The ruling party, which once again leads the government, promised already two years ago to carry out reforms at full speed, but obviously a lot of work has been left unfinished. With the new mandate there are no more excuses to delay them further. That’s how the messages of the IMF and the World Bank need to be interpreted.
Although higher than expected economic growth is undoubtedly good news, essentially there has not been a reversal in the country’s trend of borrowing, because fiscal consolidation has not been implemented consistently. The same can be said when it comes to building the business and investment environment – some changes have been made, but neither their speed nor their coverage are sufficient. Serbia must do much more in order to be really attractive for investors, says Professor Mihailo Crnobrnja.
We have a new government, with the same prime minister and the same majority supporting him. Is there room to expect that something will change in the way reforms are done … and that it will change for the better?
I sincerely hope that the answer to your question will be a positive one. The prime minister-elect won a decisive majority which, by the way, he had in the previous parliament as well. There will be no excuse for the weak execution of reforms. I would like to remind readers that the pre-election slogan in 2014 was “with full force into reforms”. It is now obvious that the full force was not applied, so there are quite a few things left to do. Now is the time to apply the “full force” and I hope, for the good of the people, that it will be done.
How would you describe the reality in which we live to an ordinary citizen who simultaneously listens to the forecasts of the central bank – for example, that economic growth this year will leap by two per cent – and the Fiscal Council, which in turn says that we are facing serious challenges?
The latest news is that both the IMF and the EU agree on the possible revision of the expected GDP growth rate to 2.5% for this year. That is undoubtedly good news. However, in order to really feel improvement on a larger scale we need 4-5 years of 4-5% of annual GDP growth. That would be really good news. On the other hand, the Fiscal Council is right in pointing out that we still face major challenges. One of them is the fact that the national debt is still growing, and will continue to grow, particularely if restraints on goverment spending (including salaries and pensions) are not in place. Yes, fiscal consolidation in the course of 2015 achieved something, but it is not yet time to celebrate. The celebration would spoil the achievement we would be celebrating and take us back to square one.
How would that same answer come across if, for example, we want to look at reality from the perspective of investors? Is this is a good time for investment and is there reason for delay?
The growth of GDP is always a welcome sign in the investment community. However, we must bear in mind that ours is not the only market, nor is ours the only GDP, that bigger investors are looking at. Take “Fiat” for example. In spite of the expected GDP growth in Serbia, they are reducing both the number of cars they make and the number of people employed. Other than GDP growth rates in Serbia, and on the international market, investors also watch out for changes in what is known as the “business and investment climate,” i.e. the rules and procedures impacting on their business. Here also in the last few years changes for the better have been made, but not enough, nor fast enough. There is still some way to go before we really become investor attractive, even without employment subsidies to investors, which Serbia is now generously handing out to new investors.
The Fiscal Council warns that shifting the debts of public enterprises at the expense of state finances would annul all the effects of the reforms, while foreign investors who are already doing business in Serbia often point to delays in the reform of public and state-owned enterprises as one of the biggest problems for establishing equal market conditions for all. What is the greater of the two evils?
Both are bad enough and it is difficult to choose. The first option is visible immediately and would, indeed, wipe out most of the effects of the reforms conducted so far. On the other hand, further government support to “economic invalids”, i.e. spending tax payers’ money to keep loss-making companies alive, is a long and protracted process that has gone on for decades. That has to be stopped, or at least dramatically reduced, for the benefit of other investors and, even more importantly, for the tax paying public. Since the second problem is continuous, and actually creates and feeds the first, I would give priority to solving the problem of “economic invalids”. In the longer run, that would be the more efficient way to solve the two problems.
Realistically, how much time – if we take as a yardstick that which was agreed in the agreement with the IMF – was lost in this pre-election and post-election period, and how much could that cost us?
I think we have lost about five months, which is the time during which there was no Parliament to pass the laws necessary to carry out reforms. Also, the government was (and at the time of this writing still is) a “technical” or “caretaker” government, not working at its full political capacity. What the cost of this delay will be is difficult to say, either in dinar terms or in terms of the effect on GDP growth, but undoubtedly there is one.
In that sense, how do you interpret the last IMF assessment after the recent visit, as well as the message of the World Bank that it will halt the release of some loans until reforms are implemented in public administration?
I interpret the positions of both the IMF and the World Bank as being non-compromising, i.e. suggesting to the Serbian Government the need not only to continue with the reforms, but to increase their speed, particularly when it comes to the public sector. It takes a very long time to establish the required number of public employees and the actual number of those employed in the public sector. The suggestion of the two institutions is that getting the two numbers closer should be done as soon as possible.
If we look at external economic factors, such as instability in Croatia and Macedonia, but also to a certain extent in Montenegro and in Europe itself, In your opinion how much can these events have an impact on economic outcomes in Serbia?
We do not live in an isolated world, so what happens around us clearly has an impact on what happens in Serbia. In which ways, and how much, is not easy to say. Considering that the European Union is by far our biggest trading partner, both in terms of exports and imports, the challenges that the Union is facing at this moment do reflect on the health of our economy. The same is true of our neighbouring countries, particularly if we take into account political instability.
In such times of economic it is safer in economic policy to play “by the book” or to be creative, as was done for example by Hungarian Prime Minister Orban?
I am not quite sure what “playing by the book” means in economics, nor how “creative” Prime Minister Orban is in that regard. The reason: today there are at least two books to be played by: the neo-liberal, relying almost exclusively on the market, and the neo-interventionist, relying on some kind of Keynesian government intervention. Not to mention the new book that the Chinese are writing – which is a good book, by the way.
I think that the best odds are to be had from an economic policy of diversification and “not placing all the eggs in one basket”. I am not suggesting removing them from one basket to another, nor am I suggesting which basket should be the most important. But diversification adds flexibility and prevents exclusive reliance on one key player. I should add that this policy will not be easy to accomplish for both economic and political reasons.