INTELLECTUAL CAPITAL OF NATIONS AND ECONOMIC DEVELOPMENT pp 105-116

Publisher Centar za izdavačku delatnost Ekonomskog fakulteta u Beogradu

(Faculty of Economics of the University of Belgrade – Publishing Centre) Kamenička 6, tel. + 381 11 3021 045, fax + 381 11 3021 065

E-mail: [email protected]

Dean of the Faculty of Economics Marko Backović

Editor of the Conference Proceedings Aleksandra Praščević

Editors Gojko Rikalović

Stevan Devetaković

Cover Design Milan Novičić

Internal Design and Composition

Nadežda Stamatović

Printing ČUGURA PRINT – Beograd

Published 2007.

ISBN: 978-86-403-0844-1

International Scientific Conference Contemporary Challenges of Theory and Practice in Economics

ECONOMICS POLICY AND THE DEVELOPMENT OF SERBIA

- PROCEEDINGS -

EDITED BY

Gojko Rikalović Stevan Devetaković

Contents Adžić Sofija, ECONOMIC POLICY AND INITIATION OF DEVELOPMENT CYCLE....................1

Bašić Tamara, FISCAL CHALLENGES IN SERBIA TODAY / WHAT TO DO WITH PRIVATIZATION RECEIPTS .......................................................15

Ćirović Milutin, FINANCIAL GLOBALIZATION: BASIC ISSUES AND STRATEGIES..............27

Devetaković Stevan, REGIONALIZATION, DEFINITION OF TERRITORIAL UNITS FOR STATISTICS (NUTS) AND SERBIAN REGIONAL DEVELOPMENT.......................35

Đurović-Todorović Jadranka, Đorđević Marina, NBS EXPERIENCES WITH CHOOSING MONETARY POLICY STRATEGY ...................................................................43

Filipović Milorad, Đukić Petar, SUSTAINABILITY OF DEVELOPMENT PROCESS IN SERBIA............................................................................................51

Grečić Vladimir, THE ECONOMIC IMPACT OF MIGRATION FLOWS: SUSTAINABLE DEVELOPMENT OF THE REPUBLIC OF SERBIA AND EMIGRATION..........63

Jakopin Edvard, STRATEGIC DIRECTIONS OF DEVELOPMENT OF SERBIA - RESULTS, MECHANISMS, RISKS .............................................................................75

Jovanović Gavrilović Biljana, SERBIA FACING THE CHALLENGE OF SUSTAINABLE DEVELOPMENT .......................................................................87

Kočović Jelena, Tatjana Rakonjac-Antić, STRATEGY OF INSURANCE MARKET DEVELOPMENT IN SERBIA ....................................................................99

Komnenić Biserka, INTELLECTUAL CAPITAL OF NATIONS AND ECONOMIC DEVELOPMENT ..............................................................................105

Manić Slavica, PREPAREDNESS FOR THE NEW ECONOMY AND ITS OUTCOMES .............117

Mikić Hristina, POTENTIALS FOR THE CREATIVE-LED DEVELOPMENT IN SERBIA ........129

Mitrović Đorđe, TRANSITION TO THE KNOWLEDGE-BASED ECONOMY IN SERBIA: OPPORTUNITIES AND PROBLEMS.....................................................141

Omerčić Seakif, POSSIBLE MACROSTRUCTURE OF THE CAPITAL MARKET IN THE WEST BALKANS..............................................................................153

Rikalović Gojko, Knežević Borisav, DEVELOPMENT ACHIEVEMENTS OF NATIONAL ECONOMY IN SERBIA AT THE BEGINNING OF THIRD MILLENNIUM .................................161

Savić Ljubodrag, COLLAPSE OF THE SERBIAN INDUSTRIALIZATION – MESSAGE FOR THE FUTURE ......................................................................................................169

Stanišić Dragana, THE ROLE OF SOCIAL NETWORKS WITHIN THE PHENOMENON OF ENTREPRENEURSHIP: A COMPARISON OF SERBIA AND POLAND................................181

Stojanović Žaklina, THE AGRICULTURAL POLICY CHANGING DIRECTIONS AND IMPLICATIONS ON AGRICULTURAL AND RURAL DEVELOPMENT IN SERBIA ......189

Stošić Ivan, Brnjas Zvonko, PRIVATIZATION IN REAL SECTOR OF SERBIAN ECONOMY - RESULTS AND CHALLENGES ..............................................................199

Vujović Milan, CREATION OF THE NEW FINANCIAL PRODUCTS AND EMPLOYMENT POSSIBILITIES ............................................................................................207

Živković Aleksandar, Kožetinac Gradimir, DETERMINANTS OF SHORT-TERM INTEREST RATES: ARE THOSE RATES DETERMINED EXTRAGENOUSLY OR ON THE MARKET FACTORS BASIS? .....................................................................................215

Foreword

On the occasion of the 70th anniversary the Faculty of Economics in Belgrade organizes a scientific conference Contemporary Challenges of Economic Theory and Practice. The Conference takes place from 26th to 29th September 2007 at the Faculty.

The Conference programme integrates plenary sessions and parallel section sessions.

At the plenary sessions a group of outstanding keynote speakers provides presentations of general interest, dealing with four significant topics from the field of economics: • “Governance and Institutions: Transition and Economic Integration as seen from the viewpoint of

Evolutionary Institutional Economics”, Yagi Kiichiro, Kyoto University, Graduate School of Economics, Japan

• "The Present Stage of Globalization and its Role in Economic Development", Ashok Bardhan, University of California, Berkely, Haas School of Business, USA

• "Organizational Design: Science and More", Richard Burton, Duke University, Fuqua School of Business , USA

• "The European Social Model and its Dilution as a Result of EU Enlargement", Domenico Mario Nuti, University La Sapienza (Italy) and London Business School , UK

One hundred and sixty-two papers are presented at the Conference and more than 100 academics from foreign universities and academic institutions participate in the Conference as authors or co-authors. Foreign participants come from 21 countries. More than 50 academics from the Faculty of Economics of the University of Belgrade participate in the Conference, as well. It is also important to mention the importance of Serbian scientists from other faculties of the University of Belgrade, and other Serbian universities and institutes who also take significant part in the Conference.

The Conference is divided into six sections, as follows: • Challenges of Globalization and Transition • Economic Policy and the Development of Serbia • Challenges of the International Economic Integrations • Management and Marketing Under Globalization • Accounting and Business Finance and Financial Market Development • Quantitative Economics and Finance

The Conference sections cover scientific fields which have been developed and advanced for decades within the Faculty’s departments. These are: general theoretical economy and its application to specific conditions of transition and globalisation, macroeconomic and microeconomic analysis, national economy and Serbian economic policy, management and marketing, international economy and international economic integration, accounting, finance and finance market development, applied statistics and informatics, as well as quantitative analysis and quantitative finance.

This book refers to the one of the Conference sections. It is comprised of the works accepted for the presentation at the Conference (presented in alphabetical order). The works have been reported by anonymous referees and accepted by the book’s editors and Scientific Conference Committee.

The authors have been requested to edit the text and send it in the form ready to be published, so the authors themselves have been responsible for the proofreading of their works.

Finally, I use this opportunity to express my gratitude to everybody who shared our efforts in organizing the Conference and helped us to publish this book.

Belgrade, Aleksandra Prascevic

September 2007 Vice-dean

ECONOMIC POLICY AND THE DEVELOPMENT OF SERBIA

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ECONOMIC POLICY AND INITIATION OF DEVELOPMENT CYCLE

Sofija Adžić1

Abstract: After rapid restoration of capitalism carried out at the beginning of nineties of the last century and disastrous transition policy, Serbia has come quite close to the development threshold of low income countries. With reference to basic characteristics, the real sector crisis in Serbia can hardly be explained by some form of economic crisis which has been theoretically identified so far. At a first glance, it is much closer to crisis events of early capitalism and cannot be linked to hyper production crises of developed capitalism. In the opinion of the author, one of key reasons for the real sector crisis in Serbia is wrong concept of economic policy. Not accepting the fact that the stability of prices and foreign exchange rate (and not vice versa) is based on the stability of a company, the economic policy has created such a microeconomic environment in which practically it is not possible to find a successful manufacturing company (with an exception of those which owe their success to a monopolistic market position, and which are linked with the government apparatus and headed by the management skilfully deploying these two factors). This has created a paradox situation in Serbia which means that here noting is profitable to produce. In that respect, Serbia will be faced with difficult tasks to launch development cycle and in the next period of seven to ten years develop concurrently: (1) dynamic growth of gross product and creation of new jobs, (2) radically upgrade performances of (manufacturing) companies and (3) complete market institutions and structurally adjust institutional infrastructure to public regulation of the economy and economic development in compliance with the European Union’s standards.

KEY WORDS: ECONOMIC POLICY, DEVELOPMENT CYCLE, PARADOX SITUATION, PUBLIC REGULATION, PROMOTION OF COMPETITIVENESS

1. INTRODUCTION Each approach to analysing whether the development component of economic policy is

successful must start from the fact that transition in Serbia has caused more economic, social and demographic problems than opportunities for prosperity. In so doing, almost all advantages which Serbia used to have in relation to other (former) countries of real socialism were lost. This is the reason why after seventeen years since the restoration of capitalism, Serbian economy is still in the situation of structural unbalance and in search of ways to renew development propulsion. Starting grounds for the analysis of the development component’s performance of the national economic policy is based on the identification of basic structure of its objectives and actions. Its current features are as follows:

• Balancing the budget on the basis of income generated by taxes on current consumption which is to a large extent financed by remittances of workers and increased indebtedness of companies and banks abroad and by privatization of a so called “national silver” (however, without precisely established problems related to servicing one part of accumulated commitments of the public sector towards the economy and citizens)2,

• Restrictive monetary policy, • Internal convertibility of national currency, • Privatization on the basis of the sale of companies to so called strategic investors, • Exhaustion of real sector’s financial capacities (particularly industry and agriculture) in

favour of public finances and financial sector, • Forcing public investments into revitalization, modernization and new building of physical

and social infrastructure, • Lack of (realistic) regional and industrial policy, • Intensive reliance on foreign capital and foreign direct investments in relation to domestic

savings, entrepreneurship and innovativeness.

1 Faculty of Economics, University of Novi Sad, Serbia. 2 More details related to reasons of irregular servicing of the public sector’s obligations towards other economic

branches and their consequences on the formation of the economic policy concept in Serbia can be seen in Popović, D., Adžić S. (2004), Učinak “nevidljivog” javnog duga na ekonomsku politiku: Slučaj Srbije, “Ekonomija/Economics”, Broj 2, str. 275–291.


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In this context, I will start the analysis of the development component’s performance of the economic policy in Serbia by establishing its methodological grounds.

2. METHODOLOGICAL GROUNDS FOR THE ANALYSIS OF THE DEVELOPMENT COMPONENT’S PERFORMANCE OF THE ECONOMIC POLICY

The basic task of the economic policy’s development component in modern market economies is to implement optimum management of inter-sectors development, regional development and human resources development by means of the combination of market mechanisms. Determining whether economic policy has been successful in managing the development of these factors is faced with four essential problems. The first relates to the choice of economic and social objectives which should be accomplished and the establishment of the sequence of their priorities. The other problem refers to their quantification and the third one is connected with the ways of isolating and establishing impacts of certain economic policy’s mechanisms on their successful implementation. The fourth problem concerns the question - “Who sets up norms for the evaluation of achieved results and through what institutional mechanisms are they articulated?” It is obvious that the norms for the evaluation of performance of economic policy’s development component depend primarily on relations between leading socio-economic groups and development levels. Therefore, the evaluation of performance of the economic policy’s development component cannot be effected on completely objective grounds but it is mostly subjective and comparative procedure. The subjectivism of evaluation arises from the fact that any assessment can be discarded if the norm it has been based on is given up. In compliance with above stated, the analysis of the efficiency of the economic policy’s development component has a more or less twofold aspect: (1) intuitive and (2) quantitative.

Intuitive aspect is emphatically personal and abstract. In our case, the results of the analysis depend primarily on the current allocation of costs and earnings to certain economic and social groups (and even to individuals due to emphasized “tycoonization”) and credibility of active factors (bearers) of the economic policy most of all on the basis of previously given promises which have either been kept or failed to be kept. In this context, the judgments of the performance of the national economic policy’s development component in the period from 2001 to 2006 are mostly simplified and marked by dominant political attitudes and subjective interests of their authors (Table Number 1).

Table 1. Extreme Assessments of the Performance of Economic Policy’s Development Component

Indicator: Extreme positive assessment: Extreme negative assessment: General economic situation Dynamic continuous growth of

economic activities with positive structural changes

(Moderate) stagflation with continuous decline of national competitiveness

Standard of living Dynamic growth of the standard of living

Stagnation of standard of living of the majority of population at the low level of meeting existential needs and far below pre-transitional maximum;

Development Continuous development at high economic growth rate; Dynamic growth of public investments particularly in the revitalization of physical and social infrastructure; Dynamic growth of foreign direct investments;

Greater fall of production than pre-transitional maximum in comparison to other countries in transition; The growth of production is fictitious as the production in industry and agriculture are either stagnating or declining; Disinterestedness in the real sector; No serious private investments into new jobs, products and processes;


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Economic efficiency Relatively stable macroeconomic

ambient; Growth of foreign exchange reserves; Rehabilitation of the financial system; Growth of economic efficiency, particularly in the financial sector and companies taken over by foreign capital; Regular servicing of public obligations and decrease of the public deficit;

Decline of national competitiveness; High unemployment particularly of labour and production capital; High share of public consumption in the gross social product; High foreign trade and payment deficits; Large growth of cumulative indebtedness of the State, economy, and citizens (indirectly through the credit system) abroad; Large internal debts; Domination of interests of distribution-oriented coalitions; Slow development of domestic savings, entrepreneurship and innovativeness;

Social justice Radical decrease of poverty; Improved quality of social and health services; More regular servicing of pensions and other social benefits; The system of severance pays for workers voluntarily leaving the public sector and large public companies which have been taken over either by foreign investors or which are getting ready for privatization by the Serbian Government;

Intensive social segregation at non economic grounds; Not introduced adequate substitute for (national version) a “social welfare country”; High degree of social discrimination and in particular of: (a) rural population, (b) genders, (c) old age population, (d) young age population, (e) refugees and internally displaced persons and (f) Roma people ethnical groups; Inadequate system of health care marked by irregular system of quality in the private sector and high corruption in the public sector;

Flexibility Liberalization of prices; Liberalization of foreign trade; Simplification of administrative procedures regulating the process of reproduction; Horizontal and vertical decentralization of the function of public regulation of economy and economic development ; Intensified participation of small and medium size enterprises in the overall economic structure; Strengthening of business services; Reforms of the labour market for the purpose of easier adjustment of the volume and structure of employment to the changes of business orientation and seasonal and characteristic fluctuations in the demand and supply;

Centralization; Suppression of regional and local incentives; Strengthening of monopolistic and oligopoly market structures; Rigid regulation of the labour market; Financial system is not interested in risky investments and export oriented industries; Inadequate system of social protection for regular adaptation of the volume and structure of employment at the level of a company in compliance with economic cycles and business decisions of entering into new activities and abandoning old ones;


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Better utilization of production and economic development factors

Rehabilitation of the financial system’s role; Institutional regulation of the labour market; Development of the information system (market ) infrastructure; Development of innovative (market) infrastructure; Development of management (market ) infrastructure; Reforms in the educational system in compliance with the European Union’s standards; Programmes for the promotion of entrepreneurship and development of “small businesses”, and small and medium size enterprises; Programmes for the preparation of large companies for privatization; Programmes for using Diaspora potentials;

Low productivity of work and capital in the real sector far below pre-transitional maximum; There is no stimulating political and economic environment for productive engagement of domestic savings and development of manufacturing entrepreneurship and innovative economy; There is no stimulating institutional, political and economic environment for efficient functioning of companies’ market, managers and experts; Outflow of “brains” and entrepreneurship oriented citizens abroad; Continuous reduction of “human” capital performances in relation to pre-transitional maximum and relevant surrounding;

Presented estimates of the performance of economic policy’s development component are derived primarily on the basis of the following: (1) maximum outputs in the pre-transitional period, (2) previous much worse economic and social situation caused by various economic and non-economic factors in the last decade of the previous century, (3) needs to accomplish much faster progress in order to create economic and social conditions for efficient European integrations and the like. In any case, all above stated assessments although based on different theories and concepts of economic policy are more or less founded on realistic socio-economic movements. In the quantitative analysis of the performance of the economic policy’s development, the key aspect is certainly - “How do movements in the domain of gross social product, employment and exports impact the provision of macroeconomic stability?” There are no doubts that development results in the modern market economies must be achieved under the conditions of (dynamic) maintenance of macroeconomic stability but the opposite is also applicable – macroeconomic stability makes sense only within the framework in which the stability of the national currency and low inflation rate is realized in the context of increased production, employment and exports. In the Table No. 2, basic indicators for the measurement of the Index of Discomfort and the Index of Macroeconomic Stability in the period form 2001 to 2005 are presented.

Table 2. Indices of Discomfort and Macroeconomic Stability from 2001 to 20053

Year:

Growth rate of Gross Social

Product [%]

Price Growth

Rate [%]

Unemployment Rate [%]

Share of Payment

Balance the Social

Product [%]

Discomfort Index

Index of Macroeconomic

Stability

1 2 3 4 5 6 = 3 + 4 7 2001 5.1 91.8 21.8 - 2.7 113.6 - 91.9 2002 4.5 19.5 24.5 - 8.7 44.0 - 95.0 2003 2.4 11.7 26.1 -7.8 37.8 - 92.5 2004 9.3 10.1 26.1 -12.6 27.2 - 88.0 2005 6.3 16.5 27.0 -9.1 43.5 - 93.0

Source: National Bank of Serbia, RZS, Internal Data, Coefficient computation done by the Authors

3 Indices of Discomfort and Macro Economic Stability are calculated on the basis of basic data about recorded

unemployment. Data on the basis of survey polls about labour force (which are closer to the methodology used in statistical monitoring of unemployment in the European Union) differ significantly. According to the labour force survey polls, unemployment in Serbia amounted to: 12.2, 13.3, 14.6, 18.5, and 20.5 respectively in specified years. The consequence of this is somewhat more favourable figures of the index of discomfort: 104.0, 32.8, 26.3, 30.3 and 37.0 and index of macroeconomic stability: - 88.3, - 91.6, - 91.0, - 86.0 and – 91.4.


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Presented indicators indicate the low level of macroeconomic stability. The index of macroeconomic stability in the observed period is even slightly below the figure in the economy of the former Socialist Federal Republic of Yugoslavia (whose destiny was shared by the economy of Serbia) – immediately before the transition (1987/1988). The main conclusion which can be derived from the presented analyses of development component’s performance of the national economic policy is that in the previous period of seventeen years structural changes needed for the increase of total economic efficiency and renewal of development propulsion were not opened. There are no doubts that key (present) creators of the national economic policy and transitional micromanagement do not respect the fact the stability of prices and foreign exchange rate are based on the stability of companies and their microeconomic performances (and not vice versa), have established such a microeconomic environment in which practically it is not possible to find a successful manufacturing company (with an exception of those which owe their success to a monopolistic market position, and which are linked with the government apparatus and headed by the management skilfully deploying these two factors). This is the reason we have come to a paradox situation that in Serbia noting is profitable to manufacture. At that, results accomplished in the period after 2000 are denied. Results accomplished in the domain of ensuring relative stability of prices and foreign exchange rate, market development and public infrastructure for the regulation of economy and economic development, as well as the renewal and new construction of physical and social infrastructure under the circumstances which are neither easy nor simple should be evaluated objectively. Yet, successful incorporation of Serbia into global social and economic movements requires not only stable prices and foreign exchange rate but also dynamic growth of economic activities, efficiency, competitiveness and technical progress. In compliance with above stated, searching for ways to launch new development cycle in Serbia will be performed in the context of: (1) renewed development propulsion on the grounds of privatized development, and (2) created economic conditions for the first two steps for European integrations – preparation for membership in the World Trade Organization and ensuring free access to the internal market of industrial products of the European Union.

In this respect, the research “How to reach more efficient concept of development policy in Serbia?” has been derived from the hypothesis that in the next, the focus of the economic policy and institutional reforms should be on upgrading competitiveness of the national economy. This paper is concentrated on the analysis: (1) “What should be done in the domain of economic policies for more efficient and more dynamic restructuring of the national economy, particularly in order to improve export performances of manufacturing companies?”; (2) “What should be done in order to increase economic rationality and improve quality of production of public goods and service of public administration in conditions when it is necessary to curb public consumption within the framework corresponding to generated level of the gross national social product per capita?” and (3) “What should be done in order to make the present model for the formation and realization of partial economic policies – which are more or less created autonomously within certain domestic and international political, economic, administrative and institutional structures – have an impact on: (a) promotion of competitiveness of the national economy, companies, processes and products, (b) improvement of motivation for private investments, and (c) higher public and private investments in education, scientific – research work and physical infrastructure?”.

3. ECONOMIC POLICY AND STRUCTURAL ADAPTATION OF THE ECONOMY AND COMPANIES

Basic mechanisms of the present economic policy in the domain of national economy’s restructuring and improvement of microeconomic performances are: (1) privatization according to the model of sale to strategic investors and (2) encouragement of foreign direct investments. The results may be observed from various aspects but key measure is certainly their impact on changes in the structure of real economy and upgrading of export performances of manufacturing companies. Let us see what the results are and how to measure them.

Firstly, there are still a lot of non-privatized small, medium and large companies in Serbia such as: (1) electricity and metal processing complex, (2) consumer goods manufacturing plants, (3)


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agro-industrial complex (particularly processing of meat, fruits and vegetables), (4) non-ferrous metals metallurgy and (5) petrochemical complex.

Secondly, as far as upgrading of performances of privatized companies is concerned, from the socio-economic aspect the most important issue is readiness of their (new) owners to tackle challenges of open and severe market competition. There are very little empirical researches about that and weak impulses of privatization on intensifying exports indirectly suggest that entrepreneurship performances of new owners as a whole are not particularly high.

Thirdly, not going into deep analysis, it can be proved that foreign direct investments are to a large extent irrelevant for the renewal of development propulsion4. But, this does not mean that foreign investments are not welcome in Serbia. On the contrary, although it is necessary to raise awareness that foreign capital cannot resolve crucial national development problems. Its main interest is profit, which does not necessarily coincide with the growth of production, employment and balance in foreign-economic relations. Practise (also in the case of Serbia) has shown that foreign capital may increase profits by reducing production, employment and substitution of domestic reproduction materials with foreign ones.

In any case, in the next period the focus of economic policy should be transferred form privatization and encouragement of foreign direct investments to the domain of general socio-economic framework for the promotion of real sector’s competitiveness – with an emphasis on activities which could be stimulating for the improvement of manufacturing companies’ performances in compliance with the criteria of open market economy. As this is a field in which (national) empirical experiences are scarce, the author’s vision of this problem will be presented here based on the analysis - “What should be its ideal (scientific) content?” From the scientific aspect, the real sector of the Serbian economy should be comprised of companies with: (1) sound financial structure, (2) qualified and dynamic management, (3) adequate physical resources and staff, (4) micro organizational structure and the governance system for efficient production and distribution of high quality material goods and services, and (5) flexibility which enables quick and efficient response to the changes in the surroundings. From the theoretical aspect derived from the analysis of the manner in which modern market economies operate, providing above mentioned microeconomic performances is a result of overall socio-economic efforts to integrate a company as a basic economic subject in a complex hierarchical system comprised of four levels:

The first level should include single companies incorporated into business networks and alliances or clusters in such a way which enables economic and technologically efficient operations in circumstances of global competition.

The second level should encompass single companies integrated in macro reproduction complexes with a core located within Serbia or its regions and which will ensure optimum national social division of labour and supply (of companies) with necessary physical inputs (energy, raw materials, basic reproduction materials, intermediary products, business services, traffic and telecommunication services) under the most favourable economic and technical conditions. Macro reproduction complexes should involve large trading companies both on the supply side for inputs and intermediary products and on the side of marketing, placements and after sale support on target segments of the global market.

4 In Serbia, there are only three relevant projects in which it has been attempted to use what has remained form

the capacities of export oriented industries by means of import of complex entrepreneurship, financial, marketing and technological packages (US STEEL – SERBIA (SARTID), CIMOS – LŽTK and ATB – SEVER). US STEEL SERBIA is the largest importer and exporter in Serbia however, the issue of its overall impact on the national balance of payments remains open as the computation of indirect import inputs does not exist for its operations. CIMOS – LŽTK and ATB – SEVER are companies with positive net export balance (they were like that even in the pre-transitional period and on a so called convertible markets!) however, as these concern projects which have recently been activated, it is too early to talk about their long term development scopes.


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The third level should include single companies integrated into institutionally arranged frameworks of national or regional socio-economic environments. Its basic task is to provide companies with human and financial capital and services of public administration which have stimulating effects on its behaviour in respect of meeting wider socio-economic objectives aimed at better competitiveness of products, processes, enterprises, businesses and macro-reproduction complexes. Therefore, the contents of the institutional establishment should provide to each company: (1) development oriented environment, (2) business oriented environment, (3) improved corporate governance, (4) participation and decentralisation, and (5) consistent, transparent and precise vision of scientific and technological development.

The fourth level should encompass companies in institutionally regulated frameworks of the internal market of the European Union. Its task is to provide to an enterprise the economics of volume and stimulation of development of those productions which may on the basis of available production factors, as well as those to be developed in the future, reach the level of efficiency and competitiveness in respect of prices, quality, design and provision of after sale support in circumstances of severe international competition. Only intensive competition which rules over the internal market of the European Union can force national companies, entrepreneurs, managers and their expert teams to upgrade production continuously, raise the quality of goods and accompanying services and on these grounds provide economically rational execution of the process of (business) reproduction through the sale by exporting.

In the above system, there is no sharp boundary between hierarchically established levels. Thus, the organization of not only business alliance or cluster but also of a national company itself as a trans-national corporation (which obviously exist in Serbia!), may spread out at all mentioned levels and wider if a significant portion of its operations is implemented outside the limits of the European Union. However, for Serbia as a small and poor country with insignificant labour created resources which must accept business standards which rule over the internal market of the European Union as exogenous variables, above mentioned division requires theoretical and empirical validity. In that respect, the search for a way to increase efficiency of the economic policy’s development component can be done by looking for an answer to two questions: (1) “What should be done in order to improve export performances of Serbian companies?” and (2) “How to enable more intelligent functioning of the economic policy in the sphere of upgrading export performances of companies?”

Theoretically, the following techniques are available for the company’s restructuring: (1) team work, (2) benchmarking, (3) strategic planning and governance, and (4) business reengineering which has been used with more or less success in modern market economies in the past two decades. However, slight efforts for their implementation as well as the failure of the majority of programmes deployed in the preparation of companies for privatization, show that institutional (non)regulation, which is ultimately reflected in undeveloped and deformed action of market mechanism, has not been successfully replaced by public regulation of economy and economic development. Without an intention to get into an argument here, the main cause of the public intervention’s failure should be sought in the contents of the current economic policy. Its main feature is the lack of understanding or insensitivity to the economic position of a company. Because of constant moving out of money from companies to public and financial sectors, we have now devastated industry and agriculture which are not capable of maintaining the existing (very low) technological level. There are no doubts that under the influence of the current economic policy basic parts of economic flows have been transferred from real into the financial sphere and the greatest victims are export industries and agriculture. In order to increase the efficiency of the economic policy under such circumstances and improve competitiveness of companies, it is necessary to resolve basic controversy: “How long can national political and economic elite delay a search for solutions to provide companies’ performances arising from global development trends and processes, such as: (a) stronger links of national economies and their production systems within the framework of the European Union (or this will be completely left to trans-national corporations undoubtedly with a risk that at lest one half or even everything of what has remained may be destroyed, (b) liberalization of commercial, financial and technological flows and the manner of organizing and directing economic activities, (c) privatization of development, (d)


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growth of the role of services and information technologies in creating new values, and (e) implementation of the sustainable development concept?”.

An assumption but not an ultimate solution is, of course, the transformation of pro-recession economic policy into development one – with a main objective to increase production and employment on the basis of exports with maximum preservation of macroeconomic stability. This concept has been the basis in the last sixty years on which all modern market economies and newly-industrialized countries have accomplished partial improvement of exporting performances of national companies. But, this has not been attained anywhere by deploying universal concept of economic policy. The greatest successes have been made by countries which have taken care consistently (of course, to a possible and justifiable extent) about specificities of available potentials and limitations of their valorisation and internal (national) and external (global) environments in the context of their development schedules. In compliance with that, the creators of national economic policy should search for adequate solutions definitely by respecting achievements of others and requirements of external factors but taking care that their implementation will not impose barriers for internal development.

In any case, making performances of national companies to be at the level of the European Union is a complex, expensive and long lasting process which cannot be done without building integral market system and efficient infrastructure for market and public regulation of economy and economic development. However, upgrading companies’ performances cannot wait for the completion of market institutions and structural adaptation of infrastructural institutions for public regulation of the economy and economic development according to European Union’s standards. The development of market and public institutions and improvement of companies’ performances should be attained parallel with and in passing on the basis of analyzing phenomena such as: (1) Vision, objectives and strategy of companies in Serbia with an emphasis on the topic: “learning organization”; (2) entrepreneurship in Serbia , with an emphasis on the topic: “how to direct entrepreneurship’s energy into real sector?”; (3) Business alliances and networks in Serbia , with an emphasis on the topics: “how to make a (domestic) trans-national company (TNC)?” and “How to form a cluster?”

4. ECONOMIC POLICY AND PROBLEMS RELATED TO THE IMPROVEMENT OF ECONOMIC RATIONALITY AND HIGHER QUALITY OF PUBLIC GOODS AND PUBLIC

ADMINISTRATION SERVICES

Similarly as in the majority of countries in the world, there is a prevailing opinion in Serbia that the participation of the State in the production of public goods is too large, that their quality and availability are unsatisfactory, and that it is necessary to privatize a large part of their production and transfer the costs to beneficiaries partially or fully. In that respect, the last seventeen years have seen visible and invisible commercialization of production of the significant part of public goods5. However, their effects on increasing efficiency of the economy are minor. On the other hand, little is done on the development in the complex of services of public administration in the domain of: (1) upgrading the quality of processes and products, (2) protection of life an health of consumers and employees, (3) environmental protection and improvement, and (4) creating conditions for dynamic and efficient entrance of companies into new activities and leaving old ones. A large part of the public administration development should be accomplished by the implementation of common (legal) achievements of the European Union (acquis communautire). This will provide exact grounds for establishing precise, clear and transparent contents of objectives of the reform and structural adaptation and measurement of the degree of their implementation particularly in the domain of institution building and creation of stimulating environment for innovative behaviour of an individual,

5 In the previous seventeen years, almost all existential alimentary products (bread, milk, sugar and edible oils)

and housing construction were taken out from the production and distribution of public goods. Special problems are caused by partial and to a great extent irregular commercialization of public goods production and public services in the domain of social welfare and health protection and providing services of university education. The current situation in the production of public goods in Serbia can bee seen for example in Adžić, S., Economic System and Economic Policy, pp. 95-98, The Faculty of Economics, Subotica, 2006


9

economic entities and bearers of local, sub-regional, regional and central public powers. However, on the other hand, their implementation is associated with high economic and social costs which directly impact the increase of public expenditures and operating costs of microeconomic entities. In order to avoid these costs, above reforms should be accomplished under the concept of “re-rationalizing the State” on the basis of a criterion: “How to provide better education and training, better health protection and social security and better quality of physical, abstract and administrative infrastructure which will enable population and national economy to be faced more efficiently with challenges of capitalistic restoration, globalization of economy and joining international economic and political integrations with the same or lesser fiscal loads and lower prices of public goods, services of public administration and goods which are produced within the regime of administrative monopolies?”. In that context, the following reforming actions should be undertaken:

The first is decentralization and dispersion of power and public (state) administration with an aim to come closer to beneficiaries and enable flexibility in work. The basic challenge is to provide central coordination and control without disturbing freedom in work of lower levels of organization of power.

The second concerns separating policy creating function from the policy enforcement function. The solution should be sought in a more daring set up of specialized enforcement agencies, rationalization of the number of policy creating institutions (ministries and the like) and elimination of bureaucratic structures.

The third implies introduction of quality management system in public administration services with an aim to completely fulfil citizens and companies needs by taking over corresponding business techniques and orientation to the expectation of a single beneficiary.

The fourth is upgrading regulatory mechanisms - reduction of quantity and improvement of quality of legal regulations by decreasing costs of their implementation and improving the controlling system of their enforcement – taking over the control of business techniques.

In addition to above stated, it will certainly be necessary to find adequate solutions for below specified primarily by means of implementing achievements of a legal state:

The fifth concerns precise, transparent and easy access to operating results of private companies. This thing has several dimensions of which the following should be emphasized: (a) “To what extent and under which deadlines do private companies meet their obligations towards suppliers, creditors, property owners, the state and employees?” and (b) “What sanctions have been taken against companies, entrepreneurs and managers who are late with the execution of their obligations?”

The sixth means public control over Trans-National Companies (TNCs) – and their role in the Serbian economy, as there are practically no relevant information!

The seventh concerns ensuring publicity and transparency in the functioning of modern institutions of the financial system (particularly investment funds which actively take action in ownership and organizational restructuring of the real economy in Serbia however, without precise and transparent regulation of their behaviour!)

The eighth implies the establishment of balance between rights arising from work and economic and administrative opportunities for their implementation.

The ninth, transparent and precise establishing of responsibilities of entrepreneurs, managers and owners of companies relevant to: (a) the provision of economic and social security of employees (Why reliable information do not exist about - “What are the causes of current epidemics of the employers’ unsanctioned failure to regularly service obligations towards employees? ”) and (b) implementation of environmental and safety at work regulations, as well as the protection of life and health of consumers (“What are the expenses of tax obligors because of lost health and lives of employees and consumers as a consequence of avoiding to apply current (and very liberal – according to the measures of the European Union!) regulations in these areas? ”).


10

The tenth, the protection of rights and interests of small shareholders (“Why reliable information do not exist on what the position of small shareholders is in companies in which the majority control is done by one group by (partial transfer) of ownership?”, or, “Why has not been at least single offer recoded in Serbia of small shareholders shares conversion into shares of an entity which has taken over the majority control?”).

5. IMPROVEMENT OF COORDINATION AIMED AT INCREASED EFFICIENCY OF THE ECONOMIC POLICY

Increasing efficiency of the State with an aim to upgrade competitiveness of national economy requires complex economic policy which will first of all involve explicitly or implicitly instruments such as: (1) monetary-credit policy, (2) fiscal policy, (3) industrial policies, (4) regional policies, (5) strategies for revitalization, modernization and new building of physical and social infrastructure and (6) development policies for entrepreneurship, “small” businesses, and small and medium size enterprises6. For Serbia, as well as for all other market economies, it is characteristic that these policies are formulated more or less autonomously within certain domestic and international political, economic, administrative and institutional structures. First of all, let as take a look on the situation in the domain of credit-monetary system and the policy for its operationalization. In the interest of foreign international economic organizations, foreign investors, politicians, businessmen, but also the majority of citizens of Serbia, the exchange rate is practically useless economic variable for market management of foreign-economic relations and optimal allocation of production and development factors. On the other hand, although the population of Serbia is in possession of significant treasured (foreign currency) savings the amount of which exceeds current demand for fresh capital – the financial system is incapable (or disinterested due to extremely favourable terms and conditions for the placement of foreign capital?) to gather this money and engage it productively. It is obvious there is no scarcity of capital but there is a lack of efficient projects for reproduction.

In this context, a good fiscal system and good fiscal policy7 and strategy of revitalization, modernization and new building of physical and social infrastructure should play the key role in increasing efficiency of the economic policy’s development component. They should be supplemented by objectives and various primarily non-economic mechanisms of industrial policy, regional policy and development policy of entrepreneurship, “small” businesses, and small and medium size enterprises. The problem of upgrading coordination of partial economic policies should be observed in a wider context which involves not only phenomena of economic rationality and quality of public goods and services of public administration but also spatial decentralization of the economic policy function (in particular regional policy and strategy of revitalization, modernization and new building of physical and social infrastructure). Poor results of partial economic policies coordination and in particular the lack of industrial policies indicate that it is not possible to increase efficiency of the economic policy’s development component without existing institution re-engineering on the basis of a higher degree of support for the effects of market mechanisms in the conditions of open

6 The complex of partial economic policies does not include agrarian policy, i.e., the strategy of agro-industrial

complex development. Although agro-industrial complex represents basic part of actual production potentials of Serbia, and available natural and labour made resources exceed many times its internal requirements, it has been awarded more or less secondary role in preparations for European integrations while actual agrarian policy is based on the reproduction of its capacities at the level which essentially jeopardizes national alimentary self sufficiency established during the struggle for national liberation at the beginning of the XIX century.

7 The terms “good fiscal system” and “good fiscal policy” are determined in the context of needs to adapt public expenses to the economic strength of the Serbian economy on the basis of rationalization of public consumption, expansion of the tax basis and reduction of overall rate of fiscal loads wit an aim to stimulate private investments into export oriented industries. See Adžić, S. i Popović, D. (2005), Fiskalni sistem i fiskalna politika – njihov doprinos unapređenju konkurentnosti privrede: Slučaj Srbije, “Ekonomija/Economics”, br 1, str. 173 – 200.


11

economy8. In the concretization of actions associated with their redesigning, the following should be taken into consideration:

Firstly, in determining objectives and logic of certain institutions functioning, real power of the political system, public finances and administrative system should be taken into considerations much more than so far for the purpose of their implementation. A prerequisite is certainly breaking up with the dominant system of values in order to substitute servility of not only managerial and entrepreneurship but also public administration towards ruling (political) structures with the culture of respect for institutions, laws and standards (which in the case of Serbia is practically reduced to creative implementation and respect for things which are implied by corresponding parts of acquis communiatare!).

Secondly, reengineering of infrastructure for the implementation of the economic policy is an evolutionary process, which should be integrated in the overall development strategy with an aim to integrate Serbia in the European Union. This means that changes should represent an integral part of long term adaptation of the Serbian society and economy to the European Union’s criteria – respect for the principle of radical changes introduction and learn on successes and failures – step by step.

Let us see what key moves in reengineering of institutional infrastructure should be for the implementation of non-economic measures and instruments of industrial policy with an aim to increase competitiveness of processes, products and companies. The area of public regulation of processing industries (outside the complex of food and beverages and tobacco processing industries which are regulated by the Ministry of Agriculture) is in Serbia covered by as much as three ministries: Ministry of Trade, Ministry of Economy and Regional Development and Ministry for Foreign Economic Relations. In fact, what Serbia actually needs is obviously single Ministry for Trade and Industry with specialized agencies, services and institutes in order to provide:

Firstly, precise, transparent and timely gathering, processing and distribution of information about economic situation in exports oriented industries in compliance with the needs imposed by their public regulation. Undoubtedly, the key role in all this should be given to currently occurring adjustments of the statistical system which must obviously cover much wider area than export industries due to its function.

Secondly, continuous promotion of needs to dynamically increase exports and care for the national image.

Thirdly, gathering, processing and distribution of information of commercial and technical information about the supply and demand of products, raw materials and energy carriers at targeted segments of the global markets with an emphasis on the following sectors: electrical and metal complex; consumer good manufacturing complex; agro-industrial complex; textile manufacturing complex;

Fourthly, precise, timely and transparent monitoring of foreign economic flows per industrial complexes, economic entities (for example: 10, 50, 100 and 500 largest exporters in Serbia!), that is, certain countries and international economic and political groups based on a criterion - impact of their movements on national economic performances.

Fifthly, dynamic implementation of: (a) manufacturing and technological standards; (b) standards and regulations for environment protection and safety at work; (c) standards and regulations for the protection of life and health of consumers; (d) ecological regulations and standards into processes and products – in compliance with corresponding regulations of the European Union. 8 Reengineering is determined as ambitious, radical, high quality and innovations supported methodology which

will on the basis of the development vision set up the direction of institutional changes in the economic system, as well more productive devising of objective contents and actions of the economic policy in order to put in motion the society and economy of Serbia from development lethargy based on the concepts of macro environment which ensures equal opportunities for everybody and consistent integration strategies of Serbia targeted at European countries. See Adžić, S. (2004), Reinženjering privrednog sistema i ekonomske politike, “Ekonomski Anali”, godina XLVIII, Tematski broj (Decembar), str. 119-134.


12

Sixthly, implementation of modern telecommunication and information technologies as stimulation of development: (a) telecommunication and information infrastructures in companies; (b) Internet entrepreneurships; (c) global electronic businesses and trade.

Seventhly, improvement of cooperation between: (a) complementary and competitors companies; (b) domestic and foreign companies; (c) domestic and foreign teams of experts in the domain of development of products and processes, engineering, upgrading quality management systems and the like.

Parallel, it is necessary to unite functions of ministries in charge of education, technological development and environment protection by means of corresponding reengineering moves and join them in a single Ministry for Education, Technological Development and Environment Protection with an aim to provide the following:

Eighthly, improvement of the national system of continuous education of managers, entrepreneurs and experts per selected export clusters with an aim to ensure implementation of: (a) international marketing techniques; (b) international financial engineering techniques; (c) Total Quality Management systems (TQM); (d) human resources quality upgrading in companies; (e) reengineering of business activities;

Ninthly, development of intermediary institutions for the connection of state universities, scientific and research organizations ad corresponding business functions in companies into a unique complex for research and development of products and processes per selected export clusters primarily through the system of development and exchange of personnel.

Tenthly,constant efforts aimed at upgrading the culture of sustainable development with an aim to encourage changes in approaches and attitudes of companies, managers, entrepreneurs, experts and workers towards environmental problems in compliance with minimum standards of the European Union.

6. CONCLUSIONS

The above stated taxotomy is an attempt of descriptive interpretation what should be done in the domain upgrading the efficiency of economic policy with an aim to launch development cycle in Serbia. However, certain operational conclusions can be derived which will be relevant for the current political and economic moment:

Firstly – basic causes of non-competitiveness of the national economy are located in the domain of a so called “x-inefficiency”, i.e., they are e induced by poor economic, technological and development performances of (manufacturing) companies. Because of that, each company must find for itself corresponding solution for structural adaptation and redesigning of business processes with an aim to create conditions for maximum satisfaction of buyers at the internal market of the European Union.

Secondly - making performances of (manufacturing) companies to be at the level of the European Union is a complex, expensive and long lasting process which cannot be done without building integral market system and efficient However, upgrading (manufacturing) companies’ performances cannot wait for the completion of market institutions and structural adaptation of infrastructural institutions for public regulation of the economy and economic development. The development of market and public institutions and improvement of companies’ performances should be attained parallel within preparations of Serbia for European integrations.

Thirdly – the essential task of the economic policy in the next period should be the improvement of competitiveness of (manufacturing) companies - by means of actions directed towards the change of certain primarily internal limiting factors.

In this context, the solutions for successful economic policy should be searched for in a hexagon comprised of partial economic policies: (1) monetary-credit policy, (2) fiscal policy, (3) industrial policies, (4) regional policies, (5) strategy of revitalization, modernization and new building of physical and social structure and (6) development policy of entrepreneurship, “small” businesses,


13

and small and medium size enterprises. Since Serbia is located in a neoliberal surrounding of hard monetary restrictions, the basis for a successful development policy is good fiscal system and good fiscal policy and strategy of revitalization, modernization and new building of physical and social infrastructure supplemented by objectives and various primarily non-economic mechanisms of efficient national industrial policy, regional policy and development policy of entrepreneurship, “small” businesses, and small and medium size enterprises.

REFERENCES

Adžić, S. (2004), Reinženjering privrednog sistema i ekonomske politike, “Ekonomski Anali”, godina XLVIII, Tematski broj (Decembar), str. 119-134.

Adžić, S. (2005), Unapređenje performansi industrije Srbije u kontekstu Evropske integracije, “Ekonomske teme”, br. 1-2., Knjiga 1, str. 341-351.

Adžić, S. i Popović, D. (2005), Fiskalni sistem i fiskalna politika – njihov doprinos unapređenju konkurentnosti privrede: Slučaj Srbije, “Ekonomija/Economics”, br 1, str. 173–200.

Adžić, S. (2006), Privredni sistem i ekonomska politika, Ekonomski fakultet, Subotica.

Adžić, S. i Popović, D. (2006), Decentralizacija, koordinacija i efikasnost ekonomske politike – Studija slučaja za Srbiju, “Ekonomija/Economics”, br 1, str. 31–65.

Adžić, S. (2006), Kreativno društvo, inovativna privreda i tranzicija – Studija slučaja za Vojvodinu, u Tripković, red.: “Socijalni kapital i društvena integracija”, str. 315-339, Filozofski fakultet, Novi Sad, 2006.

Andreosso B. and Jacobson, D. (2005), Industrial Economics and Organization: A European Perspective, Second edition, The McGraw-Hill Education.

Hess, P. and Clark, R. (1997), Economic Development: Theories, Evidence and Policies, The Dryden Press - Harcourt Brace & Company.

Matejić, V. (2002), Prilozi istraživanju naučnog i tehnološkog razvoja, Savezni sekretarijat za razvoj i nauku, Beograd, 2002.

Popović, D., Adžić S. (2004), Učinak “nevidljivog” javnog duga na ekonomsku politiku: Slučaj Srbije, “Ekonomija/Economics”, Broj 2, str. 275 – 291.

Studija (2006), Konkurentnost privrede Srbije, Jefferson Institute, Beograd, 2006.

Zbornik (ed. Kirkpatrick, C., Clarke, R. and Polidano, C.) (2002), Handbook on development Policy and Management, Edvard Elgar Publishing Inc.

ECONOMIC POLICY AND THE DEVELOPMENT OF SERBIA �

� 15

FISCAL CHALLENGES IN SERBIA TODAY – WHAT TO DO WITH PRIVATIZATION RECEIPTS∗

Tamara Bašić�

Abstract: This paper analyzes the relationship between the privatization receipts and fiscal deficit in Serbia, from 2002 to 2007. An empirical study incorporates monthly data series, where findings suggest that the privatization receipts in Serbia have caused an increase in budgetary deficit and expenditure, and have thus endangered a long term fiscal position of Serbia. Change in use of privatization receipts is necessary if the fiscal balance is to be kept on track in longer term. Paper suggests that the receipts should be used for capital investment, under condition that this does not threaten price stability. Should the problem with inflation arise, an alternative use for these funds should be repayment of foreign debt. It is also advisable that a methodology for budget presentation is accepted, which would be more transparent with regards to use of privatization receipts .

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27

FINANCIAL GLOBALIZATION: BASIC ISSUES AND STRATEGIES

Milutin Ćirović1

Abstract: The second era of financial globalization creates both positive and negative implications, but it is considered as a historical process driven by very strong forces. These forces stem from effects of strong capital accumulation and high technology, and are interconnected through sofisticated market mechanisms. The process of globalization of domestic financial systems is acceptable for developing countries, provided that sufficient caution and protective strategies at the level of individual countries are embeded. A cost-benefit analysis should be applied on net effects of financial integration on aggregate, on effects of specific channels of foreign capital inflows, and on effects on specific projects. Foreign direct investments are considered as the most convenient form of foreign capital inflow, especially during the period until host countries manage to develop the quality of micro structure which exist in home countries already.

KEY WORDS: FINANCIAL GLOBALIZATION, FOREIGN CAPITAL, ENTRY OF FOREIGN BANKS, FOREIGN DIRECT INVESTMENTS, DEBT CAPITAL, HOME BIAS.

BACKGROUND

Financial globalization refers to rising global linkages through cross-border financial flows, whereas financial integration refers to an individual country's linkages to international capital markets.2

The global economy is now in the second phase of financial globalization. The first phase lasted from 1880 to 1914, i.e. during the gold standard period. This phase was based on the invent of telegraph as an important communication technology. After the collapse of the first phase of the financial globalization, a long period has been covered by trade and financial protectionism. However, approximately in the middle of 1980s forces of globalization of cross-border capital flows have started to rise again. The new information and telecommunication technologies, especially the Internet, have created the technological basis for a new process of globalization of financial flows. At the outset the decrease or repeal of cross-border capital flows restrictions happened in industrialized countries, but later on the process has been transferred to developing countries as well.

According to William White, the contemporary global economy is characterized by three big structural reforms: the liberalization of product markets, the macroeconomic policy of very low inflation rates, and the integration of world financial markets.3

Issues of integration of financial sectors of national economies into a globalized network are very complex, as the financial sector – according to Joseph Stiglitz – represents the brain of the economic system.4 Namely, the financial sector – in the sense of banking and securities markets – represents the coordination center for the reallocation of financial resources. That is why it is very important to realize all positive and negative aspects the financial globalization can bring to countries involved. As a lot of experience in this field is accumulated so far, rhetorics of unlimited praise or of general abandonment of the financial globalization are not appropriate. The starting point for evaluation of the financial globalization is related to potential benefits and challenges, so both of the

1 Faculty of Economics, University of Belgrade, Serbia. 2 Eswar Prasad / Kenneth Rogoff / Shang-Jin Wei / M. Ayhan Kose, Effects of Financial Globalization on

Developing Countries: Some Empirical Evidence, International Monetarry Fund, March 2003, p. 7. 2 William White (Head of the Monetary and Economics Department of the BIS), "Opening Remarks", at the

conference on Financial Globalization organized by the BIS and held in Brunnen (Switzerland) on 19-20 June 2006, BIS Papers No. 32, Decembar 2006.

4 Joseph Stiglitz, "The Role of State in Financial Markets", Proceedings of the World Bank Annual Conference on Development Economies 1993, Washington D.C., The World Bank, 1994, p. 23.


28

opposing components should be objectively weighted; or, as the American professor Frederic Mishkin put it correctly, "the financial globalization is controversial".5

The main potentially positive effects of the financial globalization on developing countries are the following:

• Important increase of capital infows from abroad, fostering economic growth and technological development;

• Decrease of capital costs on the domestic financial market, encouraging the demand for investments;

• Enhancement of the efficiency of companies in the real and financial sectors;

• Modernization of the banking business, and especially the introduction of modern methods of credit risks evaluation as well as the management of total risks of banks and other financial institutions.

On the other hand, the financial globalization poses potential challenges for developing countries, including:

• Enhancement of financial instability and greater possibility of financial crises arising within the country,

• Enhancement of the possibilities of transferring shocks from abroad and contagion of financial crises originated somewhere abroad.

The development of market economy on the domestic level seems to lead sooner or later towards the liberalization of cross-border financial flows. Besides, in the world of modern communication technologies it is more difficult to monitor cross-border financial flows than before. However, with a general acceptance of financial globalization as the global process, it is necessary to design adequate protective mechanisms in developing countries in order to make the mixture of positive and negative aspects more favorable.

POTENTIAL FINANCIAL INSTABILITY

The major negative aspects of the financial globalization consist of an increase in financial instability, and in a possibility of outburst of a financial crisis. On the basis of empirical evidence, one can draw a standard model of emergence of financial crisis after the financial integration has been introduced. A huge inflow of foreign capital leads to a credit boom and to enhanced liquidity in the domestic economy. A part of this huge inflow of foreign money is absorbed by the central bank, so a major increase of foreign exchange reserves is evolved. This strong enhancement of liquidity in the country concerned brings an increase of asset prices, especially stock and real estate prices. The upswing of domestic business activities sets the stage for excessive indebtedness of companies and households, with foreign currency clause stipulated in credit contracts.

The excessive indebtedness of the domestic corporate and household sectors, in combination with insufficient exports, brings foreign investors and domestic capital owners to suspicion whether macroeconomic developments are tenable. The foreign and domestic capital owners come to conclusion that a further upward movement of the domestic economy is untenable. At an undefined point of time, a speculative attack against the home currency by holders of capital takes place, especially if the country is based on a fixed-rate currency regime. Capital is flowing out of the country towards foreign financial centers. The government is unable to defend the local currency through increased interest rates alone. It becomes necessary to perform a massive devaluation/depreciation of the local currency. This has a direct effect on increase of inflation. On top of that, domestic debt holders are not able to service their debts with a foreign currency denomination any more. The net

5 Frederic Mishkin, "Financial Stability and Globalization: Getting It Right", Introductory paper at the

conference organized by the Central bank of Spain on Central Banks in the 21st Century in Madrid, on 8-9 June 2006, p. 1.


29

outflow of foreign capital, or at least a sudden stop of foreign capital inflows, creates a payment deficit producing the necessity to attain an export surplus as soon as possible. That is why a stong devaluation/depreciation takes place. The domestic economy enters a recession enhanced by credit restrictions introduced by domestic banks. The financial crisis is transformed into an economic crisis and last about two years on average.6

THE AGGREGATE APROACH

According to the neoclassical theory, the foreign capital inflow produces directly an enhancement of investments and a corresponding increase of GDP. Provided no barriers, capital normally flows from more developed countries towards less developed ones. As less developed countries are short of capital, the wage rates are lower and the returns on capital are relatively higher than in developed countries. The inflow of foreign capital into the less developed countries, however, produces a lowering of interest rates and profit margins in these countries over time.

Levchenko-Ranciere-Toening in their analysis basically confirm the neoclassical theory. Their research has confirmed that the financial liberalization increases the production growth rates. This is achieved through channels of capital accumulation and employment increase, in the context of entry of new firms. At the same time, an increase in volatility of production is noticed. It is found, however, that the effects of financial liberalization are not long lasting, and that they vanish usually after 6 years. The effects on capital accumulation are longer. The only lasting effect of the financial liberalization confers to competition, bringing a decrease of price-cost margins.7

Kose-Prasad-Rogoff-Wei point out that the effects of financial globalization consist not only of direct effects on an increase of investments and growth of GDP, but also of indirect effects on the quality of the economy (so-called collateral benefits). These indirect benefits of the financial globalization consist of positive impacts on the development of financial markets, institutional quality of the economy, and macroeconomic policy. So the financial globalization produces more rapid development of the banking sector through the entry of foreign banks. This implies improvements in credit and financial services quality, enhancement of competition, as well as the introduction of new financial instruments and technologies. In a similar way, the financial globalization is acting towards the improvement and faster development of financial markets. Besides, the financial globalization acts towards the improvement of corporate governance and the development of market for corporate control (through mergers and acquisitions). And finally, the financial globalization acts towards improvement of macroeconomic policies, introducing a trend of decreasing inflation.8

However, within this general framework, different performance of foreign capital in specific developing countries and in specific periods can be found. So it is in the interest of every country - starting from a general theoretical framework - to envisage its own strategy of financial integration. In other words, the domestic country should develop its own strategy, translating the global strategy into its own specific pattern, having in mind the characteristics of the country concerned.

There is a high level of understanding among experts all around the world that some preconditions have to be satisfied in order to join the financial globalization. "An excessively rapid opening of the capital account, especially if stability-oriented macroeconomic policies and strong institutional fundamentals are not yet in place, may magnify a country's vulnerability to external shocks."9 This does not imply that absolute macroeconomic stability or a perfect institutional

6 See more on problems of financial and currency crises in the book: Milutin Ćirović, Devizni kursevi (Foreign

Exchanges), Belgrade, 2000, chapters 16-18. 7 Andrei Levchenko/ Romain Ranciere / Mathias Thoening, "Growth and Risk at the Industry Level: The Real

Effects on Financial Liberalization", Conference on the New Perspectives on Financial Globalization, IMF, Washington D.C., 26-27 April 2007.

8 Ayhan Kose / Eswar Prasad / Kenneth Rogoff / Shang-Jin Wei, "Financial Globalization: A Reappraisal", IMF Working Paper WP/06/189, August 2006.


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underpinning is required. Nevertheless, a sufficient level of macroeconomic stability and institutional components of the economic system has to exist in order to efficiently support strong inflows of foreign capital. Under this assumption, a strong inflow of foreign private capital would act towards enhancement of macroeconomic stability, and especially towards further strengthening of a market oriented institutional system and a corresponding behavior of companies and banks.10

A permanent expert center in every country should continually monitor the effects of financial integration on the balance-of-.payments, investments, and other important variables. It is very significant to monitor the effects of foreign investments on the allocation efficiency, enhancement of productivity and profitability, enhancement of competitiveness on world markets etc. Besides, these centers would make research of global capital markets.

Today there are more than 160 investment promotion agencies at the national level and more than 250 agencies at the subnational level. These agencies try to focus on and target those sectors they believe are offering most adequate chances for capital investments. For example, the Chech investment promotion agency - CzechInvest – targets the automobile industry, electronics, plastics and business services. The Swedish agency – Invest in Sweden – focuses on the automobile industry, communications, and wood processing. These investment agencies try to identify and attract specific foreign investors for specific types of projects, as high tech, greenfield projects, joint ventures etc. This targeting of specific industries for capital investment is based on the FDI quality concept in the sense of effects of an unit of FDI on economic growth.11

STRUCTURE OF FOREIGN CAPITAL INFLOW

In the strategy of foreign capital liberalization, the principle of sequencing is almost universally accepted today. This means that the strategy of foreign capital inflow contains a stage approach. Liberalization of long-term capital is carried out in the first stage, whereas the liberalization of short term capital is introduced later on. As far as specific forms of foreign capital are concerned, the liberalization of foreign direct investments, as opposed to foreign debt capital, is more stressed at the outset.

All flows of foreign private capital are usually classified in three segments: foreign direct investments (FDIs), portfolio equity, and portfolio debt flows. This classification is important because of different features of the types of capital flows mentioned above. Foreign direct investments, especially of greenfield type, are considered as the most convenient form of foreign capital flows into developing countries. It is pointed out that through the FDIs not only the transfer of capital, but also the transfer of newer technology and managerial expertise is accomplished. FDIs have an advantage over other forms of foreign capital investments, as they are less volatile in case of emerging crises situations. A further point for preference of FDIs flows is that the business risk is transferred on foreign investors. The FDIs tend to show better performance in economies in which institutional mechanisms determining the market quality are not at a sufficient level yet.

Foreign direct investments have two forms: greefield investments and acquisitions of domestic companies. Greenfield investments have a sure advantage over acquisitions, because they involve an increase of productive capacities and new jobs. As far as acquisitions are concerned, much depends on the price paid for the acquisiton, and on the investment policies of the acquiring companies.

Bank loans and cross-border transfers of securities – as forms of foreign debt capital – are more risky and have more pronounced procyclical content, meaning that they suddenly expand during the cyclical upswings, whereas during cyclical downturns tend to contract and even to produce reversals of flows. However, the main problem with the cross-border transfer of debt capital consists 9 Jürgen Stark (member of the Executive Board of the European Central bank), "Introductory Remarks",

Conference on Financial Globalization and Integration, Frankfurt am Main, 17 July 2006. 10 See: Kose / Prasad / Rogoff / Wei, "Financial Globalization: A Reappraisal", IMF Working Paper WP/06/189,

August 2006. 11 Laura Alfaro / Andrew Charlton, "Growth and Quality of Foreign Direct Investment: Is All FDI Equal? "

Conference on New Perspectives on Financial Globalization, IMF, Washington D.C., 26-27 April 2007.


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in the assumption that the market structures in developing countries perform in approximately same way as in countries of origin of that capital. It seems that a greater risk, in terms of efficiency, is involved in allocation of debt capital in the corporate sector of developing countries. Transfers of debt capital have a slow impact on improvement of the market quality in developing countries, especially if an improvement in corporate governance is not involved. This problem does not exist in cross-border transfers of debt capital among developed countries, since the quality of markets is very similar.

One may expect that successful emerging countries become capable to raise substantial amounts of equity portfolio capital in developed capital markets. It is understood that institutional investors (pension funds, investment funds, insurance companies) in developed countries have huge and steadily rising funds under management. A gradual increase of the proportion of these funds transferred into developing countries would represent a big achievement in the second wave of the financial globalization. However, such a possible trend is based on the assumption of sufficient eligible companies and a sufficiently developed market infrastructure (especially in terms of the legal system, corporate governance, and market behavior).

One may specify two models of developing countries’ financial integration. The first model stresses direct greefield investments, especially in the real sector, implying the construction of new capacities with a substantial export orientation. The second model is overwhelmingly oriented on acquisition of domestic companies in the real and financial sectors. The first model has been used very succesfully in China and other Asian countries, whereas the second model has been applied to the greater extent in European transition economies, especially in Serbia. According to some estimates, foreign banks now hold about 70 percent of the total assets of the banking systems in Europen transition countries. In some of these countries almost 100 percent of the banking system is in hands of foreign banks (Chech Republic), but not much less in Hungary, Poland etc. A quite different situation exists in "old" countries of the European Union.

NTRY OF FOREIGN BANKS

The main reason for a rapid entry of foreign banks into the European transition countries was the privatization of government-owned banks, which was carried out in relativelly short period of time. Bearing in mind that the securities markets in European transition countries are in a embrionic phase and that the nonbank financial institutions are also underdeveloped, the financial sector in these countries consists almost completely of banking institutions.

Foreign banks in Serbia have achieved important performance with respect to the modernization of business. However, the functioning of the privatized banking sector with a strong concentration of foreign banks has not been quite satisfactory in some aspects so far. Namely, it was expected from the reformed banking sector - in the context of development of a market economy - to make a significant contribution towards a dynamic restructuring of the domestic economy. It was hoped that the reformed banking system would have helped in the development of corporate governance. Such structural changes should have produced rapid enhancement in efficiency and profitability of companies as well as an increase in exports. Bearing in mind that the creation of a vigorous securities market takes much more time, the reform of the banking system has been understood as the key institutional driver in the process of creation of corporate governance. The proprietary, organizational, and business restructuring of companies are all of paramount importance in making the domestic microstructure more close to market performance in developed countries.

However, the foreign banks have not fulfilled these expectations, as they have been oriented on credit and deposit relations with the population. This implied insufficient level of loans to companies, with a strong effect on deceleration of the restructuring process in the corporate sector. The reason why foreign banks have been oriented mostly on retail banking is very clear. Even in developed countries banks earn highest returns by granting loans to households. Nevertheless, in developed countries major banking institutions allot substantial loans to companies, despite the existence of securities markets as an alternative channel of external financing of companies.

The second problem in the banking structure dominated by foreign banks consists in excessive interest rate margins and high commissions. The explanation given by foreign banks is that the high


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credit interest rates in developing countries are necessary because of substantial credit risks involved. However, the credit risk in loans to households in developing countries is not higher than in developed countries. Banks in developing countries are protected through obligatory current accounts which borrowers have to open with respective banks, so that monthly incomes of individuals are transferred through these current accounts. As far as loans for new homes are concerned, banks are protected through mortgages, in a same way as in developed countries. The competition of a quite large number of banks produced a rather sluggish trend of interest rates reduction, so the expectations have not been fulfilled, especially bearing in mind a significant decrease in inflation.

HOME BIAS

A problem much discussed in developed countries relates to the slow growth of foreign investments in relation to the overall increase of financial assets in developed countries. Thus, in spite of an absolute and even relative growth of foreign investments, the bulk of capital flows is still tied to the countries of origin (the so called home bias). So at the beginning of 1990s more than 90 percent of total wealth on stock markets in the U.S.A., Canada, and Japan, and over 80 percent in Great Britain and Germany have been invested in domestic stocks. This means that portfolios in developed countries show an important stock home bias, since domestic investors hold most part of their wealth in domestic stocks, although they could get a higher return and a smaller portfolio risk by a greater diversification on cross-border markets.12

This binding of stock holdings in countries of origin is not in accordance with the neoclassical portfolio theory, according to which one should expect that capital from developed countries flows to less developed countries, attracted by higher interest rates, until interest rates become equal. The neoclassical theory considers the existence of international barriers in the international flow of capital as the unique reason for a departure from the theoretical model. As the cross-border barriers among developed countries are abolished, and substantially decreased by a majority of developing countries, the question of validity of the neoclassical theory has been raised. The outcome is that the neoclassical theory should be supplemented by other factors, mainly of institutional or microeconomic nature, which are also influencing cross-border capital flows.13

Although the home bias has steadily but slowly decreased in recent years, especially in countries of euro zone, it is still strong in the global economy. Bearing in mind that majority of countries invest only some 10 percent of the portfolio wealth in foreign securities, which is much less than optimum, "this would suggest that we are only at the start of this new era of financial globalization. 14

CONCLUDING REMARKS

The second era of financial globalization creates both positive and negative implications, but it is considered as a historical process driven by very strong forces. These forces stem from effects of strong capital accumulation and high technology, and are interconnected through sofisticated market mechanisms. The process of globalization of domestic financial systems is acceptable for developing countries, provided that sufficient caution and protective strategies at the level of individual countries are embeded. The volatility of economic process and the possibility of financial crises in market economies cannot be entirely avoided, but could be reduced to a large extent by adequate strategies on countries' level. If financial crisis still do happen – although unfavorable in economic and social sense – they are at the same time a stimulus for additional measures and processes towards strengthening economic and financial systems in a market context.

12 Ayan Kose /Eswar Prasad/ Marco Terrones, "How Does Financial Globalization Affect Risk Sharing? Patterns

and Channels", Conference on New Perspectives on Financial Globalization, IMF, Washington D.C., 26-27 April 2007.

13 Bong-Chan Kho /Rene Stulz/ Francis Warnok, "Financial Globalization, Governance and Evolution of the Home Bias, BIS Working Papers No. 220, December 2006.

14 Jürgen Stark, Introductory Remarks, July 2006.


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The existence of the home bias in developed countries points out that the financial globalization represents a gradual, although a far reaching process. On the contrary to the home bias in developed countries, a general trend towards gradual openness works in developing countries. Every country can evaluate independently – having in mind all specific circumstances – which degree of financial openness suits it the most. A selective and gradual deregulation od foreign capital transfers has been a major feature of the strategy of opening domestic financial systems in China and India. It is normally to assume that more successfull developing countries would more rapidly increase the degree of their financial integration.

In order to make sure that the effects of financial globalization prevail in the long run, a developing country should take care that the inflows of foreign capital supplement, but not substitute, domestic capital formation. In this sense it is important that both the domestic and foreign capital affect the determination of an increased rate of savings of the population and retained profits at the companies' level. In order to insure the conditions for long-run positive effects of financial globalization, it is important that the domestic economy increase the export share of its production.

In the current phase of global development, all countries should make endeavor to adjust their macroeconomic policies and institutional processes with the global market standards. At the macroeconomic level this confers to the monetary and fiscal policies, which are oriented to attaining/maintaining a low inflation rate as the main criterion of macroeconomic policy. The regime of flexible exchange rates is becoming a general norm in the framework of financial globalization. Nevertheless, the focus should be put on the fulfillment of a market-oriented institutional strategy in the sense of strengthening microeconomic foundations. It can be evaluated that the breakthrough of cross-border capital flows does have a more rapid and much stronger effect on strengthening the market-oriented institutional structure than political pressures by the International Monetary Fund, which was in earlier periods primarily focused on macroeconomic policies.

Every developing country faces potential positive and negative effects of financial integration, so it should be advised to quantify them on the basis of cost-benefit analysis. This analysis should not treat only the net effects of financial integration on an aggregate level, but also the effects of main forms of foreign capital. On the micro level the net effects of inflow of foreign capital are supposed to be evaluated in terms of specific projects. This also holds for foreign direct investments which are considered the most convenient form of foreign capital inflow, especially until the country does not attain the quality of micro structure already existing in developed countries.

REFERENCES

Alfaro, Laura / Andrew Charlton. "Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?" Conference on New Perspectives on Financial Globalization. Washington D.C.: International Monetary Fund., April 26-27, 2007.

Baltagi, Badi / Panicos Demitriades / Siong Hook Law. "Financial Development, Openness and Institutions: Evidence from Panel Data". Conference on New Perspectives on Financial Globalization. Washington D.C.: International Monetary Fund., April 26-27, 2007.

Corbo, Vittorio. "Some Policy Lessons for Emerging Economies". Financial Globalisation. BIS Papers No. 32, December 2006.

Cumming, Christine. "Review of Recent Trends and Issues in Financial Sector Globalisation". Financial Globalisation, BIS Papers No. 32, December 2006.

Ćirović, Milutin. "Forms of Foreign Capital Inflows". Serbian Scientific Society, Scientific Review, No. 23, Belgrade, 1997.

Ćirović, Milutin. "Strane direktne investicije: Trendovi i strategije" [Foreign Direct Investments: Trends and Strategies]. Publication: Strana ulaganja: Poslovno-analitički pristup [Foreign Investments: A Business and Analytical Approach]. University "Braća Karić", Belgrade, March 2000.

Ćirović, Milutin. Devizni kursevi [Foreign Exchanges]. Belgrade: Bridge Company, 2000, Chapters 16-18.


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Ćirović, Milutin. "The Entry of Foreign Banks". Serbian Scientific Society, Scientific Review, No. 28, Belgrade, 2001.

Ferreira, Miguel / Pedro Matos, "The Colors of Investors' Money: Which Firms Attract Institutional Investors From Around the World?". European Central Bank. Conference of Financial Globalisation and Integration, Frankfurt am Main, June 2006.

Kho, Bong-Chan / Rene Stulz / Francis Warnock. Financial Globalisation, Governance and the Evolution of the Home Bias. BIS Working Papers No. 220, December 2006.

Kose, Ayhan / Eswar Prasad / Kenneth Rogoff / Shang-Li Wei. "Financial Globalization: A Reappraisal". IMF Working Paper WP/06/189, August 2006.

Kose, Ayhan / Eswar Prasad / Kenneth Rogoff / Shang-Li Wei. "Financial Globalization: Beyond the Blame Game". Finance and Development, March 2007.

Kose, Ayhan / Eswar Prasad / Marco Terrones. "How Does Financial Globalization Affect Risk Sharing? Patterns and Channels". Conference on New Perspectives on Financial Globalization. Washington D.C.: International Monetary Fund, April 26-27, 2007.

Levchenko, Andrei / Romain Ranciere / Mathias Thoenig. "Growth and Risk at the Industry Level: The Real Effects on Financial Liberalization". Conference on New Perspectives on Financial Globalization. Washington D.C.: International Monetary Fund, April 26-27, 2007.

Mishkin, Frederic. Financial Stability and Globalization: Getting It Right. Introductory paper for the conference organized by the Central bank of Spain in Madrid on June 8-9, 2006.

Ortiz, Guillermo. "Global Banking: Trends and Policy Issues: A Host Country Perspective". Financial Globalisation. BIS Papers No. 32, December 2006.

Smith, Katherine / Diego Valderrama. "The Composition of Capital Flows When Emerging Market Firms Face Financing Constraints". Conference on New Perspectives on Financial Globalization. Washington D.C.: International Monetary Fund, April 26-27, 2007.

Stark, Jürgen. "Introductory Remarks". European Central Bank. Conference of Financial Globalisation and Integration. Frankfurt am Main, July 17, 2006.

Stiglitz, Joseph. "The Role of the State in Financial Markets". Proceedings of the World Bank Annual Conference on Development Economies 1993. Washington D.C., 2004.

Uribe, Martin. "Individual Versus Aggregate Collateral Constraints and the Overborrowing Syndrom". Conference on New Perspectives on Financial Globalization. Washington D.C.: International Monetary Fund, April 26-27, 2007.


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REGIONALIZATION, DEFINITION OF TERRITORIAL UNITS FOR STATISTICS (NUTS)∗ AND SERBIAN REGIONAL DEVELOPMENT

Stevan Devetaković1

Abstract: Taking former experiences and territorial organisations of Serbia into consideration, and our former suggestions, we have decided to explain briefly our view on a feasible modern solution, which we believe would be appropriate to current relations in our country, i.e. Serbia. Namely, population has been taken as a basic criterion for determining territorial units for statistics, along with numerous other relevant parameters, with the aim of giving a better account of the various aspects of a total regional development, primarily economic, as well as wider social development. The major aim is to make these parameters widely acceptable, i.e. to avoid not only possible political implications in defining territorial units for statistics, but above all any notion about probable political segmentation of Serbia.

Starting from former examples of thin modern regionalization and experiences in territorial development of the Republic of Serbia which can be found in various sources2, that we previously published, we opt hereafter for explaining our own vision and feasible solution (Option 3). Thereby we take population as a basic criterion for defining primarily statistical regions, at the same time taking into account many other relevant benchmarks in order to present better various aspects of primarily economic and whole social and multidimensional territorial development as well.3

The cornerstone of our presentation, accepted by Regional Development Strategy of the Republic of Serbia 2007-2012, we presented in our and few other suggested solutions since the Federal Republic of Yugoslavia was formed. Earlier, in Socialist Federal Republic of Yugoslavia, it was customary for a long period to treat the whole Republic of Serbia as one integral area, or partitioned into three regions – two provinces and Central Serbia (so called “the territory of the Republic of Serbia without autonomous provinces” or “Serbia proper”). In favour of such a solution the Republic as a whole was thought of as a federation member and that was a usual perception to overlook territorial development aspect, in comparison with others and a country as a whole. But, further territorial partition wasn’t consistent because three divisions or provinces, on the one side, and Serbia proper, on the other, were discussed without appropriate state/legal status. Anyway, for all of them statistical data were collected and processed, so there was a possibility to view and compare them from different aspects with country as a whole, other republics or mutually, but that wasn’t possible within any narrow territorial unity. As significant shortages that regionalisation emphasized, such as differences in size – area and population number, then non-homogeneous internal development, and setting the boundaries of republics/provinces in SFRY, important were political, national, historical, as well as many other non-economic criteria.

The importance of economic regionalization and its political and economic aspects has determined the following three optional approaches.

∗ NUTS – nomenclature des unités territoriales statistiques or Nomenclature of Territorial Units for Statistics 1 Faculty of Economics, University of Belgrade, Serbia. 2 Since FR of Yugoslavia was formed, that is since the beginning of the 1990s, the country has faced many

problems and various difficulties, starting from sanctions imposed by international community, then the war which waged in the neighbourhood to bombing in 1999. Many negative consequences arose, which called for a full attention of current economic policy in order to at least alleviate the present difficulties, in a situation when economic regression and a host of negative social, political and other effects could not be prevented. Although the country has considerably shrunk, it has been showing from its very beginnings a bigger or smaller fall in output of all goods and services, as well as fewer territorial imbalances caused by lower aggregate economic activity. This is the reason why economics has not paid due attention to long-term development aspects in general, and regional development in particular.

