ArticlePDF Available

Yoji Koyama (2018),Challenges Facing the Western Balkans after the GFC



This a manuscript for Chapter 4 Balkans of a book Steven Rosefielde (ed.)(2018), The Unwinding of the Globalist Dream: EU, Russia and China
Challenges facing the Western Balkans after the Global Financial
Crisis: Focus on Serbia
[The title was changed. This is the original manuscript for Chapter 4 Balkans of a book Steven
Rosefielde, et al (eds.) (2018), The Unwinding of the Globalist Dream: EU, Russia and China. Y.K. :
Feb. 21, 2019]
Yoji Koyama
1. Introduction
The Western Balkans is a region consisting of Albania and successor countries of the
former Yugoslavia except Slovenia and Croatia. Although Croatia was excluded from
the grouping of the Western Balkans when it was admitted to the European Union (EU)
in July 2013, it is discussed for comparison in this chapter. As there were ethnic
conflicts in former Yugoslav Republics in the 1990s, this region has been instable.
Reflecting such unstable situations in the region, the amount of FDI inflow has been far
less than Central Europe and the Baltic States. Frankly speaking, in the 1990s the EU
had no options to deal with problems in the Western Balkans. The Kosovo problem
became increasingly serious, leading to the Kosovo war in 1999. Finally only at that
time, urged by the USA the EU launched an active policy for the Western Balkans. In
1999 Stability Pact for South Eastern Europe was concluded by EU member states, the
USA, neighboring countries in Europe and international organizations. When the
Kosovo War ended in mid-1999 the Stabilization and Association Process (SAP)
started. Stabilization and Association Agreement corresponds to the European
Agreement for Countries in Central and Eastern Europe (CEE). Instead of strengthening
its cooperation vis-à-vis individual candidate countries, SAP adopts a “regional
approach” in which the EU encourages regional cooperation among neighboring
countries and their development with the Western Balkans as a regional unit.
In the 21 century, in a series of its documents the EU gave the Western Balkan
countries a message that if these countries make continuous efforts toward reforms
eventually they would be able to join the EU. For example, the European Council in
Brussels in March 2003 states, “The future of the Western Balkans is within the EU”
(European Commission, 2003a). Also the European Commission states that the
unification of Europe will not be completed until these countries join the European
Union (European Commission, 2003b). At present Macedonia1, Serbia, Montenegro and
Albania2 are EU Candidates. Among them Montenegro and Serbia began accession
negotiations with European Commission in June 2013 and in January 2014 respectively.
Bosnia and Kosovo3 are potential Candidates.
Currently, in addition to “enlargement fatigue” the EU faces some serious problems
like a refugee problem and Brexit. It seems that the EU cannot afford to accept any new
member state. However, the Western Balkans is as it were “a backyard” for the EU, and
if the region is left in a state of being poor, it would remain a hotbed of organized crime
and a route for drug smuggling and human trafficking, threatening the stability of the
EU itself. Therefore, for mainly political reasons the EU will be obliged to deal with the
Western Balkans’ European integration. After the UK’s EU referendum turned out
Brexit, Federica Mogherini, the High Representative of the Union for Foreign Policy
and Security Affairs, was reported to said “we are determined to implement the
enlargement procedure as before” (Asahi Shimbun, July 6, 2016).
This chapter considers challenges facing the Western Balkans after the global
financial Crisis. To begin with, an overview of the Western Balkans is given and
necessity for switch-over of their economic development model is discussed. Then,
taking Serbia’s case for example, the current situation is examined more concretely and
the necessity for industrial policy stressed. Finally the paper reaches some conclusion.
2. Overview of the Western Balkans
  All countries in the Western Balkans are small. Aside from Croatia, which is an upper
middle-income country, they are all poor. Their economies heavily depend on foreign
funds including remittances from expatriates. The unemployment in these countries is
extremely high, recording a double-digit inflation rates (see Table 1). Reflecting the
history, the region lacks cohesion.
World population is rapidly increasing, whereas in South Eastern Europe its
population is decreasing (see Table 2). During the period 1989-2007 due to fierce ethnic
conflicts the case of Bosnia was striking with population decreasing at an annual rate of
1.25. In spite of the absence of ethnic conflicts, in Albania the population was
decreasing at an annual rate of 0.75%. In the rest of the Western Balkans the population
decrease has been also substantial due to emigration related to wars in this region and
subsequent economic difficulties.
1 For Macedonia More in detail, see Chapter 7 of Koyama (2015).
2 For Albania more in detail, see Chapter 8 of Koyama (2015).
3 For Kosovo more in detail, see Chapter 3 of Koyama (2015).
Table 1 Basic Indicators of the West Balkan Countries
rate (%) 2015
from abroad
(% of GDP)
National currencies
Croatia 57 4,220 10,400 16.6 2.9 Kuna
Macedonia 26 2,080 4,400 27.0 4.3 Denar
14 625 5,800 18.0 13.6** Euro
Serbia 88 7,040 4,700 17.0 Dinar
Bosnia 51 3,820 3,700 27.7 17.6 Convertible Mark (KM)
Albania 29 2,889 3,600 17.0 14.9 Lek
Kosovo 11 1,830 3,200 34.0 14.3*** Euro
Source: Forecast Report, Spring 2016, wiiw.
*World Bank (2010), p. 59; **Data for Serbia and Montenegro; *** As of 2007, IMF (2013), Country Report
Table 2 Population Dynamics in South Eastern Europe 1985-2005 (thousand people)
of outflow
[2:1][1] [2] [3] [2-3]
South Eastern Europe      
A) Western Balkans 25,775 5,727 818 4,909 22.6
Albania 3,563 860 83 777 24.1
Bosnia and Herzegovina 4,430 1,472 41 1,431 33.2
Croatia 4,442 726 661 65 16.3
Macedonia 2,045 371 121 250 18.1
Serbia and Montenegro 10,829 2,298 512 1,786 21.2
B) EU Member States  
Bulgaria 7,450 937 104 833 12.6
Romania 22,330 1,244 133 1,111 5.6
Slovenia 2,011 134 167 -33 6.7
Source: Jovancevic (2009), p. 19.
