International Economics of Serbia

International Economics AY 2012/2013
POLITECNICO DI MILANO

AGENDA
FastFactsaboutSerbia
EconomyofSerbia
Facts&Hypotheses
Theory&Practice
Conclusion

SERBIA AT A GLANCE
Official Name Republic of Serbia
Form of State Democratic Republic
Political Structure
President and unicameral
assembly with 250 seats
Capital Belgrade
Area 88,361 km2 (including Kosovo)
Population
7,243,007 (July 2013 est.,
excluding Kosovo)
Median Age 40 years (men), 43 (women)
Life Expectancy 72 years (men), 77 years (women)
Monetary Unit
Republic Serbian Dinar (RSD),
1€ = 111,1RSD*
Major Language Serbian
Major Religion Christian Orthodox
SerbiabridgesEastandWest.Itstreasured
positionintheheartofSouthEasternEurope,inthe
centralpartoftheBalkanPeninsula,
makesitanoutstandinginvestmentlocation
* Official Exchange Rate, National
Bank of Serbia, as on May 26th 2013,
http://www.nbs.rs/

IMPORTANT EVENTSINHISTORY OFSERBIA
The Kingdom of
Serbs, Croats, and
Slovenes is
formed
The country
changes name into
Federal People's
Republic of
Yugoslavia
After the Yugoslav
wars, Federal
Republic of
Yugoslavia (FRY) is
formed
After
Montenegrin
independence,
Republic of Serbia
is formed
1918 1929 1992 2003 2006 20081946 1963
Kosovo declares
independence, but
there is still ongoing
dispute on whether it
is a legally recognized
state or not
The federation is
reconstituted into a
state union known
as Serbia and
Montenegro
The country is
renamed to
Socialist Federal
Republic of
Yugoslavia (SFRY)
The name of the
country is
changed into
Yugoslavia

SERBIA’S MEMBERSHIPS
Massive 78-day bombing campaign by NATO alliance
UN membership
IMF, World Bank, European Investment Bank memberships
Partnership for Peace (PfP) membership
WTO membership negotiations
Full candidate status for EU and rejection of NATO membership
1999
2000
2001
2006
2011
2012

FastFactsaboutSerbia
EconomyofSerbia
Facts&Hypotheses
Theory&Practice
Conclusion
AGENDA

Source: Doing Business, Measuring Business Regulations, http://www.doingbusiness.org/~/media/giawb/doing%20business/documents/profiles/country/SRB.pdf
42
179
76
41
40
82
149
94
103
103
Starting a Business
Dealing with
Construction Permits
Getting Eectricity
Registering Property
Getting Credit
Protecting Investors
Paying Taxes
Trading Across Borders
Enforcing Contracts
Resolving Insolvency
Serbia’s Ranking on Doing Business Topics
DOING BUSINESS IN SERBIA

SERBIA’S TRADE AGREEMENTS
Market Trade Regime
Year of
Agreement
No. of
Inhabitants
EU
Preferential
Trade Regime
2010 494,070,000
USA
Generalized
System of
Preferences
2005 302,558,000
Russia, Belarus and
Kazakhstan
Free Trade
Agreement
2010 168,640,600
Macedonia, B&H,
Montenegro, Kosovo,
Albania, Moldova
Free Trade
Agreement
2007 29,990,542
EFTA
Free Trade
Agreement
2009 13,000,000
Turkey
Free Trade
Agreement
2010 75,000,000
Total Market Size
Source: Serbia Investment and Export Promotion Agency, http://siepa.gov.rs/en/index-en/invest-in-serbia/liberalized-trade.html
1,083,259,142

