Vol. 1 . No. 1-2/2009

MACROECONOMICANALYSES ANDPROGNOSES

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For the publisher

Prof. Dejan Erić, PhD Prof. Gordana Vukelić, PhD

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Marko Danon Mr. Božo Drašković, PhD

Mr. Mališa Đukić, PhD Prof.Dejan Erić, PhD

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Prof. Živka Pržulj, PhD Prof. Mirjana Radović-Marković, PhD

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Mr. Igor Savić Mr. Drago Smiljanić Mr. Ivan Stošić, PhD

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2009 Institute of Economic Sciences All rights reserved. No part of this study may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of the Institute of Economic Sciences.

MAP – why again?

Institute of Economic Sciences published monthly bulletin called ’Monthly Analyses and Prognoses’ or MAP in short from May 1994 to December 2005. In that bulletin research results of the current economic trends and effects of economic policy measures in Serbia were published, as well as short-term forecasts of the most important economic indicators. According to adopted methodology, results of the analysis of all important macroeconomic policies were presented there, as well as macroeconomic aggregates and special indicators such as the following: scope of production, industrial production, agricultural production, service sector, foreign trade relations, credit and monetary sphere, etc.

In mid December 2009, four years after publishing the last issue of the bulletin, the Scientific Committee of the Institute of Economic Sciences, made a decision to start issuing this bulletin again, in cooperation with the Belgrade Banking Academy – Faculty for banking, insurance and finance (whose co-founder is the Institute of Economic Sciences). The bulletin would appear under the old shorten name of MAP and slightly changed name – Macroeconomic Analyses and Prognoses. The bulletin would be published twice a year instead of once a month.

Following up and analyzing systematically the most important measures of macroeconomic policy and its effects on basic economic trends in certain segments of economy, researchers of the Institute and the Faculty would publish the results of their analyses twice a year, in order to make MAP a bulletin in the field of macroeconomic research intended for creators of economic policy, business and wider public.

Starting from ’hard’ statistical and ’soft’ qualitative data, using a model approach in exploring dynamic interdependence of macroeconomic, endogenous and exogenous variables, we would try to assess measures of macroeconomic policy based on impartial economic analyses, as well as their scopes and limitations, to identify key problems and point out possible solutions.

Apart from ’traditional’ areas which refer to analysis of economic trends in real sector of economy, particular attention in this (pilot) issue would be paid to the analysis of financial sector, relations between Serbia and the EU from the point of view of measuring Serbia’s advancement in reforms, that is in European integrations, as well as analysis of key dimensions of the sector of small and medium-sized enterprises and entrepreneurship in Serbia.

We think that such concept of MAP would be beneficial not only for creators of economic policy in Serbia, but for decision-makers, potential investors in green field, brown field and portfolio investments.

In Belgrade, February 1, 2010 Editors

Prof. Dejan Erić, PhD

Prof. Hasan Hanić, PhD

Vol. 1 No. 1-2/2009 December 2009.

Contents

MAP – why again?..................................................................................................................... 3

PART I. RELATIONS AMONG SERBIA AND THE EU................................................... 7

PART II. MACROECONOMIC TRENDS: Economic growth in Serbia .......................... 8

PART III. ECONOMY............................................................................................................ 9 Economic trends in the real sector of Serbian economy - industry and civil engineering ..... 9 Measures of economic policy in Serbia related to economic crisis ..................................... 10 Management of natural resources and agricultural reform .................................................. 10

PART IV. MONETARY – FINANCIAL SECTOR............................................................ 12 A three-year implementation of the inflation targeting regime: achievements and limitations ...................................................................................................................... 12 National Bank of Serbia reference interest rate fluctuation ................................................. 12 Fiscal indicators.................................................................................................................... 13 Some aspects of financial balance of payments: Foreign direct investments (FDI) and foreign debt of Serbia .................................................................................................... 13

PART V. TRADE BALANCE OF THE REPUBLIC OF SERBIA IN 2009: ANALYSES AND FORECASTS FOR THE FORTHCOMING PERIOD..... 15

PART VI. FINANCIAL MARKET MOVEMENTS .......................................................... 16 Movements on inter-bank foreign exchange market............................................................ 16 Insurance market in the Republic of Serbia ......................................................................... 16 Movements on financial market ........................................................................................... 17

PART VII. SECTOR OF SMALL AND MEDIUM-SIZED ENTERPRISES AND ENTREPRENEURSHIP (SMEE) IN SERBIA ............................................... 18

Analysis of the sector of small and medium-sized enterprises and entrepreneurs (SMEE) in Serbia ................................................................................................................. 18 Development and Prospects of Women Entrepreneurship in Serbia ................................... 18

PART VIII. EMPLOYMENT AND DEVELOPMENT OF HUMAN RESOURCES .... 20 Loss of human capital in transition process in Serbia .......................................................... 20

Vol. 1. • No. 1-2/2009 • page 7

PART I

RELATIONS AMONG SERBIA AND THE EU (Economic policies, reforms, harmonization of legal regulations, problems of transition,

progress in European integrations)