Suppose GDP level in 1989 being 100, it is only in Bosnia and Serbia that even in 2015
countries’ GDP have not recovered the 1989 level. In addition to the transformational
depression, Bosnia and Serbia suffered damages from ethnic conflicts in the first half of
the 1990s. Reflecting such tragic incidents, economic activities of these two countries
declined considerably. Serbia suffered severe damage from the Kosovo war in 1999,
causing another decline in the economic activities (see Figure 1). Serbia’s GDP in 2015
is still only 76.6, which is below the level of Bosnia (79.0).
Figure 1 Changes in Real GDP Growth in the Western Balkans
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Albania Bosnia
Croatia Macedonia
Source: Extrapolated by the author based on data in Transition Report, various issues.
Note: Montenegro is omitted in this figure because together with Serbia it consisted of a country (Federal
Republic of Yugoslavia in 1992-2003 and Serbia and Montenegro in 2003-2006) until 2006.
Table 3 Banking Sector in the Western Balkans
credit to
private sector
credit to
The share of
banks in total
asset (%)
Loan to
deposit ratio
(% of GDP) (% of GDP) (% GDP)
Albania 35.3 13.2 91 93.6 65.1
Bosnia and Herzegovina 53.5 27.2 87.2 95 118.3
Croatia 67.4 37.1 122 90 129.1
Macedonia 43.9 15.5 77.8 93.1 98.4
Montenegro 87.2 31.5 113.8 84.5 122.6
Serbia 39.7 13.9 67.9 75.3 130.6
Source: Country Report, 8 February 2010, UniCredit Group, p. 4.
From the second half of the 1990s to the early 2000 foreign banks mostly Greek,
Italian and Austrian advanced to this region where local banks were in financial
difficulties. The presence of foreign banks in the region is remarkable. As of early 2010
the share of banks controlled by foreign capital in total assets ranged from 75.3% in
Serbia to 95.0% in Bosnia (see Table 3). As interest rates for euro-denominated loans
have been cheaper than those for national currency-denominated loans, euro-
denominated loans have become widespread in the region and at the same time deposits
in euro have also increased. Therefore, it said that their economies have become euro-
ized. These banks gave loans actively to households and enterprises, contributing to the
economic development.
We are concerned about very low export-to-import ratio in foreign trade of the
Western Balkan countries. It means low export ability and low international
competitiveness. The worst case is Montenegro where exports of goods have been only
one-fourth of imports of goods. These countries have had chronic trade and current
account deficits (Table 4). A huge current account deficit in Montenegro has been
covered by a huge amount of FDI inflow, but it would fall into difficulties once FDI
inflow sharply decreased. As for Croatia, after negative economic growth for 6
consecutive years since 2009, it turned to positive economic growth only 2015. During
the period of the negative economic growth its current account deficit continued to
decrease and the current account balance turned positive in recent years. However, as
long as its industrial structure remains unchanged, it is likely that country will fall into a
critical situation (a second Greece)4. Not to mention other Western Balkan countries.
Table 4 Current Account Balances in South Eastern Europe (% of GDP)
 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Albania -8.1 -5.5 -7.6 -6.6 -10.6 -14.7 -15.3 -11.5 -13.0 -10.2 -10.6 -13.5
Bosnia -17.3 -16.4 -18.1 -7.9 -10.4 -14.9 -6.3 -6.2 -9.6 -9.2 -5.9 -9.0
Croatia -7.2 -5.4 -6.6 -6.9 -7.6 -9.2 -5.1 -1.1 -0.8 -0.1 0.8 0.5
Macedonia -3.2 -7.7 -1.4 -0.5 -7.3 -13.0 -6.8 -2.0 -2.5 -2.9 -1.8 -2.0
Serbia -7.2 -9.7 -7.5 -10.0 -15.6 -17.7 -7.2 -7.4 -9.1 -11.5 -6.1 -5.9
Montenegro n.a. n.a. n.a. -24.7 -24.0 -32.0 -27.9 -22.9 -17.7 -18.7 -14.6 -20.0
Bulgaria -5.5 -5.8 -11.3 -18.4 -25.2 -25.4 -8.9 -1.5 0.1 -1.1 3.0 1.9
Romania -6.0 -7.5 -8.8 -10.5 -13.4 -11.6 -4.2 -4.4 -4.6 -4.5 -0.8 -0.5
4 For the Croatian economy, see Chapter 5 of Koyama (2015) and Chapter 8 of Koyama (2016).
Source: For the period 2000-2005, World Bank (2008), p. 13; For the period 2006-2008, Gligorov,
et al (2010), and for the period 2009-2011, Gligorov, et al (2013).
The Western Balkans except Albania and Kosovo were hit hard by the 2008 global
financial crisis. The reasons for Albania and Kosovo being the exception are as follows:
after a long-lasting policy of national isolation Albania turned to an open-door policy in
the early 1990. As it is not very long since then the country, albeit a small country, has
smaller dependency of foreign trade. Even though foreign-owned banks advanced to
this country in the 1990s and it came to have linkage with the world of international
finance, it has been relatively insulated from the international finance. As for Kosovo, it
was part of the Republic of Serbia in the former Yugoslavia for a long time. It is not
very long since its independence, and therefore it has smaller dependency of foreign
Small countries usually have high dependency of foreign trade, but in the case of the
Western Balkan countries their dependency of foreign trade has been low. In order to
promote economic development it is necessary for them to enhance foreign trade, and
they have enough room to increase foreign trade. Reflecting the history of the Balkans
with repeated conflicts, the amount of regional foreign trade has so far been smaller.