FINANCIAL INDICATORS
Source: World Economic Outlook 2013, IMP, http://www.imf.org/external/pubs/ft/weo/2013/01/pdf/text.pdf.
5.4
3.8
-3.5
1 1.6
-1.8
2
2
3
-4
-3
-2
-1
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013
(est)
2014
(est)
2015
(est)
Real GDP Growth
6.9
12.4
8.1
6.2
11.1
7.3
9.6
5.4
3.5
0
2
4
6
8
10
12
14
2007 2008 2009 2010 2011 2012 2013
(est)
2014
(est)
2015
(est)
Consumer Prices (annual % change)
Inflation is measured by the consumer
price index; it reflects the annual
percentage change (CPI) in the cost to
the average consumer of acquiring a
basket of goods and services. The CPI is
calculated by taking price changes for
each item in the basket and averaging
them.
After the economic crisis in 2008, a
comprehensive set of state measures
was undertaken. The country’s external
liquidity is secured through a €3 billion
worth, Stand-By Arrangement with the
IMF.
Public expenditures are substantially
reduced, but with the increased state
investment in infrastructure
development.

LABOR FORCE
[PERCENTU
ALE]
[PERCENTU
ALE]
[PERCENTU
ALE]
Serbian Labor Force Education
Primary Education
Secondary Education
University
Serbia’s labor force combines exceptional
working efficiency with sizable labor supply.
With a unique combination of high quality
and low costs, it is one of the key factors in
reaching a strong business performance.
Source: Statistical Office of the Republic of Serbia, http://webrzs.stat.gov.rs/WebSite/
59%22%
19%
Serbian Labor Force Split by Occupation
Services
Agriculture
Industry
Agricultural sector in Serbia has extremely
strong economic power, it is the basis for
economy and engine for development of
rural areas. The share of industrial
employment in Serbia is low compared to
other European countries. However, the
share of employment in the services sector is
just slightly below the level recorded in the
27 countries of the EU.

WORKFORCE TRENDS
14.4
16.9
20.0 20.0 19.4 18.8
0
5
10
15
20
25
2008 2009 2010 2011 2012 2013
Unemployment Rate (%)
The unemployment rate measures the
number of people actively looking for a
job as a percentage of the labor force.
Historically, from 2008 until
2012, Serbia’s unemployment rate
averaged 20% reaching an all time high
of 25.5% in March of 2012 and a record
low of 13.3% in March of 2008.
Source: CIA World Factbook, https://www.cia.gov/library/publications/the-world-factbook/geos/ri.html
168 179
204
275
350
370
331 324
363 376
0
50
100
150
200
250
300
350
400
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Average Net Salary in Serbia (€) With 7.2 million people, the
Serbian market is the 2nd largest
in South Eastern Europe. The
average net monthly salary rose
from €91 in 2001 to €376 in 2012.
Rapid consumer loan expansion
was reflected in double – digit
growth of retail trade turnover on
an annual basis.

FDI OVERVIEW
2.255
1.810
0.949
2.945
1.637
1.899
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
2008 2009 2010 2011 2012 2013
FDI (in million €)
2.5
0.6
0.1
0.5 0.4
0
0.5
1
1.5
2
2.5
3
2007 2008 2009 2010 2011
FDI as a Percentage of GDP
According to PWC, Serbia is the 3rd most
attractive manufacturing and 7th most
attractive services destination among
emerging economies. In the past four
years alone, Serbia attracted nearly €11
billion of inward foreign direct
investment.
Serbia attracted 77.7 million euros in
net FDI and 106.3 million euros in net
portfolio investment, mainly
in government bonds. Full – year net
FDI amounted to 232 million euros in
2012.
Source: Serbia Investment and Export Promotion Agency, http://siepa.gov.rs/en/index-en/import-from-serbia/foreign-trade-data/2012.html

FDI BY SECTOR
Others
Wood and Furniture
Tourism
Insurance and Pension
Metallurgy
Construction
Pharmaceutical
Automotive Industry
Tobacco
Real Estate
Oil and Gas
Retail
Telecommunications
Financial
Food and Beverage, Agriculture
879.1
256.2
300.4
313.0
399.1
711.1
752.5
760.0
847.0
1,016.0
1,427.0
1,853.2
2,172.0
2,400.0
2,642.6
FDI in Serbia by Sector in 2011 (in million €)