In this and future issues we would be dealing with the question of the progress of our country in terms of European integrations and economic reforms. We believe that the progress of a country in reforms mirrors in the progress in European integrations for many reasons. First of all, European integrations means fulfillment of certain conditions required and assessed by the European Commission. The process of accession is very similar to standardization of an organization by an appropriate certification authority. The European Commission, in the capacity of certification authority, defines criteria which any candidate country has to fulfill. Then the same organization leads the institutions of the candidate country through a series of certification procedures. Finally, the European Commission evaluates the progress of individual countries in terms of fulfillment of required criteria. On the other hand, the candidate country gets within the three huge fields – political, economic and institutional reforms, a certain number of issues which it should focus on. In our text, we discuss how far Serbia has progressed in the field of economic reforms. We ask how far we have gone since 2000 and how many reforms, and what kind of reforms, we have to make so as to fulfill requirements defined by the Commission.

Agreement on stabilization and accession is an international treaty which was signed on April 29, 2008 between the Republic of Serbia and the European Union. It defines the two most important obligations of the Republic of Serbia: to establish the free trade zone (by this Agreement the free trade zone is established among Serbia and the EU in the trial period of six years) and to harmonize legislation of the Republic of Serbia with the EU. During the

course of the year 2009 Serbian government passed the ’Report on Implementation of National Program of Integration in the European Union’ for the period October – December 2009. According to the results of that Report made by the Office for European Integrations, in the third quarter of 2009 the National program was 77% achieved. Having in mind realization and implementation of National Program of Integration, according to the analysis of the Office for European Integrations, Serbia has adopted many reforms in the field of internal market, environment, agriculture, official statistics, education and culture. Also, a series of regulations has been adopted necessary for implementation of Interim Trade Agreement in terms of competition, state subsidies, customs and protection of intellectual property.

Accession to the EU would bring economic growth and increase of investments, and at the same time bigger employment, exports and imports. According to the most recent analyses, all indicators show that in Serbia ’net financial effect’ would be equal to 1.5 % of GDP (which is 45 bill RSD according to the current GDP). All that would be possible if the defined political goal was achieved, that is if Serbia became the EU member in 2014 and if we manage to integrate within future seven-year budget of the EU which has been worked on (the current one expires in 2013).

In macroeconomic terms, it is reasonable to expect that Serbian economy would grow in 2010, depending on the trends at the international market, investments in infrastructure and orientation of Serbian economy towards exports.

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PART II

MACROECONOMIC TRENDS Economic growth in Serbia

Ever since 2001, when the initial transition process have started, all through 2008, gross value added (GVA) reported in dinars with fixed prices of 2002, grew with an average annual rate of 4.7% in an economy as a whole - and yet with an average annual rate of 7.0%, in service sector and only 1.4% in real sector. Due to far faster growth of GVA in service rather than manufacturing activities, the partaking of latter activity in GVA was diminished from 44.6% in 2001 to 35.7 % in 2008. Faster service than manufacturing growth characterizes developed countries, however as to - what is important for the export - the sector of exchangeable goods in these countries is more developed then in Serbia.

The effects of the global financial crisis which reflected in slower economic growth were evident in Serbia in the fourth quarter of 2008. GVA in that quarter grew, compared to the same quarter last year, to 3.7% - and this is its smallest quarterly inter-annual increase since 2004 (the initial years of transition, 2001-2003, were omitted as atypical: then the GVA, due to extensive restructuring of the real sector grew at modest rate of 0.5% annual average). In 2009 Serbian economy has entered recession: on inter-annual level GVA dropped by 3.3% in the first quarter, to 2.9% in the second quarter and 1.5% in the third quarter.

In Europe, due to the global financial crisis, economic growth, measured with increase in gross domestic product (GDP) presented in national currencies at constant prices, slowed significantly in 2008. Annual growth rate in

European Union (EU) amounted to 3.1% in 2007, and 1.0% in 2008. Also in 2008 decrease in real GDP was recorded in some EU countries - both in those who are not, as well as those who are members of the European Economic and Monetary Union (EMU). Economic growth has slowed in all candidate countries for EU membership, and in the group of countries impending membership has only been accelerated in Albania.

From beginning the transition to a market economy and prior to dealing with the effects of global financial crisis Serbia has achieved real GDP growth rate of 5.4% on average annually. In that period from 2001 to 2007 (inclusive), the following EU countries had higher average annual growth rate then Serbia: Ireland (5.5%), Bulgaria (5.8%), Romania (6.2%), Slovakia (6.7%), Estonia (8.2%), Lithuania (8.2%), and Latvia (9.2%). Of the countries with the status of EU candidate countries, and countries without that status, higher average annual growth of Serbia was attained only by Turkey (6.8%) and Albania (5.5%).

According to IMF estimates, real GDP in Serbia will fall by 2.9% in 2009 and increase by 1.5% in 2010. Therefore Serbia in the period of 2007-2010 would be able to achieve, on average, economic growth of 1.3%. This possible outcome can be considered as relatively favorable as it is expected that in the same period, GDP will realistically fall on average annually by 0.9% in the EU and by 1.1% in the EMU.