3 With regard to regionalisation in Serbia a particularly comprehensive account was given in a collective study by Z. Vacić, B. Mijatović, A. Simić, Z. Radović, Regionalizacija Srbije (Serbia's Regionalisation), Centar za liberalno-demokratske studije, Beograd, 2003., especially on pp. 19-25.

REGIONALIZATION, DEFINITION OF TERRITORIAL UNITS FOR STATISTICS (NUTS) AND SERBIAN ...

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Graph 1. Option one – the capital, provinces and Central Serbia (without Belgr.)

Graph 2. The capital, provinces, Eastern and Western Serbia

Option 1 – Regionalization in terms of NUTS2, statistical regions create four rather heterogeneous segments, according to the number of inhabitants: •City of Belgrade, •Central Serbia (without Belgrade), •Autonomous Province of Vojvodina, •Autonomous Province of Kosovo and Metohija.

The second level (NUTS3) comprised sub-regions within the proposed regions, as they had already been established in statistical terms. NUTS3 established like this assumes statistical monitoring of basic data on the basis of which economic and social development, comparison with the development level of the region they belong to, and monitoring of inner territorial balance could be determined. Statistical instruments should be precisely defined, completed and enlarged afterwards.

Option 2 – The next possible economic regionalization is based on a more balanced size of regions in terms of the number of inhabitants, that is, the number of population ranges from 1,6 to 2 million in all defined regions. Practically speaking, former reviews of the regions of the •City of Belgrade, •Autonomous Province of Vojvodina, •Autonomous Province of Kosovo and Metohija could be repeated as they are completely identical. The rest of Central Serbia (without the City of Belgrade), in this proposal of regionalization, was divided into two rather harmonized parts – •Western and •Eastern Serbia.

Western Serbia, as a region, is composed of seven districts, without a dominant regional centre, which implies a polycentric area. However, Kragujevac is set apart as a regional centre, considering its historic importance, and the existing concentration of inhabitants and economic activities, especially industry. During the 1960s and the 1970s the population in Kragujevac grew rapidly, and it can be said that this town recorded demographic explosion unprecedented in the Republic of Serbia, except in the City of Belgrade. Furthermore, arguments for selecting Kragujevac as a regional centre should be sought in its cultural, educational, scientific and research potentials as well as its influence outside the region it belongs to. According to the spatial plan of the Republic of Serbia (adopted in 1996), Kragujevac was designated as one of six macro–regional centres of the Republic of Serbia (the City of Belgrade, Novi Sad, Kragujevac, Uzice, Nish and Pristina). At the beginning of the 1990s, around 2 million citizens or 20% of the total population of the Republic of Serbia lived on the territory of Western Serbia4, and almost identical proportion was recorded at the beginning of the current decade, although the absolute number decreased. Therefore, this region is the largest regarding the number of inhabitants, and it accounts for almost 27% of the total area of the Republic of Serbia. The population density is 83 persons per square kilometre.

The region of Eastern Serbia consists of nine districts/sub-regions (NUTS3 level). Nish is its dominant development centre, with notable economic and infrastructural potential – a transit centre, a railway crossroad, road intersection and airport. The territory of Eastern Serbia extends to 28,8 thousand square kilometres, and there are around 1,91 million citizens, i.e. approximately 19% of the total population of the Republic of Serbia. According to these parameters, this is the largest NUTS2 region – near 33% in total area, so its population density is 69 people per square kilometre.

4 This review does not include data about AP of Kosovo and Metohija, as census was not carried out in this

province since 2002, so the review is based on data colllected in 1991.


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NUTS2 NUTS3 Belgrade (city of Bg) without districts EEEaaasssttt VVVooojjjvvvooodddiiinnnaaa 333 dddiiissstttrrriiiccctttsss West Vojvodina 4 districts EEEaaasssttt rrreeegggiiiooonnn 555 dddiiissstttrrriiiccctttsss South region 5 districts West region 3 districts Central region 4 districts EEEaaasssttteeerrrnnn KKKooosss...aaannnddd MMMeeetttooohhh... 333 dddiiissstttrrriiiccctttsss WWWeeesssttteeerrrnnn KKKooosss...aaannnddd MMMeeetttooohhh... 222 dddiiissstttrrriiiccctttsss For NUTS3 list see in Tab. 1 at the end of this paper

Graph 3. Economic regions (NUTS2), sub-regions (NUTS3) in Serbia

With respect to previously said, we decide to fulfil as Option 3 the regionalization of the Republic of Serbia with population as a basic criterion, so we believe that it is possible to divide the whole territory into nine quite unified entities – the City of Belgrade, East Vojvodina, West Vojvodina, East region, South region, West region, Central region, East Kosovo and Metohija, West Kosovo and Metohija. Innovation in comparison to our earlier suggestions is in introducing a novel characteristic “statistical” in regionalization (NUTS2) instead of governmental trait (political implication, new state position, potentially “new state”), then inside their sub-regions–districts (NUTS3), but not at all events the same way (see the next Graph 3).

We have opted for such regionalization having in mind the definitions of regions given in economic literature in general and in our country in particular, which was in detail explained in our textbook5. From economic view in general, we take sub-regions (NUTS3) as the smallest segments, i.e. districts since they are territorial entities made up of a few communes which are closely linked to one centre. We believe that in regionalization of Serbia as a whole it is not allowed to employ smaller territorial segments because they do not have appropriate natural, human and productive potentialities at their disposal, which would enable them to create potent focal points of growth and effect appropriate diversification of economic activities.

5 Economic regions are: (a) territorial segments of a national economy (state), which are characterized by some

economic and geographical wholeness; (b) spacious enough to make possible creation of powerful centers of growth and production diversification by its natural and human potential; (c) those whose beginning and development is due to a territorial division of labour and sрecialization of production; (d) created around one or more development center/s. (Taken from the textbook written by Devetakovic, S. NATIONAL ECONOMY, PC, Faculty of Economics, Belgrade, 2005, p. 114).

Similar definition of economic regions was given by N. Čobeljić, PhD, in his book ECONOMY OF YUGOSLAVIA growth, structure, functioning,Book II, Savremena administracija, Belgrade, 1974., p. 239.


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In other words, existing communes in Serbia, as a rule, do not have proper prerequisites and to some extent complex development on the basis of available economic potentialities. Besides, communes cannot create independently firm economic growth nodes suitable for territorial division of labour and at the same time a useful material base for a complete set of social infrastructure – health care, education, science and cultural institutions – whose activities they could either independently finance and/or partly participate in at a higher level of territorial organization.

Hence, our view is in accordance with the orientation in the EU which “found that NUTS2 (Basic regions) was a framework generally used by Member States for the application of their regional policies and was therefore the appropriate level for analysing regional-national problems”.6

Definitely, in overall analysis of territorial aspect of development it isn’t possible to exclude lower segments than regions/sub-regions because we can notice significant diversities in economic and all other associated development aspects inside each of the regions. Anyhow, in such cases a decentralized approach as well as qualifying municipalities to take suitable stimulating actions is more adequate than direct action from the state level. Thus, combined with direct monitoring, they could achieve appropriate results.

At a lower level (NUTS3) of partitioning of the Republic of Serbia as a whole, including Kosovo and Metohija, we opt for division into twenty nine districts – without districts (Belgrade), three districts in East Vojvodina (Banat), four districts in West Vojvodina (Backa and Srem), five districts in East region, five districts in South region, three districts in West region, four districts in Central region, two districts in West Kosovo and Metohija, and three districts in East Kosovo and Metohija. In setting up regions, we have respected historical regionalisation of Vojvodina as such, but Srem is merged and treated as economic region united with Backa, because Srem district is markedly short of population and even territory size, compared to other districts or minimum limit for NUTS2 in Basic principles of the NUTS7. Regional names are colloquial, but identical are used in the Regional Development Strategy of The Republic of Serbia 2007 – 20128.

In Tab. 1 (at the end of this paper), we present basic indicators for this proposed regionalization, except for Kosovo and Metohija, because since 1999 up to now statistical bureau has not been collecting them (except for total area and settlements)9. Additionally, we check out dispersion of used indicators in separate table (Tab 2) ) in order to measure the quality of this selected regionalization by objective procedure for both observed levels.

Still, in the rest of the paper we'll tackle only some of the indicators used since the length of the paper does not allow us to analyse them all thoroughly. We'll concentrate on those most essential for evaluation of our regionalization.

1. Regional total population number fluctuates between 688 thousand in East Vojvodina and 1 576 thousand in Belgrade, and corresponding variation coefficient is only 0,284. This we take as an important argument that it is comparatively unified regional size according to population number in the 2002 census. If we eliminate Belgrade from the analysis, as the capital with very dense population so much unlike other regions, the differences would be minimized and extremes would be in the ratio of 1,95:l (Western Vojvodina : Eastern Vojvodina), hence the related variation coefficient (0,196) for all other regions.

As expected, differences are still growing if we observe relations in sub-regions (NUTS3) of the Republic of Serbia. If we analyse all sub-regions collectively in Serbia as a whole, the highest population density is recorded in the City of Belgrade (explained in previous paragraph), as this

6 Purpose of the NUTS, http.//ec.europa.eu/eurostat.ramon/nuts/application_regions_en.html (2007 06 16) 7 http.//ec.europa.eu/eurostat.ramon/nuts/basicnuts_regions_en.html (2007 06 16) 8 Regional Development Strategy of The Republic of Serbia 2007 – 2012, p. 187. 9 See for details Statistical Yearbook of Serbia 2006., p. 412-416.


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territory is considered as a sub-region at the same time. However, at this level of analysis, we ought to eliminate Belgrade from the analysis according to the above rationale, i.e. attributes in relation to regions. In that case, the highest population is registered in Southern Backa District, while the lowest population number is recorded in Toplica District (102 075). The dispersion analysis of the number of inhabitants, in all sub-regions collectively, implies the corresponding variation coefficient even now of 0,428. We consider this a high value in all cases.

According to the size of territory, the largest is East region (14 856 km2) and the smallest is Belgrade (3 222), i.e. the ratio is 4,61:1, and variation coefficient is 0,424. Extremes are somewhat closer in the size of territory of sub-regions/districts, which is also confirmed by a smaller value of the variation coefficient (0,165).

2. Regional development level measured by gross domestic product (material concept) ranged from 92 358 (South region) to 227 926 dinars (Belgrade). In other words, deviation from the average was over 76% above and near 29% below, i.e. extreme would range from 2,5:1, and appropriate variation coefficient was 0,399. This means that in comparison with the beginning of this decade (the start of 2000) the existing differences have widened to some degree, and consequently this calls for an effort targeted at equalization or at least blocking of moreover increasing existing inequalities. Certainly, the obtained results are not solid bearing in mind scarce indicators for Kosovo and Metohija, since just that area was short of the mean value for the Republic of Serbia in the past.

In that way measured differences at the level of sub-regions collectively of economic development level in Serbia ranged from 62 067 (Jablanica distr.) to 180 460 (South Banat), namely extreme would range from 2,9:1, that is, deviation from the average was 52% above and 48% below for extremes, and corresponding variation coefficient for all was 0,324.

If the criteria, according to which regions inside the EU10 qualify for the European Fund for Regional Development and other structural funds when they satisfy other conditions envisaged by the Union’s policy, were applied 15 sub-regions, out of 25 districts included in the analysis, would have the gross domestic product per capita less than 75% of the average of the Republic of Serbia (districts: Srem, Bor, Zajecar, Danube, Pomoravlje, Jablanica, Pcinja, Pirot, Toplica, Zlatibor, Kolubara, Macva, Rasina, Raska, Sumadija). This means that if the Union’s criteria were considered and if they were applied to sub-regions of the Republic of Serbia, the above mentioned 15 districts would satisfy one of the conditions which would qualify them to use the mechanism designed to stimulate their development. It is necessary to note here that the sub-regions' number whose gross domestic product per capita was less than 75% of the country average doubled according to the results at the beginning of the current decade (2001), which leads to conclusion that differences on the sub-regional level (NUTS3) are growing.

* * *

The conducted regionalization based on population as the main criterion and the performed analysis of some indicators for respective levels prompts us to believe that we deal with regions – territorial segments which possess enough natural, human and relatively homogeneous economic potential to create powerful centres of growth and production diversification. Taking exactly this into account, as well as material conditions, existing distinctiveness and other available factors, we ought to work out the concept for each of those territorial parts of the Republic, to effect harmonization inside the region and/or among the regions, as well as the whole economy of the Republic of Serbia. The choice of the strategy of development and current economic policy should be established on such a concept, whereas at the same time should depend on available means, the main objectives of regional development in general and in particular, as well as surrounding circumstances and their influences.

10 European Commission, Structural Funds and their Coordination with the Cohesion Fund; Guidelines for

Programmers in the Period 2000-2006, Office for Official Publications, Brussels, 1999. Inforegio 5/2000. This is discussed in greater detail in our work “Development and perspectives of regional policy in the

European Union”, published in Economic Annals, No 155, Belgrade, 2002.


40

Apart from previously mentioned elements which permanently affect the choice of the strategy of development, current economic policy, as well as regional success, the crisis repercussion will still be present in forthcoming period, as well as the effects of country disintegration and international sanctions, and still incomplete transition process. This all means that in the short term it is impossible to expect some remarkable positive shifts in the regional development, which is otherwise improbable from the regional viewpoint. However, just stated belief about unfavourable influences, which always contain the aspect of territory size, does not exclude the possibility and necessity to carry out the regionalization of Serbia suitable for statistical monitoring of development and to establish principles from the regional development point of view in newly maintained institutional conditions. Besides, it is necessary to prepare other conditions for the time when the situation in our country, in our immediate and wider surroundings will normalize in order to activate the regional development dimension in an appropriate way, that is to carry out compatible regional policy, as an integral part of the whole national economic policy of the Republic of Serbia.

Tab. 1 REGIONS (NUTS2) AND SUB-REGIONS (NUTS3) IN SERBIA* Regions

Subregions (districts)Total area

km2

Arable area

2005, ha

Settlements, 2004

Population number

2002

Index population number 1991=100

Employed persons

2005

GDP (material) 2004 mil.

din.

GDP 2004 per

capita

Employed persons per

1000 inhabitants

Population per km2

Belgrade 3 222 206 491 166 1 576 124 101,5 613 744 359 239 227 926 389 489Vojvodina 21 536 1 455 105 430 2 031 992 310,9 544 765 307 089 151 127 268 94East Vojvodina 9 830 740 177 199 688 274 97,0 158 103 109 261 158 747 230 70

South Banat district 4 245 311 677 94 313 937 99,5 76 492 56 653 180 460 244 74North Banat district 2 329 186 052 50 165 881 93,4 37 536 23 865 143 869 226 71Midle Banat district 3 256 242 448 55 208 456 96,2 44 075 28 743 137 886 211 64

West Vojvodina 11 706 714 928 231 1 343 718 420 386 662 197 828 147 224 288 115West Backa district 2 420 193 932 37 214 011 101,6 49 022 33 703 157 484 229 88

South Backa district 4 016 311 749 77 593 666 109,2 209 525 102 297 172 314 353 148North Backa district 1 784 156 808 45 200 140 98,8 57 039 29 422 147 009 285 112

Srem district 3 486 246 371 109 335 901 110,8 71 076 32 405 96 472 212 96Central Serbia 55 968 2 593 186 4 251 5 466 009 97,5 1 524 198 722 334 132 150 279 98East region 14 856 753 274 701 922 340 462 217 131 87 335 94 689 235 62

Bor district 3 506 131 534 90 146 551 89,8 34 962 12 384 84 502 239 42Branicevo district 3 865 215 324 189 200 503 91 39 129 23 452 116 963 195 52

Zajecar district 3 623 156 637 173 137 561 89,2 30 525 10 826 78 700 222 38Danub district 1 248 101 438 58 210 290 97,3 49 159 18 382 87 414 234 169

Pomoravlje district 2 614 148 341 191 227 435 94,5 63 356 22 292 98 013 279 87South region 14 010 551 959 1 465 1 058 099 95,9 248 184 97 724 92 358 235 76

Jablanica district 2 769 123 477 336 240 923 95,9 49 670 14 953 62 067 206 87Nishava district 2 729 137 124 285 381 757 97,9 101 085 49 281 129 089 265 140

Pcinja district 3 520 117 296 363 227 690 95,9 49 666 16 536 72 626 218 65Pirot district 2 761 85 498 214 105 654 91,1 29 355 9 889 93 595 278 38

Toplica district 2 231 88 564 267 102 075 93,1 18 408 7 065 69 216 180 46

West region 11 883 543 387 884 835 225 97,4 182 038 78 377 93 840 218 70Zlatibor district 6 141 194 147 438 313 396 94,3 70 627 28 799 91 892 225 51

Kolubara district 2 474 147 123 218 192 204 97,8 44 951 17 996 93 628 234 78Macva district 3 268 202 117 228 329 625 100,1 66 460 31 583 95 815 202 101

Central region 11 989 538 075 1 035 1 074 221 97,9 263 101 99 658 92 772 245 90Moravica district 3 016 138 621 206 224 772 98,5 57 511 26 898 119 666 256 75

Rasina district 2 668 135 157 296 259 441 95,1 55 305 22 797 87 869 213 97Raska district 3 918 112 573 359 291 230 99,3 70 875 21 403 73 492 243 74

Sumadia district 2 387 151 724 174 298 778 98,4 79 410 28 561 95 591 266 125Kosovo and Metohija 10 887 ... 1 449 ... ... ... … ... ... ...West Kosovo and Metohi 4 500 ... ... ... ... ... ...

Pec district 2 450 ... 317 ... ... ... ... ... ... ...Kos.Mitrov.district 2 050 ... 335 ... ... ... ... ... ... ...

East Kosovo and Mehotij 6 439 ... ... ... ... ... ...Kosovo district 3 117 ... 393 ... ... ... … ... ... ...Prizren district 1 910 ... 220 ... ... ... … ... ... ...

Kos.Pomorav.district 1 412 ... 184 ... ... ... … ... ... * Statistical Yearbook of Serbia 2006., p. 412-416.


41

Tab. 2 SUMMARY DISPERSION USED INDICATORS IN Tab. 1

Total area km2

Arable area

2005, ha

Settlements, 2004

Population number

2002

Index population number 1991=100

Employed persons

2005

GDP (material) 2004 mil.

din.

GDP 2004 per

capita

Employed persons per

1000 inhabitants

Population per km2

Belgrade Belgrade East reg. East Vojv. East reg. East Vojv. West reg. South reg. West reg. East reg.minimum 3 222 206 491 166 688 274 96 158 103 78 377 92 358 218 62maximum 14 856 753 274 1 465 1 576 124 462 613 744 359 239 227 926 389 489

East reg. West reg. South reg. Belgrade West Vojv. Belgrade Belgrade Belgrade Belgrade BelgradeStandard deviation 4 164 190 289 497 303 829 168 158 520 101 646 51 751 60 155Average 9 826 578 327 669 1 071 143 196 295 566 147 060 129 651 263 139Variation coefficient 0,424 0,329 0,743 0,284 0,857 0,536 0,691 0,399 0,228 1,120

Danub PirotWest Backa Toplica Zajecar Toplica Toplica Jablanica Toplica Pirotminimum 1 248 85 498 45 102 075 89 18 408 7 065 62 067 180 38maximum 6 141 311 749 438 593 666 111 209 525 102 297 180 460 353 169

Zlatibor S.Banat ZlatiborSouth Backa outh BackaSouth BackaSouth Backa outh Banat South Backa DanubStandard deviation 8 571 447 408 620 106 136 82 259 946 129 560 38 391 44 73Average 5 193 313 973 287 248 168 120 138 734 69 792 118 577 246 95Variation coefficient 1,650 1,425 2,158 0,428 0,686 1,874 1,856 0,324 0,180 0,765

North Banat N. Banat N. Banat N. Banat N. Banat N. Banat N. Banat Mid.Banat Mid.Banat Mid.Banatminimum 2 329 186 052 50 165 881 93 37 536 23 865 137 886 211 64maximum 4 245 311 677 94 313 937 100 76 492 56 653 180 460 244 74

South Banat S.Banat S.Banat S.Banat S.Banat S.Banat S.Banat S.Banat S.Banat S.BanatStandard deviation 958 62 922 24 76 223 3 20 861 17 691 23 048 16 5Average 3 277 246 726 66 229 425 96 52 701 36 420 154 072 227 70Variation coefficient 0,292 0,255 0,363 0,332 0,032 0,396 0,486 0,150 0,071 0,074

North Backa N BackaWest BackaNorth BackaNorth Backa West BackaNorth Backa Srem SremWest Backaminimum 1 784 156 808 37 200 140 99 49 022 29 422 96 472 212 88maximum 4 016 311 749 109 593 666 111 209 525 102 297 172 314 353 148

South Backa S Backa SremSouth Backa outh BackaSouth BackaSouth Backa S Backa South Backa S BackaStandard deviation 1 010 67 275 33 182 328 6 75 790 35 272 32 912 64 26Average 2 927 227 215 67 335 930 105 96 666 49 457 143 320 270 111Variation coefficient 0,345 0,296 0,491 0,543 0,055 0,784 0,713 0,230 0,236 0,237

Danub Danub Danub Zajecar Zajecar Zajecar Zajecar Zajecar Zajecar Zajecarminimum 1 248 101 438 58 137 561 89 30 525 10 826 78 700 195 38maximum 3 865 215 324 191 227 435 97 63 356 23 452 116 963 279 169

Branicevo BranicevoPomoravlje Pomoravlje Pomoravlje Pomoravlje Braničevo Braničevo Pomoravlje DanubStandard deviation 1 073 41 866 62 40 025 3 13 102 5 698 15 060 30 54Average 2 971 150 655 140 184 468 92 43 426 17 467 93 118 234 77Variation coefficient 0,361 0,278 0,441 0,217 0,037 0,302 0,326 0,162 0,130 0,703

Toplica Toplica Pirot Toplica Toplica Toplica Toplica Jablanica Toplica Pirotminimum 2 231 85 498 214 102 075 91 18 408 7 065 62 067 180 38maximum 3 520 137 124 363 381 757 98 101 085 49 281 129 089 278 140

Pcinja Nishava Pcinja Nishava Nishava Nishava Nishava Nishava Pirot NishavaStandard deviation 461 22 526 59 115 426 3 31 755 17 054 27 136 41 41Average 2 802 110 392 293 211 620 95 49 637 19 545 85 318 229 75Variation coefficient 0,164 0,204 0,200 0,545 0,028 0,640 0,873 0,318 0,178 0,543

Dispersion in subregional indicators - East Vojvodina

Dispersion in subregional indicators - West Vojvodina

Dispersion in subregional indicators - East region

Dispersion in subregional indicators - South region

Dispersion in indicators for all subregions collectively (excluding Belgrade)

Dispersion in regional indicators


42

Tab. 3 SUMMARY DISPERSION USED INDICATORS IN Tab. 1 - continued

Kolubara Kolubara Kolubara Kolubara Kolubara Kolubara Kolubara Zlatibor Macva Zlatiborminimum 2 474 147 123 218 192 204 94 44 951 17 996 91 892 202 51maximum 6 141 202 117 438 329 625 100 70 627 31 583 95 815 234 101

Zlatibor Macva Zlatibor Macva Macva Zlatibor Macva Macva Kolubara MacvaStandard deviation 1 929 29 718 124 75 095 3 13 780 7 177 1 966 17 25Average 3 961 181 129 295 278 408 97 60 679 26 126 93 778 220 77Variation coefficient 0,487 0,164 0,422 0,270 0,030 0,227 0,275 0,021 0,076 0,326

Sumadia Raska Shumadia Moravica Rasina Rasina Raska Raska Rasina Raskaminimum 2 387 112 573 174 224 772 95 55 305 21 403 73 492 213 74maximum 3 918 151 724 359 298 778 99 79 410 28 561 119 666 266 125

Raska Sumadia Raska Sumadia Raska Sumadia Sumadia Moravica Sumadia SumadiaStandard deviation 666 16 278 84 33 801 2 11 399 3 368 19 316 23 24Average 2 997 134 519 259 268 555 98 65 775 24 915 94 155 245 93Variation coefficient 0,222 0,121 0,326 0,126 0,019 0,173 0,135 0,205 0,093 0,260

Dispersion in subregional indicators - West region

Dispersion in subregional indicators - Central region


43

NBS EXPERIENCES WITH CHOOSING MONETARY POLICY STRATEGY

Jadranka Djurović-Todorović1 Marina Djordjević1

Abstract: Monetary policy is very important part of economic policy. However it is not powerful for solving problems in financial and economic sphere. There are a lot of obstracles in monetary policy conduct. The most important of them are: gray economy and time-lag problem.

Central banks through changing money supply could not influence directly on basic goals (economic growth, price stability, high employment). So, it is forced to use operational and intermediate targets if it want to rise its efficiency. As operating targets central banks can use monetary base or short-term interest rates. Area of intermediate targets is broader. Namely central banks can use next variables: the monetary aggregates (M1, M2 or M3), interest rates, nominal income, inflation rate, exchange rate.

Making of optimal monetary strategy is not easy work. In focus of any monetary strategy there is a nominal anchor. That is nominal variables which use policy makers for inflation rates, exchange rates or money supply reduce. When policy makers use the nominal anchor, they have to conduct such monetary policy where this one variable must be stable. Thats reason why the nominal anchor is a base of succesfuly conduct monetary strategy.

On central banks menu there are many alternatives: monetary aggregates targeting, intrest rate targeting, inflation rate targeting, exchange rate targeting, nominal income targeting. A target variable is one whose value the policy maker wants to change. The targets can be ultimate final goals, intermediate ones or operating ones. Which strategy had be choosen depends of many factors: economic and financial systems stability, acchieving of economic growth, central banks independent levels, priority goal of economic policy, policy makers credibility.

The aim of this work is to point out the basic features of monetary strategies. This is the way for understanding NBS decisions for choosing and acchievement that strategy, which criterions and tools has used. Especialy attention would be concern on current NBS monetary strategy (inflation rate targeting) analysis.

KEY WORDS: MONETARY STRATEGY, INFLATION TARGETING, TARGETS, NBS.

1. INTRODUCTION

In recent years a growing consensus has emerged for price stability as the overriding, long-run goal of monetary policy. The increased importance of this goal was reflected in the December 1991 Treaty of European Union, known as the Maastricht Treaty. This treaty created the European System of Central Banks, which functions very much like the Federal Reserve System. The statute of European System of Central Banks sets price stability as the primary objective of this system and indicates that the general economic policies of the EU are to be suppotred only if they are not in conflict with price stability. However, despite this consensus, the following question still remains: how should monetary policy be conducted to achieve the price stability goal?

A central feature of all monetary regimes is the use of a nominal anchor in some form. A nominal anchor is a constraint on the value of domestic money, and in some form it is a necessary element in successful monetary policy regimes. Namely, a nominal anchor provides conditions that make the price level uniquely determined, which is obviously necessary for price stability. However, a nominal anchor can be thought of more proadly as a constraint on discretionary policy that helps weaken the time-inconsistency problem so that in the long run, price stability is more likely to be achieved. The time-inconsistency problem arises because discretionary policy at each point in time can lead to poor long run outcomes.

Although there are institutional differences in the ways in which central banks conduct monetary policy, there are two important similarities in recent practices. First, most central banks in industrial countries have increasingly used short-term interest rates as the operating target through which goals are pursued. Second, many central banks are focusing more on ultimate goals such as low intlation than on particular intermediate targets.

1 Faculty of Economics, University of Niš, Serbia.


44

2. THE TARGETS OF MONETARY POLICY

A target variable is one whose value the policy maker wants to change2 or targets are variables that central bank can influence directly and that help achieve monetary policy goals.3 For example, the Fed has set six monetary policy goals that are intended to promote a well-functioning economy: (1) price stability, (2) high employment, (3) economic growth, (4) financial market and institution stability, (5) interest rate stability, and (6) foreign-exchange market stability. The targets can be ultimate or final goals, intermediate ones or operating ones. Since a given variable can fall into any one of these categories, there is no hard and clear-cut separation among these categories. An operating target is one on which the central banke can directly or almost directly operate thorugh the instruments at its disposal.

In the selection and use of goals, guides and operating targets by the moentary authorities arise several questions:

• can the central bank achieve the desired levels of the operating targets thorugh the instruments at its disposal?

• are the relationships between the ultimate goal variable, the intermediate and operating targets and the policy instruments stable and predistable?

• what are the lags in the relationships, and it they are long, can the future course of the economy be reasonably well predicted?

For understanding conection between ultimate, intermediate and operating goals, we can use next relationships:

y = f(x;Ψ)

x = g(z;θ)

where:

y ultimate goal variable

x intermediate target

z policy instrument or operating target

ψ, θ sets of exogenous variables.

It is important to distinguish between the usage of a variable for controlling the economy from its usage as an indicator. Sometimes, the same variable will be used to perform both of these purposes, while in other cases different variables will be used to perform these distinct roles. An illustration of the latter is when a selected monetary aggregate is used as the indicator variable for determining the state of the eonomy while the interest rate is manipulated for changing the state. In such a context, the interest rate becomes an immediate objective and is the operational target, while the selected monetary aggregate is being used only as a guide. An illustration of the former case is where the monetary aggregate serves as both the indicator of the state of the economy and, is an indicator of the need for changes in monetary policy, and is also as an operational target, pursued through open market operations.

The target variables usuallq suggested for monetary policy are: • monetary or reserve aggregates; • interest rates; • exchange rate; • the price level or the inflation rate and • nominal GDP.

2 Handa (2000), p. 286. 3 Hubbard (2005), p. 480.


45

3. EXCHANGE-RATE TARGETING

Targeting the exchange rate is a monetary policy regime with a long history. It can take the form of fixing the value of the domestic currency to a commodity such as gold or for currency some of low-inflation country. Exchange rate targeting has several advantages.4 First, the nominal anchor of an exchange rate target fixes the inflation rate for internationally traded goods, an thus directly contributes to keeping inflation under control. Second, if the exchange rate target is credible, it anchors inflation expectations to the inflation rate in the anchor country to whose currency it is pegged. Third, with a strong commitment mechanism, an exchange rate target provides an automatic rule for the conduct of monetary policy that helps mitigate the time inconsistency problem. Fourth, an exchange rate target has the advantage of simplicity and slarity, which make it easily understood by the public.

France and the United Kingdom successfully used exchange rate targeting to lower inflation by tying the value of their currencies to the German mark. This regime has also been an effective means of reducing inflation quickly in emerging market countries.

Despite the inherent advantages of exchange rate targeting, it is not without several serious criticism.5 First is that, with open capital markets, an exchange rate target results in the loss of independent monetary policy, since the targeting country loses the ability to use menetary policy to respond to domestic shocks that are independent of those hitting the anchor country. A striking example of these problems occurred when Germany reunified in 1990. This shock (rises in interest rates) to the anchor country was transmitted directly to the other countries whose currencies were pegged to the mark. This regime has additional disadvantage that it removes the signal that the foreign exchange market provides about the stance of monetary policy. On a daily basis. Another potential danger from an exchange rate target is taht by providing a more stable value of the currency, it might lower perceived risk for foreign investors and thus encourage capital inflows.

The events in East Asia and Mexico, in which the weakntess of the banking secotr and speculative attack on the currency tipped their economies into full-scale financial crises, illustrate how dangerous exchange rate targeting can be for emerging market countries. But in countries whose political amd monetary institutions are particularly weak and therefore have been experiencing continued bouts of hyperinflation, exchange rate targeting may be the only way to reak inflationary psychology and stabiliye the economy. In this situation, ixchange rate targeting is the stabiliyation policy of last resort.6

4. MONETARY TARGETING

In many countries, such as the USA, Japan or the European Monetary Union, exchange rate targeting is not an option because the country or bloc of countries is too large or has no obvious country whose currency can serve as the nominal anchor. Thus this countries must look to other monetary policy strategies, one of which is monetary targeting.

A major advangate of monetary targeting is that it enables a central bank to adjust its monetary policy to cope with domestic considerations. Information on whether the central bank is achieving its target is known almost immediately. Thus, monetary targets can send almost immediate signals to both the public and market about the stance of monetary policy and the intentions of the policymakers to keep inflation in check. Monetary targets have been able to promote almost immediate accountability for monetary policy to keep inflation low and so help constrain the monetary policymaker from falling into the time-inconsistency trap.

If the relationship between the monetary aggregate and the goal variable is weak, then monetary aggregate targeting will not work. The weak relationship implies that hitting the target will

4 Mishkin (1999), p. 581. 5 Obstfeld and Rogoff (1995), p. 73-96. 6 Mishkin (1999), p. 586.


46

not produce the desired outcome on the goal variable and thus the monetary aggregate will no longer provide an adequate signal about the stance of monetary policy.

The two countries which have pursued monetary targeting quite seriously are Germany and Switzerland. The success of monetary policy in these two countries in controlling inflation is the reason that monetary targeting still has strong advocates and is part of the official policy strategy for the ECB. Monetary targeting was less successful in the United States, Canada and the United Kingdom, partially because it was not pursued seriously but also because the relationship between monetary aggregates and goal variables such as inflation or nominal income broke down.7

There are two key lessons from monetary targeting in Germany and Swizerland. First, a targeting regime can restrain inflation in the longer run, even when the regime permits substantial target misses. Second, the key reason why monetary targeting has been reaonably successful in tese two countries, despite frequent target misses, is that the objectives of monetary policy are clearly stated and both central banks actively engage in communicating the strategy of monetary policy to the public, thereby enhancing transparency of monetary policy nad accountability of the central bank. At the end there are economists who suggested that German and Swiss monetary policy is actually closer in practice to inflation targeting than it is to Friedman-like monetary targeting, and thus might best be thought of as hybrid inflation targeting.8

5. INFLATION TARGETING

New Zealand was the first country to formally adopt inflation targeting in 1990, with Canada following in 1991, the United kingdom in 1992, Sweden in 1993, Finland in 1993, Australia and Spain in 1994.

Inflation targeting involves several elements: (1) increased transparency of the monetary policy strategy throuht communication wirh the public and the markets; (2) increased accountability of the central bank for attaining its inflation objectives; (3) public announcement of medium-term numerical targets for inflation; (4) an institutional commitment to price stability as the primary, log-run goal of monetary policy; and (5) an infor ation-inclusive strategy, with a reduced role for intermediate targets such as money growth.

In contrast to exchange rate targeting, but like monetary targeting, inflation targeting enables monetary policy to focus on domestic considerations and to respond to shocks to the domestic economy. This strategy also has the advantage that velocity shocks are largely irrelevant because the monetary policyu strategy no longer relies on a stable money-inflation relatioship. Futher, inflation targeting is readily understood by the public and is thus highly transparent. Because an explicit numerical inflation target increases the accountability of the central bank, inflation targeting also has the potential to reduce the likelihood that the central bank will fall into the time-inconsistency trap in whish it tries to expand output and employment by pursuing overly ispansionary monetary policy. Inflation targeting has also potential to reduce political pressures on the central bank to pursue inflationary monetary policy. Another key feature of inflation targeting regimes is that they do not ignore traditional stabilization goal.

The performance of inflation targeting strategy has been quite good. Countries who use this regime seed to have significantly reduced both the rate of inflation and inflation espectations beyond that which would likely have occured in the absence of inflation targets.

Although inflation targeting does appear to be successful in moderating and controlling inflation, it is not without potential problems. In contrast to exchange rate and monetary targeting, inflation is not easily controlled by the monetary authorities. Another poterntial problem with inflation targeting is that, because of the long lags o monetary policy, inflation oucomer are revealed only after a substantial la. A common concern raised about inflation targeting is taht it will lead to low and unstable growth in output and employment. Some economists have criticized inflation targeting

7 Bernanke and Mishkin (1992), p. 189. 8 Bernanke and Mishkin (1997), p.107.


47

because they believe that it imposes a rigid rule on monetary policymaker taht does not allow them enough discretion to respond to unforeseen cicumstances.9

6. INTEREST RATE TARGETING

The interest rates are currently the favourite operating targets and instruments of many central banks. It has been historically the most common target of monetary policy. A measure commonly used for this purpose has been the Treasury bill rate.10 This rate is a reflection of other interest rates in the economy. More recently the USA, UK and Canada have used an overnight loan rate as an operating target.

There are two basic objections to the use of short-term nominal interest rates as the guides or intermediate targets of monetary policy. First, the observed interest rates are equilibrium rates so that changes in them could reflect either changes in demand or supply conditions or bot. Changes in the equilibrium interest rates do not by themselves provide adequate information as to the causes of their rise and therefore as to the policy actions that should be undertaken. The second basic objection to the use of interest rates as guides to monetary policy arises rom one’s belief in the structure of the economy. In financially developed economies the central banks believe that the interest rates are a major indicator of the performance of the economy and thend to use them as the preferred guide and operating target of monetary policy.

A problem with using interest rates as an operational target is that the central bank can determine the general level of interest rates but not equally well the differentials among them. Spreads between different interest rates depend upon market forces and can be quite insensitive to the central bank’s discount rate.

An interest rate target is to be preferred if the dominant source of shifts in aggregate demand is from money demand or supply shifts, while a monetary aggregate target is to be preferred if the dominant source os fhifts is in the IS variables. These are not variables on which the central bank can operate directly, to that interest rates usually remain as the operating targets of monetary policy.

7. NOMINAL GDP TARGETING

With the shifts in the velocity of the monetary aggregates in the 1980s, the relationship between these aggregates and nominal income became unstable, to that such aggregats could not be reliably used as the targets of monetary policy.11 On the other site the concern that a sole focus on inflation may lead to larger output fluctuations has led some economists to propose a variation on inflation targeting in which central banks would target the growth rate of nominal GDP (real GDP times the price level) rather than inflation.12 Relative to inflation, nominal GDP growth has the advantage that it does put some weight on output as well as prices in the policymaking process.

Nominal GDP targeting has several advantages. Firs, a nominal GDP ratet forces the central bank or the govenment to announce a number for potential GDP growth. It may lead to an accusation that the central bank or the targeting regime is anti-growth, when the opposite is true, because a low inflation rate is a means to promete a realthy economy with high growth. Second, information on prices is more timely and more frequently reported than data on nominal GDP. Third, the concept of inflation in consumer prices is much better understood by the public than the concept of nominal GDP, which can easily be confused with real GDP.

Finaly, inflation targetin allows considerable flexibility for policy in the short run, and elements of monetary policy tactics based on nominal GDP targeting could easily be built into an inflation targeting regime. Thus it is doubtful that, in practice, nominal GDP targeting would be more effective than inflation targeting in achieving short run stabilization.

9 Friedman and Kuttner (1996), p. 112. 10 Handa (2000), p. 294. 11 Handa (2000), p. 297. 12 Mishkin (2004), p. 508.


48

So, while a nominal income target ahs the advantage of eliminating the impact of demand shocks on the economy, it does not necessarily provide a preferable solution when there are suplly shocks. Futher, nominal income targeting is normally an intermediate goal and not an ultimate goal so that it is tiself a desirable procedure only if there is a stable and predictable relationship between nominal income and the final goal variables of stable prices and full employment output.

8. A NEW FRAMEWORK OF MONETARY POLICY IN SERBIA

The basic purpose of the National Bank of Serbia is to provide monetary and financial stability. Monetary stability means a low, stable and predictable inflation and confidence in the currency. Financial stability means a sound financial system in which banks and other financial organizations function well and responsibly safeguard their clients' money.

The highest contribution that monetary policy can make to economy consists in low, stable and predictable inflation. However, in the conditions of high dollarization (euroization) of economy, monetary policy has limited scope for achieving this objective. Key components of monetary policy in Serbia are the following: (a) managed floating exchange rate and (b) controlled inflation. A more flexible exchange rate has already been introduced earlier this year as the first step in this program and also as a response to problems under large capital inflows. In particular, the capital inflows have exposed the difficulties in simultaneous targeting of low inflation and external balance and complicated implementation of autonomous monetary policy under a fixed or highly managed FX regime pursued before. As a result of these measures the exchange rate moves in response to the monetary policy actions and inflation began to decline in response to the monetary policy measures taken earlier this year.

On August 30 2006 the Monetary Policy Committee of the National Bank of Serbia adopted new measures and approved of new principles of monetary policy conduct aimed at chieving inflation objectives. The main aims of policy makers in Serbia are:

• to build an environment of low and stable inflation compatible with EU accession criteria,

• to strengthen the use of and trust into the domestic currency,

• to increase the flexibility of adjustment against temporary domestic and external shocks and changes in economic fundamentals that are expected as Serbia approaches the EU and improves its income levels.13

A monetary policy actively responding to shocks threatening low inflation is needed to achieve price stability in Serbia, while fluctuations of nominal exchange rate should provide the main buffer of adjustment against these shocks. In the coming years, Serbian economy is likely to experience massive structural changes, some which can put upward pressure on the prices. In addition, progressive opening of the Serbian and a high degree of euroization make transmission of inflation shocks particularly fast. Under these circumstances, preserving a fixed exchange rate regime or targeting monetary aggregates (as it had been done in the past) is unlikely to secure stable low levels of inflation. So in preveous period the main strategy was monetary aggregates targeting and it was less succesful.

Similarly to other central banks, the NBS focuses on the stability of retail prices. Empirically, core inflation is a better indicator but it is also one that is difficult to communicate to the public and the press. Price stability does not mean that prices never change, but rather involves moderate price growth. Price stability in the Serbian economy means a long-term net (core) inflation rate ranging from 5% to 10%. In order to accomplish this objective, the NBS uses adequate monetary instruments.

NBS monetary policy instruments are the following:

• Required Reserves,

• Open Market Operations, 13 www.nbs.yu


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• Collateralised Liquidity Loans,

• Depositing of Banks’ Excess Liquidity with the National Bank of Serbia,

• Interest Rates of the National Bank of Serbia,

• Minimum Credit Rating Requirements for Banks,

• Reconciliation of Household Lending and Share Capital of Banks.

The above instruments do not exert direct impact on the objectives. At times, many months may elapse before their effects become evident. That is why the NBS focuses on the accomplishment of targets, which are somewhere in between instruments and objectives. There are two “types” of targets: (a) operating and (b) intermediate. Operating targets are easy to control, but are distant from the objectives. Intermediate targets are hard to control, but are closer to the objectives. Unlike developed market economies where the reference interest rate (interbank rate on overnight loans) represents the operating target, we are used as operating targets unborrowed reserves (excess liquidity), and reserve money (net foreign and net domestic assets). In developed market economies the long-term interest rate represents the intermediate target, but in our country this function is reserved for monetary aggregates (M1, M2, M3).

The interest rate on the 2W repo/reverse repo transactions of the NBS (2W repo rate) is the key policy rate of the NBS. In other words, it is the main instrument of monetary policy transmission, signaling the policy stance to the markets. The key policy rate is supported by a corridor of O/N standing facilities linked to the key rate:

• O/N lombard rate : 2W + 4 pp

• O/N deposit rate : 2W – 4 pp

Achieving low and stable inflation will be a gradual process requiring coordination between the NBS and Government. In Serbia, inflation is a matter of shared responsibility between the NBS and the Government. In the environment where a large proportion of prices is controlled by administrative regulations, the NBS can effectively control only the part of inflation that is market determined. On the other hand, the Serbian Government is responsible for the other part of inflation stemming from adjustments in administered prices and tariffs.14

For start, the NBS has declared short-term inflation objectives for the end of 2006 (december 2006: 7-9% interyear growth and 2007 (december 2007: 4-8% interyear growth) defined in terms of ‘core inflation’, i.e. the retail price inflation under the influence of NBS instruments. The first objectives for end 2006 and 2007, though short-term, reflect the aim of the NBS to gradually lower inflation in Serbia, a course that is going to continue in the future, until the achievement of the level of inflation compatible with price stability.

The declared inflation objectives for the end of 2008 is 3-6%. In future we expect that the horizon of the objectives will set up medium-term inflation objectives.

CONCLUSION

Monetary policy conduct is very difficult and complex work. One of the most important decesion of policy makers is choosing of monetary strategy. There are several alternatives, but one is optimal in current conditions.

In the past in Serbia has been used monetary aggregates targeting as monetary regime, but it has not brought diserable results. In 2006 policy makers has done change and choosen inflation targeting as monetary strategy. The NBS expects that the recent decline in inflation will not be reversed and that the disinflation will continue in line with the declared objectives. This should help anchor public’s inflation expectations at the declared inflation objectives, thereby further supporting the creation of the low inflation environment. In pursuing the inflation objectives, the NBS shall 14 www.nbs.yu


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implement its policies in a sustainable, consistent and transparent manner to avoid unnecessary fluctuations in output, interest and exchange rates. The NBS will remain transparent and accountable to the public in pursuing the inflation objectives. In particular, the NBS will regularly inform the public on how the inflation objectives are being fulfilled, explaining the reasons behind the developments as well as policy actions taken to ensure meeting of the inflation objectives in the future. The Inflation Report will become the main tool of communication with the general public.

The NBS expects the commercial banks to use the 2W repo rate as the effective benchmark for their interbank and client operations. These measures should encourage banks to trade more actively at longer maturities, developing an effective money market yield curve on the basis of expectations about the movements in the 2W repo rate. Finally, the new measures should help banks to be more active in attracting and intermediating dinar deposits from households and commercial sector. At the end NBS provides for a flexible and sustainable framework in the period of the EU accession and helps to rebuild the trust in the national currency.

REFERENCES

Bernanke, B.S., Mishkin, F.S., (1992), Central Bank behavior and the strategy of monetary policy: Observations from six industrilized countries, MIT Press, Cambridge.

Bernarke, B.S., at al, (1999), Inflation Targeting:Lesons from the International Experience, Princeton Unversity Press, Princeton.

Djurović-Todorović, J., at all, (2006), Monetarni i fiskalni menadžment, Ekonomski fakultet, Niš.

Friedman, B.M., Kuttner, K., (1996), A price target for US monetary policy? Lessons from the experience with money growth targets, Brookings Papers on Economic Activity 1.

Handa, J., (2000), Monetary Economics, Routledge, London.

Hubbard, R.G., (2005), Money, the Financial System and the Economy, Pearson, Boston.

Mishkin, F.S. (1999), International experiences with different monetary policy regimes, Journal of monetary Economics 43, Elsevier, North-Holland.

Mishkin, F.S., (2004), The Economics of Money, Banking and Financial Markets, Pearson, Boston.

Obstfeld, M., Rogoff, R., (1995), The mirage of fixed exchange rates, Journal of Economics Perspectives 9.

Svensson, L.E.O., (1999), Inflation targeting as a monetary policy rule, Journal of Monetary Eonomics 43, Elsevier, North-Holland.

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SUSTAINABILITY OF DEVELOPMENT PROCESS IN SERBIA

Milorad Filipović1 Petar Djukić2

Abstract: Changes in the economic and development policy of Serbia that occurred after political changes in October 2000 are analysed in this paper, primarily in terms of a long-term sustainability of ongoing processes. Serbia has started the process of reform implementation, which set EU integration as a long-term goal, with great delay. Upon a long period of sanctions and isolation of the country the political changes were expected to achieve a fast and efficient development of the national economy, full integration into EU structures and catching up with neighbouring countries in transition that had started implementing similar processes much earlier. However, the events over the last six years of transition proved these expectations to be only partially fulfilled, at the level of macroeconomic stabilisation above all, and a long-term sustainable development of Serbia to be still a very distant goal. Serbian development in the previous period was largely based on privatising the social property and directing thus gained funds towards closing the current balance along with new indebtedness of the country on the international financial market. Structural changes of the national economy were conducted very slowly, so the efficiency and competitiveness of Serbia compared internationally was improved only in part. Huge mostly inherited problems in balance of payments, unemployment and development of modern institutions of the market economy have so far remained unsolved, while the national economy development is still not based on knowledge, innovations and information-communication technologies as the basic impetus of modern world economy development. It is therefore insisted on changing the development philosophy in terms of developing a knowledge-based economy where innovativeness, enterprising spirit and creativity of Serbian people will dominate together with application of contemporary technologies and construction of a modern infrastructure in service of accelerated development of the national economy.

KEY WORDS: SUSTAINABILITY, DEVELOPMENT, REFORMS, STRUCTURAL CHANGES.

SUMMARY

The issue of national economies development of today at the beginning of the 21st century has evolved to a large extent and overcome theoretical considerations valid in the second half of the previous century. In other words, previous concept of the development theory based on “natural” limitations to the possibilities to achieve high growth rates in a long period of time from the beginning of the last decade of the past century gave shape to presently valid development concept – the concept of sustainable development. Theoretical basis of the sustainable development concept is a transfer from observing development process based on the economic science of Adam Smith3 to a development concept based on endogen growth theory, with concretized knowledge and a complex of scientific-technological development in the centre of modern development driving mechanism. Instead of the former concept of natural comparative advantages, the modern understanding of development is dominated by created comparative advantages; instead of natural resources as the decisive determinant of growth and development speed of a national economy, now the speed of creating innovations and ability of an economy to concretize created theoretical knowledge in form of new technologies and inventions appears; instead of former dominant understanding of richness in physical and financial capital, ability to generate new knowledge, ideas, innovations and technologies is considered today to be the key richness of a nation. Parallel to speeding up of the development in world proportions, global alliances are created and entire regions linked with the aim to create a stronger position in the world economic and financial stage. Those who do not participate in these processes surely become marginalized in the long term and banished from the main world flows of information and knowledge, and as the time goes by missed chances are becoming harder to recreate.

1 Faculty of Economics,University of Belgrade, Serbia. 2 Faculty of Technology, University of Belgrade, Serbia. 3 The essence of “Smith’s” growth and development is a process of gradual improvement through specialisation

and usage of natural comparative advantages that one national economy possesses. Such an archaic way of generating growth and development is considered today to be time-limited in the long term, i.e. it is possible only as long as an economy owns free unused resources (work and capital).


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The following basic characteristics of the world economy at the beginning of the 21st century can be singled out:

• Globalisation of total goods and financial flows in the world with concentration of power in decision-making in several world centres;

• Liberalisation of goods and capital flows on the global stage under pressure of the most powerful world economies, with parallel growth (or maintenance) of restrictions for free movement of labour force and

• Harmonisation and coordination of economic policies of member countries of different political-economic groups such as EU, ASEAN, NAFTA, etc.

Such a development of the world economy is made possible primarily by materialisation of basic inventions from the period of the so called “third technological revolution” that dominated in the last two decades of the last century in the most developed economies in the first place. Until recently unimaginable development of the information-communication technologies (ICT) sector, production of new materials, biotechnology, genetics and other propulsive sectors has led to a possibility of networking and linking goods and particularly financial flows. Instead of natural resources, fertile land and availability of capital, applied knowledge education and science have become the main development factor in the modern world.

In contrast to tendencies of accelerated growth and development of the most propulsive countries in the world, a large number of less developed countries has faced over the last twenty-five years a decrease in production and income rate growth, increase in unemployment and marked crises of insolvency as internally so, and even more, externally. Economies that did not conduct programmes of structural adjustment to oil crisis challenges from the seventies have not managed until present day to recover and get out from the “vicious circle” of debt dependence, low growth rates and increasing lagging behind the most developed countries. Unfortunately Serbia falls into that second group of countries.

In the last decade of the past century Serbia additionally aggravated its already weak position in the international environment. The structure of creation and usage of the gross domestic product (GDP) was drastically disrupted, and increase of domination of the primary sector, negligence and decay of the industry and stagnation of the service sector took place.

Over the last six years after democratisation of the country, an accelerated economic recovery took place together with a relatively high GDP rate growth, but a conducted analysis shows that it is not a sustainable growth, much less a sustainable growth of the national economy. This suggests a need to define a different development strategy of Serbia for the following period that would be oriented towards entering the group of countries which create their development on the basis of investment into knowledge, science and innovations and modern technologies. Such a developmental course is certainly not easy to achieve and will not give effect in short term, but is the only way that clearly indicates orientation to a long-term sustainable development of the country.

1. STATE OF DEVELOPMENT IN SERBIA

In the period 2001-2006 high GDP growth rates were achieved thus increasing GDP for almost three times expressed in dollars.

Table 1. Basic indicators of macroeconomic movements in 2001-2006

2001 2002 2003 2004 2005 2006 GDP, current prices, billions Dinars 783.9 1020.1 1171.6 1431.3 1750.01 2139.82

GDP, millions US$ 11812.0 15840.7 20344.8 24516.6 26231.51 32187.22

GDP per capita, in US$ 1574.2 2112.1 2719.7 3285.0 3525.41 4325.22

GDP, real growth in % 5.1 4.5 2.4 9.3 6.81 6.73

1- Previous data, 2- Assessment, 3- January-June 2006 / January/June 2005. Source: Memorandum on Budget and Economic Policy for 2007


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However, when the structure of generating this income is analysed in more details then not so encouraging data is reached, because it turns out that the fast growth is largely based on a leaping growth of the agricultural production4 and services, while the sectors of industry and construction stagnated:

Table 2. Real GDP growth and gross added values (GAV) of the sectors

2001 2002 2003 2004 2005* GDP, real growth in % 5.1 4.5 2.4 9.3 6.8 GAV, agriculture – real growth in % 17.4 -3.2 -7.0 19.1 -4.9 GAV, industry and construction – real growth in %

-4.7 -3.1 -2.0 6.4 1.1

GAV, services – real growth in % 4.1 5.2 5.6 8.2 12.3 Source: Memorandum on Budget and Economic Policy for 2007

But then again, although improved the way of using GDP in the period from 2001 until today is far away from the optimal structure, primarily due to domination of personal and collective consumption on one hand and too low participation of investments in GDP allocation on the other. For the reached level of development Serbia is currently at, the minimum needed level of investments is expected to reach participation of 22-25% in GDP allocation in order to maintain a high growth rate with implementation of necessary structural changes.

Table 3. Participation of components of aggregate demand in GDP, in %

2001 2002 2003 2004 2005* GDP 100.0 100.0 100.0 100.0 100.0 Personal (individual) consumption 92.1 91.7 87.1 81.6 82.4

- individual consumption of households and non-profit institutions offering services to households

83.2 81.3 76.5 70.8 71.0

- individual consumption of the state

9.0 10.4 10.6 10.9 11.4

Collective consumption of the state 11.5 11.9 11.9 9.0 9.5 Gross investments in basic funds 10.4 11.8 16.1 17.7 17.3 Changes in supplies 5.6 5.4 6.5 14.3 5.2 Balance of export and import of goods and services

-19.6 -20.8 -21.6 -28.4 -20.4

Statistical difference 5.7 6.0 - Assessment

Source: Memorandum on Budget and Economic Policy for 2007

This situation is additionally complicated by the fact that domestic saving supports only one smaller part of undertaken investments, while the major part is covered by foreign accumulation. This means an additional burden on future generations of Serbian population. The table clearly shows balance of export and import of goods and services to be in a constant and high deficit, which consequentially means that accumulated debts would have to be paid off by new indebtedness. High inflow of foreign accumulation based on privatisation will start rapidly decreasing over the next 2-3 years and if a more serious increase of “greenfield” foreign investments fails to be achieved the economy of the Republic of Serbia will face danger of a foreign solvency crisis.

4 Movement of agricultural production had a marked leaping character from year to year, which shows that in

our conditions it is still very dependable on natural prerequisites and not based to a large extent on application of modern knowledge.


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2. STATE OF DEVELOPMENT IN DEVELOPED COUNTRIES

Analyses of the world economy and sources of its growth at the end of 20th century show that in the past three decades the importance of certain growth and development factors drastically changed. Parallel to the increase of achieved GDP per capita the employment structure also changed and a role of the complex of knowledge, innovation and enterprise strengthened. Contrary to this, the importance of employing simple labour force reduced, as well as the borderline capital product, i.e. it became less and less scarce and restricting element of a faster growth and development of the national economy.

Table 4. Calculation of growth: Comparison of growth sources (in % per year)

Period and country Capital Labour TFP * Output 1950-1973

Japan 3.1 34 2.5 27 3.6 39 9.2 W. Germany 2.2 37 0.5 8 3.3 55 6.0

1973-1992 Japan 2.0 53 0.8 21 1.0 26 3.8 UK 0.9 56 0.0 0 0.7 44 1.6 USA 0.9 38 1.3 54 0.2 8 2.4 W. Germany 0.9 39 -0.1 -4 1.5 65 2.3

1978-1995 China 3.1 41 2.7 36 1.7 23 7.5

1960-1994 Hong Kong 2.8 38 2.1 29 2.4 33 7.3 Indonesia 2.9 52 1.9 34 0.8 14 5.6 S. Korea 4.3 52 2.5 30 1.5 18 8.3 Philippines 2.1 55 2.1 55 -0.4 10 3.8 Singapore 4.4 54 2.2 27 1.5 19 8.1

* TFP or Total Factor Productivity indicates in the modern development theory a complex of technical-technological changes based on knowledge and its application, science and educational system. In the analysis of the macro-production function one part of the achieved economy growth cannot be directly explained nor by engagement of capital nor of labour force. Such a residual is TFP and it is a key part of the achieved growth in highly developed economies.

Source: Crafts, N: «Globalisation and Growth in The Twentieth Century», IMF Working Paper, WP/00/44.

As it can be observed from the table the countries with the highest growth rate in a long period also had a very significant TFP contribution to such growth. This shows that a long-term trend of national economies growth was based precisely on development and encouragement of a knowledge-based economy, together with a maximum forcing of propulsive sectors and productions based on innovation and application of new ideas and knowledge.

Another component of the structural transformation process refers to employment of labour by sectors, more exactly to the process of transferring labour from the primary to the secondary sector and, at high levels of development, even to tertiary sector of the economy. Such a developmental course was taken by all developed countries of today, and in the last fifty years of the 20th century this meant half less labour employed in agriculture and industry, and twice as much in the service sector.


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Table 5. Employment structure in five leading economies, 1950-1995

France Germany Japan UK USA 1950 Production of goods 61.6 66.3 68.9 50.9 43.7

Agriculture 28.0 23.9 43.6 6.4 10.5 Industry 25.8 32.6 18.3 33.9 24.8

Market services 21.9 24.2 26.0 36.6 40.1 Non-market services 16.5 9.5 5.1 12.5 16.2 1973 Production of goods 48.0 54.5 53.3 44.8 32.4


Market services 29.6 30.8 38.9 38.5 43.9 Non-market services 22.4 14.7 7.8 16.7 23.7 1995 Production of goods 30.3 38.4 41.1 26.7 21.8


Market services 38.4 41.7 50.1 53.1 52.6 Non-market services 31.3 19.9 8.8 20.2 25.6

Source: Crafts, N: «Globalisation and Growth in The Twentieth Century», IMF Working Paper, WP/00/44

Production of goods covers agriculture, industry, construction, mining and public utilities; market services are: transport and communications, distribution activities, financial services, personal and household services; non-market services are those offered by employed in public administration, health care and education.

3. ECONOMIC TRANSITION IN SERBIA – STATE, THEORY AND PRACTICE

Serbia does not have yet the elementary rounded economic system upon which to build a concept of sustainable economic growth on the basis of knowledge-based economy. The institutions of market economy such as property, contractual system, competence, property responsibility, are still not fully operational in the country. In such conditions a permanent and sustainable internal and external macro-economic stability with economic growth has not been reached yet.

Regardless of previously mentioned important economic progress after 2000, Serbia has fallen into great temptation when it comes to the problems of unemployment reduction and productive employment, current payment deficits, completion of privatisation, restructuring of the public sector, reduction of too high public consumption and reduction of costs of the state.

Further management of the foreign debt is more than problematic at external level, already reaching the level of 67.9% GDP5, which is considered by all criteria to be a very high external indebtedness hazardous to development. This problem is directly linked to a chronically high deficit of the current balance (above 10% GDP) and foreign trade, which calls into question sustainability of the external solvency of the country and imposes the need for a very sensitive management of the external financial position of the country. Serbia is a country whose external solvency is largely based on one-off revenues from privatisation, that is, on capital inflow from abroad. Along with that remittances from abroad are the key element to maintain balance in country’s balance of payments because according to IMF and NBS assessments they amount to more than 3 billion US $ a year.

5 IMF Executive Board Concludes 2006 Article IV Consultation with Republic of Serbia, Public Information

Notice (PIN) No. 06/120, October 20, 2006 .


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3.1. CONSUMPTION BASED ON EXTERNAL MONEY INFLOW

Economy, state and citizens in today’s Serbia live to a great extent live at the expense of inflow of foreign monetary and non-monetary investments, as well on the basis of additional indebtedness of economy and population, which means at the expense of future generations as well. This is borne out by data from the following table which shows that total money inflows from abroad were the lowest in 2000, when also real wages were extremely low, too, i.e. approximately around 47 euros a month, while in 2005 they reached around 210 euros.

Table 6. NSU inflows in Serbia per capita (2000-2005) in USA dollars Year 2000 2001 2002 2003 2004 2005 00-05 Money inflow per capita

1.5 4.6 43.5 142.8 106.2 189.8 488.4

Inflow of goods and money per capita

6 21 63 182 130 210 612

Source: National Bank of Serbia, Research Centre

This data also shows that the internal debt per capita at the end of 2006 already amounts to around 300 euros, while the total external indebtedness is more than 2000 euros, i.e. over 18 billion dollars at the end of 2006. According to the assessment of the European Union Commission, at the end of July 2006 the state debt in the structure of the total debt of the country amounted to around 32% GDP, while the faster increasing private debt was somewhat bigger, around 34% GDP.

Foreign direct investments increased from one year to another, but until 2006 they were at a relatively modest maximum annual level of approximately 1.5 billion euros, much below the achieved results in other referential countries in transition. All until the end of 2005 the estimated contracted amount of foreign direct investments6 for the period 2001-2005 was 4516 million dollars to reach over 4 billion dollars in 2006 by a combination of circumstances.7 Available data on foreign direct investments for nine months of 2006 is given in the following table, where the value of achieved results by sectors can be seen as well as participation in the total value in percentage.

Table 7. Value of achieved foreign direct investments in the period I-IX 2006 Sector FDI (000 USD) % Agriculture 4,936 0.13 Fishing 34 0 Mining and stone extraction 947 0.03 Processing industry 868,461 23.65 Electricity, gas and water productions 692 0.02 Construction industry 15,344 0.42 Wholesale and retail trade, repair 272,966 7.43 Hotels and restaurants 2,439 0.07 Traffic 1,568,138 42.71 Financial mediation 751,526 20.47 Real estate business 184,048 5.01 Public administration and social insurance 403 0.01 Education 115 0 Other, utility, social and personal services 1,482 0.04 Total 3,671,531 1 Source: SIEPA, National Bank of Serbia, 2006

6 What most often appears in the public are contracted amounts of investments based on privatisation, greenfield

investments and takeovers that include contracted value of selling the major share package, total contracted investments and contractual obligations based on the social programme. This, however, does not mean realisation of all financial obligations under contracts. Namely, a part of these contracts is cancelled due to failure to meet contractual financial obligations, among other. Information on really realized revenues based on privatisation cannot be easily obtained.

7 Estimation and data given in the Memorandum on Budget and Economic and Fiscal Policy for 2007, with projections for 2008 and 2009, page 16.


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It can be observed from the table that nearly 43% of the value was achieved by selling one operator of mobile telephony, which is in expansion all over the world, and that 23.6% of the achieved value was realized on the basis of selling a very propulsive pharmaceutical industry in the world, and finally around 20.5% comes from sale of banks, which is currently in Serbia, particularly upon banking reconstruction in 2001, a rarely profitable economic sector. All in all, the more valuable part of Serbian economy capital has already been privatised to a large extent.

3.2. OVERSIZED DEPENDING ON REVENUES FROM PRIVATISATION

It can be seen from the previously presented state that Serbia started with privatisation some time later with relatively weak initial results that became more significant over time. This was very good in terms of achieved increase of foreign currency reserves of the country that amounted to nearly 10 billion euros at the end of 2006.

Sale of the national capital for the purpose of privatisation took place during each year of the previous transitional period with the primary goal of filling budgetary revenues that thus created an illusion of a budgetary balance and surplus after 2005. The biggest problem is sustainability of the mentioned state in view of the fact that these are unrepeatable and one-off revenues the majority of which was used in consumption.

Table 8. the biggest foreign direct investments in Serbia by years

Company Country of origin Sector Form of

investment Value of invest.

(million €)

Year of privatisation

Telenor/Mobi 63 Norway Telecommun. Privatisation 1.513 2006 Stada – Hemofarm Germany Pharmaceut. Privatisation 475 2006 NBG – Vojvodjanska bank Greece Banking Privatisation 425 2006 OTP Bank – Niska/Kulska/Zepter bank Hungary Banking Privatisation 166 2006 San Paolo IMI/Panonska bank Italy Banking Privatisation 122 2006 JTI/Tobacco industry Senta Japan Tobacco Privatisation 100 2006 Banca Intesa – Delta bank Italy Banking Privatisation 462 2005 Alpha Bank – Jubanka Greece Banking Privatisation 152 2005 U. S. Steel – SARTID USA Steel Privatisation 150 2005 CIMOS – foundry Kikinda Slovenia Car parts Privatisation 100 2005 Erste Bank – Novosadska bank Austria Banking Privatisation 73 2005 InBev – Apatinska brewery Belgium Beer Takeover 430 2004 Metro Cash & Carry Germany Wholesale Greenfield 150 2004 Carlsberg – Brewery Celarevo Denmark Beer Takeover 95 2004

BAT – DIV Great Britain Tobacco Privatisation 87 2004

Ball Corporation USA Packaging Greenfield 80 2004 Philip Morris – DIN USA Tobacco Privatisation 518 2003 Lukoil – Beopetrol Russia Petrol Privatisation 210 2003 Africa Israel Corporation /Tidhar Group Israel Real estate Greenfield 100 2003


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Mercator Slovenia Trade Greenfield 240 2002 OMV Austria Oil Greenfield 150 2002 Lafarge – BFC France Cement Privatisation 126 2002 Henkel – Merima Germany Chemicals Privatisation 70 2002 Holcim – Cement plant Novi Popovac Switzerland Cement Privatisation 185 2001 Titan – Cement plant Kosjeric Greece Cement Privatisation 94 2001 Coca Cola – Vlasinka/Fresh&Co USA Soft drinks Takeover 142 1997 Source: SIEPA, November 2006.

It can be seen from the above table, which shows the biggest privatisations over the last six years, that more and more valuable majority privatisations were achieved from one year to another, with a tendency to increase the number and total value of the most valuable privatisations. So in 2003 the biggest sectoral privatisation until that moment was achieved from selling two companies from tobacco industry in the total value of almost 600 million euros, while the most valuable individual transaction was achieved by the sale of DIN (Tobacco Industry Nis) for 518 million euros. Upon expected initial privatisations of cement, beer and tobacco industries in the first place, the time came for banking and, finally, telecommunications in 2005 and 2006, so several high-value transactions of more than 400 million dollars took place to reach so far the most valuable privatisation by selling “Mobi 63“ to the Norwegian “Telenor“.

3.3. DISPROPORTIONATE CONSUMPTION AND EXTERNAL DEBT

Deficit of the foreign trade and balance of international payments should not be a problem in itself if it was not an expression of disproportionate consumption, i.e. growth of the total (public and private) external debt of the state. Thus it happens that revenues from privatisation and foreign capital inflow artificially raise current consumption of Serbian population and economy at the expense of its future consumption, in a time when revenues from privatisation become exhausted and time comes for larger allocations for foreign debt servicing.

Available data indicate that already in 2001 the total final consumption amounted to 108.3% GDP, in 2002 105.3%, and in 2003 107.1%.8 Since the consumption continued growing above work productivity growth in 2004 and 2005, and expansion of all forms of consumption occurred - particularly at the end of 2006 - based on the increase of budgetary expenditures for wages in the public sector and implementation of the National Investment Plan, unsustainable tendencies of disproportionate public consumption will continue on the basis of assumed budgetary obligations for 2007. This means that the current model of consumption and production is not sustainable and that fundamental changes of the economic system, legislation and even economic behaviour must be made so as that Serbia would gradually develop a sustainable knowledge-based economy.

4. TRANSITION – CHARACTER AND SUSTAINABILITY OF THE ACHIEVED GROWTH

Bearing in mind performances of the achieved reforms, relevant domestic analyses and empirical research of the character of achieved growth from 2000 to 2006 show that in that period a “strategy of frontal attack was carried out against all obstacles” to growth, which resulted in a “confusion in the economic policy and absence of a clear growth strategy”. Although the gross domestic product increased in the period 2000-2006 by the highest average rate in the region, consequences of the achieved results are very problematic. Namely, regardless of their permanent growth the investments brought into Serbia proved to be under the a high-risk pressure, i.e. insufficient in comparison to similar economies and countries (Bulgaria, Romania, Hungary, Croatia), production and export of Serbian economy made an insufficient progress, the economy failed to make a substantial change of its structure, and the economic subjects their business conduct, the expected technological renovation of the economy failed to be achieved to a sufficient extent, basic business 8 According to data from Republic Statistical Office website, Use of gross domestic product


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environment was not improved enough, and there was a constant decrease of employment and increase of unemployment, which all leads to a clear conclusion that there are numerous restrictions in the economic-political sphere that cause so bad (or insufficiently good) effects of the achieved growth, and that the transition of Serbian economy failed to be approached from a position of strategic evaluation and forecasting.

Analyses that examined “growth diagnosis” refer to very scanty results of “contribution to the social capital”. In other words, the research concludes that the education level of average employed labour and population i.e. the quality of human capital is very low. This also includes a tendency to raise wages above the growth of work productivity, weak flexibility of labour force, problems with socialistic inheritance in forming and treating jobs and work obligations, “softness” of employers’ and politicians’ treatment of general population in reforms, as well as victims and holders of privileges of the previous economic and social model until 2000. Nothing less important cause of such a bad contribution to the social capital is backward infrastructure and insufficiently developed telecommunications.

The second part of the registered problems of growth and its performances refers to a series of factors of property and other legal benefits of the system to generate or encourage the economic growth. Part of these factors (with negative effect) are many „micro risks“ including, above all, organised crime and corruption, which place Serbia, according to the results for 2004 and 2005, to the 97th place out of 145 countries, thus recording the worst results in the region. Property rights are far away from their implementation, not only in the context of delay and implementation of privatisation, but particularly because of inexistence of laws on property return, (non)solving of land ownership, etc. Micro risks also include current fiscal policy, oversized growth of state consumption, still high and unpredictable inflation and reactive i.e. unstable monetary and economic policies, monopolised market structures and bad performances of corporate management.

5. PROBLEMS TO REMAIN

The key dilemma refers to the question of whether the current orientation of Serbian economy’s functioning and development is sustainable, i.e. favourable and acceptable in a several-decade perspective and for future generations. Will foreign direct investments in Serbia, revenues from privatisation in particular, be increasing from one year to another so as to service the external debt with success, as well as technological development, environmental improvement and social balance?

The most general insight into the shown reality refers to the following problems or risks of sustainability of the current processes.

(1) The first one refers to the structure of revenues, i.e. to the fact that the amount of greenfield investments is almost irrelevant in relation to privatisation of the existing enterprises – only five from the list of 25 biggest enterprises with the total value of 750 million euros, which is less than 20% of the total investments. Although the volume of these investments increased in 2006, in the total view this cannot be considered sufficient enough to compensate any potential losses from the reduction of revenues from privatisation. Insufficient participation of domestic investors, as well as still week development of entrepreneurship, investments and employment in small and medium enterprises, announce the possibility of severe problems.

(2) The second problem is that ending of revenues from privatisation can be seen in the distance, since privatisation is to finish during 2007 as foreseen by the law. What remains is, of course, privatisation of public enterprises as well as increase of greenfield investments. Although the process of privatisation has not finished yet, the harder part of work is left to be done that includes overindebted and market-unpromising enterprises and a part of somewhat more valuable public sector – public enterprises. Anyway, there is a question of the financial epilogue of privatisation ending.

(3) The third problem refers to the public consumption and budget balance in Serbia. Despite a great effort made in the reform of the budget and its transparency after 2001 and even improved structure of revenues and expenditures, particularly after 2005 when a minimum budget surplus was achieved, later movements show that in 2006 that relation was worsen by a bigger growth of


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expenditures, so according to IMF estimations a budget deficit of 0.6% GDP will be achieved. Public expenditure permanently amounts to over 45% GDP. Only expenditures for employees for 2006 and as planned for 2007 amount to 9.2% GDP, which is far less than the total paid pensions of 10.6% GDP. In this matter it should be emphasized that the current expenditures for education are only 3.5% GDP and for environmental protection only 0.3% GDP which in the long run is estimated as unacceptably low.

(4) The fourth problem that appears in this context is expansion of import and intensification of trade and payment deficit on that basis. Namely, after foreign trade liberalisation in 2000 the value of import amounted to 44.5% GDP in 2001, 43.1% GDP in 2002, and 42.22% GDP in 2003 according to available data of the Statistical Office. Since in 2004 a maximum level of import growth was recorded, as well as of trade deficit, it can be said that participation of import in GDP was around 45% to remain until now at around 40% GDP. During that time the export stayed at about 20% GDP despite the absolute growth in 2001-2003, which means that the trade deficit permanently amounted to more than one fourth of GDP.

(5) The fifth problem that naturally follows previous tendencies is insufficient investing. Namely, after 2000 Serbia had a relatively important inflow of foreign funds from donations, and later on from privatisation and foreign investments, so the structure of GDP suffered reduction of participation of domestic investments into basic funds. So, that percentage was 13.8% in 2000, only 9.2% in 2001, 13.1% in 2002 and 14.1% in 2003. There is no doubt that share of investments in GDP in 2006 and 2007 will increase based on the National Investment Plan, but this is at the same time an increase of the economic role of the state at the level of entire economy.

