International Competitiveness and Economic Growth of Serbia

Transcription

1 International Competitiveness and Economic Growth of Serbia Belgrade, November 2008

2 Content 1. Executive Summary Introduction Economic Growth in Serbia Analysis of Studies on International Competitiveness of Serbia The World Economic Forum Global Competitiveness Report The World Bank s Doing Business Report...19 The following text has been produced for the needs of the National Competitiveness Council of the Republic of Serbia. We would like to thank the Deputy Prime Minister s Team for Implementation of the Poverty Reduction Strategy and the USAID Competitiveness Project for supporting the production of this report. Production of this study was made possible with support of the American people through the US Agency for International Development (USAID) and support of the Deputy Prime Minister s Team for Implementation of the Poverty Reduction Strategy. Positions contained therein do not necessarily reflect positions of USAID or Government of the United States of America, nor positions of the Serbian Government Deputy Prime Minister s Team for Implementation of the Poverty Reduction Strategy of the Republic of Serbia. 2

3 1. Executive Summary Based on the analysis presented in this paper, the National Competitiveness Council of the Republic of Serbia, at the session held on October 9, 2008 proposed the following policy measures: a. Increase public administration efficiency by: i. reducing time required for issuing permits; ii. introducing E-government; iii. coordinating and improving inspection services; iv. implementing Government Annual operational planning, and v. continuing implementation of the Public Administration Reform Strategy. b. Directing capital investments from the budget into infrastructure projects of national importance. c. Continuing education reform by: vi. linking strategy with budgetary policy; vii. implementing successful pilot programs in secondary vocational schools; viii. strengthening the role of the private sector in formulating education policy, and ix. introducing a system of continued (lifelong) learning. d. Continuing implementation of the Export Promotion Strategy for the period e. Promoting competition by amending the Law on Protection of Competition. In this paper we analyze Serbia s international competitiveness and its economic growth. We argue that economic growth represents the best tool for attaining goals of a prosperous society: productive employment, quality education, better health care, poverty reduction, etc. We believe that small, open economies such as Serbia can attain high growth rates in mid- to long-term only through successful integration into the global market which provides deep and flexible demand. Since the beginning of transition, Serbia s economic growth has relied primarily on domestic demand. Over the past five years, 80% of GDP growth came from just three sectors: retail and wholesale trade, financial services, and telecommunications and transportation. These three sectors belong to the non-tradeable segment of the economy, i.e. the services they provide cannot generally be exported. Growth led by non-tradeable sectors, relying as it does only on domestic demand, is unsustainable in the long run. This position is substantiated by analysis of other Eastern European economies, which saw early transition growth reliant on the same sectors as Serbia but where sectors with exportable products gradually came to drive growth. To retain a relatively high GDP growth rate in the future, Serbia will also need to render trade-based sectors the engine of its growth. For a successful integration of a country s economy into the global markets, its international competitiveness is crucial. In order to evaluate Serbia s strengths and weaknesses, this paper analyzes in detail the two most relevant studies dealing with international competitiveness: The Global Competitiveness Report by World Economic Forum and the World Bank s Doing Business. These two studies are widely recognized, and are used by investors and economic policy makers. They cover a large number of countries, and thus provide excellent insight into the position of a national economy in the wider global context. In addition, these studies cover a wide and 3

