comparative advantages of serbia

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/

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


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

http://www.doingbusiness.org/~/media/giawb/doing%20business/documents/profiles/country/SRB.pdf


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

http://siepa.gov.rs/en/index-en/invest-in-serbia/liberalized-trade.html


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.

http://www.imf.org/external/pubs/ft/weo/2013/01/pdf/text.pdf

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.

http://webrzs.stat.gov.rs/WebSite/

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.

https://www.cia.gov/library/publications/the-world-factbook/geos/ri.html

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

http://siepa.gov.rs/en/index-en/import-from-serbia/foreign-trade-data/2012.html

FDI BY SECTOR


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



SERBIA’S FOREIGN TRADE



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 €)




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 €)




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

http://www.worldbank.org/content/dam/Worldbank/document/Serbia-Snapshot.pdf


http://www.mpt.gov.rs/postavljen/171/FACT%20SHEET_FINAL%20VERSION.pdf


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).


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.

http://www.dairyco.org.uk/market-information/supply-production/milk-production/eu-milk-deliveries/


GERMAN DIARY SECTOR

Source: European Diary Association, http://www.eda2013.eu/german-dairy

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

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


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:


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,


• 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.



https://www.cia.gov/library/publications/the-world-factbook/geos/ri.html






http://www.nbs.rs/






http://www.imf.org/external/pubs/ft/weo/2013/01/pdf/text.pdf

APPENDIX