(6) In relation to this is the problem of insufficient development of the capital market. Regardless of the dynamic annual growth of Belgrade stock exchange trade (no less than 40% in 2006 in relation to the previous year), the total market capitalisation amounted to 1.2 billion euros in December 2006, and although twice as high as one year before, its share in the gross domestic product was still insufficient in relation to reference economies, as a specific indicator of perception of entrepreneurial chances and tendencies to private domestic investors’ investments. 9

CONCLUSION

Too high expectations of Serbian citizens of political changes carried out at the end of 2000 are largely based on the extremely low starting position of the national economy from where the reforms were initiated (a bit less than half GDP achieved in 1989), as well as on the fact that integration of our country in the world economic and financial flows was conducted very quickly (UN, IMF, WB and other institutions), which was supposed to give additional stimulus to country’s growth and development through inflow of the foreign capital. However, despite this the achieved results are suboptimal in view of income growth (similar results are recorded by other transitory economies as well) but even more in view of structural reforms. One of the key causes is lack of development strategy as an integral understanding of movement of Serbian economy in the following period. Country’s growth and development based on copying the same or creating a very similar structure of GDP creation and allocation which existed in the last two decades of the 20th century, have already proven to be unsustainable. Such structure is the cause of the long-term insolvency of the national economy, internal imbalances that cause constant episodes of increased inflation, impossibility to open a great number of new jobs and remaining on the bottom of European scale by competitiveness of domestic products on the international market. This is precisely the reason why adoption of a strategy for sustainable growth of the national economy is imposed as a necessary turn, which growth would be based on developing a knowledge-and-information-based society, encouraging creative potentials of the young generation of Serbian population and as efficient as possible using of foreign capital and knowledge inflow. Together with further development and strengthening of market economy institutions compatible with EU solutions, this is the only basis the sustainable development of Serbia, 9 At the same time, market capitalisation of all of 31 billion euros in Croatia amounts to 93% GDP, while in

Montenegro even 140% GDP, and in Bosnia and Herzegovina around 70% GDP, according to S. Bojadić, Stock exchanges in the region, “Ekonomist” magazine, 1 January 2007, page 42.


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as well as stopping of further outflow of the finest representatives of young generation to other countries and reaching a high quality of life and work in the foreseeable future as the guarantee of a continuous progress of the society, can rely on.

REFERENCES

Boulding E. Keneth, »Fun and Games with the Gross National Product - The Role of Misleading Indicators of Social Policy», The Environmental Crisis, Man’s Strugle to Live Himself, ed. by H. W. Helfrich, Jr. New Haven and London, Yale University Press, 1972.

Crafts, N: »Globalisation and Growth in The Twentieth Century», IMF Working Paper, Wp/00/44

Grabowski, R: »Pathways to Economic Development», Edward Elgar Publishing, Cheltenham, 1999.

Griffin,K: »Alternative Strategies of Economic Development», second edition, Mac Millan Press, London, 1999.

Goldberg Itzhak, Radulovic Branko, Schaffer Mark, Productivity, Ownership and the Investment Climate: International Lessons for Priorities in Serbia, www.worldbank.org.yu

Gorz, Andre «Ekologija i politika», srpski prevod, Prosveta, Beograd, 1982.

Grupa autora, Strategija smanjivanja siromaštva u Republici Srbiji, Vlada Republike Srbije, 2002.

Harriss, J, Hunter, J, Lewis, C.M: »The New Institutional Economics and Third World Development», Routledge, London, 2000.

Konkurentnost privrede Srbije - Dijagnoza rasta 2006, Jeferson Institite, Republika Srbija, Ministarstvo finansija.

Memoradnum o budžetu i ekonomskoj i fiskalnoj politici za 2007. godinu, sa projekcijama za 2008. i 2009. godinu, Ministarstvo finansija Republike Srbije.

Rao, P.K: «Sustainable Development – Economics and Policy», Basil Blackwell, Oxford, 2000.


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THE ECONOMIC IMPACT OF MIGRATION FLOWS: SUSTAINABLE DEVELOPMENT OF THE REPUBLIC OF SERBIA AND EMIGRATION

Vladimir Grečić1

Abstract: Thousands of professionals and students left the Republic of Serbia during the 1990-2000 periods for better life and working opportunities in Western European and overseas countries. The effects of the highly skilled migration – both positive (remittances, possible investments, strengthening of social networks, etc.) and negative (losses of human capital and others) on sustainable development have not been well studied or measured. Simple models of «brain drain» and «brain gain» - which dominate most policy discussions – do not fully capture the complexity of the movement of people and knowledge across borders.

This paper looks at the impacts of highly skilled migration on sending countries, particularly on the Republic of Serbia and the policy options of the State. As a matter of fact, it looks at different possible policy responses to the emigration of highly skilled from the country with the goal of minimizing its adverse effects and promoting the sharing of gains between Serbia and host countries. Theoretically, it focuses on three policy approaches: retention, return and circulating of skills. It argues that the best strategy to deal with the problem of loss of skilled labor is one based on the concept of circulation of skills, which yields mutual benefits for both sending and host countries.

The paper highlights several measures that can facilitate the process of circulation, including greater cooperation between countries of origin and host countries than observe at present. It argues that the Diaspora option must be included in the strategy.

KEY WORDS: BRAIN DRAIN, BRAIN GAIN, DIASPORA, HIGHLY SKILLED MIGRATION, REPUBLIC OF SERBIA.

INTRODUCTION

The Republic of Serbia is a country of emigration by tradition. It was characterized mainly by migration for economic reasons. However, intensity of emigration was attributed to historical, economic, demographic, political, social, ethnical and psychological factors. The events that occurred in the 1990s Yugoslav republics of Bosnia and Herzegovina, Croatia and in the Serbian province Kosovo and Metohija, as well as the international isolation of FR Yugoslavia caused by the sanctions imposed by OUN and, finally, three months period of NATO aggression in 1999, deterioration of the population’s standard of living and the growth of poverty in Serbia and Montenegro, have accelerated emigration from Serbia and Montenegro.

One among a number of painful processes during the transition period is brain-drain, or emigration of highly skilled, mostly young people, researchers and just graduate students from CEE countries to developed OECD countries.

Although the brain-drain problem affects developed countries too (emigration of scientists from UK, Germany, and other EU member countries to US, for example), loss of university degree professionals is much more difficult for developing countries, preventing them to use their own development potentials and making them depend more on cheap natural resources. Besides, just a few of these countries are rich of natural resources; most of these countries sell them as the only export goods. Having in mind that developed countries already perform within a framework of knowledge based economies and societies, the only valuable good could be the one based on knowledge. Therefore, brain-drain issue should be treated as new colonialism and not neglected with the excuse of human rights issue – transfer of people in different sports is a “normal” economic category, highly monitored and regulated by national and international regulatory bodies – restrictions for emigrations are rigorous, if interests of involved parties, both individual and institutional, are not fulfilled; only in science this is a human right, although debts of national economies in countries affected with strong brain-drain, could be re-calculated under brain-drain economics!

1 Institute of International Politics and Economics, Belgrade, Serbia.

THE ECONOMIC IMPACT OF MIGRATION FLOWS: SUSTAINABLE DEVELOPMENT OF THE REPUBLIC ...

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SERBIA – COUNTRY’S ECONOMIC PERFORMANCE IN THE 1990 AND 2005 PERIOD

Republic of Serbia, a country of almost 8 million people (excluding Kosovo and Metohija), has during the last fifteen years had an outpouring of more than 400,000 mostly young people; around 10 per cent of them were professionals. On the other hand, economic hardship during transition leads to the emigration of high-skilled specialists, intellectuals, researchers, etc. which slows down progress and causes further emigration. Thus, it is argued, skill migration can have a cumulative negative effect on fragile economies.

Table 1. Real GDP growth rate in Serbia and Montenegro

Year Real GDP growth rate Year Real GDP growth rate 1991 - 11.6 1999 - 18.0 1992 - 27.9 2000 5.2 1993 - 30.8 2001 5.1 1994 2.5 2002 4.5 1995 6.1 2003 2.4 1996 7.8 2004 9.3 1997 10.1 2005 6.3

1998 1.9 Real GDP in 2005 (1989=100) 60

Source: EBRD, 2007.

At the beginning of nineties, the country faced the first big wave of the emigrants in years. When the civil war in Croatia begun in 1991, many Serbs started moving away from the former Yugoslavia, fearing the conflicts could spill over. The war-driven emigration was briefly interrupted when the Dayton Peace Accord that marked the end of bloodshed in Bosnia was signed in late 1995. The conflict in Kosovo, which ended in the 77-day NATO air strikes in the spring of 1999, increased the number of those who left or were planning to leave Serbia in search of more safety place for living. Additionally the emigration was boosted by the country's poor economic and overall social situation. A research of the migration patterns done two years ago at the Belgrade University, found that estimated 30,000 university graduates left Serbia and Montenegro during last decade of 20 century. An unknown number of working-class people also migrated and are unlikely to return, since they can make far more money in Western countries.

Table 2. Persons Becoming Legal Permanent Residents During Fiscal Year 1994-2005 by Country of Birth and Selected Characteristics in Overseas Countries -

Australia, Canada and United States

Country of Destination

1994/ 1995

1995/ 1996

1996/ 1997

1997/ 1998

1998/ 1999

1999/ 2000

2000/ 2001

2001/ 2002

2002/ 2003

2003/ 2004

2004/ 2005

Australia 3,665 3,049 2,097 1,550 2,912 2,356 2,343 2,082 1,633 931 671 Canada 2,987 1,831 1,384 1,172 1,492 4,745 2,804 1,623 941 708 272 United States 2,907 3,600 2,792 2,399 1,886 2,742 6,203 10,387 2,994 3,331 5,202

Total 9,559 8,480 6,273 5,121 6,290 9,843 11,350 14,092 5,568 4,970 6,145

Sources: Settler Arrivals 1994/95 to 2004/05. States and Territories, Canberra, Commonwealth of Australia, 2005; Facts and Figures. Immigration Overview. Permanent Temporary Residents, Canada, 2005; 2005 Yearbook of Immigration Statistics, U.S. Department of Homeland Security, January 2006.


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Table 3. Persons Becoming Legal Permanent Residents During Fiscal Year 2005 Country of Birth and Selected Characteristics

From Serbia and Montenegro Total Male Female Total 5,202 2,581 2,621 Under age of 18 1,085 569 516 Age 65+ 241 108 133 Marital status: Single 2,039 1,187 852 Marital status: Married 2,844 1,307 1,537 Others 319 87 232 Professions: Executive and managerial 101 65 36 Professions: Scientist and Engineers 302 189 113

Source: 2005 Yearbook of Immigration Statistics, U.S. Department of Homeland Security, January 2006.

SKILLED EMIGRATION INVOLVES MULTIPLE IMPACTS

Migration, whether within or between countries, is better thought of as a part or an aspect of development – more significant at some times and in some countries than others, sometimes a cause of events, sometimes a consequence of them, but always an integral part of the development process (ILO, 92nd Session, 2004). There are both positive and negative consequences. The potential advantages, for the country of emigration are:

• Reduced population pressure

• Lower unemployment

• Foreign currency remittances

• Knowledge and skills of returns

• Building transnational communities

• On other side, there are potential disadvantages of skilled emigration:

• Losing younger people

• Coping with sudden returns

• Loss of potential output and tax revenue

• Brain drain and loss of better workers; reduced R & D.

• Social disruption and a culture of emigration

• Increasing inequality.

The Republic of Serbia, excluding Kosovo population2, is a country with decline in population in Europe is due to low birth rates that do not allow generations to be replaced. As a matter of fact, according to data of the Institute of Statistics of the Republic of Serbia, in this Republic the number of births (72,180) was less then the number of deaths (106,771) was during 2005. The growth rate of population is on the level of Croatia, Bulgaria, Hungary, similar to other European countries. Therefore, aging in Europe is to a certain extent inescapable as it is for the rest of the world. Maintaining the size of the population in working age (15-64) would be somewhat less unrealistic and more desirable but would still (based on the 1995-2050 period) require the EU to increase its net migratory flow from the base projection of 300.000 persons per year to more than 1.4 million persons (United Nations, 2001). That means emigration from Serbia is not a factor of reducing population pressure but factor of losing young qualified people.

2 Kosovo Albanians have boycotted census in the last two decades and so.


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a) Reducing unemployment

Like most social processes, the net impact of skilled emigration from developing countries is a balance of direct and indirect effects. The most direct effect of skilled emigrations to reduce the number of educated workers who are critical to productivity and a developing country’s economic growth, but it also sets in play a number of forces that can increase economic growth (Lowell-Findlay, 2001). Uneployment rate is the Republic of Serbia was 25 per cent in 2005.

b) Foreign currency remittances

Serbian Diaspora sent to Motherland more than 4.1 billion US dollars in 2004(The World Bank, 2006). Therefore, workers` and emigrant remittances are important and stable source of development finance; however, the remittances are influenced by different factors (Russell, 1992):

• Number of workers

• Wage rates

• Economic activity in the host country and in the sending country

• Exchange rates

• Relative interest rate between the labor-sending and receiving countries

• Political risk

• Facility for transferring funds

• Marital status

• Level of education of the migrant

• Whether accompanied or not by dependents

• Years since out migration and household income level.

These factors affect the total pool of remittance income, the decision whether or not to remit, the amount to remit and the uses of remittance incomes. Factors that affect migrant workers` choice between the formal banking system and informal channels in remitting their earnings include: individual socio-economic characteristics of their household members, levels and type of economic activity in the sending and host countries, differential interest and exchange rates and the relative efficiency of the banking system compared with informal channels (Russell, 1992). There are no official sources, which can reliably indicate the total number of the Serbian Diaspora over the World. However, according to the censuses, immigration statistics of the main countries of immigration and the neighboring countries and reports of the Serbian organizations abroad, the estimates show that nearly four million Serbs now live outside Serbia. Concerning the there status, there are three groups of Serbs in the World: citizens of Serbia and Montenegro, Serbs who have citizenship only of country of destination and Serbs who live as a national minority in neighboring countries – Bosnia and Herzegovina, Croatia, Romania, Hungary and Macedonia.

Special attention has been paid to Serbian migrants who had left the country in second half of the twentieth century, particularly in the nineties, and to the Serbian intellectual Diaspora. Talking about S&M, estimates of migrants` remittances are around US$ 4.1 billion, or 17.2 percent of GDP in 2004 (The World Bank, 2006). The money that migrants send home is very important not only to their families but also to their country’s balance of payments. Like other countries, there are two types of leakages: one due to erroneous, imprecise accounting, and the other due to the choice of informal, unsupervised channels for remittances. It has become accepted practice to treat all informal remittances as foreign exchange leakages from the labor exporting country (Puri-Ritzema, 2004); but this practice is erroneous because these “leakages” also include remittance items such as (1) personal imports of migrant workers, and (2) the savings brought home on return subsequently converted into local currency at domestic banks. The actual leakage of remittances takes (as against “accounting” leakages noted above) takes three forms: (1) some migrant workers retain of their savings in personal


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accounts with in the receiving countries; (2) a part of the remittances hand carried (in the form of cash and travelers cheques) by return migrants may leak to the informal market for foreign exchange; (3) there are transfers by migrant workers through intermediary financial operators in the informal foreign exchange market. According to the estimates of authors of this contribution, the level of unrecorded remittances from migrants in Serbia and Montenegro could be around 50 percent.

Any policy making use of migrants as a development resource must understand the size and allocation of remittances, and the role played by migrants and their communities in the remittance process. The flows of remittances in relation to other financial flows are significant. For example, in S&M total inflow of foreign direct investment (FDI) was about US$ 1 billion in 2005. It was much less than migrants` remittances. The problem is how was used the remittance. Mostly was spent on consumer goods – such as food, clothing and health care. Funds are also spent on building or improving housing, buying apartments, buying land and agricultural machines, tractors etc., and buying durable consumer goods such as cars, washing machines and televisions. The remittances caused inflation of housing prices. Generally only a small percentage of remittances are used for savings and what is termed “productive investment” for e.g. income and employment-generating activities such as small productive business firms. The impact of remittances was estimated as a productivity equation using a set of 11 transition countries during the 1990 to 1999 period. Results of the research prove “the positive impact on productivity and employment both directly and indirectly through its effect on investment” (Leon-Ledesma, M. and M. Piracha, 2004). The problem was investment climate: relatively unstable economic and political situation in Serbia and Montenegro.

c) Knowledge and skills of returns

The reforms led by young professionals returned from Serbian Diaspora, working in government and other states institutions, like Bozidar Djelic (vice Prime Minister), Vuk Jeremic, (actually Minister of Foreign Affairs), Milica Cubrilo (actually Minister of Diaspora), Radovan Jelasic (actually Governor of the National Bank), Kori Udovicki (former Minister of Energy) and many others in state and private sector, are the real ones. They seem to present facts as they are and do their job the best they can, regardless of the political influence. They are leaving something positive behind.

The migration of the more highly skilled people might also affect capital movements. There could be an impact on foreign direct investment since companies would take into accounts the skills and personnel available locally and might be discouraged from investing in a country that loses its most qualified people. In addition, migrants not only depart with their education, they also leave with significant amounts of capital (ILO, 92nd Session, 2004). The destination countries encourage this. Besides, as a positive effect is a stimulus to investment in domestic education and individual human capital investments (UN Department of Economic and Social Affairs, 2004).

d) Building transnational communities and home country development

Today, with the global knowledge-based economy increasingly relying on science and technology skills and generating their international flows more than ever before, the Diaspora issue has become even more crucial. Serbian Diaspora invests in the country and participates in various ways in economic life of Serbia.

The research of the Serbian Diaspora includes not only originated from what is today Serbia, but also Serbs from Bosnia and Herzegovina, Croatia, Montenegro and other parts of former Yugoslavia. They are not separated in any way in the World, adhering to the same religious, ethnical and other cultural organizations.

The general attribute to the whole Serbian Diaspora over the World is that they have integrated in the domestic societies, and hard working, law abiding and gifted people. They are rather easy to integrate, especially through mixed marriages. They usually keep the Serb Orthodox religion. Serbs are not known as members of organized crime or taking part in serious criminal activities.

There were in the past as well as there are today a number of scientists (Nikola Tesla, Mihailo Pupin and other), politicians, judges and journalists of Serbian descent in many American states.


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In the science and technology, there are many professionals in the United States and developed Europe – Germany, France, Switzerland, the Netherlands, United Kingdom, Sweden and others.

There are also very rich businessmen of Serbian origin whose fortunes are estimated to be in the range from half a billion to a couple hundreds of million dollars. The main economic activity of American Serbs is in construction business. Some say there is 30 per cent of Serbian Diaspora in the United States working in construction. Secondly come all kinds of services, maintenance, small business, insurance, even banking. Many American Serbs of second generation chose government business as their occupation.

The current relation between migration and development has rightly been characterized as “unsettled” (Nyberg-Sorensen and others, 2002). There is consensus that rather that stemming or containing migration pressure, development can stimulate migration in the short term by raising peoples` expectations and by enhancing the resources that are needed to move.

e) Losing younger professionals

The brain drain is evident in the last two decades of the 20 century. Since the early 1990s the international mobility of highly skilled workers has been increasing with the rising global demand for skills, alongside advances in globalization and phenomenal growth in information and communication technologies. Highly skilled and professional workers have become central players in globalization (Balaz, V. at al., 2004). Professionals move for many reasons, including higher wages, better facilities, and more opportunities for advancement. Serbia was particularly affected by emigration of professionals. Since 1992, when the SFRY was disintegrated, until 2005, the USA issued 55,608 immigrant visa, Canada (1992-2005) 34,285 and Australia 26,289 to citizens of Serbia and Montenegro. Among them at least ten per cent were with university diploma. Besides, many people from S&M got non-immigrant visa. For instance, non-immigrants admitted to the USA as temporary workers with specialty occupations (H1B visa) were 454 from S&M in fiscal 2003. Among them 26 workers were with extraordinary ability or achievement in fiscal year 2003. However, it could be suggested that temporary migration may facilitate rather than substitute for permanent migration. It is usually argued that highly skilled migration from Central and Eastern Europe is characteristically temporary and short term (Balaz, V. et al., 2004). Besides, during the same period, non-immigrants admitted to the USA from S&M were 790 exchange visitors and 1,535 students. As a matter of fact, student migration is a precursor to the brain drain.

The production of one highly skilled expert costs the country approximately $ 300,000, and the creation of a single top world expert takes at least ten years after his/her formal graduation. Thus the direct loses from accelerated brain drain from Serbia and Montenegro are between $ 9 and $ 12 billion, and real (still hidden) financial loses are much higher, if measured only in lost profits and inadequate replacement of the departed experts. Above all, costs which could not be calculated in currency measures are pointed out in the warning, stated by famous Russian academician, Piotr Kapica: It is more than painful for one big country to loose 50 top experts, for its science can be decapitated thereby. For a small underdeveloped country this risk is several times greater. The outflow of gifted people inevitably leads to technological backwardness (Ушкалов - Малаха, 1999), decrease in economic growth and ‘stabilization’ in a stagnant, backward economy and society.

f) Social costs

The social cost of labor migration in terms of fractured families and communities are without a doubt at least as significant as those related to the more measurable economic costs. The effects are almost never gender-neutral. Life in Serbia has been very difficult for ordinary people over the past 15 years. The reports show that often the children of migrant women workers drop out of school or find themselves in vulnerable situations of neglect and abuse. On their return, some women also face traumatic experiences, violence or family dislocation (ILO, 92nd Session, 2004).

Mainly due to bad politics, due to several wars that Serbia was involved in, which all-together broth ups a very bad economic situation in all aspects of the society? The consequences are not


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measurable, but it would be mentioned that so-called brain drain has seen as a dramatic process. And this problem covers thousands of young, well-educated people, who decided to leave the country. As a negative effect is reduced growth and productivity because of the lower stock of highly skilled workers and its externalities; selective migration may cause increasing disparities in incomes in the home country; loss of fiscal revenue from taxation of workers (UN Department of Economic and Social Affairs, 2004).

g) Migration and economic performances in a country of origin

Migration is viewed usually positively in origin countries not only because it improves the economic conditions of migrant families and their communities but also because migration and return have become conduits for new ideas and new ways of doing things, and serves as a window to the outside world (ILO, 92nd Session, 2004). In addition to sending remittances, migrant communities abroad are now seen as investors, welfare providers, knowledge communities and technology harbingers to the home countries. They can do this, for example, by passing on information and contacts and helping to enforce contractual arrangements.

The Republic of Serbia is a country in the process of transition, facing dynamic political, social and economic changes. After the economic stagnation of more than ten years, caused by primarily political difficulties, forthcoming period will bring overall state recovery that will be conditioned, first of all, by the economic stability. Serbia is now open for all kinds of cooperation, particularly in the field of economy. Joining in the international economic integrations and approximation to the European Union with the aim to become its full member are the objectives to be prepared by fundamental economic reforms. Privatization, as the specific national interest, investment promotion, alteration of the legal regulations and their harmonization with the European Union regulations, are the main processes that the state bodies foster.

RESPONSES WITH MIGRATION, DIASPORA AND DEVELOPMENT POLICY

Diaspora entrepreneurs and investors can play a critical role in bringing new ideas and ways of doing business to their nations. By sharing new knowledge and fusing it with local customs they can help speed the adoption and acceptance of positive change. As a matter of fact, if a brain drain begins seriously to affect the quality of labor force in a country there are two obvious solutions (a) make it worthwhile for highly-trained professionals to stay and (b) replace them with competent locals at a rate as fast or faster than their departure (Cohen, 1996). Another solution is to devise strategies of “brain gain”.

a) Brain gain

These can three forms: (a) recruiting abroad in key segments; (b) return of talent – the return of talent programs; (c) the construction of a brain gain network.

In regards with the experience of many countries of emigration, the concept about the migration skills evolved, putting stronger emphasis on brain gain, which is based on the idea that the expatriate skilled population may be considered as a potential asset instead of a definite loss. The scientists and engineers abroad appear as human resources educated, trained through professional practice, and employed in much better conditions than those the country of origin could have provided to them. If such a country were able to use these resources largely shaped through others` investments, it would be then gain a lot (Meyer, 2001). There are two ways to implement the brain gain:

• Through the return of the expatriates to the country of origin (return option), and

• Through their remote mobilization and association to its development (Diaspora option).

The Diaspora option takes for granted that many of the expatriates are not likely to return. They have often settled abroad and built their professional as well as their personal life there. However, they may still be very concerned with the development of their country of origin, because of cultural, family or other ties. The objective than, is to create the links (Diaspora networks) through which they could effectively and productively be connected to its development, without any physical temporary or permanent return.


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b) Some suggestions for policies

Governments of origin countries are increasingly becoming interested in the potential value of transnational communities as engines of development. Serbia, for example, has created special Brain Gain Program that is particularly promising. A good idea, yes, but apparently it would not work due to provisos, even prejudices, from both the side of the faculties and the side of the potential guest lecturers. The objective of the Brain Gain Program is to open up the higher education sector in Serbia, by inviting academics that have emigrated from the country to give short-term lectures at the university faculties in this State Union.

On the other hand, the New Research and Innovation Policy of Serbia represent a radical policy change from the previous one. Its goals are (Domazet, 2003):

• Development of an innovation society where the knowledge and development of innovations will be the basic factors of the industrial growth.

• The global competitiveness of the Serbian industry shall be achieved by developing the national innovation system that will support applications of the existing and new knowledge and technologies, as well as development of innovative products and processes.

• Achieving competitive and useful research results with minimal costs.

• Achieving a dynamic GDP growth by developing of the knowledge-based export-oriented industry and services.

• Development of a supportive environment for development of innovations and conditions for a research program of a good quality that will have an impact on the Serbian economy.

• Achieving a sustainable development with preserving the environment and quality of life of citizens in Serbia.

Dominant subjects of new policy are development activities, transfer of knowledge and technology and supporting environment for development of innovations. Development activities and development of innovations should be dominantly realized in industrial enterprises, which will be eligible to use public funding for their development projects, regardless of the type of their ownerships.

Therefore, it could be suggested to the governments the following:

• Keeping best brains at home – and encouraging them to come back; plugging the brain drain high on agenda;

• To promote linkage with nationals abroad: promote Diaspora networks;

• Promote short term movements of professionals using GATS Mode 4 and other means;

• Dual citizenship and Diaspora recognition arrangements;

• Greater emphasis on R&D and creation of centers of excellence with support from receiving countries; to try to implement the 3% Action Plan, as countries of the European Union are doing;

• Incentives to attract expatriate investments. The new initiatives for growth.

Finally, how can migration of highly qualified people be managed with respect to a sustainable development? There are many solutions for management but following are the most important: recognition of interests of the sources countries; bi- and multilateral cooperation; strengthening of social networks; facilitating and strengthening of productive uses of remittances; improving investment conditions in the source countries of migrants, and international recognition of quality and education standards.


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c) A suggestion for migrants

The migrants themselves have formed associations and networks abroad, some of which are associations of the intellectual Diaspora. Meyer and Brown (1999) have identified 41 formal knowledge networks linking thirty countries to their skilled nationals abroad. They distinguish between five types of networks: student/scholarly networks, local associations of skilled expatriates, expert pool assistance through the UNDP`s TOKTEN program, and intellectual/scientific Diaspora networks. Along with other leading organizations of the Serbian Diaspora, the Serbian Unity Congress insists on enabling our expatriate nationals an active participation in domestic affairs, by offering their knowledge, experience and worldwide connections. Above all, this translates to stronger ties and coordination with the government in Belgrade.

CONCLUDING REMARKS

The results of research in the filed of population movements suggests conclusion that some economic development generates both the resources and the incentives for people to migrate. Its have also shown that current thinking is still tentative and available evidence is sketchy with regard to the links between migration and development.

Like other from developing world, people in Serbia require resources and connections to engage international migration. In response to their increasing displacement, the poor have made mobility a part of their livelihood strategies.

There are evidence of a direct link between poverty, economic development, population growth, social and political change on one hand, and international migration on the other.

Migrants as a development resource are the most important. However, according to the economic and political interests, there is a need to reinforce the view of migrants as a development resource, for at least four reasons.

First, the remittances by migrants are likely to be double the size of aid and may be at least as well targeted at the poor in developing countries. It is generally accepted that policies can encourage remittances – recorded or unrecorded – for longer-term growth and income security in labor-sending economies (Puri, 2004):

• By encouraging migrants to hold savings in financial assets in the labor-exporting country rather than abroad (or spending their savings on consumer goods);

• By redirecting remittances to official channels, and

• By facilitating the investment by migrants in self-employment and enterprise creating in labor-exporting countries.

Second, migrant Diaspora is engaged in a variety of transnational practices with direct effects on international development cooperation – investments, cultural exchange, and political advocacy.

Third, both private and public sectors in developed countries recognize their immediate and long-term dependence on immigrant labor with an ever more complex skills mixture.

Fourth, policies on development cooperation, humanitarian relief, migration, and refugee protection are internally inconsistent and occasionally mutually contradictory. Viewing migrant Diasporas as a development resource and seeking links between aid and migrants` transnational practices could address some of these trends and concerns.

The suggestions for policy formulation could be directed at optimum utilization of the Diaspora option. The experiences of other countries of emigration suggest that state policy based on the both options should be regarded as the best solution.


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Grečić V. (2003a), »La communaute emigree serbe aux Etats-Unis« (Chapite 6), Une communaute dans un contexte de guerre: la serbe en Occident, Paris: L` Harmattan.

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STRATEGIC DIRECTIONS OF DEVELOPMENT OF SERBIA – results, mechanisms, risks –

‘All around the world where economic reforms have been succesfully implemented a key issue is opening up for trade operations’ (M.Mandelbaum)

Edvard Jakopin1

Abstract: Serbia has defined its strategic directions of development until 2012 through the making of three pillar documents: National Strategy for Economic Development of Serbia 2006-2012, National Strategy for Accession to the EU, and Strategy for Regional Development of Serbia 2007-2012.

Consequences of economic distortion of the 1990s, additionally aggravated by transition problems at the beginning of the new millennium can hardly be measured. Still, statistically speaking, gross domestic product at the beginning of 2007 stands at only 62% of GDP recorded in 1990, industrial output is below 50%, a long-term unemployment rate is the highest in the whole Europe, the balance of payment deficit is also high ($6.7 billion in 2006), while the level of investment is low (17% of GDP). The fact that in Serbia life expectancy is 6 years shorter than in the EU-15 countries, that the infant mortality is one of the highest in Europe, and that regional disparities are still extremely marked (1:7 according to the EU standards), all make the demographic, economic and social map of Serbia even gloomier.

An economic inventory has been made. Strategic development objectives and priorities have been defined. The action plan, goals and institutional responsibility have been pinpointed. The state has defined its role in the creation of stimulating business environment, is gradually withdrawing from the economy and fosters the partnership between the public and private subjects; the process of management decentralization is under way.

The paper analyses strategic directions of development of Serbia from three different perspectives: (a) the analysis of results, (b) the analysis of mechanisms for the attainment of strategic objectives, and (c) the analysis of key risks for attainment of strategic objectives.

KEY WORDS: TRANSITION PROBLEMS, COMPETITIVENESS, STRATEGIC DIRECTIONS, RISKS.

INTRODUCTION

The process of integration of the Balkan countries into the EU is still not completed. Its major characteristic is an unbalanced transition process since the Balkans is the most underdeveloped European area, burdened with a high unemployment rate and non-competitive economy. The economic growth is not sustainable and macro-economy still faces numerous challenges – most Balkan countries today produce less than in 1990. This in particular applies to industrial output, structural changes, the level of foreign investment, and the structure of exports. As different from the Balkan countries, industrial output in most EU states plays a key role in economic growth, structural changes have been made and unemployment is reduced.

Chart 1. Transition walk

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1 Republic Development Bureau, Belgrade, Serbia.

STRATEGIC DIRECTIONS OF DEVELOPMENT OF SERBIA – results, mechanisms, risks

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The European economic developments resulted in the economic growth of the Balkan countries being recordable again. Solid growth rates were recorded, in some countries GDP of even above 6% (Romania 7.7% in 2006; Bulgaria, Turkey, and Bosnia and Herzegovina 6%)2, unemployment rates were reduced and inflation curbed.

A primary question that is raised at this point is: will the growth be sustainable in the period to come? The answer hinges on the source of growth, export performances of each individual economy and investment, i.e. industrial revival – how swiftly can economies of the Balkan countries increase their competitiveness (macro and micro level), i.e. make essential structural changes to economy.

Serbia defined its strategic development goals until 20123, key development priorities, strategic directions, institutional mechanisms and development policies. Most attention was paid to increase in competitiveness of Serbian economy, structural changes aimed at attracting foreign investment and upgrading of export performances of Serbian economy.

1. ECONOMIC UNDERDEVELOPMENT AND GROWTH

The transition period from 2001 to 2006 is characterized by the implementation of numerous reforms, establishment of macroeconomic stability, and sustainable and stable economic development, restructuring of large systems, privatization of enterprises and beginning of the EU accession process that involves legal harmonization on a large scale in all fields of economy and society. Major goals of the economic policy were the maintenance of macroeconomic stability coupled with the achievement of a high economic growth rate. Production activities, over the period following 2000, were managed in parallel with positive processes of economic transition and reforms of the tax system, labour market and the social welfare sector; in addition, the dinar exchange rate is stable, foreign exchange reserves are on the continual rise, prices were de-regulated and liberalized to a large extent, and so were foreign trade operations, and relations with international financial institutions were renewed. A significant progress was made in the implementation of structural reforms, in particular in the field of privatization of companies, and consolidation and privatization of the banking sector4.

Table 1. Major indicators of economic developments (growth rates, in %)

2001 2002 2003 2004 2005 2006 2001-2006 GDP, real growth 4.8 4.2 2.5 8.4 6.2 5.8 5.3 Retail prices 40.7 14.8 7.8 13.7 17.7 6.6 16.4 No of employed persons 0.2 -1.7 -1.2 0.5 0.9 -1.9 -0.5 Net earnings, real growth 16.5 29.9 13.6 10.1 6.4 11.4 14.4 Labour productivity 4.6 6.0 3.7 7.9 5.3 7.8 5.8

The economy of Serbia in the period 2000-2006 is characterized by a dynamic growth of gross domestic product at an average rate of 5.3% annually, whereby 2004 saw the highest GDP growth rate of 8.4%. The level of the physical volume of industrial output in 2006 equaled 47.3% of the level of 1990, and in comparison with 2000 it was up by 11.6%.

In 2001 and 2002 the share of final consumption was above the GDP volume by 3.5%. In 2003 final consumption (personal and collective) was down on GDP by 1.1%, in 2004 by 9.5%, in 2005 by 8.1%. Personal consumption in the same period recorded a gradual fall in the share in GDP

2 On the basis of comparisons of GDP growth rates of some countries with GDP growth rates with the EU-27

countries (by using Pearson’s correlation coefficients), the lowest or most insignificant correlation is registered in Bulgaria, Romania, Greece, Malta and Serbia. A large number of countries, Serbia too, went through a period of economic recession in 2003 (see more in Serbian Economic Diagram – SED No 3/27, p. 8-9, RDB)

3 National Strategy for Economic Development of Serbia 2006-2012, Republic Development Bureau, Belgrade, 2007 / www.razvoj.sr.gov.yu / adopted by the Government in early November, 2006

4 Some authors rightly argue that Serbia over the period 2000-2004 demonstrated no ‘transition recession’, which some countries experienced two times (Romania, Czech Republic, Bulgaria). The main cause of such reasoning lies in subsidies granted to state and social companies (D. Popovic, Four Transition Years in Serbia, CLDS, 2005, Belgrade, p. 39-41).


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(from 92.1% in 2001 to 84.2% in 2005), this still having been a high level. The share of gross investment in major funds in GDP showed a tendency towards increasing (from 10.4% in 2001 to 17.3% in 2005), but was still at a low level.

Over the past transition years the price stability was achieved, which was facilitated by the stability of the exchange rate and a continual rise in foreign exchange reserves. Inflation, measured by retail prices, after a high growth of 40.7% in 2001 dropped to 6.6% in 2006. Main factors that influenced the rise in prices were the rise in oil price and basic metals on the world market, and when it comes to domestic factors, those were the rise in administratively controlled prices, greater real effective demand and structural problems of Serbian economy.

Tax reform made the tax system more transparent, simple and in line with international standards. In the period 2001-2003 fiscal deficit fell and, for the first time in the history of modern finances of Serbia, in the course of 2005-2006 a consolidated surplus of the public sector was generated (in 2006 of 30.3 bn dinars).

Labour market in Serbia is characterized by high unemployment, huge disguised unemployment, a low share of employment in the private sector and inadequate mobility of labour force. As a consequence of transition processes, in the period 2001-2006 overall employment was decreasing at an average annual rate of 0.5%, while unemployment was rising at an average annual rate of 5.7%. The rate of surveyed unemployment showed a tendency towards rising from 18.5% in 2004 to 20.8% in 2005 and 20.9% in 2006 and was substantially lower than the unemployment rate of registered persons seeking a job of 33.1%.

Liberal forming of earnings had as a result their real growth in the period 2001-2006 at an average annual rate of 14.4%, which was considerably above the growth of overall economic activity and labour productivity. Average net earnings rose from EUR 102 in 2001 to EUR 250 in 2005, which is EUR 260 in 2006.

However, there are innumerable constraints to economic development: a relatively low level of overall economic activity (it is estimated that a real level of GDP in 2006 stood at about 65% of the level of 1990), low level of investment (an average share of investments in fixed assets in GDP in 2001-2005 was around 15%), a high level of unemployment, problems of external and internal debts, high foreign trade deficit, prominent social frictions, a low competitiveness level of economy, etc.

High deficit of the current account of the balance of payments represents a key macroeconomic disequilibrium factor, which so far has not posed a major problem since there has been a substantial non-market external inflow (donations and new loans). High deficit of the current account of the balance of payments (the share in GDP in 2006 was 11.5%) largely results from a negative balance on the account of goods.

1.1. LOW STANDARD OF LIVING – COMPARATIVE ANALYSIS

The soundest assessment of the level of the standard of living is given in the form of a structural indicator of GDP by purchasing power. The analysis of purchasing power parity enables the analysis of variety deriving from purchasing power among countries through the exclusion of differences in levels of prices. This sort of analyzing is especially applicable in international comparisons of GDP and its components. Estimations of purchasing power include goods and services comprised by GDP through the forming of sufficiently representative sample of overall goods and services, the price (retail price) monitoring of which is necessary over a period of time.

Table 2. Comparison of the standard of living in Serbia with the EU

ЕУ-25=100 2002 2003 2004 2005GDP level index (PPP) per capita 24.4 25.0 27.1 27.8

Comparative price levels 42.7 44.1 42.7 43.1

Countries with the highest standard in 2005 (according to the Eurostat) expressed through the PPS Index were Luxembourg, Norway, Ireland, Iceland and The Netherlands. The lowest standard per


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capita was recorded in Macedonia, Bulgaria, Romania and Turkey. Serbia was at a somewhat lower level relative to Romania, Bulgaria, and approximately the same level with Turkey and Macedonia. 2005 saw a mild increase in the value of PPS (Purchasing Power Parity)5 Index of Serbia relative to 2004. Determining the purchasing power parity, in relation to the EU-27 average, would result in the value of the PPS Index per citizen of Serbia of 29.0, which would not change basic conclusions a lot.

Chart 2. GDP PPP 2005

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The analysis of the comparative level of prices indicates that countries with the highest level

of prices (EU-25=100) in Europe in 2005 were: Iceland (151.5), Norway (139.3), Denmark (138.3), and Switzerland (136.2). The lowest level of prices for the same basket of goods was registered in Bulgaria (42.7), Macedonia (43.5) and Serbia (43.1).

1.2. IMPROVED LEVEL OF HUMAN DEVELOPMENT IN THE BALKANS

Determining the degree of development of regions by the concept of the UN is performed on the basis of Human Development Index (HDI). HDI of Serbia calculated after the methodology of the UNDP for 2004 was 0.811. Such an index value marks a high level of human development (above 0.800) and ranks Serbia 56 in the world (close to levels of Bulgaria and Romania, and ahead of BiH, Albania and Macedonia).

Chart 2. HDI in the Balkan 2004

0.811

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The analysis of trend of Human Development Index indicates that in Serbia from 2001 to 2004

the value of the HDI continually rose. Prominent continuality of the growth of the HDI in the region in 2001-2004 is a property of apart from Serbia (1.8%) only of Romania (1.2%) and Greece (1.1%). The rise in the value of Human Development Index is a characteristic of other countries of South East Europe, but not to the extent to which its progression was marked in these three countries. In 2004 (relative to 2003) the highest growth rate of the Human development Index in the region was recorded by Serbia (1.8%), BiH (1.8%) and Romania (1.6%).

5 PPS represents a simplified measurement unit that stands for the value of a single basket of goods in various

states of the EU.


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The analysis of HDI in the period 2002-2004 indicates that Serbia experienced a substantial improvement in the quality of living, primarily owing to the rise in the education index and GDP by purchasing power per capita. What is interesting is to compare HDI with GDI – Human Development Index per Gender (Gender Development Index). The value of GDI Index in 2004 stood at 0.800, which ranks Serbia 6 among SE countries and 50 in the world. Values of GDI and HDI do not differ greatly, which is indicative of the fact that in Serbia in 2004 there was no large disparity between levels of human development of two genders.

1.3. LACK OF SECTOR REALOCATION OF EMPLOYEES IN ECONOMY

Serbia, as opposed to other transition countries, did not go through transition recession. According to already presented rationale, the reason, among other things, is to be found in ‘active subsidizing of state and social companies’. Until end 2005 more than 90 such companies had been subsidized. To present only one data on the level of losses of large industrial systems: the loss of 97 large industrial systems in 2004 stood at 2% of GDP (in 2003 it was even worse, the loss having been 2.7% of GDP).

Chart 3. Lillien’s coefficient sector allocation of employees

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that changes in sector allocation of employees are insignificant, as opposed to other transition countries undergoing the first transition phase, i.e. employees in large systems losers very rarely quit their jobs. Economic sectors that have redundant labour or unutilized capacities will have the greatest difficulties in adapting to the EU markets. This adaptation will be easier in sectors that have complementary capacities. Sectors that are protected by the state require deepest changes.

The methodological explanation is as follows: were these sectors to rise at the same rate, Lillien’s coefficient would equal zero. This measurement unit is always positive and becomes larger if growth rates of employment of each economic sector do not deviate more than the value of a long-standing average. The present change, a rise or a fall in the share of workers per sector corresponds with reallocation of workers. Lillien’s measurement unit of sector reallocation is counter-cyclical since it is indicative of great fluctuations of the total number of employees among sectors in periods of recession than in expansion. The main conclusion of Lillien’s measurement unit indicates that lack of sector reallocation causes approximately the same growth employment rates by sectors; if there is reallocation of employees in economy, expanding sectors will have a growth rate higher than the rate of less propulsive sectors. To sum up: high dispersion, in fact equal employment growth rates of sectors is an indicator of weak economic activity. Lillien’s coefficient for the period 2002-2005 in the economy of Serbia was 4.3% (2.9% the sector of services, 2.3% industry and 1.08% agriculture) and it indicates that there are no substantial changes to sector reallocation of employees (e.g. over the first four transition years Czech Republic and Poland had the Lilllien’s coefficient of about 20%).

6 Lillien’s coefficient represents a standard deviation from a long-standing employment trend overall and by

economic sectors, and consequently indicates the intensity f performed reallocation of employees in industry and its sectors.


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2. NON-COMPETITIVENESS OF ECONOMY

One of the greatest problems of Balkan economies is their non-competitiveness. According to annual reports of the World Economic Forum (WEF), Serbian economy records low levels of indexes and sub-indexes of competitiveness. Causes of such developments are to be found in the process of economic transformation as of 2000 and still present structural problems.

One should say that, despite the fact that Serbian economy records a low level of the global competitiveness index, for the past three years some progress has been made (from 96th in 2004 to 85th in 2005, i.e. 87th in 2006). Indeed it is positive that the value of the index is rising year in, year out (3.38; 3.67; 3.69). The deterioration in 2006 relative to 2005 is the consequence of the deterioration of the sub-index of basic market requirements, and that from 92nd to 99th position. This is clearly indicative of Serbian economy facing problems in the field of institutions, infrastructure, macro-economy, and health care and primary education. The other two sub-indexes, Efficiency Initiator Sub-index and Innovative Factor Sub-index recorded modest improvement and that from 75th to 72nd, i.e. from 85th to 83rd position. Positive results Serbia is achieving in the field of tertiary education and training, and technical equipage (Efficiency Stimulator Sub-index), as well as in the field of innovations (Innovation Factor Sub-index), while negative results are registered with market efficiency (Efficiency Stimulator Sub-index) and business sophistication.

The position of Serbia as regards the Business Competitiveness Index (BCI) is unfavourable and very low: 85th position in 2004 (103 states analyzed), 86th in 2005 (116 states analyzed), and 86th position in 2006 (121 states analyzed). In 2004-2006 the rank of sub-indexes of strategies and company operations recorded a drop from position 87 to 110. The rankings of the National Business Environment Index dropped in the given period from position 81 to 86, i.e. 85th position respectively.

A comparative analysis with neighbouring referential countries indicates the following: Serbian economy is ranked lowest when it comes to global competitiveness. As with other referential countries, except Croatia, the rankings of the Global Competitiveness Index (GCI) deteriorated, although with some countries (Hungary, Macedonia, Romania, Serbia and Slovenia) the index value improved. If the components of the GCI are analyzed, Serbia ranks lowest when it comes to the sub-index of basic market requirements (position 99), which at the same time implies the highest weight that was the principal cause of the deterioration of global competitiveness. With the remaining two sub-indexes, Serbia (72nd, that is 83rd position) left behind only Macedonia (80) with the Efficiency Stimulator Sub-index, Bulgaria (85) and Macedonia (87) with Innovation Factor Sub-index. When it comes to the Business Competitiveness Index (BCI), Serbia is ranked 86, better only than Macedonia (87), and right behind Bulgaria (83), Russia (79) and Romania (74).

3. REGIONAL DISPROPORTIONS AND DEMOGRAPHY PROBLEMS

Regional disproportions between levels of development in Serbia are the highest in the whole Europe, and are increasing year in, year out. Regional disparities, viewed at the level of administrative districts (NUTS 3 level) stand at 1:7 (Development Deficiency Index of Belgrade is 0.8 and DDI of the Jablanica District is 5.4), while the ratio between the most developed and least developed municipality7 – NUTS 4 level, stands at 1:15 in 2005. Accomplishment of this goal is critical, given that the transition process is still not complete. Besides, the breakdown of some economic systems and the transition process resulted in the underdevelopment parameters having even larger values in the traditionally underdeveloped South of Serbia8 and the territory of Stari Ras9, but it also caused that once developed industrial zones of Serbia now suffer hard economic and social circumstances, which led to the emergence of new underdeveloped areas (East Serbia, parts of the Central Serbia, regional centers of mining and traditional industry) and devastated areas. In spite of the economic growth over the period 2000-2005, every tenth citizen of Serbia is poor, which can be explained through the effect of transition changes to an economic system. 7 Without Belgrade municipalities, measured by realized NI per capita 8 The South of Serbia comprises municipalities of the Jablanica and Pcinja District. 9 Stari Ras area comprises municipalities of Priboj, Prijepolje, Tutin, Sjenica, Nova Varos and Novi Pazar.


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Chart 4. Development Deficiency Index

Extreme values standardized indicators

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The depopulation (an intensive process of demographic depopulation seized 79

municipalities), migrations (since 1981 a negative migration balance has been recorded that in 1995-2000 was diminished by the inflow of refugees and internally displaced), negative natural growth (22 districts have a negative natural growth), demographic ageing (of 7 stages of demographic ageing, all regions are in three: oldest demographic age, old demographic age and demographic age), infant mortality (almost double the average of the EU states), and life expectancy (1.5 years less than the European average, but even 6 years less than the EU-15) all represent major demographic and development problems.

4. THREE STRATEGIC PILLARS

Strategic goals and development directions of the economy of Serbia defined in the National Strategy for Economic Development of Serbia until 2012 (NSEDS) are ambitious, but viable. The Strategy rests on three pillars:

1. Essential structural changes to economy aimed to raise macroeconomic and business competitiveness

2. Development of knowledge-based economy (and more new jobs) 3. Faster development of infrastructure

If strategic objectives be fulfilled, until 2012 Serbia will most likely be ready in competitive, development and institutional terms for a full-fledged EU membership. The Strategy is consistent in presenting the way of reaching that readiness through, in the first place, enforcing competitiveness of Serbian economy and its empowering to face robust economies of the EU states. Several important elements of the Strategy have to be highlighted:

Firstly, the Strategy precisely pinpointed the development position of Serbia of today and how big the development, resource and institutional gap in relation to the new ten EU members of 2004 is, as well as that against three main regional competitors – Bulgaria, Romania and Croatia;

Secondly, the Strategy defined a set of anticipated development and reform results, that is the development profile and pro-European institutional framework of Serbia at the beginning of 2013;

Thirdly, on the basis of the diagnosis of economic growth, major development constraints were identified – human, material, natural and institutional;

Fourthly, the Strategy defined basic development priorities, development policies and further evolvement of reform and transition processes;

Fifthly, the Strategy presents an unequivocal plan of implementation, monitoring of the Strategy implementation on the basis of verifiable and internationally valid indicators, and drew attention to political accountability of major agents of its enforcement.


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4.1. MAIN MACROECONOMIC TARGET VARIABLES UNTIL 2012

Accomplishment of strategic development objectives requires a dynamic rate of economic growth of Serbia in the decade to come. Without going into details with the structure of projections on macroeconomic growth, key target macroeconomic variables until 2012 are:

Rise in BDP – according to the projected scenario of a 7% average growth until 2012, GDP would increase to $56.5 bn until 2012 or $7,935 per capita. In real categories (in constant prices) GDP would rise by 61% until 2012.

• Employment – would rise by 5.9% or by 140,000 persons, which would lead to a 15.5% fall in unemployment.

• Investment – would increase from today’s 17.3% to 25% of GDP in 2012. The inflow of about 3 bn on average annually of FDI is necessary.

• Export of goods and services – increases from 25.4% to 40% in 2010 and to 45% of GDP in 2012.

• Net exports (balance of goods and services) – projected model-based successive decreasing of the deficit of goods and services in GDP to 17.5% in 2010 and 16.7% in 2012.

• Imports – grows annually by about 15.3% on average. • Deficit in the balance of current transactions in GDP decreases from 8.3% in 2012. • Collective consumption – from 20.6% of GDP in 2005 drops to 17.8% in 2012. • Inflation – gradually decreases: to below 5% annually over the period after 2009. • Productivity – would rise by 40%. • Consumption – an average real growth of consumption stands at nearly 6%.

Fulfillment of projected goals cannot be managed automatically, i.e. without the implementation of extensive system and structural changes that will be enabled through coordinated macroeconomic and structural policies. Although realization of target variables will depend on many factors, main risks, in fact the riskiest pre-requisites are the following:

• First, the necessity to achieve high annual inflows of FDI for the export strengthening. In the first years a substantial portion of the investment might be generated through privatization processes, but in the years to follow an ever larger portion of envisaged FDI should be realized through greenfield investment. This brings the creation of favourable business climate for foreign investors to the fore and it entails sweeping reduction of the country risk. These are prerequisites for efficient management of this risk;

• Second, very ambitious growth rates of the export of goods and services have been envisaged. They should exceed corresponding growth rates on the import side, so that the deficit of the current account by the end 2012 would be reduced to a sustainable rate of 6% of GDP. It is quite clear that realization of this goal cannot in the long run rely on the current business developments on the world market that suit the present structure of Serbian exports ( a high share of primary products), but on structural changes and an increase in international competitiveness of entire economy;

• Third, considerable changes to the structure of distribution of generated GDP, whereby investment should be increased, including the development usage of privatization revenues at the expense of consumption. To be more precise, projected scenarios envisage substantial limiting of consumption, especially of the public one. Accomplishment of this goal is directly related to two factors: firstly, to the existence of political readiness and expert capacities for efficient preparation and realization of envisaged reforms on the expenditure side of public finances, and secondly, to the rate of economic growth that the country will realize in the next years.


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4.2. PROMOTION OF THE NEW WAY OF THINKING

Each country makes a selection of development priorities and defines the plan of realization. However, actions taken often depend on the outcome of the previously adopted actions. Whether the outcome will be favourable depends in the first place on valid choices. ‘A good strategy is the transformation of choices made on the basis of information to timely actions’10. In defining strategic development objectives of Serbia a different approach had been taken, the one that differs a lot form the previously enforced strategies. The main pillar of the new approach is competitiveness (both macro and micro).

Table 3. Representative paradigm – old and new way of thinking11

Paradigm Old way of thinking New way of thinking Thinking focusing on comparative advantages against the thinking focusing on competitive advantages

• Comparative advantage • Amount of wealth is limited and

needs to be rationed • Competition limits wealth creation • States compete • Orientation towards natural resources • Cheap products, mass production

• Competitive advantage • Wealth can be unlimited and must

be rationed • Competition aids wealth creation • Companies compete, not states • Orientation towards consumers • Complex products

5. STRATEGIC DIRECTIONS OF ECONOMIC DEVELOPMENT 5.1. COUNTINUATION OF INSTITUTIONAL REFORMS

The implementation of institutional reforms aims to establish a stable and efficient market system and competitive economy, and close the process of transition. Serbian economy is undergoing the process of building market-based doing business and system-based prerequisites for its smooth functioning, so that higher growth rates that can be the basis of macroeconomic and social stability would be achieved. Also, in parallel with this the processes of harmonization of economic and legal systems, as will as processes of adaptation of infrastructure to standards of the EU evolve, the final aim of which is the EU accession. Economic policy is focused on the acceleration of structural reforms that ensure economic growth and increase in employment and standard of living.

Serbia has over the past five years of economic transition completed the first phase of reforms, during which macroeconomic stability was established and grounds built for the second phase of reforms the focus of which will be the economic growth and structural changes. Legal safety of economic entities has been upgraded and conditions for doing business particularly important for investors from abroad improved. The value of an average annual transition index rose from 1.6 in 2000 to 2.7 in 2006.

Such a claim is best affirmed by transition indicators of the European Bank for Reconstruction and Development (EBRD) on the basis of which it is possible to analyze the progress made in structural and institutional reforms in 2006 for 28 transition countries. The comparison of an average annual transition index among 20 European transition economies indicates that in 2006 there were 16 countries (range 2.9-4) more developed than Serbia (Index 2.7), while only Belarus, BiH and Montenegro had weaker results. The group of most advanced transition economies comprises Estonia, Czech Republic, Slovakia and Poland (3.9-3.7). With respect to the degree of enforced reforms, Serbia was overcome by Moldavia and Albania (2.9), Ukraine and Russia (3.0).

Serbia in 2006 made progress in two fields: (1) privatization of small enterprises, and (2) competition policy. However, the greatest lagging behind is still in the field of competition policy (1.7). Transition EBRD indicators are affirmative of the fact that Serbia has successfully completed the 1st transition phase.

10 Fairbanks and Lindsay (1997), p 125. 11 Ibid, p 238.


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5.2. RISE IN INVESTMENT

The current investment activity, vis-à-vis development requirements, is at a low level and compared to 1990 was substantially down on the production activity (it is estimated that the real level of investment in 2006 equaled only one third of the level realized in 1990 and the real level of GDP about 65%). Investments over the period 1990-2003 were decreasing at an average annual rate of 10.4%. A steep fall of investment is indicative of technical and technological obsoleteness of production capacities. In the period 2004-2006 a real growth of investment activity was registered. The rise in investment in economic infrastructure and new technology and equipment are the basic prerequisite for achieving higher growth rates of GDP, rise in competitiveness and exports.

What is important is that in the structure of the total investment the share of investments of the private sector considerably rose from 20.3% in 2000 to 50.1% in 2005. It can be inferred that the rise in private investments can largely be attributed to the privatization process. In the structure of the total realized investments n fixed assets in 2005, the largest share was on the part of industry (21.3%) and trade (16%).

A stable economic, financial and political system (stable in macro-economic terms) as well as ensured legal safety of the property and invested assets are critical pre-conditions for the creation of favourable investment climate. In the period 2001-2005 institutional framework pertinent to investment was partly completed. It is estimated that the share of investment in GDP in 2005 stood at around 17%, which is very low in comparison with EU-10 member states and neighbouring countries: Bulgaria (23.8%), Romania (23.1%), and Croatia (29.3%). It takes investment of about 25% of GDP to surmount technological obsoleteness and achieve economic growth.

A key role in the fulfillment of strategic goals is played by foreign direct investment, both through the promotion of overall production and reduction of poverty, creation of new jobs and rise in exports, and through the transfer of new technology and promotion of corporate management. In 2005-2006 investment climate in Serbia markedly enhanced, which resulted in an increased inflow of FDI. In 2006 FDI amounted to USD 4.4 bn (in the period 2001-2005 the total of USD 4.5 bn).12

Experiences of Central Europe transition countries demonstrates that key factors that led to the rise in FDI were enhanced investment climate, tighter regulations on commercial and financial doing business, and diminishing of the political risk. FDI in Central East Europe are still concentrated in Poland, Czech Republic and Hungary. The share of the volume of FDI (Stock) in GDP in our country is 20.7% and far below the EU-25 average (33.5%) and the average of South East Europe (26.7%). FDI per capita (USD) for the period 1995-2005 amounted to: in Romania 1020, Bulgaria 1292, Croatia 2814, Hungary 3781, and in Serbia only 670. The inflow of FDI in Serbia in 2006 per capita was about USD 540.

Attraction of a larger volume of FDI requires open economy and sound market environment. The creation of favourable climate for foreign investment surpasses ‘standard’ macroeconomic prerequisites. FDI require implementation of development policy void of interventions on the part of bureaucratic bodies and certainly free of lengthy administrative procedures with registration, employment, exports, profit repatriation, provision of necessary legal protection, etc. Besides, transparent and right legislation as well as the existence of an efficient banking and financial system are also essential.

5.3. STRUCTURAL CHANGES TO ECONOMY - PRIORITIES

Accomplishment of strategic goals of economic development of Serbia should have the following structural changes as a result. The structure of Manufacturing in 2012 should be altered to the benefit of highly technology-based industrial sections. Exports, being a key determinant of a projected macroeconomic model, would be changed ins structural terms: the share of exports of highly-technological sections would rise from 13.5% to 20%. In the period to come sections of metal, food, chemical, rubber and plastic industry should be leading export-oriented sections.

12 Viewed by economic activities, the largest portion of FDI in 2006 referred to postal and telecommunication

services (28.3%), industry (18.2%), and financial intermediation (36.8%).


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Chart 4. Export Projection of Serbian Industry

Technological structure

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2001 2002 2003 2004 2005 2012

mill EUR

low-techmedium-techhigh-tech

The degree of efficiency of projected structural changes will in the first place hinge on the

degree of accomplishment of the next objectives: (1) Reconstruction and development of production with a high degree of ‘monitoring’ of

all phases of the business cycle and a high share of domestic knowledge. Products and services hereby referred to are those few that already bear the label of a ‘Serbian product’ recognizable on the international market;

(2) The development of new economic activities based on state-of-the-art technologies and innovations. Receptive strength of Serbian economy to launch new production relies on skills of workers and positive environment that is to be fostered. In the light of this, innovativeness becomes one of the key factors of competitive production;

(3) Development of small and medium-sized enterprises. Autonomy of small and medium-sized enterprises should remain one of the criteria providing them with state aid, dominantly in the form of horizontal measures. Autonomy is not only an institutional criterion but also a prerequisite of their market independence, but also of bearing risks;

(4) Sustainable development based on social and economic efficacy; (5) Minimization of costs as the basis of a competitive offer. Competitive position of

Serbian economy is the basis of competitive re-positioning of enterprises. The speed and volume of foreign investment depend on global macroeconomic parameters of the structure of costs that pose the cornerstone of assessment of investment prospects. Therefore disciplined spending and monitoring of costs is the critical factor of competitiveness and strengthening of negotiating position in various forms of international exchange;

(6) Right validation and trade of rent of various attributive features. Hereby the position, resource, technological, scientific and infrastructural rent is referred to;

(7) Enforcement of competition among lucrative programs. Making the competition among profitable programs stronger means to develop competition for ideas. Such a deed is based on measurable parameters of the contribution to value added, human resource engagement, employment, an increase in the market share, growth of productivity, and other features of enterprise development;

(8) Taking care of balanced regional development. Taking into consideration the specificities of each region, its resources, economic legacy, and the assessment of potentials, taking care of the harmonization of local and regional development with the development of entire Serbia is a structural issue;

(9) Adjustment of the contents and form of through education and in particular of knowledge innovation. Without a new knowledge acquired and continual perfecting there can be no progress. If one lacks funds for an individual research, the skill of making use of somebody else’s knowledge is pivotal since the time horizon is a key variable. Reforms of the education system will in that sense open up new possibilities;


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(10) Building up of the system of values in line with global trends and harmonization of theory with practice. Long-term in its features, the process of adoption of new values should in particular be directed at developing the awareness of individual accountability and taking care of interactions within an environment. It is important to raise the consciousness of the national interest, but not of the one that is self-sufficient but open to wider environment that has its habits and values. This means to be recognizable and acceptable under circumstances that are partially created by ourselves, and under conditions of which we are not the creators – to accept and adapt to one’s own interests.

6. RISKS Generally speaking, risks of the non-implementation of strategic goals can be divided into

economic, social and political: • Economic risks can partly arise as a consequence of external factors that are out of control,

such as extremely unfavourable international developments on some commodity and factor markets. Another reason is the reform risk, i.e. the fact that the creation of stimulating development environment is too slow and therefore decreases mobilization and efficient allocation of production factors and thus directly decelerates economic growth. Finally, the problem might arise because of the necessary maintenance of internal and external macroeconomic equilibrium at the expense of the deceleration of economic growth;

• Social risks in the first place relate to the threat of the Government and other relevant agents, irrespective of commitments and agreed upon liabilities, yield to social pressures typical of the current transition phase. Beneficiaries of public expenditure among social activities, redundant workers, a great number of impoverished, pensioners, and other socially underprivileged can, through putting a constant pressure for their material standing to be improved, threaten reform and development orientation of the Government. As a result, all types of expenditure that are not grounded in reality begin to rise, as well as inflation and overall macroeconomic instability, which negatively mirrors on investment and entrepreneurship.

• Political risks are linked to economic and social risks. Efficient fulfillment of strategic objectives involves the creation of stable market climate, full protection of the property and contract, an efficient state and independent institutions. The Government can be exposed to pressures of many lobbies, before all monopoly and oligopoly structures from the real and financial sector to which sound competition as the most efficient environment for a fast economic growth does not appeal since thus their privileged position is endangered. The second political risk lies in populist promises for an immediate improvement of living conditions for all citizens.

REFERENCES Arandarenko, M. (2006), Mapa tržišta rada Srbije, CEVES, Beograd. Bajec, J. i Jakopin E. (2006), Nacionalna strategija privrednog razvoja Srbije 2006-2012 – polazne osnove,

izazovi, rizici, Savetovanje ekonomista Srbije, Kopaonik Biznis forum. Begovic, B. i dr (2005), Četiri godine tranzicije u Srbiji, CLDS, Beograd. Devetakovic, S. (2004), Potrebne promene sa stanovišta regionalnog razvoja Srbije, Institucionalne promene

kao determinanta privrednog razvoja Srbije, EF Kragujevac. Djuricin, D (2007), Tranzicija i dostizanje iz perspektive Srbije, SES, KBF. Fairbanks, M. and Lindsay, S. (1997), Plowing the Sea. Nurturing the Hidden sources of Growth in the

Developing World, Harvard Business School Press, Boston, Massachusetts. Human Development Report (2006), UN, New York. Jakopin, E. (2005), Konkurentnost u senci siromaštva, MEF, SES and SECG. Kelly, K. (1998), New Rules for the New Economy, Penguin Group, London. Konkurentnost privrede Srbije (2005), Jefferson institute and Ekonomist, Beograd. Petrovic, P. (2007), Okruglo sto: ciljanje inflacije, apresijacija dinara i spoljna ravnoteža: 2006. i izgledi za

2007, Ekonomski fakultet, Beograd /www.fren.org/ Proposals for Improvement of the Investment Climate in Serbia (2006) FIC, Belgrade. Republički zavod za razvoj (2006), Nacionalna strategija privrednog razvoja Srbije 2006-2012, Beograd, 2006.

/www.razvoj.sr.gov.yu/ The Global Competitiveness Report (2006), WEF. World Investment Report (2006), UNCTAD.


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SERBIA FACING THE CHALLENGE OF SUSTAINABLE DEVELOPMENT

Biljana Jovanović Gavrilović1

Abstract: The paper begins with a brief overview of the evolution of understanding of development in the post-war period – from traditional approach to development, which is characterized by the obsession of economic growth, to contemporary view on development embodied in the concept of sustainable development. Then, a more detailed definition of the term „sustainable development“ is given, which itself has evolved with time. The substance of this approach to development is to provide continuity of developing process, while paying respect for interests of present-day and future generations. In early discussions regarding the subject of sustainability ecological aspect was prevailing, but gradually this concept has broadened so that nowadays it encompasses another two important components as well – economic and social. In addition to substantial ones, procedural elements of sustainable development also attract attention. They refer to the manner of policy creation and decision-making, along with consultation with experts and wide public participation.

In view of a low level of economic development of Serbia, which is supported by relevant data in this paper, economic development is imperative for our country. The question, however, arises in terms of what kind of development should it be and which purposes should it serve. Since Serbia left behind itself a multi-decade experience of unsustainable development based on «temporal opportunism», i.e. aptitude to achieve the highest possible production results in as short period as possible, even at the cost of slowing down economic dynamics drastically in the long run, the orientation towards sustainable development seems to be a logical choice. In favour of this speaks the fact that sustainable development was accepted as the goal of the European Union in 1997, and thereafter the Strategy of Sustainable Development of the EU was adopted, which represents one of its most important documents.The idea of sustainable development has been present in our country over a rather long period. What is late, however, is the implementation of this concept. It is not until recently that the work on the Strategy of Sustainable Development of Serbia has started, and enactment thereof is soon to be expected. That strategy should be a basis for securing dynamic and high-quality economic development of our country in the years to come.

KEY WORDS: SUSTAINABLE DEVELOPMENT, POVERTY, ECOLOGICAL PROBLEMS, ECONOMIC GROWTH, HUMAN WELFARE.

1. INTRODUCTION

This is an exciting time for those of us who are dealing with economic development issues. We are witnessing substantial changes occurred over the last fifteen years or so, not only in the real world that surrounds us, but also in the “world of ideas”, i.e. considerations on development.

Regarding the first group of changes it is obvious that one big experiment failed. There were two systems, two theories and ideologies fighting for “hearts and minds” of people around the world for a long time. The collapse of socialist economies marked an ending of one big experiment in the field of social engineering, but also a beginning of another – post-socialist transition that led to big changes on both political and economic stage of the Eastern European countries and the former USSR. Failure of socialist economies was for some people a signal to banish the state out of the economic life and to give full freedom to the market in fostering economic development. Role of the state is, however, a purely practical matter, not an ideological issue, and cannot be resolved in general terms. It varies depending on the level of economic development of a country, external conditions, even the very capability of the state.

Let us also mention that there were various successful examples of economic development in the last decades and even before. Economies of Eastern Asia wrote the most impressive story on development over the last half of century regardless of the financial crisis in 1997. China, too, has achieved substantial economic success lately relying on a strategy that includes a limited dose of liberalisation, market and privatisation. Development proved to be possible, but not inevitable or easy. There is no magic formula to guarantee success. What works in one set of circumstances may not in another. This, of course, does not mean that lessons cannot be learned from someone else’s experience. Lessons can be drawn from good, but also from bad examples.

1 Faculty of Economics, University of Belgrade, Serbia.


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The third important change regarding economic development is globalisation of the world economy. Globalisation has a long history, but a dramatic speedup of this process has occurred only recently, in the last fifteen years in particular. A parallel course to strengthening of international connections in the economic sphere, but also in other domains (culture, art, etc.) is taken by the process of localisation within national states, implying demands for autonomy and forcing of the local identity. Globalisation and localisation are phenomena that should not be ignored by any development agenda. Movement towards globalised and localised world with much more players and votes above and below the national state level demands from some governments to set up a dynamic balance at the international and national level in order to provide stable conditions for development programmes implementation.

When it comes to changes in the “world of ideas”, it should be emphasised that over the last ten years the perception of economic development has substantially changed. Sustainability of the development process has become increasingly interesting as well as its contribution to improvement of human welfare. The awareness that economic efficiency and growth are the means to meet various needs of people (primarily basic needs of the poor, who should be given overriding priority) rather than goals per se has become stronger.

New view on development has become prominent in the modern concept of sustainable development, which places man in the centre of attention as well as meeting his needs now and in the future. In this process economic needs are taken into account, together with needs for clean environment, education, health care, favourable opportunities for employment, etc.

Global ideas on development are born in globalisation conditions. The concept of sustainable development is the same, and pretends to become a universal development paradigm relevant for all countries of the world, including Serbia.

2. SUSTAINABLE DEVELOPMENT CONCEPT 2.1. HISTORICAL BACKGROUND

The traditional approach to development, which marked 50ies and 60ies of the last century, was characterised by a specific obsession with economic growth. At the height of post-war expansion of production that affected developed and developing countries, growth rate came to the foreground as the main indicator of development performances. Increase of production became a major concern of the society, some kind of a goal per se, in which process the integrity of social goals was disrupted.

Certain number of authors drawn attention back in the fifties on the undesirable effects of such understanding of economic growth.2 These warnings, however, did not question the generally favourable impression on the growth. At the end of the sixties a feeling of satisfaction, created by post-war conjuncture, was gradually replaced by disappointment caused by socio-economic and environmental consequences of increased production. A very stimulating book by E. J. Mishan appeared in that period, where the author draws attention to costs of the economic growth, coming forward against increase of production as a goal per se. If we are primarily interested in improving human welfare, than only those forms of growth that make contribution to achievement of such goal are legitimate and acceptable, while others should be discarded.3

Failure of the economic growth to contribute to a tangible improvement of welfare of the general population, particularly in the developing country, made an impact on changing the very understanding of economic development at the beginning of the seventies. Development is redefined so as to include reduction or elimination of poverty, inequality and unemployment in growth conditions. “Redistribution with growth” became a usual slogan of that time that corresponded to the title of a book published in 1974 by a very influential group of authors headed by H. Chenery.4 It is

2 See: Fourastié (1951), Mécanisme et bien – être, Universitaires de France, Paris; J. K. Galbraith (1958), The

Affluent Society, London. 3 Mishan (1967), p. 37-38. 4 Chenery et a1. (1974).


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worth mentioning that the same year another important work appeared which unjustifiably attracted far less attention. That was the article by L. Lefeber, who also advocated a new approach to development.5 This author, however, does not insist that much on the need to balance income distribution between different social groups as a goal per se, but more on the need to sustain the very process of economic growth, which is particularly important bearing in mind the later flow of ideas on development.

At the end of the sixties and the beginning of the seventies environmental problems gained more interest, thus giving a new dimension to discussions on development. This was affected first of all by unfavourable state of the environment caused by economic growth, but also by the fear of shortages of basic natural resources the modern production is based on. The UN Conference on Human Environment was held in Stockholm in 1972 under the slogan “only one Earth”, which symbolically expresses interdependence of life cycles, i.e. common destiny on this planet. A study “The Limits to Growth” was published the same year, after which an animated debate took place in the scientific world on the possibility and desirability of a continuous expansion of production.6 Ones advocated stopping the growth, while others asked for more account to be taken of ecological aspects of production increase. The prevailing belief is that the growth itself is not a problem. Quite the contrary, if understood correctly it is a solution.

Since the middle of the seventies the literature was showing more and more a belief that redistribution with growth is not sufficient to guarantee better welfare of the part of population living in the absolute poverty (in developing countries above all, but also in other areas of the world). This helped a new approach on development to be articulated, which was based on the basic needs. Orientation towards meeting the basic needs not only means a direct attack on the poverty, but at the same time contributes to the increase of labour productivity, which supports the process of economic growth.

During the eighties the impact of this development paradigm weakened and eventually, in the recent times, the approach to development relying on the basic needs was entirely abandoned. Although the term “basic needs” can hardly be found today, the idea itself still lives. This is witnessed by the modern concept of sustainable development in which the idea of basic needs holds its place.

2.2. EVOLUTION OF SUSTAINABLE DEVELOPMENT UNDERSTANDING 2.2.1. MAJOR DIRECTIONS OF CHANGES

The concept of sustainable development was first mentioned in the “World Conservation Strategy” from 1980.7 This strategy advocates a development model that will take care of natural resources important for people’s survival and their welfare. Definition of the sustainable development puts an emphasis on preservation of the critical natural capital and biodiversity, while the economic and social dimensions of the sustainability are almost completely neglected. The term sustainable development did not become widely used until publishing of the World Commission on Environment and Development Report (known as Brundtland Commission) in 1987, titled “Our Common Future”. Sustainable development is there interpreted as a “development that meets the needs of present without compromising the ability of future generations to meet their own needs”.8

This definition was quite anthropocentric and oriented towards meeting people’s needs in present and in future, and not towards environmental protection.

Sustainable development, as seen in the Report of Brundtland Commission, brings together two key concepts: (1) the concept of needs, in particular the essential needs of the poor, to which

5 L. Lefeber , “On the Paradigm for Economic Development”, in A. Mitras (ed.) (1974), Economic Theory and

Planning, Oxford, according to: Hunt (1989), p. 72-73. 6 See: D. H. Meadows et al. (1972), The Limits to Growth, Universe Books, New York. 7 IUCN (1980), World Conservation Strategy – Living Resource Conservation for Sustainable Development,

IUCN-UNEP-WWF, Gland, Switzerland. 8 World Commission on Environment and Development (1987), p. 43.