Each country tended to skip neighboring countries and have close economic relation
directly with EU member states. In 2000 the government of Western Balkan countries
concluded bilateral free trade agreements one another, but it proved ineffective in
increasing the regional trade. In 2006 governments of Western Balkan countries agreed
to use CEFTA, the framework for free trade which Central European countries used
until their EU accession, and established CEFTA-2006. The new framework was
intended to remove all tariff and non-tariff barriers to foreign trade and realize foreign
trade liberalization of both agricultural and non-agricultural goods, services and
investment by the end of 2010 (Kikerkova, 2014). This has contributed to modest
increase in the regional foreign trade, but it has not brought remarkable results as
To sum up, the Western Balkans countries face the following challenges: Since mid-
1999 this region has been gradually stabilized, and seemingly their economies has been
developing. FDI went mainly to services and only a smaller portion of FDI went to
manufacturing industry, especially production of tradable. Consequently, the
international competitiveness of their economies has not enhanced. Their economic
growth was led by consumption heavily financed by the foreign borrowings, which
foreign-owned banks actively facilitated. As a result, their trade balances and current
account balances have recorded chronic deficits. These external deficits have been
covered by FDI inflow. Therefore, their economies have become very vulnerable to
changes in external environment. When the global financial crisis broke out in 2008
their economies faced sharp output decline and the severe disruption of financing flows.
Hence, these countries have the necessity for conversion of the economic development
3. Challenges facing Serbia
Privatization and Foreign Direct Investment
From the period of self-managed socialism the Serbian economy has inherited a
tendency of strong dependence of imports. It is quite important for the economy to
overcome this tendency and increase exports. Therefore, the country is required to
improve its international competitiveness. In order to attain rapid economic
development this country keenly needs FDI inflows.
Until 2001 FDI inflows were negligible. In spite of an early start of the transition to a
market economy in 1990 it was not successful due to very difficult situation in the
1990s. Only after the collapse of the Milosevic regime in October 2000 Serbia
embarked on transition to a market economy and the European integration with 10
years’ lag. In parallel with full-fledged privatization, the amount of FDI inflows
increased since 2002. In Serbia there were three waves of privatization: The first wave
was the privatization implemented from 1990 through 1994, which gave priority to
insiders (employees and managers in enterprises). It proved utterly unsuccessful due to
ethnic conflicts deriving from a breakup of the Federation and UN sanctions as well as
hyperinflation. The second wave was the privatization starting in 1996. The law on
privatization enacted in 1996 schemed at spontaneous privatization and gave priority to
insiders. In fact, however, there was substantially no progress until the collapse of
Milosevic regime, and only after the collapse of the regime in October 2000 through
February 2001 the privatization was hurriedly implemented. As the sale of the state-
owned enterprises’ share brought very limited amount of proceeds to the government,
the law on privatization was soon abolished. The third wave was the implementation of
a new law on privatization of 2001 (enacted in May 2001). The law required all state-
owned enterprises to be privatized, and changed its method from an insider model to the
sale in a commercial way. This method has eradicated any factors of self-management
from the way of privatization. The privatization was to be implemented in the following
ways: The first one was tender privatization. All of about 150 large enterprises were to
be sold to strategic investors through tender privatization which the Agency of
Privatization would implement. The second one was auction privatization. The number
of small and medium-sized enterprises exceeded 7,000, and all of them were to be
privatized through auction.
Vujacic (2011) clarified that there were many problems also in the third wave of
privatization. For example, the privatization did not bring so big amount of proceeds to
the government as expected. Especially in the process of auction there were many cases
in which the number of bidders was extremely small and consequently enterprises were
sold at prices close to their reserved prices. There were many successful bidders who
did not keep the condition of the requirement of business continuity. There were cases in
which successful bidders, who should have paid by installments, used the enterprises as
collateral for borrowing money and returned the enterprises to the Agency of
Privatization without paying the second installment. There were also cases in which
purchases of enterprises were used for money laundering, i.e. transformation of illegal
wealth – money obtained through drug trafficking – into legal wealth.
As the third wave of privatization proceeded the amount of FDI inflow increased, but
the structure of FDI inflows by sector was not satisfactory. Although total FDI inflow
from 2004 through 2011 amounted to US$ 22.589 billion, manufacturing, the most
expected one, accounted for only 20.0% (the second place). The first place was
occupied by financial intermediary (28.1%), and the third place was occupied by
wholesale and retail trade and repair (16.3%), followed by real estate and leasing
(14.1%), and transport, storage and communication (13.1%).
The government of Serbia, especially the Serbia Investment Export Promotion Agency
(SIEPA), endeavored to improve the investment climate in order to attract FDI inflows
as more as possible. One of its efforts was to the reduction in the rate of corporate
income tax. SIEPA (2011) stresses that the corporate tax of 10% in Serbia, along with in
Bulgaria, is the lowest in South Eastern Europe. It is competition toward the bottom. As
can be seen from cases in other transition countries, however, it seems that a low
corporate income tax and low labor costs do not have decisive effects in the attraction of
FDI. It seems that crucially important factors in the investment climate are
macroeconomic stability, political stability and the prospect for the EU accession.
