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On behalf of the Serbian Association of Economists and the Serbian Association of Corporate Directors, we are pleased to invite you to the 24th Kopaonik Business Forum (KBF). The Forum will be held in Kopaonik Convention Center.¬

Traditionally, KBF is organized under the patronage of the Prime Minister of the Republic of Serbia. Last year KBF gathered more than one thousand participants, including respectable scholars, government representatives, diplomatic officials, business practitioners and media.

The Program Committee has foreseen a debate on the following three thematic clusters:

March 7, 2017:  Intelligent Investments as New Government’s Agility after Fiscal Consolidation
March 8, 2017:  Sequenced Reform Agenda: Infrastructure Development, Public Sector Restructuring and Smart Growth
March 9, 2017:  Sustainable and Inclusive Development: Industrial Policy Perspective

Transition in Serbia has started more than a quarter of century ago, too long from the perspective of the world we are living in today. Unfortunately, Serbia’s transition achievements such as enhancement of private sector, encouragement of entrepreneurship, boost of competition, competitiveness increase, leading-edge technology implementation, efficient and ethical corporate governance, and better integration in global supply chain are in contradiction with expectations from the start of that process and far below other CEE countries achievements.

We can easily recognize that trajectory of Serbia’s transition is uneven. Its speed varies. It has its ups and downs, zigzags. The whole period of transition was full of fault lines in terms of misconceptions, overestimation, and wrong doing. Transition as a way to escape the middle income trap, pushed Serbia into transitional trap, structural crisis sometimes called "transitionism" (never ending transition).  

The true causes of transitionism we have experienced are not only widespread, but also hidden. The so-called "non-arm’s-length" system, absence of transparency and enforceability of contracts through the legal system, is the most important fracture of the system. The contact between arm’s length system and non-arm’s length system creates fragility. For example, when investors from an arm’s length system come into a non-arm’s length environment to finance investment projects, they minimize risks by doing three things at once. Firstly, by denominating payments in foreign currency so that their claims cannot be reduced by domestic inflation and/or currency depreciation. Secondly, by releasing mostly short-term credits so that they can pool their money out on short notice. Thirdly, they lend through the local banks so that, in case the banks could not repay their debt, the government would be drawn into supporting its banks to avoid widespread economic damage. Namely, foreign investors get an implicit government guarantee. With such hedging, foreign investors had little incentive to screen the quality of projects financed. On the other side, domestic banks directed and guaranteed by the government, had little ability to exercise carefull judgement, especially when borrowers were climbing up the ladder of leading-edge technologies and/or investing in capital intensive projects. But when projects start underperforming, foreign investors are quick to pull their money out. When it happens, the government has to go hat in hand to the IMF to ask for loan for structural adjustments. Another two major hidden fractures are connected with dominance of politocratic over technocratic mindset in governance of state-owned enterprises, and with ignorance of the output gap as priority tenet of economic policy.  

Delay in economic transition is one of the causes of transitionism. As a consequence, the income level in Serbia is not converging with that in the EU and there is still a long way to go before we can talk of parity. To achieve income convergence with the EU, it means attaining compound average growth rate of 6% by 2030. It is almost unfeasible. The growth below the rate required for income convergence could be a cause of delay in political integration with the EU and, maybe, the trigger of crisis of political legitimacy.
The CEE countries had positive experience with transition. Transition did not happen overnight, but it was much faster than in Serbia. Actually, it took 8 to 12 years. Open market-oriented economy and global integration were key ideas in the CEE transition. Throughout that period, the EU and its values as well as institutions provided a vital anchor point and a strong incentive for reforms.  The process ended in 2004 when the CEE countries on average reached pre-transitional level of GDP with completely renewed institutional setting and with macroeconomic stability.

Serbia clearly committed itself to the EU path and the government, independent of political coloration, steadfastly declared it would do everything in their power to help speed this journey. In the last period, Serbia’s accession to the EU is being put in the context of the Western Balkans cooperation. Serbia’s commitment to the economic integration and regional cooperation does not rest on dogma. It is a pragmatic way of constructive realism to secure the rightful place in the EU for a country with significant delay in transition. Neighbourhood is going to be the most decisive factor in this stage of Serbia’s transition, particularly at a time when threat of terrorism and violent non-state actors is going to change global security landscape.

In modern world, continuing shift in global economic power is a cause of increasing geopolitical tensions. In the EU, the globalization and supporting arguments in favor of open and integrated market-oriented economy are being strongly challenged by reality. Given the global economic turbulence since 2008, questions have arisen as to whether the era of globalization is over and, consequently, whether majority of emerging economies like Serbia are destined to become hostage of the middle income trap. Scepticism about those values has been growing dramatically after the Brexit. The EU is not broken, but it is in serious trouble because some countries feel like they are not benefiting from the integration any more. Also, leaders of some countries (Visegrad group, for example) think that their countries are strongly penalized by joint policy elements, particularly implementation of the free movement of people principle, inspired by the argument that economic emigration is not collectivistic phenomenon but phenomenon concerning individuals.

