Serbia: Policies to enhance competitiveness

Abstract

The main purpose of the paper is to discuss an apparent erosion of competitiveness of the Serbian economy in the aftermath of the global crisis and to propose a set of policy interventions that would restore the pre-crisis level of competitiveness, as well as support the resumption of institutional and policy reforms needed to close the gap with new EU members and other candidate countries. Comprehensive measures of competitiveness (such as GCI produced by the World Economic Forum), empirical studies, and academic papers provide a wealth of information on key determinants of competitiveness, growth, and current account sustainability. GCI alone measures 111 indicators organized into 12 pillars and three blocks focusing on basic requirements, efficiency and innovation. Empirical studies identified dozens of factors that contribute to or explain import and export dynamics, and determine CA movements with large numbers of possible policy combinations (mixes) that could be associated with desirable growth outcomes. Clearly, not all factors are equally important or really binding. To identify the key binding constraints to competitiveness and sustainable growth of the Serbian economy the paper uses a diagnostic methodology advanced by Rodrik and Hausmann [9] and further developed by Hausmann et al. [1 ]. We confirm recent empirical findings and claims of Serbian businesses that the real effective exchange rate (REER) indeed represents an immediate binding constraint on competitiveness and growth which needs to be addressed as soon as possible. However, it should be stressed that finding and maintaining equilibrium REER is not a panacea that will cure all problems of tradable sector in Serbia. It is closely followed by high real cost of financing and inefficient financial intermediation, expensive and intrusive state (resulting in costly uncompetitive business environment), and inefficient management and labor force (manifested through high unit labor costs or low productivity). These constraints need to be addressed in short sequence to restart the engines of export led growth.