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PART III

ECONOMY

Economic trends in the real sector of Serbian economy - industry and civil engineering

Economic trends in the real sector, and especially in the Serbian industry, in 2009 were under the strong influence of negative effects of the global economic crisis. Due to unfavorable global environment, the economy of our country entered, after several years of growth, the phase of recession, which was particularly visible during the first half of 2009.

In the first half of 2009 there was significant fall in volume of industrial production of even 17.4% (which was particularly evident in manufacturing industry). At the same time, the volume of activity in civil engineering was reduced by about 13% (while the value of contracted works has dropped whopping 46.5%), turnover in retail trade for about 8.4%. All this has affected the decline in GDP of 4.1% in the first part of last year.

During the third quarter and particularly the fourth quarter of 2009 there has been certain halting in adverse trends in the real sector of domestic economy, especially in industry. The fall in industrial production was subdued and there are some, although weak signals, of slight recovery in production activities (especially in the production of metal products - due to temporary renewal of U.S. Steel production, production of motor vehicles, cellulose and paper production, etc.). In 2009 level of industrial production was about 13% lower than in 2008.

Within the real sector, growth has been achieved only in the transport sector (mainly due to the dynamic growth of activities in the field of telecommunications), and in agricultural domain, which has significantly affected the fall of Serbia's GDP in 2009 to be less than initially projected.

The transition from expansion phase to recession phase emphasized many weaknesses

of the real sector of domestic economy, and in the forefront stressed the issue of budget deficit, which was found to be the focus of measures of current economic policy. In fact, many of the anti-crisis economic policy measures have not provided desired results. However, in spite of all, realized tendencies in the real sector domain of the Serbian economy are less adverse than in most countries in the region. It is estimated that the total decline in GDP in Serbia in 2009 will amount to be about 3%, which considering the unfavorable global economic environment and a number of breakdowns on the world capital market is not such a bad conclusion of all that the critical 2009 year have „brought". Namely, the adverse GDP trends have been recorded in almost all neighboring countries. According to IMF estimates, in 2009 drop in GDP will amount to 6.7% in Hungary, 5.2% in Croatia, 3.0% in Bosnia and Herzegovina, 4.0% in Montenegro, 2.5% in Macedonian, 6.5% in Bulgaria and 8.5% in Romania. Only a small growth in GDP is predicted in Albania by 0.7%.

Bearing in mind that due to "freezing" of earnings and pensions, greater incentives on the basis of domestic final demand cannot be expected, the dynamics of industrial production in the following year will largely be determined by the trends in export demand. With the first signs of recovery in world economies, including economies of EU countries to which our country is mostly directed to, there are real prospects for some revival of economic activity in the industry during the 2010. Sustainability of recovery in industrial production will primarily depend on foreign demand, and measures of current economic policy aimed at stimulating lagged internal demand. Nevertheless, 2010 cannot be counted on with significant recovery in industrial production that will be lower than in 2008.

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There are also real prospects for strengthening the scope of civil engineering activities in 2010 particularly in the field of low building, above all considering the likely intensified activity works on the road and railway corridor X. At the same time, it can be counted on the

strengthening of certain construction activities in the field of building construction, although it will, especially in the first half of the 2010, still be strongly influenced by the negative effects of economic crisis.

Measures of economic policy in Serbia related to economic crisis

Stimulating although in essence positive measures of the Serbian government intended to maintain liquidity and encourage investments are wrong in one of the key aspects - they are aimed at subvention of the banking sector and the maintenance of an enormously high interest rates denominated in the interest reported in Euros. Specifically, by interest rate subsidies part of the cost of interest is paid by the state from the budget instead by the debtor, and the banks can continue to maintain the real interest rate elevated. Users of credit, populace, and companies surely can benefit from interest subvention because they reduce the portion of expenditures for interest. However, when one bears in mind the level of indebtedness and illiquidity of our economy, then government policies that by interest rate subsidies maintain high interest rates in the short run, discourage investments in the long run , as interest rates are really too high. High interest rates are also maintained with an enormously high discount rate of the National Bank of Serbia, which at one point in 2008 was very high 17.75%. In addition high interest rates are generated by the Government through the maintenance of permanently higher level of borrowing in the financial markets through the issue of treasury bills of Republic of Serbia.

Stimulating Government measures that are targeted to boost domestic production of cars, crediting wholesale purchases of consumer goods, excluding the purchase of tractors and

agricultural machinery and repair of transport vehicles are economically speaking, erroneous. In particular, these measures are measures of imitation of the developed countries that promote their own domestic industries. The incentive to buy Zastava cars with subsidized interest rates and direct incentives of 1,000 Euros per car, according to the principle of replacing "old for new" boosted Fiat's production, because in Zastava actually only assembly is performed.

Increase in level of real wages, reduction of interest rates, increasing investments, stimulating domestic production and exports in the long term should represent a stable and promising economic policy for our country.

