Quantum Leap- what will it take to
double Serbia‟s economic growth
in the next decade?
Quantum Leap Conference

Belgrade, ...
McKinsey has conducted >2,000 projects in the social sector in the past 4
years for governments, foundations, non-profits ...
… almost half of which included economic development
Global client experience

Deep functional expertise

▪ Worked for ove...
Our topic today – what can the Serbian government do to achieve a
DATA FOR THE 1990'S SHOULD
quantum leap in growth over t...
The government may choose to launch one of five types
of pragmatic Transformation Programmes
Program
typology

Main object...
Recent, high and sustained economic growth is possible …

Lower income3

All countries with over 5% average growth for at ...
… which, data suggest, more than half of the high growth countries (>5%)
Before
have achieved through a Quantum Leap in gr...
Ideas others have leveraged to achieve a quantum leap
growth strategy
1Sectorwe all need to do?
What do

institutions
2 Po...
SECTOR GROWTH STRATEGY

1 For growth, sector performance matters more than sector mix in both
developing and developed cou...
SECTOR GROWTH STRATEGY

1 Example of a Sector strategy overview, similar to what many other
ILLUSTRATIVE
countries have de...
SECTOR GROWTH STRATEGY

1 Middle income benchmarks suggest that most growth is likely to come
from productivity improvemen...
SECTOR GROWTH STRATEGY

1 … while some sectors are much more likely to generate employment
than others
Share of US employm...
SECTOR GROWTH STRATEGY

1 FDI data suggest that Serbia’s rate of return on Foreign Direct
Investment (FDI) is low compared...
SECTOR GROWTH STRATEGY

1 Export data suggest that Serbia has export strengths in ammunition
and agricultural products
Ser...
SECTOR GROWTH STRATEGY

1 A country sector growth strategy should be squarely
positioned to take advantage of major global...
SECTOR GROWTH STRATEGY

1 Increasing demand for food – the global food and agriculture sector is
facing severe pressure fr...
SECTOR GROWTH STRATEGY

1 Serbia is well positioned to play a significantly larger role in food
production in the next dec...
SECTOR GROWTH STRATEGY

1 … as well as in food processing
Food processing labor costs in
the region are significantly lowe...
SECTOR GROWTH STRATEGY

1 However, Serbia has increased it’s exports of commodities, while other
countries in the region h...
SECTOR GROWTH STRATEGY

1 Benchmarks suggest a number of measures are needed to grow
agricultural productivity, especially...
SECTOR GROWTH STRATEGY

1 Agriculture Transformation example: “Green Morocco” has achieved a
jump of almost 50% in agro GD...
Ideas others have leveraged to achieve a quantum leap
growth strategy
1Sectorwe all need to do?
What do

institutions
2 Po...
POLICIES AND INSTITUTIONS

2 The overall findings of the latest 2013-2014 Global Competitiveness
Report mirrors the public...
POLICIES AND INSTITUTIONS

2 … while suggesting that productively channeling the great talent
available in the country is ...
POLICIES AND INSTITUTIONS

2 However, countries should not implement policies blindly – following a
reform agenda focusing...
POLICIES AND INSTITUTIONS

2 The priority and supporting sectors can be grouped
by degree of differentiation and tradabili...
POLICIES AND INSTITUTIONS

2 … which allows governments to tailor policy based on the sector group
needs which both target...
POLICIES AND INSTITUTIONS

2 Example of a best practice proactive investment attraction approach
Design
Customized pitch b...
POLICIES AND INSTITUTIONS

2 A relatively low level of financial depth in Serbia suggest that
availability of capital is a...
POLICIES AND INSTITUTIONS

2 Infrastructure example: benchmarks suggest a major rise in
infrastructure spend may be needed...
Ideas others have leveraged to achieve a quantum leap
growth strategy
1Sectorwe all need to do?
What do

institutions
2 Po...
DELIVERY

3 Achieving a transformation is hard, but it is not harder in the public
sector than in the private sector
How s...
DELIVERY

3 Why transformation is hard – a few thoughts from former
transformation leaders
―The difficult thing is not to ...
DELIVERY

3 Lessons a government can leverage to increase chances of success (1/3)
10 key learnings from an analysis of 40...
DELIVERY

3 Lessons a government can leverage to increase chances of success (2/3)
10 key learnings from an analysis of 40...
DELIVERY