Deindustrialization in Progress and Necessity for Reindustrialization
Looking at changes in in the contribution to gross value added by activities from 1999
to 2006, the share of agriculture, forestry and fishery in the total gross value added
decreased considerably from 17.3% to 9.2% during the period. Still, it is said that 44%
of the total population live in rural areas (World Bank, 2011, p. 14). The share of
industry decreased from 21.2% to 19.9%. Instead, trade and hotel, etc., transportation
and telecommunication, and construction increased their contribution. During the period
2001-2008 the GDP grew at annual average rate of 6%. It was seemingly steady growth,
but the growth rate of industry was modest. Serbia attained the economic development
led by domestic consumption, which was supported by banks’ loans. According to an
IMF report (IMF, 2009), as of September 2008, loans to non-bank private sector as a
percentage of GDP was a little over 70%, and nearly half of them, i.e., about 35% were
cross-border loans. Most of them went to non-tradable sectors, especially
telecommunication, financial credits and real estate.
Table 5 Macroeconomic Indicators 2005-2014
 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
GDP Growth rate 5.6 3.6 5.4 3.8 -3.5 1.0 1.9 -1.7 2.6 -1.8
GDP/capita (EUR at ex. rate) 2,700 3,100 3,900 4,400 3,900 4,000 4,500 4,200 4,800 4,700
GDP/capita (EUR at PPP) 7,200 7,700 8,200 9,000 8,400 8,700 9,100 9,000 10,100
Gross fixed capital formation 5.0 15.2 12.0 8.0 -22.1 -5.5 4.6 13.2 -12 -3.6
Gross industrial production 0.8 4.2 4.1 1.4 -12.6 2.5 2.5 -2.2 5.3 -6.5
Unemployment rate, LFS 20.8 20.9 18.1 13.6 16.1 19.2 23.0 23.9 22.1 19.4
Average wages, annual change 6.4 11.4 19.5 3.9 0.2 0.7 0.1 1.0 -1.9 -1.7
Consumer prices 16.2 11.7 7.0 13.5 8.6 6.8 11.0 7.8 7.8 2.9
Central bank policy rate 8.5 14.0 10.0 17.8 9.5 11.5 9.8 11.3 9.5 8.0
General gov. budget balance 0.9 -1.6 -2.0 -2.6 -4.5 -4.6 -4.8 -6.8 -5.5 -6.6
Public debt(% of GDP) 50.5 37.7 30.9 29.2 34.7 44.5 45.4 56.2 59.6 70.4
Gross external debt (% of GDP) 66.2 60.9 60.2 64.6 77.7 84.9 72.2 80.9 75.1 77.3
Source: wiiw, Current Analyses and Forecasts, various issues.
About 55% of total exports go to the EU-27 countries. Its main sectors are agricultural
products accounting for about 20% of total export (mostly, grain, sugar, fruits and
vegetables, confectionary products and beverages). Others include steel and metal
products (20%), machinery and transport equipment (17%) and chemicals (World Bank,
2011, p.1). In parallel with an expansion of the domestic demand, imports increased
faster than exports, expanding the external disequilibrium. Export of goods has always
remained about a half of import of goods. Although there has been some fluctuations
depending on years, export of services and import of services have been almost at the
same amount. Looking at export and import including goods and services, the
export/import ratio fluctuated between 55% and 63%. The trade deficit as a percentage
of GDP has been very large, being between 20% and 25% until 2008. After the global
financial crisis, the trade deficit has somewhat decreased as export has increased faster
than import. Similarly, current account deficit, which recorded 17.7 of GDP in 2008, has
substantially decreased to 7.2% of GDP in 2009 due to the global financial crisis (see
Table 5). In my opinion, however, reductions in trade deficit and current account deficit
have been temporary phenomena, and there remains a challenge to improve the
international competitiveness. According to the World Bank report of 2011, neighboring
European and Central Asian economies have export shares of GDP in the range of 60-
80%. In spite of small country, Serbia’s export is too small. The report points out that
there is substantial room for improvement as a share of GDP, currently at about 25%,
could be to 2-3 times larger (World Bank, 2011, p. 2).
Table 6 Balance of Payments 2006-2014
 2006 2007 2008 2009 2010 2011 2012 2013 2014
Exports of goods + services* 6,948 8,686 10,157 8,478 10,070 11,145 11,469 13,937 14,451
Imports of goods + services* 11,970 15,578 17,877 13,578 14,838 16,487 17,655 17,783 18,096
Trade balance* -5,022 -6,892 -7,720 -5,100 -4,768 -5,342 -6,186 -3,846 -3,645
Trade balance (% of GDP) -21.4 -23.3 -22.5 -17.3 -17.0 -16.0 -19.5 -11.6 -10.9
Current account (% of GDP) -10.0 -15.6 -17.7 -7.2 -7.4 -10.9 -11.6 -6.1 -6.0
FDI inflow (% of GDP) 14.4 8.5 5.9 4.8 3.6 10.6 3.2 4.7 4.5
Source: wiiw, Current Analyses and Forecasts, various issues.
Note: * EUR (million)
Due to the 2008 global financial crisis, the GDP in 2009 contracted by 3.5%, and it
picked up somewhat in 2010 and 2011, but recorded negative growth again in 2012 and
2014 affected by the EU economy’s stagnation. In January 2009 representatives of
private financial institutions, headquartered in the EU, and public financial institutions
met in Vienna in order to prevent the financial crisis in Central and Eastern Europe from
expanding to the magnitude that East Asia experienced in 1997 (“Vienna Initiative”). It
was targeted specifically at Latvia, Hungary, Romania, Serbia and Bosnia. It is widely
publicized that major banks from Western Europe, which had given loans to these
countries, agreed not to withdraw a large quantity of capital and succeeded in achieving
the expected results. As Serbia’s decline in GDP in 2009 was 3.5%, smaller than that of
many post-socialist countries, there might be some effect for Serbia, but it seems that
there were not substantial effects. We have to pay attention to the content of the
agreement that committed Western European banks to keeping their funds in their East-
European banks if these governments committed to austerity to stabilize local banks’
balance sheets (Blyth, 2013, p. 221) and to the fact that already only several months
after the Lehman shock austerity was imposed on these countries as a precondition for
the financial support.
