Serbia’s Industrial Policy

Let the Right One In

Business as usual is not an option for Serbia and the Western Balkans, which is why the new industrial policy should be sectorspecific and rely on new policy measures

Focus: Serbia’s industrial policy, Let The Right One In

The Serbian Government is currently devising a new industrial development strategy, as well as a strategy for smart specialisation. While a new industrial policy represents a precondition for closing Chapter 20 in EU accession negotiations, covering entrepreneurship and industrial policy, it is also a must given the idea that Serbia has to develop a new growth model. Serbia has tried to re-invent its industrial policy several times in the recent past and thus to the challenges faced following the devastation of the industrial sector during the transition period, the low share of production in tradeable goods, a lack of competitiveness and weak economic growth fundamentals. The most recent such document, adopted in 2011 and valid until 2020, caused a major dispute among the professional public. In the meantime – mostly with the help of FDI – Serbia has increased industry’s share of GDP significantly and recorded strong growth in exports, albeit with little effect on economic growth.

What should a new industrial policy concept in Serbia look like? Should it be horizontal or sector-specific? Can small economies allow themselves to develop in every area, or should they focus solely on individual branches? Are there models that Serbia should seek to emulate or not? Should an agreement on the distribution of forces in the industrial sector be reached at the regional level? Should role models be sought among European countries or in Asia? Can there be an industrial policy without people? What challenges are posed to policymakers by education and demography?

Our interlocutors offered valuable advice on how to shape the new industrial policy and, even more importantly, how to implement it. They also caution that overexposure to Chinese investments, which are coming easier than those from the EU, might be risky in the long run.

H.E. ORLA O’HANRAHAN

AMBASSADOR OF THE REPUBLIC OF IRELAND TO GREECE, SERBIA AND ALBANIA

We Plan Far Ahead

All policy reforms are developed through across-government commitment and engagement with business and stakeholders. This is about building resilience in our economy and taking steps to prepare for the challenges we face

The Irish Government, together with key economic agencies – Enterprise Ireland, the Industrial Development Authority, Tourism Ireland and Bord Bia (the Food Board) – is planning ahead to ensure that our economic policy is robust enough to weather these challenges and protect Ireland’s economy in the future.

One of those policies is “Enterprise 2025 Renewed”, which focuses on building resilience in Ireland’s enterprise base by driving productivity growth and encouraging firms to invest in talent, skills, research and innovation.

‘Ireland Connected’, published in March 2017, sets out a vision to create a strong, open economy and make Ireland an attractive location to live and do business. This strategy sets the following specific targets to strengthen exports and increase levels of foreign direct investment, including to increase indigenous exports to a level of €26 billion by 2020; generate 30,000 additional jobs in the tourism sector by 2020 and €5 billion in overseas tourism revenue by 2025; secure 900 new foreign direct investments in a four-year period to 2019 and increase international student numbers by over 25 per cent.

Extensive analysis is being undertaken by government across all issues and key sectors that may be impacted by the consequences of brexit

We implement these strategies throughout all our key economic sectors in an effort to diversify and plan for the future. These sectors include agri-food, ICT and tourism, which I know are also key sectors in Serbia. In the ICT sector, Ireland is the world’s second largest exporter of computer and IT services. With a highly creative and talented workforce, an open economy and a competitive corporate tax environment, Ireland has successfully enticed eight of the top ten global information technology companies to establish a significant presence. The sector’s traditional players with long-established operations in Ireland, such as Intel, Hewlett Packard, IBM, Microsoft and Apple, have been joined by the newer vanguard of the internet and social media revolution, including Google, Facebook, Amazon and Twitter. All of this investment has established Ireland as the internet capital of Europe. Our worldwide experience for creativity and communication is also attracting games companies, with Big Fish, A, Demonware, Pocap, Zynga, Riot Games, Jolt and Serbia’s Nordeus all present in Ireland.

Irish companies are currently partnering with Serbian IT businesses, or in some cases setting up branches in Serbia. Serbia is gaining a reputation as an increasingly popular location for Business Process Outsourcing and Shared Services (BPO/SSC).

ALEKSANDAR MARKOVIĆ

CEO, METALAC A.D.

A Strategy is Worthless Without a Clear Action Plan

Even the best industrial policy is worthless without good implementation and control. On paper we have everything, from the ministry to agencies, yet implementation cannot be felt

Regardless of what the industrial policy looks like, the essence is not in the concept but in the implementation. Most strategies that are made well conceptually fail on implementation, and that’s what needs to be focused on. The previous development strategy for industry, which by the way is still valid, also looked good on paper, but in the end it was mostly boiled down to a list of nice wishes. There was no clear action plan that could be followed by someone in terms of its implementation and effects. I personally think it’s better to opt for sector-specific policies, because they allow us to focus on chosen branches.