3 Lessons a government can leverage to increase chances of success (3/3)
10 key learnings from an analysis of 40...
DELIVERY

3 Malaysia case example: The Prime Minister outlined 4 elements to
Malaysia’s transformation Programme

1 People...
DELIVERY

3 Malaysia case study – cross functional full time delivery labs were used
to detail out the concrete reform pla...
DELIVERY

3 Malaysia case example: 500 people, primarily from the private
sector, worked across 12 labs for 8 weeks to dev...
DELIVERY

3 Malaysia case example: 12 National Key Economic Areas (NKEAs) were
selected
Financial
Services

Oil, Gas &
Ene...
HIGHLY ILLUSTRATIVE EXAMPLES

DELIVERY

3 Some transformations specifically drive concrete changes in
behaviors by tacklin...
DELIVERY

3 “I know the best” mindset example: moving from unconsciously
unskilled to consciously unskilled is the necessa...
DELIVERY

3 While growth is a critical outcome, over time the Transformation
Program could also address other drivers of h...
THANK YOU

McKinsey & Company

| 43
BACKUP

McKinsey & Company

| 44
Looking forward, time is of the essence

A karios may be approaching –
Serbia can capture the opportunity
Achieving a Quan...
Day zero hypothesis
growth strategy
1Sectorwe all need to do?
What do

PRELIMINARY DRAFT

institutions
2 Policies &could t...
Ideas others have leveraged to achieve a quantum leap
growth strategy
1Sectorwe all need to do?
What do

institutions
2 Po...
SECTOR GROWTH STRATEGY

1 100 largest companies in Serbia (1/2)

Source: APR

McKinsey & Company

| 48
SECTOR GROWTH STRATEGY

1 100 largest companies in Serbia (2/2)

Source: APR

McKinsey & Company

| 49
SECTOR GROWTH STRATEGY

1 Manufacturing, professional services and mining sectors pay the
highest salary in Serbia
Top 10 ...
SECTOR GROWTH STRATEGY

1 Number of people employed in Serbia by Sector (1/2)
Top 10 industries by growth in employment, 2...
SECTOR GROWTH STRATEGY

1 Number of people employed in Serbia by Sector (2/2)
Top 10 activities by decrease in employment,...
SECTOR GROWTH STRATEGY

1 National vision example: Singapore 21 vision- key messages
Our vision for Singapore is not house...
SECTOR GROWTH STRATEGY

1 National vision example: Malaysia’s Wawasan 2020 vision established
and maintained since 1991- k...
SECTOR GROWTH STRATEGY

1 National vision example: Malaysia’s Wawasan 2020 vision established
and maintained since 1991- r...
SECTOR GROWTH STRATEGY

1 On a total economy level, productivity and employment drive growth

Economy level

Myth
1 Produc...
SECTOR GROWTH STRATEGY
PRELIMINARY

1 Serbia should target sectors according to four criteria
Description

▪

A
“Countercy...
SECTOR GROWTH STRATEGY

1 Most growth is likely to come from productivity improvements, rather
than increased employment
G...
SECTOR GROWTH STRATEGY

1 Given Serbia’s middle income status, more than half of Serbia’s future
growth can be expected to...
SECTOR GROWTH STRATEGY

1 GDP per capita has been increasing with time, mostly driven by
productivity increase, with simul...
SECTOR GROWTH STRATEGY

1 Both higher efficiency and higher output value lead
to productivity growth

Reduce
input for a
g...
SECTOR GROWTH STRATEGY

1 Driving service sector growth is critical, particularly in terms
of jobs growth
Sector contribut...
SECTOR GROWTH STRATEGY

1 Within a 3000km radius, Serbia has access to ~900 million people, >650
airports and ~100 cities ...
SECTOR GROWTH STRATEGY

1 Serbia’s sector growth strategy should be squarely positioned to take
advantage of the major glo...
SECTOR GROWTH STRATEGY

1 Serbia’s sector growth strategy should be squarely positioned to take
advantage of the major glo...
Ideas others have leveraged to achieve a quantum leap
growth strategy
1Sectorwe all need to do?
What do

institutions
2 Po...
POLICIES AND INSTITUTIONS

2 The overarching goal of policy is to increase country competitiveness
by making it easier for...
POLICIES AND INSTITUTIONS