The Government economic policy measures are particularly debatable in regards to interest rates subsidies and credit insurance for residential building in Serbia. This issue causes a lot of controversy even in professional public community.

The government of the Republic of Serbia makes such a mistake, with its subsidized interest rate policy. Instead of affecting the reduction of prices through tax incentives or direct government intervention and social policy, in order to cool down high cost of housing in big cities in Serbia, especially Belgrade, the Government with its economic policy encourages the maintenance of high price apartments in Belgrade.

Management of natural resources and agricultural reform

In environmental protection realm, on level of the Republic of Serbia, during 2009, a number of laws, as well as bylaw acts, relating to environmental management and proper use of natural resources have been enacted. Among them one should note so called Green Pack (set

of 16 laws whose implementation should significantly improve the resolution of the accumulated environmental problems), the Law on Waste Management, Republic of Serbia draft program EMAS, as well as ratification of the Rotterdam, Stockholm and Aarhus

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convention. By adopted set of laws and the acceptance of applicable international standards, the competent authorities showed a certain dose of determination in resolving pressing issues in the field of environment. Indeed, all legislation is in line with the National Strategy of sustainable development objectives, adopted in 2008, in which sustainable development of society, economy, and environment are closely integrated.

Next to the implementation of economic instruments, which are often stemming from environmental principle polluter pays (taxes and fees), opened the door to admittance and solving of some concrete ecological problems in the country, mostly those related to the waste management (removal of a series of wild landfills in many municipalities, the construction of two regional landfills and the establishment of centers for the recycling of waste). However there is no small number of cases where inertia of local governments is still noticeable in the process of making and

implementing regulations regarding and within the scope of environmental protection.

In agricultural domain, during 2009, the reform of this sector has continued. The passing of Law on Agricultural Land (Official gazette of the Republic of Serbia, 62/2006, 65/2008 and 41/2009) has defined the planning, protection, regulation and use of agricultural land, supervision over the implementation of the law, and other issues. In addition to this law, the current law trend is directed towards the Law of transformation of social ownership over agricultural land in other forms of property, the Law on privatization of land, the Law on cooperatives - in the draft, Law on Protection of Competition and many others. It should be noted that the Law on privatization of land, primarily deals with issues related to social soil, which for a long time had a comparative advantage over fragmented individual rural farms (better organization and safety by infrastructural content).

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PART IV

MONETARY – FINANCIAL SECTOR

A three-year implementation of the inflation targeting regime: achievements and limitations

Inflation targeting is centrally positioned part of the National Bank of Serbia’s monetary policy. Targeted inflation rates, until 2011, are harmonized with a need to achieve a mid-term price stability and amount at 2-4% per annum. There is no difference between the theory and practice as long as this objective is relevant to the monetary policy. Both theory and practice prove that low and stable inflation creates favorable conditions for a long-term economic development. In addition to this, economists and central bankers have largely agreed on possibilities and limitations of monetary policy. Central bankers are aware that monetary policy may have an influence on average inflation level, i.e. inflation rate fluctuation in time. On the other hand, monetary policy shall not exercise a significant impact on average level of real values, such as production and employment (i.e. unemployment). A rigid interpretation of monetary policy possibilities may quite easily be taken as something central banks are able to influence inflation with. However, even though

monetary policy cannot have an impact on average level of real values in economy, this does not imply that its activity is ineffective when it comes to stabilization of these values. All inflation targeting regime central banks nowadays implement is usually called a flexible inflation targeting. This flexibility implies that – besides a long-term inflation targeting – central banks also aim at creation of such conditions keeping inflation and real economic flow fluctuations within acceptable limitations. A well-balanced monetary policy usually implies a genuine balance between inflation fluctuation and economic real sector values. Three years later (2006-2008), experiences with targeted inflation regime of the National Bank of Serbia testify achievements are much less encouraging and much more dissatisfactory. Reduction of inflation rate has made seemingly satisfactory results. Nonetheless, effects are rather unfavorable when it comes to stabilization of real economic sphere (hence, production, employment and balance of payment results).

National Bank of Serbia reference interest rate fluctuation

The National Bank of Serbia is determined to control its main objective - targeted inflation - by a reference interest rate as a monetary policy instrument. Analyses, however, prove that stabilization of the national currency and control of unwanted foreign currency fluctuation have been its true effects. Stabilization of the national currency has indeed been achieved, but at the expense of hindered credit activity and violated macro system liquidity.

Even though a reference interest rate demonstrates divergent movement in terms of

continued REPO stock growth, the level of REPO transactions on 4 December 2009 was RSD 175,108,342,827. Commercial banks credit portfolios were ‘repacked’ from credit agreements with real sector into unproductive and expensive channel towards the National Bank of Serbia. Hence, banking sector has slightly increased its investments in economy from 660 billion RSD to only 736 billions, whereas placements to residents remain unchanged - below 400 billion RSD. Such a situation is not surprising, knowing that two-week REPO agreements of a commercial bank

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with the National Bank of Serbia are almost non-risk placements, and accordingly does not need any allocations reserved for potential losses. However, REPO transactions make the National Bank of Serbia responsible of paying

interest rates. Positive real reference interest rate hence raises an issue of justifiability related to interest rate payment by the National Bank of Serbia, which will amount to over 150 million Euro in 2009.