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overriding priority should be given and (2) the idea of limitations imposed by the state of technology and social organization on the environment′s ability to meet present and future needs.9 There is no conflict between development and preservation of the environment, as indicated in the Report. Sustainable development concept provides a framework for integration of environmental policy and development strategy, thus crushing a belief that environmental protection can be achieved only at expense of the economic development.

Since the aforementioned Report was published, many countries and international organisations have agreed upon the urgent need to conduct a policy that will help to achieve more sustainable forms of development. OECD was particularly active in promoting sustainable development. This is supported by the fact that a three-year project (1998-2001) was launched within this organisation with the aim to help its member states, as well as other countries, to follow the way of sustainable development. Activity of OECD has continued even upon termination of the mentioned period.

At the United Nations Conference on Environment and Development, held in Rio de Janeiro in 1992, sustainable development was accepted as the goal of many countries of the world which signed the Agenda 21 – a comprehensive action plan to achieve sustainable development in the 21st century. It is worth mentioning that on that occasion agreements on global environmental problems, such as climate changes and biodiversity, were reached. Along with representatives of various governments, the Conference was also attended by numerous nongovernmental organisations. Owing to this the spirit of cooperation in solving environmental issues was manifested, as well as increasing importance of “participation” in dealing with sustainable development. The aim of the Conference was to reach a consensus on how to harmonise economic development with the need to protect the environment at global level.

Other changes in approaching sustainable development have been noticed since the mid-nineties. The emphasis is now laid on social not environmental issues, and a demand for simultaneous achievement of economic, social and environmental goals is manifested. The win-win-win approach, in which all three dimensions of the sustainable development are united and potential conflicts reduced to a minimum, is obtaining more and more support. Such a comprehensive approach to sustainable development has its origins in the Report of Brundtland Commission, and was manifested at the Conference in Rio de Janeiro.

Further on the three-dimensional concept of sustainable development gains a wider support. For instance, “Guidance in Preparing National Sustainable Development Strategy” adopted within United Nations in 2001, clearly indicates that sustainable development covers three key dimensions: economic growth, social justice and protection of environment.10

Sustainable development concept was reaffirmed as an important issue of the international agenda of the World Summit on sustainable development in Johannesburg in 2002. The emphasis was moved from solving global environmental issues like climate changes and biodiversity to fighting poverty.

The key word for the economic dimension in this new three-dimensional approach is “efficiency”, for the environmental dimension it is “resilience” and for the social dimension “equity and pluralism”. Such a broad approach creates a problem of its measuring. In this respect, sustainable development is related to stocks of capital – natural, human and produced. Potential to meet the needs of current and future generations depends primarily on the availability of capital. One condition for sustainability is to preserve the total stocks of capital, with the presumption that there is neither technological progress nor population growth. The key question is to what extent different components of the total stocks of capital are replaceable by each other. That is the context where a difference between “weak” and “strong sustainability” is made. According to the concept of weak sustainability, the total stocks are important, and substitution between certain components of these stocks is possible 9 Atkinson (1997), p. 1. 10 Commission on Sustainable Development (2001), p. 7.


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and desirable. Strong sustainability, however, relies on a conviction that there is no substitute for some types of natural capital, so these stocks need to be governed with caution.

Beside the essence of sustainable development, that was previously discussed, the procedural side of this concept is attracting more attention. Procedural aspect implies sustainable development to be seen as a way to achieve changes not as the final goal. Accordingly, the emphasis in moved from substantial goals and indicators to factors that influence decision-making (organisational culture, availability of information, the rationality of decision-making, impact assessment methods).

2.2.2. MODERN PERCEPTION OF SUSTAINABLE DEVELOPMENT

Relying on previous considerations, this section presents important characteristics of the modern approach to sustainable development.

It is a fact that today a quite clear distinction is made between essential and procedural elements of the sustainable development. Essentially, sustainable development includes three dimensions: economic, social and environmental. Early discussions on sustainability were dominated by the environmental aspect, but over time the concept was broadened to cover the other two important components as well – economic and social aspects. Harmonised progress in economic, social and environmental sphere is exactly what makes the essence of the modern approach to sustainable development.

Different dimensions of sustainable development are interdependent. Research confirms that these connections are strong, numerous and complex. Economic, social and environmental goals may develop synergy up to a certain extent. But they do not support each other; in certain circumstances they are even each others competition. In that case, the concept of sustainability demands to establish adequate balance between mentioned goals. Undertaken measures related to one of them must provide respect of at least minimum standards that are relevant for the other two goals.

Sustainable development is not against growth, as it is sometimes wrongly perceived. On the contrary, growth is important from sustainable development point of view, but not any growth and not at all costs. The key value of sustainable development is contained in concerns for quality of economic growth, just as well as for its quantity. Sustainability concept opens the question of character of the economic growth, but does not impose physical or technological barriers to production increase. Solution for the problems of environment is not to stop growth but to shape new sustainable models of economic expansion. Zero growth may also be fatal for the environment, as well as fast increase of production.

Sustainable development concept involves inter-generation and intra-generation justice. Inter-generation justice used to be a priority, but having moved the emphasis from environmental to social problems, intra-generation justice was made the centre of attention.

Inter-generation justice lades to allocate resources in such a way that welfare achieved today does not endanger the possibility of achieving welfare in the future. Future generations must have available sufficient stocks of capital that would help them create at least the same level of welfare we have today. Intra-generation justice basically means that all people should be given a chance (provide access to resources) to achieve at least the minimum level of welfare that is considered acceptable in given social circumstances.

The procedural aspect of sustainable development refers to the manner of creating policy (how it is reached, not what is the observed policy per se like). This assumes respecting experts’ opinion, but also broad participation of the public. The procedural aspect is oriented towards demystifying scientific-technological paradigm “experts know it all”.


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3. SUSTAINABLE DEVELOPMENT OF SERBIAN ECONOMY 3.1. ATTAINED LEVEL OF ECONOMIC DEVELOPMENT OF SERBIA

Starting from the fact that even in conditions of globalisation each state is the most qualified to take care of its own development, we will briefly see what are the results achieved by Serbia in the recent period.

The entire decade of the nineties can be seen as lost for our country in views of economic development. During that period intervals of economic precipitation and production growth took turns, but the final balance is very unfavourable – Serbian gross domestic (material) product in 1999 was reduced to a bit more than two fifths (42%) of the level from 1989.11

During transition, that has been ongoing since the end of 2000, there was no decrease in production as it was announced by some economists, but rapid rise, many people hoped for, also failed to be reached. Data for Serbia shows that in the period from 2000 to 2006 the annual growth of gross domestic product reached 5.3%.12 A more detailed analysis shows that in the first three years of transition moderate and even decreasing GDP growth rates were recorded. Economic growth was speeded up in 2004, while in 2005 a relatively high yet a bit more modest growth rate of 6.2% was reached. It is estimated that corresponding data for the year of 2006 amounts to 5.8%.

Configuration of the growth rates shows a quite ununiform movement of production. Two subsequent years (2003 and 2004) recorded extreme (minimum – 2.5% and maximum – 8.4%) values of this indicator in the observed period.

As a result of economic growth achieved in Serbia in the period 2000-2006 the level of gross domestic product increased more than four times in size, i.e. from approximately 1,000 dollars in 2000 to around 4,200 dollars in 2006.13 Data of the World Bank on the level of gross national income (GNI) per capita can be used for international comparisons of the achieved degree of economic development of one country. This data shows that GNI per capita exceeded the limit of 3,596 dollars in 2006 in Serbia, placing our country among those with a higher middle income. Of all former Yugoslav republic Croatia was placed in the same group; Bosnia and Herzegovina and Macedonia still remained with a lower middle income, while Slovenia became one of the industrialised countries with high income long time ago (more than 11,115 dollars).14

Dynamic economic growth in our country is followed by significant changes in the economic structure. These changes were marked by an increased share of services in the gross value added (from 49% in 2000 to 56.7% in 2005), with simultaneous decrease in industry’s share (from 30.3 to 24.4), while the position of agriculture remained almost unchanged (15.6% in 2000 and 15.3% in 2005).15

The period 2001-2006 is characterised by relative price stability in Serbia. Inflation, measured by retail prices, was reduced in 2006 from 40.7% in 2001 to 6.6% in 2006.16 This is an important result, especially if taken into account that it was achieved in conditions of growing prices of crude oil and corrections of price disparities. Stability of general price level was helped by stability of foreign exchange and a continuous growth of foreign reserves.

Investments were, without any doubt, one of the key factors of economic prosperity in the countries in transition. Data shows that gross fixed investment rate in Serbia increased from 10.4% in

11 Calculated on the basis of data from the Statistical Yearbook of Serbia and Montenegro (2003), p. 128. 12 Calculated on the basis of the Statistical Office of the Republic of Serbia (2006), Revision of gross domestic

product, p. 2 and Statistical Office of the Republic of Serbia (2007) Quarterly gross domestic product, in constant prices 2002, the first quarter 2007, p. 3.

13 Ministry of Finance (2007), Public Finances Bulletin, May, p. 56. 14 World Bank (2007), World Development Indicators database. 15 Group of authors (2006), National Economic Development Strategy of Serbia 2006-2012, Government of the

Republic of Serbia, Belgrade, p. 9. 16 Ministry of Finance a (2007), Public Finances Bulletin, May, p. 56.


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2001 to 17.9% in 2006, but still remains relatively modest.17 Share of fixed investments in the gross domestic product of our country should not be less than 20-25%, bearing in mind the need to solve issues of unemployment and technological underdevelopment.

In conditions where domestic savings are low in relation to the needs for financing investments, foreign direct investments (FDI) deserve a special attention. Serbia has attracted a relatively little FDI in comparison to some other countries of the southeast region of Europe. During the last two years an improvement of investment climate was recorded in our country resulting in an increased inflow of foreign direct investments (1.5 billion dollars in 2005 and 4.4 billion in 2006).18 Many things are yet to be done regarding this matter in order to encourage domestic and foreign investments and provide a dynamic and sustainable growth and development.

Deficit of the current balance of payments is the basic macroeconomic imbalance in Serbia. It mostly results from a high foreign trade deficit, which is caused by import of goods substantially higher than export. Participation of the current transactions deficit in the gross domestic product varied in the period 2001-2006, amounting in 2006 to 12.3%.19

Data of the World Economic Forum for 2006 shows the competitiveness of Serbian (and Montenegrin) economy to be low. Our economy took 87th place out of 125 analysed countries by the height of global competitiveness index. Its position is somewhat worse than in the previous year when it took 85th place, but much better than in 2004 when it was placed in the 96th position. Taking into account only countries that are on the way to join the European Union, Croatia and Macedonia were ahead of Serbia taking 51st and 80th place respectively, while Bosnia and Albania were behind, taking 89th and 98th place respectively.20 Global competitiveness index relies on nine pillars: institutions, infrastructure, macroeconomy, health and primary education, higher education and training, market efficiency, technological readiness, business sophistication and innovation. Macroeconomy is the weakest point of our country, while the strongest are higher education and training.

As perceived by the World Economic Forum, competitiveness of a country includes a set of factors, policies and institutions that determine the level of its productivity. Productivity growth, i.e. better usage of available factors and resources, affects rate of return on investment, which, in turn, determines the aggregate rate of economic growth. Thus, a more competitive economy is expected to achieve faster growth in the medium and long term. In the end, competitiveness is manifested through ability to achieve a dynamic and sustainable economic growth and development over time.

Economic development is aimed at meeting people’s needs as much as possible, i.e. at increasing their living standards. This is why the achieved level of development of one economy is ultimately confirmed through results realized in that field.

Living standards in Serbia have been improved over the last six years of transition. According to data, real wages in our country recorded an average annual increase of 14.4% in the period 2001-2006, which is above the growth of gross domestic product and labour productivity.21 Along with wages, pensions also increased but usually at a somewhat slower pace. So, the real pension growth amounted to 9.5% in 2006.22

The total employment in Serbia had a decreasing tendency. Reduction of employment also occurred in 2006 for 1.9%. The rate of registered unemployment in the period 2001-2006 increased from 26.8% to 33.1%.23 If the upper “acceptable” unemployment rate in the modern market economies 17 Idem. 18 Idem. 19 Idem. 20 World Economic Forum (2006), The Global Competitiveness Report 2006-2007, p. XVII. 21 Jakopin et al. (eds.) (2007), Report on Development of Serbia 2006, Republic Development Bureau, 2007, p. 14. 22 Ministry of Finance (2007), Public Finances Bulletin, p. 56. 23 Jakopin et al. (eds.) (2007), Report on Development of Serbia 2006, Republic Development Bureau, Belgrade,

p. 76 and 78.


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amounting to 4-5% is taken into account, then it is not hard to understand how serious the problem of insufficient employment of the labour in our country is. Yet, high unemployment rates in Serbia can be at least partially explained by methodological reasons related to the way of determining the number of employed and unemployed. If methodology of the International Labour Organisation is applied in calculation of the unemployment rate, i.e. if data contained in the Labour Force Survey are taken into account, then the percentage of the unemployed is considerably lower – 12.2% in 2001, and 20.9% in 2006.24

Poverty in Serbia has been moderated to a certain extent after 2000, but it still remains one of the key problems our country is facing. In 2006 8.8% of Serbian population was below the line of poverty established at the level of 6,221 dinars a month per unit of consumption.25 Depth and severity of poverty in our country are not particularly marked, which is in conformity with relatively low disparity consumption/income (Gini coefficient calculated on the basis of consumption amounted to 0.25 in 200526).

Human development index (HDI) defined by the United Nations Development Programme can be used for synthetic observation of economic and social results achieved by Serbia in the recent period. This is an aggregate indicator that expresses average achievements of one country in the domain of: health, education and living standards (measured by the size of GDP per capita expressed in international dollars). Value of HDI goes within the interval from 0 to 1 and shows the distance a country has crossed on its way to maximum possible value of this index, i.e. unit.27

Research shows that in 2004 HDI in Serbia amounted to 0.811. According to this, our country was 56th among 178 countries of the world, for which corresponding data is available.28 Judging by the value of HDI in 2004, Serbia entered in the category of countries with high level of human development. Of all former Yugoslav republics, Slovenia (0.910) and Croatia (0.846) came before our country, while B&H (value of HDI in this country was at the very limit that sets aside high and middle level of human development – 0.800) and Macedonia (0.796) came behind.29 It is important to point out that Serbia is better positioned in terms of the level of HDI than the level of GDP per capita (there is a difference of 13 places between GDP per capita rank and HDI rank30), which means that it was relatively successful in translating income into human welfare. Some authors draw attention to the need to include environmental component into HDI in order to obtain a broader measure of developmental results, but satisfactory solutions have not been found yet.

The environmental aspect of development in Serbia can be judged on the basis of numerous indicators witnessing the state of air, water resources, land, waste management, preservation of biodiversity, etc.31 Without going into a more detailed analysis, it can be concluded that Serbia has inherited bad quality of environment from the previous period (especially in certain locations), as well as inadequate policy framework referring to environmental protection. Only 0.3% of the gross domestic product was allocated in 2005 for this purpose. At the same time, degradation of the

24 Idem, p. 78. 25 Calculated on the basis of the Household Budget Survey in Serbia in 2006., www.prsp.sr.gov.yu 26 Statistical Bulletin (2007), Empirical consumer basket and Indicators of Standard, 2001-2006, Statistical Office of the Republic of Serbia, p. 47. 27 More detailed explanation on the methodology to calculate HDI can be found in: UNDP (2006), New York, p. 394. 28 Our country’s rank was established on the basis of comparing HDI values for Serbia, calculated in the

Republic Development Bureau, with values of 177 countries covered in the “Human Development Report 2006” published by UNDP. This is not an officially confirmed result, because data for HDI in Serbia were not obtained through official international procedures used in other countries.

29 UNDP (2006), p. 283-286. 30 Calculated on the basis of data taken over from: Jakopin et al. (eds.) (2007), Report on Development of Serbia

2006, Republic Development Bureau, Belgrade, p. 58 and UNDP (2006), p. 283-286. 31 See: Serbian Environmental Protection Agency (2006), Report on the State of the Environment in the Republic

of Serbia, 2005, Belgrade.


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environment, as estimated, causes annual expenditures for Serbian economy, amounting to between 4.4% (conservative scenario) and 13.1% (maximum scenario) of GDP from 2005. The major part was caused by air pollution (53% of the total expenditure), then water contamination (22% of the total expenditure) and waste management (11% of the total expenditure).32

3.2. IMPORTANCE OF SUSTAINABLE DEVELOPMENT FOR OUR COUNTRY

Summing up development results achieved by Serbian economy after 2000, we can conclude that the process of economic growth and development was initiated in the conditions of market reforms implementation – transition by the model of reform with growth and not reform then growth. The general impression is that the process of transition began in an insufficiently organised manner, without a clearly defined sequence of moves and dynamics of changes, without a new development philosophy and development strategy based on such philosophy, which strategy would represent a framework for adoption of a consistent macroeconomic and development policy. Lack of clear and generally accepted strategic landmarks in achieving development process can be brought into connection with the neoliberal approach also typical for other countries in transition at the beginning of the nineties, but that approach has been overcome to a large extent.

Interest in defining development strategies was brought to life in our country in the last couple of years, but there is a lot of irrationalities and overlapping in that respect that could have been avoided. The “National Economic Development Strategy of the Republic of Serbia for 2006-2012” was adopted at the end of 2006, and was preceded by development of numerous sectoral strategies. The following basic development priorities were singled out: sustainable economic growth, raising competitiveness of the economy, development of a knowledge-based society, balanced regional development and accession to the European Union. The “Sustainable Development Strategy of the Republic of Serbia” is currently being developed, and is expected to be completed soon. This strategy should be the base to harmonise economic, social and environmental components of development and solve economic and social problems, as well as environmental problems.

Bearing in mind the low level of economic development of our country, that has not even reached its gross domestic product from 1989 yet, economic development is imperative for Serbia. However, the question is raised about what kind of development should it be and what goals should support.

Orientation towards sustainable development is a logical choice for our country, taking into consideration its multi-decade experience of unsustainable development that demanded high expenditures and counted on short-term effects, even at the cost of drastic slowdown of economic dynamics in a longer period of time (development in present at the expense of the future).

This concept is supported by the fact that sustainable development was accepted as the key goal of the European Union by the Amsterdam Treaty signed in 1997. Since Serbia tends to join the EU, the aforementioned moment is very important for us. The European Commission made additional effort in 2001 to translate the vision of sustainable development into operational strategy that identifies main threats to sustainable development and gives specific proposals and recommendations on how to improve efficacy of the policy and ensure sustainability of the development process. Recognising the importance of both internal and external factors, the European Council added external dimension to the Strategy in Barcelona in 2002, committing the European Union to take over the leading role in affirmation of sustainable development at global level. The main goals mentioned are: harnessing the globalisation process – ensure that globalisation makes contribution to sustainable development; fight poverty and promote social development; and sustainable management of natural and environmental resources.

During 2004-2005, the European Union Sustainable Development Strategy was re-examined in the light of new circumstances – terrorism threats, natural disasters, new threats to people’s health, expansion of the EU, adoption of national sustainable development strategies in majority of the member states. This resulted in adoption of the Renewed EU Sustainable Development Strategy in 32 Idem, p. 12-13.


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June 2006. This is an ambitious and comprehensive document for expanded EU that gives answer to the question of how the European Union will face challenges of the sustainable development in the most effective way. The Renewed Strategy reaffirms the importance of global solidarity and recognises the importance of closer cooperation with partners outside EU, including dynamic economies that will have a substantial impact on achieving sustainable development worldwide.

The innovated Lisbon Strategy33, which is compatible with the EU Sustainable Development Strategy, was also adopted in 2005. While the Sustainable Development Strategy primarily deals with the quality of life, intra-generation and inter-generation justice and harmonisation of policies from different domains, the Lisbon Strategy gives important contribution to realisation of sustainable development by focussing on actions and measures to increase competitiveness, stimulate growth and create new jobs. The European Union needs a dynamic economy in order to achieve broader economic, social and environmental goals.34

The idea of sustainable development has been present in Serbia since the end of the eighties. The first attempts of its legal regulation date back from the beginning of the nineties. Taking into account recommendations of the Rio Conference, our country adopted back in 1993 the Resolution on Environmental Protection Policy and the Resolution on Preserving Biodiversity Policy, which were along the lines of sustainable development implementation. Among other, Serbia took an active participation in the Summit in Johannesburg in 2002, where it showed its determination in implementing the Agenda 21 and sustainable development. But practical application of this concept runs behind schedule. The basic prerequisites for the achievement of sustainable growth and development in our country are: provision of a considerably larger scope of investments, creation of new economic structures with competitive production and service programmes and cooperation between Serbian and foreign companies on a partnership basis, raising quality of work and increasing productivity, introduction of new (especially, information) technologies, greater investment in scientific research, sustainable management of natural resources, greater investment in human resource development.35

Sustainability principles should be incorporated into both strategy and policy of the economic development of Serbia. Instead of partial and insufficiently coordinated political solutions that affect economic, social and environmental dimensions of the development, what we need is an integrated set of policies that will jointly act towards improvement of human welfare. This will lead to creation of conditions to take into account interactions between the aforementioned key dimensions of the sustainable development when formulating different political interventions. Measures undertaken to affect one of three dimensions (economic, social or environmental), without conducting proper research on the effect that dimension has on the other two, can cause unforeseen consequences and costs.

Sustainable development cannot be implemented without good management, which ensures that different (economic, social, environmental) priorities are based on a broad consensus in the society and that votes of the poorest and most vulnerable are heard in creating decisions on allocation of development resources. Responsibility for achievement of sustainable development is mostly born by the state, but other institutions from the domain of private sector and civil society should also become active partners in that process. The state should create a favourable environment for achievement of that kind of development, i.e. establish and maintain a sustainable, effective and just legislative-regulatory framework within which the economic activities will be carried out. Business activities and income are mostly generated by the private sector, which is very important in view of

33A new strategic goal was set on European Council’s meeting in Lisbon in 2000 for the following decade – EU

to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion. [See: European Commission (2002), p. 12.] In the middle of the way (2005) it became clear that the set goal would not be achieved, which demanded certain changes in the Lisbon agenda. [See: European Commission (2005)].

34 European Commission (2005), p. 7. 35 See: United Nations System in Serbia (2006), p. 5.


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sustainable development. Civil society organisations (trade unions, NGOs, ecological groups, business associations, humanitarian organisations), on the other hand, facilitate political and social interaction and recruit people to participate in economic, social and political activities. As such, they can propagate and monitor implementation of reforms contributing to achievement of sustainable development. Since each domain of governance – state, private sector, civil society – has its good and bad sides, it is very important to establish a constructive relation between them.

Sustainable development assumes an increase of production on sound economic bases, with responsible treatment of natural environment and satisfaction of social justice criteria. A country that wants to follow the way of sustainable development must develop in such manner to limit all sorts of debts the current generation is handing down to future generation, including financial debts (covering current consumption with loans that should be repaid in the future by someone else), social debts (neglecting human resources, i.e. insufficient investing into health care and education) and environmental debts (depleting natural resources and polluting environment). Undoubtedly this is an attractive concept, but its application in practice is a real challenge for any country, including ours.

4. CONCLUSION

The concept of sustainable development has been attracting lately special attention of economists, but also of experts from other domains - ecologists and sociologists above all. There are polemics around different issues, including the name of the concept itself that, according to some of them, is an oxymoron. In this respect it should be emphasised that sustainability in the context of sustainable development does not mean orientation towards status quo, but preservation of opportunities for development. Sustainable development is a dynamic concept that deals with changes and implication of these changes now and in the future.

This is a new approach to development, substantially different from still dominant paradigm of conventional development. Sustainable development is expected to better balance the short term development horizon with the long term, to put social, environmental and economic interests at the same level, to successfully adjust societal scale of preferences and interests with the individual one, to correct market failures and internalize social and environmental costs into economic costs, to cope with governance failures by using the triangle of equal partnership between government, private sector and civil society.36

Affirmation of sustainable development requires important changes in value judgements and attitudes of individuals. Education and development of human resources have important role in building up a new system of values appropriate for sustainable development. The UN Conference on Environment and Development from 1992 gives high priority to the role of education in provision of sustainable development. The Agenda 21 points out that education is of the utmost importance for promotion of new kind of development. A Decade of Education for Sustainable Development was proposed on the Johannesburg Summit in 2002 and was soon afterwards announced publicly by the UN General Assembly for the period 2005-2014. This is a complex and extensive feat that is aimed at integrating principles, values and practice of the sustainable development into all aspects of education. In order to ensure their future, people all over the Planet must learn to change their behaviour.

The ongoing process of transition in Serbia should provide the comeback of economic development, but also a change of its quality, i.e. reorientation towards implementation of sustainable development. The idea of sustainable development that relies on sound economic bases and contributes to the increase of human welfare is not new to our country, having in mind its unfavourable legacy from the previous system. Like other former socialist countries Serbia did not manage to avoid traps of low-quality development – development that is expensive and short-sighted, that does not create conditions for self-preservation, for continuation in the upcoming years, but quite the contrary, the one that directly endangers chances for economic progress in the future. It should be repeated that man was also in the centre of attention in socialism, and his welfare was proclaimed the basic goal of economic growth. The difference is that achievements of socialist systems regarding

36 Salim, E. “Paradigm of Sustainable Development”, in OECD Sustainable Development Studies (2007), p. 28.


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improvement of human welfare did not correspond to their economic results, and as such they could not sustain in the long run.

Achievement of sustainable development goals largely depends on the quality of governance, especially on effective application of the national sustainable development strategy. The need to formulate national strategies with the aim to provide sustainable development was observed back in 1992, within the Agenda 21, and was singled out ten years later in the Plan of Implementation adopted on the Summit in Johannesburg. The National Sustainable Development Strategy of the Republic of Serbia, which is expected to be adopted soon, should pave the way to achievement of dynamic and quality economic development in our country.

REFERENCES

Atkinson, G. et al. (1997), Measuring Sustainable Development – Macroeconomics and the Environment, Edward Elgar, Cheltenham, UK.

Chenery, H. et al. (1974), Redistribution with Growth, Oxford University Press, London.

Commission on Sustainable Development (2001), Guidance in Preparing National Sustainable Development Strategy: Managing Sustainable Development in the New Millenium, Division of Sustainable Development, UNDESA.

COWI, ECA and Scott Wilson (2004), Evaluation of Approaches to Integrating Sustainability into Community Policies, Final summary report, European Commission Secretariat General.

European Commission (2002), A European Union Strategy for Sustainable Development, Luxembourg.

European Commission (2005), Working Together for Growth and Jobs – A New Start for the Lisbon Strategy, Brussels.

Hunt, D. (1989), Economic Theories of Development – An Analisys of Competing Paradigms,Harvester Wheatsheaf, London.

Mishan, E. J. (1967), The Costs of Economic Growth, Stapples Press, London.

OECD Sustainable Development Studies (2007), Institutionalising Sustainable Development, OECD, Paris.

Stiglitz, J. E. (1998), An Agenda for Development in the Twenty-First Century, in: B. Pleskovic – J. E. Stiglitz (eds.), Annual World Bank Conference on Development Economics 1997, The World Bank, Washington, D.C.

UNDP (2006), Human Development Report 2006 – Beyond Scarcity: Power,Poverty and the Global Water Crisis, Palgrave Macmillan, New York.

United Nations System in Serbia (2006), The Review of the Implementation the Millennium Development Goals in Serbia, Millennium Development Report 2005 - Serbia.

World Commission on Environment and Development (1987), Our Common Future, Oxford University Press, Oxford.


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STRATEGY OF INSURANCE MARKET DEVELOPMENT IN SERBIA

Jelena Kočović1 Tatjana Rakonjac-Antić1

Apstract: The aim of strategy of insurance market development in Serbia is the defining of the future model of insurance market in Serbia on the basis of analysis and comparison of the key parameters which are characteristic for the insurance markets of former-Yugoslav republics. The strategy should provide the development of efficient system of insurance protection by introduction of new insurance products, first of all, life insurance, voluntary pension and health insurance which will enable the transfer from the extensive to intensive insurance market model.

KEY WORDS: STRATEGY, INSURANCE MARKET, LIFE INSURANCE, PENSION INSURANCE, HEALTH INSURANCE, INSTITUTIONAL INVESTORS.

1. INTRODUCTION

The level of insurance development in some country depends on its economic development. The characteristics of macroeconomic environment in which the insurance organisations function, define the chatacteristics of the insurance market. In Serbia, the insurance market is facing great difficulties in functioning. The decrease of economic activities, the low level of national income, low purchasing power of citizens, are only some of the reasons for poor development of insurance market in our country. The aim of this work will be to show the need for fullfillment of certain institutional and economic conditions which are necessary for the development of insurance market in Serbia. Special attention will be paid to: the concept of privatisation of insurance organisation, providing the conditions for functioning of insurance companies and pension funds as institutional investors and the possibility of introducing the new products, first of all, in the field of voluntary pension and health insurance.

2. THE AIMS OF STRATEGY OF INSURANCE MARKET DEVELOPMENT IN SERBIA

The first and the main aim of the strategy of insurance market development in Serbia is the development of an efficient system of insurance protection. Namely, insurance represents one of the most efficient methods of risk management which aim to provide stable development of national economy and social sphere, stimulating responsible behaviour of economic subjects towards their property and the responsible behaviour of citizens not only towards their property but also to their health and providing the safe retirement. The condition for building an efficient system of insurance protection is the transfer from extensive to intensive development of insurance market by introduction of new long-term sorts of insurance, like life insurance, voluntary pension and health insurance, which will positively influence the change of insurance portfolio structure in Serbia. This means, improving the methods for insurance market supervising which will enable formation of competitive climate, i.e. the same conditions for all participants in the insurance market. Necessary condition for the development of an efficient insurance market is certainly raising the level of information and culture of insurance as well as strenghtening the trust of the citizens in the insurance institutions.

The aim of the strategy is certainly the appliance of European Union (EU) standards and international standards (accounting, actuarial and other) so that our country could integrate into EU insurance market. Financial sevices, which include insurance, are considered as one of the key elements for functioning of market economy. That is why one of the main aims of EU is formation of the united market of financial services. Formation of the united insurance market in the region would enable faster harmonization of the former –Yugoslav republic insurance market and their integration into EU.



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Because of small differences in national legislations of the countries in the region it would be possible to achieve mutual goals, overcome obstacles and coordinate differerent solutions. The goals which could be reached by harmonization are: free delivery of insurance services in the region due to commercial (constant) presence on the market of the country in which the service is delivered or without this presence; free service purchasing in any country in the region which means free formation of insurance companies, standardization of basic supervising rules in the countries in the region, auditing, in order to give the customers appropriate protection and at the same time not to prevent the development of insurance market; standardization of the conditions for the activities of brokers and agents in all the member-countries, whose activities should enable professional and competent information of the insured about the best possibilities for insurance by the best insurer, no matter which country in the region they are in.2

The aim of harmonization of legislation in insurance is to prevent unfair competition of insurance companies and to give efficient protection to the customers and the third injured party.

3. ANALYSIS OF THE KEY PARAMETERS OF THE INSURANCE MARKET AND DEFINING THE FUTURE MODEL

Total collected gross insurance premium in Serbia shows the tendency of growth from 22,6 billions dinars (362 million euros) in 2004., to 38,3 billion dinars (432 million euros) in 2006. Participation of premium in gross national product rose from 1,7% in 2004. to 2,1% in 2006. Participation of life insurance premium in total portfolio rose from 7,5% in 2004. to 11% in 2006. Property insurance participated in total portfolio with 29,5%, and self-responsibility with 32,3%, total insurance with 10,6%. Premium per capita in 2004. was 38 euros and in 2006. it was 65 euros.

In 2004. there were 40 insurance societes and in 2006. it fell to 17. The number of employed in insurance rose from 5407 in 2004. to 7880 in 2006.

On the insurance market there are 8 foreign insurance societies and their participation in total collected premium is 28,5%. Participation of 6 domestic private societies is 8,1%, and two biggest insurance companies which are state property participate in total insurance premium with 63,4 %.

The greatest influence on the rise of life insurance in total insurance portfolio came from foreign insurance companies. The positive effects of entrance of foreign insurance companies into insurance market in Serbia are improvement of performance, improvement of coorporative management, greater transparency and introduction of new products.3 Beside positive effects of entrance of foreign insurance companies, the strategy for the development of insurance market in Serbia should define future model of the market giving answers to the following questions: total or partial liberalization of the market; privatization of insurance-selling two biggest insurance societies or leaving at least one as majority state property; which insurance to leave to foreign insurers and which should stay “in hands” of domestic insurers?

It is necessary to make a detailed economic analysis of all these questions in order to get the optimal model of insurance market for our country. While making the analysis we have to take into consideration the experience of the countries in our neigbourhood, first of all Slovenia and Croatia, which have recently very succesfully developed insurance market.

Total collected insurance premium in Croatia in 2006 was 1,057, and in Slovenia, 1,667 euros. Collected premium per capita in 2006 was 232 euros in Croatia and in Slovenia 825 euros. Participation of foreign capital in insurance market of Slovenia is 10% and in Croatia 30%. Serbia already has participation of foreign capital of 28,5% so that selling of two biggest insurance companies would increase the participation of foreign capital to 91,5%.There is a question, what would be the negative effects of such a concept and should Serbia, like Slovenia and Croatia keep at least one domestic insurance company as state property? 2 Ph.D. Jelena Kočović, Ph.D. Predrag Šulejić; “Insurance”, Publishing center, The Faculty of Economics in

Belgrade, 2006 p. 271. 3 www.nbs.co.yu; Mira Erić-Jović; “Situation on the insurance market in 2006”, 2007.


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Taking over the total insurance portfolio on the insurance market of Serbia by foreign insurers would require necessary change of legislation which would liberalize taking the assets out of the country. Taking the assets out of the country would negatively affect the development of financial market in Serbia, first of all the capital market. Because of this it is necessary to find the optimal relation between domestic and foreign capital on the insurance market in Serbia. It is also important to stimulate the entrance of foreign insurers through greenfield investments and not only through buying domestic insurance companies as it has been practice so far. Compulsory insurance, first of all, self-responsibility insurance and all other non-life insurance should be dealt by domestic insurers. On the basis of our experience, we can claim that we should leave to foreigners life insurance, voluntary pension and health insurance, considering the low level of development of these kinds of insurance in Serbia. Since the important aim of the strategy of development of insurance market is the development of voluntary pension and health insurance, which is one of the conditions for the entrance of Serbia into EU, the following chapter is dedicated to the strategy of development of voluntaty pension and health insurance.

4. THE STRATEGY OF DEVELOPMENT OF VOLUNTARY HEALTH INSURANCE

The strategy of development of voluntary health insurance should enable the higher level and quality of services of a person who has health insurance as well as prevention and early diagnosing of an illness. In our conditions this system of insurance represents an addition to the system of compulsory health insurance.

Health systems in almost all countries in the world, including our country, is in crises.In the last 30-40 years there was a rapid growth of insurance protection costs in the most countries in the world and they are the result of: intensive aging of the population; development of the science and technology; more levels of educated people which caused awareness of neccessity to have better health insurance; new illnesses.4

As it has already been said, the public system of health insurance in our country is in a very difficult situation. The costs of health insurance are extremely high but the sum of money they have at their disposal in this sector is small. Between 2 and 2,5 million insured people pay contributions, and this resources are used to finance health service for about 7 to 7,5 million people. Total expenditure of public helth insurance system is 8% of GDP. On average, the sum of 160 euros per person is paid for health insurance, which is very little. According to the reports of the world health organisation, a country is considered to have undeveloped health insurance system if the sum paid for health insurance per capita is 500$ and less. There are around 130000 people employed in the system of health insurance and the resources which are accumulated are used for their salaries (60-80% of the resources) which are not adequate. Around 25-30% of all staff is non-medical staff. According to the general medicine service reports from 157 medical centres, in Serbia there are 1049 patients on one general practitioner (in 2005). Total of 122 stationary medical centres have 44142 beds,i.e. we have 6 beds on 1000 people. The number of receptions on a day and a year level is also known. The great problem is that we don`t have statistics of physicians` errors, i.e. the errors which are not recorded.

Voluntary health insurance system offers the choice and this system should enable faster, better-quality, and faster available health service which should result in better and longer life, less moral hazard (overuse of health services), higher investments in health system, less corruption, financial risk insurance, different and elastic system of health insurance, etc.

According to the actual Health insurance law, “voluntary health insurance is an insurance which, on the basis of the agreement between a legal person who conducts voluntary health insurance and a person who has voluntary health insurance, can introduce:

1. additional health insurance (insurance on risk of paying participation) which is organised and conducted in public interest. This kind of insurance can include people with compulsory health

4 www.who.co.yu


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insurance. Additional health insurance is organised and conducted as a short-term insurance, as a rule, for a year period;

2. compensational health insurance (insurance of the people who don`t have conditions for compulsory health insurance or who lost the conditions, e.i. people who are not included in compulsory health insurance);

3. supplementary health insurance (insurance on the rights which are not included in compusory health insurance);

4. parallel health insurance (insurance on the rights which are included in health insurance, but now in wider range, i.e. with higher standards than the rights included in compulsory health insurance);5

Some of our insurers offer the services of voluntary health insurance. Every insured person who signs an agreement on voluntary health insurance, receives a card which is an identification and the means of payment in a health institution. Insurance can be individual or collective on a year basis. There is an insurance for a case of serious illnesses and the results of the illnesses, surgeries, and there are also packages of health services: which include e.g. one systematic check-up, three or four check-ups at a general practicioner, abdomenal ultrasound and a discount of 25-30% of the price for unlimited visits to the general practicioner, etc.

Generally, voluntary health insurance should influence the wider community to have greater responsibility for their health. Prevention is very important and a special attention has to be paid to it. In the next period it is necessary to work on connecting insurance companies and health institutions, making new packages of health insurance, making promotions of voluntary health insurance, especially in firms, etc. It is necessary to make a detailed plan of positioning private practice in the system of health insurance. It is important to try to connect public and private system of health insurance on a group and later on the whole system. Introducing supervision of private practice will result in decreasing the number of errors and higher efficiency of this kind of health insutance. It is necessary to strenghten the use of voluntary health insurance, by introduction of suitable tax treatment of contributions for this kind of insurance, which has been done with voluntary pension insurance.

5. STRATEGIES OF DEVELOPMENT OF VOLUNTARY PENSION INSURANCE

The main goal of the strategy of pension insurance development is introduction of the voluntary pension insurance which will enable higher pension for an individual. This system of insurance most commonly represents the addition to the system of compulsory pension insurance. Analysing the information on the amounts of pensions that our pensioners receive, we can see that they need another source of income for normal living. For example, according to the results for April 2006., the average pension in the system of public insurance in Serbia was 13440 dinars6 and it is not enough for the existential minimum. If our pensioners had the voluntary pension insurance 30 years ago, today they would have had pension at least twice as big as they have now.

Beside the main goal, that we have just explained, the system of voluntary pension insurance should also influence the higher level of national savings, and since this is a long-term investment, we can expect positive effect on the investments which will result in new jobs.7 This system will also have a positive effect on the development of financial market, stronger role of pension funds as institutional investors, etc.

The law on voluntary pension funds and pension plans gives basis for foundation and acting of primary subjects in voluntary pension insurance, and they are: voluntary pension funds, societies for

5 The Health Insurance Law,102/02 and 109/05. 6 www.nbs.yu 7 Ph.D. Tatjana Rakonjac Antić: “Voluntary Pension Insurance (actuarial and financial analyses)”, The Center

for Publishing, The Faculty of Economics in Belgrade, 2004.


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governing the voluntary pension funds, custody banks, auditing and control agencies, etc. However, the key question of safety of investment in the conditions of lost trust in financial sector is still open.

The system of voluntary pension insurance in our country is at its beginning8, and the following information will confirm that. Accordng to NBS (activities during 2006 and the first quartal of 2007)9 on our market of voluntary pension insurance, there are six societies for managing voluntary pension funds.10 These societies delegated the duty of custody work to three banks.11 Total contributions that were mobilised within four societies12 for managing the voluntary pension funds in the first quartal of 2007 were 800 880 455 dinars (793 847 893 dinars of this amount refers to net asset of funds of two companies for managing the voluntary pension funds which transferred the funds from the period of managing the pension insurance).13

Because of unadequately developed financial market, debtor securities have the greatest part in total purchasing of the funds. The managing companies charge two kinds of fees: when paying the contribution and the fee for managing the funds. The four first-founded societies for managing made total contribution of 6 million dinars in the first quartal of 2007. So far, in our country, the greatest is the number of signed collective voluntary pension funds (sponsored by the employer), and most commonly the payment up to untaxed 3000 dinars.

Up to now, the greatest participation is among the employed in public firms and foreign companies. However, in the situation where the average salary in Serbia is low and a great number of the employed receive minimum wages, we can not expect great involvment of the employed in this kind of insurance (so far in the total number of signed contracts, 10% are individual contracts), and at the same time one part of the well-off citizens has already become involved in some kind of insurance, so that we can not expect greater number of participants even in this structure.

In the following period, special attention has to be paid to the education of citizens. Next, beside insisting on individual pension insurance, it is necessary to use positive experience in collective pension insurance and direct the forces to pension insurance sponsored by the employer in small and medium –size companies. The country, with its incentive tax policy should help the development of voluntary pension insurance. It is still early for the change, but it is necessary to make analyses of possible loans from individual pension accounts to the beneficiaries of the insurance. This idea can be realised only in the situatin when the number of participant has increased and made a greater quantum of accumulated funds; and for our citizens who live in difficult condition, some incentive like, downpayment for example in a loan for buying a house, etc., would mean a lot.

6. CONCLUSION

The strategy of insurance market development in Serbia must respect the priorities of the develpoment of national economy with special emphasys on social sphere through the development of life insurance as well as voluntary pension and health insurance. The develpoment of these, new insurance products, will relieve the budget and help build an efficient system of social protection of the citizens of Serbia. 8 Financial statement is 0,02% in relation to the whole financial sector (90,04% bank sector , lizing 5,3%,

insurance companies 4,3%), the presentation of NBS ,9th May 2007. 9 www.nbs.co.yu 10 Delta Generali; Raiffeisen future; Garant pension society; DDOR pension plus; Dunav, NLB New Pension 11 Eight banks got the permission from Comission for securities to do the custody work and Delta generaly

society for management, Raiffeisen future society for management and NLB New Pension left the custody works to Unicredit bank, DDOR society for management and Dunav society for management gave custody works to Commercial Bank See the site of National Bank of Serbia; www.nbs.yu; Sector for auditing the societies for voluntary pension funds; Activities during 2006 and the first quartal of 2007.

12 Delta Generali, Raiffeisen future, Garant, DDOR. 13 See the site of The National Bank Of Serbia, www.nbs.yu; sector for auditing of the societies for managing the

voluntary pension funds; Activities during 2006. and the first quartal of 2007.


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The aim of the strategy of insurance market development in Serbia is to provide stable and transparent insurance market which will enable continuous application of the primary function of insurance through regular payments from insurance and insured amounts.

Moreover, thanks to the amounts in reserve, which are at disposal of insurance companies and pension funds, in the following period, they should give incentive to the development of financial market, first of all capital market, strenghtening its position of institutional investors.

REFERENCES

Ph.D. Jelena Kočović, Ph.D Predrag Šulejić (2006.); “Insurance”. The center for publishing, The Facultu of Economics in Belgrade.

Ph.D. Predrag Šulejić (2006.); “Insurance right”. Dossier and Law School in Belgrade.

Ph.D. Tatjana Rakonjac-Antić (2004.): “Voluntary pension insurance (actuarial and financial analysis)”, The Center for Publishing, The Faculty of Ecinomics, Belgrade.

www.nbs.yu, Mira Erić-Jović “The situation on the insurance market in 2006, 2007”.

The law on voluntary pension funds and pension plans, RS 85/05.

www.//F:/HCJZ (21st May 2006).

www.who.co.yu

The Law on health insurance, RS 107/02 and 109/05.

The Law on health protection RS 107/05.


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INTELLECTUAL CAPITAL OF NATIONS AND ECONOMIC DEVELOPMENT

Biserka Komnenić1

Abstract: The aim of this paper is to study the relation between intellectual capital (IC) and economic development. As economies continue to become more knowledge intensive, intellectual capital will become the competitive edge of people, corporations, and nations. In a macroeconomic point of view, IC is considered as major tool of enhancing the economic development. IC is seen as a production factor and as an asset (like physical capital) that organization have to mix, in order to have success: in consequence, IC is a tremendous tool of wealth production and economic development. It is becoming more and more essential to visualize the intellectual capital of nations. Intellectual capital of nation requires the articulation of a system of variables that helps to uncover and manage the invisible wealth of a country. Most importantly, an emphasis on human capital allows for better understanding of the hidden values, individuals, enterprises, institutions, and communities that are both current and potential future sources of intellectual wealth. The main hypothesis assumedis that IC, although fundamental, is not sufficient to assure the existence of economic development. For a developing country to become a modern economy some fact have to happen. For serbian public and private institutions, to succed in the new economy (knowledge economy), this translates into restructuring industrial age organization structures, processes, and mindsets to utilize the wealth-creating potential of people. Also, today the dominant investments in developing countries go into intangibles, such as R&D, IT software and internet, education and competencies. On average, more than 10 per cent of GDP in OECD countries is estimated to go into intangibles. Huge and successful investment in IC are fundamental for economic development to happen. However, other important factors, like an established democracy, a high degree of economic and political stability, and a profound degree of economic and political international integration, are also important to improve the relation between IC and economic development. The need of active social policies, for formal investment in E&T, technology and science is probably not solely responsible for the diffusion of economic development in the developing world. The ability of formal IC systems to build on the existent tacit competencies will be decisive to speed up the economic development process of those countries. Therefore, intelligence of the Serbian people and organizations should not be underestimated.

KEY WORDS: INTELLECTUAL CAPITAL, ECONOMIC DEVELOPMENT, MEASUREMENT, MANAGEMENT.

1. INTRODUCTION

Globalization, enhanced with revolution in IT, has provided much of the inputs for many countries to move towards information or knowledge based economy. In 1997, analysts recognized the U.S. economy went through a decade of strong growth. This could not have been explained by traditional methods of evaluation of economic growth. It has been concluded that the basis of this tremendous expansion of post-industrial society was in implementing IT. IT strongly affected organization, innovation, costs, development and productivity. Internet became one of the most important tools of globalization and basic tool for enhancing and sharing knowledge and information. Furthermore, in developed countries, large sums of public and private funds were directed towards both, fundamental and applied research, with the objective of establishing those countries as leaders in diverse, knowledge-based fields such as financial and insurance products, software development, biotechnology, and education and training. It become obvious, that in last fifteen years developed nations of the world have seen a significant movement in terms of the important economic activities that comprise their GDP. Today, these economies are far less reliant upon traditional primary (resource based) commodities or even secondary (low value added) commodities such as manufactured goods. In the „new economies“, the emphasis in terms of high economic value-added, is on service activities and intangible-based outputs. In 1997, professor Baruch Lev at Stern University, New York, conducted research on investment patterns in the USA, which shows very different investment perspective since 1929. In period between late twenties and late nineties, approximately 70 per cent of the USA investments went into tangible goods and some 30 per cent into intangibles. However, by 1990, this pattern was inverted, and today the dominant investments go into intangibles, such as R&D, education and competencies, IT software and the internet. In last 25 years, share of 1 Business school in Novi Sad, Serbia.


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nonmaterial sector in USA gross domestic product has grown from 50 per cent to 85 per cent. In Europe, the share is around 70 per cent. During nineties, it became obvious, the trend of value creation is moving from material to nonmaterial. Today dominant Forbes 500 companies come from financial sector, telecommunications, IT industry, media, tourism and consulting. Those companies require only a modest investment in capital equipment. In essence, together with clear trend of shrinking share of material production, today’s production is more intensively based on knowledge, creation of relevant business models, innovation, sales strategies and intelligent solution for clients. Therefore, today’s share of material costs in total cost of production became insignificant comparing to situation fifteen years ago when 80% of total cost was related to material assets.2 Today, the largest share of total cost is in inputs such as competencies, corporate identity, innovative solutions, original sales techniques, developed customer relationships etc. In example, the share of intangible assets in software industry is 95 per cent and in automotive industry is 60 per cent.3

At the same time, labor market is showing growing need for higher qualification of workers. Rapid technological advancement in computational power and communication technologies are transforming the nature of knowledge, skills, talents and expertise of individuals in the workplace. Today's global market requires a different kind of worker, one with competencies, attitudes, and intellectual agility, conducive to systematic and critical thinking within a technologically oriented environment. Growing qualification of workforce is important for both, the intellectual and production occupations, since they are more and more dependent on knowledge inputs. Drucker states that the largest success of management in 20th century was fifty-fold increase of productivity of manual labor, while the largest challenge of 21st century will be increasing the productivity of knowledge workers. USA ministry of labor is predicting that the most of future work positions will be created by the sectors, which are intensively based on knowledge and technology occupations. Based on data before 2005, projections show the most of these positions will be created by small and medium enterprises. Data shows the percentage of highly qualified workers increased at expense of unqualified workers. Today 15 percent of workforce in USA and 18 percent in UK have low qualifications. At the same time, compensation for low qualification positions decreased and compensation for high qualification positions increased. Twenty years ago, average USA collage graduate had 32 to 49 percent higher salary then average high school graduate. In 1993 that difference was even higher – 71 to 89 percent.4

The last but not least, the tremendous development of information technology and myriads of possibilities this created, paved the way to new economy of knowledge. IT created infrastructure for fast information exchange and accelerated globalization of world markets. It enabled creation of new organizational structures and new ways of communication and work. Progress in information and telecommunication technologies enabled processing, storing, exchange of information regardless of distance, time and quantity, in any possible form, and with decreased cost. This concept has increased capacity of human intelligence and has become resource, which transforms our ways of interaction and work. UN has concluded that combination of human intelligence and IT has replaced accumulation of physical capital as leading factor of reproduction. Therefore, the 21 century brings with it a brand new challenge for nations and enterprises. It is becoming more and more essential to visualize the intellectual capital of nations (IC). The old market drivers may have been manufacturing, land and capital, but the driver of the new era is intellectual capital efficiency. Consequently, the number one priority for politicians and business executives moving forward should be the recognition, identification, measurement, benchmarking, development and harvesting of nation’s and its firms’ intellectual capital.

2. INTELLECTUAL CAPITAL FROM MACROECONOMIC PERSPECTIVE

From macroeconomic perspective, IC is considered as a major tool of enhancing the economic development (EC). IC is seen as a production factor and as an asset (like physical capital) that organization has to mix, in order to have success: in consequence, IC is a tremendous tool of wealth production and economic development. Since the early day’s great economists: Smith, Malthus, 2 Jelčić, (2004). s. 5. 3 Ibid. 4 Ibid


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Ricardo, Marx, and Keynes, considered the working skills as a condition for bigger growth. The neoclassical early studies (made by Harrod, Domar and Solow), continued in that line of thought, although they did not analyze in detail the question of labor heterogeneity. In the early 1960s, Schultz stated that E&T, knowledge and skills, were important to determine growth5. Machlup was the first who invented the term „intellectual capital“and used it to emphasize the importance of general knowledge as essential to growth and development6. Alfred Marshall says that knowledge is our most powerful engine of production; it enables us to subdue nature and satisfy our wants7. The concept of intellectual capital was further analyzed by Kendrick confirmed that finding and the idea that „non tangible capital“ is important for the existence of economic development8. Management guru Peater Drucker in his description of post-capitalist society also further expanded the concept of IC. Drucker highlights the importance and arrival of a society that is dominant by knowledge resources and competitive landscape of intellectual capital allocation9. The term intellectual capital became well known in 1991, thanks to Tomas Stewart groundbreaking cover story in Fortune Magazine, which provided the main impuls for a new world of intellectual capitalists10.

Today managing intangible assets on the level of organizations, cities, regions and nations has been recognized as a key factor of enhancing competitiveness and economic development. Recognizing the significance of this intangible resource for corporate and national economy, many companies, scientific institutions and regional and national policy makers started initiatives for researching, stimulating and measuring intangibles. To the present day companies, practitioners and academics are experimenting with various ways of identifying, measuring, managing and reporting intangible assets within organizations. As part of this trend, new types of management and accounting models are beginning to emerge. Some of this has been proposed by authors or researchers: Intangible asset monitor by Carl Eric Sveiby11, Balanced Scorecard by Kaplan and Norton12, Scandia Navigator by Leif Edvinsson13, Value added intellectual capital coefficient by Ante Pulic14. Those models were all made in the perspective of companies. Their authors tried to extend the study of company valuation away from the balance sheet traditional measures, in order to make valuation more in line with the market capitalization. Those models imply the need for financial and management practice to adapt to new performance measurement systems that focus on intellectual capital in an effort to re-engineer the traditional accounting and management reporting process. There are less and less doubts that the traditional indicators of business success, such as increase in total income, profit or cash flow, do not reflect the real business capacity of a company. Moreover, these indicators do not reveal whether companies create value or not, as we can talk about value creation only if a company is creating more than it has invested in resources, capital employed (physical and financial) and intellectual capital15. In 2001 the Financial Accounting Standards Board (FASB), one of the leading institutions defining accounting standards together with the IASB published a special report: Business and Financial Reporting: Challenges from the New Economy«. The report is dealing with a problem raised by the IC-community, namely that the economy in 2000, is fundamentally different from one in the 1950s and traditional financial monitoring of business success does not-and cannot monitor the moving force of business success, which is intellectual capital.

5 Schultz (1961), s. 1-17. 6 Machlup, (1962). 7 World Bank (1998), s.20. 8 Kendrick, (1993). 9 Drucker, (1993). 10 Stewart, (1991), s. 44-60. 11 Sveiby, (1997). 12 Kaplan and Norton (1992), s.9-71. 13 Edvinsson and Malone, (1997). 14 Pulic (2004), s.45-57. 15 IC report (2002), s.5.


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2.1. INSTITUTIONAL INITIATIVES

At the same time policy makers, important international organizations, governments and economic bodies have addressed the issue. Some of them have set clear goals for their future economic development strategy and took practical steps by examining the methods to transform institutional knowledge into social intellectual capital.

The EU has been very active on this matter. At the European Council of December 2000, the EU set the goal of increasing Europe’s social wealth trough increased innovation and knowledge. Thus, the EU made the first steps towards “knowledge society”. This goal was stated in Lisbon Agenda according to which: „EU is facing quantum leap caused by globalization and challenges of new knowledge economy. These changes affect all aspects of human life and require radical transformation of European economy... Union has new strategic goal for next 10 years: to become most competitive and dynamic knowlege economy in the world...“ The Lisbon strategy should reinvigorate Europe’s economy and boost employment. In 2000, the European leaders agreed to stimulate economic growth and employment and make Europe’s economy the most competitive in the world. If Europe would really reach the goals, they set; Europe’s GDP could increase by 12 per cent to 23 per cent and employment by about 11 per cent. For more than a decade economic and employment growth would be at least 0.8 per cent higher than without these goals. However, to reach these goals important efforts to develop the policy measures will be necessary in most countries. Five of the most important Lisbon goals are: services’ market opening up, reduction of administrative burdens, goals on improving human capital, the 3 per cent target on R&D expenditures, and the goals on employment. All these goals together could revive European’s economy and its labor market. For accomplishing these goals, EU made massive investments in education, training, R&D and new technology with the accent on information technology. The EU institutions have set up particular programmes funded by the EU own resources. These investments would be decisive in two main ways:

• Internally as a tool to combat social exclusion and to obtain the essential social and economic cohesion level: and

• Externaly as an essential tool to put »Europe« more even when compared to Japan and to the USA.

Even before Lisbon Agenda in 1998, the EU developed MAGIC, a programme designed to measure and account for the IC of European companies. Aim of this programme is to obtain benchmarks and developing prototypes by branch, which should be disseminated in order to better evaluate and manage IC. Also in 1998, European Commission decided to support a six-nation research project named« Measuring and reporting intangibles to understand and improve innovation management« A special European Commission High – Level Expert Group published a report in 2001 entitled, The intangible Economy- Impact and Policy Issues. The research part of extensive MERITUM project, involving nine European universities, was organized under four activities: a literature survey; classification of intangibles; a management control study; and a capital market study. The final report, which was sent in 2001, comprised policy implications in the form of a proposal regarding guidelines for measuring and reporting intangibles. This guidelines are subject to dissemination and further refinement in a new two–year project labeled E*KNOW-NET. In the dissemination process, the idea is to involve stakeholders who are interested in the development of intellectual capital guidelines.

The OECD also become very interested in the theme, having organized some actions in order to »measure minds« in a company setting. OECD initiated various activities in the 1980s when observations were made that intangible investments in member countries appeared to increase more rapidly than tangible investments. In the 1990s, a number of OECD conferences were held to encourage attention to the question of how to account for intangibles. Also in USA, Brookings Institution in Washington published a report from the task force on understanding intangible sources of value. The task force proposed that while business bears the primary responsibility for developing better metrics for measuring business and economic performance, at least within individual companies, government actions could contribute in at least three areas to facilitate or reduce barriers to


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private sector efforts to overcome these problems. The three identified areas for government action are data building, corporate disclosure and adjustments in the intellectual property laws.

In addition, the World Bank started program named, The Knowledge for Development (K4D) Program helps build the capacity of client countries to access and use knowledge to strengthen their competitiveness in the global economy and increase their social well-being. It works with client countries to design and develop realistic and achievable strategies to further their transition to the knowledge economy. On the website of the World Bank, www.worldbank.org there is information on K4D learning events; country assessments, reports and presentations, on the knowledge economy, as well as access to one internet based benchmarking tool – the Knowledge Assessment Methodology (KAM). Approaching economic development from a knowledge perspective – that is, adopting policies to increase a nation’s intellectual wealth – can improve people’s lives in myriad ways besides higher incomes16

3. INTELLECTUAL CAPITAL OF NATION

Assessment of IC of nation requires the articulation of a system of variables that helps to uncover and manage the invisible wealth of a country. The intellectual capital of nations includes the hidden values of individuals, enterprises, institutions, communities and regions that are current and potential sources for wealth creation.17 These hidden values are the roots for nourishment and the cultivation of future wellbeing. The reason why leaders of national economics are trying to find relevant ways for managing and measuring intangible assets is the same reason that companies and their managers are trying to develop reliable methods for managing and measuring intangible assets. They need them for understanding how they relate to future performance. Expectations of governments from finding such reliable measures of intangible assets are that such measures can help governments to better manage the intangible resources that increasingly determine the success of their economies. Key to deterring these success factors is an understanding of relationships and synergistic modulations that can augment the value of each sub component of intellectual capital.18 For this purpose, it is essential to have a mapping system to describe the IC of nations and systematically to account and follow the evolution of such intellectual capital development.

In knowledge economy, new ways of measuring national performance have to be considered if orientation is to be obtained. Until now just several concepts and methods used to capture statistics and describe the construct of national IC was developed and published. The report »Sweden's Intellectual capital Balance Sheet« was the first and laid the foundations for the »Intellectual capital of Israel«. A different concept was applied in the report »Intellectual capital Development in the Arab Region«. Also Croatia published report named »Intellectual capital Efficiency of Croatians Economy«. Those last two reports, take a third approach in measuring and representing national IC performance. The following pages provide explanations of these two methods.

National Intellectual Capital Index (NICI)

The system that was used to capture national IC in Arab region is modified methodology which concept relay on the foundation of methodology named »Scandia navigator«. Originally, »Navigator« has been created on purpose for enterprises to measure and manage their intangible assets as key factors of their future successful performance. Methodology was developed by Leif Edvinsson, who was first corporative director of Intellectual capital division in global insurance company - Scandia, where this method was first implemented. Leif Edvinsson, the chief architect behind Skandia’s initiatives developed a dynamic and holistic IC reporting model with five areas of focus: financial, customer, process, renewal and development, and human capital. This framework consists of five value-creating fields, each focusing on an individual sphere of interest. “This new accounting taxonomy sought to identify the roots of a company’s value by measuring hidden dynamic factors that underlie the visible company of buildings and products”19

16 World Bank, (1998). 17 Bontis, (2004), s. 14. 18 Ibid. 19 Edvinsson and Malone (1997), s. 11.


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FIGURE 1. SKANDIA’S VALUE SCHEM

Source: Edvinson and Malone (1997), Iintellectual Capital, HarperBusiness, New York.

According to Skandia’s model, the hidden factors of human and structural capital when added together comprise intellectual capital. Nick Bontis20 has modified Skandia Navigator on purpose for valuating national IC, and developed national IC measurement methodology and index. The construct of Skandia navigator has been transformed from a firm level perspective: Market value is transformed into National wealth, financial capital into financial wealth, customer capital into market capital, and innovation capital into renewal capital. The remaining constructs in figure 1. Are labeled the same.

Financial wealth: According to Malhotra21, traditional assessment of national economic performance has relied on understanding the growth of gross domestic product (GDP) in terms of traditional factors of production – land, labor and capital. Considering the nations’ capacity to accept the fast changes that are related to national performance, it is not surprising that some less developed countries with significant assets in information technology and Internet-related expertise are hoping to leapfrog more developed economies. For evaluation of financial wealth, Bontis used comparison of GDP per capita between Arab countries and OECD member countries. Bontis normalizes this figure for the difference in purchasing power parity, so his metric (FC01) represent the GDP per capita with purchase power parity. In addition to GDP measures, Bontis used trade policy as an important factor in determing financial capital. Barriers to trade influence overall economic wellbeing. Indicator FC04 is published by Heritage Foundation and represents nation’s barriers to trade scale from 1 (low) to 5 (high). Another chief indicator (FC05) of financial capital is the market capitalization of nation’s stock market.

Human capital: Bontis defined human capital as knowledge, education and competencies of individuals in realizing national tasks and goals. The human capital of nations begins with the intellectual wealth of its citizens. This wealth includes knowledge about facts, laws and principles, as well as the less definable knowledge of specialized, teamwork and communication skills22. Therefore, metrics have to include the quality and quantity of individual’s stores of knowledge as well as that of the collective knowledge stores found within organizations. It is important to completely examine the 20 Bontis (2004). 21 Malhotra (2001). 22 OECD (1998).

Market value

Intellectual Capital Financial Capital

Human Capital

Structural Capital

Customer Capital

Organizational Capital

Innovation Capital

Process Capital


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educational systems first, which are the prime developers of human capital. The quantity and quality of nation’s educated population is key, including the degree to which people are developed after formal education is completed.

Metrics which were used to assess human capital are: literacy rate, number of tertiary schools per capita relative to highest value, percentage of primary school teachers with required qualifications, number of tertiary students per capita relative to highest value, cumulative tertiary graduates per capita relative to highest value, percentage of male grade 1 net intake, percentage of female grade 1 net intake.

Process capital: Process capital is defined as the non-human storehouse of knowledge in a nation, which is embedded in the technological, information and communications systems as represented by its hardware, software, databases, laboratories and organizational structure, which sustain and externalize the output of human capital. In today’s global information society, one cannot overstate the implications of the knowledge revolution. We have only begun to comprehend the effects of this revolution on the economic, social and political structures of societies around the world. It has been compared in magnitude to the industrial revolution that transformed the agrarian societies of the eighteenth century23. Bontis argues that countries with inadequate computers, Internet access and telecommunications are at risk of falling even greater behind competitors in the world market. Weak telecomunations and Internet infrastructure are major impediments responsible for the slow penetration of process capital development in less developed countries. Utilizing process technologies is a necessary action to participating in the global economy of the twenty-first century. Government and private sector leaders must redirect investments into fast growing, high productivity areas. In the coming decades, these opportunities will be in businesses that can compete in the global market and utilize current information technology. Developing countries have one opportunity to leapfrog into new technologies without entering intermediary stages incurred over the past 50 years by economically developed countries.

Some of the index which Bontis used for valuing process capital are: telephone mainlines per capita relative to highest value; personal computers per capita relative to highest value; Internet hosts per capita relative to highest value; Internet users per capita relative to highest value; mobile phones per capita relative to highest value; radio receivers per capita relative to highest value; television sets per capita relative to highest value; newspaper circulation per capita relative to highest value.

Market capital: Bontis defined Market capital as the intellectual capital embedded in national intra-relationships. Market capital represents a country’s capabilities and successes in providing an attractive, competitive solution to the needs of its international clients, as compared with other countries. A country’s investment and achievements in foreign relations, coupled with its exports of quality products and services, constitute a significant component in its development of market capital, which is rich in intangible assets. Market capital is social intelligence created by elements such as laws, market institutions and social networks. It is similar to social capital, but a lot more, because it includes systemic qualities with embedded discovery attributes that enhance social capital creation. According to Bontis, it seems that proxies for these elements are usually hard to find in many countries. In addition, another major factor that ascertains market capital is international trade. International trade brings innovative and more efficient methods of producing new and improved goods and services. It is very important that countries should be capable of using their capital generated from international trade and invest it domestically to attract foreign trade. Also according to Sullivan24 relationships within and across countries are seen as an important factor, which enhance ability to create knowledge and provide a greater ability to extract value from the knowledge of nation foreign direct investment provide benefits to countries trough spill over of workforce, influence on local suppliers and technology sales25.

23 UNDP (1998). 24 Sullivan (2000). 25 World Bank (1999).


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Indexes’ which were used for evaluating Market capital are: high-technology exports as a percentage of GDP relative to the highest value; number of patents granted by USPTO per capita relative to the highest value; number of meetings hosted per capita relative to the highest value.

Renewal capital: Bontis defined Renewal capital as a nation’s future intellectual wealth. This includes its capabilities and actual investments in renewal and development for sustaining competitive advantage. He states that examination of the forces shaping renewal capital demonstrates the link between continued investment in renewal capital and sustained economic growth. Research and development (R&D) are seen as a key parameter in renewal capital. Analyses show existence of direct relationship between the success of a country’s financial systems and the effectiveness of its R&D sector. The results of investment in R&D are not only limited to financial strength on the national balance sheet, but also increase the efficiency of its population as a whole26. According to Ducharme27, in the context of intangible investment, the empirical literature on the private and social rates of return of R&D vary between 25 and 50 percent providing further evidence of the impact of research on innovation and productivity. Further components of renewal capital should include patents and scientific publications. Analyses show that country which performs well in these areas exhibits a high level of educated people who share and codify their knowledge and ideas. This is typical for a country with potential to perform well in an intellectual capital audit28.

Indexes which were used for evaluating Renewal capital are: book imports as a percentage of GDP relative to the highest value; periodical imports as a percentage of GDP relative to highest value; total R&D expenditures as a percentage of GDP relative to highest value; number of ministry employees in R&D per capita relative to highest value; number of university employees in R&D per capita relative to highest value; tertiary expenditure as a percentage of public education funding

The Value Creation Efficiency Analysis (powered by VAIC)

Guided by the notion that an explicit orientation towards value creation will be in the interest of modern Croatian economy, the Croatian Chamber of Commerce ordered the study „Value Creation Efficiency Analysis of Intellectual Capital in Croatian Counties“. This analysis is significant because it is the first one in Croatia to take value added and value creation efficiency as criteria of business success. The results of this analysis have been published in 2004, in the report called „Intellectual Capital – Efficiency of Croatian Economy“. Professor Ante Pulic who developed VAIC methodology conducted this analysis. Starting point for the VAIC analysis is the business result-value added. Analysis is based on two key resources in each business: capital employed CE (physical and financial capital) and Intellectual capital IC. Both are treated equally as investments and both are in the function of value creation. In order to calculate the value creation efficiency of these resources each one is related to the created VA. This way the two key efficiency indicators are received:

• Intellectual capital efficiency (ICE) incorporates human capital efficiency (HCE) and structural capital efficiency (SCE). They indicate how much new value is created on each monetary unit invested in each of the resources.

• VAIC Value Added Intellectual Coefficient, incorporate ICE and CEE (capital-employed efficiency). This indicator reflects the company’s “total efficiency” or its intellectual ability. The higher the VAIC indicator, the better management has utilized the existing potential.

In this approach employee expenses are not calculated as input, in other words, they are not treated as cost, but as investment and therefore come into analysis as Human Capital. The benefit of this measuring method is his focus on value creation, not control and takes intellectual capital, particularly human capital, into account. It considered human capital to be key resource and driving force of value creation in the new economy, and thus its ability to create value has to be measured and

26 Bontis (2004), s. 24. 27 Ducharme (1998). 28 Bontis (2004), s. 25.


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monitored29. The VAIC analysis is simple. The big advantage of this method and what makes it unique is that it can be applied on all levels of business activity: the macro-economic (national level), the meso (sectors) level and the microeconomic (company level). All data needed for the VAIC analysis on macro level are included in standard balance sheets and business reports. However, this method cannot provide a precise depiction of required changes in management of a company or an economy. VAIC is just a tool for scanning value creation efficiency. Therefore, it is best if combined with other IC/KM – management tools. Today VAIC is applied across a range of firms and in different countries. Applied on a time series of data, it indicates managers, policy makers how well they are converting intellectual resources into financial wealth, and whether conversion performance is improving or deteriorating. Since the objective is achieving maximum results with available resources, the management both corporate and government has to introduce new monitoring and measurement systems, which will indicate how successfully the resources, capital employed and intellectual capital have been utilized… In order to develop an economy which will create value successfully, Croatia’s primary objective is to raise the value creation efficiency of companies. With this objective in mind, it has become an imperative to identify the value creation efficiency of each county and each economic sector. All the counties, industries and companies that have crucial influence on regional and national value creation should be identified, as well as those destroying value30.

This methodology can be used as a new output measure for measuring intellectual capital performance on corporate, local, sector, regional, national and global level. According to Professor Pulic, measuring the efficiency of IC on national level is as important as on a company level. It may be even more important, as laws and political decisions, which are issued at macro level strongly, influence the entire economy and individual company’s business success. By monitoring IC-efficiency at national level, a new perspective on economy’s performance can be obtained. Pulic believes that like revenue and profit, which are no longer adequate indicators of business success at macro level, GDP cannot be considered a valid indicator of national economy performance any more. He thinks that the problem with GDP is the fact that if country has a GDP of X billion EURO, similar to revenue, you have no information, whether this is good or bad, with regard to the utilized resources. Second problem is that the macro level is measured with one measure and the micro level with another, although both belong to the same economic organism. Therefore, according to principals of new economy Pulic suggests a substitute for GDP, an ICE of country. In order to receive an insight into the operational benefit of these two categories, Pulic calculated the ICE for all EU countries, summed them up and compared them to the GDP per capita. The analysis follows trends from 1997 to 2001. The results show that GDP per capita rises continuously while ICE stagnates. Throughout the entire period value creation efficiency of IC does not change, which means that in 2001, each monetary unit invested in employees created the same value as five years ago, in 1997. Therefore, high GDP p/c does not imply efficient economy. For example, although UK shows the lowest value creation efficiency of IC of all the EU countries, it holds rank five according to GDP p/c. The main reason for these differences is the fact that in calculating ICE only the working population was taken into consideration while with GDP p/c the entire population of a country comes into account.

The results from VAIC analyses on national level can indicate governments to what extent economy has made progress or stagnated in comparison to the previous year and how individual national economies are performing in comparison to others. General trends show how the “value creation ability” has been developing, in certain sector of economy, which are stagnating and which the growing ones. Therefore, VAIC can help national and local governments, company management and consultants in determining weak points and reasons for value destruction, in systematic improvement of value creation efficiency and establishing balance on higher and higher levels. In addition, as a close relationship between the ICE and MV of company has been provided in many cases, it enables forecasting fluctuations in share value.

29 IC report: Intellectual capital efficiency in Croatian economy (2002), s. 5. 30 Ibid.


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Ante Pulic who has developed, refined and applied VAIC has therefore added an essential “top down” tool to “bottom up” tools of the pioneers like Edvinsson, Sveiby and others. Pulic shows that value creation efficiency of IC can shed entirely new light on national economies performance and it is certainly a different one from GDP.

4. INTELLECTUAL CAPITAL AND ECONOMIC DEVELOPMENT

As already said, from macroeconomic point of view IC has been seen as major tool of enhancing the economic development. Sveiby states that in Knowledge economy, small countries with few natural resources can look towards the future with more confidence than the nations that base their wealth generation on commodities. Many of the features that made the old commodity based economy successful are turned into factors that inhibit value generation in the new Knowledge-based economy. The growth of the Singaporeans' wealth since the 1970's compared to the simultaneous deterioration of the Australians' is a good illustration of the enormous power of knowledge to generate wealth compared to the old economy. To be »resource-rich« gets a new meaning when the energy and knowledge people turn into the only resource of value31. Important positive links can be detected between the level of economic development of many countries and their IC standards. For making IC investments and sharing their rewards it is necessary that set of conditions pass from one type of balance to another, which includes individual, entrepreneurial, public and social commitments. Tome argues that it is very important that mainly firms should make IC investments. The returns from IC investments are beneficial for firms that made those investments, but also for the entire society and the individuals32. Consequently, government in sense of direct public intervention and help in producing R&D, funding and patenting, should support investments in IC. This support is essential because those investments carry high risk. Therefore, fundamental R&D should in general be made or subsidized by the State, whereas applied R&D, which are much easily profitable, and linked with the firm’s economic activity, should be essentially funded by private sector. Instead of financing all kinds of IC investments, government has to make a difference between lacking of IC, which comes from economic cycles and structural development of economy, and need for subventions and production of IC, which is linked with specific situation such as: unemployment, low work qualifications, elementary education and basic R&D investments. The role of private sector has to stay the most significant, and State should interfere only when private sector would not manage to fill the IC shortages. Also, the state should first try to solve market imperfections or redistribution problems (if they exists) with other policy measures rather then subsidies or production, and only after should intervene in the market producing IC or funding IC investments.

