(Originally published in Serbian at Peščanik)
In the current politically and emotionally charged situation in Serbia, even seemingly technical issues, such as Gross Domestic Product (GDP), have become subjects of heated political debates. The end of 2024 and the beginning of 2025 have seen several GDP-related discussions by notable figures: Professor Arsić, who critiqued the Serbian Statistical Office’s recent GDP revisions (N1 Info); Professor Ognjen Radonjić, who analyzed the peculiarities and potential manipulations of Serbia’s GDP revisions (Nova Radar and here); Acting Director of the Serbian Statistical Office Branko Josipović, who defended the revisions as being conducted with international assistance (Nova Radar); and former President of the Privrednik Club, Zoran Drakulić, who highlighted the role of corruption in inflating Serbia’s GDP figures (Danas). These discussions reflect the growing contention around GDP as both an economic metric and a political tool, often (mis)used by the political elites.
As debates about economic performance intensify, it is worth revisiting the divergence between Serbia’s GDP growth and the state of its democracy—a theme I explored in a previous article published on LINKS. In another piece, titled Serbia as super-periphery: Growth without quality and transformation, I highlighted how the governing party frequently cites GDP figures as a cornerstone of its legitimacy. This raises a critical question: just how meaningful are GDP figures when assessing a country’s development and governance? Are these numbers a true reflection of prosperity and well-being, or do they mask deeper structural and political contradictions?
This article seeks to answer these questions by focusing on Zoran Drakulić’s critique of Serbia’s inflated GDP. Through his analysis of corruption’s role in driving nominal growth, I aim to uncover how inflated GDP figures distort the country’s economic narrative and mislead policymakers. By exploring Drakulić’s concept of the “circular economy of corruption,” this discussion highlights the broader risks of relying on flawed economic metrics to shape public policy, including debt sustainability, inflation, and resource misallocation. Ultimately, I argue that Serbia’s inflated GDP is not just a technical issue but a reflection of deeper systemic failures, with significant implications for its development trajectory.
What GDP measures—and what it misses
Gross Domestic Product (GDP) is often touted (in Serbia as well as elsewhere in the world) as the ultimate measure of a nation’s economic performance. At its core, GDP is the sum of all monetized transactions that occur within an economy over the course of a year. It includes the value of goods and services produced and exchanged for money—whether through consumption, investment, government spending, or net exports.
However, this seemingly comprehensive measure has significant blind spots. GDP excludes all activities that occur outside the realm of monetary exchange. Household labor—such as cooking, childcare, and elder care—though essential to social and economic life, is absent from GDP calculations. Similarly, unpaid community efforts, informal economies, and subsistence farming are invisible in GDP figures. These omissions mean that GDP provides, at best, an incomplete snapshot of economic activity and, at worst, a distorted picture of societal well-being.
Not all GDPs are created equal
When we talk about GDP, it’s important to recognize that there isn’t just one GDP but several variations, each reflecting a different perspective on economic activity. The most commonly discussed are nominal GDP and real GDP.
- Nominal GDP measures the total value of goods and services produced in an economy during a given period, using current prices. This means it captures the raw monetary value without adjusting for inflation, making it sensitive to price level changes. For example, if prices rise significantly (inflation), nominal GDP might increase even if the actual quantity of goods and services produced remains unchanged.
- Real GDP, on the other hand, adjusts for inflation by using constant prices from a base year. This allows for a clearer comparison of economic performance over time, as it focuses on changes in the actual volume of production rather than changes in price levels.
Figure 1 shows Serbia’s nominal and real GDP over the past decade in 2014-2023. The divergence between these two measures often grows during periods of significant inflation or deflation. For example, in 2021, the nominal GDP growth spiked to over 14%, but real GDP growth was much lower at 7.9%, indicating that part of the nominal growth was due to rising prices rather than increased production.
Figure 1: Nominal and real GDP growth rates, 2014-2023. Source: Author, based on the National Bank of Serbia data.