FDI LOCATOR

SERBIA’S FOREIGN TRADE

MAIN TRADE PARTNERS
Hungary
Croatia
Slovenia
Macedonia
Montenegro
Russian Federation
Romania
Bosnia and Herzegovina
Italy
Germany
256.5
309.5
333.6
375.0
623.0
675.8
727.6
842.6
933.2
1,023.8
Major Export Countries in 2012 (in million €)
Poland
Croatia
Slovenia
Austria
Romania
Hungary
China
Italy
Germany
Russian Federation
409.5
418.8
460.3
512.6
641.4
728.2
1,078.9
1,431.9
1,608.0
1,608.0
Major Import Countries in 2012 (in million €)

MAIN TRADE GOODS
Rubber manufactures
Iron and steel
Miscellaneous articles
Apparel and clothing
Metal manufactures
Fruits and vegetables
Road vehicles
Non-ferrous metals
Electrical machinery
Cereals
282.9
287.9
340.3
392.4
402.0
421.4
469.9
523.8
647.1
651.8
Major Export Products in 2012 (in million €)
Paper
Plastics
Non-ferrous metals
Iron and steel
General industrial machinery
Medicals and pharmaceuticals
Electrical machinery
Gas
Road vehicles
Petroleum
428.0
456.8
484.9
493.6
509.3
550.6
636.5
843.3
909.3
1,457.6
Major Import Products in 2012 (in million €)

AGRICULTURE IN SERBIA
Agriculture is the only sector in Serbia with a
positive foreign trade balance, which means
that it is the backbone of foreign trade
development of the country
Agricultural and food products accounted for
23% of the Serbia’s total exports and 7.9% of
the country’s overall imports in 2011
Sources: World Bank, http://www.worldbank.org/content/dam/Worldbank/document/Serbia-Snapshot.pdf
Ministry of Agriculture of the Republic of Serbia, http://www.mpt.gov.rs/postavljen/171/FACT%20SHEET_FINAL%20VERSION.pdf
The most important agricultural products
exported by Serbia are:
• Maize, yellow
• Frozen raspberries with no sugar added
• Sugar, white
• Soybean oil, crude
• Sunflower oil, edible
• Sunflower oil, crude
• Wheat flour
36%
30%
8%
21%
5%
Agriculture Export Commodities in 2012
Fruit
Cereal
Vegetable
Livestock
Oil seed

FRUIT PRODUCTION IN SERBIA
Source: SIEPA’s Fact Sheet about Serbia’s Agriculture in 2012
Production by Fruit Species in 2010
The share of exports of fruit
and processed fruit products in
the total value of exported
agricultural and food products
is significant, usually averaging
27%.
In terms of value of
exports, raspberries top the list.
The share of raspberries in the
total value of fruit exports in
2010 was 47%.
In 2011, Serbia's total agricultural exports increased for 20% comparing to
previous year, reaching record of 2.8 billion USD. The biggest surplus in foreign
trade of agriculture product came from grain and grain products (USD 666
million), processed fruit and vegetables (USD 450 million) and refined sugar (USD
200 million).

ABOUT RASPBERRIES IN SERBIA
Most of Serbia’s raspberries are exported in FROZEN FORM (around 95% of all
production goes for exports). Exporting them FRESH would strongly improve
revenues, but many structural problems go against Serbian
producers, examples being the country's SHIPPING AND LOGISTICAL CAPACITY.
The fresh raspberry must reach the final consumer within a couple of days
from the moment it is hand picked in the plantations. This is not an easy task
given the conditions in the region. It does not only depend on the DEXTERITY
OF THE PRIVATE SECTOR, but also on PUBLIC ADMINISTRATION.
Serbia has 4.2 mil ha of arable
land (0.56 ha per citizen); 90%
is privately owned and 10%
belongs to the government
67% of the total area under
berries is used for raspberry
plantations