Fiscal indicators

Adopted Law on Budget for 2010 envisages the total fiscal deficit of 107 billion RSD, i.e. budgetary revenues should be higher in 2010 than in 2009 by 41 billion and expenses by 43 billion RSD. Payments and transfers will be the highest individual expense in 2010, i.e. payments to mandatory social insurance organizations amounting to 263.3 billion RSD, out of which 215 billion RSD has been earmarked for pensions.

Key IMF-Serbia arrangement requirements have been met by adoption of this budget, or, more precisely, 107-billion-dinar deficit has

been reiterated and pensions and salaries in a public sector have been frozen by the end of 2010. Envisaged GDP growth is 1.5% in 2010.

When compared to the 2009 budget, expenses earmarked for investments have significantly gone up, which implies that the 2010 budget is investment orientated. Statements given by some officials related to possible pay rise in 2010 have been based on some assumptions hard to achieve, and which would require a quicker GDP growth and a higher amount of collected public revenues in comparison with the envisaged sum.

Some aspects of financial balance of payments: Foreign direct investments (FDI) and foreign debt of Serbia

FDI income in Serbia might be characterized as neither spectacular not disappointing. Following a rather dynamic growth of FDI at the beginning of new millennium, excluding a giant investment by Telenor in 2006, and the world financial crisis that reduced FDI income, FDI growth trend for Serbia turns out to be quite modest. FDI's distribution by sectors is not much balanced and favorable for sustainable economic growth needs. Industry and agriculture are still not among the first FDI’s destinations in Serbia. FDI in Serbia take place aiming at buying the market, and less at buying manufacturing capacities; there are still not enough green field investments, although this structure has improved lately. Only around 60% of FDI controlled business in Serbia is export orientated, some of the biggest exporters are the biggest importers at the same time (e.g. US Steel); there are significant market distortions at a number of economic segments invested in from abroad. Should we exclude areas easily susceptible to local oligopolization, the ones immune to possible import due to high

transport costs and those suitable for momentary exploitation without any significant capital stock increase or any dependence on wider infrastructure, Serbia seems to be unattractive for both foreign and domestic investors in other economic sectors. International financial crisis is not the only reason for this, but insufficiently operational industrial policy and a number of administrative and other related issues as well.

Foreign debt of Serbia on 31 August 2009 was almost 22 billion Euro and shows no serious oscillations in comparison with the end of 2008. Should we neglect emergency loans by the International Monetary Fund (IMF), it is clear that Serbia has faced a sudden gridlock phenomenon, even net outflow of (private) capital. Debt sector structure has been undoubtedly influenced by insufficient number of green field FDIs; currency and maturity structure has still been quite balanced, however recent indebtedness growth dynamics is alarming, as well disputable allocation (usage) of this debt. Even though Serbia is still among

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moderately indebted countries by most IMF/BIS/World Bank’s indicators, Serbian debt repayment as goods and services export percentage is 44% and foreign debt's share in the BDP is 68% at the end of the second quarter of 2009! Foreign debt management will be much easier once anti-corruption, economic and development, and particularly agriculture and

industrial policies of Serbia are properly formulated and implemented, as well as education policy that should support the abovementioned strategies in a long-term way. Serbia’s foreign debt is nothing but a reflection of its economic structure and social and economic failures of our economy related policy.

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PART V

TRADE BALANCE OF THE REPUBLIC OF SERBIA IN 2009: ANALYSES AND FORECASTS FOR THE

FORTHCOMING PERIOD

Serbia as inefficiently competitive and import-dependent country has to turn towards export strategy in the forthcoming period, increase economic growth rate and achieve sustainable competitiveness on the world market. Serbia, in the course of last five years (the last being 2008), has gradually increased, year by year, foreign trade deficit, as a result of quicker growth of import than export. However, the foreign trade deficit was 6.521 million USD in 2009 (until November), which is by around 5.5 billion USD in comparison with 2008.

The world economic crisis in 2009 was a key factor influencing downsizing of import and export, both here and in the world (with EU member countries above all). One should not forget when assessing Serbian export structure that it is based on primary or semi-products and raw materials. Intermediary products (reduced by 41%), long-lasting products for large consumption (reduced by 9.6%) and capital products (reduced by 17.2%) largely influenced reduced export scope in 2009.

The greatest part of our foreign trade in 2009, until the third quarter, was carried out with the EU member countries (export 52.8%, and import 55.3%), which has reduced by 26% in comparison with the same period of 2008. Chief export foreign trade partners of Serbia within the EU were the following: Germany (20.2%), Italy (17.9%) and Romania (9.6%). On the other hand, Serbia imported most commodities from Germany and Italy (the total

of 41%) and Russian Federation, making the highest foreign trade deficit (1,208.8 million USD) due to import of energy substances above all.

