The interview with Vladimir Gligorov was conducted by Miloš Obradović
The economic growth in Serbia in 2018 was 4.4 percent, the highest in the previous decade, which speaks more of a weak economy in the last ten years than a strong one in the previous year. Projections for 2019 show that growth will be higher than the originally planned 3.5 percent. However, experts in this field, both domestic and international financial institutions, point out that much higher growth rates are needed, which would last at least a decade.
By contrast, the Vienna Institute for International Economic Studies, in its November report, states that the momentum for growth in Central and Eastern European countries had passed, and that there is a visible slowdown. Also, according to the analysis of this Institute, in the last five years, from 2014 to 2018, Serbia, regrettably, stands close to the bottom in terms of economic growth and wage growth.
Vladimir Gligorov, a senior research associate at the Vienna Institute, talks in an interview with Danas about what is behind this 3.5 to 4 percent increase and what are the obstacles to getting closer to the standard of the European Union.
After a growth of 4.4 percent in 2018, this year the economic growth will be over 3.5 percent. Is the Serbian economy on the right track? Is this growth sustainable and is it sufficient?
In the previous year (2018), a significant contribution to growth came from a good agricultural year. As far as the year 2019 is concerned, a contribution, which is being disputed, came from the construction of the Turkish Stream. In addition, this agricultural year was also very good. But once these temporary effects are excluded, the economy is growing at approximately three percent a year. It seems that this will continue in the future. It can be debated whether phenomena such as the Turkish Stream or favourable climate can occur every year, but this is unlikely. With Turkish Stream, akin to other state investment projects, there is always the issue of whether it was properly chosen.
What if by some chance that pipeline never starts working? The same issue exists with roads. When investments and construction take place, it has a momentary effect on GDP growth, someone earns a salary, and someone makes a profit. But in order for these projects to pay off, they need to permanently increase GDP and even tax revenues, because this is how the state pays for such projects. However, this is not assured.
When one-off effects are excluded, what remain are industry, services, and foreign trade. This year imports are growing slightly faster than exports, having a negative contribution to GDP growth. Industry is not showing much growth this year. The service sector remains, prompted by the exchange rate being fixed for quite some time. Such an exchange rate encourages both exchangeable and non-exchangeable services. For example, it encourages foreign tourist spending in Serbia. In other words, there is a potential growth rate of about three percent with little likelihood of accelerating, on the one hand, and one-off changes that contribute in one year, but have an effect on the decline in growth in the following year, on the other.
The World Bank recently presented a report that demonstrates how Serbia can achieve long-term annual growth rates of seven percent. What is your opinion on that?
You can always say why an economy doesn’t grow seven or eight or, why not, 10 percent. But if this is a country lagging in development, such as Serbia, since it has been regressing for 30 years, then someone calculates at what speed you could reach a similar country, such as Austria. You can have such growth rates as well, but that happens in a model or an equation, almost never in reality.
With a proper economic policy Serbia could probably reach a potential GDP growth of 4 percent, and that would be on the basis of investment in capital and education, that is, an increase in labour productivity.
Given that, in order to get closer to the EU standard, it is necessary that we have a high growth rate, but also that it continues for ten or twenty years, is long-term prosperity of Serbia as a European country possible, in a situation where corruption is increasing and there is no rule of law, with an ever growing state control of the media?
I wouldn’t know to what extent Serbia is a European country, and here I do not mean geographically. All these institutional circumstances certainly have an impact, but there are two other problems here. The corporate sector in Serbia has very limited investment opportunities. Serbia relies heavily on public and foreign investment, while private investment is far lower. Now, one argument is that corruption limits entrepreneurial behaviour and investment, and the other is that the corporate sector has been in financial problems since 2008 until today. We had very high uncollectible accounts and only now has this been reduced to a level relatively normal for a country like Serbia.
There is no domestic investment, and there are no domestic savings. The share of domestic savings in GDP is very small. The essence of the Serbian economic system is that the population consumes and the foreigners invest. It is a model for living from day to day. That problem is far more important in my opinion. Another issue is the public investment orientation. It is necessary, the country is in a ruined condition, but look at how entrepreneurs and people in Serbia in general are coping. The service sector is growing, but there are plenty of people out there working informally.
If you are in the informal sector, you have major constraints on growth. You don’t pay taxes, so you cannot advertise yourself, you cannot use financing. The rule of law is important for making the life of citizens easier, but I believe that low savings and the informal economy have a considerable impact on insufficient private investment.