ABOUT MILK IN GERMANY
Source: DiaryCo, http://www.dairyco.org.uk/market-information/supply-production/milk-production/eu-milk-deliveries/
Trade of milk primarily takes place
with other EU MEMBER STATES.
Alongside these particularly close
trade relationships, there is
also great potential for exporting to
DEVELOPING COUNTRIES OUTSIDE
EUROPE (e.g. China).
The dairy industry has developed into the sector with the
highest turnover in agriculture and in the food and drink
industry in Germany. Germany is THE BIGGEST PRODUCER
OF MILK IN THE EU, producing about a fifth of all European
milk.
German milk production costs well over 40 cents a liter.
The dairy industry’s focus over the next few years will be on
how to reorient itself after THE MILK QUOTA EXPIRES IN
2015, and accommodating the European Union’s new
common agricultural policy.

GERMAN DIARY SECTOR
Source: European Diary Association, http://www.eda2013.eu/german-dairy

TARIFF SYSTEMS
0%20%
COUNTRY
IMPORT TARIFF
IMPORT PRODUCT
Source: Administrative Customs and Tariffs, http://www.upravacarina.rs/cyr/Zakoni/Uredba%20CT2013.pdf

WHYSHOULDSERBIAANDGERMANYTRADE?
Serbia can produce raspberries at a lower cost
(Pr)Serbia < (Pr)Germany*
Germany, as opposite, can produce milk at a lower cost
(Pm)Germany < (Pm)Serbia*
Serbia’s productivity in producing raspberries is
higher than Germany’s, while Germany’s productivity in
producing milk is higher than Serbia’s
Serbia is better at producing raspberries, while
Germany is better at producing milk
* absolute price comparison
r - raspberry
m - milk

GAINS FROM TRADE
A country specializes in its sector of comparative advantage
When the country specializes in its sector of comparative advantage,
its GDP at international prices increases
The relative price of the good that
has comparative advantage
increases with trade
The relative price of the other
good (without comparative
advantage) decreases with trade
Domestic workers earn a higher income from production of the good that
has comparative advantage

CONCLUSION ABOUT TRADE
Consumption is
restricted to what
is produced
internally
Consumption in
each country is
expanded because
overall world
production is
increased as a
result of
specialization of
the countries
WITHOUT TRADE WITH TRADE

RICARDIAN MODEL
The Ricardian model, using concepts of OPPORTUNITY
COST and COMPARATIVE ADVANTAGE, provides the
simplest setting to illustrate comparative advantage and
the gains from trade in a general equilibrium setting
The model explains DIFFERENCES IN PRODUCTIVITY OF
LABOR between countries, which is a consequence of
DIFFERENCES IN TECHNOLOGY.
Implication of Ricardian model: a home country’s
economy gains from the trade (import) of products that
it does not have comparative advantage for.

ASSUMPTIONS OFTHERICARDIAN MODEL
1.
•Two countries are included in the model – Serbia (home) and Germany (foreign)
2.
•Only two goods are produced in both countries – raspberries and milk
3.
•Labor is the only factor of production
4.
•Supply of labor is constant in time
5.
•A situation of perfect competition is present in both countries – everyone is a price taker
6.
•There is an infinite number of suppliers and customers who have the same preferences in both
countries
7.
•Workers can move freely among different sectors of a country, but not between the two countries
8.
•There is a constant return on scale
9.
•There are no transportation costs between countries

UNIT LABOR REQUIREMENT
General formula:
* the number of hours of labor required to produce one unit of
output
P price of a product in a specific country
W wages of the workers in a specific sector
1+ μ desired gain margin
Relative prices according to the Ricardian model:
PRICEMILK
[€/L]
WMILK
[€/h]
aLM
PRICERASPBERRIES
[€/L]
WRASPBERRIES
[€/h]
aLR
GERMANY 0.69 5.33 0.129 8.2 5.33 1.538
SERBIA 0.76 1.98 0.384 2.7 1.98 1.364