4.1. IMPORTANCE OF ECONOMIC INTEGRATION FOR ENHANCING THE LEVEL OF NATIONAL IC

High level of IC investments is characteristic for developed countries, because, in general, they are linked with high performance sectors of the economy, which in turn, generally speaking, exist by nature in developed world. Therefore, it is not surprise, why IC is beginning to be a new battlefield in the struggle between the big economic blocks that dominate the world economy, i.e. the USA, Japan and the EU. The irony is, that developed world see IC as more needed, even if it is in the developing world that IC could have more effect.

The reason for this paradox is that for stabile economic development and IC sustained impact some other basic conditions have to be fullfield. Globalization of knowledge, not only entails technical knowledge, but ides which transforms societies – ideas like democracy and markets-and knowledge which forms the basis not only of adoption of policies which serve to enhance growth but also institutions33. Tome argues that IC, although fundamental, is not sufficient to assure the existence of economic development. For developing country to become a modern economy, some facts have to happen. Those facts are a process of stable political democratization; a process of economic

31 Ibid.s. 4. 32 Tome (2004), s. 657. 33 Stiglitz (2003), s. 510.


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stabilization; a process of economic and political integration; a process of investment in developing tools, like physical capital and intellectual capital34. Established democracy brings along internal competition, less monopolies and more power sharing, features that enable economic agents to grow, to strengthen and mature. Macro-economic stabilization usually derives from mature economic situations, which, in return, have much to gain from stable macro policies and environments. Strong international integration has many positive effects, because it enhances external competition and gives integrated countries the possibility to profit from economies of scale. Strong integration also improves stabilization levels because it confers a lasting environment to the integrated economies and because it facilitates the coordination of macroeconomic policies between states that tend to be stable. Since, the process of investment in IC implies the development of active social policies; it is difficult for a developing country to make those social policies by itself. Therefore, strong international integration can favor the practice of active social policies that themselves increase IC and ED, in the form of internal policies, but also as “external help”.

In today’s global world characterized with furious competition, basic developing competencies of one country are seen as pre-conditions, or in other words necessities, for its normal economic development. However, developing countries usually lack the basic development tools they need. They have low literacy level, poor health conditions and they do not have enough basic infrastructure. For them, internal solution for this problem would be very long, because the development gap to fulfill is huge. Therefore, external help, especially in context of the influx of funds could produce easily a catching up situation. A recent study made by EU, mentions that macroeconomic stability, infrastructures, human resources, endowments, and active social and structural policies, are essential to the “catching up” process at the EU level35 .

Considering that our country tends to become a member of EU, it is necessary to try to accomplish EU existing standards, and there is a lot of work which has to be done. In November, 2006, at conference titled „Valuing and measuring Intellectual capital in Serbia“ in organization of ministry of economy of Republic of Serbia and regional chamber of economy Novi Sad, Professor Pulic made presentation of IC efficiency in region of Vojvodina. His calculation shows that IC efficiency of region of Vojvodina is 1.54 which is below European average which is 2, 3. Today in Serbia, investments in R&D are only 0.6 from GDP. In addition, Serbian population has a low level of education - 60% of population have not finished or finished only elementary school. In addition, Serbia is still in phase of building infrastructure for internet. Payment through internet is in early phase, and credit cards are not widely excepted because there are not enough local centers for data processing. Furthermore, investments from service sectors are waiting because adequate infrastructure has not been build yet. In Serbia, there are 225.000 companies and organizations and implementation of internet is still in infancy. Despite of demands of business users, information and communication technologies have not yet been efficiently implemented in business activities. Still most of the companies possess computers, and use them for writing purposes, for office applications and accounting.

5. CONCLUSION

IC in his various forms is a very important tool of economic development. Importance of IC is growing with the emergance of new technologies and the economic development itself. IC has become fundamental resource in today's knowledge based economy. Therefore IC investment for one country represents investments in country's sustained competitivness and consequantly they determine its future wealth and economic development. In order to optmise IC investments, active social policy is important. Althought huge investments in IC are fundamental for ED to happen, other important factors, such as established democracy, a high degree of economic and political stability, and international integration are necessery for improving relation betwen IC and ED. Although, Serbia like most developing countries lacks the IC, and the infrastructural and organizational tools, which are needed to accomplish a sustainable ED process, it should make strong effort to restructure industrial 34 Tome (2004), s.652. 35 EC (2001).


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age organization structures, processes, and mindsets to utilize the wealth-creating potential of its people. The need of active social policies, for formal investment in E&T, technology and science is probably not solely responsible for the diffusion of economic development in the developing world. The ability of formal IC systems to build on the existed tacit competencies will be decisive to speed up the economic development process of those countries. Therefore, intelligence of the Serbian people and organizations should not be underestimated.

REFERENCES

Bontis, N. (2004), »National Intellectual Capital Index – A United Nations initiative for the Arab region« Journal of Intellectual Capital, Vol. 5 No. 1, pp. 13-39.

Drucker, P.F. (1993), Post – Capitalist Society, HarperCollins, New York.

Ducharme, P.F. (1998), Measuring Intangible Investments, OECD, Paris.

EC (2001), Economic Europeene, Bilan 2000, Vol. 71, Bruxelles.

Edvinsson, L., Malone, S. (1997), Intellectual Capital, Harper business, New York, pp. 44.

IC report” Efficiency of intellectual capital in Croatia economy, (2002), GIPA, Zagreb.

Jelčić, K. (2004), Priručnik za upravljanje intelektualnim kapitalom, HGK. Zagreb.

Kaplan, R. And Norton, D. (1992), „The balanced scorecard“ Harvard Business Review. January –February, pp. 71-9.

Kendrick, J. (1993), „The total capital economic growth“, Atlantic Electronic Journal, Vol.22 No. 1.

Machlup, F. (1962), The Production and Distribution of Knowledge in the US, PUP, Princeton, NJ.

Malhotra, Y. (2001), Knowledge Management and Business Model Innovation, IPGroup, London

OECD (1998), Human Capital investment – An international comparison, OECD, Paris.

OECD (1999), International Symposium Measuring Reporting Intellectual Capital: Experiences, Issues and Prospects, June, OECD, Paris.

Pulic, A. (2004), „Intellectual Capital-Does it Destroy or Create Value?” The Journal of Business Performance Management: Measuring intangible assets - the state of the art, Vol. 8 No. 1.

Pulic, A. (2004) „Value Creation Efficiency at National and Regional Level: Case study Croatia and EU“ in (Ed). Intellectual Capital for Communities - Nations, Regions, Cities and other Communities, Elsevier Butterworth Heinemann, Boston, USA.

Schultz, T. (1961), Investment in human capital”, The American Economic Review, Vol.1 No.2, pp. 1-17.

Stewart, T. (1991), “Brainpower: how intellectual capital is becoming America’s most valuable asset” Fortune, 3 June, pp. 44-60.

Stiglitz, J., (2003)“ Globalizaation and growth in emerging markets and the New Economy“ Journal of Policy Modeling, 25, pp 505-524.

Sullivan, P. (2000), Value driven Intellectual Capital, John Wiley & Sons, Toronto.

Sveiby, K.E. (2002), The New Organizational Wealth, Berrett-Koehler, San Francisco, CA.

Tome, E. (2004), “Intellectual capital, social policy, economic development and the world evolution” Journal of Intellectual Capital, Vol.5 No.4, s. 648-665.

United National Development Programme (UNDP), (1998), Raising capacity of the Arab Workforce for the Global Information – Based Economy, Research paper, Regional Bureau for Arab Studies, Damascus.

World Bank (1998), Knowledge for Development, World Development Report, World Bank, Washington.

World Bank (1999), Knowledge for Development, Oxford Unversity Press, New York. NY.


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PREPAREDNESS FOR THE NEW ECONOMY AND ITS OUTCOMES

Slavica Manić1

Abstract: The new economy, knowledge economy, information society are now some of the most frequently cited terms in several branches of social (and other) sciences. From the standpoint of economics, there is disagreement amongst researchers concerning the economic significance of the processes that are associated with new economy. The boundary between new and old economy is not clearly established and very often it is difficult to pinpoint what distinguish those concepts. Yet, different attitudes have something in common, i.e. they came to the agreement that the way of doing business definitely has changed, causing (either positive or negative) effects on people, organizations and society.

There are so many proposed indicators pointing to the growing importance of ability to create, distribute and exploit knowledge in economic performance. All of them have what can be concerned a common denominator: investment in ICT (information and communications technologies), as well as investment in intangible assets (education, research and development) are supposed to be sources of competitive advantages of the economy. The above-mentioned investments offer the potential for stronger growth and represent only a first step towards enabling better economic performance. But, lagging behind (whether in proper usage of ICT or in adequate implementation of education improvements in practice) means that any option to be competitive in this context will be lost.

That is why this paper is going to survey the indicators (no matter which concept they belong to) in order to indicate where Serbia (as less advanced reformer and latecomer) has been placed. These indicators are meant to measure competitiveness, technological and institutional preparedness and readiness to benefit from the achievements of the new economy, and we hope they would serve as an illustration how far we had moved from resource-based to knowledge- based path of economic development. Although Serbia made some positive movements referring to new economy, there remains considerable scope for further learning about successful approaches to scientific advances and technological changes.

KEY WORDS: NEW ECONOMY, ICT, KNOWLEDGE

1. INTRODUCTION – WHAT IS REALLY NEW ABOUT THE NEW ECONOMY? «The world that we have created to date as a result of our way of thinking has problems that cannot be

solved by continuing to think in the way we thought when we created them».

Albert Einstein

The very concept of new economy2 can be observed either in its narrow or broader sense. By narrow definition it is understood as a complex of processes based on ICT and therefore changing the way of doing business (Kolodko, 2001, p. 72). Still, this type of explanation can easily place new economy within broaden concept of the old economy, because knowledge production and diffusion (as frequently acknowledged criteria for the new economy) are also evident in so-called “sunset” industries (belonging to old economy) (McGregor, 2004, p. 156).

Broader definition emphasized the following facts: a) technology achievements and information have been around for a long time; b) only networked technology generates and diffuses information creating the potential for greater efficiency, as well as opening up new economic possibilities. So, judging by its consequences, new economy does differ from the old one, not only by allowing transformation of all types of economic activities, but particularly by making the pace and the scope of change (associated with technology and information) become faster and wider. In that sense, the new economy can be understood as new paradigm of economic growth which (if their potential gains are properly managed) continues apace being the vital component of world welfare.

1 Faculty of Economics, University of Belgrade, Serbia. 2 From year to year this subject has drawn much more attention. For example, it has been for the third time that

World Conference on Intellectual Capital for Communities (held in Paris) was exploring the challenges and opportunities stemming from the achievements of knowledge-based economy.


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Speaking from the standpoint of economics, at the risk of oversimplifying, one might distinguish between two contrasting positions, i.e. there is a disagreement amongst researchers concerning the economic significance of the processes that are associated with new economy.

Some of them claimed that new technologies have no significant socio-economic impacts, i.e. that importance of, for example, Internet and other new technologies have been grossly exaggerated. Nobody can deny the fact that information and communication technologies (ICT) have become an integral part of almost every business process bringing a lot of benefits. On the other hand, it is very hard to demonstrate (at the level of national economy) that the ICT investments really have increased productivity and output, i.e. as Robert Solow has emphasized: “We see computers everywhere except in the productivity statistics”.3 Thus, something that has been presented as an excellent contribution to the rise of productivity might not in fact be so, at least at first sight.

To the other side belong those claiming that new economy has deep effects on the nature and performance of any economy owing to recent technological innovations (with their enormous breath and speed) which fundamentally could have changed its functioning. Knowledge accumulated through investment in R&D activities, innovation and education is a key driver for long term growth. As the foremost example of this can serve the fact that a quarter of EU GDP growth and 40% of its productivity growth can be explained by the contribution of ICT.4

New technologies, even in their infant phase have had such economic consequences that have tended to strengthen the position for those who argue for continuing changes associated with the new economy.5 Skill-building and life-long learning ensure that people can take advantage of the job and business opportunities created by the new economy, so that overall economy can be flexible in the face of dynamic change. So, effects of information technologies are supposed to be confirmed in the long-run (that is why the analysis of short periods of time were incapable of reflecting the positive effects of the new technologies); also, they are reflected in attributes that are complex to measure (quality, improvements in the process, etc.), so-called intangible ones. On top of everything, more conventional ratios used with the aim of measuring or reflecting increases in productivity are not useful when dealing with new information technologies (Brynjolfsson, 2000, p. 30; Fuentelsaz, et. al, 2002, p. 307).

With no intention to speak in favor of one of these arguments, we have to emphasize the following things. The speed of appearance that is associated with overall economic and other changes was the main reason to be blamed for the amalgam of activities was given the name of the new economy. At the same time, the literature sometimes rejected the above-mentioned description due to its relatively lengthy existence and especially owing to the fact that it was not necessarily imply a change in the laws governing the behavior of the economy (Fuentelsaz, et. al, 2002, p. 301).6 Precisely, the appearance of new concepts in the achievements of competitive advantages refers to “changes in the form, whilst this is not the case with the substance” (Fuentelsaz, et. al, 2002, p. 304), so, profitability remains the core value of business no matter whether it be a new or an old one (Porter, 2001, p. 65) whereas “fundamental institutional infrastructure responsible for the development of both the “new” and the “old” economy are largely the same” (Piatkowski, 2002).

3 That discrepancy between measure of investment in ICT and measures of output at the national level is

described as the “productivity paradox”. Turban, et. al, (1999), p. 561. 4 Oluf Nielsen, “i2010 –a European Information Society for Growth and Employment”,

http://info.woldbank.org/etools/docs/library/145274/2010.pdf Speaking of the correlation between GDP per capita and knowledge economy, Jean-Eric Aubert (from the World Bank Institute) said that West could be treated as source of scientific progress, Far East as leader in application of production systems, while South is Laggard. See:http://info.worldbank.org/etools/docs/library/145347/IC.JEA.pdf

5 Even the poorest economy (for example Ethiopia) is spending nearly one tenth of its GDP on information technology every year. Dutta and Mia, NRI 2006-2007, Executive Summary, http://www.weforum.org/pdf/summary2007.pdf

6 Having rejected the term new economy, these authors suggested alternative names: digital, network or information economy.


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That is why the key aim of this paper is to present evidence on some issues of the new economy and to indicate main features of Serbia’s position in new economy’s world. The paper is structured as follows. Section 2 presents and describes some of the methodological problems concerning the measurement of new economy’s achievements. Section 3 contains a brief overview of some indicators chosen to represent different aspects of new economy, Section 4 offers an extended analysis of Serbia’s position in the above-mentioned context, and section 5 concludes the paper.

2. METHODOLOGICAL DIFFICULTIES

As we have already noticed, the above-mentioned attitudes have something in common, i.e. nobody would deny that the new information technologies have changed the way that businesses are organized and interact with each other and, through those changes, caused (either positive or negative) effects on people, organizations and society (Turban, et. al, 1999, p. 282).7

However, the impact of those changes is difficult to measure due to following facts:

1. The structure and the focus of national statistical system are best suited for measuring the old economy (and their products);

2. Also, there is a lack of time and resources for making the measurement of products of new economy possible.

So, large measurement gaps remain on new and existing data sources. Considering statistical data collected by famous institutions more reliable than those home -made, it will be much easier to analyze some specific problems of new economy we are interested in. That is why we decided to use well-known (and some other) indicators as an easy way of explaining the main points without facing with missing data, and in order to escape problems like these: why incompatible elements are lumped together in a single index, how to sort out exactly the relative role played by each factor etc. Surely, we are aware of the fact that it would (in methodological sense) make this paper weaker, but it could be justified by its previously mentioned purpose.

Of course, it is necessary to emphasize that indicators, although meant to measure similar things (concerning new economy), are not quite comparable, and that the period (or the year) they were referring to could be different one due to (once again) non-availability of the data.

That is why we should also take into account all limitations of the indicators the authors have during their creation. From the theoretical point of view there is a sort of consensus about the importance of technology for economic growth and development. However, neither methodological attempts to create a logically meaningful indicator which could aggregate heterogeneous components of the new economy, nor the interpretation of statistical data being used for its creation seemed to be agreed (Archibugi, 2005).

What are the facts about the indicators? First of all, their number has the tendency of increasing owing to the activities of many institutions, devoting their time to provide different measures for heterogeneous elements of the new economy; also, the quality of these indicators is improving, in spite of the fact they cover more and more complex components, thanks to good and other-mannered critiques they were exposed to.

Second, each of them tries to apply the same common methodological framework to considerably different countries (being placed in different stages of competitive development), thus there are, in methodological sense, some omissions stemming from the above-mentioned intention. This implies that the selection of indicators should be able to differentiate between countries that are at the top and at the bottom of the scale (Archibugi, 2005), which usually has not happened.

Third, if it is assumed that those different components are complementary in the sense all of them can contribute new economy’s achievements,8 we can sum them up, so that countries would be 7 Chapter 7 (pp. 282-315) is coping with impacts of IT on organizations, individuals and society. 8 The same assumption was made by Archibugi when he spoke about components of technological capabilities.

(Archibugi, 2005).


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ranked in a proper way; however, problem could arise if they have some common denominator – certain things would be multiplied by summing up (thus their impact overestimated), so it would no longer reflect a real state of affairs.

Fourth, the choice of indicator (and its components) is always the normative (value “colored”, Archibugi, 2005) decision: it is, as we have already seen, influenced by the availability and reliability of the data; that is why certain aspects are highlighted, while the others are obscured; besides, within the group of chosen components, the significance prescribed to each of them is also subject to value judgment.

So, a number of alternative indicators are available and each one is optimized for more or less precisely determined purposes. Is it possible to compare the results of such rival approaches to the new economy? In answering this question (which would be helpful to reveal is Serbia ready for the new economy's challenges, as well as to identify the relative role of different preconditions which should be satisfied for it), we should be clear in emphasizing the following pitfall: cross-indicator analysis can at best be only suggestive and edifying. Observing any single number referring to different components can hardly provide comprehensive understanding of the country’s overall position, but it could be used to describe its under or over-performing in a certain respect. Also, it is much easier to observe ranking of countries (in different studies) than to mapping their similarities and differences (in that case you are supposed to be much familiar with either their specific or general features). That is why we hope to be able to draw some relevant and thought-provoking conclusions concerning the main points of the paper.

3. HOW TO MEASURE NEW ECONOMY’S ACHIEVEMENTS?

To access countries' progress in their transition towards a knowledge economy, the World Bank Institute developed a benchmarking tool – a knowledge assessment methodology (in further text – KAM),9 almost all-inclusive indicator which shows how an economy compares either with its neighbors or countries it wishes to emulate. The basis of the KAM is a data set comprising of 81 structural and qualitative variables for 128 countries. Those variables can serve as proxies either for three or four pillars of a knowledge economy. The knowledge index (KI) covers variables in the following three pillars: education and human resources, the innovation system and ICT. This index measures a country's ability to generate, adopt and diffuse knowledge (as an indication of overall potential of knowledge development). From the other side, the knowledge economy index (KEI) is calculated on the simple average of the normalized10 country scores on the key variables11 in all four pillars (three above-mentioned ones plus economic incentive and institutional regime). So, this index takes into account whether environment is conducive for effective use of knowledge.

Why we decided to present the results of Knowledge Assessment Methodology referring to Serbia, as well as some other countries of Western Balkan which belong to so-called lower middle income group?

This concept offers freely available statistics produced by World Bank and other renowned institutions. The program allows anyone to choose another group of variables in order to create own approach to the new economy. It is also a convenient tool for both comparisons: over time and among countries for any of the variables listed. Besides, it contains the warning about incomplete nature of the data for some countries but, at the same time, does not eliminate the possibility of creating (at least) partial snapshot of a certain country in new economy context. KAM is also a useful tool to spark debate on countries' preparedness for the knowledge economy as the scorecards can be used to access progress made by any country on each of the four pillars of the knowledge economy.

9 http://www1.worldbank.org/gdln/kam.htm 10 The variables are normalized on a scale from 0 to 10 (the lowest and the maximum score, respectively)

relevant to four possible comparison groups: all countries, region, income, and HDI group; this “normalization” procedure makes the ranking of countries possible.

11 There are 14 key variables – three variables for each knowledge economy pillar plus two variables for overall economic and social performance.


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For the sake of observing potential of knowledge, we will try to compare results produced by KAM and some other different approaches. In respect of technological capabilities and ICT development (which are treated as the most important “drivers” of new economy) we shall deal with the findings relying on two indicators: NRI (Networked Readiness Index) and ArCo.

The former measures the degree of preparation of a certain country to participate and benefit from ICT development by accessing the environment for ICT, the readiness of country’s stakeholders (individuals, business and government) and the usage of ICT among these stakeholders. Among the available international composite ICT indices, the NRI has the most number of variables (67) and uses a combination of survey, qualitative and quantitative indicator data.12 That is why this snapshot seems to be more detailed than equivalent picture of ICT development from any other ICT composite index.

The latter is a new indicator of technological capabilities (ArCo), which is composed of three main components: a) the creation of technology, b) the technological infrastructures and c) the development of human skills.13 Both above-mentioned indicators are supposed to be important benchmark tools for researchers who would like to track progress of countries in developing their ICT sectors and technological capabilities over time, or for comparing performances with their peers. However, considering the treatment of human skills only as a part of technological capabilities as not quite appropriate, we decided to make the position of human resources stronger by including results for so-called preparedness for the new economy (made by OECD).

Mentioning of some other indexes, for example GCI (Growth Competitiveness Index) and BCI (Business Competitiveness Index)14 represents just another attempt meant for better determining concrete factors and their impact on the competitive advantages of individual countries. These global competitiveness results measure the “set of institutions, market structures, and economic policies supportive of high rates of economic growth”, either in the medium term, or the current one, respectively.15 So, we considered them very helpful in approaching whether environment is conducive for effective use of knowledge.

Both GCI and BCI serve particular countries to compare their practices with the best ranked countries, seen as a model of desirable behavior. Differently weighted components within composite index16 contributed to the accuracy of these indicators and made their credibility stronger. Being well-known and lengthy existing, their results have been very often cited. We shall do the same, because, observing the subcategories of, for example, technology index within GCI (innovative capacity, ICT diffusion and technology transfer), we can easily notice their measures are mainly analyzed within KEI (innovation, education and ICT pillars), NRI and ArCo, as well. So, it sounds reasonable to use competitiveness indexes in order to check whether their results correspond to those represented by other, more or less, different approaches.

12 Some of them are obtained from the World Bank and International Telecommunication Union (ITU) whereas

opinion surveys come from WEF as part of their research for the global competitiveness report. 13 The authors (Archibugi and Coco, 2004) divided all the countries into four groups: leaders (from 1 to 25

ranking), potential leaders (from 26 to 50), latecomers (from 51 to 111) and marginalized (from 112 to 162). The data cover the period 1990-2000, but mainly refer to the last third of this decade which, in case of Serbia, represents the most difficult period.

14 The GCI is comprised of three sub-indexes: the level of technology in an economy (technology readiness), the quality of public institutions, and the macroeconomic conditions (the quality of macroeconomic environment) related to growth. From the other side, BCI is an aggregate measure of microeconomic competitiveness (the level of GDP per capita that is sustainable in the long term), and it is comprised of two sub- indexes: the company operations and strategy and the quality of national business environment.

15 Porter, et. al, (2002). Actually, Current Competitiveness Index (CCI) changed its name into BCI. 16 For the non-core economies (where technological advancement and innovation play a more limited role

relative to the other two factors) more weight is given to the quality of institutions and macroeconomic environment since they can still make progress to achieve higher growth by getting their fundamentals in order. The way of creating the technology index for non-core innovators is also specific since it assumed that adoption of foreign technologies, or the kind of technological transfer (associated with FDI) could be of greater relevance for them.


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4. SERBIA’S POSITION IN THE CONTEXT OF NEW ECONOMY

After a decade of pause of almost any valid reforms efforts, Serbia and Montenegro (what was left from ex Yugoslavia) restarted its transition at the end of the year 2000. In the meantime overall circumstances have been dramatically changed. The long-run shift from manufacturing to services has been accelerated and complicated by the pervasive influence of ICT. Innovation and entrepreneurship transform the intangible assets (research and development, brands, know-how and human capital) into products and services, thereby driving forward economic growth. The pace and the scope of change (associated with new economy’s achievements) became faster and wider.

Frankly speaking, even Europe has been slower to respond to the emergence of the new economy than, for example, United States.17 The ability to be the first mover retained its importance in specific situations, but any country was obliged to move (whether first or not), because, if such a step was not taken, then an option to be competitive in this context would be lost (Fuentelsaz, et. al, 2002, p. 305). Anyway, countries have taken different routes to occupy different parts of the new economic landscape, depending on their inherited economic strengths.

What were the features of Serbia at the time? Under the circumstances which have represented inherited distorted economic structures, restructuring became both difficult and urgent because it had to overcome such a bad heritage and build the institutional framework appropriate for a market economy, which are neither easy nor quick tasks (Hare, 2003; Kaufman, et. al, 2005; Dabrowski, Gortat, 2002). Generally, the capacity to cope with change and exploit its opportunities was not he promising one.

Serbia and Montenegro (along with Macedonia) belonged to the (so-called) latecomers group, which suffered from inadequate technological infrastructure (Archibugi and Coco, 2004, p. 641). What has to be considered as the main problem of this type of countries? Very weak negative correlation between indicators of human skills and those of technological infrastructure could be understood as certainly the most troubling one. They just did not know how to convert their theoretical research into sound practice because “…the flow of knowledge between science and industry was very weak” (as it was confirmed by Piatkowski, 2002). Taking into account that the component of technological capabilities can be perfect substitutes18 (for example, a reduction in the level of technology creation can be compensated by an equal increase of human skills), the above-mentioned correlation caused more complication for the country, having in mind that regulatory framework and deficient incentive structure continued to limit this type of co-operation.

Mere retaining of solid level of basic education could enable only small improvements in generating economic growth19 from (in certain extent) broader range of manufacturing activities. Our economic model, built on long-term relationships, formal education and training and incremental innovation did not produce appropriate results. Moreover, the potential in the sphere of education has been used in other (developed) countries contributing to their economic performance.20 Serbia did not know how to release talent, realize potential and “unlock” any hidden opportunity it possessed at the moment. Increasing competition of developed countries for high-skilled immigrants (i.e. increasing demand for them) has been associated with much more integrated labor markets and the appearance of

17 The recommendation for job creation in Europe is to focus on labor-intensive service sectors, having in mind

that US companies have captured first-mover advantage in highly innovative industries (high-tech industries) – see: Dutta and Mia, NRI 2006-2007, Executive Summary, http://www.weforum.org

18 There are examples confirming that technological “incapability” can be substituted by investment in human capital. Some countries have financial institutions and capital markets which were not set up to promote entrepreneurship in high tech industries (for example, India, Ireland and to a lesser extent Israel). Being relatively abundant with labor they just easily specialized in labor intensive sectors and adopt labor intensive technologies. So, might software, with its dependence on human capital, but relatively low intensity in physical capital, offered a new way for them. Arora, Gambardella, (2004).

19 About human capital as a basic source of growth, see: Glaeser, E., (2004). 20 Obviously, they understand that developing talent in business is «the sine qua non of competition in

knowledge economy». Drucker, P.F. (2002), p. 71.


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skill-biased technological change which is often ascribed to the acceleration of technological developments in ICT and increasing reorganization of workplaces. That is why firms from those countries recruited and hired IT workers (possessing particular qualifications), usually coming from East-European and non-EU countries.21

What has happened since the time? Observing the KEI results (presented in table 1), we can notice that Serbia performed better than other countries within the group of «four Balkans» (with the exception of economic regime as the most problematic component of the KEI). According to the results, it is quite obvious that three other components (education, innovation and ICT) in almost the same proportion contribute to new economy, while economic and incentive regime (where Serbia was “under-performing”) shows no coherence with them. Owing to chart 122 we can get more precise depiction of Serbia’s position in the context of new economy. Since the country performs worse over time on innovation and ICT, this has happened not because it actually has lost ground on absolute terms, but rather because it improved slower than comparative group.

Table 1.23

21 For the details, see: Bauer and Kunze, (2004), pp. 6-9. 22 Source: http://www1.worldbank.org/gdln/kam.htm 23Source: http://www1.worldbank.org/gdln/kam.htm

KEI

Economic Incentive and Institutional

Regime

Innovation Education ICT Country

recent 1995 recent 1995 recent 1995 recent 1995 recent 1995Europe and Central Asia 6,12 5,77 4,85 3,58 6,59 6,7 6,74 6,42 6,32 6,38

World 5,59 6,07 4,73 4,99 7,18 7,29 4,13 4,76 6,31 7,25 Serbia and Montenegro 4,89 4,44 2,31 0,45 5,83 6,26 5,85 5,09 5,57 5,95

Macedonia, FYR 4,61 4,24 3,83 3,99 4,39 2,83 5,17 4,71 5,05 5,42 Bosnia and Herzegovina 4,16 N/A 3,52 1,57 2,96 0,65 5,98 N/A 4,17 3,41

Albania 2,7 2,65 2,46 3,4 1,56 1,72 4,71 3,15 2,07 2,32

Annual GDP Growth (%)10

5

0

Human Development Index

Gross Secondary Enrollment

Normalization Group: All type: weighed Year: most recent and 1995


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NRI scores for years 2003, 2004 and 200524 represent another proof supporting this attitude. Serbia is ranked as 77th, 79th and 80th, respectively, according to its capability to leverage the potential of ICT (i.e. readiness) and the usage of ICT by its stakeholders have been measured. The achieved level of readiness is supported by a very solid performance in individual readiness (the presence of relevant skills for using ICT within individuals). Usually country needs to have a certain level of readiness with regards to ICT before there can be an effective usage of ICT, and it is being confirmed by the fact that readiness and usage scores of Serbia move hand-in-hand (we are neither ready for ICT nor we are able to use ICT).

As we already know, countries’ ability to respond to rapid technological change greatly depends on the availability of the right set of skills as this factor sustain an environment conducive to innovation and receptive to new technologies. The main precondition for “producing” right skills is good quality of education, which remains the only bright point within KEI. Solid results in this area were confirmed by recent study made by OECD, which determined the quality of education system, math and science to be the main criteria for any country’s preparedness to meet the needs of new economy.25

However, what we should not forget is that education infrastructure offers only potential for knowledge development. From the other side, proper use of it is expected to remove an existing mismatch between the skills of secondary school graduates and the needs of technology-driven employers. Workers will need to possess knowledge that is specialized, differentiated and relevant to industry; it is also imperative to sustain technological literacy (escape technological obsolescence). 26 Another striking feature of this new generation (more inclined to ICT development) is that they are still too few in number to make a real difference to the shape of Serbian economy. All in all, in spite of good potential of knowledge development, its non-adequate use serves as a proof that we have neither ability nor capacity for making a transition from being low-cost manufacturer into becoming more global provider of higher-value-added products and services.

Anyway, under improved technological capabilities so-called potential leaders and latecomers (most of transition countries belong to any of those groups) are supposed to advance (Archibugi and Coco, 2004, p. 651),27 but probably at different speeds. Despite the diffusion of contemporary innovation, which obviously has replaced its concentration in the past (Archibugi and Coco, 2004, p. 652), and although the penetration of new technologies to less-advanced transition countries is going on, it has been tested and proved in the literature that countries with better developed institutions for a market economy and most advanced private sector development receive more FDI inflows, which are of substantial importance for technology transfer and its adoption (Bevan, et. al, 2004, p. 62).

What were the results we achieve in these areas? Keeping in mind that we have already experienced the brain drain, which occurred when the country has lost the competition to retain, regain, or attract skilled labor, it is not surprising we have lost the competition for capital investment (because they usually follow human resource capacity). Speaking of FDI inflows, there is no significant, initial impulse for the substantial shift (from the old toward the new economy). Typical export products are made in labor-intensive sectors (textiles, miscellaneous manufacturing goods, food and beverages), so cost-saving considerations have mostly driven the size and the flow of investments to our country. Competing on inherent endowments (comparative advantages like natural resources or low labor cost) has been and still is our predominant mean in the competitive battle on the world market. 24 http://www.weforum.org 25 A recent study conducted at the OECD and the World Economic Forum ranked 125 countries according to

their preparedness for the competitive economy. Countries were ranked from 1 (dos not meet the needs of new economy) to 7 (does meet the needs of new economy). Concerning the quality of education system, here are positions of analyzed countries: Macedonia, Serbia, Bosnia and Albania (their ranks are: 43, 46, 63, and 80, respectively). Speaking of quality of math and science education: Serbia, Macedonia, Bosnia and Albania (their ranks are: 24, 40, 45 and 68, respectively). See: http://www.oecd.org

26 About transitional model of human capital in the new economy and competencies required by new economy workers, see: McGregor, (2004), p. 257-8.

27 They also expect that the various sources of technological capability may have a different impact on economic growth, as well as the same component will have a different impact across countries.


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Private sector share in GDP (which reflects both entrepreneurial activity and progress in economy-wide privatization) has risen, and this reflects substantial progress in small-scale privatization. Nevertheless, as Serbia still lags behind other transition countries, it suggests an untapped potential for further private sector growth. The literature confirms that country which simultaneously privatized and established a regulatory framework (promoting competition) may boost its growth potential compared to a country which carried out privatization without adequate changes in business environment (Godoy and Stiglitz, 2006).

Although market entry barriers have been lowered, the circumstances in business environment are far from being appropriate for market economy. It is wide-spread belief that economies employing less technology capital probably have an environment that is less supportive of the needed changes in organizational behavior within firms and resource allocation across firms and sectors in the economy (Jones, 2003, p. 216). Obstacles to formal private sector development show that setting up a business can be a time-consuming and expensive procedure due to problems concerning regulations and its enforcement as well.28

During the first phase of transition, the process of restructuring, particularly in manufacturing industries, has led to the relatively high contribution of ICT capital, but only in more advanced transition countries. Thus, their growth is mostly related to the effects of restructuring and to a lesser extent to technology transfer (Van Ark, Piatkowski, 2004).

From the other side, Serbia made rapid progress only in initial-phase reform, which is consistent with the fact that is much easier to make first step than to complete the process (Falcetti, et. al, 2005). Incompleteness of second-phase reform’s tasks and the lack of some relevant parts of institutional infrastructure, which are supposed to be prerequisites to benefit from new technology achievements (Piatkowski, 2002), brought about a slowdown in the process of transition and posed a serious obstacle to future economic growth.

Weakness in economic and institutional regimes29 provide limited incentives for the efficient rise of existing knowledge, for the creation of new knowledge and for dismantling of the obsolete activities and the start-up of more efficient new ones. Exactly this pillar within KEI seems to be critical to the effectiveness of the other three key areas. Even NRI results turned out that regulatory environment (laws and regulations and their enforcement to the usage of ICT) much more than infrastructure environment (level of availability and quality of the key access infrastructure for ICT within a country) influenced the environment component index.30

If we now include the results for GCI or BCI covering the year 2005 (Lopez-Claros, 2005), anyone will notice that some problems still remain and seem to be untouched. The incredible success measured by public institution hardly can compensate things that are getting worse. Slightly rise in the macroeconomic environment score left us at the bottom of the table representing this index. On top of everything, the component of BCI – reflecting company operations ranking – made it clear that micro reforms did not abolish market distortions. Under such circumstances a small decrease in the level of technology index hardly can attract any attention, neither it will cause greater wary.

Now, on these couple of examples, pointing to the discrepancies within components of KEI, NRI, ArCo and GCI, one can see why, apart from the level of reform, the complementary of reform’

28 The ease of starting a new business reflects both the de jure regulations (relevant legal framework governing

business entry) and de facto application (the overall institutional environment in which these regulations are applied) as well (Kaufmann, et. al, 2005).

29 Institutions “represent the major immobile factors in a global market…Institutions affect the capacity of firms to interact and therefore affect the relative transaction and coordination costs of production and innovation” Mudambi and Navarra, (2002), p. 637.

30 At the same time it is called into question whether this picture is an accurate present form of a country’s ICT development. Actually, we are also lagging considerably behind in terms of information infrastructure, thus exacerbating the risk of a growing «digital divide». Besides, some variables which may be more helpful to shed the light in ICT environment are missing (for example, concerning the environment, the indicator that look at market concentration, i.e. the degree of competition in ICT is left out).


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steps also matters. Although in terms of the average reform level there will be no difference, coordination between different aspects of structural reform followed by their equalized improvements (changes of its complementary) is the crucial factor for the growth in transition economy (Braga de Macedo, 2006). Consequently, equalized changes in all four pillars of KEI would do much more for the new economy’s achievements than their movement at different speeds.

The Serbian responses to the knowledge-driven economy are at relatively embryonic stage and its overall position allows only to be focused on the immediate threats it is facing with. Traditional factors remain the mainstay of economic growth, so it has no other available opportunity but to make any positive movement on the basis of cost competitiveness. The adoption of a defensive stance was caused by Serbia’s economic agenda, which didn’t give a chance to map out a distinctively advanced path towards the new economy.

5. INSTEAD OF CONCLUSION

New economy certainly is an era with great possibilities for growth and creativity, but far from being the “land of milk and honey”, especially when you take into account that a great number of countries have been still isolated from its positive impacts by geography, poverty or politics. More knowledge by itself (rapid advances in ICT) or having access to knowledge will not have an economic and social impact unless it is put to productive use. Readiness to realize that potential in practice has been materialized in the developed countries (those placed in the Innovation-Driven stage).

Unfortunately, such a capability turned not to be the main feature of transition economies (although within that group there are differences between more- and less-advanced reformers). So, it somehow does not sound quite reasonable to speak about knowledge economy when Serbia, for example, can be comparable only to some transition countries, and not to the prosperous ones. But for enthusiastic researchers there is a space for further analysis – to find out the similarity between rankings of Serbia (made by various studies) by using rank of correlation (Spearman index).

At the moment, according to results for some of the indicators of the new economy, we can make the conclusion that Serbia experienced no capability to mobilize inner resources (neither human nor financial ones) and/or to take advantage of external inputs (for example: know-how and transfer of technology). No matter what indicator has been chosen - findings were almost the same (and not surprising ones): Serbia was, at best, placed in the middle, but more often at the bottom of any list. The country has already moved from its initial level of development, and shown some potential concerning the overall level of education system but, due to incompleteness of second-phase reform’s tasks and the lack of some relevant parts of institutional infrastructure, has not been able either to use properly opportunities in the “old” economy, or to realize potential of the “new” economy.

Thus, Serbia has become caught somewhere in between Factor-Driven and early Investment-Driven (or how it is called now – Efficiency-Driven) stage of development, representing the lack of technological sophistication and scientific innovative capacity.

That is why we will consider conveniently emphasizing an interesting conclusion made by Piatkowski (2002), when he concerns future benefits of the new economy for transition countries: if they were not able to build institutional infrastructure, all the announced potentials of the new economy would vanish, leaving those countries caught in the “technological trap”.

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Arora A. and Gambardella, A. (2004), “The globalization of the software industry: perspectives and opportunities for developed and developing countries”, NBER Working Paper 10358, http://papers.nber.org/papers/W10538.pdf

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POTENTIALS FOR CREATIVE-LED DEVELOPMENT IN SERBIA

Hristina Mikić1

Abstract: "Modern economy" or "knowledge-based economy" finds its economic support in creativity, emphasizing creative sector as a conceptual framework within which we should look for growth generators. In a broad sense, the term "creative-led development" signifies "the transformation of a production-oriented economy to a consumption-oriented one, as well as the grater importance of cultural and symbolic goods and invisibles, material and immaterial cultural products and cultural services in economic development" (Du Gray, Paul 1997). Discussions on creative-led development keep pace with the latest research that examines changes in relations between culture and economy, education, urban regeneration, national and city images, cultural heritage and tourism. Those discussions have a tendency to focus on economic aspects of creative industries rather than the critical, participatory and political potential of creative industries, which was the case in the past. This situation is related to the conceptual creative industry's history of origin. The term was introduced as the result of criticism of the art economization by Theodor Adorno and Max Horkheimer ("Dialectic of Enlightenment", 1944) and it was used in a polemic manner to describe irreconcilable opposition of culture and economy. While Adorno used the term cultural industries in a polemic manner, creative industries became a concept of UK labourist government development policy as some kind of alternative economic strategy for London, the later for different UK regions.

In 2005 creative industries in the Republic of Serbia count 2242 enterprises, which represent about 2% of all active enterprises. The mentioned CI sector employs about 29 049 persons; obtains about 1.9% gross value added and represents about 0.5% of the total export value achieved in 2004. These facts preliminary speak about the importance and economic influence of this sector for the economy development in Serbia. However, if we measure the creative industries` level of import with measures suggested by the creators of certain sectoral policies, one can draw a conclusion that in Serbia there is no systematic support for CI development. This situation is mostly caused by a partial policy approach and short-term perspective that does not give a basis for the strategic position of sector and establishes a considerably more offensive and efficient development concept, which would make it possible for creative industries to become the incentive of economic, social, demographic and other positive currents.

The paper is focused on the economic potential of creative industries in Serbia and their influence and contribution to economic development. The paper will explore how creative intangible assets could be transformed into a source of economic development through the formation of coherent integrated sectoral policies; which innovative policy response should be developed for the promotion and encouragemen of creative industries; how we can use worldwide national and regional experiences as well as best practice cases in creating creative-led development in Serbia etc.

KEY WORDS: CREATIVE INDUSTRIES, CREATIVE-LED DEVELOPMENT, MACROECONOMIC AGGREGATES, BUSINESS PERFORMANCES.

1. INTRODUCTION "Modern economy" or "knowledge-based economy" finds its economic support in creativity,

emphasizing creative sector as a conceptual framework within which we should look for growth generators. In that sense, the modern understanding of economic development that rests on the integrated economy implies balanced sector networking of cultural/creative activities and industrial sectors with the special emphasis on new ideas and their creative application in forming development performances.

In a broad sense, the term "creative economy" signifies the transformation, from an industrial economy to a creative economy that generates wealth by harnessing intellectual labour, intangible goods and human creative capabilities. The essence of this transformation is "transition of the production-oriented economy to a consumption-oriented one, as well as the grater importance of cultural and symbolic goods and invisibles, material and immaterial cultural products and creative services in economic development".2 1 Business School in Novi Sad, Serbia. 2 Du Gray (1997), p. 175.


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Creative industries as an economic subject have been moved to the mainstream of policy agenda in many advanced economies. In that sense, the terms "experience economy", "value-added economy", "creative economy" and "symbolic economy" are sometimes used to describe transformation by underlining the market culturalization now occurring rapidly and to a wider extent in our economy.

The creativity lies in the core of creative economy and by disposition it is of an immaterial (spiritual, intellectual) nature, then we can draw a perfectly logical conclusion that it is within this framework of creative economy that realization of making products and offering services tied to immaterial goods protected by copyright and related rights are for the most part accomplished. The reason being that the term creativity, integrating human creation, spiritual essence, particularity of form and originality, creates a common essential thread between creative economy and rights of the intellectual property. In numerous research studies, especially in studies on economy of culture or creative industries, creativity is defined in a cross-sectoral and muldisciplinary way, mixing elements of artistic creativity, economic innovation as well as technological innovation. In those researches creativity is considered as a process of interactions and spill-over effects between different innovative processes.

2. EVOLUTION OF CREATIVE INDUSTRIES CONCEPTS

John Howkins emphasizes three elements in creative economy: creativity as an idea that creates economic implications; creative product that represented economic goods as a result of creative work and creative activities. According to Howkins, creative economy consists of creative product transactions. Therefore, creative economy is an equivalent value of creative products and number of transactions. Each transaction has two complementary values: intangible value and value of tangible platform. However, every creativity does not create a creative product. In creative economy, only creativity that can be transformed into some tangible product with tradable value can be considered as a part of creative economy.3 According to Howkins there are 15 activities which he considers to be the nucleus of creative economy: advertising, architecture, visual arts, fashion design, film industry, performing arts, publishing, radio and television, design activities, video games, interactive leisure software, R&D, music industry, entertainment tolls and games and art and antique market.

Instead of Howkins`s concept of creative economy, there is also quite similar concept as creative industries or cultural industries. Difficulties in finding an explicit response and clear academic definition of cultural or creative industries are evident. This situation is related to the conceptual cultural industry's history of origin. The term was introduced as the result of criticism of the art economization by Theodor Adorno and Max Horkheimer in their book "Dialectic of Enlightenment" (1933/1944). The term was used in a polemic manner to describe irreconcilable opposition of culture and economy. It became widely used in polemics against the perceived limitation of modern life, and it was picked up by French sociologists and was first converted to the term cultural industries,4 later it was converted to the term creative industries by policy makers.

With the start of the New Media boom, at the latest in the mid 1990s, the concept of cultural industries was transformed into creative industries. The concept of creative industries first appeared in Australia at the beginning of 1994 (in a strategic document "Creative Nations", 1994); it was accepted only at the end of the decade due to the British politicians. The first definition of creative industries appeared in Britain in 1998 and it was later adopted by researchers and politicians in other countries: "creative industries are those industries which derive from individual creativity, skill and talent and which have a potential for wealth and job creation through the generation and exploitation of intellectual property".5

3 Howkins (2001), p. 14-16. 4 Hesmondhalgh (2002), p. 15. 5 Creative Industries Mapping Document (1998), p. 4.


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A very similar definition of creative industries was given by UNESCO. Concerning the UNESCO definition, the term cultural industries refers to industries which combine the creation, production and commercialization of creative contents which are intangible and cultural in nature, and the term creative industries includes a broader range of activities which in addition to the cultural industries also comprise all cultural and artistic production, whether live or produced as an individual unit.6

Developments towards a broader context of cultural industries were also given by UNCTAD in such a manner that made it possible to understand the concept of creativity moving "from activities having strong artistic component, to any activities producing symbolic products with a heavy reliance on intellectual property and for as wide a market as possible". To make a clear understanding of cultural and creative industries, UNICTAD argues that complex relationships between and among different artistic, economic and technological activities make up the cluster of creative industries. In the cluster of creative industries activities are ranged from upstream activities, such as the traditional arts, performing arts, literature and visual arts, to "downstream" activities such as advertising, design, publishing and media-related activities. Form this perspective, UNICTAD points out that cultural industries make up a subset of the creative industries, while the even broader cluster copyright industries consist of both creative industries and distribution-based industries.7

The standpoint in which cultural industries were seen as a subset of creative industries was emphasized in the working document Future of Creative Industries-Implications for Research Policy. Carmen Marcus, the author of this working document, by using different theoretical and functional definitions of cultural and creative industries considers "the creative industries as lying at the crossroads between arts, business and technology and having the cultural industries as a subset".8

Taking into account different conceptual interpretation, it seems that we can make a distinction between concepts of creative and cultural industries with more abstract meaning and concepts which have a pragmatic orientation. Pragmatic concepts of creative industries have resulted from the international research papers and empirical studies (mapping documents) that have dealt with analyzing its economic potential, so they are focused on arguing and identifying determiners in the "broader" and "narrow" economic sense. In that context, it is possible to distinguish the following general creative industries determiners:

• basic resource is "human capital" – people and their intellect, creativity and skills,

• economic value comes from individual inspiration and creativity,

• creativity understood in the broadest manner is treated as a product factor,

• protection of intellectual property and copyrights are key factor for the realization of economic value.

The increasing significance of creative industries is often regarded as the engine of a modern economy or creative economy. There are two kinds of influences that creative industries have on the contemporary development: the first one, which has repercussions on economic performances and the second one, which has repercussion on social value performances of a society. Therefore, those influences can be treated only in a complex and multidimensional fashion, i.e. in mutual intertwining and interaction of economic and social development factors.

On the macroeconomic level, the immediate influence of creative industries can be perceived through direct and indirect economic effects that creative industries bring about to economy’s development on the local, regional and national level. In the context of indirect economic effects it is possible to talk about influence they have over:

6 UNESCO (2006), p. 5. 7 UNICTAD (2004), p. 4. 8 Marcus C. (2005), p. 4.


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• image development of areas and cities that is of utmost importance for attracting investors and focus of business activities;

• strengthening identity within the local, regional and national framework;

• strengthening social capital;

• advancement of human development strategy;

• regeneration of underprivileged urban and rural areas;

• promoting social integration;

• advancement of competitiveness of the region;

• adding creative and innovative elements through an urban development concept;

• strengthening endogenous regional potentials.

While evaluating indirect economic effects of creative or cultural industries on development is somewhat impeded by their qualitative nature and complexity, the direct economic effects of creative industries can be perceived through economic values such as the level of employment, GDP growth rate, rate of technological progress, market size and expansion, number of enterprises that perform economic activities in the sector of creative industries and other. On the global level, different estimations shows for example, that creative industries account for more than 7 per cent of the world’s gross domestic production9 and their annual average growth is 10 per cent. These industries represent a leading sector in the OECD economies, showing annual growth rates of 5 to 20 per cent.10

Still, the most interpreted data comes from the empirical studies, which are related to creative industries mapping studies. The first study of this kind was carried out in Great Britain where, at the same time, the basic research methodology was developed, but the idea for analyzing economic potential and impact of creative industries came from The International Intellectual Property Alliance (IIPA) in 1990 with research of economic potentials of copyright industries in the USA. So, today we can identify four research concepts: American approach orientated to copyright industries which have an influence in Canada, Australia, Mexico and Singapore; the British approach orientated towards creative industries, which has an influence in majority European countries, the French approach oriented to cultural industries and the Nordic approach orientated towards the experience economy.

British approach appeared during the 1990s when the first Blair administration set up Creative Industries Task Force to outline the promotion of creative industries as economic drivers. The concept was formalized by two editions of the Creative Mapping Document published in 1998 and 2001. The UK model is basically product-oriented, regarding the creative value of products and services the most important attribute to be measured in the creative sector. Under this concept, the creative industries include 13 sectors: advertising, architecture, the art and antiques market, crafts, design, designer fashion, film and video, interactive leisure software, music, the performing arts, publishing, software and television and radio. The British concept represents a clear economic approach based on two elements: creativity as a central input to the production process and intellectual property as a characteristic of those inputs.

The US concept had an influence in Australia, Canada, Mexico and Singapore. This approach is known as "copy based industries" and it refers to those industries that produce and distribute goods protected with intellectual property rights. In accordance with this concept, copyright industries are divided into three sub-groups: the core industries that include activities directly connected with copyrights (publishing industries, music publishing, motion picture etc); the partial copyright industries that comprise industries that distribute copyrighted material to the market and finally, copyright-related industries that produce and distribute products necessary for consumption of copyrighted products (computers, radio and television sets, recording devices etc). The US concept of 9 World Bank (2003), p. 4. 10 UNICTAD (2004), p. 3.


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creative industries has been mostly accepted by countries using the North American Industry Classification System (NAICS), because this classification system offers a better classification of services industries and it is most relevant to "copy based industries".11

The French approach first appeared in the Frankfurt sociological school led by Horkheimer and Adorno. The concept of cultural industries had a negative connotation and very abstract meaning. In "Dialectic of Enlightenment", Adorno introduced a new concept: "cultural industry" that replaced the term "mass culture". He used the connotation of industry not to describe the production process, but standardization and rationalization of reproductive techniques. The importance of the chapter concerning the creative industry lies in the research on anti-enlightenment influence of creative industries to progress of consciousness. Thirty years later, French policy makers and researchers accepted the concpet of creative industries in a more possitive way. In accordance with the French concept, creative industries represent a set of economic activities that are connected with the conception, creation and production outputs based on massive reproduction as well as protected with copyrights. Under this concept, cultural industries include: publishing and printing of recorded media, audiovisual activities and directed related activities (press agencies, multimedia, advertising etc).12

The Nordic concept was introduced in 1967 by the situationist movement, particularly by Guy Debrod. The later, Gerhard Schulze introduced Debord`s spectacle society as "the experience economy". The experience economy is based on rising demand for experiences that build on the added value creativity generates both in new and more traditional products and services. In the experience economy the industrial competitiveness is to provide quality products and services that embody sentiment, values, convictions, identity and aesthetics for witch consumers are willing to pay extra. The experience economy represented the last stage of evolution of economy – the agrarian economy based on extracting commodities moved to an industrial economy based on manufacturing goods, than to a service economy based on delivering services and now to an "experience economy“ based on staging experiences. In accordance with the Nordic concept, creative industries represent a huge part of experience economy. Under this concept, the experience economy include: visual arts, music industry, tourism, publishing, performing arts, radio and television, architecture, sports industries, design, printed media, film and video, advertising, film industry, fashion, entertainment events and amusement.13

From a methodological point of view, starting point in most of mapping studies is not to define or measure creativity, but to examine how creativity is exploited and transformed to tradable products or services, and how process of production, commercialization, distribution and consumption can be properly evaluated within the same sector of economic activities. In that sense, the creative industries are an industrial system that transforms intangible assets into processes of production and distribution of goods and services of symbolic values and social meanings.

In mapping studies, creative industries have been observed as an aggregate part of a production system. This criterion follows the conventional conception of value chain to include those economic activities directly involved in the production of content, reproduction, distribution and consumption of product or service of the creative industries. There are three general parts of creative industries production system: content origination - activities directly involved in the creation of contents; production input - activities that providing means of production or infrastructural supports to the production process and reproduction and distribution-activities of reproducing original content.14

The general data gathered from these studies is a powerful means for analyzing driving forces of certain areas within creative industries and their contribution to economic growth in national frameworks, but they cannot be accepted as consistent indicators for gaining a global picture on the 11The North American Industry Classification System (NAICS) classified economic units in two primary sectors:

the information sectors and arts, entertainment and recreation sector. The information sector include three types of activities: activities related to producing, activities related to manipulating and distributing information and cultural products and activities that provide the means to distribute of product, data and communication.

12 Economy of culture in Europe (2007), p. 47. 13 Denmark in the culture and experience economy-5 new steps (2003), p.7-9. 14 Baseline study on Hong Kong’s creative industries (2003), p. 23-24.


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development of creative industries. The reason being that crucial questions which relate to contents of creative industries that are a mapping subject vary from country to country.

Although mapping studies bring a certain methodological incomparability, they also reveal basic trends which show that creative studies represent a significant segment of the overall industry and that their influence to forming GDP is continually increasing. So for example, their share in the GDP goes from 2,8% in Singapore to 7,9% in Great Britain. The average annual growth they realize is 7% in USA up to 13,4% in Singapore, with a strong tendency of the average growth in these industries to overcome the average growth of GDP. In Britain, creative industries accounted for over 7.9% of the GDP, employed some 1.95 million people and accounted for about £112.5 billion value added. London is the center of the UK`s creative industries and its growth shows an expansion economy of creative sector in the city. In London, creative industries employed 546,000 people, accounted for £ 21 billion and record average annual growth more than 11%.15 London is the first creative industry city leader that takes advantage of development and concentration of talented creative people to build the city brand and local economy. With the project "Cool London, Cool Britain" London’s government had recognized the diversity of creative capital and possibility to invest in cultural initiatives to increase its economic success. In 2000, London’s government developed an aggressive local camping to market and promoted London as a creative industries hub that offers a high quality of life, good jobs in creative industries, welcoming climate for creative entrepreneurs and leaders in creative fields. This project was supported with micro-financial programmes dedicated to start-up investments for entrepreneurs in creative industries (Creative London, Creative industries fund, Art Community Programme, Creative Economy Programme etc) as well as with structural non-financial support that have been in charge of Development agency for creative industries.

3. CONTRIBUTION OF CREATIVE INDUSTRIES TO THE ECONOMIC DEVELOPMENT IN SERBIA

Creative industries are a conglomeration of very heterogeneous economic branches where creativity is the essential input for creating product and services. If we analyze the international research carried out on creative industries, determining activities that belong, so to speak, to the sector of creative industries is based on official activity classifications which are grouped in accordance with the specific and objectively perceivable value chain. In practice, the available statistical data limit full consistency and the value chain application in mapping creative industries and therefore it is always those activities for which the lowest levels of aggregation are developed and for which only the most data is available or their share could be estimated with a high degree of reliability. With such a methodological approach, the abstract categories related to creative industries such as concept and definition are brought down to a specification of activities included in the subject of a research and in accordance with statistical and pragmatic demands of economic development evaluation.

The full perception of the creative industries’ economic contribution in Serbia is limited by the application of the specific (material) concept in calculating basic macroeconomic aggregates. Relating to that, different economic categories have been used depending on whether certain activities belong to the social activities sector (such as architectural and engineering activities, motion picture projection, radio and television activities, computer activities and similar) or whether we talk about activities that fulfil a vaguely determined concept of material production and therefore results of their activities should be a part of the gross domestic (material) product and national income calculation.16 15 Ibidem, p. 213-215. 16 For this paper, the term "creative industries production system" was used in measuring the business

performance of the mentioned sector, and the term "core of creative industries" was used in measuring the macro-economic importance of the sector. The reason for using the two terms was the result of different methodological data in measuring economic performances: business performances are measured on the basis of financial statements so it was possible to include data for the advertising industry, motion picture projection and radio and television activities as well as to make a comparison through the value production chain; macro-economic indicators are measured on the base of the official national accounts methodology system, and in this system it is not possible to identify analytical information for advertising and propaganda services, motion picture projection and radio and television activities because the lowest levels of aggregation are not developed. Also, all the data represent "statistically visible" indicators which mean they do not account individuals and those business entities which principal occupation is in another sector.


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Having in mind methodological restrictions and available data, in this paper the creative industries production system in Serbia cover the following activities: publishing and printing (NACE, rev.1 branch 221 and 222), recorded media reproduction (NACE, rev.1 branch 223), advertising and propaganda services (NACE, rev.1 branch 744 and 741), motion picture and video projection (NACE, rev.1 branch 921) and radio and television activities (NACE, rev.1 branch 922) and the core of creative industries covers: publishing and printing (NACE, rev.1 branch 221 and 222), recorded media reproduction (NACE, rev.1 branch 223) and motion picture and video projection (NACE, rev.1 branch 921).17

The economic aspects of creative industries in Serbia can be viewed from two perspectives: the business performances and contribution they make in generating basic macroeconomic aggregates. The factual perception of the creative industries’ participation in generating basic macroeconomic aggregates in the Republic of Serbia is very difficult to make because during the last couple of years there have been two ways of calculating macroeconomic aggregates present in the national statistical system: the first one, which theoretically relies on the concept of material production and the second, the internationally accepted system of national accounts. As a result of application of those two ways of calculating , the economic activities in our statistics is measured through the use of data regarding gross material product and gross domestic product.

According to the official statistics, publishing, printing and reproduction of recorded media the greatest participation in creating gross material product in 2001 with about 1,93%, whereas their participation in 2003 was about 1,45%. Within the same period of time, motion picture and video activities record growing participation in creating gross material product (with 0.05% in 2001 to 0.1% in 2003).

Observing the sector origin of gross material product and national income on lower levels of aggregation such as branches and groups, offers valuable analytic information on productional structure, as well as contribution of certain branches in forming gross material product and national income on the area level. In forming gross material product of publishing, printing and reproduction of recorded media, the greatest contribution belongs to publishing (in 2001 -63%, in 2002-55.4%, in 2003-63.6% and in 2004 -61.5%) and the smallest that of recorded media reproduction (in 2001- 0.06%, in 2002-0.19%, in 2003-0.63%, and in 2004 0.36%).

It is interesting to notice certain trends within the framework of relatively coherent groups of activities. For example, in forming the gross material product and national income in publishing, the participation of publishing books, brochures, music books and other publications decreases (gross material product- from 65.2% in 2001 to 23.95% in 2004; national income – form 63.2 in 2001 to 28.2 in 2004) and the participation of publishing newspapers increases (gross material product -form 7.04% in 2001 to 22.69% in 2004; national income- from 24.6% in 2001 to 50.46% in 2004). Within the framework of forming the gross material product and national income of motion picture and video activities, the increase in participation of motion picture and video production (gross material product -from 41.8% to 51.9% in 2004; national income- from 5.1% in 2001 to 51.9% in 2004) and decrease of motion picture and video distribution (gross material product- from 58.1% in 2001 to 36.8% in 2004; national income- from 94.9% in 2001 to 34.5% in 2004) is evident.18

There is a large number of factors that affect results of economic activities in the observed activities, so there is no reason to doubt the existence of certain relations between fiscal, credit, administrative and other measures and scopes of economic activities. However, based on summary economic indicators, it is not possible to come up with an adequate conclusion on the nature, power and characteristics of these relations, rather, it is possible to perform only based on empirical research of concrete activities.

17 Creative industries typology was made in accordance with the Law on Activity Classification and Register of

Classifying Units which is based on activity classification of the European Union (NACE, revision 1). 18 Jovicic S. Mikic H. (2006), p. 61-62.


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If we consider the sector origin of this macroeconomic aggregate (by methodology of National Accounts), when it comes to forming GDP, publishing, printing and reproduction of recorded media have a relatively stable participation of about 0,7% (2001-2004). In obtaining the gross value added in the field of pulp, paper and paper products manufacture they participate with an average of 65%, and in obtaining the gross value added of manufacturing industry the average participation is 4.1%. On the other hand, recreational, sporting and cultural activities participate in generating gross domestic product with 1,2 % (2001-2004), whilst their average participation in obtaining the gross value added of other community, social and personal services is about 55%.19

If we examine the indexes of relative changes of the gross value added and gross domestic product it is noticeable that the growth realized within the area of publishing, printing and reproduction is lower than the growth of gross domestic product, so that negative growth rates of the gross value added within the framework of publishing, printing and reproduction decrease until 2003 and that in 2004 there is an achieved growth of 6.3% in comparison with 2003. In spite of the 6,3% growth in 2004 when the growth of the gross domestic product was 9,3%, publishing, printing and reproduction in that year reached the level of 98,37% of the gross value added from 2001.20 Such data, besides pointing out the decrease of certain structural and economic deformations within the sector, also show a certain ascending trend which culmination we should expect in the years ahead.

In the context of economic aspects of the core of creative industries, attention should be drawn to available employment facts. Although in the period between 2002 and 2005 the number of employed persons within the area of publishing, printing and reproductions went down, the negative employment rates are considerably lower than the negative employment rates of the overall employment, but that of employment in the manufacturing industry as well.

So, for example, in the period of 2002 and 2005 the total number of employed persons on the level of all activities decreased for 7.78%, in the manufacturing industry for 18.83%, whilst in the field of publishing, printing and reproductions it decreased for 3.45%. In 2005, the number of persons employed in this field represents 1.25% of the total number of employed and about 4.2% of persons employed in the manufacturing industry.

4. CREATIVE INDUSTRIES PRODUCTION SYSTEM IN SERBIA In 2005, about 2242 enterprises were active in the creative industries production system. This is an increase of 0.1% compared to 2004 and corresponds to about 2% of the total number of active Serbian companies. At the same time, the number of the employed was about 29,049 persons. The proportion of employees in creative industries compared to the total number of Serbian employed is about 1.89 %. Compared with the previous year, the number of employees has decreased by about 9%. This decline can manly be attributed to the structural change in the field of radio and television activities (for example, transformation of Radio-television of Serbia). Concerning employment, it should be noticed that the employment is much higher than it is "statistically visible“. The employment in creative industries is quite unique. It is characterized by atypical forms of employment: job flexibility, multi-tasks, higher job mobility, freelance contracts, part-time or self-employment activities. For example, the average of honorary engagements (authors, freelance editors, actors, designers etc) per enterprise is 100 persons a year.21

In 2005, the creative industries production system realized revenues of € 965 million, which represented an increase of about 23.31% compared to 2004. Accordingly, net profit also rose to about €75.1 million in 2005, compared to €39.6 million in 2004. The increase of the net profit in creative industries production system has been primarily driven by structural changes in printing and music industries. For example, the liberalization of paper market e.g. free import of paper and paper material for printing newspapers as well as privatization of "Matroz", Sremska Mitovica (factory for newspaper paper) contributes to the strong competition in the paper market which resulted in the decrease of the paper prices and increase of profit margins.

19 Statistical Year Book (2005). 20 Statistical Year Book (2003, 2004, 2005). 21 Case study "Publishing house CLIO" and interview with director Zoran Hamovic, march 2006.


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The publishing industries as well as radio and television activities are the most important sectors in both the number of enterprise and employees. More than a half of all the cultural industry enterprises were in the filed of publishing (70%) and about 13.5% in the field of radio and television activities. About 96% of creative industry enterprises are micro-businesses with between 1-12 employed persons. There is also a significant concentration of creative industry enterprises in major administrative centres and the capital, which can be explained by a very strong infrastructure and distribution network cannels, as well as a huge supply of creative workforces.

If we observe the potential for growth at generic stages of the value production chain (content origination and production, reproduction and distribution), there has been a growth in all indicators in the “content industries” as well as in those industries concerned with the reproduction. The distribution and consumption were less developed, so this situation can be accounted for by both the non systematic nature of the public policy for creative industries, as well as the state ownership of most enterprises which are involved in distribution activities (for example, bookshops, cinemas etc).

Table 1. Number of enterprises, employees and revenues in creative industries, 2005

Brach Number

of enterprises

Number of

employed

Revenues (in 000 €)

Net profit (in

000 €)

Net profit ratio

(2005)

Net profit ratio

(2004) Publishing books 468 3789 107494 13950 12,98 9,35Publishing newspaper 134 4494 205490 11916 5,80 1,41Publishing magazines 123 958 44633 9031 20,23 20,45Other publishing activities 110 618 42072 1229 2,92 2,21Printing newspapers 32 1579 45122 722 1,60 2,77Other printing 519 5024 142672 12183 8,54 3Bookbinding and finishing 34 255 4948 321 6,49 4,45Composition and plate-making 10 54 1805 212 11,75 5,84Other activities related to printing 136 1213 18409 677 3,68 3Total 1566 17984 612645 50241 8,20 5,6Publishing sound recording 50 168 14735 2546 17,28 8,4Sound recording reproduction 13 45 7693 1929 25,07 8Total 63 213 22428 4475 19,95 8,27Motion picture and video production 147 383 20610 1902 9,23 8,67Motion picture and video distribution 42 239 18459 2116 11,46 6,53Motion picture projection 22 342 4245 250 5,89 2,71Video recording reproduction 4 5 229 6 2,62 2,71Total 215 969 43543 4274 9,82 6,59Radio and television activities 301 8642 160950 1511 0,94 0,68Total 301 8642 160950 1511 0,94 0,68Advertising22 97 1241 125830 14614 11,61 10,95Total 97 1241 125830 14614 11,61 10,95TOTAL 2242 29049 965396 75115 7,78 5,35

Camber of Commerce of Serbia, 2006; Statistical Year Book 2006; Journal for marketing Taboo, No. 25/2006.

The financial performances of enterprises in cultural industries are better than the average for the whole economy. In 2004, the most profitable industries were publishing journals and similar periodicals (net profit ratio 20.45%), publishing books (net profit ratio 9.35 %) and movie picture and 22 Advertising includes advertising agencies, marketing research, intermediary marketing agencies, agencies for

promotion and public relation and agencies for propaganda.


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video production (net profit ratio 8.67%). In the same year, the average net profit ratio for the whole economy was 3.57%23 and average net profit ratio for creative industries 5.53%.

In 2005, the financial performances were improved. Also, the rank of the most profitable industries changed a lot. The most profitable industries were sound recording reproduction (net profit ratio 17.28 %) as well as publishing journals and similar periodicals (net profit ratio 20.23%). In 2005 average profit net ratio for the whole economy was 4.67%24 and average net profit ratio for creative industries 7.78%.

Facts about creative industries economic potential and importance have a different scope and analytical value, but instead of that, its offers important message for strategic positioning of creative industries in Serbia as well as for identifying long-term development components. In that sense, the future research should be directed towards identifying of activities that have perspective potentials as well as mapping activities that have a strategic significance for the development of certain Serbian regions and cities.

In the sprit of a good financial and economic performance of creative industries in Serbia, there is no systematic support for creative industry development. The public policy approach is partial, mostly from a short-term perspective, and therefore not giving basis for strategic positioning of sectors and establishing a considerably more offensive and efficient developmental concept which would make it possible for creative industries to become an incentive of economic, social, demographic and other positive currents. This situation has been caused mostly due to an uneven public awareness on the importance and economic influence of this sector for the economy and social development. One of the manifestations of this situation is the disharmony of public attitudes and the non-existence of consensus in the matter of the role and future development of creative industries.

The countries that have recognized the strategic importance of creative industries, like the UK, Hong Kong, Singapore, the USA, Denmark etc and accordingly took suitable measures, have succeeded in accomplishing both results in their economy, as well as cultural influence on the international market. Those countries that have clearly defined and even aggressive political measures which benefit their creative industries, gain worldwide dominance both in economy and culture, while those countries which proudly speak about their culture often by that imply a set of normative regulations by the use of which they ensure control over creative production.

The basic goal of the creative industries` development is to develop such a structural policy which would, by combining elements of strategic actions of economic and cultural policy, enable a positive adjustment of creative industries to newly emerged changes in the economic system on permanent bases. For their creative economy of Serbia, public investments will still be key element, since the individual entrepreneurship and private investments in the field of creative industries, nurturing creative talents and developing the room for innovations are in the process of creation. Therefore, the public interventions will remain one of the most significant factors in the creation of competitive and sustainable creative economy.

Even though there are different ways to overcome numerous economic and non-economic obstacles for the development of creative industries, international experiences show that the initial development strategies of development and positioning of creative industries are generally based on the following:

• capacity building and coordination improvement between different institutions and acters with the special emphasis on the cooperation between the private and NGO sectors;

• improvement of the legal environment • development of the system non-financial support • development of adequate programmes for direct and indirect financial support.

23 The average net profit ratio for whole economy is calculated on the basis of financial statements for 2004 for

all active enterprises that submit closing bills. Internal Research, the Camber of Commerce of Serbia, 2006. 24 The average net profit ratio for whole economy is calculated on the basis of financial statements for 2005 for

all active enterprises that submit closing bills. Internal Research, the Camber of Commerce of Serbia, 2007.


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3. CONCLUSION REMARKS

In the time of globalization, competitive advantages are based not only on the input based technological innovation, but intangible elements such as style, branding, design, aesthetic and symbolic value. In that sense, culture has been rediscovered by many governments as a core resource that could help foster the development. Subtle qualities as creativity and originality are vital to the success of economy and transformation of society. Creative industries earn their distinctive nature in society by generating or producing cultural and social meaning through the creation of text, image, sound or other multimedia forms. The multiplying values of the creative industries are not limited only to economic areas; they contribute to the configuration of the cultural image of a city, regions and countries.

Having in mind the heterogeneous nature of creative industries as well as the connection between sectors and outside of them, it is evident that the development of creative industries needs combined programmes of stimulating measures which, through integrating economic cultural and employment policy measures, contribute to an even social-economic development. So, in the future long-term sustainability of Serbian creative industries will depend on the co-ordination and joint programme development between economic development and cultural development portfolio areas. The economic importance, in terms of creating wealth and opening new work positions is a reason and in some way a universal motif for development of creative industries, but is by no means the essence. In the transitional countries accomplishing a balance in the domain of world cultural exchange, can be realized only if they become suppliers of cultural goods and services themselves, by encouraging local creativity, allow and support development of their own creative industries.

The worse the state a society is in, as it is the case with countries in a process of political transition, the higher the responsibility of creative industries is. In many European countries research has shown that creative industries have participated in gross domestic product to an important degree, that they open new work positions and contribute the overall development especially of cities and regions. Beside the already recognised importance for preservation and development of the national culture (language, values and attitudes), these new results that are of use to creative industries also give arguments to the cultural policy significant for its repositioning amongst public policies, as well as a significant chance to get on the list of government’s priorities.

The disharmony of public attitudes in Serbia and non-existence of consensus in the matter of role and future development of creative industries is just one more element that causes autarchic and chaotic actions on all levels of authority. Therefore, we can start talking about development of creative industries in the true sense of the word in that moment when areas which are the skeleton of development in the 21st century are truly based on strategic foundations and contemporary and systematic regulatory framework that will suit the period in question.

REFERENCES

Baseline study on Hong Kong’s creative industries (2003), Center for Cultural Policy Research, The University of Hong Kong, Hong Kong.

Creative Industries and Development (2004), United Nations Conference on Trade and Development (UNCTAD), Eleventh session, Sao Paolo, 13-18 June 2004. http://www.unctad.org/en/docs//tdxibpd13_en.pdf

Creative Industries Mapping Document (1998), The Department of Culture, Media and Sports (DCMS), London http://www.culture.gov.uk/global/publications/archive_1998

Creative Nation (1994), The Department of Communication, Information Technology and the Arts, Canberra, http://www.nla.gov.au

Denmark in the culture and experience economy-5 new steps (2003), The Danish growth strategy, Danish Ministry of Culture, Copenhagen.

Du Gray P. (1997) Production of Culture /Culture of production, Sage, London.


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Economy of culture in Europe (2007), European Commission, Directorate – General for Education and Culture, Brussels.

"Financial indicators of marketing business in 2005" (2006) Journal for marketing TABOO-World of marketing, No. 25, MARK-PLANETAK, Pancevo http://www.taboomagazine.org/code/navigate.asp?Id=27

Hesmondhalgh, D. (2002), The Cultural Industries, Thousand Oaks, New Delhi: Sage Publications ltd. London.

Howkins J. (2001), The creative economy: How people make money form ideas, Penguin Business, London.

Jovicic S. and Mikic H. (2006), Creative industries in Serbia-basic facts and recommendation, British Council, Belgrade.

Marcus C. (2005), Future of Creative Industries-Implications for Research Policy, European Commission, Directorate-General for Research, Brussels

Understanding Creative Industries –Cultural statistics for public-policy making (2006), UNESCO http://portal.unesco.org/culture/.

Urban development needs creativity: How creative industries affect urban areas (2003), World Bank http://www1.worldbank.org/devoutreach/nov03/article.asp?id=221.


