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PUBLIC SECTOR EFFICIENCY INDEX 2015

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Public Sector Efficiency Index in Post-‐Transitional European Countries for 2015

RESUME

Growth of the public sector during the course of the XX century has led to the fact that most of the developed countries spend between one third and one half of its gross domestic product on services provided by the state. Recently, many European countries have been influenced by the fiscal crisis manifested through low rates of economic growth and high accumulated public debt that piled up due to significant budget deficits. Services provided by the public sector are often not adequate and do not satisfy needs of citizens, and on the other hand pecuniary resources available for those service are meeting hard constraints. Therefore, it is important to raise the question of public sector efficiency, so that better results could be achieved with reduced spending of public resources. C0untries with an inefficient public sector can increase their efficiency through various reforms (introducing competition to provision of services, providing concessions for infrastructure development or partial privatization and reducing state interference, better social spending targeting, etc.) which would lead to the decrease of spending requirements and increase of the quality of goods and services that public authorities deliver to citizens. This is especially important for Republic of Serbia, as research of public sector efficiency in post-‐transitional countries shows that public sector in Serbia is the least efficient of all countries included. Study shows that it is possible to deliver current level of services with a significantly lower public spending if efficiency would be improved (it would reach 35.9% instead of 46.3% GDP). Compared to previous year 2014, Serbia has not improved its results and is still at the bottom of the public sector efficiency index.


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METHODOLOGY

Methodology that was used for analysis of the public sector efficiency was developed by Vito Tanzi, Ludger Schuknecht and Antonio Alphonso in 2003. This Methodology was applied to compare efficiency among countries that are members of Organization for Economic Cooperation and Development (2003) and newly industrialized Asian countries as well as new members of the European Union (2005).1 Measuring of public sector efficiency in this respect is understood as the ratio of achieved results and goals on one side, and the resources used to achieve them on the other. Processes, and not goals, are in focus: how something is being done, and not what is being done.

First step is to determine what are public sector results. In order to do this, neoclassical economic theory of market (in)efficiency as foundation of the modern public sector of welfare states is taken into consideration. Most important presumed roles of the state, such as administration and the rule of law, stability and income redistribution2 are complemented with biggest public sector systems (education and healthcare) that deal with externalities, moral hazard and provision of public services (infrastructure). Public sector achievements are measured relatively, compared to the achievement of others that were considered by deducing median value of a given parameter that is then used as a unit value based on which public sector performances are calculated. If value of a given indicator is in a positive correlation with public sector performance, value that was used was calculated by dividing given value with average value (ie, as enrollment in high school is one of positive parameters, higher rate of enrollment leads to high performance results of the public sector). On the other hand, if the indicator is in a negative correlation with public sector efficiencies, an inverse value was used – average value was divided by the given value of the indicator (higher rate of unemployment or higher rate of corruption results in lower public sector performance).

Seven indicators were used to create this Index and their value was calculated based on eighteen sub-‐indicators.

1 For more about the results of this research, see: Afonso, Schuknecht and Tanzi, Public Sector Efficiency, an International Comparison, European Central Bank working paper series no 242, 2003, and Afonso. Schuknecht and Tanzi, Public Sector Efficiency: Evidence for New EU Member States and Emerging Markets, European Central Bank working paper series no 581, 2006. 2 Such a division of roles of state was introduced by Robert Musgrave in 1939 in his publication Voluntary Exchange Theory of Public Economy.


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1) Administration:

• Level of corruption measured by final score in the Corruption Perception Index of the Transparency International

• Level of bureaucratic procedures measured by ranking in the Doing Business Report of the World Bank

• Quality of the judicial system measured by Global Competitiveness Report of the World Economic Forum – section 1,06: Judicial Independence

• Size of the shadow economy measured in comparison to GDP. Data were taken from the publication “Shadow Economy in Serbia: New Findings and Reform Recommendations” by Fund for Development of Economic Science, and the level of shadow economy was calculated according to 2010 data. Data for Turkey, Macedonia, Croatia, Albania and Bosnia and Herzegovina were taken from Schneider, Buehn, Montenegro: “Shadow Economies All Over the World: new estimates for 162 countries from 1999 to 2007” by the World Bank. Size of the shadow economy was estimated based on 2007 data. Data for Montenegro were estimated on “Information Concerning Measures by the Montenegro Government for Reducing Shadow Economy for 2012”. Different resources had to be used since no available publication covered the whole sample of countries.