In 2013 Serbia’s GDP has recovered only 72.4% of the 1989 level (see Figure 1), but
the situation in industry is even worse with it recovering only 40.8. According to Savic
and Kovacevic (2014), in 1990, the last year of “normal” development in the country, in
industry 44% of GDP was generated and about 1.1 million workers were employed.
Total exports in that year amounted to almost 6 billion US$, of which 90% was
industrial products. A quarter century later, only 275 thousand workers (the same as in
1955) work in the Serbian industry, the level of industrial production is below a half of
the level recorded in 1990 and only 17% of GDP was generated in the industry (Savic
and Kovacevic, 2014).
Thus a phenomenon “de-industrialization” has occurred, say Savic and Kovacevic
(2014). There is an argument that it is natural for industry in post-socialist countries to
decrease its share of GDP since excessive industrialization was pursued at the sacrifice
of the service sector during the socialist period5 (de Melo, et al, 1997), but in my
opinion, this does not apply so much to successor countries of former Yugoslavia
because during the period of self-managed socialism a mechanism of a kind of market
economy worked to a certain extent there. Rather, as mentioned before, Serbia
experienced ethnic conflicts deriving from the breakup of the federation in the first half
of the 1990s and the Kosovo war in 1999 as well as UN sanctions during the both
periods, and consequently the Serbian industry has become weakened. In this
connection, Savic and Kovacevic (2014) make a comparison as follows: during the
period 1990-2013 Serbia increased its export by 2.6 times while the Czech Republic
increased its export by 26.6 times (p. 85). In advanced industrial countries growth and
further expansion of the service sector followed development of industry whereas in
Serbia the service sector expanded as a result of the decay of its industry. Indeed a large
number of SME in the service sectors such as restaurants, cafes, retail shop, boutiques,
etc. have already been established, and they mitigated unemployment to a certain extent.
However, Cerovic (2014c, p. 49) argues that it could be realistic if SMEs are established
5 Cerovic (2014c) makes a comparison of a proper share of industry in GDP which de Melo, et al
(1997) has predicted and the real changes in 2007 for Albania, Bulgaria, Croatia, Macedonia,
Romania and Slovenia for which all necessary data are available.
in cooperative relationship with larger firms that can become their main partners and
customers and can involve them in their programs, but also organize them and help
them in technology, know-how, management, etc.
In addition to a loss of the former Yugoslav common market, ethnic conflicts in 1992-
95 and Kosovo war in 1999 as well as UN sanctions as causes of “de-industrialization”,
Savic and Kovacevic (2014) stress “an extremely bad development model” applied by
governments after the change in October 2000 (fall of the Milosevic regime,
democratization and Serbia’s return to the international community), specifically as
follows: a) Direction of inflow of foreign capital: As mentioned above, FDI went mostly
to services, real estate, etc.; consumption-led economic development; b) Wrong
privatization model: the privatization has been implemented by the governments based
on neoliberalism. They were so naïve to believe that “a majority of deeply stumbling
industrial enterprises would be bought by rich foreigners who would rebuild them from
the ruins into contemporary and efficient companies within a short time” (Savic and
Kovacevic, 2014, p. 70); c) Hasty liberalization of the Serbian market: a problem is that
liberalization occurred in the second phase of transition when completely exhausted and
devastated Serbian industry did not have any chances in competition with very efficient
multinational companies (ibid, p. 72). ; d) A complete lack of a vision of long-term
development of Serbia: in this regard they positively evaluate a role played by Japanese
“De-industrialization” has brought a huge and increasing amount of external and
public debts. Public debt emerged as a result of necessity for financing budget deficit,
and only a part of funds was used for the construction of infrastructure. Foreign credits
which domestic companies obtained were used not for investment but for financing
current production with the exception of a few cases. Foreign credits should be used for
investment to upgrade the economic structure and construct the industry’s export ability
(exports first of all in the EU market).
Table 7 Indicators of External Solvency and Liquidity of Serbia in the Period 2005 - 2014 (%)
 2005 2006 2007 2008 2009 2010 2011 2012 2013
Indicators of external solvency
External debt/GDP 60.7 61.3 61.1 64.2 76.9 84.1 76.6 86.6 80.6 79.9
External debt/Export of
commodities and services
Indicators of external liquidity
Repayment of debt/GDP 5.2 10.8 10.7 11.0 13.5 12.7 13.3 14.0 14.0 12.4
Repayment of debt/Export of
commodities and services
19.8 36.2 37.5 37.5 48.8 37.4 37.6 36.1 32.2 25.8
Current account as a
percentage of GDP
-8.8 -10.1 -18.7 -21.8 -6.1 -7.4 -10.5 -12.3 -6.5 -4.7
Source: Savic and Kovacevic (2014), p. 83; Note: * estimate
Looking at indicators of external solvency, the external debt reached 277% of the export
revenue in 2009 (Table 7). Then the proportion declined gradually while the external
debt as a percentage of GDP continued to increase and reached 86.6% in 2012. Looking
at indicators of external liquidity, since 2006 the repayment of debt/GDP continuously
exceeded 10% of GDP, being a heavy burden on the national economy. In 2009, the
worst year, nearly a half of the export revenue had to be allotted to the repayment of
external debt. Current account deficit reached 21.8% of GDP, which was an
extraordinarily record figure. This miserable situation necessitates re-industrialization.
Savic and Kovacevic (2014) stress the importance of the state’s active approach, i.e. the
industrial policy.