In 2009 (until September), Serbia mainly exported the following products: grouped by materials (26%, out of which iron and steel 7.3% and non-ferrous metals 5.3%), food (18%) and machines and transport devices (17.7%). The total economic export has been reduced by 23% in comparison with the same period of 2008. The share of primary products, agrarian and mining products in the total export was around 7% in 2009. Agricultural sector’s share went up by 67% (from 251.3 million USD to 379 million USD), while mining sector’s share went down by 40% (from 49.5 million USD to 26.8 million USD). We envisage that metals, food products, chemical products and rubber and plastic products shall be the main export leaders in the forthcoming period.

Intermediary and capital products lead the way in economic import, amounting together to more than a half of total import (58.6%). Mining sectors records the biggest import of all primary products 13%, with an emphasis on crude oil and gas import from the Russian Federation. Serbia mainly imported machines and transport devices (29.9%) and mineral fuels and lubricants (16.8%, out of which 9.3% for oil and oil derivatives) in 2009 (by the thirst quarter).

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PART VI

FINANCIAL MARKET MOVEMENTS

Movements on inter-bank foreign exchange market

EUR/RSD par oscillations in the course of 2008 and 2009 have been presented on the basis of real data and, at the same time, underline and explain par’s concrete oscillations adequate factor.

Presented national currency volatility analysis for these two reviewed years clearly shows that certain periods in a year largely demonstrate similar trends (dinar currency purchase power sapping at the beginning of the year; summer holidays are typical for months leading to domestic currency appreciation; last quarter, as a rule, brings about domestic currency depreciation due to a reinforced need to close foreign debts, etc.).

Rough analysis, however, proves a constant decline of dinar currency. The National Bank of Serbia 'defended' in 2008 a psychology limit of 95 EUR/RSD, and 100 EUR/RSD in 2009. National currency was the highest in August, 2008 – 75.75 EUR/RSD as a result of the so-

called carry trade strategy, which implies dinar currency was actually ‘blown up’ by hot money, while its lowest value was in January, 2009 – 96.33 EUR/RSD.

The National Bank of Serbia exercises undoubtedly the most important influence on par movement, besides all mentioned market makers. The National Bank of Serbia, by its monetary credit policy in terms of reference rate height, foreign reserves interventions, talks with IMF, following energy substances prices changes, as well as by presence of unavoidable issue of high budgetary expenses, has influenced on the national currency value, ranging from increase in value (appreciation) to the opposite direction trend. The given movements in inter-bank foreign exchange market, including forecasts for the forthcoming year in the end, might indicate the future policy of the National Bank of Serbia.

Insurance market in the Republic of Serbia

Insurance premium share in the BDP is one of the most significant insurance development level indicators. This share in Serbia in 2008 was 1.9% (1.8% in 2007), placing Serbia on the 58th position in the world.

Serbia’s insurance companies portfolios structure in the second quarter of 2009 is still for the benefit of non-life insurances, since 13.1% of the total insurance premium refers to life insurances, and 86.9% to the non-life ones. According to the National Bank of Serbia’s data, the total insurance premium in the second quarter of 2009 was 28.5 billion RSD (305 million Euro, i.e. 430 million USD), which is a drop by 0.7% in comparison with the same period of 2008. This is due to the financial

crisis, which reflects through decrease in insurance products demand when it comes to the insurance sector. Insurance sector business scope, measured by insurance companies’ balanced sum, has gone up in the second quarter of 2009 in comparison with the same period of 2008 by 16.4%, i.e. from 83 billion RSD to 96.7 billion RSD. Within insurance companies’ assets structure, on 30 June 2009, 39.1% refers to non-current asset, while 60.9% refers to circulating asset. Technical reserves with 62% recorded the highest share in liabilities structure on 30 June 2009, plus capital and reserves with 27.3%. Guarantee fund and solvency margin relation was 198.48% at the level of all insurance companies in Serbia primarily dealing with non-life

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insurances; whereas it was 177.91% for insurance companies dealing with life insurances. Movement of this indicator in reviewed period of time between 30 June 08 and 30 June 09, underscores better insurance risk absorption capacity. According to the data submitted by insurance companies, technical reserves coverage by prescribed forms of assets was 93.18%, while it was 90.41% in 2008. Technical reserves coverage by prescribed forms of assets was 100.47% on 30 June 09 in insurance companies primarily dealing with life insurances, while it was 100.3% on 30 June 08. In insurance companies dealing with non-life insurances, harmonization indicator of short-term assets and short-term liabilities in the second quarter of 2009 was 104.02%, and in the second quarter of 2008 103.18%. Movement of this indicator in two examined years underscores a significant tendency of insurance

companies’ liquidity rise. growth. In insurance companies dealing with life insurances, harmonization indicator of short-term assets and short-term liabilities was 211.40% on 30 June 09, and 197.45% in the same period of 2008, which proves their high liquidity.

