Fiat, Italy’s automotive giant, has been present in Yugoslavia since 1954, with the models produced in the Kragujevac car plant having become symbols of the socialist Federation's dolce vita. After a decade of war and economic devastation inflicted by the rule of Serbia’s strongman Slobodan Milošević, Fiat returned in 2008, when then President Boris Tadić signed a contract hailed as "the deal of the century".

Together with a decision to sell the country’s entire oil and gas infrastructure and resources to Russia’s Gazprom for a fraction of its estimated value, the joint venture between Fiat and Serbia marked a new era in which successive governments would lure foreign investors with lavish cash subsidies and generous tax exemptions, wrapped up in classified deals protected from public scrutiny.

Over the past nine years, transparency groups and investigative reporting networks pieced together a puzzle that revealed a bleak picture in which the country's political class gave – and still gives – substantial amount of public money into foreign investments that bring little or no benefit to the wider community.

Impact

  • Serbia’s political leaders are winning cheap populist points by attracting low-cost manufacturing jobs to the country. The benefit to the employer – such as companies like Fiat – is that they benefit from a low-cost work force and a significantly reduced corporate profit tax rate. Although the regular tax rate is 15%, it has been reported that the rate for foreign operations ranges between 0.12% and 0.25%. Government subsidies come in different forms of open and hidden cash transfers, write-offs, and exemptions from paying salary contributions. Though some of the incentives that violate EU laws have been abandoned, the authorities have discovered alternative ways to ostensibly keep the money flowing.
  • One of the most striking and harmful effects of Serbia’s policy to use cash – one of its most scarce resources – to attract low-tech foreign investment is that it perpetuates poverty-level wages and destabilisation of the broader economic playing field. The scheme, such as that employed with Fiat, has brought largely low-tech, low-skill manufacturing jobs that are paid minimum wage; whilst contributing to the dramatic rise of poverty and inequality in the country. The presence of corporate entities that are exempted from almost all contributions and taxes has subsequently shifted the burden of public revenues to other private companies (and some public enterprises) who are forced to cover the bill.
  • In effect, as a result of the Serbian government using cash to compensate its inability to offer a stable political and legal environment, an anomaly has been created. Large segments of the labour market have been turned into poverty traps, and shadow employment has risen. Unable to meet even the most basic needs, workers on minimum wages are forced to seek additional income on the grey market, which is now believed to account for 25-30% of the economy. On the other hand, private companies that do not enjoy government handouts and operate under the constant scrutiny of the tax authorities are often unable to hire, let alone expand. With taxes and contributions at 67%, employment in Serbia is prohibitively expensive, and many companies are offsetting the cost by paying part of the salaries in cash, and/or hiring on the grey market.