GDP can also be analyzed in two ways: total GDP and GDP per capita.
- Total GDP represents the overall value of goods and services produced within an economy during a specific period. It provides an absolute measure of economic size and activity, often used for comparisons between countries with different population sizes.
- GDP per capita, on the other hand, divides total GDP by the population, offering an average economic output per person. This measure provides a more nuanced understanding of living standards and economic well-being, as it adjusts for population size.
The relationship between these measures and demographic trends can reveal interesting insights (Figure 2).
Figure 2: Total nominal and per capita nominal GDP growth rates, 2014-2023. Source: Author, based on the National Bank of Serbia data.
While the two growth rates generally follow a similar trend, per capita nominal GDP growth slightly outpaces total nominal GDP growth in most years. This reflects the impact of Serbia’s shrinking population, which increases the average economic output per person even when total GDP growth is moderate. After a synchronized drop in 2020 due to the COVID-19 pandemic, per capita GDP growth significantly outpaced total GDP growth in 2021-2022. This can be attributed to government measures, such as direct payments to all adult citizens, to boost purchasing power and stimulate the economy during and after the pandemic.
To complicate the picture further, Serbia’s GDP is periodically revised to account for changes in the base year. These revisions can significantly alter nominal GDP figures and, by extension, key economic ratios like public debt as a percentage of GDP. The 2024 GDP revision by Serbia’s Statistical Office increased nominal GDP by 4.6% for 2019 and by 8.2% for 2023. As a result of these revisions, Serbia’s public debt as a percentage of GDP was reduced by approximately 4 percentage points in 2023, improving the country’s perceived fiscal health without altering the underlying debt levels.
These distinctions underscore that GDP figures are not absolute truths but are shaped by the specific lens through which they are viewed. Understanding these nuances is crucial for interpreting GDP data and its relevance to real-world conditions.
The circular economy of corruption: Zoran Drakulić on Serbia’s artificially inflated GDP
In an interview with Danas, Serbian businessman Zoran Drakulić sheds light on how systemic corruption inflates GDP figures in Serbia, creating a distorted image of economic progress. His analysis focuses on the mechanisms of corruption-driven GDP inflation and its broader consequences.
According to Drakulić, public works, such as roads, are systematically overpriced. For example, a project costing 100 (million) is billed at 250, with the inflated expenditure directly contributing to GDP. Under the expenditure approach, GDP is calculated as the sum of private consumption, private investment, and government spending (adjusted for net exports, which is the difference between exports and imports).
Drakulić argues that corruption-driven spending inflates Serbia’s GDP, creating a misleading narrative of economic progress. This “growth” is largely nominal, with little impact on sustainable development or productivity.
To illustrate his argument, Drakulić describes a “circular economy” of corruption, represented by the following model (Figure 3).
Figure 3: Circular economy of corruption. Source: Author’s visualization
In this model, government spending on public infrastructure projects is inflated through overpriced estimates and construction contracts. These inflated funds directly contribute to GDP as government expenditure. However, rather than adding genuine economic value, these funds flow back into the private sector through kickbacks and overpriced contracts, forming a self-reinforcing cycle. Contractors who profit from these government projects reinvest their gains in overpriced assets, such as luxury real estate developments like Belgrade Waterfront. This reinvestment inflates GDP further, as construction and real estate activities are included in private investment and consumption metrics.
Drakulić highlights that this “circular economy” generates nominal economic growth without improving productivity or adding real value to the economy. The funds circulate within the system, artificially enhancing GDP figures and creating a misleading narrative of economic progress. As the model shows, inflated GDP metrics justify further government spending on similar projects, perpetuating the cycle of inefficiency and corruption.
An inflated GDP, driven by corruption and overestimated expenditures, poses significant risks for economic policymaking. Policymakers often rely on GDP as a primary indicator of economic health and progress. However, when GDP figures are artificially inflated, they create a false sense of security about the economy’s capacity to sustain higher levels of borrowing or spending. For instance, governments may engage in excessive borrowing, believing that debt-to-GDP or debt-to-revenue ratios remain manageable. Yet, if the share of productive economic activities is low, the economy’s ability to generate returns on borrowed funds diminishes over time. This can lead to a scenario where the cost of servicing debt exceeds the returns on investments, ultimately destabilizing the financial system.
