Economic Reforms in Serbia and Prospects for Economic Recovery and Growth

Economic reforms have been relaunched under the SNS-led government that came to power in 2014. The priorities have been fiscal consolidation, financial sector resilience and structural reforms designed to boost productivity, employment and growth. The diagnosis of Serbia’s economic ills has been that poor investment and growth performance has been due to an oversized public sector, a high level of employment in state bodies, and over-regulated labour markets. This chapter questions whether this diagnosis is the whole story and whether reductions in public sector pay and pensions will translate into higher levels of private sector investment. It argues that other factors may be involved, including a high level of banking sector deleveraging, capital flight as foreign investors repatriate profits rather than reinvesting in the Serbian economy and tax treaty shopping and round tripping in pursuit of aggressive tax planning. An equally serious problem has been the collapse of the credit system following the onset of the economic crisis as non-performing loans have accumulated, reducing banks’ ability to provide new credit to the business sector. The chapter concludes that a boost to public investment is needed in support of private sector growth, rather than the continuation of a potentially futile effort to shift the costs of adjustment onto low-paid public sector workers and pensioners.