4 complementary set of factors, thus enabling a comprehensive insight into the strengths and weaknesses of the countries concerned. 1 Serbia s ranking in these studies is not favorable it is ranked at about the average for other countries of the Western Balkans, 2 lagging far behind the Central and Eastern European countries 3 that are already members of the European Union. According to World Economic Forum, Serbia is ranked 85th of 134 countries. Although this is an improvement compared to the last year (when it ranked 91st), Serbia is still only at the level of the average of the Western Balkans (86 th position), lagging a great deal behind the Central and Eastern European countries (average position 56th). Similarly, in the World Bank study Serbia ranked 94th of 181 countries at exactly the average of the Western Balkans. The average of the Central and Eastern European countries is the 53rd place. According to World Economic Forum s Global Competitiveness Report, entrepreneurs have listed factors directly related to public administration as those that hinder business: inefficient public administration, corruption, and political instability. Similarly, World Bank s Doing Business identified inefficiency in issuing licenses and permits as the main reason for Serbia s low ranking. Serbia ranks just 171st of 181 countries in relation to efficiency in issuing construction permits. Numerous administrative tasks represent an additional hurdle. A more detailed analysis of the World Economic Forum ranking uncovers further weaknesses of the Serbian economy. Serbia is very poorly ranked in terms of infrastructure, institutional development, and the goods market efficiency (i.e. the level of competition in the domestic market). In addition, although various strategies often cite the education level of Serbia s labor force as a substantial competitive advantage, the World Economic Forum analysis shows that Serbia s level of higher education and training, as well as its level of technological readiness, is only slightly above the average for the Western Balkans, and substantially below the average of Central and Eastern Europe. Improving Serbia s competitiveness in the near future, and creating conditions for a more successful integration into the global economy and high economic growth, will require clear vision and strong leadership by the policy-makers. Designing of national policies for the future needs to be guided by the awareness about economic growth as a key priority, as well as that government resources need to be focused on removing key obstacles identified in this paper that are impeding economic growth. Based on the analysis of the results of the World Economic Forum and the World Bank reports, as well as on relevant publications on economic growth, we have identified three key recommendations for the policy-makers. The first recommendation concerns reform of public administration. We consider this a crucial issue for the efficient functioning of the economy in the medium to long-term. Inefficiency and poor transparency of public administration hinder business, promote corruption, unduly burdening entrepreneurs with cumbersome procedures. Public administration reform is a complex task, and one that requires leadership and commitment on part of policy-makers. Resistance to these reforms is often substantial, while results may not become apparent at once. This is why recent studies show that the best results in reforming public administration are often achieved when the reforms are pursued as an incremental process, moving step by step and reflecting specific characteristics of a country. This process may involve mistakes, but these are an integral part of reform and learning processes. However, what truly matters is an awareness on the importance and relevance of the process, and the commitment by political leaders to constant improvement of public administration. The general impression is that public administration reform in Serbia has slowed down 1 For more details on methodology used in the Global Competitiveness Report and Doing Business refer to Sections 4.1 and Тhis group comprises Albania, Bosnia and Herzegovina, Croatia, Macedonia and Montenegro. 3 For purposes of this paper, this group comprises Bulgaria, the Czech Republic, Hungary, Poland, Romania, and Slovakia. 4

5 substantially, and that things have now come to a standstill, after the progress that was undoubtedly made since the onset of transition. A well laid grounds for the reform are already in place the Serbian Public Administration Reform Strategy. The implementation of this Strategy was, however, slowed down over the past several years. Thereby our first recommendation would be to intensify its implementation. In addition, we would suggest a broader adoption and mainstreaming of other current best practices, such as the Annual Operational Planning project, into regular activities of all governmental agencies. In addition, we propose activities relating to updating and strengthening of IT systems used by public administration services, which should assist the establishment of E- government. The second recommendation concerns simplification of administrative procedures and issuing of permits. Complicated licensing procedures have been listed as the main hindrance to businesses by the two surveys we have mainly devoted our attention to, but also by other relevant studies. We are of the opinion that the most efficient way to improve the competitiveness of the Serbian economy in the short run is by achieving this priority goal. The explicit aim of simplification of administration procedures should be the significant reduction in the number of days required to issue a license, as well as the number of procedures needed. 4 Certain programs aiming at reducing administrative burdens to the economy (such as the Regulatory Guillotine Program, the Out of the Maze project, etc) are already in place. We therefore propose full implementation of these projects. Construction permits and urban planning are largely under the competence of local authorities. Thus, we believe that these bodies should set as their priority the updating of general urban development plans and detailed regulation plans, which will significantly simplify the permitting process. The first step is to draft an up-to-date general urban development plan, which, among other things, determines what land is used for industrial zones. Secondly, a detailed regulation plan for the industrial zone should be drawn up, defining all required infrastructural connections (roads, power supply, water supply, etc). Finally, the industrial zone should actually be equipped with the required infrastructure. Once all these activities are completed, permitting will become much easier, and documents required for implementation of investments will then be much quicker and easier to obtain. Municipalities have a legal obligation to update spatial plans under the Law on Local Self- Government. Punitive measures need to be put into place for municipalities that fail to comply with this requirement. National authorities can provide both direct and indirect assistance to plan drafting. The National Investment Plan (NIP) has earmarked funds for drafting of urban planning documentation, which are already being used by some municipalities. The third recommendation focuses on education reform. When viewed over the long term, human capital (reflected primarily in the population education level) and technology are two key factors for the competitiveness of an economy. However, Serbia s levels of higher education and technological readiness put it just slightly above the region s average, and significantly below the Eastern European average. We believe that education reform can be implemented successfully only if it is more firmly linked with budgetary policy. University funding should be more strictly linked to performance. Funding of the Government-run faculties today depends mainly on the number of students enrolled. Other factors must be taken into account as well the number of students graduating on time, the percentage of students getting jobs in the industry they were trained for, etc. We also believe that the private sector needs to be granted a greater role in the educational policy designing process if education is to be adjusted more closely to the needs of economic and social development. It should be added that we are also of the opinion that better educational policy drafting requires improved quality and availability of education statistics. 4 Some municipalities (such as Zrenjanin and Kruševac) have already made significant progress in this field. Other Serbian municipalities should modify their procedures to reflect best practices implemented in these municipalities. 5