2) Education:

• Secondary school enrollment rate, based on World Economic Forum data from Global Competitiveness Report – section 5,01: Secondary Education Enrollment

• Education outcomes measured by student achievement at standardized PISA tests on mathematics. Macedonia and Bosnia and Herzegovina are not included in PISA so this parameter was not used during calculation of public sector performance in education for these two countries

• Quality of education, according to data by the World Economic Forum from Global Competitiveness Report – section 5,03: Quality of the Education System


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3) Healthcare:

• Infant mortality rate measured by number of stillborn babies on 1000 newborns. Data were taken from the Global Competitiveness Report by World Economic Forum – section 4,06: Infant mortality

• Life expectancy measured by average length of life. Data were taken from Global Competitiveness Report by World Economic Forum – section 4,08: Life expectancy

• Quality of the healthcare system measured by total score at the European Healthcare Consumer Index by the Health Consumer Powerhouse

4) Infrastructure:

• Quality of infrastructure measured by data from Global Competitiveness Report from World Economic Forum – section 2,01: Quality of overall infrastructure

5) Distribution:

• Equality of income measured by comparing income of the richest 20% of households to the poorest 20% households. Data were taken from World Development Indicators by the World Bank for the most recent available year (2008-‐2013), as well as from “Key Figures on Enlargement Countries 2013” by Eurostat (when no data were available from WDI)

• Poverty level, measured by percentage of population living under the national poverty threshold. Data were taken from World Development Indicators by the World Bank for the most recent available year (2008-‐2013)

6) Stability:

• Stability of GDP growth measured by economic growth coefficient of variation in the 2004-‐2014 period. Data were taken from World Economic Outlook database by the IMF


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• Level of inflation, measured by a ten-‐year average of CPI from 2004-‐2014. Data were taken from World Economic Outlook database by the IMF

7) Economic performance:

• Economic growth measured by a ten-‐year average of GDP growth from 2004-‐2014. Data were taken from World Economic Outlook database by the IMF

• Unemployment rate, measured by a ten-‐year average from 2004-‐2014. Data were taken from World Economic Outlook database by the IMF

• Level of public debt measured by its share in the GDP. Data were taken from World Economic Outlook database by the IMF

The second step in the analysis is to determine which resources are necessary for the public sector to operate as it currently does. Ten-‐year average of public spending was selected as the calculated value. Such a time period was chosen in order to avoid possible volatilities that could arise in case that data for just a single year were used. In contemporary European countries public sector is quite significant (in most cases it consumes over 40% GDP, and often much more) and any changes in its organization, functioning or expenses are slow and long-‐term, instead of being results of short-‐term reforms.

Third step is to compare inputs and outputs: results achieved by the public sector with resources invested into its functioning. The end result is Public Sector Efficiency Index.


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SELECTION OF COUNTRIES

Main parameters used in the process of selection of countries that are included in this research are the experience of transitional and European integration processes. It should be noted that these two processes in Central and Southeastern Europe mostly went hand-‐in-‐hand. In most cases, the process of transition from real-‐socialist political system based on a single-‐party rule and centrally administered economy, to a liberal democracy based on free and fair elections and market economy, included the agenda of European Union membership. One of the reasons for these two processes going hand-‐in-‐hand is that aspiring EU members had to meet the Copenhagen criteria that deal with the rule of law, democratic procedures and market economy in each of the applicant states. The transition process in Central and Eastern European countries did not progress with same pace or determination and some reform processes were put to a halt (p.e. Slovakia during the Meciar era) or came significantly late (ex-‐Yugoslavian countries whose transition process was plagued by nation building after military conflicts that followed the dissolution of the former country). Above-‐mentioned processes, however, continued with more or less reform capacity.

