Report No. 65845-YF Republic of Serbia Report No. 65845-YF Republic of Serbia The Road to Prosperity: Productivity and Exports Country Economic Memorandum Public Disclosure Authorized (In Two Volumes) Volume II: Main Report January 17, 2012 Poverty Reduction and Economic Management Unit Europe and Central Asia Region Public Disclosure Authorized The Road to Prosperity: Productivity and Exports Productivity Road to Prosperity: The Public Disclosure Authorized Vol. II Vol. Document of the World Bank Public Disclosure Authorized CURRENCY AND EQUIVALENT UNITS Currency Unit = RSD (Serbian dinar) US$1 = RSD 74.35 (As of November 8, 2011) FISCAL YEAR January 1 – December 31 ACRONYMS AND ABBREVIATIONS ALMP Active labor market program NBS National Bank of Serbia ATPs Autonomous trade preferences NQI National Quality Infrastructure BEEPS Business Environment and PISA Program for International Student Enterprise Performance Survey Assessment CEEC Central and Eastern Europe QMS Quality Management System countries EBRD European Bank for SAA Stabilization and Association Agreement Reconstruction and Development ECA Europe and Central Asia SIEPA Serbia Investment and Export Promotion Agency EU European Union SMEs Small and medium-sized enterprises EPS Electric Power Industry of SEE South Eastern Europe Serbia FDI Foreign direct investment SOE Socially-owned enterprises FTA Free trade agreement TFP Total factor productivity GDP Gross domestic product TTFSE Trade and Transport Facilitation in South Eastern Europe ICA Investment Climate Assessment UB Unemployment benefits ICT Information and ULC Unit Labor Cost Communication Technology LFS Labor Force Survey US$ US Dollar LLL Lifelong Learning VAT Value-added tax NES National Employment Service WTO World Trade Organization Vice President: Philippe H. Le Houérou, ECAVP Country Director: Jane Armitage, ECCU4 Sector Director: Yvonne Tsikata, ECSPE Sector Manager: Satu Kähkönen, ECSPE Task Team Leaders: Lazar Šestović, ECSPE Peter Miović, STC Table of Contents EXECUTIVE SUMMARY ....................................................................................................... 1 INTRODUCTION ................................................................................................................... 11 1. GROWTH PERFORMANCE AND STRUCTURAL REFORMS ................................. 13 1.1. Macroeconomic Environment ................................................................................. 13 1.1.1. Introduction ..................................................................................................... 13 1.1.2. Serbia’s Pre-crisis Growth ............................................................................... 14 1.1.3. Carry on or Speed up? ..................................................................................... 18 1.1.4. The Medium-term Outlook: Two Illustrative Scenarios ................................. 19 1.2. Structural Reforms: How to Achieve the Export “Push”?....................................... 23 2. EXPORT OPPORTUNITIES AND REVEALED COMPARATIVE ADVANTAGES 29 2.1. Trade Performance and Trade Policy ...................................................................... 29 2.1.1. Introduction ..................................................................................................... 29 2.1.2. The Structure of Serbia’s Trade....................................................................... 30 2.1.3. Trade Policy..................................................................................................... 33 2.2. Expanding Export Potential: What Products Could Serbia Produce? ..................... 35 2.2.1. Introduction – What exports could Serbia develop? ........................................ 35 2.2.2. The Structure of Serbian Exports .................................................................... 36 2.2.3. Case Studies of Select Industries ..................................................................... 42 2.2.4. Conclusion ....................................................................................................... 51 Annex 2.1: The Product-Space Methodology ................................................................. 53 Annex 2.2: Classification of Products According to RCA .............................................. 56 Annex 2.3: Serbia’s Position in the Product Space ......................................................... 59 Annex 2.4: Serbian exports and revealed comparative advantage .................................. 63 2.3. Industry .................................................................................................................... 65 2.3.1. Introduction ..................................................................................................... 65 2.3.2. An Overview of the Enterprise Sector in Serbia ............................................. 67 2.3.3. Trends in the Manufacturing Sector ................................................................ 69 2.3.4. The Competitiveness of the Metals and Automotive Industries ...................... 71 2.3.5. Metals Industry ................................................................................................ 72 2.3.6. The Automotive Industry ................................................................................ 84 2.3.7. Synergies Between the Metals and Automotive Sectors ................................. 92 2.3.8. Policy Recommendations ................................................................................ 93 Annex 2.5: A New Role for Industrial Policy? Insights from Recent Research ............. 95 2.4. Agriculture ............................................................................................................... 97 2.4.1. Introduction ..................................................................................................... 97 2.4.2. Structural Challenges to Serbia’s Agro-food Trade ........................................ 99 2.4.3. Evaluation of Serbia's Agricultural Policy Response .................................... 105 2.4.4. Policy Recommendations .............................................................................. 121 3. MAJOR IMPEDIMENTS TO EXPORT-LED GROWTH ........................................... 123 i 3.1. Creating a Business Environment that is a Catalyst of Export-Led Growth ......... 123 3.1.1. Introduction ................................................................................................... 123 3.1.2. Recent Changes in the Business Environment .............................................. 124 3.1.3. How does Serbia’s business environment compare ....................................... 126 3.1.4. Regulatory Reform and Administrative Procedures ...................................... 130 3.1.5. Reducing the Negative Impact of Inspections ............................................... 132 3.1.6. Serbia’s National Quality Infrastructure as a Catalyst for Trade................... 135 3.2.1. Policy Recommendations .............................................................................. 140 Annex 3.1: Overview of Econometric Analysis Methodology ..................................... 142 3.3. Skills ...................................................................................................................... 145 3.3.1. Introduction ................................................................................................... 145 3.3.2. Labor Market Challenges and Skills Needs .................................................. 146 3.3.3. Education and Training System Performance ............................................... 151 3.3.4. Active Labor Market Policies ........................................................................ 162 3.3.5. Policy Recommendations .............................................................................. 166 3.4. The Energy Sector ................................................................................................. 169 3.4.1. Introduction ................................................................................................... 169 3.4.2. Sector Overview ............................................................................................ 170 3.5.1. The Unfinished Reform Agenda.................................................................... 176 3.5.2. Financial and Commercial Viability .............................................................. 176 3.5.3. The Potential Demand Response ................................................................... 182 3.5.4. Policy Recommendations .............................................................................. 185 3.6. Land ....................................................................................................................... 187 3.6.1. Introduction ................................................................................................... 187 3.6.2. Property Rights .............................................................................................. 189 3.6.3. Land Management ......................................................................................... 191 3.6.4. Institutions ..................................................................................................... 198 3.6.5. Policy Recommendations .............................................................................. 202 3.7. Trade Facilitation: Customs, Logistics and Transport ........................................... 205 3.7.1. Introduction ..................................................................................................