6 Finally, we must add that, in addition to these three priorities, there are several other fields that deserve special attention. The first of these is much more serious work on development of the anti-monopoly policy. The very low level of competition in the domestic market, confirmed by the World Economic Forum study, reduces the efficiency of an economy. This requires liberalization of the goods market. It involves creating conditions for companies to enter and exit individual sectors efficiently i.e. simplified starting and closing of businesses as well as preventing companies dominating a sector from using their position to suppress competition. The new Law on Protection of Competition currently being drafted should regulate some of these issues. It is our recommendation that the new law should delegate the Commission for Protection of Competition greater powers to impose penalties for infringement of the law, as well as to change requirements for obligatory reporting of concentration, by increasing the minimum concentration thresholds requiring approval of the Commission (thereby freeing the Commission to devote its full capacities only to cases that can actually be of importance for protecting competition). The second field, closely related to the first, is efficient labor market. If the labor market is rigid, it hinders the process of economic adjustment and reorientation to more competitive sectors. Companies from a sector with greater growth potential may encounter problems finding workers with specific skills, which leads to such workers becoming very expensive, which in turn reduces the competitiveness of potentially successful sectors. On the other hand, companies from less profitable sectors might find it difficult to lay off excess workforce: these workers will then lack the incentive to switch to other, more propulsive sectors. Relating to labor market flexibility, the goal should be to create an optimal combination of flexibility and workers protection (compliant to the EU concept of flexicurity), thus making it easier to both hire and fire workers, without jeopardizing their rights to social security. An efficient labor market should enable fast and efficient re-training of workers on skills in demand. Therefore, flexible goods and labor markets should contribute to quicker allocation of resources from one sector to another, which is crucial for the fast-changing transitional economies, requiring time and trial and error to define the sectors with comparative advantages. All this creates conditions for efficient implementation of economic re-orientation and transformation. The third field is infrastructure development. Poor infrastructure, especially railroads and roads, has been identified as one of key limitations to greater investment and economic development. In this sense, the completion of priority transportation projects such as Corridor 10 and the Belgrade motorway bypass (already in progress) is essential, as is a major rehabilitation and improvement of the railroads network. Actions of the National Infrastructure Council, competent for construction of large infrastructure projects, can certainly contribute to these activities. The fourth field is work on further macroeconomic stabilization, which was reduced over the past year, due both to political uncertainty in the first half of the year and the global financial crisis. Passing of the budget for 2009 envisaging moderate government spending, is a step that will contribute to stabilization. Likewise, signing of the arrangement with the IMF represents a positive signal in this direction. 2. Introduction Economic growth and development represent main mechanisms for development of a society. Although economic growth does not make the goal by itself, it still is the most efficient means for achieving essential goals: poverty reduction, productive employment, higher quality of education, improved health care, etc. History and experience teach us that economic growth represents, if not sufficient, then certainly a mandatory condition for achieving these goals. Improving quality of life of wider population levels is hardly accomplishable, if not impossible, without economic growth. Without economic growth, re-allocation policies become zero sum games. In this way, improving the living standard of one population group can be achieved only to the detriment of the other. It is very difficult to achieve political concensus on issues of this nature. On the other hand, economic growth generates more resources to be allocated, and in that way there is the possibility for 6

7 additional population groups to improve their living standard, even in case of inequality increase (often accompanying economic growth). Long-term sustainable economic growth is especially important for poverty reduction. Namely, long-term economic growth is almost always a consequence of extended population inclusion in the labor force. The long-term economic growth contributes to poverty reduction in two ways. Primarily, unemployment is reduced by providing work for more people. Secondly, given the reduced long-term unemployment, number of the unemployed, as the source of new labor force, will be reduced in time. Labor becomes increasingly rare and valuable resource, therefore its value will rise, implying that the wages of employees will go up. This second mechanism makes the long-term sustainable economic growth especially important. Serbia belongs to a category of small open economies, with an average level of national income. In such economies, the long-term sustainable economic growth, in most of the cases, depends to a large extent on integration into international markets and increase in exports. International markets offer deep and relatively inflexible demand necessary for maintaining economic growth over a longer period. Besides, this demand enables a country to specialize for production of specific commodities and services. Integration of the local economy into global markets, big companies and their supply chains, enable transfer of technologies, processes and ideas. Countries which are better integrated into global trends are provided with an opportunity to more rapidly absorb the knowledge required for further growth. The factors relevant for successful integration of a country into the world economy are related to the quality of the local business climate, macroeconomic and political stability, judiciary system efficiency, infrastructure quality, competent labor, etc. All these factors jointly make a country more or less competitive at international level. 3. Economic Growth in Serbia Since the onset of transition in 2001, Serbian economy has recorded positive growth rates (Figure 1), i.e. unlike many other Eastern European economies, it managed to evade transitional recession. Still, this growth was led by the relatively small group of sectors from the area of non-tradeable services. Consequently, Serbian export fell at the rather low level, practicaly the lowest in comparison with all transitional economies of Eastern Europe (Figure 3). In order to improve the relatively unfavorable foreign trade position of Serbia, and even more importantly- enable longterm sustainable economic growth based on international economic integration, it is necessary to achieve growth in sectors producing tradeable goods and services. This is why in continuation of this paper, we will analyze in more detail economic growth of Serbia, aiming to identify typical trends, as well as to undertake comparison with other Eastern European transitional countries. Figure 1: Serbia, real growth of GDP and GVA (in %), ,0 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0, Source: Republic Statistical Office GDP, real growth, in % GVA, real growth, in % 7