Countries selected for the Index are:

1. Estonia 7. Slovakia 13. Montenegro 2. Latvia 8. Slovenia 14. Bosnia and H. 3. Lithuania 9. Romania 15. Macedonia 4. Poland 10. Bulgaria 16. Albania 5. Hungary 11. Croatia 17. Turkey 6. Czech Republic 12. Serbia

Important differences in the degree of transition of selected countries are visible. Countries that have joined the European Union during the 2004 enlargement are considered to have successfully completed the process of political and economic transition. On the other hand, countries that joined the EU in 2007 and 2013 are seen as less successful, as well as other aspiring or potential members (some of which are nowhere near the end of that process). The only country that does not have a formal transitional-‐country status is Turkey, but it is included in the analysis as the longest standing aspiring member of the EU, along with internal reforms that were conducted and that had similarities with transitional countries (democratization, reducing of military presence in politics and decrease of state interference in the economy). Bosnia and Herzegovina is


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the only country from this sample that does not have a formal status of an aspiring EU member (its legal and political sovereignty is also an issue as the Office of the High Representative still exists). Bosnia and Herzegovina, still, is an example of a transitional state with EU officials (since the Thessaloniki summit in 2003) sending clear signals that Bosnia and Herzegovina can count on a full-‐fledge membership in the European Union. Kosovo, also an example of a transitional country that receives encouragements from the EU officials for its membership in this organization, has not been included into this analysis as it lacks a fully regulated legal and political status (not being a member of the United Nations) along with the problem of accessing statistical data that is often not collected for the territory of Kosovo.

STATE SPENDING LEVELS IN SELECTED COUNTRIES

Level of state spending in these selected countries is close to the ones in developed countries of the EU. Average for the entire group is approximately 40% of GDP, but there are significant differences as the level of public spending varies from 30% in Albania to 50% in Hungary. Somewhat lower public spending than average can be found in Estonia, Latvia, Lithuania, Bulgaria and Romania (as members of the EU) and Albania, Macedonia and Turkey (as aspiring candidate countries).

Ten-‐year average public spending in selected countries (2004-‐2014) in % of GDP3

3 International Monetary Fund, World Economic Outlook Database, 2015.


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Level of public spending is affected by the level of income, thus countries that have a higher income per capita also have a higher level of public spending. Poorer as they are, transitional countries on average have lower public spending compared to more developed countries of the EU (EU countries with income higher than 30 000 $/per capita have the average spending of 49,6%, and countries with less than 20 000 $/per capita spend 38,9% of GDP – 10 percentage points lower). While this regularity is attested on a sample of great number of countries all over the world, it does not hold for the narrow sample of transitional countries as there is no such clear pattern among them. Poorer countries with low levels of public spending are Albania and Macedonia, while poorer countries with high levels of public spending are Bosnia and Herzegovina, Serbia and Montenegro. More affluent countries with low levels of public spending are Estonia, Latvia and Slovakia, while those with high levels of public spending are Slovenia and Czech Republic.

Relation between levels of income and public spending4

4 International Monetary Fund, World Economic Outlook Database, 2015


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Level of income and public spending in transitional countries5

PUBLIC SECTOR PERFORMANCE

Public sector performance shows the production of the public sector which allows for international comparison. It is possible not only to compare efficiency between public sectors of different countries, but also within a country in different time intervals. In this way, it is possible to determine whether there is a need to implement reforms in order to increase (or decrease) public sector production, as well as if initiated reforms are delivering desired results. Having in mind a long-‐term horizon that is the environment of modern public sectors, their scope (that reaches up to one half of a gross domestic product) and the importance of services that it provides which are usually long-‐term (p.e. state pensions are paid to beneficiaries from the point of their retirement, until their passing), it is inadequate to make conclusions based on results from just a few years. Long-‐term observation of results can, however, point out to long-‐term trends and clandestine issues. Measuring of public sector performance in transitional countries points out to several general trends: countries that are

5 International Monetary Fund, World Economic Outlook Database, 2015


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members of the European Union have achieved better results than countries that are not part of the EU. Estonia, Poland and Czech Republic have the best results of all selected countries, while Serbia, Croatia and Bosnia and Herzegovina are at the bottom of this Index. As the public sector grows, its performances decrease so that countries that have lower public spending create a greater volume of quality services, but this differentiation remains at a modest level. Senior members of the EU (ones that became member states during the 2004 enlargement) achieved better results than members that have joined later on (Romania, Bulgaria and Croatia). Result of these latecomers is poorer on average even when compared to candidate countries.

