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COMPARATIVE ADVANTAGES OF SERBIA
International Economics AY 2012/2013
POLITECNICO DI MILANO
AGENDA
Fast Facts about Serbia
Economy of Serbia
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
Serbia bridges East and West. Its treasured position in the heart of South Eastern Europe, in the
central part of the Balkan Peninsula, makes it an outstanding investment location
* Official Exchange Rate, National Bank of Serbia, as on May 26th
2013, http://www.nbs.rs/
IMPORTANT EVENTS IN HISTORY OF SERBIA
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
Fast Facts about Serbia
Economy of Serbia
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
Starting a Business
Dealing with Construction Permits
Getting Eectricity
Registering Property
Getting Credit
Protecting Investors
Paying Taxes
Trading Across Borders
Enforcing Contracts
Resolving Insolvency42
179
76
41
40
82
149
94
103
103
Serbia’s Ranking on Doing Business Topics
DOING BUSINESS IN SERBIA
SERBIA’S TRADE AGREEMENTSMarket Trade Regime Year of
AgreementNo. of
Inhabitants
EU Preferential Trade Regime 2010 494,070,000
USAGeneralized System of
Preferences2005 302,558,000
Russia, Belarus and Kazakhstan
Free Trade Agreement 2010 168,640,600
Macedonia, B&H, Montenegro, Kosovo,
Albania, MoldovaFree 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.
2007 2008 2009 2010 2011 2012 2013 (est)
2014 (est)
2015 (est)
-4
-3
-2
-1
0
1
2
3
4
5
65.4
3.8
-3.5
1 1.6
-1.8
2
2
3
Real GDP Growth
2007 2008 2009 2010 2011 2012 2013 (est)
2014 (est)
2015 (est)
0
2
4
6
8
10
12
14
6.9
12.4
8.1
6.2
11.1
7.3
9.6
5.4
3.5
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
6%
72%
22%
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%
20%
Serbian Labor Force Split by Occupation
ServicesAgricultureIndustry
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
2008 2009 2010 2011 2012 20130
5
10
15
20
25
14.416.9
20 20 19.4 18.8
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
2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
50100150200250300350400
168 179204
275
350 370331 324
363 376
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
2008 2009 2010 2011 2012 20130.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
2.255
1.810
0.949
2.945
1.6371.899
FDI (in million €)
2007 2008 2009 2010 20110
0.5
1
1.5
2
2.5
3
2.5
0.6
0.1
0.5 0.4
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
Source: Serbia Investment and Export Promotion Agency, http://siepa.gov.rs/en/index-en/import-from-serbia/foreign-trade-data/2012.html
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
Source: Serbia Investment and Export Promotion Agency, http://siepa.gov.rs/en/index-en/import-from-serbia/foreign-trade-data/2012.html
SERBIA’S FOREIGN TRADE
Source: Serbia Investment and Export Promotion Agency, http://siepa.gov.rs/en/index-en/import-from-serbia/foreign-trade-data/2012.html
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 €)
Source: Statistical Office of the Republic of Serbia, http://webrzs.stat.gov.rs/WebSite/
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 €)
Source: Statistical Office of the Republic of Serbia, http://webrzs.stat.gov.rs/WebSite/
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.pdfMinistry 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).
Fast Facts about Serbia
Economy of Serbia
Facts & Hypotheses
Theory & Practice
Conclusion
AGENDA
ABOUT RASPBERRIES IN SERBIAMost 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
SERBIAN RASPBERRY SECTOR
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
WHY SHOULD SERBIA AND GERMANY TRADE?
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 comparisonr - raspberry
m - milk
Fast Facts about Serbia
Economy of Serbia
Facts & Hypotheses
Theory & Practice
Conclusion
AGENDA
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 OF THE RICARDIAN 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 sector𝑎𝐿 number of workers required to produce a single unit (= )
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
Average labor 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= 0.65Milk in Germany: 1/0.129 = 7.72
Raspberries in Serbia: 1/1.364 = 0.73Milk 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 advantage in producing
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
0 200 400 600 800 1000 1200 1400 16000
10
20
30
40
50
60
70
80
90
32.5
Series1 [VALORE X].46
65
Milk
Rasp
berries
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
0 50 100 150 200 250 300 350 400 450 5000
50
100
150
200
250
300
90
[VALORE X].26
180
Milk
Rasp
berries
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 SITUATIONIndicators Pre-Trade
ConditionPost-Trade Condition
Milk Consumption 386.23 386.23
Raspberries Consumption 32.50 32.50Milk Production 386.23 772.46
Raspberries Production 32.50 0Milk Overproduction 0 386.23
Raspberries Gained from Trade 0 96.36
0 200 400 600 800 1000 1200 1400 16000
50
100
150
200
250
300
32.5
[VALORE X].23
[VALORE X].46
70
Milk
Rasp
berries
National Price
International Price
E
E’
SERBIAN POST – TRADE SITUATIONIndicators Pre-Trade
ConditionPost-Trade Condition
Raspberries Consumption 36.67 36.67
Milk Consumption 130.26 130.26Raspberries Production 36.67 73.33
Milk Production 130.26 0Raspberries
Overproduction 0 36.67
Milk Gained from Trade 0 146.96
0 100 200 300 400 500 6000
10
20
30
40
50
60
70
80
[VALORE X].52
73.33
Milk
Rasp
berries
E’E
National Price
International Price36.67
130.26
GAINS FROM INTERNATIONAL TRADE
* 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:
Fast Facts about Serbia
Economy of Serbia
Facts & Hypotheses
Theory & Practice
Conclusion
AGENDA
RICARDIAN MODEL IMPLICATIONS
SERBIA has comparative advantage in producing 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
FACTORS FAVORABLE TO SERBIA'S ECONOMIC GROWTH
USA
FTAs
STRATEGIC LOCATION RELATIVELY INEXPENSIVE AND SKILLED LABOR FORCE
THANK YOU FOR YOUR ATTENTION
International Economics AY 2012/2013
POLITECNICO DI MILANO
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.
APPENDIX