8 Following the slowdown in 2003, growth of the Serbian economy has been increasing over the four years since, at relatively high rates (Figure 1). The average rate of the gross domestic product in the past four years amounts to 7,0%, with the same rate recorded for the gross value added. This rate is considered high, above most of the Central and Eastern European countries (Figure 2). It would be interesting to take a more detailed look of the GDP growth structure, in order to determine deeper trends related to development of the Serbian economy to date. Figure 2: Real GDP growth rate, average (in % ), selected countries 9,0 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 Slovakia Serbia Romania Bulgaria Czech republic Poland Croatia Macedonia Hungary Source: Eurostat, Republic Statistical Office Figure 3: Transitional economies, export of goods and services, in % of GDP, 2007 Slovakia Czech republic Hungary Estonia Slovenia Bulgaria Lithuania Latvia Poland Romania Serbia 0,0 20,0 40,0 60,0 80,0 100,0 Source: Eurostat, Republic Statistical Office By far the largest contribution to the growth of Serbian economy came from only several, mainly service-oriented, sectors (Figure 4). Let us thereby examine influence of these sectors on the overall trends. Agriculture will be excluded from the analysis given its large succeptibility to climaterelated and other exogenous factors. This means that hereby we will focus on contribution of specific sectors to non-agricultural gross value added. Three sectors contributed most to the growth of non-agricultural GVA: wholesale and retail trade, transportation, storage and telecommunications and financial services. These sectors were identified as the Top 3. What can be seen is that these sectors have developed much faster than the rest of the economy. 8

9 The average growth rate of the Top 3 sectors during the last five years amounts to 17,4%, whereas the rest of the economy was growing at the rather modest rate of 2,0% (Figure 5). As regards the share in growth, notable is that the Top 3 sectors have generated 79,8% of growth in nonagricultural GVA (Figure 6) over the last five years. Owing to such intensive growth, their share in total non-agricultural GVA has increased from 25,4% in 2002 to 40,6% in It should be mentioned that during the period concerned, contribution of industry to the overall growth of nonagricultural GVA amounted only to 9,4%, despite the fact that in 2002, its share in total nonagricultural GVA was higher than of the Top 3 sectors together (27,8% compared to 25,4%). By the year 2007, share of industry in non-agricultural GVA has dropped to only 22,6%. Figure 4: Serbia, GDP structure as per sectors, in thousand dinars of constant prices Gross Domestic Product Taxes minus subsidies Gross Value Added Agriculture, forestry and fishing Non-agricultural Gross Value Added Industrial production Mining and quarrying Manufacturing Production of electricity, gas and water Construction Services Retail and wholesale trade Hotels and restaurants Transportation, telecommunications Financial intermediation Real estate and business services Other services Source: Republic Statistical Office Sectors from the fastest-growing group mainly produced non-tradeable services. This primarily relates to trade, but can also apply to financial services, and even telecommunications and transportation. Thus it became questionable to what extent growth based on these sectors could be sustainable in the long run. Or, to paraphrase the IMF representatives, does the growth of the Serbian economy actually imply the citizens shopping at the malls using credits, while speaking on mobile phones. For obtaining at least a partial answer to this question, we have analyzed some additional Eastern European transitional economies. Figure 5: Serbia, real GVA growth (in%), Figure 6: Serbia, contribution to growth of nonagricultural GVA 25,0 100% 90% 20,0 80% 70% 15,0 60% 50% 10,0 40% 30% 5,0 20% 10% 0, % Top 3 Other sectors Non-agricultural GVA Top 3 Other sectors Source: Republic Statistical Office Source: Republic Statistical Office Note. Top 3 are the following: Wholesale and retail trade; transportation and telecommunications; and financial services. 9