In comparison with the previous year, there were certain changes in the ranking. Estonia, Latvia, Bulgaria, Turkey and Bosnia and Herzegovina have all experienced a significant decline in their results, while Poland, Albania and Romania have improved their status. Serbia performed almost identically as in 2014.


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Changes in the Index 2015/2014

PUBLIC SECTOR EFFICIENCY

By comparing performances of the public sector with total public spending, a basic analysis of outputs and inputs can be obtained. In this way it is possible to get an insight into which country managed to make the best use of every given unit of inputs and to achieve the best results measured in the quantity of public services. Efficiency of the public sector measures the successfulness of a state to turn public resources into public sector services. In other words, efficiency measures how well a public sector performs its duties, and not whether they were satisfactorily determined.

Rule that countries of the European Union are more efficient than others is not unambiguous: senior members of the EU do achieve better results when it comes to efficiency than junior members, with aspiring members being almost on the same level with EU newcomers. Primary reason for this is that aspiring members on average have lower public spending without producing significantly lower results in the public sector. The most efficient countries are Albania, Estonia and Macedonia – their common thread is notably lower public spending


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than other countries but with high performance coming from the public sector (Estonia has a superior performance, with Albania and Macedonia having much lower results). Poorest results were achieved by Serbia, Croatia and Hungary, with Serbia repeating its achievements from previous year and remaining the worst ranked country in the Index. It is clearly visible that countries with a smaller public sector have in average a much more efficient public sector. One of the key points of this Index should therefore be “Less is More” – under the condition that state interventions are adequately designed, moderate or minor intervention can provide equal or better results than an overreaching state intervention. Achieving socially desired goals is still viable in an environment that has a small public sector and lower expenses, which consequently has a major impact on economic growth.

Compared to 2014, only Poland, Slovakia, Romania and Albania have realized significant increase in efficiency, with most countries experiencing a decline. Hungary and Serbia performed almost identically as in the previous year. This is a consequence of somewhat different performance results of the public sector relative to 2014, but also due to changes in public spending in some of the countries.


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Production-‐possibility frontier is an imaginary line that encompasses production units. Production units that are on the outskirts of production possibilities (and at the same time determine it by its position) represent efficient units as no entity with given resources can increase its production level above the already achieved one. Contrasting, entities that are under the limit are working below their possibilities and are inefficient in their work, meaning that they could achieve their current production level even with reduced amount of invested resources or could produce more with better utilization of the existing resourses.

In theory, positioning beyond the production-‐possibility frontier is impossible.


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FINAL CONSIDERATIONS

Public sector efficiency measurement is an interesting concept, but beyond explorative, it should also have an instrumental value and should point out to problems that are present in functioning of the state in order to resolve them. Its value lies in the possiblity to precisely measure shortcomings in the way public authorities are organized and how public policy is applied, as well as to provide measurable indicators of an existing situation. In this way it would create a clear display of a situation and eliminate the need for often unchecked and provisional remarks, or anecdotes, about the existance or scope of the problem, adequately measuring it. Having in mind a wide spectrum of measured variables, true image of the situation will be much clearer with not just general relative efficiency of the system, but also by observing seven individual components that it consists of. In the Appendix there are tables with informations on seven sub-‐indexes as well as about possible lessons that can be applied to Serbia specifically. Currently bad situation in Serbia suggests that is possible to achieve significant improvements which would amount to decreasing expenses and increasing the quality of public services. If Serbia’s public sector would reach average efficiency of countries that were included in this research, volume of public services could be increased by 15% or public spending could be reduced by as much as 10.4% GDP, without the existing level of public services being compromised.


