A New Global Order in the Making

For a small, open economy in the Balkans, relying exclusively on its own might and entrepreneurship is not desirable.

The global economic scene is facing numerous challenges that will largely shape the new geopolitical order. We talked with Dr. Ivan NIkolić, Senior Research Associate from the Economics Institute, about the impact of wars, health and economic crises in the global market, but also on Serbia.

Considering that the war in Ukraine caused huge changes in the global economic scene, how is the figurative deck of cards going to be split in this context? Who is at a loss and who is at a gain?

There are no winners. The biggest loser is Ukraine, but also Europe as a whole. As for the Russian Federation, the effect of the Western sanctions was overestimated from the beginning of the war, while the rebound effect on the EU economy was underestimated. The Russian economy was preparing for these circumstances in the middle of the last decade when it was punished for the annexation of Crimea. The downturn in the EU is driven by deindustrialization. To a lesser extent, it stems from the decline in global demand. The productivity and efficiency gains from closer international cooperation are no longer possible due to geopolitical concerns. However, the fundamental source of the deconjuncture is the loss of technological advantage. The war further exacerbated previous production problems by augmenting energy costs. Fiscal policy is under increasing pressure. The available resources necessary for refinancing the debts of future generations are rapidly decreasing. Expenditure increased due to investments in the defence sector. High inflation is distortionary, while its extended duration implies high real interest rates, which would harm private and public investments and thus curb future growth. Demographic problems, the ageing population and the lack of qualified workforce in many sectors are becoming increasingly pronounced. Technological progress and different dimensions of digitization are putting business models in all sectors under considerable pressure to modernize and adapt quickly, with a strong imperative for accelerated decarbonization.

How stable is the US economy today and how well is it resisting the crisis? How does the state of the US economy affect the rest of the world?

The situation is somewhat more stable ‘across the pond’, due to the lower tension over the approval of the interim state budget in late September. But that does not diminish the fact that the Fitch agency recently refused to give the USA its highest credit rating precisely because of the deteriorating medium-term fiscal outlook, excessive public debt, political instability and lacklustre economic activity. Fiscal concerns and risks are growing in an environment of economic slowdown, prolonged periods of elevated interest rates and narrowed fiscal space. This state of economic affairs produces ever greater distortions in relations with China, with negative externalities on the rest of the world.

At the end of this decade, China will probably be the world’s largest economy in terms of GDP at current prices

How is the Serbian economy dealing with global turbulences? Will imposing sanctions on Russia cost us dearly? 

Serbia persistently insists on neutrality. Such an approach is very risky, but at this moment, high risk is coupled with higher gain. Excellent economic cooperation, above all with China, has positive effects in numerous segments. There are even greater expectations from the signing of the Free Trade Agreement (with China). It sounds incredible that industrial production in Serbia in August was 5.7% higher compared to the same month of the previous year. Almost a third of the production increase comes from the processing sector. This is the best result in Europe (for instance, in this period, production in the Eurozone decreased by 5% on average). Total economic growth this year will be around 2.5% and will be driven by net exports and fixed investments. Due to preserved economic stability and positive medium-term prospects, the interest of foreign investors is not decreasing.

Many view the Chinese economy as the strongest in the world in the future. How far are we from that moment and how will it affect us? 

Such an outcome seems inevitable despite the many challenges and risks. The Chinese economy has slowed, but not enough to halt its progress altogether. The discontinuity with earlier development was consciously created and since the pandemic, the key levers of progress have been self-confidence and own strengths, not globalization and export expansion. Domestic demand became the main source of growth. At the end of this decade, China will probably be the world’s largest economy in terms of GDP at current prices. Various factors indicate that in many segments China is already a global leader. The fact that causes the biggest anxiety and nervousness among European officials is that this process is also taking place in the sectors in groups that are in higher stages of generating added value and the latest technologies. 

The BRICS countries are also demonstrating considerable strength and expanding their influence and importance in terms of global events. What is your view of this alliance and what can we expect from it in the near future? Is BRICS about creating a new world order?

That’s inevitable, but it is also a process that is happening past us, far away, and which is of an evolutionary nature. It was devised to find an alternative to the financial architecture created after WW2, which is said to have neglected the voice and interests of developing economies. I believe that competition is useful and welcome in the global financial system as well. However, the BRICS itself is made up of countries that are asymmetrical in economic strength and influence, with different economies and political interests. Diversity is sometimes an advantage, but also a limitation, especially if you want to accomplish the final goal quickly. We cannot even formally be part of BRICS, because that is the official position of the EU to which membership we aspire. That is why it is better to follow the development of BRICS from aside and to extract benefits from the cooperation provided by, for example, the Belt and Road Initiative, which this year marks the tenth year of development.

Have we managed to curb inflation in Serbia and what are your predictions in the context of local and global events?

This year, globally speaking, inflation is slowing down. But the fight against inflation is still ongoing, although some of its causes are under control – supply chains have recovered, while shipping and transport costs are lower. The reason for declining inflation is not only the restrictive monetary policy measures but also the drop in food and energy prices that followed the accumulation of gas reserves in Europe and the slowdown of the Chinese economy after its opening. Core inflation (which excludes food, energy, alcohol and tobacco) is declining much more slowly. Its high level and persistence are the result of the growth of corporate profits and wages (which are incorporated into prices), especially when we take into account that productivity is dropping and that high profits and wages are less and less sustainable.

This year, globally speaking, inflation is slowing down

Is the Serbian economy’s dependence on Germany a danger for us in the long term? Are claims that this is a new colonialism justified, not only in terms of Serbia but also in the case of other Balkan countries? 

Since 2017, the Serbian economy’s strong dependence on Germany has somewhat subsided. This fact partly explains the current divergent movement of our economies. Germany is still the No 1 external trade partner of Serbia and an important investor, but its position is not as dominant here as it is in regional countries. Being highly dependent on Russian gas, Germany’s economy has been under pressure since the start of the conflict in Ukraine, i.e. since the rise in energy prices and a simultaneous drop in consumption due to pessimistic forecasts. The current PMI for Germany’s manufacturing industry (in terms of new orders) is at a 30-year low, as is employment in this sector.

How can we start relying on our own might and entrepreneurs? We can see from the example that local areas with strong entrepreneurship show exceptional resilience to the global crisis.

For a small, open economy in the Balkans, relying exclusively on its own might and entrepreneurship is not desirable. The domestic entrepreneurial spirit is currently going through an initial awakening. Apart from the ITC sector, the MSME sector has shown resilience during recent external shocks, but is not credited with maintaining a relatively high rate of economic growth and this is especially true for the real sector. There is no ambitious growth without big businesses. Unlike large economies where MSMEs are the backbone of the economy, it is the other way around here. The small companies continue to support the big ones and that won’t change for a long time. This reality defines state aid and incentives for this sector.


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