AVERAGE PRODUCTIVITY
* the amount of goods and services produced by one hour of labor
General formula:
AVERAGE PRODUCTIVITY
Milk Raspberries
GERMANY 7.72 0.65
SERBIA 2.61 0.73
Raspberries in Germany: 1/1.538= 0.65
Milk in Germany: 1/0.129 = 7.72
Raspberries in Serbia: 1/1.364 = 0.73
Milk in Serbia: 1/0.384 = 2.61
Calculations:
Summary:

COMPARATIVE ADVANTAGE
COMPARATIVE ADVANTAGE
GERMANY SERBIA
11.88 > 3.55
0.08 < 0.28
A country has a comparative advantage in producing a good if the opportunity cost
of producing that good is lower in the country than in other countries.
A country with a comparative advantage in producing a good uses its resources most
efficiently when it produces that good instead of producing other goods.
Germany has comparative
advantage in producing
milk
Serbia has comparative
raspberries
Calculations:
Summary:

PRODUCTION FRONTIER
PRODUCTION FRONTIER
Max Milk Max Raspberries
GERMANY 772.46 65.00
SERBIA 260.52 73.33
The production possibility frontier (PPF) of an economy shows the maximum output that
can be produced for a fixed input.
The economy’s total resources are defined as L, the total labor supply
(e.g. if L = 100, then this economy is endowed with 100 hours of labor or 100 workers).
Assuming the two countries have the same labor force
(ASSUMPTION: 100 WORKERS),
the production frontier will have the maximum values of production as follows:
Summary:

GERMAN PRE-TRADE PPF
* The assumption is that the intersection point identifies a quantity in each
sector equal to half of the maximum production capacity
65
[VALORE X].46386.23
32.5
0
10
20
30
40
50
60
70
80
90
0 200 400 600 800 1000 1200 1400 1600
Raspberries
Milk
Maximum amount of raspberries that
can be produced In Germany
Maximum amount of milk that
can be produced in Germany
Raspberry consumption
& production
Milk consumption
& production

SERBIAN PRE-TRADE PPF
180
[VALORE X].26
90
0
50
100
150
200
250
300
0 50 100 150 200 250 300 350 400 450 500
Raspberries
Milk
Maximum amount of raspberries
that can be produced in Serbia
Maximum amount of milk that
can be produced in Serbia
Raspberry consumption
& production
Milk consumption
& production
*The assumption is that the intersection point identifies a quantity in
each sector equal to half of the maximum production capacity
260.52

OPPORTUNITY COST
A country faces opportunity costs when it employs resources to produce certain goods
and services. For example, the opportunity cost of producing raspberries is the
amount of milk not produced, while the opportunity cost of producing milk is the
amount of raspberries not produced
* The cost of an alternative that must be forgone in order to pursue a certain
action, i.e. the benefits that could have been received by taking an alternative action.
SERBIA:
GERMANY:
0.08 0.25<
3.55 4.01<

GERMAN POST – TRADE SITUATION
Indicators
Pre-Trade
Condition
Post-Trade
Condition
Milk Consumption 386.23 386.23
Raspberries Consumption 32.50 32.50
Milk Production 386.23 772.46
Raspberries Production 32.50 0
Milk Overproduction 0 386.23
Raspberries Gained from
Trade
0 96.36
70
[VALORE
X].46
[VALORE
X].23
32.5
0
50
100
150
200
250
300
0 200 400 600 800 1000 1200 1400 1600
Raspberries
Milk
National Price
International Price
E
E’

