The Serbia privatization challenge

earth-newA political earthquake shook Serbia on March 16, 2014. The Serbian Progressive Party (SNS) of Alexander Vucic took 48.6% of the popular vote in general elections and secured 63% of the seats in Parliament. For the first time in the post-Milosevic era, Serbia’s Prime Minister will have a strong mandate to govern.

A number of factors contributed to this seismic shift. Chief among them was public disenchantment with the venality and malfeasance of the country’s ruling class, which historically has placed self-interest ahead of the public good. Vucic’s rivals self-destructed through internal divisions and rivalries. Vucic himself ran a superb campaign. In the two years leading up to March’s election, Vucic skillfully exploited his position as Deputy Prime Minister in charge of corruption. He won widespread public acclaim with the December 2012 arrest of Serbia’s richest man, Miroslav Miskovic, on charges of abuse of power and tax evasion. Miskovic’s personal fortune is estimated at $1 billion. The conglomerate he founded, Delta Holdings, operates through 76 different subsidiaries and has 9,000 employees, making it Serbia’s largest private sector employer. By prosecuting Miskovic, Vucic proved himself to be a charismatic populist leader with an ambitious yet credible reform program.

But can he deliver? One of every four Serbians is unemployed. The public sector accounts for 30% of Serbia’s work force, a total of 720,000. According to the World Bank, state-owned enterprises (SOE) represent 11% of Serbia’s formal employment. Total direct state support for SOE’s was 2.5% of GDP in 2010-2011. In addition the stocks of guaranteed debt and arrears are estimated at 12% of GDP. GDP growth is an anemic 1.3%. Serbia ranks 101st out of 148 countries in the World Economic Forum’s 2013-14 Global Competitiveness Index.

Addressing these structural weaknesses will be Vucic’s top priority. His government has endorsed IMF findings that reducing the state’s footprint in the economy is needed in order to provide impetus to investment, sustainable private sector growth and create jobs. High on the agenda is privatizing state-owned enterprises, cutting public wages and reforming labor laws.

Yet skeptics point to the politically-charged case of Miroslav Miskovic as a warning sign that the Prime Minister’s populist anti-corruption campaign may have succeeded in getting him votes, but could also prove his undoing. It calls into question the government’s commitment to support for the private sector and raises serious doubts about transparency and independence of the judiciary. One of the principal charges against Miskovic is “abuse of power,” a matter more in the purview of the board of directors than the State Prosecutor. The court set his bail at $16 million – terms that are without precedent and contrary to any prevailing regulation.

If Serbia’s privatization program is to succeed, two requirements have to be met. First, the economy must provide jobs for the thousands made redundant. Second, significant private sector investment is required. Politically-motivated prosecutions preclude both. The Miskovic witch-hunt is a cautionary tale for any risk-averse investor and a death-knell for Serbia’s struggling economy. If Serbia’s leading capitalist and the most powerful engine of private sector growth can find himself subjected to legally suspect proceedings on specious charges, then what signal does that send to other, less well-established entrepreneurs? Several leading American corporations are considering strategic investments in Serbia, including joint venture opportunities with Delta Holdings. The group is an ideal partner for Americans seeking a foothold in the Balkans. Its agribusiness, real estate, distribution and insurance subsidiaries are strong performers with an established and rapidly growing market presence. For now, however, U.S. investors are staying away from Serbia, They are dissuaded by the Miskovic prosecution — what it says about government attitudes toward the private sector and how it reflects negatively on the rule of law.

Serbia certainly has the potential for economic success and its new government has put together a team that inspires international confidence. Without a clear and unmistakable signal, however, that it will depart from the traditional practice of attacking political enemies and placing near-term partisan expediency ahead of the broader long-term social good, Serbia’s prospects for economic recovery are dim indeed.

Adam Ereli is a former State Department Deputy Spokesman and former Ambassador to the Kingdom of Bahrain

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