2 GCI detail: Serbia (1/2)

McKinsey & Company

| 68
POLICIES AND INSTITUTIONS

2 GCI detail: Serbia (2/2)

McKinsey & Company

| 69
POLICIES AND INSTITUTIONS

2 FDI attraction activities should be aligned with the
sector strategy

ILLUSTRATIVE

Criteria
...
POLICIES AND INSTITUTIONS

2 Governments should differentiate their interventions and sectorlevel policies by the degree a...
POLICIES AND INSTITUTIONS

2 Governments have a broad array of options available to them
across this spectrum of intervent...
POLICIES AND INSTITUTIONS

2 1980-1990s: Washington consensus (1/2)

▪

"Unified" position of required reform measures
to ...
POLICIES AND INSTITUTIONS

2 Best-practice example of "go to market" country strategy:
Singapore
1 Targeting and proactive...
POLICIES AND INSTITUTIONS

2 Best-practice example of "go to market" country strategy:
France
1 Targeting and proactive
ap...
POLICIES AND INSTITUTIONS

2 Best-practice example of "go to market" country strategy:
France
1 Targeting and proactive
ap...
POLICIES AND INSTITUTIONS

2 Best-practice example of "go to market" country strategy:
Ireland
1 Targeting and proactive
a...
POLICIES AND INSTITUTIONS

2 Best-practice example of "go to market" country strategy:
United Kingdom
1 Targeting and proa...
POLICIES AND INSTITUTIONS

2 Best-practice example of "go to market" country strategy:
Georgia
1 Targeting and proactive
a...
Ideas others have leveraged to achieve a quantum leap
growth strategy
1Sectorwe all need to do?
What do

institutions
2 Po...
DELIVERY

McKinsey & Company

| 81
DELIVERY

3 A multi-year culture change journey can be tailored based on the
transformational change toolkit
Performance
1...
DELIVERY

3 Depending on complexity, a typical transformation program
can take up to a year to become established
Frame

M...
DELIVERY

3 There are a number of ways to bring the vision of having the top talent
to life
Transition to a culture where ...
DELIVERY

3 How to get it Done – Setting in Motion the Virtuous Cycle: the Six
Elements of Agriculture Transformation

▪

...
DELIVERY

3 The sector growth strategy should be framed as part of a change story
that will rally the nation behind a sing...
DELIVERY

3 There are many examples of effective delivery units set up by
governments to implement their growth agendas ac...
DELIVERY

3 An effective delivery unit needs to establish routines, solve problems
early and build momentum and sustain pr...
DELIVERY

3 Three main roles must be clearly defined when setting up a delivery
unit
Description of roles and responsibili...
DELIVERY

3 Once the routines are planned, create and publish a master calendar
that should be followed in a draconian fas...
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?
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Mr. Sven Smit, Director, McKinsey&Company - What will it take to double Serbia’s economic growth in the next decade?

