CAVIRC.net - Serbia

Serbia - Report on the Productive Integration within the Cadses Area

1. Overview of the economic scenario

The economic analysis of the republic of Serbia and Montenegro is a very difficult task to accomplish. This is certainly due to the lack of reliable data to use to do the investigations. The official data sources provide information referred only to the public sector, without considering the private ones that seem to follow a more positive trend. Another aspect to keep in mind is that Serbia just comes out from an intense and tough war period that devastated the nation and dramatically reduced its economic capabilities. Indeed, after the inner wars at the beginning of the 1990s, which spitted the former Yugoslavian confederation, in 1999 there was against the western countries which determined the migration of million people abroad. The first notable consequence of this last conflict is the reduction of the Serbian population, which passed from 10.6 million people in 1999 to 8.1 million people in 2003.

In the last years, Serbia has passed through a difficult economic situation. The rate of growth of the economy was constantly negative through all the first ?90s. Between 1994 and 1998 it was steadily positive, but in 1999 it sharply decreased again to -18.3%. In the 2000s it was supposed to be around 4-5% after 2001, it slowed down to 3.3% in 2002 and to 1.5% in 2003. This situation is due to the contemporaneous presence of a weak domestic Serbian economic system and to the period of crisis of the entire European economy. GDP growth is expected to rise to 6% in 2004.

In 2003 the industrial production reduced by more than 3%. The main reduction was that of the instrumental goods (-24.4%) though these goods represent just 4.7% of the whole production. The more important productions, that is intermediate goods and final goods reduced by 1.9% and 3.3% respectively.
The two war periods had negative consequences on the external trade too. The total export passed from 5241 million US$ in 1990 to 1841 million US$ in 1996 to 2477 in 2003. The flows of imports followed a different trend. In 1996 the total import flow was 6808 million US$. It sharply reduced in the middle ?90s but it recovered and in 2003 it was 7324 million US$.
After the 1999 war, the economic situation would have been expected to improve. It should have been dragged by the inflow of FDI and by the expansion of the infrastructure and constructions sectors. The low level of income and the general spoiling of national resources should have pushed for a sharp economic recovery. On he contrary, due to the pervasive presence of the government in the public and private sectors reforms (banking, justice, defence of freedom), the economic development still find several obstacles. The external debt represents a break for the economy. In 2001 it has been signed an agreement to drop 4.5 billion US$, and afterwards the IMF has conceded a debt reduction of 829 million US$ to foster the economic growth. Thanks to this cancellations the Debt-GDP ratio reduced from 143% in 2000 to 63% in 2003.

The control of the inflation rate represents one of the most important results achieved by the government. It slowed down from 32% in 2001 to 7.8% in 2003.
Agriculture still has a central role in the Serbian economy. After the unusual results of 2001, determined by exceptional weather conditions, it decreased its production. Despite of the negative productive trend followed by the agriculture in the last two years, the agri-food sector maintain a dominant role in the entire industrial production. The productive sectors that grew the most over the last few years have been the electronic sector, transport means and plastic. Traditional sectors such as textile-clothing, leather-footwear and wood-furniture had a reduction instead.?
Serbia reached a fiscal harmonization with Montenegro in order to accelerate and stabilize the process toward the admission to the UE. An important accord has been signed between the foreign ministers of the Balkan area in order to create a area of free trade for those countries within 2007.

2. Economic Integration

The role of FDI in the economic integration
The war determined a big break point in the economy of Serbia and Montenegro, cutting all the integration processes ongoing in the country. The war froze the foreign economic activities pushing down the level of FDI.

Figure 1. FDI in Serbia between 2000 and 2003

Indeed in 2000 the stock of FDI in Croatia was just 25 million US$, representing 0.7% of the GDP. Progressively, due to the possibilities of reconstruction and of economic development, the flows of FDI increased up to the value of 1360 million US$ in 2003, the 6% of the GDP. In 2003, Italy ranks as the fifth investor in Serbia with 14 million US$, after Austria, Greece, Croatia and Slovakia. Unfortunately, the lack of data on the composition of FDI does not allow investigating on their features. Only for the 2002 FDI there is a kind of classification which permits to discriminate between FDI in money and in goods.

Table 1. Classification of FDI in Serbia by typology

As stated in table almost half of the 2002 money FDI in Serbia went to production activities, whilst just about 5% were service activities.
By comparing the stocks of the FDI in the Eastern Europe between 1997 and 2003, it appears that in the mid ?90s Serbia was among the first recipients of FDI. During the wartime, its level of attractiveness lowered to the lowest level, but recently it has started rising again.

Table 2. FDI in Eastern European Countries

With this scarce information about the composition of the FDI in is hard to infer anything about the level of international economic integration, at least through the traditional multinational approach. As for all the countries coming out form a war period even for Serbia it can be argue that the majority of the FDI are targeted toward those economic activities for the reconstruction of the industrial and productive system. The Serbian industrial sectors were mainly on production of chemical and chemical products, productions of cars and transport means.
In general, the scarce inflows of FDI are due to the difficulties generated by the external trade, the economic stagnation and the fiscal deficit.