Demography is a challenge for all of us, and probably the toughest issue. I’m not an optimist when I consider the answer

We know, for example, that the branches of the Serbian economy that have a constant competitive advantage are the ICT sector, organic foods and health tourism, and those branches don’t have the same needs. That’s why it’s better to adopt sector-based policies in order for the state to support the development of each branch individually. Both small and large economies naturally develop everything. The state’s industrial policy serves to identify which branches of industry have a competitive advantage and what the state should do to maximise the effect. And which branches will have their development dictated primarily by market trends. I do not think it’s possible to follow a model and develop according to the ‘copy-paste’. However, if I were to take something from the Irish model, that would be its relationship towards education, because that is the backbone of a modern economy. If we imply under the Asian model an economy based on low labour costs, I do not think that’s the road to the country’s sustainable development. We should praise our top engineers and technologists, not cheap labour. We hear often of late that the fourth industrial revolution has changed the paradigm in the economy. In other words, the rules of the game haven’t changed, rather the game has changed, and now we’re not helped in the new game by old knowledge. In all of this, education has changed the least.

We still teach children to remember facts and data, but that no longer has any value, because everything is easily accessible in the digital world. Now resources are skills, the management of that data and its use, and educational systems adapt to that poorly.

IVAN NIKOLIĆ

PH.D., DIRECTOR FOR RESEARCH DEVELOPMENT, 
INSTITUTE OF ECONOMIC SCIENCES

Processing Sector Should Be at the Forefront

Current industrial production and goods exports rely on the activities of foreign multinational companies as a marginal part of their value chain. The source of their key competences isn’t in serbia now and won’t be. Under such circumstances, should they be helped and, if so, how?

The ‘new’ industrial policy mustn’t be focused in isolation on the processing industry, but should rather include the construction and ICT sectors. So, I don’t consider that it should be neutral, rather it should focus actively on sectors that are expected to be the biggest contributors to economic growth and social mobility. In that sense, the order of priorities should be such that the processing sector, in the medium term, is found at the forefront.

Why? The fourth industrial revolution is underway around the world. Digital technologies are finding applications in all segments of society, and in technologically developed countries that includes manufacturing processes, where intelligent automation of the production process is being sought, and represents a precondition for creating production methods through the intelligent factories of the future. The results of analysis of the efficiency of investments in the last decade, which we recently published in MAT, show incontrovertibly that the fastest growing capital efficiency in Serbia has been recorded in the service sector with so-called professional-creative activities. According to the new development paradigm (the key elements of which are creativity, knowhow, originality, ideas etc.), these activities are potentially the greatest sources of economic prosperity.

The industrial policy shouldn’t be neutral, but rather focused actively on sectors that are expected to be the biggest contributors to economic growth and social mobility, and those are the ict sector and construction

The very concept of growth and development is changing, and the current allocation of investments is moving towards increasing the share of intellectual property in the structure of fixed assets (software and research & development as the most important constituent elements), which encourages the stronger development of activities in which these resources are more represented, in relative terms. On the other hand, a country with this kind of income per capita and this level of development, and considering the existing liquidity of public finances, should push construction to the maximum. In periods of accelerated economic growth, investments in construction outgrow GDP growth. This is a fact that must be valid until we reach the mid level of development.

JENS BASTIAN

ECONOMIC CONSULTANT AND FINANCIAL ANALYST

Focus on a Sector-specific Approach

A proactive industrial policy concept in serbia should link domestic needs and conditions with experiences from other countries and european institutions or organisations

First and foremost, an industrial policy should be proactive and inclusive. This implies that various civil society representatives are included in the formulation and execution of industrial policymaking, that it is not (!) a top-down policy initiative and that it has a long-term strategic outlook, even when obstacles are encountered along the way.

Under these preconditions, a proactive industrial policy concept in Serbia should link domestic needs and conditions with experiences from other countries and European institutions or organisations, e.g. the European Trade Union Confederation in Brussels. As Serbia is in the complex process of accession negotiations with the European Commission regarding various chapters, EU rules, regulations and financing instruments (e.g. the EFSI Juncker Investment Plan) have to be considered when formulating the Serbian version of an active industrial policy.

Given the experience with previous attempts at industrial policymaking in Serbia, I would encourage those sitting at the negotiating table to focus on a sector-specific approach.

The track record of economic and social transformation in the Western Balkans suggests that business as usual cannot continue to be the roadmap going forward. Instead, I would argue for new policy instruments. One such avenue consists of encouraging policymakers to elaborate and implement a more efficient industrial policy, both at national and regional levels.