SERBIAN POST – TRADE SITUATION
Indicators
Pre-Trade
Condition
Post-Trade
Condition
Raspberries
Consumption
36.67 36.67
Milk Consumption 130.26 130.26
Raspberries Production 36.67 73.33
Milk Production 130.26 0
Raspberries
Overproduction
0 36.67
Milk Gained from Trade 0 146.96
73.33
[VALORE
X].52
0
10
20
30
40
50
60
70
80
0 100 200 300 400 500 600
Raspberries
Milk
E’
E
National Price
International Price36.67
130.26

GAINSFROMINTERNATIONALTRADE
* refers to the advantages which different countries, participating in international
trade, enjoy as a result of specialization and division of labor.
The gains from trade are the benefits from trading rather than producing i.e. the
benefits that accrue to each country to a transaction over and above the benefits
each would have derived from producing the goods or services themselves
Germany: 386,23 * 0,25 = 96.36 kilograms of raspberries
Serbia: 36.67 * 4.01 = 146.96 liters of milk
Gains from trade = Production of specialized product * Opportunity cost
General formula:
Calculations:

RICARDIAN MODEL IMPLICATIONS
SERBIA has comparative
RASPBERRIES, and GERMANY
has comparative advantage in
producing MILK.
Serbia specializes in raspberries
production and Germany
specializes in milk production.
BOTH COUNTRIES ARE BETTER OFF
BY ENGAGING IN INTERNATIONAL
TRADE.

RASPBERRIES IN SERBIA - KEYWORDS
RURAL DEVELOPMENT
STABLE EXPORT
STRATEGIC PRODUCT
PRECIOUS SOURCE OF FOREIGN CURRENCY
WORK INTENSIVE PRODUCTION
BENEFITING UNEMPLOYMENT ISSUE
HIGH PRODUCTION VALUE, INCOME AND PROFIT
PER INVESTED CAPITAL UNIT AND LABOR
CONSTRUCTION AND EXPANSION OF THE FOOD INDUSTRY CAPACITIES
ACCUMULATIONS FOR INFRASTRUCTURE CONSTRUCTION
ADEQUATE CLIMATE AND SOIL QUALITY

FACTORSFAVORABLETOSERBIA'SECONOMICGROWTH
USA
FTAs
STRATEGICLOCATION RELATIVELYINEXPENSIVEAND
SKILLEDLABORFORCE

REFERENCES
• Administrative Customs and Tariffs, http://www.upravacarina.rs/cyr/Zakoni/Uredba%20CT2013.pdf
• CIA World Factbook, https://www.cia.gov/library/publications/the-world-factbook/geos/ri.html
• DiaryCo, http://www.dairyco.org.uk/market-information/supply-production/milk-production/eu-
milk-deliveries/
• Doing Business, Measuring Business
Regulations, http://www.doingbusiness.org/~/media/giawb/doing%20business/documents/profiles
/country/SRB.pdf
• European Diary Association, http://www.eda2013.eu/german-dairy
• National Bank of Serbia, http://www.nbs.rs/
• Ministry of Agriculture of the Republic of
Serbia, http://www.mpt.gov.rs/postavljen/171/FACT%20SHEET_FINAL%20VERSION.pdf
• Serbia Investment and Export Promotion Agency (SIEPA), http://siepa.gov.rs/en/index-en/import-
from-serbia/foreign-trade-data/2012.html
• Serbia Investment and Export Promotion Agency (SIEPA), http://siepa.gov.rs/en/index-en/invest-in-
serbia/liberalized-trade.html
• SIEPA’s Fact Sheet about Serbia’s Agriculture in 2012
• Statistical Office of the Republic of Serbia, http://webrzs.stat.gov.rs/WebSite/
• World Bank, http://www.worldbank.org/content/dam/Worldbank/document/Serbia-Snapshot.pdf
• World Economic Outlook
2013, IMP, http://www.imf.org/external/pubs/ft/weo/2013/01/pdf/text.pdf.

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