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APPENDIX: PUBLIC SECTOR PERFORMANCES IN SEVEN AREAS

ADMINISTRATION

LESSONS FOR SERBIA:

Bureaucratic procedures and level of shadow economy are very poorly rated areas. Recent change in methodology of Doing Business Report by the World Bank will affect the improvement of Serbia’s score when it comes to bureaucratic procedures, and steps forward have been made in the field of construction permits. The issue of inspection is still unresolved and implementation of new legislature has always presented itself more as an additional problem than a solution for them. In order for Serbia to improve current state of things, it is necessary to reduce bureaucratic obstacles for businesses through elimination of unnecessary procedures or their softening by increasing use of internet technologies among public authorities. Disorder of the cadaster, low capacities of the Tax Administration and complicated tax procedures are serious issues. Judicial system, along with several failed reforms, remains dependent on political will of the executive power and partial in its dealings, with long procedures making the right to a trial within reasonable time utterly pointless. Length of trial should be reduced and some judicial proceedings should be automatized, with reducing judicial load by extrajudicial settling (private arbitrage and mediation, relocation of certain proceedings out of courts as in the case of notaries or private bailiffs). Some improvements were made in


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combating shadow economy and by increasing collection of excise and VAT (which still remains on a significantly lower level than prior to 2012). Beyond repression, it is necessary to eliminate or reduce institutional settings that foster shadow economy: rigid labor legislation (which was insufficiently liberalized by the new Labor Law), high income tax wedge that reaches 38,9% on average salary, as well as relatively high minimum wage compared to average salary with existence of high minimal social contributions. Appropriate steps would be to abolish universal minimum wage and to form specific minimums for different industries, which could be agreed upon through social dialogue, cut down income levies and decrease of minimal social contributions. High levels of endemic corruption can be reduced by greater use of internet technologies and decrease in required documentation for realizing one’s rights. Healthcare is a very important area in which this kind of policy could reduce corruption, as well as in the public procurement sector.


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EDUCATION

LESSONS FOR SERBIA:

Education is one of rare areas in which current situation is close to average in selected countries. But having in mind more successful countries from the region (i.e. Slovenia or Croatia), results are not satisfying. Elementary school network is irrational, resulting in a great number of small classes, with agency issue being present when it comes to employment – constant decline in number of pupils is followed by increase in number of teaching staff, with continuing reduction of employee-‐user ratio. Introducing capitation as in many Central and Eastern European countries with similar demographic trends would contain the raise of expenses through reducing numbers of small schools and classes. This would lead to improved responsibility and quality of schools as competition would arise, which would be amplified if this type of financing should be expanded to accredited private schools. Change in the curriculum that would focus on applicable knowledge in place of factual learning could also give good results, through changes in existing subjects and introduction of new ones. Lack of teacher autonomy when it comes to plans and program of studying is an issue by itself. New Law on Textbooks additionally reduces the possiblity of a teacher to choose textbooks and this is a step backwards that has yet to be made. Higher education, officially based on meritocracy, is non-‐inclusive for students that come from families with lower socio-‐economic background, due to hidden expenses that arise during studies (lodging and meals for out-‐of-‐city students) and students coming from families with higher income have better performance.


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Some of these problems could be mitigated by changes in financing, so that financing from state resources would be available only for students that come from low-‐income families, without taking into account their academic performance. In that case, other students would, based on their possibilities, pay partial or full tuition. Including private faculties in the system of state funding through vouchers, for technical and natural science, would bring about market orientation to educational institutions as well as better conections with the labor market.


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HEALTHCARE

LESSONS FOR SERBIA:

Healthcare in Serbia is another section of the Index that is near average of selected countries. Quality of the healthcare system is, however, perceived as very low, and this could be due to fact that indicators on expected lifespan and infant mortality (that were used in the Index) do not reveal the true character and results of a healthcare system. Existence of high private expenses and prevalent levels of perceived corruption in state healthcare point out that clear and comprehensive reforms in the system are needed. One of them that could increase quality by reducing waiting time for health services and reduce the risk of corruption is introduction of private clinics into a capitation system, at least in those sectors that have long waiting lists. Besides, rationalization of primary healthcare institution system, in order to keep track of mechanical movement of the population, would remove bottlenecks in the system. System of general procurement for the healthcare system led to significant savings, but this system needs to become more flexible in order to avoid shortage of medicines.