Comparative data from the second quarter of 2009 and second quarter 2008 indicate that the financial crisis managed to slow down insurance market growth through insurance products demand decrease trend. VHV Group, Eureko, KBC and AXA expressed a huge interest in starting their respective business in Serbia. We may expect that insurance premium structure shall improve for the benefit of life insurance and that arrival of these insurance companies shall lift quality of services and create a more competitive insurance market in Serbia.

Movements on financial market

The first quarter of 2009 clearly signals that crisis effects have deepened on the Serbian financial market, manifested through the further fall of price indexes, reaching historic minimums, a small circulation on the capital market and pressures on the foreign exchange liquidity of financial system. Two price indexes showing movement tendencies on the Serbian capital market prove that Belexline reaches the value of around 850 index points (historic maximum was at the level of around 5000 points), while belex15 drops to the level of below 400 points (historic maximum was at the level of around 3200 points). The National Bank of Serbia, under uncertainty circumstances, opts for the tight money policy and keeps the reference interest rate at the high level.

The second quarter indicates signs of stabilization at all financial market segments, price indexes are recovering, exchange rate is

stable, while the National Bank of Serbia reduces price of money so that dinar loans are more available. The reference interest rate significantly drops, accompanied by the fall of treasury records return rates. The same trend goes on in the third quarter as well. A certain group of economists and politicians have consequently reached a conclusion that the crisis has hit the bottom and the recovery is to follow.

Stabilization trend has continued in the last quarter on both money and exchange markets, brining about a systematic depreciation of reference interest rate and treasury records return rates accordingly. A moderate rise of exchange rate by several percentages takes place on the exchange market. However, instability is again characteristic for the capital market, as well as decreased circulations, resulting in the fall of price indexes.

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PART VII

SECTOR OF SMALL AND MEDIUM-SIZED ENTERPRISES AND ENTREPRENEURSHIP (SMEE)

IN SERBIA

Analysis of the sector of small and medium-sized enterprises and entrepreneurs (SMEE) in Serbia

In all market economies, sector of SMEE is the main generator of economic development and employment. This can be said for Serbia, as well, whose economic development is also based on affirmation of market economy founded on private ownership. Mentioned statement can be proved by the fact that in 2008 the SMEE sector in Serbia contributed greatly and determined economic growth of the country and had the major share in employment of labor (67.2%). So high participation of the labor in SMEE in the total number of the employed people in Serbia, points out its strategic significance in reducing the unemployment rate and increase in the number of new jobs. In the SMEE sector in the period 2004-2008 the employment and the number of jobs increased by 24.9% (187 419 employees). Observed by counties, the biggest number of people employed with the sector of SME in 2008 was on the territory of the City of Belgrade (31.2%) and South Backa county (10.4%), while the least employees were in Toplica county (0.8%), Pirot (1.1%), Bor (1.2%) and Zajecar (1.3%).

Fast growth of employment in SMEE contributed at the same time to development of entrepreneurial flair and enabled ever more people to be independent in earning a living. Besides, analyses of SMEE development show that companies are most often organized as limited partnerships, being the most suitable

form of organization for entrepreneurial activities in Serbia. Data show that the structure of the field of activities is not so favorable, because tertiary activities are dominant, while production activities are far less present. Trade is the predominant activity, then processing industry, real estate business and civil engineering. Also, regional dispersion of SMEE sector is not even. Namely, regional analysis of the level of development of SMEE sector shows its concentration and effectiveness in developed regions and big cities. In 2009, the City of Belgrade and the South Backa county had the biggest share in the structure of SMEE (88 872 or 29.3% and 27 991 or 9.2% , respectively). These two counties employed 41.6% workers (293 352 or 31.2% and 98 088 or 10.4%) made 55.1% turnover (2054.2 bill RSD or 44.1% and 514.4 bill RSD or 10.7%). On the other hand, although undeveloped, this sector is important in many regions, and in some municipalities it is the only segment of economy in implementation of structural reforms, especially in terms of creation of new jobs and development of economy as a whole. However, it is important to emphasize that, although dominant in economic structure of any municipality in Serbia, this sector did not have significant influence on reducing regional disproportions.

Development and Prospects of Women Entrepreneurship in Serbia

In most Eastern European countries which are in the process of transition, certain peculiarities have been identified in terms of developing

entrepreneurship, especially in developing women entrepreneurship. However, while statistics of the well developed countries show

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that the number of female business owners has increased significantly during the last ten years, contributing to GDP growth in their countries and creation of new jobs, in transition countries it is not the case. A kind of women discrimination can be found, having in mind that women are offered short-term jobs, or temporary jobs so as to reduce the costs of maternity leaves or child care leaves. According to the data provided by Eurostat from early 1990s, average salary of a woman in transition countries was by 20-25% lower than the salary of a man. The degree of participation of women entrepreneurs in economic development of transition countries is to a great extent connected with conditions in which they work, as well as the support given by the state with the development of legal regulations and fast implementation of economic reforms. Most often, the biggest advance was made by the countries – new members of the EU, which managed to find a catch with other EU members faster. In such a context, it is difficult to make generalizations and draw a single conclusion for majority of transition economies. However, what development of women entrepreneurship in former socialist countries has in common is the fact that economic and social reforms have brought about insecurity of paid jobs for a huge number of women

employees, which encouraged them to turn to alternative and new models of work. For all these reasons, the idea to start their own business appeared to be one of the opportunities for women to be active and solve the issue of their unemployment.

