69369 Report No. March 25, 2010 Public Disclosure Authorized Policy Note Mapping Serbia’s Growth Public Disclosure Authorized Public Disclosure Authorized The World Bank Poverty Reduction and Economic Management Unit Europe and Central Asia Region Public Disclosure Authorized Table of Contents Abstract ........................................................................................................................................... 1 1. The context: Motivation for this Note ........................................................................................ 2 1.a. The key findings of the 2009 World Development Report .................................................. 2 1.b. The Serbian Context ............................................................................................................. 4 2. Geography of Serbia’s growth .................................................................................................... 6 2.a. Spatial Concentration of Growth .......................................................................................... 6 2.b. Spatial Concentration of Economy ...................................................................................... 9 2.c. Spatial Concentration of Sectors ........................................................................................ 11 2.d. Spatial Concentration in the Labor Market ........................................................................ 11 3. Concentration of Capital and Industrial Specialization ............................................................ 12 3.a. Privatization ........................................................................................................................ 12 3.b. Foreign Direct Investments ................................................................................................ 13 3.c. Infrastructure ...................................................................................................................... 14 3.d. Foreign Trade Patterns and Growth Concentration............................................................ 16 4. Impact on the living standards .................................................................................................. 17 4.a. Wages ................................................................................................................................. 17 4.b. Migrations of Labor ........................................................................................................... 19 4.c. Other Factors ...................................................................................................................... 23 4.d. Overall Disparities in Social Outcomes ............................................................................. 23 5. Conclusions ............................................................................................................................... 27 Annexes......................................................................................................................................... 30 Annex 1: Data Issues ................................................................................................................. 31 Annex 2: FDI by Municipality and by Sector, EUR million, cumulative 2001-2008 .............. 32 References ..................................................................................................................................... 34 Abstract Big cities are becoming even bigger and these have been and will be the key drivers of economic growth in Serbia. Belgrade, Novi Sad, Niš and Kragujevac, Serbia’s four largest cities contributed to about 60 percent of the increase of value added in the economy over the period 2001-2008. These four largest cities in 2008 accounted for about two thirds of country’s economy. Spatial characteristics of foreign direct investments inflow, privatization process and location of export oriented sectors, indicate significant concentration. FDI and privatization were attracted by largest cities, though the proximity to the key transit routes, like Corridor 10, is also important for making decision where to invest. Export is concentrated in several places, depending on the type of production, and proximity of major export markets contributed to concentration of export near the borders of the EU (i.e., Hungary) and Bosnia and Herzegovina, the second most important export market for Serbia. Spatially uneven growth caused differences in living standards. Wages did not play significant role, as migrations did in adjusting differences in economic development among regions. Living standards are lowest in southern Serbia which has on average negative growth rates over this period and where both unemployment and poverty are highest. The last section of the report discusses some of the possible options for policy makers as response to spatially biased growth. * * * This Note has been prepared by Lazar Šestović, Economist, ECSP2, with significant input from Somik Lall, Senior Economist, FEU, and support with data collection, analysis and presentation from Vladan Božanić (consultant) and Galen Burr Evans (FEU). Author is grateful to Jane Armitage for overall guidance as well as to Bernard Funck, Simon Gray, Marina Wes and Ronald Hood for comments and suggestions received, and finally to Hermina Vuković-Tasić, for the assistance with formatting the document. 1 1. The context: Motivation for this Note 1.a. The key findings of the 2009 World Development Report The World Development Report (WDR) 2009: Reshaping Economic Geography argues that growing cities, migration, and trade have been the main catalysts of progress in the developed world over the past two centuries. Namely, analysis of the growth within most developed countries from North America, Western Europe, and Northeast Asia shows that growing cities, ever more mobile people, and increasingly specialized products are integral to development. The fastest growing countries were those which promoted transformations along the three dimensions of economic geography: 1. higher densities, as seen in the growth of cities and concentration of economic activity; 2. shorter distances, as workers and businesses migrate closer to density which then represents concentration of factors of production; and 3. fewer divisions, as countries reduce economic barriers to trade and transport and enter world markets thereby taking advantage of scale and specialization. These changes are also noticeable in fastest growing emerging markets economies of East and South Asia and Eastern Europe. The WDR concludes that such transformations will remain essential for economic success in other parts of the developing world and should be encouraged by government policies. Therefore WDR’s main message is that economic growth may necessarily be geographically uneven. To try to spread economic activity evenly across the country is to discourage it. But development can still be inclusive, in that even people who start their lives far away from economic opportunity can benefit from the growing concentration of wealth in a few other places or regions within the country. In fact, this should be one of the governments priorities – how to ensure participation in growth benefits to all of its citizens. The best way to get both the benefits of uneven growth and inclusive development is through economic integration of leading and lagging regions. This should be the key challenge for the policy makers: how to integrate all the regions within the country. One of the options is promotion of within country migration to reduce the distance of the people from the lagging regions to places with economic opportunity. In contrast to that, the report finds that spatially targeted interventions have limited success in broadening the participation in growth. Besides place-based incentives, governments have far more potent instruments for integration. They can build institutions that unify all places and put in place infrastructure that connects some places to others. The WDR actually calls for rebalancing these policy discussions to include all the instruments of integration – institutions that unify, infrastructure that connects, and interventions that target. And it shows how to use the three dimensions of density, distance, and division to tailor the use of these policy instruments to address integration challenges. Other transition countries follow this pattern of geographically concentrated economic growth. Recent work on the EU New Member States1 shows that there was significant concentration of economic activity around the countries’ capitals or in one or two more cities (as it is the case in bigger countries, like Poland for instance). Graph 1 portrays Central and Eastern 1 This has been done under the World Bank report “EU10 Regular Economic Report”, February 2009 2 Europe’s economic topography which indicates that this area is not “flat”. Rather we see that practically each of the countries has one or two “peaks” and several “hills” indicating places with higher economic density (as measured by GDP per square kilometer). This report also shows that the six most unequal countries in terms of the spatial dispersion of GDP per capita levels are Latvia, Estonia, Hungary, the Slovak Republic, Bulgaria and Romania. Further, the economies which have grown fastest in the EU over the period 2001-2005, i.e., the most successful of the Eastern European economies, are also those which have experienced the largest increases