The prime minister’s resignation, prompted by mass protests, may open a window for Serbia to shift from state-led cronyism to an entrepreneurial model grounded in strong institutions and democratic reform
The sharp deterioration of democratic freedoms and the quality of institutions in Serbia since 2015 has adversely impacted investments in the domestic private sector and, consequently, its growth. Democratic freedoms have reduced sharply in Serbia over the previous 10 years, so much so that only six countries across the world have experienced greater declines (cf. Freedom House). This has resulted in political protests, and hence political uncertainty, that have taken place each year since 2017. At the same time, deterioration in the rule of law, rising levels of corruption and other global governance indicators have been recorded in Serbia (cf. World Bank) and have adversely impacted the country’s economic growth (cf. Petrović et al.). International evidence ascertaining that quality of institutions and democracy are essential for economic prosperity also support the aforementioned findings in Serbia.
In attempting to address the aforementioned dismal development of the domestic private sector, the government has opted for state-driven growth, and has done so by increasing public investments sharply (reaching 42% of total investment) and subsidising FDI heavily (22% of total investment). The share of domestic private sector investment has remained small (19%) and this growth strategy will be soon exhausted (cf. Petrović et. al. 2024, SANU).
Democratic freedoms have reduced sharply in Serbia over the previous 10 years, resulting in political protests, and hence political uncertainty, each year since 2017
Specifically, the sharp rise in infrastructure investment has resulted in it having a diminishing effect on GDP growth, due to poor project prioritisation (e.g. national stadium and EXPO vs. environmental protection, infrastructure in education, local roads etc.) and the inefficient execution of projects that has commonly resulted in rising costs and sometimes resulted in poorer quality. The aforementioned issues stem directly from a failure to adhere to standards and ensure transparent procedures for public investments, such as neglecting cost-benefit analysis during project selection and bypassing open public tenders in selecting construction companies.
FDI has been the second pillar of the growth strategy, but such investments have mainly been directed towards traditional, low productivity sectors, including mineral resources’ extraction, sectors with “dirty technologies” (e.g. rubber and plastic products) etc., which are highly unlikely to drive future economic growth.
The latest prime minister’s resignation, which came as a consequence of students’ and civil protests demanding strong and properly functioning institutions, the curbing of widespread corruption and advances in democratic freedoms, might open a window of opportunity for Serbia to make a U-turn. This implies abandoning the current prevailing state capitalism model, with one dominant party and related cronyism, for an entrepreneurial capitalism model in which strong institution would underpin domestic private sector, resulting in lasting economic growth.