Importance of Industrial Policy
Until recently industrial policy has been disregarded in Serbia. In recent years Serbian
economists such as Savic and Kovacevic (2014) and Cerovic (2014b; 2014c) came to
emphasize its importance. A Japanese specialist of Developmental Economics, Ken’ichi
Ohno (2013) enumerates areas of the standard menus for the reinforcement of industrial
ability: (1) framework on legislation and policy-making; (2) training of capable persons
for industry (education and training); (3) reinforcement of enterprises (management and
technology); (4) funding; (5) invitation of FDI; (6) marketing and inter-companies
cooperation; and (7) innovation. In addition, maintenance and upgrading of
infrastructure, transportation and physical distribution, appropriate measures for social
and environment issues and comprehensive regional development are enumerated. None
of the enumerated policies is in breach of international rules such as the WTO, FTA and
EPA (Economic Partnership Agreement). It is preferential treatment for domestic
products and domestic producers compared with imported products and foreign
enterprises that the WTO prohibits.
In 2010 the labor participation rate, i.e. the share of people actually working and
people seeking jobs in the productive age (15-64) was 58.9%. The employment rate, i.e.
the share of people actually working in the productive age was only 47.1%, and 11.7%
of them was unemployed (World Bank, 2011, p. 12). In comparison with other
countries, in 2004 the employment rate was 64.7% in EU-15, 68.6% in Japan and 77.4%
in Switzerland (Eurostat, 2009, p. 270). If the labor participation rate and the
employment rate in Serbia are increased to the same level as in EU-15, more rapid
economic development could be expected. For that purpose, however, more investment
is also required.
In order to increase inward FDI, it is necessary for the country to improve the
investment climate. For that purpose, there are many challenges to be tackled, for
example, the establishment of rule of law, the suppression of corruption and organized
crimes, the promotion of regional cooperation, etc. Among others, it is of urgent
necessity to improve the educational system. It is indispensable also for re-
As many authors (Aspen, 2014; World Bank, 2011) indicate, there has been a big gap
between what the educational system can offer students and what businesses request. A
lack of skill in the labor market has also been pointed out. It seems that problems are
concentrated in the secondary education. “Despite the oversupply of schools and
teachers for the number of secondary school-aged youth, many students are not able to
pursue the curricula of their choice. For instance, there is an abundance of spots
available to take courses in textiles, wood processing, agriculture and other vocational
trades, while the courses in health care, economics, law and general secondary
education are oversubscribed. Serbia’s system forces students to select narrow
educational tracks at a young age; this has resulted in more than 76% of secondary
school students attending vocational education (the second highest percentage in
Europe)” (World Bank, 2011, p. 13). As for University graduates, there has been a big
gap between supply and demand in terms of skills and knowledge, and brain drain has
become a serious problem (Djuricin and Vuksanovic, 2010, p. 113). In this way, Serbia’s
educational system is now pressed to implement reforms in order to get rid of mismatch
of supply and demand in the labor market and train capable people necessary for a
knowledge-based economy.
Cerovic (2014c) sharply criticizes austerity measures6 which together with the IMF
6 It is Blyth (2013) that sharply criticizes this point. The essentials of his argument are as follows:
Politicians today in both Europe and the United States have succeeded in casting government
spending as reckless wastefulness that has made the economy worse. In contrast, they have advanced
a policy of draconian budget cuts – austerity – to solve the financial crisis. We are told that we have
all lived beyond our means and now need to tighten our belts. This view conveniently forgets where
all that debt came from. Not from an orgy of government spending, but as the direct result of bailing
the European Commission recommended countries with budget deficits as a ‘universal
recipe’. Usually, expenditures for education, research, medical care, safety net and
culture have been targeted. Reduction of administrative employees is also problematic.
He warns that reduction of these kinds of expenditures will inevitably lead to a
substantial decrease of countries’ economic activities and contribute to negative growth
rates. He also casts a question on reduction of subsidies for private investors when
countries aim at a necessary structural change towards production of tradable and
exporting goods in economies that are lacking local capital.
 Inward FDI is very important. Contrary to short-term capital, FDI, staying in a host
country for a longer time, contributes to the country’s economic development and
therefore it is useful. However, multinational enterprises are fickle. FDI is never
immobile as shown by the case of the Smederevo Steel Company. Since 2001 Serbia
has pursued the economic development mainly depending on foreign capitals. For that
purpose, the country has sold many enterprises to foreign companies. In contrast to
Central European countries, however, FDI has not flowed into manufacturing so much
as expected. Even if foreign capitals arrived in this country, multinational enterprises are
fickle. For example, The US Steel Company acquired the Smederevo Steel Company in
Serbia in 2003. In January 2012 when the Eurozone experienced a second-dip
depression and demand for steel decreased due to the auto industry slump, the US Steel
Company sold this steel factory to the government of Serbia for only US$1 and
withdrew from the country, concentrating steel production on Slovakia where
automobile production has been in good shape. The government bought it back the plant
to avert the loss of 5,500 jobs (EEM, April 2012). This relocation was logical behavior
for a multinational enterprise, but unbearable for both employees and the government in
out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private
debt was rechristened as government debt while those responsible for generating it walked away scot
free, placing the blame on the state, and the burden on the taxpayer (Blyth, 2013, book cover). From
a critical standpoint a young Italian economist Paternesi Meloni (2015) explains mistakes in
austerity as follows: The European Commission recommended deficit countries to implement
structural reforms on the grounds that current account differentials were almost exclusively referred
to their weak competitiveness. He explains the logic underlying austerity measures which have been
imposed on peripheral countries: Firstly, in order to restore government debt sustainability the
reducing of the debt-to-GDP ratio, mitigating market losses of trust and lowering of risk premiums
(expansionary austerity); secondly, in order to restore external competitiveness through internal
devaluation real wage reduction and structural reforms (competitive austerity). This is the
neoliberal view placing an emphasis on the supply side. As a matter of fact, an improvement in
current account occurred not through these channels, but through a channel of a decrease in
aggregate demand, leading to a decrease in total output, and a decrease in consumption and a
decrease in imports. In this way, this policy has brought debt deflation. Paternesi Meloni disproves
the austerity – competitiveness linkage and, based on Keynesian economics, argues the necessity for
putting an emphasis on the demand side.