Furthermore, inflated GDP figures can contribute to wage pressures that are disconnected from productivity. As GDP appears to grow, wage expectations among workers may increase. However, if this “growth” is not accompanied by real productivity gains or sufficient goods and services to match higher incomes, the result is inflationary pressures on the economy. Over time, this can lead to a broader economic crisis, characterized by eroded purchasing power, declining competitiveness, and increased reliance on further borrowing to sustain the illusion of growth. Thus, an inflated GDP not only distorts current policy decisions but also plants the seeds for long-term financial instability and economic stagnation.
In addition to excessive borrowing and wage pressures, an inflated GDP distorts resource allocation across the economy. Governments may prioritize non-productive sectors that contribute to artificially high GDP figures, such as luxury real estate or redundant infrastructure projects, over essential investments in healthcare, education, or innovation. This misallocation not only hampers long-term development but also entrenches inefficiencies, making it harder for the economy to shift toward sustainable and inclusive growth.
This is why one can agree with Drakulić’s argument that corruption-driven spending inflates Serbia’s GDP at the cost of sustainable development and long-term productivity. The nominal growth achieved is largely an illusion, perpetuating misallocation of resources, entrenching inefficiencies, and failing to deliver the structural economic improvements needed to address the country’s development challenges.
Adjusting Serbia’s GDP for inflated government investment
If we apply Drakulić’s logic to Serbia’s GDP, it raises critical questions about the real growth trajectory of the Serbian economy. Specifically, Drakulić suggests that the apparent growth of GDP might be artificially inflated due to excessive government spending, particularly on infrastructure projects that are not economically justified in the long term. This overspending, often funded by external borrowing, creates an illusion of economic dynamism while potentially masking underlying economic stagnation or inefficiency.
Drakulić’s estimate that 50% of government infrastructure spending qualifies as overspending is supported by other experts. For example, Professor Arsić notes that the costs of infrastructure projects often increase by 50% or more compared to initially contracted amounts. He attributes these overruns to rising material prices, poor project documentation, and corruption, all of which contribute to inefficiencies in public investment.
That the final cost of infrastructure projects can differ significantly from initial estimates is starkly illustrated by documents linked to the recent tragedy at the Novi Sad railway station. According to a report by Forbs, a domestic company, Starting, acting as a subcontractor for China Civil Engineering Construction Corporation, was initially allocated €1.9 million for reconstruction work on the station building, as outlined in the agreement. However, the contract later disclosed a figure 2.5 times higher—€5.1 million. Similarly, as reported by Nova Ekonomija, the original contract for the construction of the Morava Transport Corridor quoted the total cost of works at €745 million, while the latest estimate by the Ministry of Finance has risen to €2.15 billion. This alignment between Drakulić’s observations, the past experiences and broader expert consensus highlights the systemic nature of these inefficiencies in Serbia’s public infrastructure projects.
Such inefficiencies are not unique to Serbia. According to the IMF (2015), cross-country comparisons of public capital (input) and infrastructure quality and coverage (output) reveal average inefficiencies in public investment processes of around 30% globally. The report notes that the most efficient public investors achieve twice the growth ‘bang’ for their public investment ‘buck’ compared to the least efficient. This highlights the significant economic dividends that could be achieved by addressing inefficiencies in public investment.
To be fair, Serbia may not be that exceptional. Budget overruns happen in other, more developed countries as well. For instance, Berlin Brandenburg Airport, which opened in 2020, was over nine years behind schedule and more than €4 billion (£3.6 billion) over budget.
