Quest for new development model and economic policy platform for Serbia: The role of industrial policy

Abstract

The devastating truth that after twenty-five years of transition Serbia's economy is still impotent and out of tune opens the question: Why do people continuously act against their own interest? The answer is: the wrong system. Serbia's economy is packed with structural imbalances. Among them, the most important one is disharmony between the real economy and financial sector due to wrong transition strategy and ineffective macro management, both blindly following neo-liberal doctrine. Deindustrialization along with financialization is the main contradiction of the system. As a consequence, Serbia has experienced output gap, competitiveness freefall, and high unemployment. By financialization we mean the increase in the influence of financial markets, institutions, and elites over both the economy and the government. Now the key challenge for Serbia is to compare neo-liberal policy platform with new conceptually complex one, which is capable of restoring the dynamic balance between the real economy and financial sector and embarking the economy on the road to sustainable employment. Doing so will take courage on the part of policy makers defining both economic policies (monetary and fiscal) and industrial policies. 'Smart' industrial policies are at the center of the rejuvenated wisdom known as the new structural economics. The economic system following the new doctrine is known as managed capitalism. It is conceptually different from free-market capitalism following neo-liberal doctrine and state capitalism following conventional structural economics. Most theories of growth and related economic policy platforms were developed at the macroeconomic level. Such perspective is good for spotting relation between stability and growth. That got us thinking: What institutional choices are supporting that relationship? Prior to the Great Recession, the answer was coming from monetary policy generally and inflation targeting policy tool specifically. But, universal efficiency of the market is not common in cases of major macroeconomic distortions like output gap, deflation, and demand-pull inflation. In such situations market forces unleashed recession, instead of booming prospects. Anti- crisis measures based on the same doctrine led to jobless recovery scenario, at best. Frequent crises confirm that some fundamental assumptions of conventional economic doctrine and related economic policy platform must be revisited. This article is a continuation of our last two contributions in the field of transition and related issues in Serbia [5] and [6]. It is an attempt to create the model of growth and policy platform in an impotent and out of tune economy from the ground up. Namely, by looking at the context primarily from microeconomic (or business) perspective and following revisited conceptual economic policy platform based on active role of government. It is reasonable because in post-crisis period the relevance of industrial policy as a common sense institutional choice and the government's lever is acknowledged by mainstream economists and politicians from all sides of ideological spectrum. There are some questions triggered by this turnaround. What is the rationale for revising market efficiency as fundamental assumption of economic orthodoxy and acknowledgement of active role of government in an economy? What are the key factors that have raised so much controversies about industrial policy per se and how to fix them up in renewed (let's say 'smart') industrial policy framework? How can 'smart' industrial policies be designed to avoid past failures as well as to emulate the past benefits? How to balance core economic policies (monetary and fiscal) with 'smart' industrial policies in the new (let's say 'heterodox') economic policy approach in the case of Serbia. What is the remaining policy agenda? This article intends to address these questions. The aim is to confirm that in defining anti-crisis measures for late developer in delayed transition industrial policy is a common sense institutional choice with deep theoretical roots and unquestionable practical results.