Serbia7. Is it enough for the government exclusively rely on FDI? It would be necessary
for the government to have its own industrial policy. We are concerned about the fact
that foreign banks account for almost all assets in the banking sector. Foreign banks
always attach importance to efficiency. It is natural and quite important, but it is not
enough for development of small and medium-sized enterprises. In the light of
experiences of East Asia, from mid and long-term perspective, the government should
have government-affiliated financial institutions which take care of small and medium-
sized enterprises while giving priority to creation of job opportunities. Hence, there is
necessity to increase the savings rate and investment rate.
It is quite important for the country to promote the development of domestic
companies. If the country succeeds in this regard, it would be able to restrain the
tendency of people’s outflow to the EU core member states. However, if domestic
companies do not develop sufficiently, such a tendency would continue and unemployed
people and low wage workers would be absorbed by richer EU member states.
 Free mobility of labor has been encouraged in the European Union. In my opinion, it
would be more desirable for labor to move two-ways between country A and country B,
but in practice it is not likely that emigration and immigration will be balanced.
However, it would be problematic that people go one-sidedly and massively within a
short period to richer countries from poorer countries. The ability of richer countries to
accept immigrants is limited8. If depopulation continues in a poor country it would lose
people who could shoulder the future economic development in the country and
concomitantly local communities would collapse and traditional cultures would decay.
It would be a great loss to a country that especially young and educated people who
7 Finally in June 2016 a Chinese company Hesteel agreed with the Serbian government to acquire
Smederevo Steel Company (JICA Balkan News, No. 11/2016, Summer Issue).
8 Current massive inflow of asylum seekers or illegal immigrants to Europe should be taken as an
exceptional occurrence. The first thing to do is to get rid of the source of an enormous level of
asylum seekers, which exceeded a million in 2015. In this regard, a Japanese economist residing in
Hungary, Tsuneo Morita (2016) offers a valuable remark. He says that the fundamental cause of the
occurrence of such massive asylum seekers is the Iraq war launched by the USA in 2003 and the US
bombardment escalated from Iraq to Syria in 2014. It is stowaway business organizations in Turkey
that have been guiding these people in refugee camps to illegal immigration into Europe. In addition,
we have to take into account activities of international NPOs which actively support “refugees” and
“immigrants” by providing information on destinations and routes. There is a guidebook for asylum
seekers. It is said that the guidebook has been produced and distributed by a charity group Open
Society Foundation, which George Soros, a refugee from Hungary, now an American citizen and a
world-famous investor, has established. He intends to transform Europe into a multiethnic society
like the USA and activate the stagnating European society. Free mobility of capital and activation of
the European society is favorable to him. It is interesting that Morita says “Noteworthy is that
anarchic words and actions of irresponsible European leftists and Soros’ market fundamentalist idea
of the abolishment of borders coincide”. In my opinion, New EU member states cannot afford to
accept a large number of “asylum seekers”.
should shoulder the future development of the country leave their mother country
massively. It is more important to create job opportunities for these people in poorer
countries. Besides Structural Funds and Cohesion Fund in the EU, it is necessary to
establish a mechanism at the EU level for inducing private funds in richer EU member
states to the Western Balkan countries.
4. Conclusion
First, the Western Balkan countries including Serbia promoted the transition to a market
economy faithfully keeping neoliberal prescriptions recommended by the European
Commission and international financial institutions. As a result, the manufacturing
industry, especially production of tradable has not developed sufficiently in these
countries and their international competitiveness declined or remained low. Since mid-
1999, when the Western Balkans began to stabilized, their economies were seemingly
developing, but the development was in fact led by consumption heavily relying on
foreign capital. Therefore, their economies became vulnerable to changes in the external
environment. The 2008 global financial crisis and the subsequent eurozone crisis
revealed their economic weakness. The high unemployment, especially among the
young generation, is a matter of concern. It is of urgent necessity to make a switchover
of their economic development model.
  Second, governments should play important roles in the economies especially when a
switchover of their economic development model is made. Industrial policy should be
attached more importance in the Western Balkan countries.
Third, inward FDI is very important for less developed countries because it
supplements capital-deficient economies, provides them with advanced technology and
enables them to have international linkage in production and sales. As the case of
Smederevo steel factory shows, however, FDI is not always immobile. From mid and
long-term perspective, the Western Balkan countries are required to make efforts in
increasing their domestic savings. In addition, it is necessary for them to establish
public financial institutions which will contribute to the promotion of small and
medium-sized enterprises.
Fourth, although there is the principle of free mobility of labor, the EU’s
development model, which has continuously been absorbing labor forces from poorer
countries into its core member states, is problematic. It is necessary for the EU to device
a mechanism in which young and educated people in the Western Balkans need not
emigrate to EU core member states excessively. For this purpose, it is necessary to
establish a mechanism at the EU level for inducing private funds in richer EU member
states to the Western Balkan countries.
Fifth, austerity which the European Commission and the EU core member states,
Germany in particular, and international financial institutions have been imposing on
Southern Europe and Candidates is one of major factors causing the EU’s secular
stagnation. Compliance of fiscal discipline is of course important, but there should be a
room for flexible policy-making to a certain extent in these countries.
Bartlett, William (2014), Implementing Structural Reforms in the Western Balkan Countries, in
Esch, Valeska and Juliana Kabus (eds.) (2014).