Now, assuming conservatively that 50% of the government’s infrastructure spending qualifies as overspending or economically unjustifiable, a correction reveals a more conservative and perhaps realistic picture of Serbia’s economic performance. Figure 4 below compares nominal GDP growth with adjusted growth, accounting for these adjustments.
Figure 4: Observed and adjusted nominal GDP growth, 2014-2023. Source: Author’s calculations.
On average, the difference between nominal and adjusted GDP growth is modest, at 0.23 percentage points, suggesting that the adjustment does not dramatically alter the overall growth picture. However, in certain years, such as 2021, the adjustment becomes more significant, with a difference of 0.67 percentage points. Translating this into monetary terms, based on Serbia’s 2021 GDP of 6,576 billion RSD, the adjustment amounts to approximately 44.21 billion RSD.
To put this into perspective, the 2021 budget allocated 43.72 billion RSD for servicing foreign debt. This comparison underscores that the adjustment’s monetary value is equivalent to a major budgetary item, highlighting its substantive implications. While the overall adjustment may seem minor, its impact in specific years raises important questions about the sustainability and efficiency of Serbia’s economic growth model.
If it is assumed that half of private infrastructure investment also uses inflated prices, the average GDP growth rate difference would increase to approximately 0.55 percentage points. However, private sector expenditure has very different consequences compared to government expenditure. While it may encourage overall corruption and government inefficiency, private infrastructure spending reflects a lack of productive investment opportunities rather than anything else. In countries with more developed financial systems, such as the United States, capital markets act as a “vacuum cleaner” for economic surplus. Through various financial instruments, profits are processed and reprocessed, often detached from the real economy.
In contrast, small countries like Serbia, characterized by underdeveloped capital markets, limited opportunities for capital transfers abroad (where higher returns might be achieved), and constrained investment in productive activities—often hindered by political issues and corruption, as noted by Drakulić—tend to see capitalists resorting to luxury consumption, particularly in real estate. Anecdotal evidence points to inflated property prices at developments like Belgrade Waterfront, where some apartments are bought at above-market rates and rented to generate a steady income flow for their owners. While such inflated pricing might mean a capitalist buys four apartments instead of six, it doesn’t fundamentally alter the pattern of capitalist consumption.
This phenomenon is consistent with Paul Baran and Paul Sweezy’s analysis of economic waste, where surplus capital, unable to find productive outlets, is funneled into unproductive or even destructive uses. Veblen’s concept of conspicuous consumption also resonates here, as luxury real estate and inflated pricing symbolize status rather than economic utility. At the same time, the broader trend of financialization—a key feature of modern capitalism—amplifies these inefficiencies by prioritizing speculative and unproductive investments over genuine economic development, as pointed out by Marxist thinkers, such as Calhoun and Harvey.
Serbia’s GDP adjustments thus highlight not only the inefficiencies of government expenditure but also the broader structural challenges posed by waste, conspicuous consumption, and the diversion of economic surplus into unproductive avenues.
Was GDP Inflated?
The assertion that Serbia’s GDP has been inflated is worth critical examination. Technically speaking, this claim does not hold ground. Whether money is spent effectively or wastefully, it still enters the economy as expenditure, and thus contributes to GDP. The calculation of GDP does not inherently differentiate between productive and unproductive expenditures. In this sense, even uneconomical spending—though perhaps inefficient in terms of social or economic outcomes—should be counted as part of GDP.
However, this technical correctness does not preclude deeper concerns about the implications of such spending. It raises the pivotal question of fiscal space: Does the government have the capacity to increase spending in sectors with potentially greater social or economic returns, particularly those that can yield long-term benefits? Even if GDP accurately captures all spending, the composition of this spending matters for development outcomes.
Here, the concept of economic surplus, as articulated by Baran and Sweezy, provides a useful lens. The surplus reflects not only the wealth and productivity of a society but also its ability to use resources effectively. A large surplus wasted on inefficiencies limits fiscal space, while a surplus strategically invested can expand it by boosting future productivity and societal wealth.