  1. 1. Quantum Leap- what will it take to double Serbia‟s economic growth in the next decade? Quantum Leap Conference Belgrade, Serbia October 3rd, 2013 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
  2. 2. McKinsey has conducted >2,000 projects in the social sector in the past 4 years for governments, foundations, non-profits as well as corporations… Today's focus McKinsey industry and functional practices ▪ 11 industry sectors including – Banking and Finance – Energy and Materials – Healthcare – High Tech McKinsey geographic scope Economic Development Education ▪ 5 special initiatives including Reputation, Government & Regulatory Strategy ▪ Specific JVs to jointly firm members, including more than 9,000 consultants ▪ Citizens of more than 120 countries ▪ 9 functional practices including Strategy, Organization and Operations ▪ More than 18,000 Global Public Health ▪ Over 25,000 former consultants around the world ▪ More than 100 Social Innovation offices in more than 50 countries Sustainability develop knowledge SOURCE: McKinsey McKinsey & Company | 1
  3. 3. … almost half of which included economic development Global client experience Deep functional expertise ▪ Worked for over 90 governments… ▪ … multinational institutions (UN, World ▪ 390 McKinsey partners across the globe with ▪ Bank), leading global foundations (Bill and Melinda Gates Foundation) and nonprofits (CARE) … … across 5 continents in almost 1,000 engagements SOURCE: McKinsey ▪ recent economic development experience … … supported by 13 economic development centers of expertise – National and regional – Delivery economic – Green growth transformations – Agriculture and rural – Private sector development development – Financial inclusion – Job creation – Private public – FDI attraction partnership – City development – Infrastructure – Development cooper- – Water ation effectiveness and waste McKinsey & Company | 2
  4. 4. Our topic today – what can the Serbian government do to achieve a DATA FOR THE 1990'S SHOULD quantum leap in growth over the next 10 years? BE CONSIDERED ILLUSTRATIVE Real GDP growth, USD (base 2010) Countries that experienced single year economic declines above 35% grew by an average of ~10% in the decade that followed the decline1 Is sustained >5% growth possible for the first time since Serbia became a market society? 6-8% 5% ~0 2x 3-4% 3% ~0 -48% 1980s 1990 1991-2000 2000-2008 2008-2012 Forecast2 Illustrative (low data quality)3 Aspiration The next decade NB: ~Two thirds of Serbia‟s economy is managed by the government 1The countries included are: Rwanda (1994), Lebanon (1989), Iraq (1991), Kuwait (1991), Georgia (1992), Armenia (1992); Only other major exception is Georgia whose economic decline lasted for 3 years, after which it grew at 6% 2 EIU projects growth at 3.3% from 2014 to 2023, while WMM Global Insight projects growth of 4.2% for the same period 3 Other data sources: -5.5% (1991-2000) from WMM, 2.2% (1995-2000) from EIU SOURCE: McKinsey Global Growth Model McKinsey & Company | 3
  5. 5. The government may choose to launch one of five types of pragmatic Transformation Programmes Program typology Main objectives Most likely to meet Quantum Leap objectives Main interventions associated to typologies 1 “Hands on”1 Actively support private sector growth ▪ Sector support/subsidies ▪ Infrastructure investments ▪ Investing in private companies 2 “Hands off" Reduce governmentcontrolled constraints for economic activity ▪ Privatization ▪ Liberalization/sector reform ▪ Remove administrative burden “Streamlining 3 government costs” Keep the same quality of government services at lower costs ▪ FTE & OPEX reductions ▪ Reducing government scope ▪ Optimizing support functions “Enhancing 4 government output” Enhance quality of government services at similar cost levels ▪ Organizational changes ▪ Operations changes ▪ IT solutions “Achieving 5 more for less” Enhance quality of government services at lower cost levels Boosting economic growth Enhancing government efficiency ▪ Mix of the two types of programmes above 1 Smaller economies trying to boost economic growth have historically tended to choose a “hands on” approach to Transformation SOURCE: McKinsey McKinsey & Company | 4