I have recently published, together with the friedrich-ebert foundation belgrade and zagreb offices, policy recommendations for a new economic agenda in southeast europe, including the advocacy of industrial policymaking

A regional industrial policy calls for coordinating national policies in agreed priority areas and creating a critical mass of initiatives. Regional cooperation in industrial policymaking should focus on sectors such as R&D, energy, transport, tourism, agriculture and business start-ups.

Countries such as Serbia, Hungary, Macedonia and Greece are increasingly being targeted by China, with Beijing’s investment footprint growing in Southeast Europe.

For these countries, the expanding Chinese footprint can present itself as a funding alternative to cumbersome and time-consuming EU programmes. Policymakers in Beijing, Tirana, Skopje, Belgrade, Sarajevo, Budapest and Podgorica frame these investments in infrastructure projects as a win-win strategy.

I always underline in meetings with Chinese and Serbian or Hungarian investors that such a pivot towards Beijing must continue to apply rules and regulations in procurement and tender processes that are based on the priorities of the European Union accession process for the countries of the Western Balkans. Equally, the medium-term lending risks may create dependencies that are difficult to overcome.

KATARINA OBRADOVIĆ JOVANOVIĆ

ASSISTANT MINISTER OF ECONOMY

We Must Catch the Digitisation Wave

The concept of the new industrial policy should offer an answer to the question of how we want our industry to look in the next 10 years, and the ways in which we plan to achieve that. It is important to view realistically – in relation to the current industrial structure – where chances exist for advancement and faster growth, where we have a competitive advantage, which areas need to be strengthened, and which slowly abandoned

The leading principles of the new industrial policy concept will certainly be restructuring in the direction of innovative sectors and products with higher added value, alongside a gradual shift away from competitive advantages based on reduced labour costs, better integration into international value chains and capturing the “wave” of digitisation. Realising structural changes in industry is only possible with sector-specific measures, and in this the word sector should be considered in a much narrower sense than, for example, the food or machinery industries. We need to more clearly understand where our competitive advantages lie within the wider sectors, not limiting ourselves to official statistical classifications, in order to direct future development measures towards them. It is also important for the reconsidering of choices of sectors to remain open, for that to continue after the adoption of the policy document, in order to confirm that the right priorities have really been selected, to correct mistaken choices and to include new priorities that have been singled out in the meantime.

The fact that many areas will not be prioritised doesn’t mean there aren’t important ones among them, nor that they will remain without any support. However, if we want faster economic development and a change in the industrial structure, we must focus the majority of our limited resources in the areas where we have the greatest chances of being competitive at the international level, while high quality horizontal support measures should be provided for other areas.

Another important strategy in Serbia is also currently being drafted – the Strategy for smart specialisation. It envisages the identifying of areas in which the country or the region has a critical mass of knowhow, industrial capacity and competence, and in which it has innovative potential to position itself on global markets. The industrial policy and smart specialisation strategies must be closely linked and that’s why they’re being developed together.

MILORAD FILIPOVIĆ

TENURED PROFESSOR OF THE UNIVERSITY OF BELGRADE, FACULTY OF ECONOMICS

Only Support That Which is Competitive

In the development of new industries, the emphasis should be placed on those branches that are the most innovative and that can be positioned successfully on the global market, and those are pharmaceuticals, medical equipment manufacturing, telecommunications and the ict sector, arms production, the automotive industry and modern and technologically innovative food and beverage production

During the last almost 30 years of its transition process, the Republic of Serbia almost completely lost the industrial capacities it had built up until then. It is now clear that Serbia needs a completely new industrial policy that could lead, in the next ten years (not earlier), to the creation of the basis for a new structure of industry in Serbia. In the development of new industries, the emphasis should be placed on those branches that are the most innovative and that can be positioned successfully on the global market. For me, those are: pharmaceuticals, medical equipment manufacturing, telecommunications and the ICT sector, arms production, the automotive industry and modern and technologically innovative food and beverage production. So, we need to identify those market segments where we have already created some comparative advantages (not natural ones!!) and make their development a priority.

The future development of Serbia, and of the country’s industry, should resolve two key issues: 1) will it stop and possibly reverse the “brain drain” through the proper establishing of a different system of values in a society where an individual’s knowhow will be valued and appreciated; 2) how can the “dormant capacities” of domestic capitalists be activated and the entrepreneurship of Serbian citizens encouraged, in order for us to succeed in achieving the highest possible GNP, and not GDP. The difference between these two sizes is increasing, and based on the growing investments of foreign capital, which is not only increasingly present (we don’t have a single company among the top 10-20 exporters, in terms of number of employees, profits etc., that is under domestic ownership and isn’t a public company!!!!), but also more efficient according to all indicators. The difference between GNP and GDP already exceeded €2 billion in 2016 (2017, according to previous statistics, was €2,541.6 million or more than the value of foreign investment!!!).