10 Joint feature of the observed countries (Czech Republic, Slovakia, Poland and Croatia) is likewise reflected in the high contribution of service sectors to the overall economic growth, especially during the first stage of transition. However, unlike Serbia, industry contribution to the GDP growth has also played a relevant part in these countries, whereas at the second stage of transition, industry, owing to extensive foreign direct investments, became the main component of economic growth. Let us analyze in more detail example of the Czech Republic. Figure 7 demonstrates actual growth of GVA in this country. It can be noticed that during the first part of the period concerned, from , the Czech economy recorded a rather modest growth rate amounting to approx. 1%. The main contributors to growth during this period were exactly the sectors from the Top 3 group (wholesale and retail trade, transportation, storage and communications and financial services), now being the leaders of growth in Serbia. Figure 8 shows contribution to the non-agricultural GVA. What is noticed is that, unlike Serbia, during the first transitional stage, industry also made significant contribution to economic growth. On the other hand, during this period, strong construction industry contraction occurred in the Czech Republic. Value added in the civil engineering area was reduced by even 40% during this period. Apart from that, negative growth rate was registered in the hotel and restaurant sector, as well as in production of electrical energy, gas and water. Figure 7: Czech Republic, real growth of nonagricultural GVA (in %, average for the period concerned), Figure 8: Czech Republic, contribution to nonagricultural GVA growth, (in %) 9, , , ,0 5,0 4,0 3,0 2,0 1,0 0,0-1, Top 3 Other sectors Industrial prod. Total non-agricult. GVA Top 3 Other sectors Industrial prod. Source: Czech Statistical Office Source: Czech Statistical Office Note. Top 3 are the following: Wholesale and retail trade; transportation and telecommunications; and financial intermediation. After 2002, and especially since 2004 when the Czech Republic joined the European Union, the entire economy was strongly accelerated. So in the second part of the period concerned, from , the average growth rate of non-agricultural GVA amounted to almost 6%. Industry has become the main leader of economic growth in the country during this period, developing at an average rate of over 8% (Figure 7). The average growth rate for industry in the period from amounted to 12%. Such a strong growth of industry resulted in high growth of exports. Share of exports in GDP was in this way increased from 51% in 2002 to 71% in Throughout the entire transition period, the Czech Republic registered high rate of investments. During the first part of the period concerned, from , an average investment rate amounted to approx. 30% of GDP. Such a high investment rate has enabled intensive growth in the coming transition stage. From 5 As a reminder, share of commodity exports in GDP of Serbia amounts to approx. 22%. 10

11 2003, investments share in GDP was slightly reduced, varying from 25-27% of GDP, which is still considered a rather high rate 6. This data re-confirm the previously stated assumption about stable and sustainable economic growth being closely linked to economic integrations, high investment rates and intensive development of production in sector of tradeable goods and services. 4. Analysis of Studies on International Competitiveness of Serbia In order to obtain objective and fact-based insight into international competitiveness of Serbia, we have conducted analysis of the relevant studies dealing with comparative competitiveness analyses of a larger number of countries. The two studies we will focus on most are The Global Competitiveness Report of the World Economic Forum and the World Bank s Doing Business report. These two studies deserve special attention based on the following three main reasons. Firstly, they are widely reconized and accepted as reference studies when international competitiveness is concerned. They are consulted by both investors and economic policy makers, thereby we believe a more detailed consideration of the said studies results will prove to be useful. Secondly, they cover a large number of countries (134 encompassed by The Global Competitiveness Report and 181 in case of Doing Business report), thereby providing for an excellent insight into position of domestic economy in scope of the broader global context, along with the comparison of the local economy with other countries from the region. Thirdly, these two studies take into account broad and complementary set of factors affecting international competitiveness of a country. The Doing Business report is focused on issues pertaining to the quality of business environment. This refers mainly to administrative procedures, regulations, legal system, etc. On the other hand, The Global Competitiveness Report covers in more detail the factors directly influencing doing business and international competitiveness of a country. It addresses the issues such as quality of physical infrastructure, human resources, labor market efficiency, financial market quality, technological readiness, capacity for innovation, etc. Moreover, The Global Competitiveness Report and Doing Business report complement one another excellently, thereby providing a comprehensive insight into strengths and weaknesses of the countries considered therein The World Economic Forum Global Competitiveness Report The Global Competitiveness Report (GCR) of the World Economic Forum (WEF) is one of the most referenced publications on international competitiveness. This study includes over 130 countries and offers comparative analysis of their business climate and conditions for doing business from the enterpreneurial perspective. The report is based on the companies survey, undertaken in the same format in all countries encompassed by the survey. According to this survey, as well as secondary data, the countries are ranked according to their international competitiveness. Especially interesting for the analysis, besides the general index, is the fact that WEF also ranks countries in relation to elements relevant for international competitiveness. This approach enables precise identification of specific advantages and disadvantages of specific countries in a wider context. Special attention in our analysis is paid to the latest report from the year Additionally, we will present a brief overview of the previous year s survey, in order to identify the competitiveness components which have made progress (or deteriorated). In the 2008 survey, Serbia is ranked 85 th as regards competitiveness, out of 134 countries covered by the survey. This represents slight progress compared to the previous year, when Serbia was ranked 91 st of 131 countries. Observing the regional context, Serbia is only at the average level of 6 Share of Investments in GDP of Serbia varies from approx. 20% to 22%. 11

