Pavle Petrovic, full member of the Serbian Academy of Sciences & Arts (SANU)

In order to escape the looming low growth trap, Serbia must restructure towards advanced, high-value sectors that leverage cutting-edge technology and employ highly skilled labour. This requires dramatic improvements to institutions, which have been weakening since the mid-2010s

What does the future hold for the Serbian economy? This question is particularly relevant in light of new global economic disruptions caused by deglobalisation, climate change, multiple war zones and other factors. If we were to step into the shoes of Pavle Petrović—a professor at the University of Belgrade Faculty of Economics, full member of the Serbian Academy of Sciences & Arts (SANU) and former President of the Fiscal Council of the Republic of Serbia—the short answer might be: “It depends on what you’ve sown”.

A deeply elaborated and evidence-based answer to this very question is contained in Petrović’s book Macroeconomic Crises and Reforms in Serbia, 1980–2023: An Econometric Analysis, which was published by SANU. Speaking in this interview, Petrović touched on some of the most pressing issues ahead of the upcoming conference ‘Economic Growth in Serbia: Determinants and Prospects’, which SANU is hosting on 5th and 6th December.

Over the previous decade, we’ve primarily viewed GDP growth through the lens of FDI and the rising exports that such investment has driven. FDI was also defined and promoted as the most powerful vehicle for Serbia’s reindustrialisation and even as a key channel for technological upgrades. This approach is today further supported by efforts to integrate Serbia into global value chains through nearshoring.

Furthermore, substantial public investments in EXPO 2027, particularly in the budget for 2025 and beyond, are being viewed as a panacea for accelerating GDP growth and improving citizens’ wellbeing.

How viable are these options over the long term?

— Serbia has achieved middle-income status, building on high foreign investments and, recently, high public investment. However, international evidence indicates that reaching the middle-income level has left many countries stuck at that same level for decades (“middle-income trap”), which may well happen to Serbia.

Namely, the current ‘more of the same’ approach, i.e. sizeable FDI channelled into traditional sectors and coupled with public investments that are poorly prioritised, cannot elevate Serbia to the level of a high-income country. That would require substantial reforms.

Some existing foreign investment, e.g. in the automotive industry in southern Serbia, might become unviable, as indicated by recent tensions in these companies

In a paper to be presented at the SANU conference of 5th and 6th December, we show that growth in Serbia has been driven predominantly by the sheer increase in employment and capital, as opposed to the countries of the Central and Eastern EU (CEE), where large investment infused advanced technology in their economies, thus powering technical advancement and consequently economic growth.

We further demonstrate that traditional low-tech sectors have dominated the Serbian economy and driven overall growth in Serbia, in contrast to CEE countries.

This growth model, which is based on cheap labour and has attracted FDI to Serbia’s low value-added sectors, is coming to an end. Specifically, both Serbia and the CEE countries face adverse demographic developments and substantial emigration to advanced EU countries, which has reduced the available labour force significantly and thus led to rising wages and labour costs.

In contrast to CEE countries, Serbia’s dominant low value-added sectors cannot afford to pay these higher wages, compelling investors who are seeking cheap labour to turn to other destinations. Moreover, some existing foreign investment, e.g. in the automotive industry in southern Serbia, might become unviable, as indicated by recent tensions in these companies.

The Serbian government nevertheless expects higher wages to help prevent the labour force from abandoning the country and believes strongly that the solution to the low growth trap lies in increasing budget allocations significantly for projects like EXPO 2027. They argue that this would attract more investments and stimulate growth, thus balancing the rise in wages.

Why do you think this approach might not work?

— The average wage rate has more than doubled over the last seven years and reached 850 euros a month, which might be unsustainable for the Serbian economy because it is approaching the average income levels of more advanced CEE countries, but also those of Greece (€1,100) and Portugal (€1,200).

Moreover, just part of this increase (40%) led to a real rise in purchasing power, while the rest (60%) was propelled by inflation at home and partly in the euro area.

High “euro wages” have reduced the Serbian economy’s international competitiveness, impeding exports and deterring FDI that seeks cheap labour. The first indications that the current “more of the same” growth model is untenable are Serbia’s increasing trade deficit and the fact that inflation has yet to be tamed.

The 2025 budget and medium-term government plan (Fiscal strategy) indicate a structural shift towards high fiscal deficit and increased public spending, which may further magnify the aforementioned macroeconomic imbalances – external deficit and inflation – and hinder Serbia’s growth prospects.

If current support for FDI and the rising standard of living cannot provide the desired results, what could prove fruitful?

— In order to escape the looming low growth trap, the Serbian economy should restructure towards advanced, high value-added sectors that utilise cutting-edge technology and can afford to employ and pay highly qualified workers.

The 2025 budget and medium-term fiscal strategy indicate a structural shift towards high fiscal deficit and increased public spending, which could worsen the external deficit and inflation, thus hindering Serbia’s growth prospects

This requires a dramatic improvement in the quality of institutions in Serbia, which have been systematically deteriorating since the mid-2010s. High corruption and weak rule of law have created an uneven playing field, which has discouraged investments and innovation in the domestic private sector.

Is Serbia set to benefit from “nearshoring” and “friendly shoring”?

We’ve touched on some pressing issues in this interview, while further insights will be provided at the upcoming conference ‘Economic Growth in Serbia: Determinants and Prospects’. Which topics will this event cover?

Apart from the themes mentioned in this interview, the topics to be covered at the conference also include how (de)globalisation might impact economic growth in Serbia, and specifically whether our country can benefit from current “nearshoring” and “friendly shoring” trends.

Entrepreneurship, the start-up scene in Serbia and the region, and AI will be addressed, with their importance for economic growth to be explored. Specifically, conference participants will examine why Serbia lags behind the region’s key countries on the entrepreneurial development of new high-tech companies. Apart from the institutional framework and the economic context, and more specifically the high-tech industry context, it turns out that demographic developments are critical. That’s why the conference has a separate section devoted to this latter issue and addressing factors like ageing and late retirement, labour force availability in Serbia etc. Finally, exploring economic inequality in Serbia and its determinants, the gender wage gap, and the impact of FDI, shows how the fruits of a growing economy are distributed.