  6. 6. Recent, high and sustained economic growth is possible … Lower income3 All countries with over 5% average growth for at least a decade1 plus benchmarks <5%; Since 1980 Middle income Economic growth High income (76 countries) %; Real GDP growth (USD, base 2010); Highest average growth 10 year period selected 11 Botswana (1980) ▪ Although no country China (1980-2010) Korea (1980) Kazakhstan (2000) 10 9 Singapore (1980) Estonia (1996) 8 (except China and Botswana) has grown at a rate >10% for longer than a decade1, 41 countries have grown in the 510% range2 Ireland (1994) Serbia (2013) 7 ▪ Growth rates over 45% subjectively “feel like growth” (e.g. companies start aggressively employing) 6 Russia (1999) 5 4 Cyprus (1981) Romania (2000) Bulgaria (2000) Serbia (2000) Montenegro (2000) US (1992) ▪ With a growth rate of Germany (1983) 3 Croatia (2000)2 Italy (1983) 7%, roughly double of the forecast rate, Serbia could almost reach high income status in a decade from now Austria (1990) 2 1 Slovenia (1987) 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 Real GDP per capita USD (Base 2010) 1 Excluding countries that have rebounded from major economic declines, which include Rwanda, Bosnia, Kuwait, Iraq, Azerbaijan and Turkmenistan; From a list of 115 major world countries, including Serbia, tracked by McKinsey's Global Growth Model 2 Croatia‟s highest growth was in the 10 y. from 1994, however 2000 was used here for regional comparability 3 Based on 2012 thresholds; Includes low income SOURCE: McKinsey Global Growth Model; Global Insight, World Bank McKinsey & Company | 5
  7. 7. … which, data suggest, more than half of the high growth countries (>5%) Before have achieved through a Quantum Leap in growth since 1980 All countries with over 5% average growth for at least a decade1 since 1980; n=41 After 9.3% 7.3% Estonia -3.3% Continued 34.1% high growth2 Achieved a Quantum 65.9% Leap since 19801 5.9% Malta3 2.4% 6.1% UAE Average size of Quantum Leap -2.6% 1 Defined ac countries that have achieved an increase in economic growth between the period of the highest 10 year average economic growth since 1980 and the 10 years prior to the first year of that period (in 9 cases between 5 and 10 years were considered due to data availability, however no less than 5 years were included in the data set) 2 Highest post 1980 10 year economic growth phase started in the 1980-1985 period, suggesting that high economic growth started prior to 1980-1985 3 Uganda, Tanzania, Israel, Ireland, Dominican Republic, Costa Rica and Belize have a similar growth profile SOURCE: McKinsey Global Growth Model; Global Insight, World Bank McKinsey & Company | 6
  8. 8. Ideas others have leveraged to achieve a quantum leap growth strategy 1Sectorwe all need to do? What do institutions 2 Policies &could the What actions 3 Deliveryactually get it done? How do we government take? ▪ Set a compelling vision of what Serbia will be the best at … ▪ … that will be achieved by a prioritized sectorspecific growth strategy ... ▪ ▪ ▪ ... supported by a change in mindsets and behaviors ▪ SOURCE: McKinsey Enable local and foreign (incl. FDI) enterprises to deliver the vision through private investment and entrepreneurship... ... by orchestrating policies and institutions to increase sector and economy wide competitiveness … ... and making it easier to do business ▪ Committed and visible high level political leadership... ▪ … focusing on delivering big outcomes in few priority areas fast ... ▪ ... supported by Delivery Labs, a Delivery Unit and transparent performance management McKinsey & Company | 7
  9. 9. SECTOR GROWTH STRATEGY 1 For growth, sector performance matters more than sector mix in both developing and developed countries Contribution to total value added, 1995–2005 Compound annual growth rate, % Growth Growth momentum (growth predicted by initial sector mix)1 Total growth High 9.1 China United States 3.3 United Kingdom Low 2.6 0.4 3.4 5.2 3.9 Mexico Japan 5.7 5.5 India Differences in performance of sectors2 6.0 0.3 -2.1 2.3 0.9 2.2 2.1 0.4 -1.7 1 Country growth rate calculated as if all sectors would have grown with the sector-specific growth rate average across all benchmark countries. 2 Actual country growth minus growth momentum of initial sector mix. SOURCE: Global Insight; McKinsey Global Institute analysis McKinsey & Company | 8
  10. 10. SECTOR GROWTH STRATEGY 1 Example of a Sector strategy overview, similar to what many other ILLUSTRATIVE countries have developed Value generated per person Bubble size: additional growth in the next 10 years Labor productivity; EUR per employee 300,000 Primary/growth sectors Enabling sectors 280,000 260,000 Energy 240,000 Manufacturing Electricity, gas and water supply 220,000 Health and social work 200,000 180,000 Financial intermediation Other activities 160,000 140,000 Transport, storage and communication 120,000 Public administration and defense 100,000 Agriculture 80,000 60,000 Retail and wholesale trade 40,000 Construction Education Hotels and restaurants 20,000 0 0 20,000 40,000 60,000 80,000 100,000 Number of people employed Source: McKinsey McKinsey & Company | 9