12 the Western Balkans countries (on average these countries were ranked 86 th ), and far below countries of Central and Eastern Europe (average ranking is 56). The Global Competitiveness Report Methodology The World Economic Forum survey in 2008 in Serbia encompassed 112 firms (in 2007, 86 firms took part). The survey is standardized and used in the same format in all 134 countries it covered. Executive managers provide answers to a wide set of questions about business environment, i.e. evaluate quality of various factors relevant to businesses. Most of the questions require scoring on a scale 1-7, with 1 being the worst, and 7 the best score. Apart from the survey questions, calculation of international competitiveness index also includes quantitative data from secondary sources such as: gross domestic product, population size, inflation rate, tax rates, budget deficit, public debt, exports and imports, customs dues and tariffs, interest rates, life expectancy, data on mortality and morbidity, education costs, data on population education level, number of telephone connections, number of computers, number of the Internet connections, etc. The International Competitiveness Index is computed based on the survey results and secondary data, as a general measure of competitiveness. Share of the survey data in calculation of index amounts to around 60%, while this percentage for the secondary data amounts to approx. 40%. The International Competitiveness Index comprises 12 Competitiveness Pillars grouped in three subgroups of the main index. These are the following: Basic Requirements, Efficiency Enhancers, Innovation and Sophistication Factors (Figure 9). Figure 9. Sub-components of the competitiveness index and economic development stages Basic Requirements Institutions Infrastructure Macroeconomic stability Health and primary education Key for factor-driven economies) Efficiency Enhancers Higher education and training Goods market efficiency Labor market efficiency Financial market sophistication Technological readiness Market size Key for efficiency-driven economies Innovation and sophistication factors Business sophistication Inovation Key for innovation-driven economies Source: The Global Competitiveness Report Division to sub-components was performed based on the assumption that countries pass through three stages in their development. Economic growth at the first stage relies on the basic production factors (capital, labor, natural endowements, etc.). The group Basic Requirements is crucial for 12

13 economies undergoing the second stage. Economies at the second stage base their economic growth primarily on efficiency enhancement. Most relevant for the countries belonging to this group are the competitiveness pillars contained in the subgroup Efficiency Enhancers. Finally, economic growth of the countries at the last stage of development, depends to a large extent on innovation and sophistication of business processes. Therefore the third subgroup of competitiveness factors is most relevant for them, i.e. Innovation and Sophistication Factors. The three development stages are demonstrated in Figure 9. According to the World Economic Forum classification, Serbia is among the group of countries undergoing the second development stage. Especially relevant for these countries are the factors affecting the efficiency enhancement. Figure 10 shows the groups of countries as per stage of development. Besides Serbia, second stage group encompasses additional 26 countries covered by the survey. Figure 10: Countries at each stage of development, as per the WEF classification Stage 1 Transition from 1 to 2 Stage 2 Transition from 2 to 3 Stage 3 Bangladesh Armenia Albania Bahrain Australia Benin Azerbaijan Algeria Barbados Austria Bolivia Botswana Argentina Chile Belgium Burkina Faso Brunei Darussalam Bosnia and Herzegovina Croatia Canada Burundi China Brazil Estonia Cyprus Cambodia El Salvador Bulgaria Hungary Czech Republic Cameroon Georgia Colombia Latvia Denmark Chad Guatemala Costa Rica Lithuania Finland Côte d Ivoire Iran Dominican Republic Poland France Egypt Jordan Ecuador Qatar Germany Ethiopia Kazakhstan Jamaica Russian Federation Greece Gambia, The Kuwait Macedonia, FYR Slovak Republic Hong Kong SAR Ghana Libya Malaysia Taiwan, China Iceland Guyana Morocco Mauritius Trinidad and Tobago Ireland Honduras Oman Mexico Turkey Israel India Saudi Arabia Montenegro Italy Indonesia Venezuela Namibia Japan Kenya Panama Korea, Rep. Kyrgyz Republic Peru Luxembourg Lesotho Romania Malta Madagascar Serbia Netherlands Malawi South Africa New Zealand Mali Suriname Norway Mauritania Thailand Portugal Moldova Tunisia Puerto Rico Mongolia Ukraine Singapore Mozambique Uruguay Slovenia Nepal Nicaragua Nigeria Pakistan Paraguay Philippines Senegal Sri Lanka Syria Tajikistan Tanzania Timor-Leste Uganda Vietnam Zambia Zimbabwe Source: The Global Competitiveness Report Spain Sweden Switzerland United Arab Emirates United Kingdom United States Our analysis will hereby focus on comparing Serbia to other countries from this group. Moreover, special attention will be dedicated to comparing Serbia with other countries of the Western Balkans, as well as to the countries of Central and Eastern Europe. The Western Balkans countries covered 13