This dual lens—fiscal space as immediate policy flexibility and economic surplus as the structural foundation—allows us to critically assess Serbia’s economic policies. Are current expenditures creating a surplus that expands fiscal space over time, or are they entrenching inefficiencies that constrain future options?
Disconnect Between GDP Growth and Structural Progress
This question—whether current expenditures are expanding fiscal space or entrenching inefficiencies—finds a critical parallel in the broader structure of Serbia’s economy. While GDP growth may suggest progress, a closer examination reveals a deeper issue: the disconnect between economic output and meaningful structural transformation. This disconnection raises concerns about whether the economy is building a foundation for long-term resilience or perpetuating a cycle of stagnation that limits future development options.
While Serbia’s GDP growth has been steady in recent years, averaging around 4.5% annually from 2018 to 2022, this growth masks a lack of meaningful structural transformation in the economy. Over the past two decades, Serbia has struggled to transition from a low-value-added, consumption-driven economy to one underpinned by higher productivity and innovation. The country remains locked in a pattern of dependence on primary sectors, low-skill services, and extractive industries, with limited diversification or movement up the value chain.
Key structural indicators highlight this stagnation. The share of manufacturing in GDP has hovered at around 15% since 2005, far below the levels seen in more developed or structurally dynamic economies in the region. This is evident in the figure below (Figure 5), which compares Serbia’s manufacturing sector with that of Slovenia, a regional benchmark. While Slovenia’s manufacturing share consistently remains near or above 20% of GDP, Serbia’s manufacturing sector shows a steady decline, dipping to 13% by 2023. This stark difference underscores Serbia’s inability to leverage manufacturing as a driver of structural transformation. In contrast, low-productivity sectors such as trade and services account for over 50% of Serbia’s GDP, with little evidence of a shift toward higher-value activities like advanced manufacturing or technology-driven industries.
Figure 5: Gross value added in select economic sectors in Serbia and Slovenia, 2014-2023. Source: Author, based on the World Development Indicators.
The labor market also reveals deep structural weaknesses. Nearly 20% of workers remain employed in agriculture and other low-productivity sectors, while unemployment among youth remains persistently high at 23% in 2023. Furthermore, the emigration of skilled professionals—estimated at over 50,000 annually in recent years—has depleted the country’s human capital base, exacerbating the skills mismatch and undermining long-term economic resilience.
These statistics underscore Serbia’s inability to escape its role as a peripheral economy in Europe. GDP growth paints a picture of progress, but the underlying reality is one of limited resilience and developmental inertia. Breaking free from this cycle will require a strategic vision that prioritizes innovation, industrial policy, and human capital development over short-term growth metrics.
Conclusion
Serbia’s GDP growth presents a complex narrative. While the numbers reflect steady economic expansion, they also mask deep-seated structural weaknesses that challenge the country’s development trajectory. The debate over GDP inflation underscores a critical truth: economic metrics, though technically accurate, can fail to capture the underlying inefficiencies and missed opportunities for transformative growth.
The disconnection between GDP growth and structural progress is emblematic of Serbia’s broader economic challenges. Dependence on low-value-added sectors, stagnation in manufacturing, and the continued outflow of skilled professionals highlight the limitations of a growth model that prioritizes nominal metrics over substantive transformation. The patterns of wasteful expenditures, inflated infrastructure costs, and unproductive allocation of surplus capital further underscore the need for a strategic reorientation.
To achieve sustainable development, Serbia must move beyond a fixation on GDP growth and address the structural roots of its economic inertia. This includes investing in innovation, strengthening industrial policy, and enhancing human capital. Without these changes, Serbia risks remaining trapped in a cycle of peripheral dependency, with economic growth that is unable to deliver long-term resilience or societal well-being.
The question is not just whether Serbia can grow, but whether it can grow in a way that fosters genuine progress and transformation. This will require not only policy reform but also a shift in how success is measured—away from aggregate economic outputs and toward the qualitative improvements that define a truly prosperous society, a society that directs its resources toward its own development rather than the development of an external capitalist center.