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TRANSITION TO THE KNOWLEDGE-BASED ECONOMY IN SERBIA: OPPORTUNITIES AND PROBLEMS

Đorđe Mitrović1

Abstract: The aim of this paper is to present selected aspects of the knowledge-based economy in Serbia and to provide an overview of Serbia’s readiness for the knowledge economy using the benchmarking methodology of the World Bank Institute. The paper attempts to analyze Serbian development opportunities and difficulties from the perspective of transition to knowledge-based economy and society. In the paper, we introduce different concepts of the knowledge-based economy and provide brief survey of literature in this area. The development of knowledge-based economy is the most important strategic element of the future competitive position of Serbia on the global market and the main driver of economic growth. The government needs to develop explicit strategies to make effective use of knowledge for sustainable economic development in Serbia. According to World Bank concepts, the framework for the knowledge-based economy consists of four key functional areas: (1) economic incentive and institutional regime, (2) educated, creative and skilled population, (3) effective national innovation system and (4) dynamic information infrastructure. The main goal of the paper is to stress (1) the importance of investments in education, innovation, information and communication technologies, (2) the significance of development of appropriate economic and institutional environment in Serbia and (3) very important role of coordination across these four functional areas as framework for efficient creation, adoption, adaptation and use knowledge in economic production. The paper presents a review of the knowledge-based economy experience in Europe (in old and new EU member countries). In paper we summarize the relative position of Serbia and other countries in the region in terms of those indicators that are most relevant for the development of the knowledge-based economy. We should determine the present stage of development of the knowledge-based economy in Serbia, as well in others former Yugoslav countries using comparative analysis of KBE indicators provided by World Bank (KAM methodology). Finally, the paper aims to provide a theoretical and empirical approach to future challenges and possible actions on country (Serbia) and regional levels (former Yugoslav countries) and identifies sectors or specific areas where policymakers may need to focus more attention or future investments - especially including research and development and national innovation system which need to become a central element of development policy.

KEY WORDS: KNOWLEDGE–BASED ECONOMY, ECONOMIC GROWTH, ECONOMIC DEVELOPMENT, INSTITUTIONS, ECONOMIC POLICY.

1. INTRODUCTION

At the beginning of the XXI century, Serbia still struggles with the shift from inefficient economy to the more effective one. The main objective of transition to a market economy for Serbia is catching up to developed countries and bridging the gap to advanced economies, especially members of the European Union. In order to achieve this aim, economic policy of the Serbian government is based on macroeconomic measures which would open and liberalize the economy, eliminate the barriers to competition and set up rules and practices commonly for the advanced market economies. While the market transition process in Serbia is still in progress, developed economies make transition toward an economic system based on knowledge and information as the key factors of accelerated economic growth and development. Because of that, many years are required for Serbian’s economy in order to catch up with the lagging members of the EU. Therefore, Serbian government has to be aware of the increased importance of the concept of knowledge-based economy and society for improvement of the countries’ social and economic welfare.

The aim of this paper is to present selected aspects of the knowledge-based economy in Serbia and to provide an overview of Serbia’s readiness for the knowledge economy using the benchmarking methodology of the World Bank Institute. The paper attempts to analyze Serbian development opportunities and difficulties from the perspective of transition to knowledge-based economy and society. In the paper, we introduce different concepts of the knowledge-based economy and provide brief survey of literature in this area. The development of knowledge-based economy is the most important strategic element of the future competitive position of Serbia on the global market and the



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main driver of economic growth. The government needs to develop explicit strategies to make effective use of knowledge for sustainable economic development in Serbia. According to World Bank concepts, the framework for the knowledge-based economy consists of four key functional areas: (1) economic incentive and institutional regime, (2) educated, creative and skilled population, (3) effective national innovation system and (4) dynamic information infrastructure.

The main goal of the paper is to stress (1) the importance of investments in education, innovation, information and communication technologies, (2) the significance of development of appropriate economic and institutional environment in Serbia and (3) very important role of coordination across these four functional areas as framework for efficient creation, adoption, adaptation and use knowledge in economic production. The paper presents a review of the knowledge-based economy experience in Europe (in old and new EU member countries). In paper we summarize the relative position of Serbia and other countries in the region in terms of those indicators that are most relevant for the development of the knowledge-based economy. We should determine the present stage of development of the knowledge-based economy in Serbia, as well in others former Yugoslav countries using comparative analysis of KBE indicators provided by World Bank (KAM methodology). Finally, the paper aims to provide a theoretical and empirical approach to future challenges and possible actions on country (Serbia) and regional levels (former Yugoslav countries) and identifies sectors or specific areas where policymakers may need to focus more attention or future investments - especially including research and development and national innovation system which need to become a central element of development policy.

2. THE CONCEPTS OF KNOWLEDGE-BASED ECONOMY AND SOCIETY

The knowledge-based economy is a much complex and broader phenomenon than digital, new or networked economy which incorporates the production and use of information and communications technology and its impact on human well-being. There are different dimensions and aspects of the knowledge-based economy, but before describing this concept we must explain what knowledge is. In most part of economic literature it is one of the most crucial factors for the economic growth. The possession of the knowledge increases availability of other traditional factors (capital, labor and land). The relation between data, information and knowledge is very clearly defined in the literature. The data represents the basic piece of information. The moment when information is structuralized and interpreted is the creation of the knowledge.2 The key factors for each countries (and not only countries, but individuals and enterprises) for future improvement of their competitive position is abilities to use, modify and create new knowledge.

Knowledge may be divided into two broad categories: codified knowledge and tacit knowledge. 3 Codified knowledge is organized, systematized, written knowledge, which may be stored and transformed in different ways (books, patents, reports...). Tacit knowledge is inherently intangible and results from talents, experience and abilities. Such kind of knowledge, which is stored only in the “minds of individuals”, is very difficult to measure and quantify. Another classification of knowledge divides it into four categories. Know-what is type of knowledge relates to facts and data and is identified with information. Know-why relates to the knowledge on rules functioning in the nature, society, economy etc. Know-how is knowledge related to abilities of doing something. Know-who relates to combination of information and social relations, identifies those who posses knowledge and describes it. “Know-what” and “know-why” are knowledge which are codified, while “know-how” and “know-who” are more tacit knowledge.4

One of definitions of the knowledge-based economy says that it is economy which is “directly based on the production, distribution and use of knowledge and information”.5 In the similar way, the knowledge-based economy is seen “as production and services based on knowledge-intensive activities that contribute to an accelerated pace of technological and scientific advance as well as 2 David, P. A. and Foray, D. (2002), s. 13-28. 3 Fischer, M. M. (2003), s. 349-350. 4 Piech, K. (2004), s. viii. 5 OECD (1996).


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equally rapid obsolescence. The key components of a knowledge economy include a greater reliance on intellectual capabilities than on physical inputs or natural resources, combined with efforts to integrate improvements in every stage of the production process, from the R&D lab to the factory floor to the interface with customers.”6

The definition of the UK Department of Trade and Industry says that the knowledge driven economy is one “in which the generation and exploitation of knowledge has come to play the predominant part in the creation of wealth”.7 In that way, the knowledge-based economy is “one that encourages its organizations and people to acquire, create, disseminate and use (codified and tacit) knowledge more effectively for greater economic and social development”.8

For purpose of this paper, we will use the definition of the knowledge-based economy (according to the World Bank KAM project) as consisting of four essential, and interrelated, elements:

“1. Creating an appropriate economic incentive and institutional regime that encourages the widespread and efficient use of local and global knowledge in all sectors of the economy, that fosters entrepreneurship, and that permits and supports the economic and social transformations engendered by the knowledge revolution;

2. Creating a society of skilled, flexible and creative people, with opportunities for quality education and life-long learning available to all, and a flexible and appropriate mix of public and private funding;

3. Building a dynamic information infrastructure, and a competitive and innovative information sector of the economy, that fosters a variety of efficient and competitive information and communications services and tools available to all sectors of society. This includes not only "high-end" information and communications technologies (ICTs) such as the Internet and mobile telephony but also other elements of an information-rich society such as radio, television and other media, computers and other devices for storing, processing and using information, and a range of communication services.

4. Creating an efficient innovation system comprising firms, science and research centers, universities, think tanks and other organizations that can tap into and contribute to the growing stock of global knowledge, adapt it to local needs, and use it to create new products, services, and ways of doing business.”9

The development of knowledge-based economy is the most important strategic element of the future competitive position of Serbia on the global market and the main driver of economic growth. The government needs to develop explicit strategies to make effective use of knowledge for sustainable economic development in Serbia. This means that Serbian government needs to understand countries’ strengths and weaknesses and to identify problems and opportunities that a country may face.

3. SERBIA READINESS FOR THE KNOWLEDGE-BASED ECONOMY

We will analyze aspects of the knowledge-based economy in Serbia and provide an overview of Serbia’s readiness for the knowledge economy using the benchmarking methodology of the World Bank Institute. To facilitate the transition process toward knowledge-based economy, the World Bank Institute’s Knowledge for Development Program has developed the Knowledge Assessment Methodology (KAM).10 Comparisons in KAM are made on the basis of 81 structural and qualitative

6 Powell, W. and Shellman, K. (2004), s. 201. 7 Department of Trade and Industry (DTI) (1998). 8 Dahlman, C. and Andersson, T. (2000), s. 32. 9 Derek H. C. C. and Dahlman, C. J. (2005), s. 4. 10 There are many others individual and composite indicators for measuring the development of knowledge-

based economy: European Innovation Scoreboard, EU Global Innovation Scoreboard, WEF Global Competitiveness Index, WEF Business Competitiveness Index, IMD World Competitiveness Index, Information Society Index, Technology Achievement Index, Network Readiness Index, ITU Digital Opportunites Index, UNIDO World Industrial Development Index...


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variables for 132 countries that serve as proxies for the four knowledge economy dimensions: economic incentive and institutional regime, education and human resources, the innovation system, information and communications technologies. Variables are normalized on a scale of zero to ten relative to other countries in the comparison group.11

The mode of the KAM which will help us to understand Serbian global position concerning development of knowledge-based economy is the basic scorecard. The KAM basic scorecard provides an overview of the performance of a Serbia12 in terms of all 4 dimensions of knowledge economy, for the period from 1955 to most recent years (2004, 2005 or 2006 – the last year for which we have available and appropriate data). Each dimension is represented by three key variables (Figure 1). Examining performance in the four KE dimensions, Serbia regressed in Innovation – its weakest area, while demonstrated positive developments in Education, a traditionally strong element for transition countries. Serbia notes very important improvement in Economic Incentive Regime (the country’s strongest dimension), while stagnated in access and penetration rates of Information and Communications Technologies.

Figure 1. Serbia: Basic Snapshot of the Knowledge Economy Readiness

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Source: Knowledge Assessment Methodology (KAM), Knowledge for Development Program, World Bank

The overall level of development of the knowledge economy in Serbia we will analyze using the KAM Knowledge Economy Index (KEI). It summarizes performance over four KE elements and is constructed as the simple average of the normalized values of 12 knowledge indicators of the basic scorecard. If the value of KEI is greater, the environment is more favorable for knowledge to be used effectively for economic development. Data in the table 1 are sorted by the value of the KEI (and its components) for Serbia and other countries for the last year for which exists available and appropriate data (2004, 2005 or 2006).

11 Normalized (u)=10*(Nw/Nc), Nw – the number of countries with worse rank, Nc – the total number of

countries in the sample with available data. 12 The data in KAM is for Serbia and Montenegro together.


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Table 1. Knowledge Economy Index and its components

Rank Country KEI Economic Incentive Regime

Innovation Education ICT

21 Estonia 8,13 7,86 7,58 8,32 8,76 23 Slovenia 8,04 7,33 8,04 8,56 8,23 29 Czech Republic 7,57 7,35 7,34 7,55 8,04 30 Lithuania 7,39 7,23 6,88 8,3 7,17 32 Hungary 7,28 7,4 7,1 7,6 7,04 33 Latvia 7,18 7,02 6,2 8,33 7,15 35 Slovak Republic 7,1 7,15 6,84 6,85 7,56 38 Poland 7,04 6,82 6,44 8,08 6,8 40 Croatia 6,43 5,72 6,75 6,14 7,13 41 Bulgaria 6,13 4,79 6,12 7,41 6,21 43 Russian Federation 5,98 2,7 7,52 7,71 5,98 49 Ukraine 5,55 4,33 5,86 7,66 4,34 54 Romania 5,37 4,31 5,17 5,94 6,05 64 Serbia and Montenegro 4,89 2,31 5,83 5,85 5,57 66 Macedonia 4,61 3,83 4,39 5,17 5,05 76 Bosnia and Herzegovina 4,16 3,52 2,96 5,98 4,17 98 Albania 2,7 2,46 1,56 4,71 2,07


Figure 2 shows the relative performance in the KEI for two points in time – 1995 and most recent. The countries or regions that are plotted below the 45 degree line indicate a regression in their performance throughout time. The countries or regions that are marked above the line signify improvement. The regression may be due to two reasons: the country either actually has lost ground in absolute terms over time, or improved slower then the comparative group.

Figure 2. Serbia and the World: Knowledge Economy Index


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Serbia, despite its transition and recovery period, managed to improve its overall performance in the aggregate KEI between 1995 and 2005. But, this improvement has a relative importance and remains very modest in relation with absolute values of KEI. Serbia performs better only than Bosnia and Herzegovina (which had the biggest improvement in relative terms of all countries in transition), Albania and Macedonia. The country still lagging behind Romania and Bulgaria, which stagnated or regressed in relative terms, but are better in absolute terms, and Croatia which also demonstrated better rates of improvement. Serbia is standing roughly in the middle in the global KE map, but lagging significantly behind new EU members and EU core members. Such position presents a significant challenge for Serbian government and need for urgent development of appropriate KBE strategy, because Serbia is already competing with economies which have highly developed and permanently advancing knowledge foundation.

Although Serbia’s performance may be overall positive, it isn’t as competitive as that of other countries of the region (except Bosnia, Macedonia and Albania) which are also seeking EU membership (like Croatia) or are already new EU members (like Slovenia). In Figure 3 we compare Serbia with Croatia and Slovenia – the two leading knowledge performers in the region – on their 2004/2005 performance in the four KE dimensions. The gaps Serbia needs to cover are obvious in all four dimensions and particularly in Economic Incentive and Institutional Regime.

Figure 3. Serbia, Slovenia, Croatia

Source: Knowledge Assessment Methodology (KAM), Knowledge for Development Program, World bank

In Figure 4 we show how Serbia performed, throughout time, in each of the 11 variables that describe the four KE dimensions and aggregate KEI (data for Tariff & Non-tariff Barriers are not available), plus one performance variable - GDP growth. For second performance variable, Human Development Index – HDI, data are not available. In the dimension of Economic Incentive Regime (Figure 5), Serbia significantly improved its performances and in its field country is better than some new EU members, like Czech Republic, Bulgaria and Romania which regressed in the period 1995-2005. Serbia demonstrated improvements in the Rule of Law and Regulatory Quality Indicators.

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Figure 4. Serbia: Serbia through time in KEI defining variables


In Education (Figure 6), Serbia carries a strong tradition, especially in science and math. Education is the one of the main dimensions which is instrumental for the country’s transition to a knowledge based economy. During the past ten years, Serbia improved marginally its overall performance in this dimension. Serbia is better in the field of improvement in education from Croatia and the world average, but is lagged behind new EU member countries. In 2004, Serbia has 96,40 % adult literacy rate. Enrollment rates in secondary rise between 1995 and 2004 from 63,50% to 88,70%, while tertiary enrollment rates improved over the same period from 20,48% to 36,30%. Although Serbia notes improving in both indicators, the country is not performing as competitively as other economies of the region (except Albania and Macedonia).

Figure 5. Serbia and the World: Economic Incentive Regime


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In the dimension of Information Communication and Technology (ICT) Serbia demonstrated a significant regression during the last ten years, as shown in Figure 7. Serbia notes in absolute terms very big improvement in main indicators measuring usage of ICT. In the period 1995-2005, the number of Total telephones per 1.000 people raised from 191,20 to 910,20, the number of Computers per 1.000 people raised from 14,20 to 47,70 and the number of Internet users per 1.000 people raised from 1,90 to 147,30. But, despite the impressive progress it is evident that the existing gap in the availability and penetration of information and communication technologies is still significantly large, especially when Serbia is compared with EU and OECD averages and other countries from the region (except Macedonia, Albania and Romania which are worse than Serbia in this field of knowledge based economy).

One of the best measures of the degree in which the country benefit from ICT usage is Networked Readiness Index (NRI). In the Networked Readiness Index13 Serbia (and Montenegro), amongst 124 countries, is ranked 74th. This score is very poor when compared to regional EU members (Romania and Bulgaria), candidates (Croatia) and other countries in region. Serbia is better only from Macedonia, Bosnia and Herzegovina and Albania (Table 2). The rankings in the table indicate that the environment for ICT development is not as favorable as it should be for rapid development of the knowledge-based economy. Serbia still has weak overall capability and the low readiness of the government, business and people to employ and leverage the potential of information and communications technologies in all areas of the social and economic life. This is very obvious when we compared Serbia with advanced economies in the region and EU members.

Table 2. Networked Readiness Index Variation 2006-2007 Environment Component Readiness Usage Rank

2006-2007 Countries/Economy Overall Score 2006

Rank 2005-2006

Score Rank Score Rank Score Rank 1 Denmark 5,71 3 5,54 4 5,84 3 5,76 2 2 Sweden 5,66 8 5,52 5 5,59 11 5,87 1 3 Singapore 5,60 2 5,19 13 6,09 1 5,53 5 4 Finland 5,59 5 5,63 3 5,86 2 5,27 10 5 Switzerland 5,58 9 5,50 6 5,74 5 5,50 6 6 Netherlands 5,54 12 5,29 11 5,57 12 5,75 3 7 United States 5,54 1 5,71 2 5,77 4 5,13 16 8 Iceland 5,50 4 5,75 1 5,16 25 5,60 4 9 United Kingdom 5,45 10 5,32 11 5,69 6 5,34 9 10 Norway 5,42 13 5,45 7 5,37 11 5,45 7 20 Estonia 5,02 23 4,48 25 5,35 23 5,24 12 30 Slovenia 4,41 35 3,78 42 4,90 31 4,55 26 33 Hungary 4,33 38 4,13 28 4,82 34 4,05 40 34 Czech Republic 4,28 32 3,86 36 4,90 32 4,09 37 39 Lithuania 4,18 44 3,82 41 4,55 43 4,18 34 41 Slovak Republic 4,15 41 3,73 43 4,63 40 4,09 38 42 Latvia 4,13 51 3,83 39 4,57 42 3,98 43 46 Croatia 4.00 57 3,57 49 4,65 39 3,79 47 48 Greece 3,98 43 3,90 33 4,48 51 3,56 55 55 Romania 3,8 58 3,31 62 4,54 44 3,53 57 58 Poland 3,69 53 3,30 64 4,34 56 3,43 63 70 Russian Federation 3,54 72 3,35 57 3,98 75 3,29 73 72 Bulgaria 3,53 64 3,20 69 4,12 68 3,27 76 74 Serbia and Montenegro 3,48 80 3,09 84 4,11 69 3,25 77 75 Ukraine 3,46 76 3,29 66 4,16 65 2,94 95 81 Macedonia 3,41 82 3,13 78 4,05 71 3,03 89 89 Bosnia and Herzegovina 3,20 97 2,80 102 3,77 84 3,04 88

107 Albania 2,87 106 2,69 107 3,34 97 2,58 112

Source: WEF, the Global Information Technology Report 2006-2007.

13 The Networked Readiness Index (NRI) is defined as “the degree of preparation of a nation or community to

participate in and benefit from ICT developments.” The Index is a composite of three components: (1) Environment for ICT – measured by three subindexes (market, political/regulatory situation, and infrastructure); (2) Readiness – measured by threesub indexes (individual readiness, business readiness, government readiness); and (3) Usage – measured by three subindexes (individual usage, business usage and government usage).


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Figure 6. Serbia and the World: Education


In Innovation, Serbia worsened its overall performance during the last ten years, and in that way remains significantly weak when compared to regional and EU economies (except Albania, Bosnia and Herzegovina and Macedonia). Looking at three major Innovation variables which defined Serbia’s position in the figure 8, data indicates that Serbia raised the number of its research personnel from 1.200 to 1.330,27 per million people during the last ten years and the number of Scientific and Technical Journal Articles per million people from 47,83 to 73,17. But, patent activity still remains very low and decreased and it is the main reason for Serbia’s bad position among European countries. The main problem of Serbia and other countries in region is poor financial situation of R&D. There are limited possibilities to modernize scientific infrastructure, to purchase new equipment, scientific and technical books, journals and others, to provide Internet access, data bases, modern scientific laboratories etc. There is massive and continued “brain drain”, because R&D professions are unattractive, low pay and without social status.

Figure 7. Serbia and the World: ICT


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4. CHALLENGES FOR THE DEVELOPMENT OF THE KNOWLEDGE-BASED ECONOMY IN SERBIA

The creating and development of knowledge-based economy in Serbia is important for further socio-economic development of country. In order to achieve this, Serbian government has to create and apply proper economic policies. Three main challenges for Serbia during a building of knowledge-based economy are competitive pressure emerging from globalization, growing „digital divide“ emerging from (un)usage of information and communication technologies and transition in education. Since globalization puts big competitive pressure on all national economies, including in Serbia, it is necessary a technological, managerial and organizational answer, aimed at improving productivity. At the first place, it is necessary technological modernization of the economic production in industry. This can be done by using information and communications technologies in all domains of economic activities, which is observable trend in most advanced new EU member and candidate countries. The main sources of new technologies are foreign direct investments which played a crucial role in restructuring of the transitional economies of new EU member and candidate countries. Serbia has today a comparative advantage expressing in cost differentials emerging from low wages and well educated workforce. This is one of the most important factors for attracting investments from abroad. Other factors such as the process of the privatization, liberal taxation schemes, proximity to markets, etc. have of course an important role in attracting of FDI. These foreign investments will bring with them a series of benefits in terms of knowledge and technology transfer, improved management and production process. The most important for development of the knowledge-based economy in Serbia is the fact that the foreign direct investments contribute to the higher productivity by higher quality of management and overall human capital.

Figure 8. Serbia and the World: Innovation


The process of globalization radically transforming the global division of labor reallocating in countries with low wages many manufacturing industries. Because of that, European countries meet the challenge of specializing on knowledge and technology-intensive economic activities, on services, niche markets, on quality and tailoring, outsourcing, etc. In order to catch up with modern European economies, Serbia has to focus their human and financial resources, the political goals of the state and in number of cases the companies’ business plans on those elements that are relevant for development of modern knowledge-based economy. Competitiveness today is based on another type of criteria – criteria of the knowledge-based competition, of innovation, of product and service development, of

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quality, of niche markets, etc. This assumes the adaptation of innovation systems by boosting R&D, putting FDI flows in longer term socio-economic development framework, concentrating on high-end production, etc. This gives a very important and crucial role to the information and communications technologies.

To successful meet the challenge of globalization, development of ICT sector needs to be a priority for Serbian government. To change the overall picture and to boost the growth in the sector of telecommunications, Serbia has to attract more foreign investments combined with the full real liberalization of all telecom services (like voice over internet protocol, etc.). Liberalization, introducing competition into the sector and raising the quality of the network will affect considerably the number of internet usage and penetration which will have consequences in further increasing e-commerce, internet banking and e-government initiatives. In order to become member of EU, Serbia has not only to open a market to investment and competition, but also to raise public awareness of the benefits of modern technologies and to strength and enforce laws related ICT. The improving of efficiency and competencies in the ICT sector (with education) is the most dynamic dimension of the knowledge-based economy.

The most significant social disparity, from the point of view of knowledge-based economy, is the digital divide, which represents unequal access to information and communications technologies and its benefits. There is a risk of developing a growing digital divide between Serbia and other countries, divide within country, across different industries, generations, cultures, gender groups and social classes. The Serbian government has to pay more attention to the role of information and communications technologies in such context, because access to information is a main determinant of economic and social well-being. There are four kinds of barriers to access and the type of access they restrict. First is a lack of elementary digital experience caused by lack of interest, computer anxiety, and unattractiveness of the new technology (“mental access”). Second is no possession of computers and network connections (“material access”). Third is a lack of digital skills caused by insufficient user friendliness and inadequate education or social support (“skills access”), and fourth is a lack of significant usage opportunities (“usage access”).14 The policies of development of knowledge-based economy in Serbia need to ensure that people have greater access to information and communications technologies and that government can improve the efficiency of public services, like health and education, through these technologies.

The third challenge for Serbia during the building of the knowledge-based economy is transition in education. The available workforce and its level of education are main drivers of the economic growth in knowledge-based economy. Since the knowledge-based economy has a growing services sector, it is necessary to increase share of tertiary educated workforce. Investments in education in Serbia need to adjust to the expected structural shifts in the economy after its restructuring. The most important emphasis need to be on primary and secondary education. The reform need to bring more educational options at tertiary levels in the national education system. The main challenge will be, not only for Serbia, transition to secondary and to tertiary educated populations, balancing between traditional education and lifelong training.

In accordance with these challenges, economic policies of the Serbian government need to enhance knowledge-based growth through correct macroeconomic and structural policies, creation of competitive R&D market and increasing the efficiency of use of the research funds and education policy and a reform of the education system.15 The experience of Estonia and Slovenia shows that the appropriate economic policy need to pay more attention to education and more effective use of financial resources in this area, to harmonization of cooperation of foreign companies with national systems and to finding a balance between financing stimulation of domestic activities and stimulation of the absorption of technologies and knowledge abroad.16

14 Dyke, J. van and Hacker, K. (2003), s. 315-316. 15 Orlowski, W. (2000). 16 Bucar, M. (2003).


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5. CONCLUSION

In this paper it presented selected aspects of the knowledge-based economy in Serbia and provided an overview of Serbia’s readiness for the knowledge economy using the benchmarking methodology of the World Bank Institute. We analyzed Serbian development opportunities and difficulties from the perspective of transition to knowledge-based economy and society. We concluded that the development of knowledge-based economy is the most important strategic element of the future competitive position of Serbia on the global market and the main driver of its economic growth. The government needs to develop explicit strategies to make effective use of knowledge for sustainable economic development in Serbia. In comparative analysis with other countries in region and EU we concluded that investments in education, innovation, information and communication technologies and development of appropriate economic and institutional environment in Serbia are framework for efficient creation, adoption, adaptation and use knowledge in economic production. In the paper, we also provided a theoretical and empirical approach to future challenges and possible actions and identified sectors or specific areas where Serbian government may need to focus more attention or future investments - especially including research and development and national innovation system which need to become a central element of development policy.

REFERENCES

Bucar, M. (2003), Slovenia's potential for knowledge-based economy with focus on R&D and innovation policy, http://www.unisa.edu.au/cid/publications/zagreb2003/bucar.pdf

Dahlman, C. and Andersson, T. eds. (2000), Korea and the Knowledge-based Economy: Making the Transition, OECD and World Bank.

David, P. A. and Foray, D. (2002), “Une introduction à l’économie et à la société du savoir.” Revue internationale des sciences sociales – La société du savoir, № 171, Mars 2002, pp. 13-28.

Department of Trade and Industry (DTI) (1998), Building the Knowledge Driven Economy: Competitiveness White Paper, Department of Trade and Industry, London.

Derek H. C. C. and Dahlman, C. J. (2005), The Knowledge Economy, the KAM Methodology and World Bank Operations, The World Bank, Washigton.

Dyke, J. van and Hacker, K. (2003), “The Digital Divide as a Complex and Dynamic Phenomenon”, The Information Society, 19: 315–326, 2003.

Fisher, M. M. (2003), „The New Economy and Networking“ in Jones, D. C. ed. „New Economy Handbook“, Elsevier Academic Press, London, pp. 343-367.

Kuklinski A. and Burzynski, W. (2004), Developing the Knowledge-Based Economy in Europe: The Perspective of Eight Countries, TIGER Working Paper Series № 49, Warsaw.

OECD (1996), The Knowledge-based Economy, Paris.

Orłowski, W. (2000), “Knowledge Economy and Knowledge-Based Growth: Some Issues in a Transition Economy”, in: Kukliński, A. (ed.), The Knowledge-Based Economy: The European Challenges of the 21st Century, State Committee for Scientific Research of the Republic of Poland, Warsaw, pp. 89-96.

Piech, K. (ed.) (2004), The knowledge-based economy in transition countries, School of Slavonic and East European Studies University College London.

Piech, K. and Radosevic, S. (2006), The Knowledge-Based Economy in Central and East European Countries: Countries and Industries in a Process of Change, Palgrave Macmillan.

Powell, W. and Shellman, K. (2004), „The Knowledge Economy“, Annual Review of Sociology, 30:199–220.

Radulovic, B. (2004), Knowledge Based Restructuring in Transition Economies: The Role of Business Environment, Competition and ICT, TIGER Working Paper Series № 48, Warsaw.

WEF (2007), The Global Information Technology Report 2006-2007, World Economic Forum.


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POSSIBLE MACROSTRUCTURE OF THE CAPITAL MARKET IN THE WEST BALKANS

Seakif Omerčić1

Abstract: Possible macrostructure of the regional capital market in the area of the West Balkans is presented in this essay. The idea of common capital market in West Balkans, to which the author is dedicated, comes out of strategic commitment of the states of this region to join the European Union. Establishing of this regional capital market would proceed in line with standards of European market, with political approval but without its influence on forming and functioning of this capital market.

There are certain trends apparent in a number of capital markets in Europe, which are not only connected with the movement in the EU, but also with movement of capital markets around the world. All this is about connecting (but not about buying) more of the world or European markets, mostly due to the reduction of the expenses of running a business and increasing income through market expansion and increase in the variety of financial products. An example of this would be EURONEXT. These connections are mostly realized through business agreements of cooperation, but insist on establishing of common market platform based on information and telecommunication technology. What is typical of all these markets is that they function according to standards and rules of the EU.

What is especially important and interesting is establishing of the common capital market of Baltic and Nordic states, within NOREX markets. This served as an initial idea of this work. This union of markets is interesting due to many reasons. First, it is about capital market established between developed European countries and countries in transition which appeared after the collapse of the Soviet Union (Estonia, Latvia, and Lithuania). Secondly, NOREX is established between member states of the EU and states which are not part of the EU, some of which are developed European capitalist states. NOREX confirmed market commitment of some states from two European regions (Nordic and Baltic), devastating all of its national barriers and giving benefits to the development of national capital market, total economic development and improvement of standards of living in mentioned countries.

Common capital market of West Balkans would include already existing and newly formed capital markets in region (Albania, Bosnia and Herzegovina, Monte Negro, Croatia, Macedonia and Serbia), predicting possible expansion and involvement of capitals form other countries: Bulgaria, Romania, Greece, Hungary, etc.

Through analysis of important factors, analyzing similarities and differences between the countries of these regions in area of real and financial sector, especially in the area of functioning of capital market, opportunities for establishing of the regional capital in West Balkans are evaluated.

What has been previously mentioned in this work served as basis for explaining of the macrostructure of the regional capital market of the West Balkans. With this in mind, there are three possible models of organizing the regional capital market: undivided and unitary market, union between mutually connected markets and OTC market. After the analysis of these models, it is recommended to choose the optimal model in existing conditions. Combining of one or more of these models is only possible on the national level but not recommended in the first phase of functioning on the level of common market.

KEY WORDS: CAPITAL MARKET, WEST BALKANS, REGIONALIZATION, STOCKEXCHANGE, MACROSTRUCTURE.

1. INTRODUCTION

For the past few years connecting of the markets around the world, especially in Europe, is present more and more on the regional level. These connections are not typical of buying of smaller and weaker markets on behalf of bigger and more developed markets, even though those cases are present. This is about cooperation, mostly due to the reduction of expenses of running business outside of the national framework.

Basis of market integration is seen through introduction of common electronic system of trading, harmonization of rules and standards of business, more efficient protection of investors, reception of new members, reduction of expenses, etc. One important benefactor for this integration is introduction of common currency which reduces its risks.

1 Lukavac Municipality, Bosnia and Herzegovina.


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One example of integration of capital market is EURONEXT market, which brings together markets from four developed European countries, and there are indicators that it will expand markets of other European countries in the region. What is more interesting is that the process of integration is led outside of the boundaries of the traditional, which is seen through the example of unification of Swiss and British electronic market Tradepoint into Virt-x company.

With the exception of EURONEXT, which is about connection of more developed capital markets, the West Balkans are characteristic of establishing of the common capital market of Baltic and Nordic states, where Copenhagen Stock Exchange and OM Stockholm Exchange signed the agreement of cooperation and mutual involvement in 1997, this ending in strategic alliance based on global processes and liberalization of capital markets in the world, with the introduction of new technology, information and telecommunication, and European Currency Alliance. This alliance was named NOREX. First job of this alliance was building and implementing of common market platform and standardization of rules and regulations for membership and ways of doing business. All markets functioned on local level, but based on rules implemented by NOREX, which allowed members of one market to trade financial instruments on other markets—members of NOREX alliance. Membership is regulated by NOREX rules. This international market is implemented through SAXESS electronic market platform, which is indeed a computer network which connects all electronic systems of all markets. One can enter this network through global computer network (INTERNET) on different levels.

OMX group is also a member of NOREX alliance, which is a group of different markets from NOREX as well as from Baltic region (Estonia, Latvia and Lithuania markets). This alliance is expanded on the markets of Nordic and Baltic states. Members of NOREX are also states which became members of the EU in the first round and also states which later on became members of the EU which improved NOREX significantly. These countries, formed after the breakup of the Soviet Union, are similar to those countries of the West Balkans. CSE, ICEX, OB and SB are also members of the alliance. Emergence of the national financial market is extremely significant for the development of the market economy. Good conditions for the development of the capital market are established through the introduction of the macroeconomic stability and reintegration into world economic and financial circuits. With the presence of good conditions for the systematic development of the capital market, state makes the instruments and models which can help her to achieve its aims. Without financial market there would be no real possibility of attaining neither enormous amount of money nor sufficient economic development of one country.

With unitary market all technical, physical and fiscal barriers are not present. It starts with coordination of economic, monetary and fiscal politics; legal regulations are equalized; there is cooperation in out of state politics and social protection.

Countries in the region of the West Balkans, in the phase of reconstruction and restructuring of the whole economic and social system, suffer from chronic insufficiency of financial products for the beginning of production and other similar capacities. The reason lies in the non functionality of the financial system, undeveloped financial and market infrastructure and lack of a number of financial and non financial institutions, etc.

All of the states in the region noticed the importance of the capital market for the national economy and worked on the improvement of conditions for its development. The question is posed: Would integration of the capital market in the region of the West Balkans be functional in the sense of development of the capital market, and would that contribute to the economic growth of every country individually and also in the sense of the region as a whole?

The key for the existence of a market is in the supply and demand, in this case, financial products. Without doubt, there is a demand for financial products in more and less developed countries, as well as in the countries of the West Balkans. The problem is in the formation of adequate financial products. Offering a sufficient amount of financial products is a problem which causes many difficulties for countries in transition.


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With the implementation of the regional capital market in the West Balkans all these common and individual interests would be achieved. The most important aim is to build modern, functional and efficient financial system based on the European standards in all states, which would contribute to the integration into financial market in the EU. As part of the previously defined aim, it is important to mention development of the financial and market infrastructure, which includes development and restructuring of the existing and development of new financial institutions, financial instruments and mechanisms, which will as a whole improve and empower the savings rate. With harmonization of regulations and acceptance of the EU standards in the area of functioning of the financial system and market circuits, the process of accession to the EU will be faster.

2. POSSIBLE MACROSTRUCTURE OF THE REGIONAL CAPITAL MARKET IN THE WEST BALKANS

Capital markets in the states of the West Balkans have been in function for ten years with more or less success. All these markets can be considered as undeveloped and unregulated, and therefore instable markets. For one market to be successful, it is necessary to organize sufficient regulations, legal and regulatory organizations, high credibility of institutions which use those regulations and experience in trading securities.

Taking into consideration global trends, especially when it is about market circuits and where the sense of the national is lost, transnational market is becoming more and more prominent and it is logical to connect less developed markets in the countries of the West Balkans in a bigger one, and hope for more developed and more secure regional capital market, which will present one way to become a part of the world market circuits.

One question is evident, i.e. how and in which form would this regional capital market in the West Balkans function? The answer to this question is not as simple as thought and demands more analysis of possible variants and numerous other factors. One is for sure: capital market in the West Balkans in the first phase can function only on as the secondary market, and with its efficient work it can better work of the primary market on the national level. In later phases, there is a chance to place first emission of stocks through common market.

In line with functioning of the capital market in concurrence with the EU regulations, which can occur as an official market trade (official quotation), regulated and unregulated market trade, we will consider three possible models or macrostructures of the regional capital market in the area of West Balkans. These are: 1. unitary market, 2. union of connected markets, 3. OTC market.

It is necessary to mention that the EU regulations, based on the trading securities, i.e. capital market, do not consider organizational structure of the market, but duties of those who participate on those markets. Those can be: giving permission for participation on the market, rules for equal share of stocks in one or more countries, duties for transmitters of securities (making new prospects, periodical reports, giving information and other duties).

2.1. COMMON MARKET

As it is known, market is specialized institution of capital market, which trades according to the rules and regulations with market material. Each market has to have basic parts which allow her to professionally and efficiently deal with market material, with optimal protection of all its participants.

The most important parts of one market are: government, commission or department for registration of the market instruments, court of honor, arbitration, etc. Commission supervises trading securities and allows them to work.

The principal activities of market on the national level are:

1. receiving demands and prospects for inclusion of securities on the market, placement of those securities on the capital market and registration

2. introduction of the market instruments, i.e. quotation

3. market trade.


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Formation of the unitary market in the West Balkans would consider formation of the new market with unique rules for quotation accepted in behalf of member countries, where securities trade would be administered (in the first phase only stocks).

Existing markets would still function on the local level, and as the time goes by they would equate its rules with those of unitary market. They would cooperate in the area of stock quotation. To form something like this it is necessary to change the existing legal regulations in the area of trading securities, liberalization of the market circuits and their concurrence with European law.

Market which is formed like this would be given its legal status of national organization with clearly defined market area, internal structure and infrastructure, rules and regulations. It is important to notice that all these questions have to be solved on the national level, i.e. solving of those questions of existence and functioning of unitary market cannot be connected with only one country in the region but also with the whole region. The key problem lies here: for these questions to be solved it is necessary to implement the region of the West Balkans, which would have all institutions (political, economic, financial, etc.), previously formed on the basis of agreements between countries, which would be in cooperation with the EU.

It is also necessary to establish the Commission for securities, Regional register for securities, and Central Deposit Agency, Agency for the protection from competition and solve questions important for the protection of investors. The headquarters would have to be arranged between member states.

The work principle of market would be administered through one modern model of market trade, rules for reception and quotation of securities, the question of members. The aim of this model would be to allow all members to have equal conditions for trade, accessibility to information and use of electronic trade system.

Number of companies which could be quoted on the marked would have to be arranged, as well as the rules for quotation and rules under which one can lose quotation, i.e. entrance to the new market.

This market would also in the first phase function as secondary market, i.e. emission of securities could not be handled on this level. Only local companies could be quoted on this market under certain conditions accepted form all members. Members can also be other investors and partners who received permission for trade on this unitary market from Regional Commission for Securities.

Legal regulations do not permit formation of more regional markets, which contributes to the better quality of work of this regional market and efficient supervision of its functions, while on the other hand, competition is reduced, or the possibility to attain monopoly on the regional capital market. These problems would be solved later on, depending on the efficiency of this market and its contribution to the local capital market.

Fault of this model would be the necessity to build regional institutions of political, economic and financial character, between member states, and in the case of the West Balkans, those would be all states from this region. On one side there is already mentioned model for these states, while on the other hand, there are boundaries for the expansion of the regional capital market to the other states in the neighborhood also interested in forming of the common market.

2.2. UNION OF MUTUALLY CONNECTED MARKETS

After those arguments which confirmed connection of national markets into a common one, which will not undermine the importance of the national market itself, but indeed contribute to its growth and efficiency, it was necessary to find and create a model for integration of the capital market of the West Balkans.

Capital market of the West Balkans has regional character, since it was not necessary to involve any sort of political integration into market connections. Only political concurrence was needed, which would enable governments to establish legal environment for connection of the capital markets between two states, bilateral agreement. Due to the possibility for the third countries to enter


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this market, it was necessary to build common unified legal regulation in the area of capital trade, ruled for the participant behavior, mechanism for efficient protection, etc.

Since there are rules and standards on this level in the EU, it was only necessary to accept and implement them on the national level. With accession to the EU, all states on the West Balkans would agree upon legal regulations and standards of the EU, so that this would not pose a threat which could not be handled.

Key difference between states on the West Balkans and EU is that those which are members of the EU have significantly developed infrastructure, with more efficient capital markets. This points out that in the EU states there is more funding which could be used on the West Balkans, under proposed conditions in the area of security.

As a model of common capital market in the area of West Balkans served heterogeneous alliance of markets from Baltic and Nordic states-NOREX alliance. The primary characteristic of this alliance was that it gathers markets from less developed European countries as well as those which are in transition. One did not have to be a member of the EU to enter this market. This alliance contributed to the easier accession of Baltic states to the EU.

The first step was to sign agreement of cooperation and mutual involvement of markets. It was not necessary for all markets to be members of this common capital market. In the first phase only Serbia and Croatia could sign this agreement since they had the most developed capital market in the region.

What else is necessary to connect capital markets of the two states? Each one has its own legal rule, institutions for the capital market and participants on the market closely related to the national market. There are two markets in Croatia, which are different by the way they function and market material. If Bosnia became a member of this alliance the situation would be more complicated, since there are two markets present in Bosnia but they have two different legal rules, institutions and participants which are closely connected to only one market. This was the reason why Bosnia could not enter common market at first.

The next step would be harmonizing legal regulations on the national level in concurrence with European standards and rules. This is a long-term process and has to be handled step by step. This includes changes, which could enable participation on the local capital market on behalf of other states which signed the agreement. This regulation would present a possibility to establish a special quotation which will be named as “common market” or “common quotation.” It was obligatory to determine rules and regulations for quotation on this market, in sense that only a certain number of stocks can enter the common market. In the first phase this can include only 5 or 10 companies which are the best on the market.

If Belgrade and Varazdin market entered simultaneously with 5 or 10 companies from each market only their stocks would be quoted and not other stocks from other markets.

It was necessary to solve the question of participation on this common market, since only a certain number of companies can be quoted on the common market, so that only a certain number of third parties on the market can receive the permission to work on the common market.

The question is asked: who gives permission for trade to third parties on the common market? The Commission for Securities would assume this role, having the same duties, rules, and responsibilities on the national and regional capital market. Representatives of the national Commissions would be a separate body which could be called Regional Commission for the Securities. Its duty would be to give permission for work to other market mediators on the common capital market.

Functions of already existent markets on the national level do not have to be changed immediately, but as the time goes by it would be changed, depending on the functioning in the framework of the common capital market. Positive effects can influence all participants who cannot use advantages of the common market. If it comes to faster economic development on the national


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level, as consequence of the functioning of capital market, there might be an increase in the number of companies which can enter the common market, of course, under certain conditions.

All which is mentioned above represents only one segment of functioning of common capital market, its regulatory part, giving basis for other common institutions and enabled participants on the common capital market. With aim to protect national capital market and prevent manipulation there is no chance to form more systems for trade of securities. Degradation of the common capital market would result in alliance between Tirana, Sarajevo, Varazdin, Belgrade and NEX market on one side, and Macedonia, Montenegro, Varazdin and Banja Luka on the other. These two alliances are possible, but they should be forbidden, at least in the first phase of establishing common capital market. It is possible to predict “second quotation” or the second league of quotation on the common capital market.

Other key question which has to be solved is establishing of common trade system, which includes choice of common trade platform (electronic trade system), participation on the market, quotation system, system for information and other important factors for the functioning of common capital market.

Taking into consideration the growth of modern information and telecommunication systems it is important to choose common market platform, not out of date, and which is compatible with capital market in the EU.

With analysis of already existent systems of electronic trade in the states of West Balkans, one can notice that BTS uses the greatest number of markets. It is also noticeable that most markets have similar systems of quotation, which enables them to easily implement common trade system, with no significant changes.

There is a problem for those markets which attempt to enter the alliance but have different trade systems. These markets therefore have to accept common trade rules and electronic system. This will increase expenses but with its development it will reduce them later on.

Common electronic system would enable all participants to enter market from all sides of the world and trade stocks form any country in the region which is a member of this alliance.

Based on everything mentioned above, it can be noticed that members of this alliance do not have to be exclusively states form the West Balkans, but also states out of this region, such as those that are not EU members (Bulgaria, Romania, Turkey), but also states which are EU members (Slovenia, Austria, Hungary, Greece), and all other countries form Central and Eastern Europe. Aim of this alliance is establishing of common rules, standards, principles and procedures for participants and trade securities.

2.3. OTC MARKET

Securities trade can be administered in other ways, such as out of market trade. One way of buying and selling securities is through OTC market.

OTC (over the counter) market represents out of market trade of securities based on the principle of mutual involvement of buyers and sellers, or through the third party. There are not strict rules for this kind of trade, as are present for quotation on the common capital market while giving periodical reports, relevant information, etc. There are less specialized institutions, transactions are handled through mediators, usually through commercial bank.

OTC market is less transparent than capital market, and can be considered as non regulated. Securities trade has to be done under legal law. It is true that rules are less strict and therefore it is easier to enter this kind of market. This is the reason why there are more participants here.

It is necessary to mention that participants have to be registered with the Commission for Securities and have to have permission to trade those securities on the national capital market, which includes all types of organized trade.


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OTC market can be developed through efficient capital market as a whole, especially as a support for official market trade. OTC market has a special role as a primary market, since through this market the first emission of securities is administered.

At the primary market the price is chosen by those who sell it, while on the secondary market the securities price is confirmed through trade mechanisms.

OTC market has advantages when it comes to transactions of little importance. This market has smaller expenses and has a chance to gain more capital for smaller enterprises which have unstable future. Transactions do not have to be administered during the work time. The question is posed: Could capital market of the West Balkans function as OTC market and what is needed for this?

It is true that this is possible and this is the most logical solution for this region, but it is necessary to establish legal regulations.

Each country has to have its own regulations while regulation foreign investors on the market as well as participation of domestic investors on foreign markets, while they have to abide the rules of the country where they participate.

Therefore, OTC markets can function in any country of the region. Improvements in the functioning of this market can happen in the area of harmonization of rules and standards with European regulations. The question is only how OTC markets can contribute to the economic development of some countries, as well as to the development of capital market on the national level.

3. CHOOSING THE OPTIMAL MODEL FOR THE WEST BALKANS CAPITAL MARKET

According to practical and theoretical achievements connected with the development of the capital market on functional and instrumental level, especially after analyzing the results of the model NOREX we can conclude that the area of the West Balkans is the optimal solution for the union of mutually connected markets, due to many reasons.

The first reason is that the market which will function according to this model should not eliminate already existent markets, but indeed improve them. Secondly, this way of functioning is not only limited to territorial factor. All institutions on the national level would still function, but would have more duties than before. All regional institutions would be formed out of national institutions, and their functioning would be harmonized.

The chosen model does not ask for political integration, but for more financial institutions, for which member states would guarantee and would be responsible for.

Despite everything mentioned before, special characteristic of this model is the principle of willingness, i.e. duties are not obligatory for all markets in the region, or that all countries in the region have to immediately accept this way of securities trade. This model offers for other markets to enter the common market, but under certain rules and conditions with approval of all member states. Regional characteristic of this market is mostly due to the relationship of the EU with states, and attempts of the EU to implement its standards and principles. Taking this into consideration it is necessary to accept this model of integration into capital market in the West Balkans, which would give positive signals to European and other investors, attracting foreign capital to this area and enlivening economy in this region.

REFERENCES

Baldwin, R. and Wyplosz, C. (2004), The Economics of European Integration, McGraw-Hill.

Buch, C.M. (1999), "Capital Market Integration in Euroland - The Role of Banks", Kiel Working paper No.932, june 1999, Kiel Institute of World Economics.

Commission of the European Communities, (2006), "Communication from the Commission, The Western Balkans on the road to the EU: Consolidating Stability and raising prosperity", 27.01.2006, COM(2006) 27, final, Brussels.


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Damijan, J.P. and Kostevc, Č. (2003), "The impact of European integration on adjustment pattern of regional wages in transition countries: testing competitive economic geography models", Working paper No.18, IER, Ljubljana.

Egger, H. i dr. (2005), "International Capital Market Integration, Educational Choice and Economic Growth", november 23, 2005.

EURONEXT Stock Exchange, (2002), “EURONEXT: Organization and Procedures”, december 2002, http://www.euronext.com

Evropska komisija (2003), "Zapadni Balkan u tranziciji", Povremeni dokumenti Br. 1 - januar 2003, Generalna direkcija za ekonomske i finansijske poslove.

Gomel, G. (2002), “Banking and Financial Sector in Transition Countries and Convergence towards European Integration”, May 2002.

Jovanović, A. (2005), “Legal Rules, Governance Structures and Financial Systems”, (URL: www. fmc.co.yu).

Komisija evropskih zajednica, (2006), "Zapadni Balkan na putu ka EU: jačanje stabilnosti i unapređenje prosperiteta", Saopćenje Komisije, konačna verzija, COM (2006) 27, 27.01.2006., Brisel.

Liha, A. (2003), "Integracija financijskih tržišta Europske unije", IMO EDC - Euroscope, dodatak, God. 12, br. 65, veljača 2003, http://www.europa.eu.int.

NOREX ALLIANCE, (2005), "NOREX Key to The Nordic Markets", The NOREX Exchanges.

NOREX ALLIANCE, (2005), "NOREX Member Rules", Vesion 1.6, November 2005, The NOREX Exchanges.

Ristić, Ž. (2000), Novo Evropsko berzansko pravo, Centar za unapređenje pravnih studija, Beograd.


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DEVELOPMENT ACHIEVEMENTS OF NATIONAL ECONOMY IN SERBIA AT THE BEGINNING OF THIRD MILLENNIUM

Gojko Rikalović1 Borisav Knežević2

Abstract: In this work we provide essential information about economics in Serbia, emphasizing the facts which reflect the real state of its economy. Here we also make necessary comparisons with other countries in the region as well as in the European environment. It is time to consider the progress of Serbia - where it is now, how it reached this point, and how it reacts to the incentives coming from its environment.

The facts prove that neither Yugoslavia (nor SCG), nor socialism survived. This leaves Serbia to give answers to the contemporary development challenges in new (considerably altered), special, population and political framework, as well as in the conditions of a radical turn to market entrepreneurship and the corresponding owner structure. Transitional processes are always accompanied with euphoric criticism of the past development , where almost all previous results of half-a-century long development are being denied and underestimated. In this work we investigate whether all this is true, and whether the truth is given in its entire scope.

The development processes in the course of the first decade of 21-st century more or less (un)successfully create an assumption of Serbia’s development in the following period. In this text we examine the accumulated development potential of our national economy in the l-st few years as well as the institutional conditions which should enable its more complete and more efficient activation and use.

KEY WORDS: NATIONAL ECONOMY, DEVELOPMENT, GROWTH, LAG, GLOBALIZATION, TRENDS.

1. It is quite obvious that we are living in time of fast and radical changes in our society and national economy. Socialism in Serbia has disappeared. Market economy in Serbia exists only in reports of MMF and World Bank, i.e. in documents of domestic creators of economic politics. However, no other known way towards development is recognized, except of capitalism. There will be no development yet in Serbia as it is, except on several “islands” (Belgrade, Novi Sad and similar) attached to the West, that imitate its contemporary trends. It is much harder to notice that such tendencies inevitably affect the character of those academic economic disciplines which are reflection of our society and which contribute its formation. It is most visible in the core of studying national economy. It seams that fundamental erosion of assumptions is taking place, on the basis of which economic disciplines in traditional sense are resting. Patterns and categories taken over (or inherited) from the past are almost superfluous to the economic reality as seen and lived by the new generations. New economic accents are positive response to encouragements given by such situation. Therefore nowadays every effort promoting changing process is appreciated extending the boundaries around economy and academic contemplation about it.

Serbia is a little national economy appreciated almost nowhere in the world and is not regarded as a role model anywhere for its still strong bureaucracy, corruption and incompetent management. Administrative and partial-economic system is in charge which does not have on disposal enough resources and knowledge for more efficient management with complex commercial processes. Therefore it is necessary to provide constant expert dialogue of government and its experts with numerous bodies in Serbia and outside who really have knowledge about it.

At the beginning of the new millennium it is already identified much about prospects of 21st century, in which new commerce of Serbia will origin and develop. Our time is special (specific), because we live in a period after the cold war, after disappearance of Yugoslavia, after international isolation and SB OUN sanctions, after hyperinflation, after NATO bombing, after 20th century, after

1 Faculty of economics, University of Belgrade, Serbia. 2 Public Procurement Office, Serbia.

DEVELOPMENT ACHIEVEMENTS OF NATIONAL ECONOMY IN SERBIA AT THE BEGINNING OF THIRD ...

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11th September 2001, after new establishment of independent state of Serbia… All that, however, does not speak enough of the epoch of transition Serbia and its past, present and future is going through. Something is left behind, but sufficient trust in future is still missing therefore we cannot predict what future generations will accept and evaluate as key marks in present period of Serbian history and its economy. Dynamic changes in world economy encounter economists, sociologists, political scientists and other researchers with great challenges. Except of phenomenon of globalization and technological improvement that can articulate the thought of general economic problems, there are very few discoveries of world dimension which will be primary when 21st century begins to define national economy of Serbia. It is important to give a framework suitable for placing changes and continuity into perspective, for evaluation of options given to global and Serbian future and their potential influence on our lives and economy.

2. Serbia shared the fate of mutual country (first Yugoslavia, then SMG) until it was extinguished. Most of literature dealing with long-term development of Yugoslavia, one way or another, evaluated its after war commercial development as dynamic and very successful. Certain analysis shown that Serbia had accomplished imposing results in period after WW2 (within SFRY) and framework of Yugoslav industrialization, but it was shaded by great economic crisis during the ‘80s (because development has quality only if it makes assumptions for continuous flow in years that follow) and the fact that the very development was not confirmed on the market (especially international) so the great production growth did non necessarily mean economic advance as continuous confrontation of costs and results and selection understood by that confrontation.3 From the abovementioned and majority of other reasons, (long-term deceleration of commercial development, growing gap between aims of development and real commercial movements etc) it is clear that the development of Yugoslavia and Serbia in period after WW2 was not so fast and successful, nor therefore faster and more successful than in other countries.4

Namely, period until 1979 was for Yugoslavia and Serbia characteristic by relatively high growth rates of GDP. After that, stagnation in development takes place, and from 1987 there is insignificant decline of approx. 2% per year, which drastically results in 1990 with approx. 9, and in 1991 even 15%. It reflected in falling behind of Yugoslavia and Serbia in development compared to European countries (Austria, Italy, and Germany). Level of economic development in Greece in 1975 was the same as in our country, while in 1991 it was twice as bigger, so the level of GDP per capita in Yugoslavia was twice as lower. Accordingly GDP per capita in Serbia in 1985 was 2/5 of Austrian, and app. 30% of it in 1991.5 During the last decade of 20th century not only that development is missing (which was present even one decade earlier) but also the situation is getting rougher and the disaster is inevitable, which greatly disparages total achieved economic accomplishment in half century time. Consequently, due to very hard outcome that time leaves for new generations, all the commercial growth was achieved on future’s account. In relation to this there is high economic price of too fast long-term commercial growth of Serbia and disintegration of mutual countries (SFRY, SRY and SMG).

3. Macroeconomic flows in period from 2001 to 2006 in the Republic of Serbia bring to significant positive changes. Transition is finally accelerated and macroeconomic stability is established, remarkable real growth of GDP of 5,3% annual average is realized and stability of currency as well as continuous growth of foreign money reserves. However, these convenient macroeconomic moments are followed by faster growth of import than export, with high foreign trade deficit and high rate of unemployment. Results of economic politics in period from 2001 to 2006 are visible by stability of prices and currency, significant cumulative real growth of GDP, increase of GDP per capita, from 1757,4 (2001) to 3354 euro (2006), decrease of foreign debt, liberalization of internal and foreign trade, privatization, restructuring of banking system, reform of work market and social sector. Special attention must be paid to moderation of foreign trade imbalance, to firm control

3 Marsenic, p.185. 4 Devetakovic, p. 143-220. 5 Miljkovic, ps. 357.


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of deficient payroll balance and foreign debt, also to elimination of fiscal deficit and unemployment, in a sustainable way, as well as to establishment of convenient climate for investments in the country and strengthening competitiveness of commerce, especially the export.

4. From the above mentioned it is visible that the Serbian economy is facing many challenges during the first decade of the 21st century. However, it also has some very promising opportunities for a significant development. If Serbia avoids well-known political obstacles, the Stabilization and Association Agreement with the EU could be signed by the end of this year (2007). It will enable creation of an asymmetric free-trade area, which means that all the products produced in Serbia may be exported to the EU countries without paying any custom duties. On the other hand, the EU countries will be allowed to export majority of their products on the Serbian market without paying customs duties. The exceptions shall be made only for the very “sensitive” national products, such as agricultural products. Such products will be protected with custom duties for some period of time after the signing of the SAA. The free-trade area with 27 EU countries should accelerate the development of national economy especially with regard to the establishment of new enterprises (predominantly SMEs). We must also mention the CEFTA agreement. It was signed by all the countries in the Western Balkans region and should enable creation of a regional free trade zone (it is expected that the Republic of Serbia to ratify the agreement very soon).

When we talk about the relations with the EU and about the influence of the EU on Serbian economy we must point out the significance of the European Partnership for Serbia and Montenegro.6 The Partnership represents a roadmap for the Republic of Serbia regarding all the relevant chapters which will be negotiated with the EU and gives the short-term and medium-term priorities and recommendations which should be fulfilled by relevant Serbian institutions.

Some of the very important priorities from the European Partnership document are related to strengthening the transparency and sustainability of public finances. In relation to that the issue of spending the public resources (tax-payers money) is of great importance. It also means that the way how a state defines and conduct public procurement policy has significant influence to the public costs. Some positive trends in the field of public spending in Serbia are illustrated by the World Bank comparative analyses which is presented in the Table 1.

Table 1. Comparative review of public procurement indicators for Serbia, Slovakia, Czech Republic and Hungary, 20057

Indicators Serbia Czech Republic Hungary Slovakia

Population (in millions) 7,5 10,2 10,1 5,3

Public Procurement Law enacted 2002. 1995. 1995. 1993.

Establishing of the Public Procurement Agency 2003. 1995. 1995. 2000.

Number of employees 20 51 18 120

Competitive vs. non-competitive procedures, in % 73% 71% 67% 60%

Transparency International’s Corruption Perception Index (CPI) 2,8 4,3 5,0 4,3

Source: Reports of the Public Procurement Agency’s of the Czech Republic, Hungary, Slovakia and Serbia

6 The document was adopted by the Council of the EU on 30 January 2006, while the State Union of Serbia and

Montenegro still existed, i.e. before the referendum in Montenegro. 7 www.worldbank.org


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However, real situation in the field of public procurement in Serbia is not without problem (Supreme Audit Institution is not operational yet, the new Public Procurement Law is not adopted yet, corruptive behavior etc.)

5. Commercial development is really important macroeconomic phenomenon which is happening to a country when economic wellbeing of its citizens is increased in sustainable way. Improvement of life standard, due to different short-term fluctuations is highly contributed by measures of economy and politics which even partially influence the rate of long-term commercial growth. In the following table (Table n.2) data are given which show very impressively the capabilities of certain countries, as well as their integrations, to increase economic and social wellbeing, but also reasons for their great reciprocal differences regarding the level of development.

Table 2. Annual per capita GDP growth rate and annual population growth rate in 12 “new” EU member states, Norway, Switzerland and Turkey, 1990-2020

1990-2000

2000-2010

2000-2020

rGDP p.c. rp p.c. rGDP p.c rp p.c. rGDP p.c rp p.c.

Bulgaria -1,4 -0,6 5,5 -1,0 4,1 -1,1 Cyprus 3,0 1,1 2,9 0,7 2,7 0,5 Czech Republic 0,0 -0,1 3,7 -0,1 3,0 -0,2 Estonia -0,1 -1,3 5,4 -1,1 3,7 -1,1 Hungary 1,1 -0,3 4,3 -0,5 3,3 -0,5 Latvia -3,5 -1,2 5,7 -0,6 3,8 -0,6 Lithuania -3,3 -0,5 5,0 -0,3 4,1 -0,3 Malta 4,0 0,8 2,9 0,4 3,9 0,2 Norway 2,7 0,6 2,0 0,3 2,0 0,3 Poland 3,6 0,1 3,9 -0,1 4,5 -0,2 Romania -1,7 -0,3 5,3 -0,3 4,7 -0,4 Slovakia 0,3 0,2 3,9 0,0 3,8 -0,1 Slovenia 1,8 0,0 3,7 -0,2 2,6 -0,3 Switzerland 0,2 0,7 2,0 0,0 2,2 0,1 Turkey 1,7 1,8 2,1 1,2 5,1 1,0

Source: EUROSTAT, Economic and Financial Affairs DG. ACE. Note: rGDP p.c.-average annual GDP growth rate per capita (in %) rp p.c.-average annual population growth rate (in %)

In that sense, it is good to pay attention to differences in dynamics of commercial and birthrate growth, because in one generation only, i.e. in 30 years (period 1990-2020) dramatic differences have occurred concerning level of economic development and life standard between certain countries.8

We remind of transformation processes in commerce of Serbia during the ‘90s were almost at still due to inconvenient circumstances (“crisis” inheritance in economics, extinguished former country, narrowed development abilities due to broken traditional business connections, new determinants of development related to significantly smaller area and number of citizens, fall of economic activity, war operations in surroundings, huge number of fugitives and expatriates arrived, rigorous economic sanctions). The exact decline of commercial and social sphere came with instigation of mega-inflation trends at the end of 1993. On transition 1993-1994 there was real social

8 Barro and Sala-i-Martin, p. 387.


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and economic catastrophe. Facing such dramatic situation forced to making Program of monetary reconstruction and economic restoration. It was begun with leading different economic policy directed to cutting hyperinflation, achieving and maintaining stability of prices and foreign currency, as well as budget balance, also the so-called revival of production. Despite the fact that in following years there was certain commercial advance, it was all interrupted by NATO bombing in 1999 and minimized by numerous mistrials of the creators of economic policy of that time. Therefore nowadays, as the consequence of “making through the day” and destructive conflicts of different interests, there is a question if we will ever reach the developed countries – it seams very distant and indefinite perspective. In that context, it is very important to strengthen the trust in banks and to increase the savings of citizens in dinars and foreign currency, which with suitable influence of foreign capital could ensure conditions for overcoming insufficient level of development and low level of life standard. Making Serbian economic development dynamic is determined by creating institutional ambience compatible with commercially systematic solutions of European market economy.

By our rough estimations, using EUROSTAT, Republic Bureau of Development, Republic Bureau of Statistics’ data, on the area of Serbia nowadays GDP per capita in 2005 was 2645 euro (measured in euro from 2000), also in accordance with achieved trends of growth and expected output of current and developing policy, that mark would come to 3590euro in 2010, and 4805 euro in 2015 (under condition that growth rate per capita GDP is 6,1-6,2 % annually in period 2006-2015), in table 3 is shown the review of achieved level of development compared with each of 12 “new” members of European Union, also Norway, Switzerland and Turkey, as well as the average EU-15, EU-12 and EU-27, in certain years (assuming that long-term tendency of their growth shown in table 2 is continued).

Table 3. Trends in reached level of development in the Republic of Serbia in comparison the 12 with “new” EU member states, Norway, Switzerland, Turkey, EU-12 average,

EU-15 average and EU-27 average

Countries

GDP value per capita (expressed in euro 2000) in observed countries in relation to Serbia (Serbia=100)

GDP value per capita (expressed in euro 2000) in Serbia in relation to the observed country, in %

2005 2010 2015 2005 2010 2015 Bulgaria 90 85 78 110,9 117,5 127,8 Cyprus 562 487 432 17,8 20,5 23,1 Czech Republic 276 242 217 36,2 41,3 47,2 Estonia 215 207 185 46,5 48,4 53,9 Hungary 265 238 210 37,7 42,0 47,5 Latvia 171 164 132 58,5 60,7 75,9 Lithuania 179 164 152 56,0 61,0 65,5 Malta 458 390 364 21,8 25,6 27,4 Norway 1730 1401 1041 5,8 7,1 9,6 Poland 234 205 195 42,6 48,7 51,3 Romania 95 87 84 105,6 114,2 118,9 Slovakia 191 168 153 52,3 59,6 65,5 Slovenia 462 398 344 21,6 25,1 29,0 Switzerland 1586 1284 1080 6,3 7,8 9,2 Turkey 115 90 90 86,9 110,5 109,7 EU-12 average 203 179 167 46,9 55,7 60,0 EU-15 average 957 779 655 10,4 12,8 15,2 EU-27 average 796 654 555 12,6 15,3 18,0

Note: Author’s calculation on basis of data given by European Committee, Republic Bureau of Development, Republic Bureau of Statistics and anticipated trends of growth GDP per capita contained in National strategy of commercial development of the Republic of Serbia 2006-2012, i.e. certain analytic considerations of basic development trends by 2020.


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It is obvious that in 2005 our per capita GDP reached, compared to the same mark for certain countries, from only 6% (Norway and Switzerland) to over 50% (Slovakia, Leetonia, Latvia), i.e. almost 90% (Turkey). In that sense Serbian per capita GDP is advanced only compared to Romanian and Bulgarian while its falling behind the European average is very notable or, to be exact, disturbing (compared to EU-15 reaches only 10, to EU-27 only 13, i.e. almost 50% to EU-12). Consequently the level of economic development of Norway compared to Serbia was in 2005 higher over 17, of Switzerland close to 16, EU-15 approx. 9,6 times, and EU-27 approx. 8, and EU-12 over 2 times, i.e. Cyprus 5,6, as well as Slovenia and Malta 4,6 times etc. However, if foreseen macroeconomic movements are fulfilled and development policy is adopted at least in range between conservative and basic scenario ( 5,0-7,0% annual growth of GDP) programmed by National strategy of commercial development of the Republic of Serbia, we could open and encourage a trend of lessening the difference related to the level of development in the observed EU countries. In that way Serbia would realize 60% of GDP per capita of EU-12 in 2015, 76% of Leetonia, 65% of Slovakia and Latvia, over 50% of Poland and Estonia, close to 50% of Hungary and the Check Republic, somewhat less than 30% of Slovenia and Malta etc., but still low 15% per capita of GDP EU-15, app.10% of Norway and Switzerland. Along Bulgaria and Romania our country’s level of development would still be ahead of Turkey’s from 2010. These findings are confirmed by the data shown in tables 4 and 5.

Table 4. Trends in reached level of living standard in the Republic of Serbia in comparison with the 12 “new” EU member states, Norway, Switzerland, Turkey, EU-12 average, EU-15 average

Countries

GDP value per capita (expressed in pps), in observed countries in relation to Serbia (Serbia=100)

GDP value per capita in Serbia (expressed in pps), in relation to observed country, in %

2005 2010 2015 2005 2010 2015 Bulgaria 129 120 112 77,4 83,4 89,3 Cyprus 290 245 211 34,4 40,9 47,5 Czech Republic 246 215 189 40,6 46,5 52,9 Estonia 196 181 165 49,0 55,2 60,4 Hungary 230 205 183 43,4 48,6 54,6 Latvia 152 143 131 65,5 70,1 76,5 Lithuania 169 154 144 59,1 64,8 69,3 Malta 221 186 171 45,3 53,9 58,6 Norway 583 471 392 17,1 21,2 25,5 Poland 176 154 446 56,8 64,9 68,3 Romania 116 107 103 85,9 93,2 96,7 Slovakia 206 180 165 48,6 55,5 60,7 Slovenia 296 257 220 33,8 38,9 45,4 Switzerland 483 391 327 20,7 25,6 30,6 Turkey 100 81 80 100,0 122,9 124,9 EU-12 average 176 157 145 47,0 63,8 69,0 EU-15 average 403 329 276 22,4 30,4 36,2 EU-27 average ... ... ... … … …

Note: Author’s calculation on basis of data given by European Committee, Republic Bureau of Development, Republic Bureau of Statistics and anticipated trends of growth GDP per capita contained in National strategy of commercial development of the Republic of Serbia 2006-2012, i.e. certain analytic considerations of basic development trends by 2020.


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Table 5. Time needed for Serbia (under assumption it achieves growth rate 6,2%/2005, 6,3%/2010, 6,0%/2015 annually) to reach the level of development (per capita GDP in euro 2000) and life standard 12 (per capita GDP in pps) “new”members of EU,

Norway, Switzerland, Turkey, average EU-12, EU-15 and EU-27

Countries Time-period (number of years)

needed to reach a level of development

Time (number of years) needed to reach a level of living

standard 2005 2010 2015 2005 2010 2015

Bulgaria 1,7* 2,6* 4,1* 4,1 2,9 1,9 Cyprus 27,8 25,1 24,4 17,2 14,2 12,4 Czech Republic 16,4 14,0 12,5 14,5 12,1 10,6 Estonia 12,4 11,5 10,3 10,8 9,4 8,4 Hungary 15,7 13,8 12,4 13,9 11,4 10,1 Latvia 8,6 7,9 4,6 6,8 5,6 4,5 Lithuania 9,3 7,8 7,0 8,5 6,9 6,1 Malta 24,5 21,6 21,5 12,8 9,8 8,9 Norway 46,0 41,9 39,0 28,4 24,6 22,7 Poland 13,7 11,4 11,1 9,1 6,9 6,4 Romania 0,9* 2,1* 2,9* 2,4 1,1 0,6 Slovakia 10,4 8,2 7,0 11,6 9,3 8,3 Slovenia 24,7 21,9 20,6 17,5 15,0 12,0 Switzerland 44,6 40,5 39,6 25,4 21,6 19,7 Turkey 2,3 1,6* 1,7* 0,0 3,3* 3,7* EU-12 average 11,4 9,3 8,5 9,1 7,1 6,2 EU-15 average 36,4 32,6 31,3 22,5 18,9 16,9 EU-27 average 33,5 29,8 28,5 … … …

Note: Calculated on basis of data stated in tables 1,2,3 and 4 *Data shows number of years Serbia is in advantage compared to the country in question

Namely, while the commerce of Serbia in 2005, under condition it makes annual growth rate 6,2% (which it did that year), needed 9-46 years to achieve those days level of development of observed countries and EU, the necessary period for reaching the value per capita GPD in 2010, which referent countries and EU will achieve in that year is shorter and is 8-42 years (if the annual growth of our GDP is app. 6,3%), and in 2015 this period is shortened to 7-40 years (assuming annual increase of Serbian GDP is app.6,0%).

For comparison of life standard between Serbia and observed countries and EU we use per capita GDP shown in standards of buying ability (PPS). In this way the economic power is shown for every country. As obvious in table 5, the position of Serbia by value of GDP per capita calculated by PPP (parity of buying ability) and according to euro from 2000 is nearly the same, but differences in level based on calculation in PPS are smaller. Falling of Serbia in the level of economic power and life standard behind the observed countries and EU is less than falling behind in the level of economic development.

However, in case of Serbia it is not simple to make up for the fall and delay in development because it is the question of epochal falling behind (Lj. Madzar’s term). Our falling behind in level per capita GDP compared to the observed countries and EU is hardly overcome also because, in period of dynamic growth of Serbian commerce, the referent national economies and EU had fast economic growth and significant increase of their per capita GDP. If Serbia could have very high annual growth of GDP per capita, the stated period for reaching the level of development and economic power of developed national economies would be significantly shortened. Japan made up for its falling behind using techniques already established in USA, and the same shortcut ensured South Korea and Taiwan to make up for their falling behind. 9 9 Sorman, p. 97.


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................................

In his last book State Building, Francis Fukujama points out that the era after the cold war began under intellectual domination of economists, who strongly perceived liberalization and minimalist state, while ten years later many economists concluded that some of the most important variables which influence the development have not the economic character, but are of institutional and politics concern. He continues with widely accepted wisdom that institutions are key variables in the development and reminds on the problem “reaching Denmark”, considering “Denmark” the role model of a developed country with institutions that function well. At the beginning of the third millennium Serbia still has the problem to make difference between the authorization of the state which understands different governmental functions and aims and the strength of state government or ability of the state to plan and implement economic policy, to implement laws clearly and unambiguously (today called state or institutional capacity). Establishing the state of Serbia is our way to the development in 21st century in sense of strengthening the existing and making new state institutions. Such public institutions, which function well Serbia needs, and those mean good patterns of behavior and affect in complex ways which defy changes.10 Is Japanese, Korean or Taiwan experience the way to our shortcut? Such “imported graft“ is not possible to implement on “key in hand“ principle. It is essential to have certain macroeconomic organization and regulation. Only then can we count on the development of the market and the development controlled by state.

REFERNCES

Barro, R. and Sala-i-M, X. (1995), Economic Growth, Graw-Hill, New York.

Bilten javnih finansija za mesec maj 2007., No 33, Beograd, 2007.

Devetaković, S. (2003), EKONOMIKA JUGOSLAVIJE tehnološki progres, ekonomska struktura, društvene delatnosti, regionalni razvoj, CID, Ekonomski fakultet, Beograd.

Fukujama, F. (2007), Građenje države:upravljanje i svetski poredak u dvadesetprvom veku, (prevod V.Vuković) Filip Višnjić, Beograd.

Izveštaj o razvoju Srbije 2006, Republički zavod za razvoj, Beograd, mart 2007.

