DEVELOPMENT CHALLENGES
The 1990s, after the introduction of multiparty democracy in Serbia, were marked by economic sanctions and wars. Since 2001, despite heightened political instability, the country has undergone major economic changes on its transition to a market economy and has made remarkable progress on wide-ranging reforms. Serbia recently graduated from “lower-middle” to “upper-middle” income status, with GNI per capita increasing from US$3,800 in 2006 to US$5,810 in 2010. The country also has a “high” Human Development Index (HDI) of 0.766 and is ranked 59th of 187 countries. Between 2001 and 2009, the Serbian economy grew by about 5% annually. However, the economy suffered a GDP contraction of 3.5% in 2009 as a result of the global economic crisis, with exports decreasing by 23.8% year-on-year in the first quarter of 2009. The country is recovering very slowly, with a 1% increase in GDP in 2010, but still faces development challenges.
Poverty and inequality
Poverty in Serbia has decreased from 14.6% in 2002 to 6.6% in 2007, but this downward trend has been reversed by the financial crisis, reaching 9.2% in 2010. In addition, the country faces important inequalities. Rural poverty has become more prevalent and deeper as a result of the financial crisis, and deep inequalities have appeared within cities. Regional disparities are also among the largest in Europe and have increased in the past few years. A number of populations are at high risk of poverty, including the elderly, children, internally displaced persons (IDPs), persons with disabilities, and the Roma. In fact, about 20-40% of the Roma population lives under US$2.50 per day, compared to below 5% of the remaining population.
High unemployment
Another serious challenge faced by Serbia is the high unemployment rate, which has begun increasing, after a period of decrease, due to the global economic crisis. In April 2011, unemployment reached 22.9% of the population, compared to 20.8% in 2005. In addition, the Roma, persons with disabilities, youth and women are most affected by unemployment. Women make up about 54% of the total number of unemployed and earn 17% less than men on a monthly basis. Young women are particular vulnerable, with an employment rate of only 14.2%.
Skills gap
The bleak employment situation is further underpinned by lack of a skilled labour force and mismatch between labour supply and demand. Although primary school enrolment and completion rates are over 95%, access to education at all levels is not equal across sub-populations. Many children in remote rural areas, as well as Roma children, are excluded from the education system and lag behind in school achievements. Moreover, there is a lack of proper second chance education for children who drop out before completing school or who do not enrol at the right age. While the country spends 4.4% of GDP on education, quality of education in Serbia is below international standards. Serbia performs poorly in international assessments of student learning, indicating that the education system struggles to provide young people with the most appropriate skills for a modern economy and labour market.
Weak governance and corruption
In the area of public administration and local self-government, institutions and the civil service lack capacities to deliver decentralized social services, set standards and regulations, and monitor implementation. Service delivery also varies greatly across the country and between municipalities. Although the country has shown improvement, corruption remains a key challenge in Serbia, manifesting a lack of effective accountability mechanisms, such as proper financial controls and transparent public procurement procedures.
KEY TRADE ISSUES
Growing trade deficit
Serbia’s major export sectors consist of metals and steel, food production and chemicals. However, a drop in exports of these major items, notably steel, has contributed to the country’s rising trade deficit. The trade deficit is intensified by the fact that Serbia imports around 40% of its total primary energy supply because of its energy inefficiency and scarce resources. This is further compounded by the unsustainable expansion of imports to satisfy strong domestic demand for non-productive consumption.
Market concentration and WTO accession
55% of Serbian exports go to the EU-27, of which two-thirds go to the EU-15. The countries of the Central European Free Trade Agreement (all Western Balkan countries and Moldova) account for another 30% of total exports. This market concentration makes the country very vulnerable to changes in its partners’ economies. Serbia’s integration into the world economy is hindered by the fact that Serbia is not yet a WTO member. Having submitted its application for membership in 2004, there is a pressing need to conclude the accession process to increase the country’s access to alternative markets.
Limited access to finance
The onset of the global financial crisis has caused a sharp decrease in financial loans, hindering the development of enterprises, in particular SMEs, and limiting their ability to conduct trade transactions. Foreign direct investment (FDI) inflows have also decreased as a result of the crisis, falling from 17% in 2006 to 3% in 2010.
Underdeveloped transport and energy infrastructure
As a landlocked country, Serbia has limited access to international markets, which is further impeded by the restricted regional integration of the country’s transport network. The road and rail infrastructure is in poor condition manly due to lack of investment, rapid traffic growth, significant maintenance backlogs, and no new construction in the last 20 years. 40% of primary roads and 74% of secondary and tertiary roads are in poor condition. Road safety remains a major concern. Similarly, electric power shortages are also a risk, as the entire system is old (53% of all power plants are over 30 years old), with low reliability and efficiency.
Cumbersome business environment
In 2004-2005 Serbia undertook improvements in its business environment and was rated the world’s top reformer by the World Bank in 2006. For example, Serbia reformed its customs procedures in 2003, reducing the time required to obtain export documents and customs clearance. However, reforms have slowed down, and the country’s rating on the World Bank’s “ease of doing business” indicator has slipped from 68th of 175 economies in 2007 to 92nd of 183 countries in 2012.
Statistics have been compiled by the World Bank, OECD and UNECE. Information has been adopted from: the United Nations Development Assistance Framework for the Republic of Serbia 2011-2015; the 2009 United Nations Country Team Common Country Assessment for Serbia; the 2008 Republic of Serbia National Sustainable Development Strategy; the 2010 United Nations report on “The MDGs in Europe and Central Asia: Achievements, Challenges and the Way Forward”; the 2009 OECD report on “Sector Specific Sources of Competitiveness in the Western Balkans: Recommendations for a Regional Investment Strategy”; and the 2011 World Bank-Serbia Partnership Country Program Snapshot.