Report No. 29258-YU Report No. 29258-YU Serbia and Montenegro Republic of Serbia An Agenda for Economic Growth and Employment Public Disclosure Authorized Public Disclosure Authorized December 6, 2004 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Serbia and Montenegr Public Disclosure Authorized Public Disclosure Authorized oAgenda for Economic Gr An Public Disclosure Authorized Public Disclosure Authorized owth and Employment owth Document of the World Bank Public Disclosure Authorized Public Disclosure Authorized CONTENTS ACKNOWLEDGEMENTS .......................................................................................................... v EXECUTIVE SUMMARY ......................................................................................................... vi 1 INTRODUCTION.................................................................................................................... 1 2 ENSURING A CONDUCIVE MACROECONOMIC ENVIRONMENT FOR SUSTAINABLE GROWTH ................................................................................................... 4 A . INTRODUCTION................................................................................................................................. 4 B. RECENTREFORM PROGRESS AND ECONOMICDEVELOPMENTS .................................................. 5 The Legacy ofthe Past .......................................................................................................................... 5 Policy Response and Donor Support during 2001-03 ........................................................................... 6 Key Achievements to Date ................................................................................................................... 7 Key Impediments to Sustainable Growth ........................................................................................... 10 c . MAIN MACROECONOMICPOLICY PRIORITIES FOR GROWTH................................................... 15 D. MEDIUM-TERMOUTLOOK: AN OVERVIEW OF TWO ILLUSTRATIVE SCENARIOS..................... 23 3 INTERNATIONAL TRADE AND REGIONAL INTEGRATION.................................. 28 A . INTERNATIONAL TRADEAND GROWTH:THEORY AND EXPERIENCE........................................ 28 B. TRADEPOLICY AND PERFORMANCE:1990-2003 ......................................................................... 29 The Legacy ofthe Past ........................................................................................................................ 29 Recent Reforms during 2001-03 ......................................................................................................... 30 Recent Trade and Export Performance ............................................................................................... 32 c . KEY CONSTRAINTS TO EXPORTGROWTH ................................................................................... 40 Macro-Structural and Supply Constraints ........................................................................................... 40 Trade Policies ..................................................................................................................................... 41 Institutions Supporting Exports .......................................................................................................... 43 Foreign Direct Investment (FDI) ........................................................................................................ 49 D. TRADEINTEGRATION: MAXIMIZINGOPPORTUNITIES FOR LONG-TERMGROWTH. ................ 51 The European and Regional Dimension ............................................................................................. 53 The Network ofFree Trade Agreements: Maximizing the Benefits ofIntegration ............................ 56 E. CONCLUSION AND RECOMMENDATION ........................................................................................ 59 4 PRIVATE AND FINANCIAL SECTOR REFORM .......................................................... 62 A . INTRODUCTION............................................................................................................................... 62 B. ENTERPRISESECTOR ..................................................................................................................... 63 Legacy ofthe 1990s and Progress to Date .......................................................................................... 63 Remaining Challenges ........................................................................................................................ 65 Short to Medium-term Reform Agenda .............................................................................................. 66 C . BUSINESSENABLING ENVIRONMENT ............................................................................................ 72 Legacy ofthe 1990s and Progress to Date .......................................................................................... 72 Remaining Challenges ........................................................................................................................ 73 Short to Medium-term Reform Agenda .............................................................................................. 75 D. FINANCIALSECTOR ....................................................................................................................... 80 Legacy ofthe 1990s and Progress to Date .......................................................................................... 80 Remaining Challenges ........................................................................................................................ 82 Short to Medium-Term Reform Agenda ............................................................................................ 84 E. KEYPOLICY RECOMMENDATIONS............................................................................................... 88 5 LABOR MARKETS .............................................................................................................. 91 A . LABORMARKETS, GROWTH AND EMPLOYMENT........................................................................ 91 B. LABORMARKET PERFORMANCE IN SERBIA ................................................................................ 92 Participation and Employment ............................................................................................................ 93 Unemployment ................................................................................................................................... 96 Wage Dynamics ................................................................................................................................ 100 Labor Force Flows ............................................................................................................................ 101 &“nry of Labor Market Characteristics....................................................................................... 103 C . KEY CHALLENGES....................................................................................................................... 105 Improving the Functioning of the Formal Labor Market.................................................................. 105 Age and Labor Market Performance ................................................................................................ 111 Macroeconomic Policy and Labor Market Performance .................................................................. 112 Private Sector Development and Labor Market Performance .......................................................... 112 Education and Labor Market Performance ....................................................................................... 112 6 EDUCATION AND TRAINING ........................................................................................ 116 A . INTRODUCTION ............................................................................................................................. 116 B. SERBIA’S TRADE PATTERNS AND LABORMARKET PERFORMANCE ........................................ 116 c . POLICY PERSPECTIVES ON THE LINKBETWEEN EDUCATIONAND THE LABORMARKET ...... 117 D. PERFORMANCE OF THE EDUCATIONAND TRAINING SYSTEM .................................................. 118 E. A REFORM AGENDAFOR SERBIA’S EDUCATIONAND TRAINING SYSTEM ............................... 123 F. THECOST OF REFORM................................................................................................................. 127 G . CONCLUSION................................................................................................................................ 130 REFERENCES ........................................................................................................................... 132 LIST OF BOXES Box 2.1 Serbia’s Progress in Key Reform Areas Relative to Selected Countries in the Region Box 2.2 Economic Implications ofWorkers’ Remittances Box 2.3 Structural Reforms. Savings. and the Current Account Deficit Box 2.4 Key Aspects ofPublic Administration Reform Box 2.5 On the Potential Growth Rate ofthe Serbian Economy Box 3.1 The Puzzle ofTrade Statistics in SaM Box 3.2 What Makes for a Good Trade/Export Promotion Organization (TPO) Box 3.3 Is Infrastructure an Impediment to Growth? Box 4.1 The Informal Economy Box 4.2 Privatization: The Lessons ofTransition Box 4.3 Approaches to Debt Workout Box 4.4 PICS and BEEPS I1 Box 4.5 Present Structure ofthe Serbian