Marsenić, D. (1993), „Srbija u posleratnoj jugoslovenskoj industrijalizaciji“, Privredni razvoj Srbije: kritička preispitivanja (red. D. Marsenić), Ekonomski fakultet, Beograd, 1993.

Memorandum o budžetu i ekonomskoj i fiskalnoj politici za 2008. godinu sa projekcijama za 2009. i 2010. godinu, Ministarstvo finansija, Beograd, jul 2007.

Miljković, D. (2001), Nacionalni makroekonomski računi, Ekonomski fakultet, Beograd.

Nacionalna strategija privrednog razvoja Republike Srbije 2006-2012, Ministarstvo privrede/Republički zavod za razvoj, Beograd, novembar 2006.

Rikalović, G. (1998), „Važnost dugoročnog ekonomskog rasta“, Tranzicija i privredni razvoj-kratkoročni i dugoročni aspekti (red. D.Marsenić i G.Rikalović), Ekonomski fakultet, Beograd.

Sorman, G. (1997), Velika tranzicija, Izdavačka knjižnica Zorana Stojanovića, Novi Sad, Sremski Karlovci.

www.worldbank.org

10 Fukujama, p.1, 33.


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COLLAPSE OF THE SERBIAN INDUSTRIALIZATION – MESSAGE FOR THE FUTURE

Ljubodrag Savić1

Abstract: Some of the most developed countries of the market economy have been in a process of deindustrialization for a couple of decades. It is a phase of development in which prices of industry products are going down relatively quicker, because of the exceptionally fast technical progress and work productivity in the industry, thus reducing the participation of the industry in the local product. With the deindustrialization, the industry hasn’t lost its place as the leading sector in which the biggest part of the newly added value is created. Classic industrial development, typical for the 19th and most of the 20th century, has made way for the new viable industrial development based on knowledge, innovations and entrepreneurship. An entirely new concept of development in the EU was defined at a summit in Lisbon in 2000. when it was determined that “the wide-spread but false assumption- that manufacturing industry no longer plays the key part in informatics and service societies and in economics based on knowledge- should be abandoned as soon as possible”.

During the last decade of the 20th century, countries in transition have dramatically abandoned the concept of industrialization that had been applied for a very long period after the Second World War. Their leading industries walked over the “prickly” road of restructuring, privatization and adjustment to the market’s new rules of trading. The original view of the completely false “socialist” industrialization as the cause of all trouble was abandoned very quickly. Today, a considerable part of foreign direct investments in these countries goes for the construction of large industrial capacities. Industry has again become the generator of the overall economic development. Leading newly industrialized countries have, in the last quarter of the 20th century, China and India in the past decade or two, based their economic expansion on dynamic and efficient industrial development.

Contrary to these experiences, the concept of speeded up development of service, based on very high import, prevailed in Serbia with complete neglect of industrial development. The industry crisis that started in the last decade of the 20th century was deepened still by the inadequate process of privatization that would soon end with the liquidation of most enterprises that were the protagonists of the development in the past period. Bearing in mind the experiences of many countries, as well as the obvious fact that industry is still a very important generator of national wealth, this work’s ambition is to point to the damaging consequences and unviable industrial development concept that have been applied in Serbia since the beginning of the 21st century.

KEY WORDS: DEINDUSTRIALIZATION, GLOBALIZATION, TRANZITION, INDUSTRIALIZATION.

1. INTRODUCTION

During the last three centuries in the course of human society development, spectacular changes have happened reposed in very dynamic industry development and scientific-technical progress. Pursuant to legitimacy of trade development some of the most expanded countries entered at phase of decentralization. Countries in transition, over again are re-establishing effectively and prosperously industrial structure after distressful and traumatic experience in transition. The group of newly industrialized countries, particularly China - its spectacular development base on verified advantages of the industrial development whereas Serbia failed in finding adequate mechanism in efficient economic development. Unlike most of other countries, the industry in Serbia is “victim” of rigidly applied tranzitional concept of development. In the above fact there is part of an answer why Serbia considerably gets behind relating to most of the countries in tranzition.

2. DEINDUSTRIALIZATION - MODERN DEVELOPMENT PHENOMENA

Intensive industrial development that has commenced three centuries ago, override slow, millenia-old agrarian development. Industrialization resulted in mass movements of poor people from villages to towns, strong accumulation of labor productivity and living standards, changes of foreign trade structure, acceleration of scientific-technical progress, development of other activities, extending of human life-time and accumulation of human life quality.

1 Faculty of economics, University of Belgrade, Serbia.


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In accordance with economy development legislation, three decades ago, when the gross national product per capita exceeded over 3.000 dollars, the most developed countries entered into deindustrialization process, defined as process of relative decrease of industry share into gross national product and employment. Deindustrialization is the result of over average growth of scientific-technical progress and labor productivity in the industry, whereupon the prices of industrial products fall relative more rapidly versus other unindustrial sectors2. Comparatively, reduction of labor force in the industry in total number of employed is the consequence of greater implementation of results of modern technical progress in the industry (automation, robots and computerization) than in traditional work-intensive activities of the service department.

Table 1. Sector's structure of gross domestic product (GDP) value added, Year 2004 (%)

Source: Worl Development Report 2006.

In the modern requirements of the dynamic development of communication and transportation, process of world's economy globalization is proceeding. Very law wages and raw material and energy prices in developing countries, more liberal labor legislation, poor union organizing, tolerant ecology standards, living standard growth and market expansion, provoked new wave of removals in the industrial production from industrialized countries to undeveloped countries in the world. The crisis at first felt highly developed, well grown industries. Developed countries found a temporary solution in capturing a new knowledge's and contemporary highly-productive technologies. New products, materials and technologies entered into the scene3.

Notwithstanding decentralization, whereat some ones sees only negative consequences, the industry is still guiding economic activity, because its participation into GDP within highly-developed countries is between 20 and 30%. Some of the countries are in the process of decentralization for a few decades, some are ahead of decentralization and most of the countries, process of industrialization uses as a basic method of total economic development. Classic industrial development, typical for nineteenth and most of twentieth century ceded the place to a tenable industrial development, being based on knowledge, contemporary and entrepreneurship. Completely new developing concept in EU was defined in Summit at Lisbon, year 2000, where it was ascertained “the prevalent but wrong assumption - processing industry haven't got the key role in informatics and service societies - should be abandoned as soon as possible”4. Spectacular economic development in Ireland , the country that was only two decades ago one of the most undeveloped countries in EU, was based on very dynamic industry development, where the 42% of value added GDP is generated.

The China has the most dynamic development in the last few decades among developing countries. Long standing prosperity of this country was achieved thanks to, first of all very dynamic industrial development that produced over half value added of GDP in year 2004.

2 In the last few decades characteristics of products in current informatic-comunication technologies (computer,

mobile phone...) have been promoted for a number of times, while there's have been significantly reduced. 3 Lorber, (1999), p. 159. 4 Commission of the European Communities (2002), p.47.

Agriculture Industry Services Germany 1 29 69 Ireland 3 42 55 Japan 1 30 68 Norway 1 38 61 China 15 51 35 Korea Republic 3 35 62 Slovenia 3 36 61 Romunia 13 40 47 Czech Republic 3 39 57


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Among the countries in tranzition, and beside reduce comparing to previous period, industry still has very important position. Above is referred to Romania, Slovenia, Russia, Poland and Hungary, whereto contribution of industry in creating GDP value added is over 30%. In the industry of Serbia only quarter of GPD value added is created, that is almost double reduction according to year 1990. It is unlike that participation in industry in creating GDP value added is greater than in other countries that have been for more decades in the process of deindustrialization.GDP value added sector's structure in Serbia almost correspond to a structure of the most undeveloped countries in the world.

2. TRAUMATIC EXPERIENCE OF COUNTRIES IN TRANZITION

Difficulties of necessity in restructuring of classic industrial systems, induced by the process of deindustrialization and globalization of worlds economy in ex-socialistic countries, was additionally labored by collapse of “old” totalitarian socialistic system and by the transition into unknown system of trade economy. Establishing of the democratic rules, building of financial and market institutions, complete change of industrial and economy structure, incorporation into world market competition and acceptance of Europe's standard for the most of socialistic countries, meant replacement of “visible” Stalin's leg by the “invisible” hand of Adam Smith's. In traumatic years after fall of Berlin's wall in year 1989, all seems different. Over night complete value system collapsed. It should start all over again. All countries, some more or less was in serious transitional crises.

Beside huge initial difficulties, tranzition in these countries was significantly stimulated by direct foreign investments. Above countries in course of time, started to be more and more attractive for foreign investments because they have been geographically closer to EU countries, mentally and cultural closer than most of African, Asian and Latin American countries. Educational level and qualification of their workers was much higher, and infrastructural and communication conditions were significantly favorably. Ten of ex-socialistic countries for les than two decades, although at first seemed impossible, and/or countries in tranzition, became members of the European Union. Does it mean that those countries finished effectively process of restructuring of economy and industry? Concerning these countries what did Serbia done?

In year 1990, ex-socialistic and/or countries in process of transition noted negativ growth rate of (GDP) gross domestic product. In the seven year long period since year 2000, Serbia achieved utmost average growth rate of GDP, that is expected considering that growth level in year 2000 in Serbia was very law. On the other hand rest of the five countries prevailed transitional crisis in last decade of twentieth century, accomplishing positiv rate of growth in long period of time, while Serbia have had significant fall, of GDP in year 1999 (bombing). The fact that in year 2006 GDP growth rate in Slovakia, Czech and Poland was above growth rate in Serbia, doesn't encourage at all.

Table 2. Growth rate of the gross domestic product (%)

1990 2000 2001 2002 2003 2004 2005 2006 2006/2000Serbia -7,9 5,2 5,1 4,5 2,4 9,3 6,3 5,7 5,5Slovenia -7,5 4,1 2,7 3,5 2,7 4,4 4,0 5,2 3,8Poland -11,6 4,3 1,2 1,4 3,9 5,3 3,6 6,1 3,7Czech Republic -1,2 3,6 2,5 1,9 3,6 4,2 6,1 6,1 4,0Hungary -3,5 6,0 4,3 3,8 3,4 5,2 4,1 3,9 4,4Slovak Republic -0,4 2,0 3,2 4,1 4,2 5,4 6,1 8,3 4,8

Source: EBRD Transition report 2007.

Unemployment growth is unrelenting consequence of transitional process. Unfortunately, rate of unemployment is the biggest in Serbia, with tendency of further growth. In year 2006 rate of unemployment in Serbia, pursuant to methodology of National placement service was almost three times bigger than in Poland (unique country with double-digit rate), while in relation to other countries more than 4-5 times. Unemployment is very high (21,5%) and even if measured with methodology applied in EU (opinion pool about labor force).


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Table 3. Unemployment rate (%)

1990 2000 2001 2002 2003 2004 2005 2006 2006/2000 Serbia 19,7 25,6 26,8 29,0 31,7 31,6 32,4 33,2 30,0Slovenia ... 6,6 7,0 6,5 6,7 6,5 7,2 6,0 6,7Poland 6,5 16,6 19,1 20,2 19,7 18,2 16,9 12,2 17,6Czech Republic 0,7 8,3 8,0 7,5 8,3 8,4 7,9 6,7 7,9Hungary 1,4 6,4 5,7 5,8 5,9 6,3 7,3 7,5 6,4Slovak Republic 1,2 18,0 18,7 17,9 17,4 17,1 15,3 ... 17,4


Among chosen countries, Serbia preceded in inflation level. Average inflation rate for six years in Serbia is for the five times higher relating to countries observed. In spite significant inflation reduction in last year, our inflation rate is drastically higher in comparatively to five countries in tranzition. Czech and Poland since year 2000 have quite low and falling growth rate of inflation.

Table 4. Consumer prices – anual average (%)

1990 2000 2001 2002 2003 2004 2005 2006 2006/2000 Serbia5 ... 60,4 91,1 21,2 11,3 9,5 17,2 12,5 31,9Slovenia ... 8,9 8,4 7,5 5,6 3,6 2,5 2,5 5,6Poland ... 10,1 5,5 1,9 0,8 3,5 2,1 1,0 3,6Czech Republic 9,7 4,0 4,7 1,8 0,2 2,8 1,8 2,5 2,5Hungary 28,9 9,8 9,2 5,3 4,7 6,8 3,6 3,9 6,2Slovak Republic 10,8 12,0 7,3 3,3 8,5 7,5 2,7 4,5 6,5

Source: EBRD Transition report 2007

Per deficit level foreign trade balance since year 2004 in Serbia is at first place, regardless the fact that other countries are significantly developed in economic science. Individually observed the most successful is Czech, since in last two years achieved surplus of foreign-trade balance. Hungary is rapidly reducing level of deficit, while in Slovakia, along with dynamic growth, deficit of foreign trade exchange in the world also is increased.

Table 5. Trade balance - billion of dollars

1990 2000 2001 2002 2003 2004 2005 2006 Serbia ... -1,788 -2,834 -4,111 -5,565 -6,643 -5,563 -6,200Slovenia ... -1,139 -615 -248 -622 -1,258 -1,258 -1,426Poland 4,794 -12,307 -7,661 -7,249 -5,725 -5,622 -2,766 -4,953Czech Republic -600 -3,131 -3,068 -2,179 -2,473 -1,029 1,685 1,700Hungary 3,487 -2,930 -2,234 -2,076 -3,271 -3,082 -1,961 -524Slovak Republic ... -904 -2,125 -2,117 -637 -1,536 -2,376 -3,500


Observed countries achieved very impressive growth of export. In relation to year 1990, Czech increased export for 15,5 times, Hungary for 11,6 times, and Poland for 8,2 times.In the last seven years export growth is impressive. In Poland export is increased for 3,3 time, in Czech for 3,1 time and in Hungary for 2,5 time. In Serbia export is enlarged in year 2006, referring to year 1990 in sum of 1,1 time, while increase in relation to year 2000, for 3,4 time, first of all it is result of very small initial base.

5 2006. 6.6% (end-year)


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Table 6. Merchandise export - billion of dollars

1990 2000 2006 06/00 Ex. per cap. ($) 2006/2000

Ex. per cap. ($) 2006

Serbia 5,821 1,923 6,500 3,336 445 867Slovenia ... 8,808 21,397 13,879 6,939 10,699Poland 14,322 35,902 117,294 68,695 1,803 3,079Czech Republic 5,900 29,052 91,500 55,164 5,356 8,883Hungary 6,346 28,822 73,374 47,293 4,682 7,265Slovak Republic ... 11,872 40,000 22,923 4,245 7,407


For the last seven years, the biggest export per head achieved Slovenians, while among analyzed countries, Poland's have the smallest values of exportation per head. Serbia in period 2006/2000 exported in sum 445 $ per head, which considerably underachieve in relation to observed countries in tranzition. Export in Slovenia in the last 7 years was bigger for 15,6 times per head, and in year 2006 for 12,3 times.

Beside Slovenia, all other analyzed countries had significant payments received FDI. In the last seven years the most direct foreign investments, almost 45 billion of dollars, came to Poland, and over 33 billion of EUR in Czech. The biggest FDI per capita was in Czech and Slovakia, and the smallest in Slovenia and Serbia. In year 2006 due to sale of Mobtel, Vojvođanska and Panonska bank, payments received FDI per head in Serbia tripled. In distinction from Serbia, where the biggest part of FDI came through privatization process, in other countries the thing is that new investments, considering the fact that in these countries the privatization process is finished in the last decade of the twentieth century.

Table 7. Foreign direct investments - billion of dollars

1990 2000 2006 2006/2001 FDI/ pc 2006/2000

FDI/pc 2006

Serbia ... 25 4,400 1,267 169 587Slovenia ... 71 -377 207 103 -188Poland ... 9,327 9,656 7,378 194 253Czech Republic ... 4,943 4,616 5,615 545 448Hungary 311.0 2,151 3,055 2,990 296 302Slovak Republic 24.0 1,897 3,500 2,162 400 648


All observed countries have relative high foreign debt, with tendency of extreme growth. According to foreign debt participation in GDP, in year 2006 Hungary and Slovenia were in the group of indebted countries. If the level of indebtness is measured by the level of the foreign debt according to accomplished export, only Serbia refers to circle of indebted countries, while other countries, especially Czech and Slovakia are under the limit of indebted countries.

Table 8. External debt stock - billion dollars

1990 2000 2006 Debt pc ($) Debt/GDP (%)

Debt/Export (%)

Serbia ... 10,830 19,606 2,614 68,2 228,0Slovenia ... 8,917 31,232 15,616 84,5 120,8Poland 49,000 69,463 166,800 4,378 48,9 121,0Czech Republic 5957 21,608 48,279 4,687 34,4 48,5Hungary 21505 30,287 105,325 10,428 94,0 121,4Slovak Republic 2,004 10,804 28,570 5,291 50,8 63,8



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All countries achieved extremely rapid growth of gross home product per head. Individually observed the biggest GDP per head have got only Slovenians, after Czech and Hungarians. Beside dynamic growth in the last seven years, Serbia drastically lags behind concerning level of gross home product per capita.

Table 9. GDP per capita ($)

1990 2000 2006 Serbia ... 863 3.835Slovenia ... 9.704 18.582Poland 1.631 4.432 8.969Czech Republic 3.376 5.520 13.695Hungary 3.449 4.683 11.128Slovak Republic 2.914 3.771 8.823


In reference to five highly developed countries in tranzition, participation of our industry was the smallest in creating of gross home product. More important is that the crises of industry in Serbia is significantly expressed than in other countries. Participation of industry in creating GDP in year 1990 was at the similar level in Poland and Serbia as well. Fifteen years later in the industry of Poland 28 % of GDP was created, and in the industry of Serbia in sum 21,4%. In Czech transformation process of conservative and rigid socialistic into flexible industrial structure, was very successfully managed, and integrated in EU economy.

Table 10. Share of industry in GDP (%)

1990 2000 2005 Serbia 44,5 26,0 21,4Slovenia ... 30,0 29,8Poland 44,9 29,5 28,1Czech Republic 36,7 36,0 40,4Hungary ... 27,9 26,3Slovak Republic ... 25,5 24,5


Falling of Serbian industry participation in creating GDP is logical consequence of industrial development collapse. Average growth rate in Serbian industry for the last seven years is considerably lower in relating to GDP growth rate. If year 2000 will be excluded (very small base because of year 1999) than otherwise very low growth rate would be halved, amounting to 1,6%. In contrast to Serbia, above countries note very high growth of the industrial production, industry was doubled in year 2006 in Slovakia and Czech.

Table 11. Industrial gross output - (%)

1990 2000 2006 2006/2000Serbia ... 11,1 4,7 3,2Slovenia ... 6,3 7,0 3,7Poland -24,2 6,3 9,2 5,2Czech Republic -3,5 1,5 10,5 6,0Hungary -9,3 9,6 8,6 4,9Slovak Republic -6,0 8,3 10,1 6,4


Hence, nowadays the highly developed countries in transition in last decade of twentieth century, pass through bitter and traumatic experience of destruction of real system built up for almost 5 decades and building of complete new and mostly unknown system, based on totally different values


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and operating principles. Purely, these countries in transition passed the test and considerably approached to developed European states. Growth rates are relative higher, inflation is under the control, foreign debt, although increasing is followed up by dynamic export growth, so the foreign indebtness pursuant to export value is not high, industry as a leading sector is quite integrated into European industry. Serious, but only problem of above countries is high unemployed rate, especially in Poland. But unemployment is common problem in the world, also in developed countries. Relating to these countries, and beside certain positive results, Serbia is practically still at the beginning,

3. INDUSTRIALIZATION - BUILD-UP POWER OF MODERN CHINA

Ultra resident country in the world many years ago hardly succeeded to provide some development to be over brink of poverty. When Mao Ce Tung died, socialistic China was buried. Country was opened toward the world and industrialization became key sector of very dynamic economy development of China.

In year 1990, the most dynamic progress achieved primary sector, while the growth rate of the industrial production amounted in sum 3,4 %. Yet in 1991 industrial sector is rapidly developed, with annual growth rate over 20%. In the period 1990-2005 very impressive progress in China was accomplished, with average GDP growth rate of 9,8%, and average growth rate of the industrial production of 12,4%.

Table 12. Growth rate of GDP sectors and individual sectors in China - (%)

GDP Primary Secundary Tertiary GDP pc 1990 103,8 107,3 103,4 102,3 102,31995 110,9 105,0 114,0 109,8 109,72000 108,4 102,4 109,8 109,7 107,62005 110,2 105,2 111,6 110,0 109,6

2005/1990 109,8 104,1 112,4 109,6 108,72005/1978 1198,7 336,0 1874,7 1540,0 878,9

Source: China statistical yearbook 2006.

Although since year 1990, industrial growth rates was more reasonable, level of industrial production in year 2005 referring to 1978 was increased about 18,7 time, that is significantly higher in relation to service growth (15,4 time) and GDP (12 time). Such tendency of growth rate movements changed structure of the home product sector. Participation of the industry close to 40% in GDP structure year 1990, was increased in year 2005 at almost 48% while participation of agriculture was rapidly reduced, in accordance with legislative of economy progress, participation of service sector grow up.

Table 13. Composition of Gros Domestic Prodact (%)

Primary Secondary Industry Tertiary 1978 27.9 47.9 44.1 24.21990 26.9 41.3 36.7 31.81995 19.8 47.2 41.1 33.02000 14.8 45.9 40.3 39.32005 12.6 47.5 42.0 39.9

Source: China statistical yearbook 2006.

Modern, very dynamic development in China, based on effective industrialization, pointing out that in central phase of economy progress China is nowadays, industrialization is essential power of economy progress. In time, above country will improve service sector, but industry will for a long time be carrier of modern economy progress in China.


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4. COLLAPSE OF SERBIAN INDUSTRIALIZATION

Effects of industrial progress in our country in total after war period are very important, especially if observed relating to progress level interwar period. On fortunately our country is still in circle of less developed countries of Europe, which seriously leads into doubt very spread comprehension that post-war progress in Yugoslavia was one of the fastest in the world.

In accordance with actual orientation the biggest contribution to a total economy progress industry gave, because average annual growth rate of industrial production was much higher than growth rate of entire economy. Thanks to such progress, physical volume of industrial production in year 1990 was increased for 11,4 times relating to production level in 1955, while because of the crises in our industry, production level in 2005 was only for 5,4 times bigger than in year 1955.

Table 14. Physical volume of production and DP growth rate of industry in our country - (%)

Production of Industry Growth rate 1955 100 1953-1960 14,01965 367 1961-1970 8,51975 473 1971-1980 8,21985 1 045 1981-1990 1,01990 1 143 1953-1965 13,41998 588 1966-1980 7,12000 503 1953-1990 7,72005 536 1991-2005 - 3,9

Source: SYGSCG 2004, Stastical Office of the Republic of Serbia 2006, Republic Development Bureau 2006.

At the end of eightieth and at the beginning of ninetieth, period of dynamic growth of our industry was terminated and period of extreme crises began and last up to now. Very hard decade of our country decay, sanctions, wars, hyperinflation, high unemployment, law wages, drastic decrease of industrial and economy production, was terminated through change of power in well known events in October 2000. Although since than six years passed, industrial production level in year 2005 was below half of achieved level in year 1990. Still level of industrial production haven't been achieved as in 1998.

In term 1953-1990 very high average growth rate of domestic production industry was accomplished ammounting to 7,7%. By analyzing average annual DP growth rate in industry at individual stages, we can notice that industry is characterized by common tendency of collapse, and/or retardation of growth. Average DP growth rate in industry in terms 1953-1965 amounted to 13,4% in terms 1966-1980 7,1 in term 1981-1990 only 1 % while in period 1991-2005 negative average growth rate of 3,9% was accomplished.

Stage of industrial progress since 1991-2005, we can treat as one of the ponderously period in entire past-war period. At the beginning of fiftieth years our country was in very difficult problems, but they successfully and relatively quick solve the problems. Unfortunately, modern problems in progress of our industry are the like, that it will be required long time period to settle them. The first four years of the last decade of twentieth century represented period of agony and decay of ex Yugoslavia, when the tendency of decadence of the entire economic activity and deterioration of all relevant economic indicators comtinued.

First serious attempt of solving deep economic crises in (FRY) Federal Republic of Yugoslavia was rendered at the beginning of year 1994 (24 January) by enactment of program for Reconstruction of monetary system and strategy of economic recovery of Yugoslavia. Beside evident initial success of the Program, in second half of year 1994 industry in Yugoslavia re-entered into economic crisis. Extensively revival of the industrial activity was in year 1996 and especially in year 1997 and 1998, due to assets achieved owing to selling part of Telecom, but also owing to initiated reforms. In year 1999 Yugoslavia confronted with a bombing lasted for three months guided by 19 at most developed countries in the world. Except human victims, FRY experienced very hard destruction


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of economic capacities and infrastructure. All those circumstances leaded to drastic fall of the physical volume of the industrial production.

Upon events in October in year 2000, very hard stage of economic and industrial development of Serbia was over. Period after 2000 we can mark as period of great expectations and promises. New reform authority adopted Washington Consensus, taking care of exercising macro economic stability at short notice at all cost. New concept of progress was based on the most important principles of transitional economy: unregulation, liberalization and privatization. Country frontiers are opened for free concurrence. New concept of privatization was adopted and so far two thousand of the best Serbian companies were sold for totally 1,8 billions of EUR. Ninety of the biggest companies - carriers of industrial progress in previous period - slowly died, due to technical - technological backwardness, redundant labor and long standing negligence, they can not fight against drastic competence of effective foreign companies.

New Bankruptcy Law will relatively rapid complete there's agony. Key industrial sector is in ownership of foreign capital. Due to those circumstances, recovery of the industry in future period will be completely questionable, because only small part of privatized companies effectively operates, while foreign owners are urging only those industrial products that brings very high profit or goods that could be - due to high ecologic expenses - economically unreasonable to produce in developed countries.

Table 15. Industry growth rate in Serbia (%) (fixed prices 2002)

2001 2002 2003 2004 2005 2006 2006/2001GDP – growth rate ( %) 5,1 4,5 2,4 9,3 6,3 5,7 5,5Industry - total 0,0 2,0 -3,0 7,2 -0.8 4,7 1,7 Manufacturing industry -3,3 -2,8 -6,0 8,8 -0,7 ... ...

Source: Stastical Office of the Republic of Serbia, EBRD Transition report 2007.

All industrial sectors have expressly unbalanced growth, with high positive but also very negative growth rate per year. Manufacturing industry is for the five observed years, in four years noted negative growth rate, and that is first of all result of rapid progress concept in which import was the base where the growth was accomplished for entire service sector. At the same time nothing more seriously didn't done concerning recovery and consolidation of the most important industrial capacities. The expectations that trade mechanism and free competition will be accomplished, wasn't realistic, because increased production of privatized companies couldn't compensate decrease of production that originated by un-operating of the most of industrial capacities.

By rapid industrialization of our country in post-war period, drastic changes was rendered in economical and industrial structure, due to it is possible to isolate two different periods. First period in 1947-1990 when Serbia was in consistency of ex FRY and the other one after decay of FRY and creating of new state. In first period time, structural changes in economy was in accordance with perceived legislations of today's progress of high-developed countries. Owing to very dynamic industrialization at the beginning of sixtieth years (1962) DP of agriculture and industry was equalized. In 1988 almost 45% of DP in the industry was produced in industry, it was for three times more than contribution of agriculture, and much more than participation of entire service sector.

Table 16. Gross domestic product structure of Serbia - (%)

Activity 1960 1988 2001 2004 Primary 30,4 14,8 15,5 14,2Industry 24,1 44,4 24,8 21,4Services 28,5 30,5 44,7 43,8Others secundary activity 17,0 10,3 15,0 20,6

Source: SYY 1990., Republic Development Bureau 2006.


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Due to the fact that 90% of our export and import derivated from industry, sanctions of International Community in a great deal attacked industry. Beside certain recovery in year 1997, industrial production virtually stagnated in subsequent decade - with annual oscillation, whereupon participation of industry in gross home product (BDP) in Serbia was drastically reduced, of 44,4% in year 1998 (DP) onto 24,8% in 2001, and/or 21,4% in year 2004.

Due to rapid decrease of industrial production, economy structure in last 15 years was considerable changed. Structural participation of industry in 2001 was slightly more than structural participation in industry in distant year 1960, while in 2004 contribution of industry in creating BDP was at the level of late fiftieth years. If our country would be high developed, above structural changes would be quite expected and in accordance with development tendency in these countries, that from seventieth years of last century were qualified as process of deindustrialization. Besides, participation of industry in economic structure in these countries get around between 20 and 30%.

Impulse to the growth of our GDP gave the service sector in traffic, trade, insurance and financial procurement, which was in terms of realization of enormous high import, thereof in the last three years was spent 35 billions dollars. The huge quantity of imported goods needed to be rendered, sell and needed to provide money for financing. Essential issue is how to return already spent foreign exchange, when our export was very modest, and foreign-trade deficit is extremely high. Virtual development of our economy depends on volume of import, that is certained by the available foreign payment assets, and/or possibility of further borrowing of the country. The circle was closed in that manner, the placement of imported goods and correlated services are insured by artificial increase else low purchasing power of domestic, unemployed and very poorly paid population, through “favorable” credits, that population slightly obtained, by pledging flats and houses at mortgage. The above “model” of development conclusively depend on further afflux of foreign payment assets.

Unacceptable low participation of our industry in generating GDP is not consequence of deindustrialization, already to long present crises of industrial development, therefore through process of privatization industrial capacities haven't been restructured and revitalized. In previous period they were carriers of economy progress and export of our country. Pattern of development like this and formed structure of economy for long term can not bring good results. Concept will function - as at pyramidal savings - while there is influx of foreign assets (indebtedness, donations, diaspora, company purchasing in privatization process). Condidering that instalments of the foreign debt will be significantly above 10% of BDP already since 2010, that donations are almost dried up, that privatization process is at the end and that private sector (SME's) are still very weak at financial and developing sence. Due to lack of big companies as a frame and suport for their effective operating, progress based on huge importing demand sooner or later will experience failure. If very soon we do not realize that actual production sector - industry and agriculture - must have very eminent position in economy progress esspecialy in undeveloped countries such as Serbia, our long term progress perspective wil be very weak and Serbia will be at the last place in the Europe for a couple of years.

5. CONCLUSION

In modern, globalized world, industry still have significant role in entire economy progress. Pursuant to legislations of economy progress, some of the most developed countries in the world were in seventieth years of the last century entered into process of deindustrialization. Besides, industry participation in creating GDP moves between 20-30%.

In most of ex socialistic and nowadays countries in tranzition, at the beginning of the last decades of twentieth century, due to transitional shock industrial production was considerably failed. In the last ten years restructured and modernized industry, in most of the countries in the tranzition once again became carrier of the entire economy progress. Economy reindustrialization of these countries engaged foreign investments, opened a number of new jobs and spectaculary increased export. As a result of successfully conducted tranzition, ten ex socialistic, and/or countries in transition became members of the European Union.

Very dynamic and almost spectacular development in China in the last 15 years happened in terms of very strong industrialization. China has opened toward the world, achieved record in influx of


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FDI and unprecedented very high export growth, first of all into highly developed countries. Although poorly developed, China today represent giant in the economy, with double-digit growth rates lasting for number of years. At globally, competence of products in China seriously shacked up domination of a popular trio: USA, Japan and EU, lasting for more decades.

Serbia almost for two decades is in very serious economic crises. In the last decade of the last century, due to well known events, industry in Serbia - leading sector in post-war economy progress - suffered enormous damages. Concerning changes in October in year 2000, it was expected that further economy progress will be more dynamic. In spite of numerous experiences, for example China all highly developed countries in transition, industry didn't gain the place that she has in other countries. Collapse of industry was encouraged by the ineffective model of privatization, wherein instead restructuring and modernization, as in the countries in transition, leading industrial companies was brought in the phase of bunkruptcy and insolvency, (Example: Škoda and Zastava). Relative high growth rate was effectuated mostly through development of service sector, which was based on very high inepted import and foreign indebtedness of the country. Comparing to leading countries in transition, Serbia today considerably lags behind.

REFERENCES

Begović and others, Four Years of Tranzition in Serbia, (2005), CLDS, Beograd.

Carlin and others, (2004), Enterprise restructurning in early tranzition: the case stady evidence from Central and Eastern Europe, Economics of Inovation, Vol 3(4).

Commission of The European Communities, (2002), Industrial Policy in an Enlarged Europe, 11.12.2002. Com 714., Brussels.

EBRD, EBRD Transition report, (2007).

Savić Lj., Economisc of Industry, (2007),Faculti of Economics, Belgrade.

Lorber L., The Economic Transition Of Slovenia In The Prosess Of Globalization, Geografski zbornik, XXXIX, 1999.

Murn A.,(2002), Industrijska politika v Sloveniji, merena z državnimi pomoćmi in javnofininčnimi odhodki, Delovni zvezek 8/2002, Ljubljana.

National Bureau of Statistics of China, (2006), China Statistical Yearbook – 2006.

The Worl Bank, Worl Development Report (2006).

UNIDO, Anual Report 2005, (2006),Vienna.

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THE ROLE OF SOCIAL NETWORKS WITHIN THE PHENOMENON OF ENTREPRENEURSHIP: A COMPARISON OF SERBIA AND POLAND

Dragana Stanisic1

Abstract: The level of entrepreneurship development is usually bounded with the level of development of the environment as well as with the degree of liberal postulates of the economy, hence liberal societies. Observing the factors that influence it gives an insight of the characteristics of the social system that entrepreneurship incentive belongs to. That was the reason why the phenomenon of entrepreneurship was taken to be observed and examined in the context of social networking. Comparative study of Poland and Serbia was conducted in the framework of their market characteristics in order to derive some of the factors that influences and shapes social networking. Data collected through interviews with entrepreneurs from both countries served as a base for comparison. The level of available resources in the environment leads main hypotheses that social networking could be divided into two different groups - corruption and social capital according to available resources. Methodology provides an overview of the used tools while in data analysis section some of the results are presented and commented in respect of posed hypotheses. In conclusion it is stated that the social networking is dependant on the available resources on the market and some further questions on perspective of those networks are opened.

KEY WORDS: ENTREPRENEURSHIP, SOCIAL NETWORKING, HUMAN CAPITAL, CORRUPTION, TRANSITION ECONOMIES.

Social networks became a popular research theme with transition processes during the 1990s, and their importance in the context of economic development increased when transition economies started to show unexpected outcomes such as a high level of corruption, weaknesses of institutions and difficulties of consolidation with democratic norms. As the economists Robert Barrow, noted, the growth of the economy does not depend on the amount of money in the market, the successful economic development is more dependent on the efficiency of infrastructure in the society, for example if the post office is efficient. Therefore, if there is direct dependence between the institutions and level of economic development then sociologists and economists should research what are mechanisms that affect the efficiency of it. The World Bank formulated social networks as “glue” that holds together institutions, relationships and norms. And the importance of research of the social networks is shown by steady development of research on this topic.

Realizing the importance of social networks, the context in which they are observed further shapes the approach of their study. “Where trust and social networks flourish, individuals, firms, neighborhoods, and even nations prosper economically” (The World Bank, 2006). Post-communist countries with legacy of planned market economy are certainly a unique environment where social networks showed various oscillations. The main theme in this thesis is the changing social networks in the breakup of a transition economy and how these social networks are expected to develop according to changed market environment with embedded market economy infrastructure. In this paper it was found relevant to observe if social networking is perceived as notion of possible corruption or perceived as social capital that is an essential resource for business success.

The issue on networking in the respect of future prospects could be in following dilemmas - if social networks are constructive or destructive for the transition countries’ development. In research it is always recommendable to “break with common sense”, and to pose a question or approach to some notion that is out of the existed one. In that relation it was assumed the following: if it is implicit that entrepreneurs have specific networking on the market, on what that networking depend on should be investigated. Further significance of the research on social networks is due to their recognition as a highly influential and causal notion in the development of the society. Moreover, in the context of democratic and market economy implementation social networking is important to observe since it is the “key ingredient in both economic development and stable liberal democracy” (Fukuyama, 1998,

1 CERGE – EI The Center for Economic Research and Graduate Education of Charles University - Economics

Institute of the Academy of Sciences of the Czech Republic.

THE ROLE OF SOCIAL NETWORKS WITHIN THE PHENOMENON OF ENTREPRENEURSHIP: ...

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23). Entrepreneurship is an element of the market activity and its development usually describes the level of economic growth in the economies. Furthermore, it is not only the economic dimension that is described by entrepreneurship level, it also indicates the level of social change in the society since it involves activism from individuals and resembles their relation with institutions in the social system as well as with other subjects on the market. Entrepreneurship development and its effect on the social networks in that context is one of the highly recognized indicators of success of market transition in post-communist countries. Poland and Serbia are post-communist countries that both involved in transition processes during 1990s, the comparison of these two countries in respect of entrepreneurship networking experiences will be used to provide data for the conclusions on nature of social networking.

In this paper the research problem focus is on small and medium enterprises and the issue of the role of the social networks in their environment. The leading idea was to investigate how small and medium entrepreneurs perceive their environment, what are the main obstacles and how do entrepreneurs cope with them. When planned economy was a principle pattern for the market system, small entrepreneurs were emerging only in the segments of crafts. In the transition processes new incentive came from the employees in large state companies that saw the chance for individual businesses. “The entrepreneur learned to exploit the advantages of the relative security of the existence in the public sector as well as the extra income he could earn as a private producer in the second economy” (Gabor, 1993, 9). The research problem is set in the context of investigating how many local ties helped and made it possible for entrepreneurs to develop, and on what these ties depended on. Another assumption that has been used to pose the research problem is that the main perceptions of social networks are usually in context of corruption activities, and this will be about to change into the perception of social networks as social capital, in the moment when resources on the market will be sufficient. Sufficiency of resources then will assure that the market with its mechanisms accomplish efficient allocation among the subjects on the market. Resources in this respect are available institutions and their efficiency, implementations of regulations and laws, further to accessible elements of production and possibilities of not constrained sales, as well as level of trust between the subjects on the market are regarded as available resources. These notions are market resources for the entrepreneurs and the statement is that their availability is influential and it causes change of social networking from corruption to social capital.

THEORETICAL FRAMEWORK ON SOCIAL NETWORKS

The importance of social relations has always been a focus of scientists that have aimed to characterize the environment and a particular society. It is challenging to define how these relations are shaped and what they depend on. “Generalized social trust” has been first to take into consideration when characterizing social relations, however, there are other motives that come besides trust (Kuehnast, Dudwick, 2004, 1). Both countries, Poland and Serbia, had a planned economy type of business environment that was shaped by the post-war ideology of communism. A similar past made there legacies comparable. Therefore the communist legacy is ranging from still functioning structures of former regimes to particular social networks and informal business activities (Kovac, 1993, 13). Communist legacies made the framework for exploring social networks; on the other side it would give too narrow framework for characterizing their mechanisms. For that purpose it was found relevant to consider the notion of social networks in an environment that is different from the legacies of communism. This was done for the purpose of having an idea or at least a first step towards a changing environment. In order to include the perspective of a different market setting on the notion of social networking, the best was to include the definitions of those thinkers that developed these notions. When investigating their conclusions different definitions of social networking were found. Most of them related it to the notion of social capital. Putnam defined social capital as relations between the individuals, and how they develop social networks with the respect of mutual trust and reciprocity norms that regulate those relations (Putnam, 1993, 19). Further, Cohen and Prusak defined social capital as active connections among people that reflect their behaviors to each other and make cooperation possible. However, the first one to use the term social capital was Hanfian in 1916, when he defined it as a resemblance of “good will, fellowship, sympathy and social intercourse”. After almost 70 years Robert D. Putnam set the notion of social capital as a major focus and research theme.


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At the same time more thinkers and writers on social capital emerged, such as Jane Jacobs, Pierre Bourdieu and James S. Coleman (Encyclopedia of Informal Education, 2006). With the application of some transmittable relations it could be concluded that good social capital reflects good social networks. Defining them as good it is referring to them as constructive and beneficial to the economic development of the society. This causal relation lacks in some additional factors that are not mentioned and that affect social networks. Those supplemental factors are particularly resources in the environment that affect relations in society.

Moreover, in an attempt to explain why the social networks have a negative connotation as corruption for example, some authors explain it by the mentality of people under communism (Wedel, 1995, 5). Others would call on culture characteristics (Fukuyama, 2002, 32). To some extent explaining social networks and their character in the process of transition as a consequence of the type of mentality can provide part of the explanation. However, point here is that these explanations are not sufficient. Apart from mentality and culture, the context of environment has not been taken into consideration. By context of environment it is referred as the availability of resources, particularly for entrepreneurs and their business development. Resources for the entrepreneurs range, as previously mentioned from the institutions and regulations, to availability of factors of production and with potential of sales on the market. According to the available amount of these resources social networks shape.

The transition process brought a couple of new notions that needed to be referred to when characterizing changes and when explaining the causes and effects of different social factors that were shaping the business environment. One of those notions is social networks as they played a significant role in transition. There is still the strong role of oral agreement that is functioning instead of a written contract, in that type of environment the trust is very much important. Moreover, contract is not the only avoided form of arranging purchasing; it is used, as a security measure when subjects disobey what was agreed on. However, it has to be kept in mind that some types of businesses are not under such an influence of oral contracting as the others are.

THE BUSINESS ENVIRONMENT IN POLAND AND SERBIA

In the following section overview on the market conditions in Poland and Serbia are provided in order to describe the market environment where social networks are developing. Market situation in Poland during the transition times could be best described with the following observation of Vingoradova:

… entrepreneurs of the 1990s suffered from dishonest scheming by various opportunists who seemed to dominate the marketplace, from unresolved disputes with their business partners due to poorly written contracts, lack of legal advice on confusing and ever changing laws, or even more frequently due to the failure to understand the basics of business exchange on the part of entrepreneurs themselves. Firms struggled to survive in the conditions of lawlessness, pervasive opportunism, and social and political upheaval that shaped the economic landscape in the 1990s (Vinogradova, 2006, 5).

At the beginning of the 1990s a number of observations were made in this context, and one of them is Kovac’s reflection where he states that this might have caused obstacles to proceeding deregulations (Kovac, 1993, 18). On the other hand, the business environment in Poland changed significantly during the late 1990s as the interviewees stressed, and this was perceived as a positive change due to the European Union membership.

However, the beginning of the 1990s for Serbia and the whole region brought ten years of civil war on different fronts. In order to provide an overview of the Serbian business environment and to give some information of the obstacles of the market that entrepreneurs in Serbia are facing interview conducted with the Director of the Commodity Exchange Market in Novi Sad, Serbia was used. This interview together with the annual bulletin of Commodity Exchange Market was found relevant as a reference for the description of the institutional setting in Serbia. According to the observations of the Commodity Exchange in Novi Sad, the entrepreneurs in Serbia are in a difficult position when deciding on the type of business to engage in. This is due to the monopolies that are


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present on the market. In the same time, there is potential in some branches, however, the problem is that there are regulations and laws that are lacking, and this is the reason why the system is observed as unstable and with high risks for the individual incentives. However, Commodity Exchange Market as an institution is gradually improving the trust in the institutions as it provides the information base for the entrepreneurs in which they can find valid and representative information. Restoring trust of the individual entrepreneurs in institutions is observed with the number of members on Commodity Exchange market which shows steady growth.

THE HYPOTHESES OF THE RESEARCH THEME

Social networks are shaped by the level of accessible resources for the entrepreneurs in the given market setting. Therefore, in the context of available resources the role of social networks is perceived as social capital, while in the context of scarce resources social networks take the role of corruption. For availability of the resources on the market it will be referred to legible institutions, their efficiency, the availability of raw materials and elements for production, possibilities for sales of products on the market, as they all imply to the consolidated market conditions for the markets in transition.

Poland and Serbia have the legacy of planned economy where efficient allocation of resources was not undertaken by the state through administration tools, other instruments took that role, and those are social networks. In the transition period that was the newly emerged feature that resembled the social basis for the support for the transition processes. Moreover, in the context of the scarcity of resources available social networks provide access to goods and services, and they provide it to those who can afford “extra costs for it”. That is why there is corruption. The responsibility for emergence of such mechanisms is partially on nature of rigidness of communist setting and the planned economy that did not provide efficient allocation on the market. On the other hand, when resources are available, social networking is a productive way of coping for the best resource possible. Therefore, the direction of exploring how two given instances, given conditions on the one side and entrepreneurial needs on the other meet. And how is that type of relation influenced. Partial answer is in social networks that provided mechanisms for allocation.

CORRUPTION VS SOCIAL CAPTIAL

As previously noted, corruption in a planned economy happened first due to the lack of efficiency of distribution mechanisms. The distribution among individuals and companies had to be undertaken by mechanisms which were shaped by informal relations, i.e. connections, “for both ideological and organizational reasons, heavy industry dominated the wage bill in socialism, over education, social services or the light industries that might have produced consumer goods” (Domanski, Heyns, 1995, 326). The distributions of products and services were planned in advance and that could not have ensured efficient distribution. The efficiency of distribution makes it possible for the law of supply and demand method to function and liberalize market environment.

At the same time in Serbia, entrepreneurs still being in a small and closed market, face scarce business opportunities and business partners. From the need to ensure the continuation of businesses, entrepreneurs need to ensure business partners, and this in the environment of a lack of competition, choices and scarcity of business opportunities leads to corruption. This is supported by the remark of entrepreneur from Serbia who described what is essential for successful business conduct. He claims that the originality and will are not sufficient for the start of the business, and that relation to politicians can reduce some costs. As he noted this makes it easier to conduct all the administration processes in local offices, tax offices, courts and other institutions. Corruption is still a big problem, because if you want to finalize some business arrangement you need to ‘pay extra tax’ on couple of places, or at least take for lunch one to a couple of people. The market is not limited in respect of products, but it is limited in respect of sales according to one of the interviewed entrepreneurs.

On the other hand, social capital always includes observing what it depends on. The most applicable definition of social capital in the context of constructive social networks is with presence of uncertainty, or in other words while changes in the society are happening, finding a way to cooperate characterizes social networking hence social capital (Putnam, 1993, 43).


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The transition agents in post communist countries are not as easy to identify as in the French model. CEOs, government members, or influential groups are still not recognized by the public. Moreover, there is an incentive to describe success with certain relations with underground connections or “hard to explain” reasons. This manner of reasoning is irrational for any society and it can only be an obstacle in the development of the economy. Being unable to clarify the patterns in decision making, is slowing down the progress and development. Even today there is the perception that elites have their own pattern of cooperating and that their decisions are driven with interests that do not benefit the public in general. If the decision making of social elite and the government in that context is far from the influence of the public, then the democratic mechanisms are in direct threat. This is due to the fact that the government tends to have an influence on their businesses and in that interest conflict most of the corruption happens today. “To focus on networks helps, then, to highlight the complexity of these relationships and to avoid the shortsightedness induced by regarding social networks, trust and norms as all indistinguishably united in something called ‘social capital’ ” (Kuehnast, Dudwick, 2004, 3). Solution for the above problem is social structure transparency. According to Fukuyama there are number of elements that need to be combined in order to provide the transparency of the system which is needed for the democracy implementation “competent and transparent formulation of the policy, and [state] legitimate enough to have authority to make painful economic decisions” (Fukuyama, 2002, 25). Comparing the French model of change and the transition of the post-communist countries, the transparency of changes was what post-communist countries did not have. Democratic systems depend on the character of social networks, social networks developed with trust and tolerance ensure democratic values to be embedded (Fukuyama, 2002, 27) transparency of social structure in this respect guarantee the democratic system. This has further direct consequence that social capital with transparent social networking is constructing democracy.

What follows is the important question if European Union Membership Change s Relations. Among subjects on the market and does it affect the social networks? Entrepreneurs in Serbia perceive the European Union market as a chance for the development of business contacts and for the expenditure of business. While mainly the reasons given are out of economic reasons and chances for potentially bigger sales, the great expectations are from the laws and regulations that are going to restore the trust in institutions. Higher cooperation, encouraged motivation and higher trust in the environment are prone to happen. Therefore, the implementation of the European Union standards can have a direct influence on the characteristics of social capital. How the implementation of European Union standards changed Poland’s market is considered as highly influential. What is recognized as the most significant is the implementation of rules, laws and procedures that rest of the Europe applied. This unification of norms and clarity in expectations that an entrepreneur can have on the market encourages individual actions in the market, hence society.

CONCLUSION

Regarding the discussion of social networks Walter and Smith noted “[t]he challenge of research on networks is to explain their emergence, actuation and durability” (Smith, Walter, 379). Observing how character of social networking depends on resources could partially be directed to the characteristics of business environment in Serbia and in Poland. “… the exchange value of social capital depends very much upon the resources to which social networks give access” (Kuehnast, Dudwick, 2004, 1). However, the main idea is to raise awareness of the distinction between available resources in the market environment for the entrepreneurs in both countries. And the reason why the entrepreneurs are the best representatives of existent networking is due to the fact that they represent the individual incentive for one of the actions in the society and that is business activity. Moreover, the process of their decision making represents the character of the environment. At the same time, one of the first changes in respect of tools of decision making is at the same time the signal of the changing mechanism that guides market relations. Old patterns of decision making and at the same time the character of the market and business relations are changing. With those changes it is expected that the mechanisms within the social structure change as well.

Reliable resources in society supported with legitimate institutions and rule of law define social networking as social capital. This is in the context of shaping norms by the institutional


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implementation that is expected to restore the trust and acknowledgment of institutions in the society. With the transparent and defined market relations based on legible institutionalized norms, there is potential of development for pro-active community that insures economic development. On the other side, corruption and social networking in the framework of interest gaining for some individuals was apparently inevitable in the scarcity of resources. This is proven to change when the resources are available, and this is further confirmed by the statements of interviewed entrepreneurs claiming that with the ensured protection of interests on the market, willingness to respect the rules and integrate into community with the accepted norms of relations is present. The main consequences of corruption and its distorted motives of social networking and caused further underestimation of the capability and strength of constructive incentives of networking that is regarded as social capital. Therefore, corruption undermines the strength of institutions - it result in to a faulty allocation of resources and restricts market competition – by creating monopolies causes loss of the international competitiveness of the economy (Kaminski, 1997, 98). In transition period monopolization in the market of certain goods was rather a rule than exception, and with that social structures in the society, a system can fight against with legible institutions and law implementation.

The conclusion is that availability of resources in the market environment shape and characterizes social networking. At the same time, it should be kept in mind that social capital and cultural characteristics of society are mutually dependent variables and that is not sufficient to talk about the promotion of social capital and constructive networking on the macro level before the implementation of rule of law in the micro level, or in the level of relationships between the individuals (Fukuyama, 2002, 35). Those societies that have established and have norms and relations between the individuals based on rule of law did not reach that level by simply “deciding one day to build modern legal institutions” (Fukuyama, 2002, 35). The process took years and it is assumed that it will take time for the transition economies such as Serbia and Poland. What they need is broader, across the nationalities, communities and abroad boundaries cooperation to develop social capital, as Fukuyama and Putnam would note it. This is partly possible for the entrepreneurs by expending their businesses abroad and by becoming the part of one larger multinational and consolidated market such as the European Union one.

REFERENCES

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Barberia Lorena, Johnson Simon, and Kaufmann Daniel. 1997. Social Networks in Transition. Working Paper Number 102. The Davidson Institute Working Papers Series. The William Davidson Institute.

Bezdanov, Stevan. 1999. Institucionalni Preduslovi Razvoja Malih i Srednjih Preduzeca. “Akutni Prolemi Jugoslovenske Privrede”. Naucno Drustvo Ekonomista Jugoslavije. Beograd.

Boswell, Jonathan. 1994. Community and the Economy. The Theory of Public Co-operation. Rutledge. London and New York.

Domański H, and Heyns B. 1995. Toward a Theory of the Role of the State in Market Transition: From bargaining to markets in post-communism, “European Journal of Sociology”, XXXVI, 1995.

Encyclopedia of Informal Education. 2006. [on-line] www.infed.org

Esterberg, Kristin G. 2002. Qualitative Methods in Social Research. The McGraw-Hill Companies, Inc.

Fukuyama, Francis.1996. Trust: The Social Virtues and the Creation of Prosperity. Penguin Books. London.

Fukuyama, Francis. 2002. Social Capital and Development: The Coming Agenda. SAIS Review vol. XXII no. 1 (Winter – Spring, 2002). [on-line] www.muse.jhu.edu.

Gabor, R. Istvan. 1993. Modernity or a New Kind of Duality? Second Thoughts about the “Second Economy”. Transition to Capitalism? The Communist Legacy in Eastern Europe. Transaction Publishers. New Brunswick (U.S.A) and London (U.K).


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Grozdanic, Radmila. 1999. Institucionalni Preduslovi Razvoja Malih i Srednjih Preduzeca. “Akutni Prolemi Jugoslovenske Privrede”. Naucno Drustvo Ekonomista Jugoslavije. Beograd.

Hancke, B. 2000. “Revising the French model: Coordination and Restructuring in French Industry in the 1980s” BOOK. WZB, 2000.

Kovacs, Janos Matyas, 1993. “Introduction: Official and Alternative Legacies”. Transition to Capitalism? The Communist Legacy in Eastern Europe. Transaction Publishers. New Brunswick (U.S.A) and London (U.K).

Kaminski, Z. Antoni.1997. “Corruption under Post Communist Transformation: The Case of Poland”. Polish Sociological Review, 2, 1997.

Kuehnast, Kathleen and Dudwick, Nora. 2004. Better Hundred Friends than a Hundred Rubels? Social Networks in Transition – The Kyrgyz Republic. World Bank Working Paper no. 39. The World Bank, Washington, D.C.

Miller L. William, Grodeland B. Ase, Kosheckina Y. Tatyana. 2001. A Culture of Corruption. Coping with Government in Post-Communist Europe. Central European University Press. Budapest.

Przeworski, A. 1996. “On the Design of the State: A Principal-Agent Perspective”. Paper presented at the Workshop on Economic Transformation and the Reform of the State, NRC, Washington, November 1996.

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Vinogradova, Elena. 2006. “Working around the state: contract enforcement in the Russian Context”. Socio-Economic Review Advance Access published March 1, 2006. [on-line] www.ser.oxfordjournal.org

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THE AGRICULTURAL POLICY CHANGING DIRECTIONS AND IMPLICATIONS ON AGRICULTURAL AND RURAL DEVELOPMENT IN SERBIA

Zaklina Stojanovic1

Abstract: This paper analysis refers to the most important Serbian agricultural policy changing directions. They have been seen in the context of desired Serbian economy international integration. These processes (WTO and EU integration) are interlaced. If we think about the European future of Serbian agriculture, our strategic position starts from domestic agricultural policy harmonization with the CAP reforms directions. It is underlined that the future of European model of agriculture has been seen through a competitive agricultural sector able to participate on world markets without being over subsidized.

Considering the existing average farms size in Serbia, only minority of them have the prerequisites which will make them competitive. The agricultural policy measures are oriented on forming of the structure of commercial farms that will suit the demands of the modern market economy. It is emphasized that the European model of agriculture is not homogeneous. There are significant differences in the production patterns and farm sizes between the EU Member States. But in the European model of agriculture different production models should be allowed to co-exist along each other as long as they conform overall objectives of the CAP. Depending on the comparative advantages of the agricultural sector in different regions, following strategies can be applicable in our practice: (1) intensification, modernization and increasing value added of agricultural production in the productive regions; (2) landscape and nature conservation programs implementation in the less productive regions; (3) promotion of local agro-food, niche products and quality labels in the areas of subsistence agriculture.

KEY WORDS: AGRICULTURAL POLICY, RURAL POLICY, INTERNATIONAL INTEGRATION, POLICY CHANGING DIRECTIONS.

1. INTRODUCTION

It is well known that agriculture is no longer a dominant rural economy sector. Both agricultural and rural policy are changing to respond to the society's concerns regarding food safety and food security, environmental protection and the viability of rural areas. The basic questions present in this paper analysis are following: (1) what are the main agricultural policy changing directions in Serbia in the context of international integrations (EU and WTO); (2) what would be the most effective mechanisms to enhance coherence between agricultural and rural development policies in Serbia?

Serbia is in the process of WTO accession and intensively works on related terms and conditions that must fulfill. It is expected that WTO negotiations will result with further significant reduction of trade-distorting support. On the other side, the Common Agricultural Policy (CAP) - a massive and complex policy that changes direction like a super tanker at sea, is also turning direction. The CAP reform is steadily moving EU agricultural sector closer to the world market conditions. The question is what will be most important applicable measures within CAP by the time Serbia joins the EU? International integrations are bringing more than just one unknown. That leads us to the only one completely controllable process - transition to a full market economy. The “Copenhagen Criteria”, besides some political targets (the establishment of democracy, the rule of law, protection of minority rights), underlines creation of a functioning market economy able to withstand competition. It seems that these processes are of crucial importance for the success of Serbian international integration.

Establishing a market economy in the area of agriculture is often identified with changing role of government. Government withdraws from many of the functions that are used to perform (directing of socially/state owned farms, providing inputs and credit support, operating directly in commodity market). Parallel, it is expected from government to take on or strengthen many new functions. It is necessary to ensure that the market functions well and that private operators have access to the information and resources needed in order to work effectively (establishment of new information system, education system, system of training and advice, new low system adopting and 1 Faculty of Economics, University of Belgrade, Serbia.

THE AGRICULTURAL POLICY CHANGING DIRECTIONS AND IMPLICATIONS ON AGRICULTURAL AND ...

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implementation). It also means that farmers, trying to answer on the question “What should I produce?” must look: (1) at himself (his own interests, abilities, experience); (2) at his farm (potential of his resources); (3) at his market (demand analysis). But at the end or on the very beginning of this process, farmer will still look at the government policy. Agricultural transition to a modern food system underlines that we must face with new situation characterized by less number and bigger farms with production that is more specialized and focused on the market requirements. The real challenge is connected with transition managing. How to balance the economic drive for rapid restructuring of agriculture against the economic and social needs of all those people whose future does not lie in farming? It is obvious that agriculture does not exist in a vacuum, and we need a common basis definition for all policies that will contribute to shaping the future of Serbia’s agriculture and rural areas.

2. WHERE DO WE NEED TO LOOK FOR OUR AGRICULTURAL POLICY CHANGING DIRECTIONS?

International integration processes are interlaced. Our agriculture is faced with twofold challenge. Urgent agricultural support harmonization with the WTO rules is recognized as the first one. On the other side, the European model of agriculture gives us a strict frame for our agricultural policy changing directions. Furthermore, pre-accession programs are designed to harmonize domestic agricultural policy with CAP. If we think about the European future of Serbian agriculture, our strategic position starts from domestic agricultural policy harmonization with the CAP reforms directions.

The CAP is a set of policies aimed at raising the farm incomes in the EU. The CAP basic objectives did not change formally from the beginning of the European integration process. The original CAP objectives are defined as follows: (1) to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilization of production factors; (2) to ensure “a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture”; (3) to stabilize markets; (4) to provide certainty of supplies; (5) to ensure supplies to consumers at reasonable prices (Article 33, The Treaty). The true objectives of the CAP were established after the Stresa conference (1958) in accordance with the Treaty. They were oriented not only on the implementation of common prices and market supports, but also included a commitment to encourage the structural reforms in the EU agricultural sector. A fair standard of living for the agricultural community was not established only by increasing of farm incomes through system of public transfers, but also by the encouragement of rural industrialization thus giving opportunities to rural economy activities diversification. The CAP has been contributed to overall economic growth by allowing specialization and preserving the future of family farms within the EU.

The European model of agriculture is not homogeneous. In most European countries family farms are the key element in fulfilling the objectives of the European model of agriculture. However, there are significant differences in the production patterns and farm sizes between the EU Member States. This consequently means that the sizes and types of production units also vary considerably in different parts of Europe. A key element in the European model of agriculture is that different production models should be allowed to co-exist along each other as long as they conform to the above-mentioned overall objectives of the CAP.

The EU basic economic data figures for agriculture hide deep disparities between EU countries (Graph 1). Within the European model of agriculture the following typology can be identified: (1) a “Southern” model, typical of Greece, Italy, Portugal and most new member states; (2) a “Northern” model, mainly found in Ireland, Benelux, Germany, Denmark, France and the UK. (ECDGAgri, 1997) A “Southern” model of European agriculture is characterized by small holdings, nearly three-quarters with less than 5 hectares. The majority of farmers (57 to 63 % on national average) are more than 55 years old. Very small farms do not in general provide a real living, except in the case of certain specialized crops. Most farmers have other sources of income, not least pensions.


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Graph 1. Diversity of the European model of agriculture: the key agricultural statistics 2005 (EU-27=100)

– 200.0

– 100.0

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Belgium

Czech Republic

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ark

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any

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Greece*

Spain*

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UAA per holding (ha) Agricultural employment (share of TWP) Share of agriculture in the GDP

*- data for 2003; ** without data on UAA per holding (Analysis is made according to data available from the publication Agriculture in the EU: Statistical and Economic Information 2006, EU Directorate General for Agriculture and Rural Development, Feb. 2007)

The emphasis is more on territorial and cultural aspects, and less on production. Small farms are, in the short and medium term, less sensitive to price and market changes. They have been developing a capacity for survival which could make any qualitative improvement in agricultural sector difficult to achieve. A contrary, in a “Northern” model of European agriculture farms are typically medium-size or large. The smallest structures (15 – 17 ha) are linked with a specialization in labor intensive production (fruit and vegetables, flowers, intensive livestock) and with part-time farming. The biggest structures are found in the Germany, the UK, Denmark and France.

The CAP has been under strong reform pressure starting from 1990´s. The most important EU agricultural policy reforms driving forces are connected with budgetary, consumer, external and environmental pressure. Along with the reforms over the last 15 years, the multi-functionality of European agriculture was brought to the forefront underpinning the new role of agricultural policy. Multi-functionality asserts that farming is much more than an economic activity. Agricultural activity has unique role in rural cultural and social tradition preserving, as well as in environmental protection. The EU is paying farmers to take care of the land. Question that we must ask would be: is it natural that the largest farms should get most of the money? Using flat-area direct payments scheme, the CAP support is distributed as follows: just 5 % of all EU-15 farms receive half the money, while over 50% receive just 4% of the money. (Richard B. and Wyplosz C., 2004) Despite high prices and massive subsidies, farm population continues to decline. To most EU farms CAP payments are too small to prevent many farmers from quitting. For newcomer’s farmers that mean that they will get very little CAP support since their farms are quite small on average. It includes also a political criterion. For example, according to political agreements the CAP payments for newcomers are fixed (during the first eastern enlargement the average newcomer farm got just 170 euro, while the average farm in the EU-15 got 5000 euro - Copenhagen criteria).

The CAP is based on two pillars today. The traditional market and price policy is placed at the first pillar. The second pillar is consisted of rural areas development and environment protection measures. The future of European model of agriculture has been seen through a competitive agricultural sector able to participate on world markets without being over subsidized. On the other hand, methods of production rich on tradition are not just output oriented, but seek to maintain the


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visual amenity of countryside. Giving a chance for rural employment diversification, the rural development policy has been taking care for agricultural labor surpluses.

3. THE AGRICULTURAL POLICY REFORMS IN SERBIA: STREIGHTENING COMPETITIVNESS AS A STRATEGIC GOAL

In spite of the fact that agriculture plays a vital role in Serbia, it is characterized by extensive production structure and unfavorable productivity. Serbian agriculture is still struggling in the battle to achieve the gold 1980s (table 1). High production potentials are poorly used. Traditional agriculture dominates in most parts of Serbia. Thus it can be stated that Serbian agriculture is under a specific and urgent need for the reconstruction of farms and food industries. The most powerful agricultural development driving force is recognized in technological change. Modernization of Serbian agriculture has been addressed both on privatization process and structural reforms.

Unlikely other countries, agricultural activity in Serbia have been based on both agrokombinates and family farms. It is obvious that a dual agricultural sector structure has been our main particularity. At the very beginning of our agribusiness transition the land ownership structure was following: (1) agrokombinates were managing with 600.000 ha of cultivated area; (2) family farm holdings were situated on 3,6 million ha (85% of the total cultivated area); (3) agricultural cooperatives were managing with 3% of the total cultivated area. In the context of structural reforms, transition process relay on agricultural production proponent’s transformation. Agrokombinates privatization and development of commercial family farms have been identified as important agricultural transition components. Previously mentioned processes will conduct to our country agribusiness model establishment compatible with world-wide model of a modern agricultural sector functioning. Agribusiness has to be seen as a modern system of food production and distribution. It includes integrated group of connections and relations accomplished between participants in a modern food system consisting of up-stream, farming and down-stream sector (input supply firms, agriculture farms and processing industry).2

Table 1. Domestic product (DP), domestic product of agriculture (DPA) (in millions of dinars)* and share of DPA in DP (in %) in Serbia

1981-1990 1991-2000 2000-2005 1981-2005 Parameter

average rate average rate average rate average rate

DP 46.257 -0,66 23.328 -7,23 22.398 4,53 32.313 -2,57

DPA 4.757 -0,32 4.186 -3,03 3.920 2,17 4.361 -0,16

DPA/DP (%) 10,3 0,33 17,9 4,49 17,5 -2,23 13,5 2,48 *Fixed prices in 1994. Source: Novkovic, 2007.

Privatization of Serbian agribusiness is faster in the area of processing industry. We have to be aware of a fact that most of the privatized firms already were successful state/socially owned companies. Among them as the most attractive breweries, tobacco, dairy, sugar, miller and bakery capacities were recognized. If we have to evaluate up-stream agribusiness sector privatization in Serbia, significant leg behind related farming and down-stream sector processes might be marked. Respecting up-stream sector development importance for agricultural production, big agricultural input suppliers in our country have been included in the restructuring process today. Generally, 55% of food sector companies have been still waiting to be privatized.

2 «Borders» of agribusiness are not same in different countries. They are basically defined by the national

economic policy. Developed countries governments have been very well aware of agricultural sector economic growth positive correlation with the «around agriculture» activities improvement. A modern agriculture is equal to agribusiness.


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Possible number of firms that could be involved in the restructuring process prevails on public funds available for this kind of investments. Furthermore, the food processing companies, mostly with overestimated capacities, have been included as our agribusiness composition significant part. Most of these capacities are, even now, out of use. Displeasing technical equipped, these capacities brought important problems both in the area of the EU standards implementation and different social groups consent on privatization process. While the big agribusiness systems overwhelm with problems have been waiting for privatization and restructuring, necessity of the family farming model promotion as a basic proponent of our strategic food security arise.

Reduction of the former socially/state sector role in the primary agricultural production requires compensation in the private sector development. Our agricultural policy measures are just directed to commercial family farming development. If we track indicator level by two census data within eleven years period (1991-2002), agricultural household’s average size was slightly improved in Serbia - from 2.46 to 2,49 hectares (table 2). It is also important to notice that in Central Serbia average size of family farms recorded 9.4% decrease, unlike to Vojvodina with almost for one third family farm average size increase. Important differences were indicated in the regional context too.

Table 2. Number and structure of agricultural households in the Republic of Serbia

The Republic of Serbia

Total Central Serbia Vojvodina Kosovo and Metohija

Number of agricultural households

by arable land

(in hectares) 1991 2002 1991 2002 1991 2002 1991 2002

Total 1115663 778891 711007 577416 259129 201475 145527 ...

0,10-2,00 507939 354029 294264 248150 139951 105879 71724 ...

2,01-5,00 360623 244064 245594 197273 65612 46791 49417 ...

5,01-10,00 194345 131438 131653 100935 45449 30503 17243 ...

10,01-15,00 35298 27731 25429 19084 6347 8647 3522 ...

15,01-20,00 9444 9041 7522 5954 833 3087 1084 ...

over 20,00 5217 6300 3991 3192 412 3108 814 ...

without land 2797 6288 554 2828 520 3460 1723 ... Source: Census 1991, Book 1, SZS and Census 2002, Book 1, RZS.

An average agricultural producer in south-east Serbia has been managing just with one third of average agricultural land property in north-west part of our country. It is also well known that a commercial holdings size could be different if farm was running different agricultural production activities. For example, large-scale farm is essential for crop in comparison with fruit or vegetable production. Thereof, previous notes could be just explained by specialization possibilities based on different regions comparative advantages. Never the less, the agricultural policy makers in Serbia are obviously given by extremely hard-achieving goal – to reform very poor family farm sector structure. First dilemma that necessarily has to be solved in this area is related to the commercial family farming sector identification.


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Figure 2. Register enrolled farms by size

-3

-2

-1

0

1

2

3

4

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

do 0.5 ha 0.5-2.00 2.01-5.00 5.01-10.00 10.01-15.00 15.01-20.00 preko 20.00

(Source: The Republic of Serbia Ministry of Finance, the Agricultural households registers statistics 2005)

The Agricultural Households Registration by-low was adopted at the beginning of 2004. Identification of agricultural budget users and agricultural production development supporting measures rationalization were nominated as these action strategic goals. Around 1/3 of total number of agricultural households were enrolled in register till now. The average family farm size is around 6 hectares.

Graph 3. Register enrolled farms by activity in Serbia

-3

-2

-1

0

1

2

3

4

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Full-time farms Part-time farms Old farms

(Source: The Republic of Serbia Ministry of Finance, the Agricultural households registers statistics 2005)

A typology of regions in Serbia is based on their degree of rurality according to the share of their population living in rural communities. Communities are divided into rural and non-rural depending on their population densities using OECD criteria. Then, on NUTS 3 level regions are qualified as follows: (1) predominantly rural – more than 50% of the population in rural communities; (2) significantly rural – between 15 and 50% of the population in rural communities; (3) predominantly urban – regions below 15% of the population in rural communities. Predominantly urban region is only territory of Serbia capital city – Belgrade. Rural Serbia (significantly rural and predominantly rural regions) consists of 24 counties and 144 municipalities. (Bogdanov N. and


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Stojanovic Z., 2007).3 Generally, the region of Vojvodina producers share in total number of enrolled agricultural households tends to be more then one half. On the other hand, unexpected low registration of agricultural producers from the central part of Serbia appeared. The crucial reasons for noted phenomena are the following: (1) agricultural producer’s non-commercial (traditional) orientation; (2) significant number of old farmers; (3) lack of agricultural producers’ interest for development in spite of favorable financial conditions or low participation of risk takers and agricultural entrepreneurs (graphs 2 and 3).

The progressively reform of agricultural policy in Serbia is recommended. In the first phase, the existing commodity-related subsidies have been phased down and the resources redirected to investments that will make Serbian agriculture more profitable (grants, input subsidies, credits). Some of this support, such as the credit program, has been completely production-neutral, sending no signals to farmers what to produce. In the second phase of agricultural policy reforms in Serbia input subsidies will be scaled down, as is likely to be required for Serbia’s accession to the WTO, and the grant programs will be increasingly oriented to rural development, in line with trends in the EU. During the third (final) phase, leading up to and including accession to the EU, Serbia will prepare for and adopt the support systems of the CAP as they then apply. (The Agricultural Strategy of Serbia, 2005) The current state of Agricultural budget reforms in Serbia is graphically presented (graph 4).

Graph 4. The structure of agricultural budget support in Serbia

(Source: Agricultural budget 2003-2006, The Republic of Serbia Ministry of Agriculture, Forestry and Water Management)

It is likely that CAP will be centered on a system of flat-rate area payments, linked to various environmental criteria - unconnected with the farmer’s production decisions. Redirection of domestic support programs is addressed on the medium term goal of increasing competitiveness of Serbian agriculture by making more funds available for activities that will improve productivity, profitability and/or quality. It will help farmers to be more efficient, so they can be able to compete effectively even when such support (according to the predicted EU perspectives of agricultural support) will be withdrawn.

The future that Serbian agriculture must face is less number of farmers, bigger farms and production that is much more specialized and focused on market requirements. Producers able to survive in the market conditions have to be supported by the agricultural policy measures. Rural development policy, on the other hand, will help to steer rural communities through the difficult transition from dependency on agriculture to a diversified rural economy structure. Thus, strategic 3 List of regions in Serbia: a) Predominantly urban – City of Belgrade (1); b) Intermediate (significantly rural) –

South-Backi (7), Podunavski (11), Sumadijski (13), Moravicki (18), Rasinski (20) and Jablanicki district (24); c) Predominantly rural – Nort-Backa (2), West-Backa (3), Nort-Banatski (4), Midle-Banatski (5), Sremski (6), South-Banatski (8), Moravicki (9), Kolubarski (10), Branicevski (12), Pomoravski (14), Borski (15), Zajecarski (16), Zlatiborski (17), Raski (19), Nisavski (21), Toplicki (22), Pirotski (23) and Pcinski (25).

0

20

40

60

80

100

120

2003 2004 2005 2006

Institutional supportCredit supportIncome supportStructural supportMarket support


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goals of Serbian agriculture might be identified as following: (1) structural change (producers, ownership and institutions); (2) develop the market and its mechanisms (role of the government in the market economy, agricultural market, price policy, credit policy and other agricultural policy measures); (3) rural development and environment preservation.

4. CONCLUSION: WHAT CAN BE EXPECTED FURTHER IN THE AREA OF AGRICULTURAL POLICY REFORMS IN SERBIA?

Our agricultural policy main objective is to develop an efficient agricultural sector that can be competitive on world market. The modern agricultural sector relays on production competitiveness increasing. Considering the existing average farms size, only minority of them have the prerequisites which will make them competitive. The agricultural policy measures are oriented on forming of the structure of commercial farms that will suit the demands of the modern market economy. If a farms structure reflects a quite small size on average, even the European model of agricultural support will not success to prevent many farmers from quitting in Serbia. On the other side we have to be aware of the fact that the rural Serbia (significantly rural and predominantly rural regions) consists of 24 counties (of 25 totals) and covers 96% of territory and 79% of total population.