Analyses of the productive integration through flows of goods
The analysis of the trade flows between Serbia-Montenegro and its commercial partners relies on much more data than the FDI analysis. This should permit to better illustrate what is the role of Serbia in the international trade and to provide some evidence of the international integration processes going on between Serbia and other countries.
The 2003 data on the Serbian import and export flows ranks Bosnia Herzegovina as first export partner whit a share of 16% of the entire exports. Italy ranks second with 14% and Germany is third with 11.6%. Food and vegetables are the two most exported Serbian goods with a share of more than 9% of the total flows, followed by iron-steel accounting for as much as 7.1% and clothing with 7%.

Both the import partners and the imported goods are different with respect to the export. Serbia mainly imports from Russia and Germany, 14% and 13.9% of the total import respectively, then Italy, China and France. The import goods are prevalently petrol derivates and road vehicles, whereas the only traditional goods imported are textile and leather. With most of its trade partners, especially those at the top of the rankings, Serbia has a huge trade deficit. Serbia does not show big trade integration with the other countries of the Cadses area. With the exception of Bosnia Herzegovina and Italy, no other countries enter in its trade ranks. Therefore to deepen the analysis on the international integration through trade flows the relations between Italy and Serbia have been done. Italy is the first exporter of leather and textile toward Serbia Montenegro. Since the export of traditional goods such as clothing is one of the most important Serbian export activity, it could be imagined the presence of an international productive integration working through the trade flows of these goods.

In table the flows of textile-clothing goods between Italy and Serbia are drawn.

The trend of the flows of both import and export clearly underline the different phases of the Serbian economy between 1996 and 2003. All the series clearly show the sharp increment of the mid '90s, the fall due to the 1999 war and the augment of the last years. The textile-clothing sector shows a common trend of the two time series composing it. Italia export of textile to Serbia and Serbian export of clothing toward Italy has the same shape. This similarity is a proxy of the integration that does exist between Italian and Serbian firms of the textile-clothing sector. Moreover, the Italian firms export in Serbia instrumental machineries to be used for the above mentioned productions. In this way the Italian firms provides the Serbian ones with the necessary tools to produce and to refine the intermediate goods exported. The import of instrumental machineries has a higher value because these mechanic instruments are not just for the production of clothing.

The other traditional economic activity, which has been used to measure the productive integration between Italy and Serbia is the leather-footwear sector. In this case, the integration process is measured through the analysis of the correlation between the Italian export flows of leather to Serbia and the successive export of footwear from Serbia back to Italy. In this case as well as in the previous one the hypothesis is that the Italian firms export to Serbia a share of their production of leather and then they re-import a footwear. The labour intensive phases of the production are delocalised, and the final products are then re-imported to be sold.

The two time series of figure confirms the idea of a productive integration between the Italian and the Serbian producers of leather and footwear. In is recognisable the fall of the Serbian external trade due to the 1999 war. After 2000, the gap between the values of the export of footwear and the import of leather increased and remained stable over the following years. One reason for this can be the contemporaneous import in Serbia of Italian instrumental machineries, as highlighted in the previous figure. The adoption of modern machineries has provided the Serbian firms with a higher level of technology, which enabled them to put a higher added valued in their productions.

By restricting the analysis of the economic integration to the relation between Serbia and the North East of Italy, it is possible to analyse what is the weight of this area in the entire trade between Serbia and Italy. As far as the textile-clothing sector is concerned, the economic integration appears less developed. Indeed, even though the two series seem have a common trend between 1996 and 2003, the import of textile from the North East has always had an higher value than the export of clothing. It absolute terms, the 2003 flows of textile imported from the North East accounted for as much as 28% of the entire textile imported from Italy, whilst just 9% of the total export of clothing went toward this area. Because of these differences it seems difficult to argue that it does exist a productive integration between textile-clothing firms of these two regions. From the North East textile goes to Serbia not to be imported afterward, or at least not completely.

On the other hand, the role of the instrumental machineries imported from North East appears even more evident than in the general case of Italy. In 2003, Veneto, Friuli Venezia Giulia and Trentino Alto Adige exported almost 40% of the entire value of the instrumental machinery going to Serbia. This share is the highest of the series between 1996 and 2003, but in the previous years too the quote of North East export was very significant. Thus, firms of these Italian regions provide the Serbian firms with the technology to produce the clothing they export. It is worth nothing that, as well as for the national case, the export of machineries from North East suffered the 1999 war. That year the flow reduced sharply and the series presented a break point. The year after the Serbian import started rising again at a faster pace than before.

The trade of leather and footwear between North East and Serbia has a different shape with respect to the textile-clothing sector. In this sector indeed, apart from the 1996 values, the Serbian export of footwear toward the North East regions always exceeded the import of leather. The following years, apart from the 1999 crisis, the volumes of trade grew, and in 2001 the North East regions exported in Serbia more than a third of the entire volume of Italian export. Leaving aside the 2001 peak of export, it clearly appears that the import and export series move together. This common movement underlines a potential integration process through flows of trade. After the 1999 reduction, the export of leather toward Serbia has increased at a constant pace, whilst the import of footwear from Serbia showed a wavy path. Serbian forms raised the export of footwear in 2001, and they reduced it in the two following years.

Due to the Serbian economic difficulties and to the lack of reliable data to use for the analysis it is difficult to say something precise about the level of productive integration with the other Cadses countries. By doing inference from the Italy-Serbia data on the trade of traditional goods it would appear possible a process of integration in some manufacturing sectors.