Blyth, Mark (2013), Austerity: the History of a Dangerous Idea, Oxford University Press.
Cerovic, Bozidar (ed.) (2014a), The Role of the State in the New Growth Model of the Serbian
Economy, Univerzitet u Beogradu, Ekonomski fakultet, Centrar za izdavcku delatnost.
Cerovic, Bizidar (2014b), Western Balkans and Serbia: What are Way-outs from the Crisis?, in
Cerovic (ed.) (2014a).
Cerovic, Bozidar (2014c), Western Balkans: Late in Transition, Struck by the Crisis, Slow in
Recovery – Which Road to Take?, in Esch, Valeska and Juliana Kabus (eds.) (2014).
De Melo, M., A. Gelb, and S. Tenev (1997), Circumstance and Choice: The Role of Initial
Conditions and Policies in Transition Economies, Policy Research Working Paper no. 1866, The
World Bank, Policy Research Department.
Djuricin and Vuksanovic (2010), Population Risk and Sustainable Development in Combined
Economic Crisis: the Case of Serbia, in Domazet, Tihomir (ed.), Facing the Future of South East
Europe, Zagreb: Croatian Institute of Finance and Accounting.
European Commission (2003a), Brussels European Council 20 and 21 March 2003: Presidency
European Commission (2003b), Communication from the Commission to the Council and the
European Parliament: The Western Balkans and European Integration.
Eurostat (2009), Europe in figures Eurostat yearbook 2009, Luxembourg: Office of Official
Publications of the European Communities.
Esch, Valeska and Juliana Kabus (eds.) (2014), EU Enlargement: Between Conditionality, Progress,
and Enlargement Fatigue?, The Aspen Institute, Germany.
Gligorov, Vladimir, et al. (2010), Crisis Is Over, but Problems Loom Ahead, Current Analyses and
Forecasts 5, Vienna: wiiw.
Gligorov, Vladimir, et al (2013), Animal Spirits still Dimmed: Slow Recovery Expected, Current
Analyses and Forecasts 12, Vienna: wiiw.
IMF (2009), Republic of Serbia: Request for Stand-By ArrangementStaff Report; Press Release
on the Executive Board Discussion; and Statement by the Executive Director for the Republic of
IMF (2013), Republic of Kosovo: Staff Report for the 2013 Article IV Consultation, IMF Country
Report No. 222.
Jovancevic, Radmila (2009), The Impact of World Economic Crisis on the Sustainable Growth of the
South-Eastern European Countries: Does Regional Cooperation Matter?, in Faculty of Economics
Skopje (2009), Regional Trade Agreements and Regional Cooperation Challenges and
Opportunities: Proceedings from the Third International Conference, Skopje.
Kikerkova, Irena (2014), Administrative Barriers to Trade within CEFTA-2006, in Esch, Valeska and
Juliana Kabus (eds.) (2014).
Koyama, Yoji (2015), The EU’s Eastward Enlargement: Central and Eastern Europe’s Strategies for
Development, Singapore: World Scientific.
Koyama, Yoji (ed.) (2016a), The Eurozone Enlargement: Prospect of New EU Member States for
Euro Adoption, NY: Nova Science.
Koyama, Yoji (2016b), Systemic Defects in the EMU and Small Countries in Central and Eastern
Europe, Proceedings of a conference Capital Market and Value-based Management held by the
University of Szczecin at Kolobreg on April 20-22, 2016, pp. 687-704.
Lalovic, Gordana, et al. (2012), The Republic of Serbia, in Prasnikar, Janez (2012), Comparing
Companies’ Success in Dealing with External Shocks: The Case of the Western Balkans,
Mediterranean Countries and Core European Countries, Ljubljana: Casnik Finance.
Morita, Tsuneo (2016), Consideration of the Problem of ‘Refugees’ Inflow in Europe, Russian
Eurasian Economy &Society, No. 1002, Tokyo: Institute of Eurasian Studies. (in Japanese)
Ohno, Ken’ichi (2013), Designing Industrial Policies: Learning from Asia’s Best Practices, Tokyo:
Yuhikaku. (in Japanese)
Paternesi Meloni, Walter (2015), Austerity and competitiveness: a misleading linkage, Paper
presented at the 1st World Congress of Comparative Economic Studies, held at Rome Tre
University on June 25-27, 2015.
Radosevic and Cvijanovic (eds.) (2015), Financialisation and Financial Crisis in South-Eastern
European Countries, Frankfurt am Main: Peter Lang GmbH.
Savic, Ljubodrag and Radovan Kovacevic (2014), Izvozno orijentisana reindustrializacija kao
pretpostavka dinamicnog razvoja Srbije, in Cerovic (ed.) (2014).
Serbia Investment and Export Promotion Agency (SIEPA) (2011), Investment Guide to Serbia, [accessed on August 23,2014]
Uvalic, Milica (2010), Serbia’s Transition: Towards a Better Future, Palgrave MacMillan.
Vujacic, Ivan and Jelica Petrovic Vujacic (2011), Privatization in Serbia – Results and Institutional
Failures, Economic Annals, Vol. LVI, No. 191.
World Bank (2010), Enhancing Regional Trade: Integration in Southeast Europe, World Bank
Working Paper No.185.
World Bank (2011), Country Partnership Strategy with Serbia for the Period of 2012-2015.
strategy-period-fy12-fy15 [accessed on July 7, 2012]
Asahi Shimbun [a nationwide Japanese Newspaper].
CEE Quarterly, UniCredit Group.
Emerging European Monitor (EEM): South Eastern Europe, London: Business Monitor
JICA Balkan News, Belgrade: Japan International Cooperation Agency (JICA) Balkan Office.
ResearchGate has not been able to resolve any citations for this publication.
ResearchGate has not been able to resolve any references for this publication.