14 by this survey are as follows: Albania, Bosnia and Herzegovina, Montenegro, Croatia, Macedonia and Serbia. This group of countries will hereinafter be referred to as WB. Countries of Central and Eastern Europe included in the GCR survey are the following: Bulgaria, Romania, the Czech Republic, Hungary, Poland and Slovakia. This group of countries will hereinafter be referred to as CEE. It should be noted that from this group of countries, Bulgaria and Romania, same as Serbia, are currently undergoing the second stage of development, Hungary, Slovakia and Poland are about to enter the third stage, whereas the Czech Republic is at the highest, third stage of development. The most problematic factors for doing business Figure 11 and Figure 12 demonstrate the factors the respondents have listed as the most problematic ones for doing business in the 2008 survey as well as in the survey conducted the year before. The surveys shows that political instability was identified as the biggest problem for the companies. Corruption was listed second, followed by inefficiency of the public administration. Obviously, the three problematic factors are closely interlinked and directly related to inefficiency of public administration agencies. The last year s report mentioned once again the same three factors as the most problematic ones, pointing out to the fact that significant progress has not been made in improving business climate from the aspect of services provided to the companies by the state. However, a change occurred as regards the sequence of the said factors. While inefficiency of the government bureaucracy was ranked 1 st, this year political instability took the first position, which is probably the consequence of several pre-term elections held in Serbia over the last two years. Replies to this question clearly demonstrate that, despite certain progress achieved, there is still much left to be done by the public administration in terms of creating favorable business environment. As it can be seen from the next chapter of this paper, the survey Doing Business conducted by the World Bank also defined issuing of permits and licences as the key problem and reason for the high inefficiency of business environment in Serbia. Likewise, corruption was identified as one of the problems to be addressed much more seriously. Figure 11: The most problematic factors for doing business, GCR Policy instability Corruption Inefficient government bureaucracy Inadequate supply of infrastructure Crime and theft Access to financing Tax regulations Inflation Tax rates Poor work ethic in national labor force Inadequately educated workforce Government instability/coups Foreign currency regulations Restrictive labor regulations Poor public health Source: The Global Competitiveness Report

15 Figure 12: The most problematic factors for doing business, GCR Inefficient government bureaucracy Policy instability Corruption Access to financing Government instability/coups Poor work ethic in national labor force Tax rates Tax regulations Crime and theft Inadequately educated workforce Inflation Inadequate supply of infrastructure Foreign currency regulations Restrictive labor regulations Source: The Global Competitiveness Report Comparing Serbia with the rest of countries undergoing the second stage of development Figure 13 depicts value comparison of all 12 competitiveness pillars for Serbia and average of the countries at the second stage of development (countries whose economic growth is efficiencydriven). What can be seen in the majority of indicators, Serbia is slightly below the average, that is, less favorable compared to the group of countries from the same group. Health care system and system of primary education in Serbia were ranked above the average of the group of countries being at the second stage of development. On the other hand, the area in which Serbia is most lagging behind this group is infrastructure. Additionally, it is noticeable that Serbia is also lagging in the goods market efficiency. Several items are included in computing of this competitiveness pillar ranking, in relation to which, low score of Serbia primarily represents a consequence of the poor ranking of competition in domestic market. Figure 13: Serbia and average of countries at the second stage of development Source: The Global Competitiveness Report