In the new normality, the EU is at a tipping point. Along with the crisis of political legitimacy inspired by refugee influx and terrorism, the list of challenges the EU faces today is long. Growing indebtedness, rising income inequality, unemployment, confusion about rethinking of financial deepening, shortfall in investment, particularly in real economy and technology development, costs inspired by climate change, anti-establishment politicians growing popularity, negotiation about the so-called "soft Brexit", are top challenges.

Inside the EU, type of integration is a key issue. Today, there are standpoints suggesting that globalization, particularly political, is not a part of the solution but a part of the problem, making the mentioned challenges worse. Or even, that globalization is the primary cause of all problems, or some of them. Those voices advocate a pause in the momentum for the EU enlargement, or even rolling it back. This is not ideological battle between Left and Right but between intellectual platform favoring open society (globalization) and platform favoring closed society (deglobalization).

Where are we in Serbia at the end of 2016? Serbia is on the path to definitely escape from long-term negative and reverse consequences of transitionism and near-term consequences of the last three successive recessions after the 2008 global economic crisis. Policy of the so-called "expansionary austerity", as conceptual platform for reforms in Serbia with the purpose to solve the main fractures of the system, delivered results. Between our two Forums, the fiscal consolidation is almost completed.  In 3Q 2016 Serbia reached fiscal balance. It is expected that fiscal deficit at the end of the year will be 2.0%, which is twice lower than in 2015. Fiscal deficit was decreased due to austerity measures and better tax collection (tax revenue growth y/y is 7%). It is the most important achievement of economic policy, because fiscal imbalance always jeopardizes the growth prospects.

The growth is in positive territory. The forecasted growth rate for 2016 is in the range 2.5-2.7%. Main drivers of growth, on the demand side, are investment and export, while there is also some contribution of private and public consumption. On the supply side, the growth is generated predominantly by manufacturing, construction and agriculture. Price stability is achieved. Forecast for CPI y/y is 1.0%. Dinar is stable with small nominal and real depreciation. The World Bank has announced some improvement in business climate (improvement in ranking by 7 places in the Doing Business list), and recently the World Economic Forum declared some improvement in global competitiveness index (4 places). Public debt is shrinking and is now at the level of 74% of GDP. Unemployment is high (15.6% ILO rate), but in good trend, particularly in the segment of youth unemployment (36%). Investment ratio is 4.0% of GDP and share of export in GDP is increasing and now amounts to 35%. Trends are good, but macroeconomic performance improvement is not good enough. Without energizing and deepening reforms in the state sector and accelerating changes in institutional setting in order to achieve arm’s length system attractive for investment, current macroeconomic achievements will not be sustainable.
These days policy makers in Serbia are looking for answers to the following questions: Will fiscal consolidation be sustainable? Will this year’s growth be sufficient? In theory of growth, development is more than growth. At the same time, the economy and world we live in are evolving at a faster pace than ever before. Change is getting faster but not always in good direction. The challenge is not to be left behind by followers. Business organizations that did not move fast enough and in good direction are no longer on the scene. In that setting, there are at least three certainties. Firstly, strategy for positioning vis-à-vis changing environment constantly needs to adapt. Secondly, not only to prosper but also to survive, players of the competitive game, at some point of time, have to be agile. Thirdly, in the process of repositioning toward leading trends, failures continuously happen.

Transitionism which we live in is continuously pushing Serbia’s economists on the defensive. Of course, it is incorrect to say that no one accepts battle for recovery. This year KBF is trying to bring fresh perspective to all three system’s certainties mentioned before. But, the discussion will be toward the role of failure in that interaction.

The purpose of strategy is recognizing impending change and capitalizing on it. The trick is to be sensitive enough, particularly to "weak signals" concerning the "big things" and to reconsider ongoing strategy. The future is not a far-off point. It has to be considered that it arrives day-by-day. Attention to weak signals gives rise to nonlinear thinking which helps an organization, from company to national economy, imagine and provide for various plausible futures. For national economy, weak signals include early evidence of emerging trends in (geo)politics, technology, demography, economic policy platform, environment, culture, etc. For Serbia, picking up weak signals enables right geopolitical positioning, speeding up transition, catching up with emerging trends, and accelerating future growth through intelligent investment.

Agility is a prerequisite for responsiveness which is beginning with clear understanding of the circumstances that favor or threaten, or both, an organization. Agility continues with trial-and-errors in terms of experimentation, prototyping, testing, and support. Agility enables an organization to be proactive rather than reactive toward the leading trends.  The future is mostly unpredictable, because it is shaped by nonlinear changes and unlimited number of chance events sometimes called "strategic inflection points". Does that mean that opportunistic wait-and-see is a way to minimize risk exposure? Certainly not. Organizations must respond to the future in the planned manner.

Serbia’s macroeconomic performance fact sheet shows that capacity building to prioritize, investigate and act on key choices such as state sector restructuring, growth model reconsidering, economic policy platform justification, development of adequate education, science and health policies as well as an adaptive mindset for society that embraces continual justification toward the leading trends, has led to the specific pattern of failure.