Position of women in Serbia and on the Balkans has not been well understood. Neither is it possible to understand it without prior comprehension of a specific concept of ’sacrificing micro matriarchy’ which has been a long lasting form of life of women in this region and is revived in any social system, and in transition as well. This ’sacrificing model’, defined by the group of sociologists from the Faculty of Philosophy in Belgrade, represent a continuum in our society, as well as a specific kind of patriarchy, which are interlaced and regained with establishment of relatively persistent old forms and structuring of new ones, which are gender determined in the period of transition. In this paper, the position of women in Serbia and the Balkans is discussed, separately for the period 1989 and after 1989. Suggestions are given so as to determine directions of economic and social policy in Serbia in order to reduce gender discrimination in employment.

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PART VIII

EMPLOYMENT AND DEVELOPMENT OF HUMAN RESOURCES

Loss of human capital in transition process in Serbia

Transition process has brought about significant loss in human capital in Serbia, which had negative influence on competitiveness of the labor and the total development potential of the country. Transition is followed by cuts in economy which have decreased the level of knowledge, but have not create enough space for generating human capital as the basis for further economic development. Termination and reduction in jobs disabled continual development of organizational knowledge and reduced the space for application of knowledge acquired in the process of education. Huge number of people at the most productive age with accumulated organizational knowledge found themselves beyond the sphere of work. These processes influenced the loss of human capital, which represent the main power of economic growth and competitive advantage in contemporary economy. That can leave deep traces in Serbian economy and can influence its future greatly.

Employment in Serbia is characterized by the two periods from the point of view of its influence on the development of human capital. One was extensive employment, which created false image on employment, which in fact was latent unemployment, because people who were employed had no job in which they could have used their knowledge and abilities and develop competition and motives to achieve the results and create opportunities for further acquisition of knowledge. This period lasted until 2000. Privatization and processes of restructuring of national enterprises uncovered the fact that those people had not actually worked, which resulted in constant growth of unemployment from 2001 till the end of 2006. After that, the number of the unemployed decreased. By the beginning of the year 2009 the number of the unemployed started to grow again, as a result of

the impact of economic crisis. In March 2009, base index of employment fell to 88.7% of the level from the year 2000.

According to the data provided by the survey on labor force made by the Republic Institute for Statistics, there is a constant growth of the number of unemployed people. According to their methodology, the number of the unemployed in April, 2008 was 434 000, while in October, 2009 it increased to 517 000, causing the growth of the unemployment rate from 13.3% to 16.6%. During the same period the number of the employed declined from 2 838 000 to 2 590 000. Obviously, the effects of the economic crisis in Serbia are huge in the sphere of human resources. The reduction in the number of employees by more than 250 000 represents a huge danger for the increase of economic activity in the long run.

Structure of employment has been changed according to the form of ownership. In 2004 more than 38% of the total number of employees in Serbia worked in socially-owned and state enterprises, while some 27% were employed in private enterprises and 22% were self-employed. By the beginning of 2009 the percentage of people employed in socially-owned and state enterprises declined to 19.7%, while the number of people employed in private sector increased to 46.4% with 23.7% of those who were self-employed.

Percentage of people employed with big companies which employ more than 250 workers was 49% in 2002 while in 2008 that percentage fell to 9.2%. Competitiveness of big state systems on which Serbian economy was founded was not high enough to be left untouched by opening of the market. Nowadays, more than 40% has been employed

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with micro firms which employ less than 10 people.

If we exclude the effects of financial crisis which started world over in the second half of 2008, and in Serbia as well, it can be stated that transition in Serbia have brought about serious requirements and challenges by Serbian government as well as the institutions of the labor market so as to prevent further increase of unemployment in the period of huge economic crisis.

Serbian government, faced with the increase of unemployment, has undertaken a series of encouraging measures which have been aimed at reducing unemployment and reviving economic activities. At the beginning of the year 2009 measures were taken for which 3.5 bill RSD were allocated form which 1.5 bill for education and training. Those measures were well designed, bur regardless of them, there was

a huge decline in employment according to the data provided by the Republic Institute for Statistics from September 2008 till March 2009, especially in the sector of entrepreneurship, form 567 000 to 431 000.

Average net salary paid in the first half of 2009 in the Republic of Serbia amounted to RSD 30 953. After ten years of real growth of salaries, they started to fall in 2009 for the first time. In the first half of the year 2009 salaries were lower by 1.8% if compared with the average salaries in 2008. Further decrease of salaries could have negative impact on work motivation and optimism of population in terms of economic reforms. However, it can be concluded that in the period of transition there was a huge increase in real salaries for more than 230% and that such trend could be expected to slow down in future.