The accession to the EU is a long and complex political and economic process. According to the experience from previous enlargements duration of accession process was estimated at on average 8 years and could be in the case of the Western Balkans even longer. The EU is now turning the order in negotiations process, putting at the first place most difficult fields. The agriculture is certainly one of them. We have to think not about what is CAP now, but what will be in the future (2013 or even later). It is likely that the CAP will be centered on a system of flat-rate area payments, linked to various environmental criteria (unconnected with the farmer’s production decision). Current redirection of domestic support programs is addressed on the medium term goal of increasing competitiveness of Serbian agriculture.

In spite of the facts mentioned above, Serbian agriculture is characterized by a very slow development process. If perspective of our agriculture has been seen unchanged, question would be: will we be able to survive international competition? In that context we do need new, reformed agricultural policy (rural policy). An important activity lies in the rural development policies which will help to steer rural communities through the difficult transition from dependency on agriculture to a much more mixed economic base. Respecting the EU experience - depending on the comparative advantages of the agricultural sector in different regions, following strategies can be applicable in our practice: (1) restructuring agriculture through intensification, modernization and increasing value added in the productive regions; (2) agricultural production with increasing interest being shown in landscape and nature conservation in less productive regions; (3) maintenance of agricultural activities by promoting local agro-food, niche products and quality labels in areas of “traditional” agriculture.

REFERENCES

Artis M.J. and Lee N., ed. (1997), The Economics of European Union – Policy and Analysis, Oxford University Press, New York.

Baldwin R. And Wyplosz C. (2004), The Economics of European Integration, The McGraw Hill Education, London.

Bogdanov N. and Stojanovic Z. (2007), “Metodologija utvrđivanja ruralnosti i identifikacija ruralne Srbije”, Poljoprivreda i ruralni razvoj Srbije u tranzicionom periodu, DAES, Beograd (Agriculture and Rural Development of Serbia in the International Integration Processes - Project 2006-2010).

El-Agraa A.M., ed. (2004), The European Union, Economics and Policies, Prentice Hall, London.

Erjavec E. (2007), „The EU Common Agricultural Policy and the Western Balcan Integration Process and Tasks“, The European Association of Agricultural Economics 100th Seminar: Development of Agriculture and Rural Areas in Central and Eastern Europe, Plenary paper, June 21-23, Novi Sad 2007.


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EU Directorate General for Agriculture and Rural Development – Agriculture in the EU: Statistical and Economic Information 2006.

FAO (1988), World Conference on Agrarina Reform and Rural Development: Guidelines on socio-economic indicators, FAO, Rome.

Hay K. (2002), Rural indicators and Rural Development – Final Report, European Union.

Novković N. (2007), „SWOT Analysis of Agriculture in the Republic of Serbia“, The European Association of Agricultural Economics 100th Seminar: Development of Agriculture and Rural Areas in Central and Eastern Europe, Plenary paper, June 21-23, Novi Sad 2007.

OECD (1996), Creating rural indicators for shaping territorial policy, OECD, Paris.

Stojanovic Z. (2007), „Labour Market and Rural Development Perspectives“, The European Association of Agricultural Economics 100th Seminar: Development of Agriculture and Rural Areas in Central and Eastern Europe, Plenary paper, June 21-23, Novi Sad 2007.

Stojanovic Z. (2007), „Serbian Agriculture and its Perspectives“, The European Association of Agricultural Economics 100th Seminar: Development of Agriculture and Rural Areas in Central and Eastern Europe, Plenary session discussion, June 21-23, Novi Sad 2007.

Terluin J. Ida (2001), Rural regions in the EU – Exploring differences in economic development, Faculteit der Ruimtelijke Wetenschappen Rijksuniversiteit Groningen.

European Commission Directorate General for Agriculture (1997), CAP 2000 Working Document: Rural Developments, July 1997.

The Republic of Serbia Ministry for Agriculture, Forestry and Water Management (2005), The Agricultural Strategy of Serbia.

The Republic of Serbia Ministry of Finance (2005), The Agricultural households register statistics 2005.

The Wye Group (2005), Handbook on Rural Households’ Livelihood and Well-being: Statistics on Rural Development and Agriculture Household Income, Wye.

Thomson K. (2007), „Further CAP Reform: EU-15 Wiewpoints for Central and East Europe“, The European Association of Agricultural Economics 100th Seminar: Development of Agriculture and Rural Areas in Central and Eastern Europe, Plenary paper, June 21-23, Novi Sad 2007.

Zakic Z. and Stojanovic Z. (2005), „Osnove za izradu modela ruralnog razvoja u Srbiji“, print in ed. Zakic Z., Rikalovic G. and Stojanovic Z., Institucionalne reforme i tranzicija agroprivrede u Republici Srbiji, CID, Ekonomski fakultet Beograd.

Census 1991, Book 1, SZS.

Census 2002, Book 1, RZS.


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RESULTS AND CHALLENGES OF PRIVATIZATION IN REAL SECTOR OF SERBIAN ECONOMY

Ivan Stošić1 Zvonko Brnjas1

Abstract: The process of privatization of the real sector of Serbian economy has not been completed after 17 years of implementation. In spite of certain results, the privatization in Serbia has been accompanied with numerous problems and opposings. It is hard to believe that privatization could be successfully finished in planed period until the end of 2007. Therefore, it is obvious that for concluding privatization in short time the renewed institutional framework is necessary.

KEY WORDS: PRIVATIZATION, RESTRUCTURING, REAL SECTOR OF SERBIAN ECONOMY.

1. INTRODUCTION

While the majority of countries of Central and Eastern Europe in transition have already carried out the privatization, in Serbia, not even after 17 years of implementing privatization process (according to several different basic models and laws), this process has not been successfully completed. Therefore the focus of recent IMF missions, from reforms in monetary and fiscal sector, has been directed to implementation of structural reforms, before all the process of privatization and restructuring of enterprises.

Since by the middle of 2007 a number of non-privatized socially owned enterprises in real sector of economy has remained very high, and that privatization public state enterprises (at national and local level) hasn’t, in fact, even begun, a question arises: What has brought to this situation in privatization field? Moreover, what are possibilities for this process in the real sector of the economy of Serbia to be completed finally in relatively short term?

2. THE RESULTS OF PRIVATIZATION IN THE REAL SECTOR OF THE ECONOMY OF SERBIA

In Serbia, with the outset of implementation of intensive transitional changes (in fact since the beginning of 2001.) and by accepting the Law on privatization, processes of privatization in the real sector of the economy were intensified.

The initial results were very good. Namely, efforts in privatization were initially directed to the most attractive parts of the economy (industry of tobacco, cement, beer, medicines, rubber, construction materials, then sugar refineries, chemical industry, oil derivates distribution…) and successful enterprises. Concerning the attractiveness of these enterprises (large market and/or significant property), a greater number of investors were interested in buying them, which influenced on the results in privatization to be initially very favorable. In the acquisition of enterprises in Serbia, a large number of reputable big world companies was included: “Philip Moris“, “Bat“, “La Farge“, “Holcein“, USS, “Lukoil“, “Tarkett Somer“, “Titan“, “Tondah“, “Pharmaco“, some reputable foreign investment funds (e.g. “Salford“) and many others. But as time has been passing, the results have been not as good as in first years.

1 Institute of Economic Science, Belgrade, Serbia.


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Grafic 1. Revenues from privatization of real sector of Serbian economy in period 200-20006.

326,81

867,87

172,9

394,75332,31

0

100

200

300

400

500

600

700

800

900

2002 2003 2004 2005 2006

Privatization revenues in period 2002-2006. in EURO

A slowdown in privatization of real sector of the economy of Serbia became evident in 2004.

To a significant extent this was caused by the fact that the corpus of enterprises attractive for privatization was noticeable decreased, i.e. that some market attractive public enterprises have not entered the privatization process. At the same time, for majority of remaining "business controversial" enterprises, in difficulties and problems, there was no great interest from potential investors. Considering a great number of these enterprises, a question was imposed, in which method to access to the privatization and transforming of enterprises that can very hardly find new owners due to their performances

For those reasons, by the middle of 2005, do amendments of the Law on Privatization were introduced, with which a new incentive was given to the process of privatization. By the Amendments of the Law on privatization, basically, the government (and public enterprises) has renounced their debts towards non-privatized enterprises (through conditional written of debts). Excessive indebtedness has been reduced basically, and remaining public enterprises have been made more attractive to potential investors. Revenues from the sale of enterprise and their support to the budget of Serbia have been put by that into the second plan, and the priority was given to speeding up and finishing the process of privatization.

Besides, the government has taken over to itself financing the programme for solving redundancies. Through these programmes a great number of enterprises burdened by enormous redundancy of employees in relation to current production and market possibilities, has been made more attractive for potential buyers.

In 2005, 190 enterprises were sold by auction, with around 22 thousand employees, and revenue of €173.1mn was realized. Through tender privatization, 15 enterprises were sold, with around 8.8 thousand employees, and revenue of €96.6mn was realized. In 2005 activities in sale of minority packages were intensified, and Share Fund of the Republic of Serbia realized the best results in number of sold shares of the companies (more than 294) as well as in financial result (more than €125,5mn).

In 2006, 206 enterprises were sold by auction, with around 22 thousand employees, and revenue of €161mn was realized. Through tender privatization, 25 enterprises were sold, with around 21.6 thousand employees, and revenue of €101.2mn was realized. In 2006. Share Fund of the Republic of Serbia sold shares of the 306 companies for €70.1mn.


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All that indicates certain acceleration of the process of privatization compared in 2005 and 2006. Consequently, the overall results in the process of privatization of real sector of Serbian economy in the period of 2002-2006. could be summarized as it follows:

Table 1. Key results in the process of privatization of real sector within period 2002-2006 in Serbia

Tenders Auctions Share Fund Total Number of enterprises sold 76 1 343 433 1 852Number of employees in enterprises 67 776 127 547 94 710 290 033Selling price (in mil €) 1 004,63 691,75 398,26 2 094,64Total investment (u mil EUR) 926,44 189,37 5,9 1 121,72Social programme (u mil EUR) 278,02 - - 278,02

Source: Bulletin of public finances of the Republic of Serbia

The outcomes in tender, auction and privatization through share fund privatization are different. The EBRD in Transition report 2006 do not estimate the results of large-scale privatization and enterprise restructuring very highly in comparisons with other countries of Western Balkan. On the other hand, the results of small-scale privatization are estimated much better (as could bee seen from the following table):

Table 2. Selected transition indicators of the Western Balkan countries*

Large scale privatization 2002 2003 2004 2005 2006 ALBANIA 3,00 3,00 3,00 3,00 3,00 BOSNIA AND HERZEGOVINA 2,33 2,33 2,33 2,67 2,67 CROATIA 3,00 3,33 3,33 3,33 3,33 FYR MACEDONIA 3,00 3,00 3,33 3,33 3,33 MONTENEGRO 2,67 2,67 2,67 3,33 3,33 SERBIA 2,00 2,33 2,33 2,67 2,67

Small scale privatization 2002 2003 2004 2005 2006 ALBANIA 4,00 4,00 4,00 4,00 4,00 BOSNIA AND HERZEGOVINA 3,00 3,00 3,00 3,00 3,00 CROATIA 4,33 4,33 4,33 4,33 4,33 FYR MACEDONIA 4,00 4,00 4,00 4,00 4,00 MONTENEGRO 3,00 3,00 3,00 3,00 3,00 SERBIA 3,00 3,00 3,33 3,33 3,67

Enterprise restructuring 2002 2003 2004 2005 2006 ALBANIA 2,00 2,00 2,00 2,00 2,33 BOSNIA AND HERZEGOVINA 1,67 2,00 2,00 2,00 2,00 CROATIA 2,67 2,67 3,00 3,00 3,00 FYR MACEDONIA 2,33 2,33 2,33 2,33 2,67 MONTENEGRO 1,67 1,67 2,00 2,00 2,00 SERBIA 2,00 2,00 2,00 2,33 2,33

* The measurement scale for the indicators ranges from one to 4+, where one represents little or no change from a rigid centrally planned economy and 4+ represent the standards of an industrialized market economy

3. PROBLEMS AND OPPOSINGS TO CHANGES IN PRIVATIZATION AND RESTRUCTURING PROCESS

The process of privatization of the real sector of Serbia is followed by numerous opposings and problems.

The problem of opposing to changes often presents the main obstacle to successful privatization and restructuring process, and the most often leads to significant dragging out in implementation of necessary changes. Opposing is present when a concept of implementing changes is concerned, as well as proposed implementation method. Namely, changes affect the management and


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employees, that is, their positions, responsibilities and existing forms of behavior. Therefore the majority of employees, including there manages too, not only are not interested in changes, but also with hostile attitude towards them.

There is no readiness in the management to enter into the privatization, i.e. alter the gloomy present of business operating “of their enterprises” with uncertain, maybe even better future. Instead of working on enabling their enterprise for business activities in completely different conditions of business operating, efforts of management are still directed to a great extent to keeping obsolete methods of business operating (not rarely based on renting capacities to private entrepreneurs) or to searching for different aspects support from the government. Besides all that, it is not rare a domination of momentary private interest of some managers over the interests of the whole enterprise and the employed in them.

Unfortunately, neither the employees are too much interested in the restructuring, because they do not see direct interest in that. In addition, the majority of the employed is very scared for their work posts and wages and opposes to strategic changes due to fear from future, although they are unsatisfied with their current status as well.

In the restructuring field, very modest results were realized until 2005. Through processes of financial and organizational restructuring (mainly fragmentation of enterprises), the government i.e. the Privatization Agency has been trying to prepare a certain number of once big and/or significant enterprises for local self-government for privatization and more successful business operating in forthcoming period. Unfortunately, in around 70 economic entities that have initially been in the process of restructuring, until the alteration of the Law on Privatization in 2005, this process was implemented in a small number of enterprises (“Livnica“ Kikinda, “Sever“ Subotica, parts of other enterprises, like “Zmaj“ Zemun, etc.). Therefore, visible effects of implemented processes of restructuring to total business operating of domestic economy were not noticeable. Moreover, just recovery of these enterprises is of key importance for adding dynamics of business activity in some cities, regions and on the level of the country as a whole.

After the amendment of the Law on Privatization (since 2005), visible moves in restructuring field were realized, and some big enterprises were privatized, like “Azotara“ Pančevo, “FVK“ Kraljevo, “Hisar“ Prokuplje, “Nitex“ Niš, “Partizanski put“ Beograd, “Hipol“ Odžaci, etc. Reducing indebtedness and number of employees, as well as stabilization of total economic ambient are key reasons that influenced on adding dynamics to the process of restructuring of the real sector of the economy of Serbia. However, there are still a large number of firms in the process of restructuring with very fade possibilities to be successfully privatized. The large number of them must go in bankruptcy.

Numerous controversies related to new owners and their behavior forms are present. In a certain number of enterprises, the privatization was mainly motivated by speculative reasons, in the first place by the acquisition of property that those socially owned enterprises possessed. Therefore, new owners and management are not interested in development of an enterprise, but to create conditions, with different measures, and before all low wages and introducing rigorous working discipline, for employees to give notice and leave enterprises (in spite of social programme of adopted plan). In such manner the existing property remains ay disposal of new owners, which they will offer after the term anticipated by law (related to a ban of alienation of privatized enterprises’ property) for sale on the market (probably at considerably higher prices in comparison to those at which they had bought the capital of those enterprises)2.

A number of “annulated privatizations“ in which purchase contracts were cancelled due to the method of business operating of a new owners is relatively small and amounts around 10% (the most famous is the case of “Putnik“ Beograd). Nevertheless, a number of enterprises in which even after implemented privatization there was no visible improvement of performances is considerably higher,

2 Stošić: Ekonomska tranzicija u Srbiji 2001-2005. Rezultati, strategije perspektive, Značaj i efekti socijalnih

programa na proces privatizacije i zapošljavanja (2006), page 345.


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which emphasizes opposition of the management and employed in up to now non-privatized enterprises.

In Serbia practically everybody speaks in favour of privatization, but new owners disturb almost everybody. For many people, privatization by multinational foreign companies presents sale of national property (even so called “family silver“). Even more undesirable are domestic private, especially big entrepreneurs (Delta M, MK Commerce, East Point...). Though it is shown that the privatization by multinational companies, and even big domestic entrepreneurs by rule, in middle term, brings to an increase of efficiency of economic operating and raising the competitiveness and volume of operating (e.g. “USS Serbia“, “VB“ Sevojno, “Juhor“ Jagodina) almost all serious strategic investors are subject to numerous criticisms and demands for revision of purchases done. A concept of workers’ shareholding, at one time applied, was abandoned in Serbia (which was incorporated in legal provisions until July, 2001) and it is obvious that overall consensus has not been realized in regard of existing concept of privatization, in particular when new owners are considered. In addition, negative examples of behaviour of some new owners do not contribute to overcoming the opposition to privatization and restructuring.

The privatization (and restructuring) of enterprises is not the aim by itself, but means for improvement of performances of business operating of the real sector and entire economy. That should result with an increase of production volume, export, then decrease of inflationary pressures, inflow of foreign investments, and increase in wages of the employed, etc. Although relatively satisfactory results of key macro economic trends in Serbia have been realized in previous period, it could not be stated that all expected effects efficiently have been realized up to now. Although the production, export, real wages, investment inflow has been increased... not all initial expectations have been fulfilled until now. Serbia with GDP per capita of somewhat more than 3.5 thousand US$ falls into, even henceforth, the lowest in the region.

Table 3. Basic macroeconomic indicators for period 2002-2006

Period GNP

growth in %

Industrial productiongrowth in

%

Inflation growth in

%

Export u mil US$

Import u mil US$

Real wages

growth in %

2006 5.8 4.7 6.6 6 428 13 172 11.4 2005 6.5 1.3 16.5 4 553 10 570 5.7 2004 9.3 7.1 10.1 3 701 11 139 10.1 2003 2.4 -3.0 11.7 2 755 7 473 13.6 2002 4.5 1.8 19.5 2 075 5 614 29.9

Source: Republic Bureau of Statistics

Negative effect on employment presents key problem in the implementation of privatization and the process of restructuring. Unfortunately, the number of unemployed in Serbia is still very high and during the implementation of privatization and restructuring it has increased for around 200 thousands. According to available december, 2006, the number of unemployed amounted 1.011 million persons, and official unemployment rate has reached the level of around 27% (according to survey on labour around 20.8%), which presents one of the greatest economic and social problems of Serbia. Namely, as a consequence of the process of privatization and restructuring of public and other enterprises, it comes to increased lay off of workers, which at low level of economic activity and still insufficiently broad fan of incentive measures for development of small and middle enterprises influences on high unemployment rate in Serbia.

4. OUTLOOK OF THE PROCESS OF PRIVATIZATION

By the Law on Privatization, it was determined that by 8 March 2007 should be finished the process of privatization of socially owned enterprises in Serbia. However, in the portfolio of Agency of Privatization of Republic of Serbia in the March 2007 were more then 1200 non-privatized firms. In addition to that, there are a great number of stocks socially owned enterprises within Share fund.


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Majority of non-privatized enterprises are small enterprises, which due to their business performances, small property and/or unsolved legal problems were not attractive for privatization and the interest for them has not been shown by potential buyers up to now. However, there are more then 300 large firms or around somewhat less than 1/3 of all large enterprises among non-privatized enterprises. These enterprises employ many persons, possess immense property and are of a great significance for the economy of state and local self-government. Nevertheless, as a rule, with exemption of large public enterprises, economic subjects are considered, for which will objectively be very difficult to be successfully privatized, even with a precondition decreasing indebtedness through writing off debts due as of December 31, 2004 and a reduction of the number of employees through implementation of social programmes (programme for solving redundancy).

Therefore an issue imposes, in what way will finally be successfully completed the process of privatization that had begun long ago, which in majority of other countries in transition in Central and Eastern Europe has practically been finished?

According to current legal provisions, the possibility of fast privatization of such a great number of enterprises in anticipated term (until the end of 2007) is practically unfeasible. Namely, there are no capacities to prepare in so short-term corresponding sale documentation for such a great number of enterprises (more then 1200), in particular concerning numerous legal problems (immanent to business operating of these enterprises), as well as unwillingness (or incapability) of the management to work actively on preparation for privatization.

Apart from that, it is hard to believe that effective domestic and foreign demand exists for so great number of such enterprises (in previous 5 years were sold about 1800 firms). At last, an offer of a great number of enterprises for privatization in short term will inevitably lead to inadequate privatization revenues and other negative effects.

Special issue is the privatization of public state enterprises. After significant pressures by international financial institutions, processes of restructuring of some big public enterprises and their preparation for privatization have begun. It regards in the first place parts of oil industry, then railway, post, etc. Nevertheless, processes of privatization and restructuring of these enterprises (which possess around 50% commercial property of the economy) are in a very outset and they have ahead of them approaching implementation of huge transitional changes. Although due to its attractiveness buyers for this sector of the economy exist surely (before all NIS, EPS), there are still numerous opposings in the privatization of these enterprises, a threat of social tensions, as well as a lack of consensus (in political and economic circles) about which of these enterprises and in what method should be privatized.

5. CONCLUSIONS

Although processes of privatization and restructuring had initially negative effect (so called transitional crisis) also in other countries in transition, however the data indicate that the countries characterized by intensive restructuring processes come faster out of the crisis and realize faster economic growth monitored in longer period. Namely, the sooner it comes to change in economic structure and changes in a method of operating of the real sector, the faster assumptions are realized for greater and more stable economic growth, improvement of competitiveness and increase of export, living standard, and even growth of employment. All that indicates to necessity of implementation intensive processes of privatization and restructuring, regarding the fact that with obsolete economic structure and method of business operating it cannot be counted on more successful results of business operating in the real sector of the economy of Serbia.

Privatization, i.e. restructuring and recovering of non-privatized, especially large enterprises in the real sector of the economy of Serbia (including there also large public enterprises, as well as numerous public enterprises at local level), will present one of the greatest challenges for economic policy in imminent period. All business performances of the economy of Serbia will essentially depend on the success of solving this issue in forthcoming period.

The role of government, through not so significant subsidies for wages (and contributions) of employees or providing short-term credits for continuation of existing, mainly unprofitable, production is not sustainable in the long term, nor it is effective solution.


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Although the restructuring is often "painful" process followed by a row of undesirable effects, which includes leaving obsolete productions, “cutting” of the number of employees and closing numerous non-propulsive enterprises or their parts, the privatization of the real sector of the economy of Serbia is inevitable. The sooner it comes to change in economic structure and alterations in a method of operating, the faster assumptions are realized for greater economic growth, improvement of competitiveness and increase in total effectiveness and efficiency of business operating. Therefore, a change of the institutional framework of privatization imposes as a necessity.

REFERENCES

Transition report EBRD 2006, EBRD

Agency for Privatization of Republic of Serbia, site


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CREATION OF THE NEW FINANCIAL PRODUCTS AND EMPLOYMENT POSSIBILITIES

Milan Vujović1

Abstract: The principal processes of privatization were analysed in this text, first of all regarding development of banking system, than development of financial market, stock-exchange affairs and stocks selling, esspecially those comming from the process of privatization, protection of the stock-holders minority, their rights and interests. Especial emphasis is on the possibility for employment through development of the financial market, the new bank products, than some investment funds and influx of domestic and foreign capital.

We estimate that faster progress of financial market and bank products and net dispersion for their realisation, which goes with developed market, could open the new possibilities for the greater employment, above all for the unemployed people. It could be acheived directly through the new jobs in some institutions and organizations and indirectly through the higher investment activity and quicker economic development.

KEY WORDS: FINANCIAL MARKET, PRIVATIZATION, STOCKS, STOCK-EXCHANGE, NEW BANK PRODUCTS, EMPLOYMENT, CADRES, FOREIGN CAPITAL.

1. TRANSITIONAL PROCESSES IN FINANCIAL AND BANKING SECTOR

In spite of the last five years results in economic development of the country2, especially in the field of statistical evidence of the BDP growth, macroeconomic stability, stability of foreign exchange rate and growth of foreign exchange reserves, they are not completely realised in accordance with social and developmental goals. Above all it means high inflation, foreign trade deficit, high rate of unemployment, low rate of natality, decrease of population and working population. Internal and external macroeconomic instability points at it and it slows economic progress.

Not dealing with the all aspects of the socio-economic country development analasys, emphasis of the treatise is on the financial sector, on creating of the new financial and banking products which can directly influence politics of employment realisation. i.e decrease of unemployment.

Whatever metodology of calculation of the rate of unemployment in our country it rose from 12,2 % in 2001. to 20,8 % in 2005. In 2006 unemployment decreased for 2,1% regarding the previous year. Considering the presence of the grey economy in our country which consists of the secret employment estimation is that the real indicator of unemployment in the country is 14,3% which shows the existence of the structural problems facing our economy.

To achieve employment policy more importance is lay beside the productive sector on the sector of services and products within the area of finance and banking. Above all we have in mind development of the financial markets which is in our country intensified particularly along with transitional processes embracing the all postsocialist countries. Transition have changed economic and political system, structure of property, forms of managing and deciding and give rise to the important changes within the financial and banking sector. On that ground legal and institutional conditions are created in financial market which are of the great importance for development of the new financial products creating new possibilities for investment activities as necessary prerequisite to speed up economic development i. e. opening new jobs. With it the new institutions have emerged: economic societies, entrepreneurs, new educational and scientific disciplines, professions and activities needed for the modern market functioning. The way for development, organization and activities of new educational organisations and their institutions, associations and other forms of interest linkage is opened. 1 Serbian Regional Bank, Kragujevac, Serbia. 2 The high real growth of GDP is achieved in the period between 2001 - 2005 in the average of 5,6 % per year

i. e. BDP per capita increased more than three times – from about 1000 USD in 2000 to 3.526 USD in 2005 according to Memorandum of budget in economic and fiscal politics for 2007 with projections for 2008 and 2009, Republic of Serbia, Ministry of Finance, Belgrade, October 2006, p. 1.


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To speed up the economic development of Serbia it is necessary to define modern programmes, methodes and forms of activities. It can be realized only through the regular training, courses and seminaries which will provide the numerous cadres with adequate education needed for modern business operating. The application of modern scientific, technological and informative achievements is necessary requirement of everu subject on the market and its further development. On that ground there are the real possibilities for new jobs, above all for young people and other qualified and educated people.

New institutional conditions in the field of legal and other regulative, ability and business oriented financial and banking organizations create environment for the new financial and banking products and services on financial market which directly contribute to the increase of all economic activities i. e. expansion of the new jobs field. In that way all people’s savings, bonds etc. through new institutional investors as, for example, investment and pension funds can be invested into profitable programmes and projects which will contribute to the faster social develompent and new employment. Along with the new jobs in financial, banking and insurance organizations there are great possibilities for employment through the programmes and projects being realized within new investments based on the market capital collection. Therefore the financial market development and stock-exchange contribute to the increase of the number of participants on the market and create the greater choices of items and services i. e. to total investment activity and new employment.

2. CREATION OF THE NEW PRODUCTS AND SERVICES

Faster economic development, more profitable business and greater developmental possibilities, especially the greater capital investment into the real economic sector, can be expected partly from domestic and more from the companies, banks, insurance companies, investment and pension funds and other investments in which the foreign investmnets have more capital. That means the creation of the real possaibilities for the new products which will contribute to the further development of the capital market and new employment.

In the period of transition between 2001-2005. an important net income of direct foreign investments of $ 4,4 billion is realized. In 2006. that income increased for the next $ 4,4 billion which create conditions for financing new infrastructure and other big developmental projects which will have the great importance for development of our economy. But there is need to say that these investments are result of privatization of 2.214 state companies, banks as well as selling “Mobtel” to the Norwegian partner “Telenor” and the third licence of the mobil operater “Mobilcom Austria”, and not result of “greenfield” investments3.

Recently passed Law of investment funds4, Law of voluntary pension funds and plans (2005) and Law of lising (2003) which for the first time on our market introduce big professional investors will contribute to the faster social and economic development. Today in Serbia are six pension funds and associations and two investments funds. They have to contribute to even faster development of financial market and speeding up the process of privatization. These funds should be conceived as the institutions of collective investment in which money will be collected and invest with the aim of making income and decreasing risk. That means creation of the positive atmosphere in our country for numerous investors above all small ones which will have possibilities to invest their money in profitable programmes through professional investors. Expiriences with development of investment funds in developed countries point to that. That is the reason why investors lay more trust in investment and pension funds i. e. institutional investors has created situation in which they now control more then 50% shares in circulation in USA. More then 70% of total daily share trade on USA stock market is possible thanks to them. Possession of the larger number of shares in their hands means that they have greater influence on the politics of companies and the position of their leadership5.

3 Bulletin of the public financies, Republic of Serbia, Ministry of Finance, Belgrade, October 2006, p. 3. 4 Law of investment funds, Sl. glasnik og RS, Bgd., no. 46. 5 Frederic S. Mishkin: Monetary economy, banking and financial markets, DATA STATUS and Belgrade

banking academy, Bgd., 2006, p. 298.


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Property of investment fund can be invested in debtor valuable papers issued by the Central bank of Serbia, Republic of Serbia, units of territorial autonomies and local selfgovernment and other juristic persons with the Republic of Serbia guarantee, then valuable papers of international financial institutions, debtor valuable papers issued by the countries which are the membres of EU, OECD-a, hypothecate bonds issued on the territory of Republic of Serbia as well as other valuable papers which are of trade value and meet requirements of the valuable papers Commission.

Development of this very significant segment of market as well as other possibilities of economic prosperity opens the room for new jobs and easier solutions of the problems of unemployment which are facing our society today. Above all it can be done through:

• investment of domestic and foreign companies, banks, investment funds and other investors in new developmental programmes and projects which demand qualified, educated and business oriented people,

• organization, development and functioning of new financial investors as investment, pension and other funds and their institution, organizations and associations which will be in possession of significant means. Their rational use will create conditions for new employment and

• investment of strategic partners, investment and other funds in modern development and betterment of working process in companies, banks and other organizations which open the possibilities for new employment.

For successful work and profitable bussines making of emerging financial organizations so as investment and pension funds, custody banks, financial lising etc. it is necessary to have qualified, educated and professionaly trained people. These are first of all portfolio managers, tax and investment advisers and other bank and stock-broking experts of which our market is deficient.

For the further development of financial markets and the country in general it is very important that the certain number of educated, highly specialized and qualified people with work expirience and significant capital have come back to homeland and engaged in activities of particular companies, banks, stock-markets, insurance and consulting companies or have opted for selfemployment. Their knowledge and experience gained on developed financial markets will significantly contribute to the better organization, functioning and professional work in newly created financial institutions on our market. But from the standpoint of the new financial products and organizations themselves more developed financial market will demand education of the new people which will enable them to participate in modern process of work.

The significant role in it should have the National unemployment centre which has to recognize the market needs for this kind of people. It means that it along with other bearers of financial market within its programmes for unemployed should include itself in education of this kind of people. Through this form of education certain number of unemployed above all young people can be engaged in new jobs which are demanded by more developed market. These demands, with companies, banks, insurence companies and other investors with foreign capital entering our market along with modern work organization, professionalism, wide assortment of new products and services and high level of technological and computer equipment become even more actual.

3. SHARE TRADING, EDUCATION AND EMPLOYMENT

Already for a long time in our country transition in general and privatization paricularly opens some other questions as valuable papers and financial derivatives trading of which share trading particularly with shares from privatization becomes dominant. With the foreign trade liberalization and possibility of the foreign capital influx in our country there is more foreign capaital which participate in valuable papers trading. It contributes to increase of market capitalization on stock-market. So in 2006. share participation in total turnover on Belgrade stock-market was 87% i. e. participation of foreign investor in total turnover on Belgrade stock-market was 48% and in total share turnover 54,6%. It is important to notice increase in participation of physhical persons in buying shares which is 20% and among them are unemployed persons too. Larger presence of foreign


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investors in valuable papers trading particularly with shares on our market indicates internationalization of share capital which is good sign for other foreign investors to invest in our country.

Along with the speed up of privatization, faster development of financial markets and intensification of stock-market affairs there is increase in the number of stock-holders gaining their shares in various ways. Among them are hundred of thousand stock-holders which are leaved to themselves and unsatisfactory informed how, where and when to handle shares i. e. to sell or to buy them.6.

With restructure and privatization of all state companies through the separation of regulatory from commercial activities i. e. secondary from the main activities there will be an increase in the number of stock-holders particularly the small ones. At the same time as a consequence of privatization processes there will be more unemployed people and among them numerous stock-holders. Searching for the new jobs unemployed persons are forced to solve their problems in various ways as for example to unite means from funds for unemployed, invest severance pay which they get as technological surplus, engage personal means get from selling shares and other valuable papers (shares, bonds of old foreign exchange savings, state bonds, etc.).

It will increase supply of shares as the most numerous stock-market product which will add the pressure on the market of capital and as practice most often confirms result in the fall of their value. In unloyal supply and demand small share-holders become the subject of various manipulations, frauds and misuses by some managerial structures in the companies, numerous informal groups, so called protective associations, boards, agencies, self-appointed “legal advisers” and other individuals.

Previous practice with shares is full of various promises most often unreal, conditioning payment of severance pay and other compensations by selling shares at lower prices than on the market, false promises regarding employment, better working positions, higher income and other privileges. Behind such phenomena is most often personal interest, capital of questionable origin, payment of various compensations for the job never–be-done as well as persons not sufficiently educated to work on stock-market. But when share-holders are not organized and connected and where there is no adequate protection of their interests and rights they become very easy prey of numerous individuals and groups which only aim is to get more share capital in speculative way.

On Belgrade stock-market, in the Commission od valuable papers and various conferences it is rightly pointed out to these phenomena but it is not done enough. So because of their rights and interests protection there is a need for some form of the general social concensus which should be supported by the institutional organizations, share-holding associations, share-sholders and their organizations, associations, boards and other forms of organization and association.

But education of people organized by the stock-market, Chambre of commerce, economist associations through courses, conferences, seminars etc. with participation of foreign experts has not been sufficient to meet all the needs and demands of modern stock-market products trading. So we do above all expect much more from the valuable papers Commission, institutions that provide high education (faculties, high schools, international financial organizations etc.). The good example is realization of the project of International Finance Corporation project and Belgrade stock-market about advancement of corporative management in Serbia.

With the Central shares register and passing the Law of taking over stock companies7 it is made further step to put in order trading with shares and protect the rights and interests of stock-holders particualry the smaller ones and to create the conditions and procedure for taking over stock companies. It will enable the all stock-holders and the share owners which are unemployed to possess in more rational, efficient and certain way their shares and valuable papers and on that ground realize certain more real incom which they can invest in some new job and so secure long-term income for their existence. 6 Milan Vujović: Protection of the share-holdes interests and rights, Pravni informator, Bgd., 5/2004, p. 19. 7 Law of taking over stock companies, Sl. gl. of RS, Bgd., 2006. no. 46.


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That way it is very important that such questions in organized, transparent and responsible way are dealt by the social forces within the country beginning with stock-holders themselves, stock companies and their associations, sindicates and authorized regulative and institutional bodies. Only in such conditions stock-holding as the form of capital possession and managing can be the guarantee for invested capital, security in work and realization of profit and become significant stimulus of the whole social development.

4. FOREIGN INVESTORS INVESTMENT IN BANKING SECTOR

Reform of the banking sector8 which is intensified in the last five years brought about the changes of the capital property, structure and managing in the banks. It is characterized by decrease of domestic capital on account of the great increase of foreign capital as well as by increase of the private in relation to the state capital.

Restructure of the banking sector is still functioning through the selling of remaining greater part of state package shares in some banks (Srpska banka, Credy banka, Privredna banka Pančevo, Agrobanka, Jubmes banka, Poštanska štedionica banka) to the foreign investors, then through integration and purchasing of banks (OTP bank has become majority capital owner in banks in Kula and Niš and Cepter bank, Nova Ljubljanska bank and Coninental bank, HVB and Exsim bank) so that today in country is functionong the total of 37 banks of which in 22 is majority foreign capital i. e. in the total banking capital foreign capital participate with 67%. It will influence the concentration of the banking sector in the region, strengthening the balance positions of the banks, increasing of efficency and professionalism in the business which means more rational and functional organization and creating the new bank groupings. Considering what has already been done (Intesa bank and Sanpaolo IMI) as well as announced fusing of the banks with foreign capital majority the number of banks will decrease in the future.

Changes in the banking sector property structure open the new processes in the banking development above all through the higher participation of the foreign stock capital, change of the managing structure, development of the new business philosophy i. e. more profitable business. On domestic market it has introduced more capital, new banking products and opens wider possibilities for credit arrangements and investment activity. With the coming of the foreign banks the bussines net of the banking sector has become wider especially in the bussines with the population. It has contributed to the widering of assortment and quality of the banking services, application of the modern knowledge, advancement of the new organization and tecnology of work and managing and increase of employment. Therefore the growing competition in the banking sector9 especially the presence of the banks with the foreign capital force the banks to apply besides the interest policy other forms and methods to keep and attract new clients.

To perform all these efficiently and meet the growing needs of the clients it is necessary to have qualified, educated and professional people. It is the possibility to employ new people. From the standpoint of the young and educated people employment and development of financial market it is of great importance to train people in the stock bussines and modern trade especially in the stock trade coming from privatization. More developed electronic trade, easier access to information and decrease of the costs of transaction will contribute to that.

Introducing the new methods of trade as algoritam share trade through the traders which decide when to bay and sell trade warrants on the quantitative model basis open the wider possibilities for employment of the new people (at the end of 2005. in USA over 25% of trade was carried out through this form of trade).

8 Milan Vujović: Roud to stock activity, Vedes, Bgd., 2002, p. 208. 9 Veroljub Dugalić, Vesna Matić: Reform of banking sector in Republic of Serbia, Economic annales, Bgd.,

april 2006, p. 83.


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5. PUBLIC REVENUE AND EMPLOYMENT

In the privatization of the banking sector it is necessary to consider the real interests of the wider community from the standpoint of realization of its national priorities in development of the country as for example transportation and communal infrastructure, increased export and employment, faster and more balanced regional development etc. In the terms of the strong competition the state must have majority package of shares and decisive influence in at least one of two domestoc banks.

It is also necessary to manage the great public revenue in more rational and efficient way which are in the budget of the Serbian Government, development Fund and other funds. Having in mind the role which Fund has in financing development programmes and projects which are of the state interests as well as in development of the small and middle-sized companies which create the new jobs and decrease unemployment we can say that Fund is already carry out important things of developing bank.

Not estimating the forming, organization and managing of the National investment plan10 issued by the Serbian Government we think that means of over 1,1 billion euro which will be formed from the revenue of privatization, budget surplus and foreign credit (World Bank, European Bank for reconstruction and development and preaccessible funds of EU) will play significant contribution to our economy competitivness, modernization of our health care system, increasing the level of standard, building transportation infrastructure, faster economic development, increase of employment, decrease of poverty and more balanced regional development. Because these means as well as means coming from particular activities of particular institutions as for example the Republic institution of PIO for private activities, institutes which are financing themselves and some of them with simbolic participation of the state are on the separate bills of the state organs safe-deposit box or on some other bills they can be more rational used through the banking sector or on the capital market with the aim of carrying out their basic purpose and national intersts.

CONCLUSION

Therefore the further development of financial and banking sector in our country can open the new horizon for the faster economic development of the country as a whole. It can be done through the further concentration of capital, specialization in carriying out the basic activity, constant process of education of the people based on the modern achivements in profession and science as well as in creating new financial and banking products and services which are demanded by the modern market.

Only organized, functional, developed and into modern capital currents integrated financial market11 with mobilization of available human, productive and technological and informative potentials can be the basis for the faster social and economic development and with it for the greater engagemnt of employed and faster solution of the big problem of unemployment.

It is therefore very important that state using the measures of economic and development politics act as a stimulus of the greater investment activity and creator of conditions for employment i. e. to decrease uneployment.

10 hppt://www.fins.sr.gov.yu 11 Milan Vujović: Akcionářství a privatizace v Srbsku, Hobulet - Praha, Vedes - Belgrade, 2006. p. 157.


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REFERENCES

“Memorandum of budget in economic and fiscal politics for 2007. with projections for 2008. i 2009.”, Republic of Serbia, Ministry of Finance, Bgd., 2006.

“Bulletin of the public financies”, Republic of Serbia, Ministry of Finance, Bgd., October 2006.

Bank association of Serbia, “Banking sector of Serbia in 2006”, Bgd., 2007. p. 3.

Dugalić, V. and Matić, V. (April, 2006), ”Reform of banking sector in Republic of Serbia”, Economic annals, Belgrade.

Mishkin, F. S. (2006), Monetary economy, banking and financial markets, Data status and Belgrade banking academy, Belgrade.

Vujović, M. (5/2004), Protection of the share-holders interests and rights, Pravni savetnik, Belgrade.

Vujović, M. (2002), Roud to stock activity, Vedes, Belgrade.

Vujović, M. (2006), Akcionarstvi a privatizace v Srbsku, Hobulet, Praha and Vedes, Belgrade.

Belgrade stock-exchange Annual report for 2006, Belgrade., 2007. p. 12, 20, 23.

“Law of investment funds”, Sl. glasnik RS, Bgd., no. 46.

“Law of taking over stock companies”, Sl. glasnik RS, Bgd., 2006. no.46.

“Law of voluntary pension funds and pension plans”, Sl. glasnik RS, Bgd., no. 85/2005.

“Law of lising”, Sl. glasnik RS, Bgd., no. 55/2003. and 61/2005.

hppt:// www.fins.sr.gov.yu


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DETERMINANTS OF SHORT-TERM INTEREST RATES: ARE THOSE RATES DETERMINED EXOGENOUSLY BY CENTRAL BANK OR ON THE MARKET

FACTORS BASIS?

Dr Aleksandar Zivkovic1 Dr Gradimir Kozetinac2

Abstract: Although interest rates are one of the key economic variables, the economists disagree about how the general level of such rates is determined in the economy. In the Post Keynesian approach the interest rate determination starts from treating those rates as variables not adapting their amounts so to bring into balance the demand for real capital (investments) with supply of financial capital (savings). The nominal short-term interest rates are determined exogenously by central banks in their attempt to achieve final goals of the monetary policy. The determinants of short-term interest rates are specific for a concrete framework (or regime) of the monetary policy, with each central bank operating in its scope. In this paper the extent was investigated to which central banks of the modern market economies in the scope of basic regimes in which they are carrying out the monetary policy (particularly the regime of inflation targeting) skilfully apply short-term interest rates to influence their general level.

KEYWORDS: INTEREST RATE, CAPITAL, MONEY DEMAND, CENTRAL BANK, MONETARY POLICY REGIME.

INTRODUCTION

The changes of interest rates have considerable implications on the business cycle of the economy, being crucial in understanding financial movements and appropriate changes in the economic policy. It is rather trivial to claim that interest rates play a leading role in theory and practice of a modern central bank’s monetary policy. In central banks all over the world interest rates are used in their dual roles: (a) as instrument variables, to enable the central bank to achieve its monetary policy’s goals; and (b) as indicator variables, to provide important information on the economy position. In any case, the holders of the monetary policy increasingly consider short-term nominal interest rates as a basic instrument, most frequently in connection to a given target regarding inflation.

In this paper the answers to two major questions shall be examined: (a) how is the interest rates general level determined in an economy, and (b) in what extent do central banks of the modern market economies, in the scope of basic regimes in which they carry out the monetary policy (particularly in the scope of targeting inflation), cleverly use short-term interest rates to exert influence on those rates general level. The answer to the first question is usually based on a simplified assumption, but generally considered as nonrealistic, about only one homogenous bond and a uniform interest rate for all borrowers and lenders. The answer to the second question will be presented in two steps. In the first step the Post-Keynesian approach to determining interest rate will be examined; it suggests that the central bank determined such a rate as one of the key variables in achieving the aim/aims of its monetary policy. The determinants of the short-term interest rates are specific for a concrete framework of the monetary policy in which each central bank is operating. Accordingly, for a full understanding of the factors provoking changes of interest rate, an analysis is necessary of the context in which the decisions referring to this rate are made. Such an analysis requires the comprehension of various regimes of the monetary policy and their implications on the interest rate policy. The following basic regimes of the monetary policy will be examined in the second step: (a) monetary targeting; (b) exchange-rate targeting; and (c) inflation targeting

The paper has been structured as follows. In its first and the second part the loanable funds theory and the liquidity preference theory were discussed, as two alternative theories of determining interest rate. In the third part the Post-Keynesian approach of determining interest rate was introduced. Various monetary policy frameworks in which central banks set short-term interest rates as instruments of such a policy will be discussed in part four of this paper. 1 Faculty of Economics, University of Belgrade, Serbia. 2 Institute of Economic Sciences, Belgrade, Serbia.

DETERMINANTS OF SHORT-TERM INTEREST RATES: ARE THOSE RATES DETERMINED EXOGENOUSLY ...

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1. THE LOANABLE FUNDS THEORY

An exact determination of interest rate was subject to large discussions among the economists. The differences stand around few opinions. All the aspects referring to interest rates shall not be discussed here. Generally speaking, at present there exist two major contenders in this field. One is the Keynes’ theory of liquidity preference, the other the loanable funds theory. The first theory will be discussed further in this paper, both in its original form and in the general equilibrium form of Hicks IS-LM model, jointly explaining interest rate determination (r) and real income. In his theory Keynes proved that the amount r is a purely monetary phenomenon. Together with Hicks, the Keynesians agreed that the variable r was determined by an interrelation between monetary and nonmonetary (real) factors.

According to the loanable funds theory, interest rate is determined by the demand and supply of funds in the economy on the level of those two amounts becoming equal. Consequently, it is a standard demand-supply theory, being applied on the market for loanable funds (credit), and treating interest rate as a price per unit time of such funds. The theory is based on the following simplified assumptions:

(1) The market for loanable funds being fully integrated (and not segmented), characterized by a perfect mobility of funds on the whole market;

(2) First, the competition on the market is perfect, so that each borrower and lender is a subject of such free competition, and second, one (and only one) interest rate is dominant on the market at any moment. Also, it is assumed that the market is cleared rather quickly by the powers of competition, so that an individual interest rate presents an equilibristic interest rate (or price) performing the market clearing3.

In the theory the approach of partial-equilibrium is used, assuming that all factors differing from interest rate, and possible to influence the loanable funds demand or supply shall remain constant. In other words, it is assumed that interest rate is not in interaction with other macro variables.

In its popular form, the theory is formulated in “flow” terms, taking into account the funds demand and supply flows for a given time period. As such, the theory contains an assumption about the “flow equilibrium” (i.e. the equilibrium between two flows) of loanable funds being the one determining interest rate.

Taking into account the above mentioned assumptions, the precise determination of r can be easily explained only if the loanable funds demand and supply are specially denoted. This is the case when the loanable funds theory is believed to improve the classical theory of saving and investment, since besides the real factors of saving and investment for defining the amount r the monetary factors of hoarding, those of dishoarding and the increase of money supply are also taken into account. In that sense both monetary and non monetary factors are joined in this theory (see, Froyen, 1996).

The supply of loanable funds (LS) is usually assumed to be given by the relation

LS = S + DH + ∆M .................................................................................................................. (1) where, S = aggregate saving of all households and firms net of their dissaving; DH = aggregate dishoarding (of cash); ∆M = incremental supply of money.

According to the economic theory, both S and DH are assumed to be growing functions of r, with ∆M autonomous, and LS also a growing function of r.

The demand for loanable funds is usually assumed to be given by the relation

LD = I + ∆MD ......................................................................................................................... (2) where I = gross investment expenditure, and ∆MD = incremental demand for money (or hoarding).

3 Namely, it is balancing supply and demand on the market.


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According to the standard economic theory, it is assumed that each component of LD, as well as the total LD shall be a decreasing function of r. The equilibrium value of the variable r is determined on the level where LD(r) = LS(r), i.e. where

I + ∆MD = S + DH + ∆M ........................................................................................................ (3)

On the contrary, in the classical theory the r – determining equilibrium condition is given by the relation

I(r) = S(r) ................................................................................................................................. (4)

Figure 1. Interest Rate Determination – Loanable Funds Theory

The above two equations are presented by diagram on Figure 1, where only LD, LS, I and S are directly presented as the functions of variable r. The magnitude ∆MD was not presented separately, but can be obtained as a horizontal distance between the lines LD and I. This distance increases as r falls, since it is assumed that ∆MD shall be a declining function of r. The horizontal distance between the lines LS and S denotes the sum of DH and ∆M. This distance was presented so as to increase with growing of r, since the magnitude ∆M is taken as exogenously, while the magnitude DH is assumed to be the growing function of the variable r. In such a simplified diagram, the magnitude ∆M (or DH) is not presented separately. The equilibrium between LD and LS gives the equilibrium interest rate rl, while on the contrary, the S-I equilibrium of the classical theory will give r2 as the equilibrium variable r.

The loanable funds theory was subject to critics up to some points:

(1) In the traditional presentation of this theory various sources of the loanable funds supply and demand were erroneously denoted. Let us consider supply first. It is well known that all saving is not directed through the loan market: a part is invested by the firms directly into the physical assets, as well as into households. Similarly, all dishoarding of cash balances are not lended to other subjects; some are directly spent by those economic subjects having accumulated funds and wanting to use them (either for consumption or investments). The supply side is also misspecified. The total investments were not financed by loaned funds: a part of them was covered by own funds. Accordingly, funds are lended to other economic subjects for various purposes, not only for investments (and the creation and keeping reserves of funds), but also for financing pure consumption, for purchasing financial and nonfinancial assets.

LDS

LS

E

I

r2

r1

L

r

O


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(2) This theory’s approach through “flow-equilibrium” was subject to critics since on the bond (or securities) market there is a “stock equilibrium” managing the behavior of interest rate, at least in short-term. On this market, the volume of outstanding bonds highly exceeds the flow of the new supply and demand of bonds (loanable funds) during any short-term period. However, in order that the theory of loanable funds be reliable, it should be assumed with certainty that the outstanding stock of debt is not influencing the determination of interest rate. It will be correct only in case that all claims are non-marketable or if the creditors believe for any reason that they are tied up regarding the claims they hold, up to the date of their maturity. No one of the mentioned two conditions was easily satisfied in real life. In any of financially developed economies the stock of marketable claims is rather high. It would be wrong to conclude just from this fact that all holders of assets will change rapidly their portfolios every time interest rates on the market fail to provide an equilibrium stock, i.e. fail to equalize the stock of demand of claims with their supply one. There are several forces of inertia that block the way, such as uncertain expectations, cost of transactions, tax laws (in the aspect concerning capital gains), etc. However, the inertial-forces argument should not be extended too far. Namely, on the developed financial markets there are speculators with their utmost goal of realizing profit from the portfolios changes, i.e. trading on stock markets. At any active market where such a trade is backed by the market transactions of investors, it is highly probable that trading will be sufficiently high in relation to the new (flow) of demand and supply in short-term. Accordingly, in each financial equilibrium the loanable capital (bonds, state securities) cannot be neglected. The stock analysis and the flow analysis are necessary, where stocks and flows are interrelated and jointly determining interest rate whose level satisfies the conditions of both the equilibrium of stock and the flow equilibrium (Froyen, 1996).

(3) The critics of this theory approach through partial equilibrium point to the following: since interest rate exerts an influence on all other macro variables, as saving, investments, real income, prices, the demand and supply of money and simultaneously (consequently) is subject to influence of those variables, it would be impossible for them all to be determined independently. In explaining the process determining interest rates, a general-equilibrium model should be used. The importance of such an argument becomes evident if we take into account that with neglecting the conditions of equilibrium in the sector saving-investment, this theory neglects a simultaneous clearance of the commodity market. In Figure 1, we can see that the economy cannot be in a macroequilibrium with interest rate rl, since according to this rate there is a surplus of I over S (i.e. a surplus demand on the commodity market)4. Wicksell had noted this problem and tried to resolve it through his dynamic analysis of the cumulative process where the prices (not the real income) are constantly growing (or decreasing) every time when the market (i.e. the nominal) interest rate deviates from the “natural” one (given by S-I equilibrium). After Keynes’ General Theory the changes of real income were constantly included into the analysis of dynamic adjustment.

(4) All the theories of interest rate (including the theory of loanable funds) started from the assumption that all borrowing and lending funds was realized through perfectly homogeneous bonds on a fully integrated market. However, it is an extreme abstraction, particularly for the most developed financial markets with a large variety of credit agreements and instruments on several segmented markets, being imperfect regarding competition. Accordingly, the credit markets functioning in the modern economies “provides” a group of various interest rates and credit agreements, far from the concept of the “precisely determined interest rate and homogeneous bond”.

4 In the Figure, the S-I equilibrium is achieved at a higher rate r2.


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2. KEYNES’ THEORY OF INTEREST RATE: THE THEORY OF LIQUIDITY PREFERENCE

In Keynes’ theory the changes in money supply influence all other macroeconomic variables through the changes of interest rate, and not directly as in the quantity theory of money. According to Keynes, interest rate is a purely monetary phenomenon, a price for parting with liquidity, determined on the money market with the demand and supply of money. It is in sharp contrast to the classical theory where interest rate was described as a real phenomenon. In that theory, interest rate was determined on the commodity market with saving and investment on the level where those two amounts become equal. It is also in contrast to the loanable-funds theory, which is essentially a reformulation of the saving-investment theory in its part referring to interest rate, taking into account the phenomenon of hoarding and dishoarding of funds and autonomous changes in the stock of money.

We shall consider a major modification performed by Keynes in comparison to the neoclassical analysis. This modification ocured with introducing uncertainty, thus altering the classical view of the rate as a price for parting with liquidity, i.e. for holding assets less liquid than money.

The theory of liquidity preference may be defined as the theory of demand for money, depending (among other things) on interest rate. Keynes emphasized that the demand for money is in a reversely connected to interest rate: the higher is the rate, the smaller the amount of money demanded (Ackley, 1978). Keynes considered liquidity as something flexible in a world of uncertainty. In order to accept a less flexible solution, the economic subjects had to be bribed, i.e. they had to get some compensation for holding assets less liquid than money. Interest rate presenting such a compensation should make easier to the economic subjects to decide about their “parting with liquidity”. With a higher level of an asset’s insolvency, a larger compensation is necessary to future owners of such an asset. In the world of uncertainty, the economic subjects need some level of liquidity of their assets, and such a demand for liquidity is a basic element in the interest rate determination.

According to Keynes’ theory of liquidity preference, the monetary theory and the theory of interest rate should be coordinated. His analysis of the demand for money, in spite of being incomplete in many aspects, still exceeds the neoclassical theory’s simple view on the role of money in the economy. Keynes accepted the neoclassical view about money as a medium of exchange and the attitude about the “transactions demand for money” depending on the money value of output or income. However, he departed from the neoclassical monetary theory with his claim about the presence of (at least) two components of demand for money – the “precautionary demand” and the “speculative demand” Each of those components was a demand for money as an asset and not as a medium of exchange (Ackley, 1978).

According to the neoclassical theory, an individual should not hold a higher amount of money than necessary for satisfying his transactions needs. In that aim, he should renounce to interest rate he could get from investing his money into an interest-bearing asset. Even in case of very low interest rates, any profit is better than none. However, Keynes pointed that an individual purchasing a bond is “speculating” with the possibility that interest rate may not grow during the period he intends to keep his bond. If that individual believes in interest rate growing, he should be aware of holding the non interest-bearing money (the assets providing no income at all). Just such an uncertainty regarding the future interest rates leads people to hold money for speculative purposes. If the future interest rate is known for sure, there would be no speculative demand for money. Only in that case there could be no comments on the neoclassical concept of the demand for money. With introducing the factor of uncertainty into the economic analysis, Keynes created an additional stimulus to the economic subjects regarding their demand for money. Thus the role of money in the economy was changed: from its traditional function of the medium of exchange into a kind of financial assets in the portfolio of an investor.


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Figure 2. Determination of the equilibrium interest rate in the Keynesian system

The Keynesian view of interest rate determination is presented in Figure 2. It is assumed that

the money supply is set exogenously by the central bank on Mso level (the central bank’s monetary

policy is assumed to be the major determinating factor). In the Keynesian system, the equilibrium interest rate (io) is the one according to which the recorded line of the demand for money intersects the line of supply, i.e. where the amount of the money demanded is equal to the amount of the supplied one. The factors influencing the supply and demand for money are determining the equilibrium interest rate. According to the liquidity preference theory, the demand for money is contrary to interest rate – the higher (lower) is interest rate, the higher (lower) is the demand for money. This is presented in Figure 2 by the downward sloping demand curve.

Keynes’ liquidity preference theory was particularly accepted by John Hicks. Hicks extended a part of analytical apparatus contained in Walras’s general equilibrium framework, believing in its possible introduction into Keynes’ method. His analysis was entitled as IS-LM system. The sign IS-LM was selected since Hicks’ system was believed to summarize four basic pillars of Keynes’ General Theory: investment (I), saving (S), demand for liquidity (L) and supply of money (M).

The IS-LM model can be presented in the form of a system of two equations with two unknowns:

(1) Equilibrium on the money market: Ms = L(i,Y),

(2) Equilibrium on the commodity market: I (i,Y) = S(i,Y),

where, Ms = the quantity of money supplied; L = the quantity of money demanded; I = the rate of interest; Y = the level of income; I = the level of investment; S = the level of saving.

i

Md

0 M

i o

Quantity of money

I n t e r e s t r a t e

Mso


221

The demand for money is the function of income level (via the transaction motive) and interest rate (through the speculative motive). This yields a relation between income and the interest rate that Hicks plotted as the upward-sloping LM curve. Investment is the function of interest rate via the marginal efficiency of capital schedule, and income depends on investment via the propensity to consume and the multiplier. Out of those two relations, Hicks derived his IS downward-sloping curve, presenting the connections between saving and investment, while keeping the commodity market in equilibrium. The intersection of the curves IS and LM denotes the equilibrium values of income and interest rate.

In contrast to the conventional models of general equilibrium in which individual prices are adjusted to clear the goods markets, the characteristic of Hicks’ IS-LM model is that all prices, except interest rate, are accepted exogenously. In that model interest rate is an endogenous variable consolidating the whole model into a neat and determinate package. Equilibrium on the commodity markets is achieved only through adjustments in income and interest rate. Once the equilibrium is set, according to the liquidity preference theory (as the theory of the demand for money) the changes in the monetary sector are allowed to be transferred to the real sector of the economy through changes of interest rate (Greenwald, 1981).

3. POST- KEYNESIAN THEORY OF INTEREST RATE

Post-Keynesianism was developed to be opposed to both the neoclassical economy in general, and to monetarism, to the theory of rational expectations and the new classical thinking. Post-Keynesians accept the basic terms and opinions set by Keynes in his General Theory, but differ in their belief that money supply is not an exogenously, but and endogenously determined variable. Rogers (1986) is of opinion that the Post-Keynesian framework is close to the modern central banking. This theoretical framework is founded on three basic positions: (1) the non-existance of a theory of the rate of interest; (2) the non-neutrality of money; and (3) the endogeneity of money and credit.

3.1. THE EXOGENEITY OF THE INTEREST RATE

According to Moore (1988b) it is wrong to consider interest rates as market-clearing prices and endogenously balancing an independent demand and supply of “capital”, i.e. “loanable funds”. Accordingly, interest rates are not set to balance demand for real capital (investment), with the supply of financial capital (saving). The nominal short-term rates are created exogenously from the central banks, in the attempt of achieving ultimate goals of their monetary policy. In fact, interest rate has been put in the position of support, i.e. (a) as a variable regulated by the monetary authorities, and (b) as one of the key determinants of the investment activity level, determining the level of the economic activity through the principe of effective demand.

The changes of money supply are primarily initiated by the demand for credit of the private sector, to which the commercial banks accepted to adjust, particularly through according a dominant position to overdraft agreements and the previously arranged credit lines. In their responding to such a demand for credits, a number of banks become obliged to provide additional liquid resources, and the central bank is one of this possible solutions. The central bank cannot simply deny the resources requested, since the liquidity of the whole financial system could be impaired. The monetary authorities are in the position of doing so. One of the basic elements influencing the design of such conditions is the amount of interest rate according to which the central banks approve their resources (Moore, 1988b). Interest rate is “a politically determined distributional variable reather than a market-determined price” (Eichner, 1986, pp. 220). Kaldor supports a similar attitude: “a given stance of monetary policy is best expressed by a chosen rate of interest, and not by a chosen quantity of credit money in existence” (Kaldor, 1982, pp.190). In his final analysis, Kaldor claims that “interest rates will not be endogenously determined by the interplay of supply and demand in competitive financial markets. The central bank has the power to impose its will on the market and set its interest rates where it wants – presumably at the level consistent with that rate of employment policy” (Kaldor, 1982, pp.86). According to Rogers “the rate of interest reflects psychological, institutional and other historical factors which cannot be specified a priori; it is in other words, an exogenous variable” (Rogers, 1986, pp. 25).


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If a growing of interest rates occurs, it is due to the fact of the central banks conscious resort to the political decision about those rates increasing. Money supply is an endogenous variable determined by the demand for money, while interest rate is an exogenously determinated price of money set and managed by the central bank. It means that the central bank is capable to exert its control, through the oprtations on the open market, over the level of short-term interest rates. Besides, the central bank is not exerting a big influence over the quantity of the banks liquid reserves, but much more on the motivation of the banking institutions to take advantage of its facilities referring to borrowing through the discount window mechanism. If the “market is with the central bank” (capable of securing it through open market operations), the arbitration5 shall make possible that interest rates on the market remain approximately equal to the central bank’s discount rate. In all well-developed financial systems, the changes of discount rates exert a rapid proportional effect on the level of short-term interest rate on the market.

3.2. THE MARK-UP THEORY OF INTEREST RATE DETERMINATION

In the mark-up theory an economy is assumed with a large concentrations of market power, and where oligopolistic firms determine the prices as a mark-up6 to the unit prime costs. Similarly, interest rate may be considered as the “price” of financial “goods” on the financial sector.

The mark-up equation is usually expressed by the relation P = k (u) (Rousseas, 1998). For the commercial banks, this relation can be altered and presented in the following form:

I = k(u), where, I = interest rate on loans; k = the degree of monopoly power exercised by individual banks, or, in the aggregate, by the banking industry as a whole; u = the unit prime or variable costs incurred by banks.

The mark-up theory is possible to be applied to the banking system. The banks (like firms) do business in order to gain profit. Always few big banks tend to be dominant in that industry. While operating on the so-called “retail markets” those banks appear as oligopolistic price setters, while on the “large” financial markets they have the role of price takers, i.e. economic subjects whose activities cannot exert any influence regarding pressure on the prevailing market price.

A bank’s inputs (not counting own capital) are deposits it is capable to attract as well as borrowed money (from the financial market or from the central bank) – thereby both are necessary parts of its final product – the loans. Both inputs incur costs: interest rate payed on deposits and borrowed funds. Both interest rates payed by the banks are determined on highly competitive markets. Other expenses of the banks are the costs of insuring deposits held in their deposit potential, as well as the costs of setting aside the required reserves.

The banks revenues are created primarily from the “prices” collected for the banks loans, i.e. the interest rate income inflow from various short-term investments by the bank. Accordingly, interest rate appears as the price of loans and is determinated by a mark-up over the “basic price or the cost of funds”.

Interest rates can also be treated as the bank’s profit margins. The profit margins are determined by interest rates at which the banks borrow funds. These rates are based on the “interest rate spread”. The interest rate spread is simply the margin, or mark-up between bank costs and loans. The spread can be approximated by the diferrence between the “prime rate” (rates set by banks for their best customers) and the “repo” rate (the proxy for the cost of funds). The realization of previously set goals regarding the bank’s profit depends on the amount of this “spread”. If a bank is not capable to collect its receivable claims from the previously approved loans (or investments in

5 Namely, using the difference in prices on two markets by a simultaneous buying and selling the same or

equivalent assets. 6 That portion of price which the seller adds onto average variable costs in order to cover overheads and yield a

net profit margin.


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general), it may not be able to increase its profit margins, and will either be forced out of the market or it will be bailed out by the central bank (Rousseas, 1998).

In the mark-up theory of interest rates the analysis of demand and supply relying on IS-LM model of determining the equilibrium interest rate is rejected. In this theory, the increase of the demand for funds (relatively) to their supply is not leading automatically to the increase of interest rate on loans allowed by the bank to the economic subjects. Rousseas (1986) believes that interest rates are determined by stable margin above the banks costs. Accordingly, the changes of interest rate depends on the changes of costs the banks are bearing in the process of acquiring funds – namely, from the “repo” rate. The implication of such an attitude in the context of the Post-Keynesian analysis is convincing: the “repo” rate (as a short-term nominal interest rate ) is determined by the central bank, as a variable managed by the monetary policy. In spite of the presence of various interest rates on the financial markets, according to this theory all those rates are determined on the basis of a mark-up.

4. INTEREST RATES IN VARIOUS REGIMES OF THE MONETARY POLICY

For a full understanding of the factors influencing interest rates an analysis is necessary of the context in which the decisions on interest rate have been made. Certainly, such a context involves the framework, or the regime in which each central bank operates. In various regimes of the monetary policy specific determinants of short-term interest rates are applied. Accordingly, various regimes of the monetary policy and their implication on the interest rate policy should be understood. We shall refer here to three basic regimes: (1) exchange-rate targeting, (2) monetary targeting and (3) inflation targeting. We selected those three regimes since during the last three decades both in the developed market economies and in those developing ones, experiments were most frequent just in those three nominal goals of the monetary policy (naturally in different time periods): the foreign exchange rate, the monetary growth rate and the rate of inflation.

4.1. EXCHANGERATETARGETS

The small, open economies strongly rely on imported capital and goods and therefore the exchange rate has an important impact on the inflation rate. In the exchange-rate targeting framework the central bank determines the short-term interest rate as the monetary policy variable, in pursuance of the set targeted range of the foreign exchange rate fluctuation.

Central banks are in the position to change the domestic short-term interest rates independently from other factors. Assuming that all other conditions remained unchanged, the decrease of the domestic interest rates will tend towards provoking the outflows of capital and the depreciation of the domestic currency. Such a mechanism of transmission can be briefly presented as follows: with the domestic real interest rates decreasing relatively to foreign interest rates, the deposits denominated in the domestic currency become less attractive than the ones denominated in the foreign currencies and as a result the domestic currency becomes undervalued. Due to a low value of the domestic currency (DC), goods from abroad become more expensive than the domestic ones, leading to the increase in net exports (NX) and consequently in aggregate output.

↓ Central bank rate → ↓interest rates → ↓DC → ↑NX → ↑Y (output)

or ↑ Central bank rate → ↑interest rates → ↑DC → ↓NX → ↓Y (output) 4.2. MONETARY TARGETING AS A FRAMEWORK FOR MONETARY POLICY: IMPLICATIONS

FOR THE INTEREST RATE POLICY

The strategy of monetary targeting requires using monetary aggregates as an intermediate target in the aim of achieving the ultimate goal of monetary policy, such as price stability. In the practice of those countries having adopted this strategy, monetary targeting differed considerably from the suggestion of Milton Friedman, i.e. to apply the rule according to which the selected monetary aggregate has a constant growth rate, and second, to allow interest rates to be truly market determinated. According to experience, no central bank literally adhered to strict rules regarding monetary growth. Friedman (1984) himself admitted that the mentioned rule has never been realized. Does such a statement imply also that interest rates have never been truly market determined?


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Interest rate in monetary targeting framework is used as an operational variable in the aim of achieving the pre-determined monetary goals, all in searching an appropriate price stability. In case of increased inflation, the central bank shall be obliged to increase short-term interest rates in order to reduce the demand for money. In a modern market economy the supply of money is demand determined (being the attitude adopted by Post-Keynesians as well). What should be achieved through limiting the demand for money? A relative decrease of money supply is expected, and of prices as a result. It is assumed that the demand for money is a stable function of interest rate. However, according to a number of empirical studies carried out for the conditions in the developed countries in different time periods, pointed to an uncertain stability regarding the demand for money.

A conclusion may be drawn that in the framework of monetary targeting interest rates are a monetary policy variable used by the central bank in the attempt of achieving its monetary target. In such a system, interest rates are exogenous and cannot be considered as determinated by market factors.

4.3. ROLE OF INTEREST RATES IN THE REGIME OF TARGETING INFLATION

During the last fifteen years a relatively large number of countries adopted a new strategy of monetary policy that became known under the name of targeting inflation. In most cases the adoption of such a concept presented a practical answer of the central banks to the difficulties they faced in using the foreign exchange rate or some monetary aggregate as a major intermediary goal in the process of implementing monetary policy. The most important characteristic of the concept of targeting inflation is the setting of a clear (and low by size) inflation target and accordance of major priority precisely to that target in the framework of monetary policy carried out in concrete conditions of a market economy. The priority accorded to this target is based on the hypothesis that in long-term monetary policy is influencing the prices level, i.e rate of inflation.

The mode of operation of a typical regime of targeting inflation is as follows: the central bank did not bind itself to any special arrangemnent regarding its instruments of monetary regulation. If we assume that interest rate is an instrument of monetary policy, the central bank may be flexible when setting its interest rates. If the central bank’s prognosis regarding inflation7 is higher than targeted, the central bank shall increase its interest rate to minimize such a deviation up to the end of the horizon of targeting and vice versa. Then the households and firms make decisions on their consumer and investment plans. It became customery to compare the current creation of interest rates policy by the central bank to the situation as set by the so-called Taylor rule (Taylor, 1993), assuming that changes (of short-term) interest rates on the money market should be an answer (reaction) to the deviation of inflation from a set goal and the output gap expressed as the percentage deviation of real GDP from an estimate of its potential full employment level8. The central bank should set the discount rate as a function of the output gap, current inflation and the difference between current inflation and its targeted value.

In the regime of inflation targeting, the mechanism of transmitting the change of interest rate to the rest of the economy may be described as follows:

• The channel of interest rate: increase (decrease) of repo rate exerts an influence to other interest rates on the financial market. The firms and individuals react to such a change by decreasing (increasing) their expenditure patterns. Such a lower (higher) demand level influences production and eventually feed through lower (higher) rates of inflation. Schematically, this channel can be presented in the following way:

↓ repo rate → ↓interest rates → (↑I, ↑C) → ↑Y → ↑ prices

or ↑ repo rate → ↑interest rates → (↓I, ↓C) → ↓Y → ↓ prices

7 Based on following-up several parameters. 8 It is the so-called reaction-function of central banks.


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• The channel of foreign exchange rate: The increase of interest rates is usually connected to an appreciation of the foreign exchange rate. It may attract foreign investments as capital inflow. The appreciation of the domestic currency (DC) tends towards decreasing the prices of import, thus contributing to a lower (import) inflation;

↑ repo rate → ↑ interest rates → ↑ DC → price of imports

or ↓repo rate → ↓ interest rates → ↓ DC → ↑ price of imports

• The channel of money and credits: Due to higher levels of interest rates usually the demand for domestic credits is decreased. Following the limitation to expanding credits and money the domestic demand shall be lower and (with a time delay) inflation as well.

• Inflation expectations: Increasing the level of interest rates tends towards lowering future inflation expectations. Further, it will contribute to lowering the unit costs of the labor force and inflation in a longer time period.

CONCLUSION

Although interest rates are among the key economic variables, the economists disagree about the way how the general level of those rates was determined in the economy. The differences exist along few theoretical aspects. A particulary prominent is the Post-Keynesian approach to determining interest rate. This approach starts from treating interest rates as variables not adapting their amount as to balance investment with saving. The nominal short-term interest rates were set exogenously by central banks in their attempt to achieve ultimate goals of monetary policy. Accordingly, in such an approach short-term interest rate is treated as an instrument of monetary policy, and not as a price set on the market payed to borrowed funds. It seems that the Post-Keynesian theoretical framework is tightly connected to the modern central banking of the market economies regarding the theoretical and methodological basis upon which it is operationg. Through the analysis of three basic regimes in which monetary policy is carried out, is became evident to what extent the central banks rationally use short-term interest rates in order to influence their general level. To the extent that behave in such a way, the central banks indirectly accept the Post-Keynesian approach, i.e. through their operational work they recognize the attitude about short-term interest rates being determinated in fact as a monetary policy variable, and not on the basis of the market factors.

REFERENCES

Ackley, G. (1978), „Macroeconomics: Theory and Policy“, New York: Macmillan Publishing.

Eichner, A. (1986), „Towards a New Economics: Essays in Post Keynesian and Institutional Theory“, Basingstoke: Macmillan Publishers.

Friedman, M. (1984), „Lessons from the 1979-1982 Monetary Policy Experiment“,

American Economic Review, Papers and Proceedings, Vol. 74, pp. 379-400.

Froyen, R.T. (1996), „Macroeconomics: Theories and Policies“, 5th Edition, New Jersey: Prentice Hall Publishers.

Greenwald, D. (1981), „Encyclopedia of Economics“, New York: MacGraw-Hill.

Kaldor, N. (1982), „The Scourge of Monetarism“, Oxford: Oxford University Press.

King, J.E. (2002), „A History of Post Keynesian Economics since 1936“, Northampton, Mass: Edward Elgar Publishing.

Moore, B.J. (1988a), „Horizontalists and Verticalists: The Macroeconomics of Credit Money“, Cambridge: Cambridge University Press.

Moore, B.J. (1988b), „The Endogenous Money Supply“, Journal of Post Keynesian Economics, Vol 10(3), pp. 372-385.


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Pigeon, M.A. (2004), „Interest Rate Policy and the Bank of Canada: Setting the Agenda“, in Lavoie, M. and M. Seccareccia (eds.) Central Banking in the Modern World, Northampton, U.K.: Edward Elgar.

Rogers, C. (1986), „The Theory of Monetary Policy Revisited“, Journal for Studies in Economics and

Econometrics, No. 25 (August), pp. 13-49.

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Seccareccia, M. (1998), „Wicksellian Norm, Central Bank Real Interest Rate Targeting and Macroeconomic Performance“, in Arestis, P. and M.C. Sawyer (eds.) The Political Economy of Central Banking, Northampton, U.K.: Edward Elgar.

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