Technical as it is, Serbia’s transition debate is raging among the local economists. It is rarely discussed elsewhere. Some failures provide value in the form of immediate recognition of misconceptions and overestimations from the past. Much can be gained if we can draw the right lessons from former failures. Equally, much could be lost if we draw the wrong lessons. Failure is less painful when it involves significant short-term pain in return for more diffuse but enormous long-term gain.

We hope this year’s Forum will deepen the discussion and accelerate the search for a better solution in Serbia and zoom out a global and long-term view to the problem in order to avoid repetition of misconceptions and overestimations. There have been enough failures. We strive to extract some value from them. Our intention is to bring some explanations for Serbia’s transition pattern of failure with the purpose to release some thoughtful ideas for fixing hidden fractures of the system. Multi-pronged reforms require careful analysis and sometimes tedious attention to details. Such reforms are always difficult to sell to the public and hence have little appeal to politicians. But without them, the existing fault lines will only deepen. Furthermore, if you learn from others' failures, return on failure ratio will rise globally.
For Serbia, the year 2017 will be strategic inflection point because the acceleration of accession toward the EU is expected. But 2020, the year forecasted as the end of the so-called "soft Brexit", will be a political milestone for the EU and, consequently, for Serbia.

To build necessary momentum for further reforms, Serbia must address the main failures from the past. Namely, Serbia must define clear geopolitical position. Serbia wants efficient, sustainable and inclusive economy, as well as integrated economy in global value chain but without the excess risk and the outrageous behavior. That will be hard to achieve, but it will be really worthwhile. It is well to remember that good economics cannot be divorced from good politics. This is the reason why this field is sometimes called political economy. Also, we have to recognize that institutions in such economy have influence only so long as politics is reasonably well balanced. Deep imbalances can create the political groundswell that can overcome any constraining institution. No matter how well developed the institutions, economy suffers from structural imbalances if politics becomes imbalanced or filled with political bottlenecks.

The leitmotif of KBF is to reach the relevant answers by discussing relevant details from relevant perspectives. There is no intention to repeat arguments "for and against", but rather to consider explanatory details. After all, the devil is in the detail. Proceeding from strategic vision, through its legal and financial articulation, we come to the explanatory details. This, of course, does not mean that KBF will be able to encompass all aspects of the complex process of the system reform. While macroeconomic stability is not left out, focus of analysis is given to microeconomic or business perspective. Also, we must not forget that the implementation of multi-pronged reforms will require mindset change and adequate political agility.

In the following period Serbia has considerable work to do providing answers to some critical questions. How can economy wean itself of its dependence on debt and import? Should we create stronger real economy to protect people during the period of restructuring and not penalize well educated youngsters? And, of course, how to restructure financial sector so it can allocate resources and risks efficiently?

In structuring reforms, some could erroneously recognize that the only truly safe national economy is one enabling macroeconomic stability, mostly reduced to price and FX stability. But such system reinforces the incremental growth and, thus, the status quo. In the long run, especially given structural imbalances from the past as well as the enormous challenges the global economy faces, settling for the status quo may be the greatest risk of all, for it will make us unable to adapt to meet the coming challenges. In this stage of development, what Serbia really needs is infrastructure in line with the EU standards, efficient real economy and dynamic financial sector, but without the excess risk and the outrageous behavior. One of the greatest mistakes from the past was to believe that once a country had developed a frame of institutions based on neo-liberal policy platform, political influences would be tampered. We should now recognize that institutions have influence only so long as politics is reasonably balanced. No matter how well developed the institutions, economy stays in transitionism if politicians become overpowered.  

Of course, there are no silver bullets. Reforms will require careful analysis of the context and sometimes tedious attention to details. We will discuss possible reforms focusing on broad approaches. If implemented, they will transform Serbia’s economy fundamentally and move it away from the path of regression. Such reforms will require the society to change the way it lives, the way it grows, and the way it makes choices.

The situation in external environment is not only challenging, but sometimes encouraging. Today, there are two powerful reasons for hope. Firstly, the industrial revolution 4.0 is continuously offering amalgams of digital technologies and emerging physical technologies which challenge competitiveness landscape. Technological change is always a potential solution to the world’s evolving challenges. Secondly, successful implementation of new economic policy platform based on new industrial policies in a number of emerging economies is encouraging policy makers around the world regarding new policy alternatives. Again, much can be gained from new policy platform if we can draw the right lessons from past failures.

In the hope that you will be able to adjust your schedule and make a valuable contribution to resolving the foregoing issues, we would like to invite you to take part in this interactive event, which aspires to be a true festivity for economists and business practitioners as well as a source of viable ideas for policy makers. Some observers assume that KBF will not allow for much more than an annual update and marching orders from the top. Our thought is that in every action or inaction, there are hidden values. These values always express themselves somehow. Moreover, ideas flow across the Forum’s events, forming the Kopaonik Consensus and laying the groundwork for genuine collaboration afterwards. Just the same, we will take stock of the commitments from the last year’s Forum and pave the way to the next one.

As organizers of the Forum, we really seek to cultivate a network of relevant people and, by doing so, to create a structure of interactions in which there is a lot of discussion, debate, dialogue, and expertise sharing. We seek to establish ourselves as a true force for new ideas in Serbia. Again, the choice is up to you!