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INFRASTRUCTURE

LESSONS FOR SERBIA:

Along with Bosnia and Herzegovina, Serbia is the country with the lowest ranking when it comes to quality of infrastructure. There are multiple reasons for this current situation – years of negligence caused by politics (during the dissolution of Yugoslavia, Serbia went bankrupt twice, first during a record hyperinflation in 1993, and then by a moratorium on its dues after 1999 NATO intervention). Major investments in the infrastructure that followed were fueled by affordable credits from international financial institutions. Exceptionally low utilization of these resources points out to poor efficiency of state administration that is able to attract investment funding but not to draw them or use them, due to lack of project documentation or spending control. Besides that, public capital investment has remained for years under the level prescribed by the official state budget: funds are appropriated but are used for other purposes or are returned to the budged, artificially creating lower deficits than planned at the expense of future development. Another serious issue are political credits that are attributed by other governments such as Kuwait, Azerbaijan or Russian Federation, which may contain other requests (purchase of goods of certain value from this country, or selection of contractors) that consequently increase expenses and can completely alter the character of these


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credit conditions that were displayed. Level of corruption and political clientelism is additionally enhanced during major public investments, especially when road infrastructure is in question, negatively impacting the entire system. Another problem are political motives, in place of economic ones, when planning and development of infrastructure is considered, so that existence of a highway or its route can be affected by political agenda of a ruling party instead of a detailed analysis of costs and benefits. Current situation could be improved by reorganizing offices that are in charge of investments (within public companies that deal with infrastructure, such as Serbian Railways, or within Ministries and local administrations) so that they can perform their competences more efficiently, thus increasing the level of investments based on public resources or foreign credits. Greater transparency of tenders and public calls for building infrastructure should be utilized for decreasing risk of corruption. Low participation of the private sector when it comes to developing public infrastructure is a major hurdle, and its increased part would bring about significant benefits by reducing costs and shortening time horizons of constructions. Using different instruments of public-‐private partnership, above all concession, could be one of the ways to be put forward.


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DISTRIBUTION

LESSONS FOR SERBIA:

Serbia has poor results when it comes to income distribution, both in issues of equality and more importantly – absolute poverty. Social transfers in Serbia are quite large – through compulsory state pension system, health insurance, significant expenses for social security, income redistribution – all with very poor results. Opinions on importance of income inequality are not harmonious and were recently brought into public attention by several publishing ventures (such as Capital in the XXI Century). Understandings of inequality vary from those that believe that inequality is not an issue (beyond absolute poverty) to those that are of the opinion that a significant level of inequality affects economic growth and social cohesion. Having in mind the amount of resources devoted for social transfers (that amounted to 700 billion dinars, or 38.6% of total public spending in 2014) it is clear that one of main problems is poor targeting of social aid. Illustrating example is reimbursement that is paid to employed women during their absence from work, before and after childbirth, and is tied to their average income. Consequence of determining reimbursement in such a way, is that it leads to those that are well-‐off receiving the greatest amount of resources, and not those who need it the most: well-‐off parturient women receive 80% of total allocated resources. Similar example can be found in the case of war veterans who, without taking into consideration their property


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or income, are given special benefits (discount price of communal services) along with direct government grants. Bureaucratic procedures for receiving social aid are time-‐consuming, expensive and often pose insurmountable barriers for those that are in need, which disables them from receiving their entitlements. Targeting is performed only for some social benefits, but with outdated instruments that often annul their purpose. Having a land area of a certain size disqualifies rural households from receiving social benefits, even though in case of elderly households in remote areas this property cannot be used to create income (owners are unable to cultivate it, and there is no one who would be interested in purchasing or leasing it). Another form of social benefit expenses (not included in the total sum intended for social transfers) is part of paid subsidies for public companies that amounts to 117 billion dinars. Reason for this lies in business policy of public companies that are partially used for conducting social policy via pricing policy – providing their services at a price that is not sufficient for them to conduct normal business activities, so subsidies are used to cover the missing resources. Reforms that would increase efficiency of used resources are switching social benefits to money transfers only (social policy of public companies would go out the window) along with a quality made targeting system in order to make sure that resources are available to those who really need them and without removing those people from the system.