Why aren’t we saving? Is the problem in psychology or is it because we are poor?
Economically, there is a high discount rate on future spending. There is existential insecurity, political insecurity, and even legal insecurity, and this affects people’s behaviour. All this is independent of corruption. Corruption is, after all, the way we solve problems. We buy services that should not be sold, but are still being sold. In a flawed system, corruption brings stability. You know that if you pay, you will get a license or a health service.
This uncertainty is partly being spread by the authorities themselves through constant propaganda and the narrative of state of emergency, attacks from domestic, foreign, and neighbouring enemies. And the experience of the last 30 years, where attempting to change for the better failed, is not helpful. We have a history of defeat, which is why people do not expect to live better in the next year or in the years that follow. It has nothing to do with poverty. China was an extremely poor country, but the domestic savings rate was about 40 percent of GDP. A system that had neither social security nor health insurance forced people to save.
In our country, people save mostly to send their children abroad. When you look at the saving habits of our people who go abroad and those who are in Serbia, you see a huge difference. Our people who go abroad and even work illegally save a great deal. They save to continue living there tomorrow, but also to send to their folks at home. A considerable number of people in Serbia live from these remittances. It is not about poverty and psychological inclination, it is about living in a system that has been a generator of uncertainty about our future for 30 years. In such a system you live for today.
If we look back at the last twenty years, there was a period of growing democracy that ended economically with a major crisis. It seems that after that democracy starts to narrow, while authoritarianism is strengthening. Is democracy an obstacle to the economy in Serbia or is a (weak) economy an obstacle to democracy?
When you look at the period from 2001 to 2008-09, when the economic crisis hit, you cannot say that it was a period of stable democracy. There was the assassination of the Prime Minister and the effect it had on the economy in that and the following year was not insignificant. The democracy that came after that was debatable, as it was fuelled by nationalist politics, while relying on Russia. Part of that was the selling of NIS. It was a pretty volatile period. Even earlier, in the 1970s or 1960s, whenever the country was volatile, there was an economic policy in place that was looking to appease the public.
Between 2001 and 2008 there was a consumption stimulation through a fixed exchange rate. With the fixed exchange rate, we had a large foreign trade deficit. In the 1990s, there were no loans, and after the year 2000 people started taking loans to buy consumer goods, cars, stoves, refrigerators, all from imports, because it was not profitable to produce them here with that foreign exchange rate. Even before the breakup of Yugoslavia there was buying of peace. Later, until 2012, and after that, economic policy was merely to keep everything from falling apart. Since 2015, the policy has been reduced to subsidizing investments and saving on salaries and pensions.
The effect is that people spend less and more is exported, but it does not promise the high growth we talked about. So there is a connection between democracy and growth. The other side of the coin is that there is a political need. The political entrepreneurs, founders of political parties, who run for office, etc., have a need to maintain this degree of instability and uncertainty, because it is in line with authoritarian tendencies. Especially those currently in power. People will always prefer stability over change. Politicians have an incentive to create crises and uncertainty and then say they are the ones who keep everything from falling apart. And authoritarianism, not only here, but in all countries, goes hand in hand with corruption, because there is no control.
But we see these authoritarian trends throughout the world, in the US, both in Western and Eastern Europe. What is your opinion on what is happening with the EU? Brexit, the coming to power of Eurosceptics in European countries?
Populism in the US and Britain is a different matter from populism in Eastern Europe, say Poland and Hungary. In both cases it is demagoguery. In Britain, they actually trust politicians. When the system works well for a long time, people trust it, and they need time to understand that politicians in power are lying to them when talking about how much the EU costs them, that Britain is a vassal state, etc. In the US, most people are not interested in politics, and although they know, of course, that politicians act in their own interest, they have a certain degree of trust for the same reason, as the system has been functioning for 200 years. Then demagoguery succeeds, and the question arises as to whether institutions will succeed in sustaining themselves under demagogic attack. I believe they will, because this is not the first time, and they have managed to resist.
In authoritarian regimes such as Hungary or Poland, there is an open ‘us vs. them’ attitude, where religious or ideological differences are played upon, as for example, immigrants or atheists as opposed to the native population and traditional values. This is where a tendency to establish a one-party system exists. There is no one-party state in the making in the West, no denial of the rule of law, only an attempt to turn the law in one’s favour. Their problem is that they are EU members, and over time they will not be able to avoid the forming of an opposition that will oust them.
Translated by Ivan Obradovic