Serbia

Oxford Economic Country Briefings, Sep 15, 2008

* Despite the SAA, Serbia will not be formally placed on the road to EU accession until it can demonstrate fuller cooperation in the hunt for indicted war criminals, including Ratko Mladic, whom the UN prosecutor believes are still being sheltered inside the country. However, peaceful transfer to a more explicitly pro-EU government, which can use its sacrifices over Kosovo to win substantially higher EU structural assistance even before securing an accession timetable, will substantially improve longerterm growth prospects.

Background

* Once one of the more industrially diversified and wealthier eastern European states, Serbia's economy was severely damaged by wars surrounding the Yugoslav break-up in 1992-95, NATO bombing after disturbances in the Kosovo province in 1999 and long-running sanctions until the deposition of dictator Slobodan Milosevic in 2000. Milosevic was arrested and sent for war-crimes trial to the UN's Hague tribunal, in whose custody he died in 2006. The return of democracy and start of economic reform enabled the EU to start negotiations on a stabilisation and association agreement (SAA) in October 2005. These were quickly suspended over Belgrade's failure to arrest another UN suspect, Bosnian Serb wartime commander Ratko Mladic. But fear of isolating the reformist coalition led the EU to initial the SAA in November 2007 and sign it in May 2008, ahead of parliamentary elections in which Milosevic's one-time Radical allies had threatened to regain power.

* A coalition of moderate reformist parties took power in 2000 after public protests triggered the fall of Milosevic and his Socialist Party. Vojislav Kostunica, leader of the Democratic Party of Serbia (DPS), initially became president of Serbia-Montenegro - the federation that remained after Bosnia-Herzegovina, Croatia, Macedonia and Slovenia left the former Yugoslavia - and was formalised in 2003. Zoran Djindjic, leader of the Democratic Party (DP), took over as prime minister until his assassination in March 2003, after which Kostunica replaced him. New DP leader Boris Tadic won the presidency through a parliamentary vote in 2004 and gained re-election in January 2008, presiding over elections that returned another DPS/DP-led coalition in January 2007. Despite frequent internal argument among its moderate nationalist, free-market and centrist elements, Kostunica's administration upheld policies that stabilised the currency, reduced inflation, rebuilt international political and economic links, restructured state-owned enterprises with some lined up for privatisation and repaired the wardamaged infrastructure while paying down public debt. The DPS split from the DP over Kosovo's secession move in February 2008 and, at elections in May, the DP and its smaller allies emerged as the largest single party, with the potential to form a new coalition without the DPS and keep the Radicals out of power.

* Privatisation has moved forward at a steady pace and has been central to the generation of inward investment, thus protecting industrial revival against external payments constraint, as well as to the restructuring of industries in a way that avoids social conflict by re-employing or adequately paying off displaced workers. The early sale of major banks to EU-based multinationals has been especially important in generating renewed flows of debt finance to industry and of loan-financed consumer demand to construction and household durables production.