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STABILITY

LESSONS FOR SERBIA:

Economic stability through the level of economic growth variation and average inflation, shows unequal tendencies: a very low score in monetary stability and a success in reducing volatility of economic growth. Even though it is more appropriate to observe long-‐term trends (which was crucial for taking into account ten-‐year average of these indicators in the report) instead of just recent scores, caution is advised when it comes to making conclusions. Current state shows that the low score in monetary stability has resulted mainly as a consequence of very high inflation rates in the beginning of observed time period, and that level of inflation was in decline afterwards (still remaining significantly higher than in other European countries). Very high rate of inflation that was recorded in 2012 (in middle of recession) was then accompanied by inflation that was below the monetary policy framework. This shows that current targeting of inflation level is inadequate for Serbia. Having in mind high level of euroization in the country, as well as significance of exchange rate on price levels, question arises whether Currency Board would be a more adequate institutional framework that would serve as a barrier to inflation (it exists in some countries in the region, with Bulgaria implementing it successfully since 1997). Currency Board should prevent independent monetary policy of monetary authorities in Serbia and contribute to keeping track of


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European Central Bank monetary policy, which would in the long run equalize inflation levels in Serbia with those that are present in the Eurozone. Disabling monetary authorities to use the tools of an active monetary policy (as one of the two main tools of economic policy) appears imprudent, but weak influence from monetary policy due to high eurization of the economy as well as history of monetary failures – besides long periods of high inflation there was also a hyperinflation, all of which point out that not much would be lost and that gains could be quite high. Stability of economic growth in the country is an important advantage for Serbia, however, it is also important at what level is this stability achieved. When values are observed over the year, it seems that Serbia is underperforming in this area as well – optimal result would be achieving balanced high growth rate every yeaar. Data shows that observed period can be roughly divided into two phases: first half is consisted of years with high economic growth, while the other half reveals stagnation. Besides, in the years before crisis hit, a procyclical fiscal policy was recorded as gross domestic product was higher than its potential, while in the aftermath anticyclical and procyclical policies were occurring. Even though volatility of growth is low, which is good, resulting score is not as positive as it may look at the first glance.


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ECONOMIC PERFORMANCE

LESSONS FOR SERBIA:

The issue of economic growth is one of main problems that exist in Serbia’s economy. Prior to the crisis, high rates of economic growth were recorded in Serbia, but the spillover of economic crisis in the last quarter of 2008 led to periods of stagnation due to rotation of low growth rates with reoccurring recessions in 2012 and 2014. Because of this, Serbian its gross domestic product has yet to reach its pre-‐crisis 2008 level. This shows that there are major structural issues in Serbia’s economy, and that economic policy focusing on aggregate demand was not the solution. Along with this, public debt has exploded since 2008, arriving from 28% to over 70% GDP in only six years, multiplying by around 2,5 times. All of this indicates that current fiscal situation caused by excessive public spending is unsustainable and that major fallacies are present in economic policy in Serbia: small and open economy that leads active economic policy of encouraging demand has arrived at current account deficit through increase of imports (Serbia’s trade partners have achieved economic growth through increase of export to Serbian market while Serbia ended up with a high public debt), while problems can be observed on the side of supply and not demand. Unemployment rate in Serbia is at the same time very high, especially among the youth, with economic activity rate remaining lower than in comparable countries. In order to improve results, changes are needed in economic policy that should encourage entrepreneurial ventures through


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reducing barriers for private initiative, finishing the process of restructuring and privatization of state companies in order to release currently captured resources. Quitting subsidies for foreign investors as main drivers of economic activity, and ending the policy of covering losses for public companies and those owned by the state due to their inefficiencies, would make reductions in public spending possible so that the deficit can be brought to levels where public debt would become sustainable. Removing labor market rigidity by changing the way minimum wage is determined and introducing regional or industry guaranteed income, changing the way minimal social contribution is calculated, and reducing high tax wedge on income (at least for those with the lowest salaries, if not linearly) could help reduce not only unemployment, but also to increase currently low economic activity level.

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