  11. 11. SECTOR GROWTH STRATEGY 1 Middle income benchmarks suggest that most growth is likely to come from productivity improvements, rather than increased employment… Sector contribution to growth of value added, labor productivity, and employment for middle-income countries1 Contribution to compound annual growth rate 1985–2005 BASED ON PEER COUNTRY BENCHMARKS Growth of labor productivity, % 2.1 1.5 Growth of value added, % Goods Services Total 3.6 2.3 2.7 Growth of employment, % 5.0 0.2 1.2 1.4 1 World Bank defines middle-income countries as those with 2008 per capita GNI from $976 to $11,905. Value-added and employment data available in Argentina, Bolivia, Brazil, Bulgaria, China, Colombia, Costa Rica, Egypt, Hungary, Jordan, Malaysia, Peru, Philippines, Poland, Romania, Slovakia, Sri Lanka, Thailand, Turkey, and Uruguay SOURCE: Global Insight; International Labor Organization; National Statistics; McKinsey Global Institute analysis McKinsey & Company | 10
  12. 12. SECTOR GROWTH STRATEGY 1 … while some sectors are much more likely to generate employment than others Share of US employment, August 2009 (percent of nonfarm employment) 100% = 130 million New innovative sectors Existing large employment sectors 11.3 4.9 0.2 0.3 0.6 Biotech Semiconductor Cleantech 5.9 Construction SOURCE: The Clean Energy Economy, PEW, 2009; Bureau of Labor Statistics; Haver analytics Financial activities Retail trade McKinsey & Company | 11
  13. 13. SECTOR GROWTH STRATEGY 1 FDI data suggest that Serbia’s rate of return on Foreign Direct Investment (FDI) is low compared to benchmarks BASED ON IMF AND EIU DATA Inward FDI rates of return1, 2009-2011 average, % 62.4% 5.5% 4.0% 3.3% 2.4% Serbia (105/117) CEE EU-27 World average Angola 1 Calculated as FDI income/FDI stock based on UNCTAD methodology as presented in the World Investment Report SOURCE: IMF; EIU; UNCTAD; team analysis McKinsey & Company | 12
  14. 14. SECTOR GROWTH STRATEGY 1 Export data suggest that Serbia has export strengths in ammunition and agricultural products Serbia’s top 10: Revealed comparative advantage – exports; 2012 1 Arms and ammunition Difference to 2007 9.26 2 Cereals 8.28 +5.05 +4.57 3 Products of the milling industry 6.60 -3.97 4 Edible fruit and nuts 6.48 -1.67 5.36 5 Sugars and sugar confectionery 4.71 6 Copper and articles thereof +5.53 -0.11 7 Aluminum and articles thereof 4.07 +0.18 8 Live animals; animal products 4.06 +2.46 9 Footwear, gaiters and the like 3.60 -0.28 10 Explosives; pyrotechnic products 3.51 +0.45 EU-271 = 2.0% 1 Top 10 average for EU-27 countries SOURCE: Comtrade; MGI Economics Research Team McKinsey & Company | 13
  15. 15. SECTOR GROWTH STRATEGY 1 A country sector growth strategy should be squarely positioned to take advantage of major global trends Detailed next Global trends that influence country growth programs through 2050 1. Economic center of gravity shifts to developing world 6. Trade increases and new flows emerge 2. Urbanization rates increase rapidly – mostly in the developing world 7. Global energy demands rise, but supply sources remain uncertain 3. Global consumer class expands rapidly in emerging economies 8. Transition toward sustainable practices 4. Labor force growth decreases globally, but mostly developed countries 9. Increasing demand for food 5. Race to increase productivity through technology and the knowledge economy 10. Change in social values SOURCE: Working group McKinsey & Company | 14
  16. 16. SECTOR GROWTH STRATEGY 1 Increasing demand for food – the global food and agriculture sector is facing severe pressure from demand-supply gap World demand will grow around 70% between 2000 and 2050 Growth on the supply side is constrained ▪ Water – 40% deficit expected ▪ Population growth – 7 billion today to 9.2 billion by 2050 ▪ Urbanization – 50% today to 70% of population by 2050 ▪ Higher calorie consumption and diet shifts: more wealth = more protein Global annual food consumption1 Kcal consumption, quadrillions 10.2 +70% 6.0 ▪ Need to produce „more with less‟ ▪ Increased pressure on food price volatility ▪ Opportunity for discontinuities and investment ▪ Quality in addition to quantity by 2030 ▪ Land – over 20% of arable land already degraded; require additional 175-220 million ha of crop land to meet the 2030 demand (11-14% increase) ▪ Climate change – lead to 316% lower productivity by 2080 ▪ Productivity gain – steadily declined since the 1960s (2.2% average annual yield increase) to today (1.2%) ▪ Energy – over 50% of cash 2000 2050 costs are fertilizers and fuels (63% for U.S. corn production) 1 On a per-day basis, global food consumption is ~17 trillion Kcal in 2000, ~18 trillion Kcal in 2005, and ~28 trillion Kcal in 2050 SOURCE: FAO World Food and Agriculture to 2030/2050; FAO Expert Meeting on How to Feed the World in 2050; Sage; PEAT; USDA; UNEP; World Bank; Resource Revolution, McKinsey McKinsey & Company | 15
