but we hope to make a practical contribution to the debate.

Many of the solutions or the options will undoubtedly come with a political economy "price tag". But, since we undoubtedly have during these three days in Kopaonik the highest density of leaders in Serbia, from Government, the private sector, academia, think-tanks and others, let me leave you with this last quote: "What is leadership, if not the art of turning the hard into the possible"?


I thank you for your attention!

 

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