2009 Index of Economic Freedom

Quick Facts

Population:

• 7.4 million

GDP (PPP):

• $70.2 billion
• 5.7% growth
• 5.4% 5-year compound annual growth
• $9434 per capita

Unemployment:

• 18.8%

Inflation (CPI):

• 6.8%

FDI Inflow:

• $5.6 billion

Serbia's economic freedom score is 56.6, making its economy the 109th freest in the 2009 Index. Serbia is ranked 37th out of the 43 countries in the Europe region, and its overall score is below the world average.

Serbia scores above average in fiscal freedom and labor freedom. Both the income and corporate tax rates are competitively low. The labor market is relatively flexible but still has much room for reform to increase productivity and employment growth. Trade freedom is above the world average, but tariffs are significantly higher than in most other European countries. Further liberalization and greater transparency in the regulatory process would increase the economic gains from global commerce.

Business freedom, government size, monetary freedom, investment freedom, and freedom from corruption are weak. Government spending is high, reaching over 40 percent of GDP. Inconsistencies in rules and non-transparent regulations in the investment regime continue to stifle growth, impeding development of more dynamic entrepreneurial activity. Inflation is high and the government controls prices of basic goods and other services.

Background Back to the top

Following Montenegro's secession in May 2006, the National Assembly of Serbia declared Serbia the successor to the State Union of Serbia and Montenegro. Serbia began negotiations for a Stability and Association Agreement with the European Union in October 2005. Talks were suspended in May 2006 because of Serbia's failure to surrender indicted war criminal Ratko Mladic, but the agreement was finally signed on April 29, 2008, just before the re-election of pro-Western leader Boris Tadic. The continued exclusion of ultranationalists from the parliament positions Serbia toward the EU. Following the failure of U.N.-sponsored talks on the status of Kosovo, the former province formally declared its independence on February 17, 2008. Serbia continues to maintain that this was illegal.

Business Freedom 56.0 Back to the top

Overall business freedom remains constrained by Serbia's burdensome regulatory environment. Starting a business takes an average of 23 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 18 procedures and 225 days, and costs are high. Enforcement of regulations can be inconsistent and non-transparent.

Trade Freedom 78.0 Back to the top

Serbia's weighted average tariff rate was 6 percent in 2005. Some high tariffs, some import restrictions and bans, some import licensing and permits, non-transparent regulations, and corruption add to the cost of trade. Ten points were deducted from Serbia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 85.9 Back to the top

Serbia has competitive tax rates for individual and corporate income. The individual income tax rate is 12 percent for salaries, to be reduced to 10 percent. Other personal income (royalties, investment, and rent) can be taxed at up to 20 percent. The corporate tax rate is a flat 10 percent. Other taxes include a value-added tax (VAT), a property tax, and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 34.1 percent.

Government Size 46.3 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending was estimated to equal about 42.3 percent of GDP. The government plans to accelerate the privatization of the national airline and telecommunications enterprises.

Monetary Freedom65.8 Back to the top

Inflation is high, averaging 9.2 percent between 2005 and 2007. The government can control the prices of certain basic products, including milk, bread, flour, and cooking oil; controls the prices of utilities, public transit, telecommunications services, and petroleum; and influences prices through numerous state-owned enterprises. Fifteen points were deducted from Serbia's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom40.0 Back to the top

Serbian law provides for national treatment of foreign capital, and investment is not screened. Most sectors are open to foreign investment. While reforms have improved the investment environment, inconsistently applied and complex regulations and investment-related rules, red tape, and corruption are impediments. Residents and non-residents may hold foreign exchange accounts, subject to central bank permission or conditions. Payments and transfers are subject to restrictions, and most capital transactions are subject to controls. Both foreign and domestic entities may own real estate, and foreign investors may acquire concession rights on natural resources.

Financial Freedom50.0 Back to the top

Serbia's financial sector is not fully developed, but it has undergone transformation. Aggressive consolidation and privatization by the central bank since 2001 have helped to revive Serbia's banking sector, which now accounts for about 90 percent of total financial-sector assets. The number of banks has plummeted in the past five years as a result of the restructuring and consolidation. As of 2007, there were 37 banks: 18 foreign-owned, 12 state-owned, and seven private Serbian banks. A wide range of credit instruments is available to the private sector, but Serbia's financial intermediation is relatively low. The insurance sector is dominated by state-owned insurers, although the government has announced its intention to privatize it. Capital markets are small but vigorous.

Property Rights40.0 Back to the top

The Republic of Serbia's constitution creates an independent judiciary, but the judicial system is corrupt and inefficient. Judges are poorly trained, underpaid, and difficult to dismiss for incompetence. Central registries of land titles are typically not completely current, but the government is trying to modernize its survey system. The legal regime for protection of intellectual property rights has improved substantially as Serbia has revised laws to meet WTO's Trade-Related Aspects of Intellectual Property Rights (TRIPS) standards, but IPR enforcement is still insufficient.

Freedom From Corruption34.0 Back to the top

Corruption is perceived as widespread. Serbia ranks 79th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. The authorities are inconsistent in condemning official corruption, and investigations are often politically motivated. Demands for bribes are expected at all stages of a business transaction. A deeply rooted practice favors certain parties based on connections. Organized criminal groups engage in money laundering.

Labor Freedom70.0 Back to the top

Serbia's relatively flexible labor regulations support overall employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not costly. Regulations related to the number of work hours are fairly flexible.