16 Analysis of competitiveness pillars in Serbia and neighboring countries This part shows an overview of scores awarded to Serbia for each of the 12 competitiveness pillars as well as comparison between Serbia and countries from the region. Hereby were analyzed the results of the latest 2008 study, but in case of relevant changes compared to the previous year, the respective trend will also be commented upon. As for the overall competitiveness, Serbia scored 3,90 (Figure 14). This represents progress compared to the previous year, when the overall competitiveness score was 3,78. Still, from the regional context, it can be noted that ranking of Serbia is only at the average level of the Central and Eastern European countries. The year before, Serbia was also positioned at the Western Balkans average (3,77) and below the average of Central and Eastern Europe (4,26). Figure 14: Overall ranking of Serbia and other selected countries All countries CEE WB Serbia Overall score 4,20 4,28 3,86 3,90 Source: The Global Competitiveness Report Note. The CEE group includes the following countries: Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia. The WB group includes: Albania, Bosnia and Herzegovina, Montenegro, Croatia and Macedonia. As aforementioned, according to the GCR classification there are 12 competitiveness pillars directly influencing international competitiveness of a country (Figure 9). The first four pillars are as follows: institutions, infrastructure, macroeconomic stability, health care and primary education. These pillars belong to the subgroup Basic Requirements. The following six pillars, included in the Efficiency Enhancers subgroup are: higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness and market size. Finally, the third subgroup, Innovation and Sophistication Factors, comprises the following pillars: business sophistication and innovations. For Serbia, as country at the second stage of development (Figure 10), most relevant are the competitiveness pillars from the second subgroup. Let us first consider the Basic Requirements subgroup. Average score of Serbia for this group is 4,15 (Figure 15). This value is slightly below the average of the Western Balkans countries and below the average of the countries from the CEE group. In relation to this group, last year Serbia scored 4,19 which is a slight drop in value. This drop is the result of a bit lower ranking for the pillar Health Care and Primary Education, which is, nonetheless, still rather high. Contrary to that, the average ranking of the Western Balkans has improved, from 4,19 scored previous year to 4,29 this year. Figure 15: First subgroup of competitiveness pillars, scores All countries CEE WB Serbia I Basic requirements 4,52 4,45 4,29 4,15 1. Institutions 4,14 3,70 3,57 3,40 2. Infrastructure 3,73 3,29 2,80 2,68 3. Macroeconomic stability 4,92 5,03 5,16 4,72 4. Health and primary education 5,29 5,77 5,62 5,79 Source: The Global Competitiveness Report Note. The CEE group includes the following countries: Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia. The WB group includes: Albania, Bosnia and Herzegovina, Montenegro, Croatia and Macedonia. 16

17 Infrastructure was especially poorly scored in this subgroup of the competitiveness pillars. Serbia was scored 2,68 in those terms, which is rather low value, below the average of the CEE group of countries, as well as countries from the Western Balkans group (Figure 15). Taking a more detailed look at the data, the conclusion is that transport infrastructure was especially low ranked, railroads the lowest. Unlike this, power supply and telecommunication infrastructure in Serbia scored averaged ranking. Infrastructure was also poorly ranked the year before (2,72). Contrary to infrastructure, the pillar Health Care and Primary Education was very highly ranked (although lower compared to last year). This is at the same the best ranked area for Serbia, positioned 46 th out of 134 countries in total (position 31 the year before). As regards the remaining two pillars (Institutions and Macroeconomic stability), Serbia was ranked a bit below the countries of CEE and Western Balkans (Figure 15). Compared to the previous year these two pillars did not demonstrate specifically relevant changes implying that practically no progress has been made neither in relation to development of institutions, nor macroeconomic stability. It should be pointed out that ranking of Serbia for this group of factors is below the general average of all countries covered by the survey, excluding the pillar Health Care and Primary Education. The second group of competitiveness factors Efficiency Enhancers is most relevant for the countries at same level of development as Serbia. These countries base their economic growth on enhancing efficiency of their economies, whereas this group comprises the factors contributing to achievement of that goal. Figure 16 shows scores for Serbia and groups of countries relevant for this group of competitiveness pillars. Figure 16: Second subgroup of competitiveness pillars, scores All countries CEE WB Serbia II Efficiency enhancers 4,06 4,35 3,69 3,82 5. Higher education and training 4,02 4,49 3,78 3,91 6. Goods market efficiency 4,30 4,36 3,87 3,68 7. Labor market efficiency 4,38 4,43 4,26 4,36 8. Financial market sophistication 4,35 4,50 4,21 3,94 9. Technological readiness 3,62 4,03 3,25 3, Market size 3,67 4,31 2,77 3,59 Source: The Global Competitiveness Report Note. The CEE group includes the following countries: Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia. The WB group includes: Albania, Bosnia and Herzegovina, Montenegro, Croatia and Macedonia. The respective Figure shows that the average score of Serbia for this group of factors (3,82) is sligthly above the average of the Western Balkans (3,69), but still below the average of the CEE group of countries (4,35). However, if the market size is excluded as a factor, the average score of Serbia for this group of competitiveness pillars is exactly at the Western Balkans average. Compared to the previous year, progress has been made in this category. Namely, last year the efficiency enhancers were rated 3,65. A step forward was made primarily in relation to the labor market efficiency, contributed by reduction of tax burden on wages. Higher education and training in Serbia were rated by the relatively low score, below the general average and far below the CEE countries average, but in line with average of the Western Balkans countries. This is especially interesting due to the fact that primary education in Serbia was rated higher than average. In this respect, Serbia was ranked even below the regional average and significantly below the CEE average. On the other hand, quantity and quality of the higher education were ranked slightly above the average of the Western Balkans, but still below the CEE countries. 17