  17. 17. SECTOR GROWTH STRATEGY 1 Serbia is well positioned to play a significantly larger role in food production in the next decades… Agriculture labor costs in Serbia are significantly lower than in Western Europe Agriculture labor costs (EUR per hour, gross)1 Serbia has a high percentage of arable land, almost 50% of which is considered higher quality soils Share of total land which is arable 47% =~5 m ha 6.8 Serbia’s central location means access to almost a billion people within two days truck drive (2k km) Population by distance band Distance in KM; Millions of people xx # of cities with >1M ppl 37% 900 710 23% 3.4 1.9 280 67 Serbia2 Croatia Serbia WE CEE 500 1000 2000 3000 5 WE 21 72 94 Smart investors (e.g. UAE based Al-Dahra, EBRD, IFC) have already invested over 2bn EUR in the Serbian agriculture sector 1 Last available comparable year used (2007); Serbia‟s wage calculated based on monthly wage, assuming 20 day work week and 8 hours per day 2 Only about 6% of arable land remains unused; while only 1.5% is irrigated (which is low) SOURCE: Republicki Zavod za Statistiku RS; Agri-info.eu; The Government of the Republic of Serbia; IAMO; Agripolicy McKinsey & Company | 16
  18. 18. SECTOR GROWTH STRATEGY 1 … as well as in food processing Food processing labor costs in the region are significantly lower than in Western Europe Indexed food processing costs, 2012 Labor costs All other costs Building on the existing research institutions, Serbia can build it’s position as an agro R&D hub Quality of scientific research institutions, rank out of 148 countries Serbia has significant potential to add more value by exporting more processed agricultural products Share of total agricultural product exports by degree of processing; 2012 Processed products -9% Commodities Semiprocessed products 66 44 44 26 29 56 21 30 WE CEE Serbia 27 23 Serbia World CEE “The greatest opportunity for Serbian agriculture is in fruit processing and in meat production. Those are areas where you can advance significantly” – Laurent Stokvis, Ambassador of Holland to Serbia, at the 2013 Agricultural Fair in Novi Sad SOURCE: Eurostat, McKinsey analysis; WEF, Comtrade, MGI Economic Research McKinsey & Company | 17
  19. 19. SECTOR GROWTH STRATEGY 1 However, Serbia has increased it’s exports of commodities, while other countries in the region have moved up the productivity ladder Revealed comparative advantage index1 2007 1.11 1.09 2012 1.04 Threshold 1 0.99 0.92 Serbia ▪ 0.81 1.25 ▪ 1.16 CEE 0.84 0.85 Commodities Processed products 0.80 0.75 Semiprocessed products Serbia agriculture sector has been increasingly relying on exporting commodities (e.g. corn, fruit, sugar beet, tobacco)… …while countries in the Central and Eastern Europe1 have significantly increased exports of processed agricultural products (e.g. processed fruit/vegetables, prepared meat, dairy products) 1 or Balassa index is the ratios of the industry‟s share in the country‟s exports relative to the share in world trade. If the index takes a value of more (less ) than 1, the country is (not) specialized in exporting selected industry products SOURCE: Comtrade; Team analysis McKinsey & Company | 18
  20. 20. SECTOR GROWTH STRATEGY 1 Benchmarks suggest a number of measures are needed to grow agricultural productivity, especially investment in automation and developing scale economies EU-15 Agriculture value added per worker (thousands of US$ per year, constant 2005) CEE 344 33 10 Share of arable land Percent of total land 24 Share of irrigated land Percent of arable land 17 Agricultural machinery Tractors per 100 sq km of arable land 172 Scalability Average plot size, hectare2 34 47 1,125 Fertilizer consumption Kg per hectare of arable land 43 37 28 8 13 344 1 155 18 141 138 78 28 7 1 Growing of perennial (cereals and vegetables) and non-perennial (fruits) crops, plant propagation and animal production 4 Data point for 2010 according to the World Bank methodology 2.5 ▪ Higher share of arable land vs. EU-15, gives Serbia a good starting position to further build on its agricultural base ▪ Significant investments and incentives needed in irrigation and to push machinery driven production ▪ Consolidation of plots highly desirable to allow for economics of scale ▪ The Economics Institute recently estimated the potential of the Serbian agriculture sector to 12 billion, almost three times the current 4.5 billion agricultural production gross value 2 CEE average plot size figure excludes Czech and Slovakia SOURCE: World Bank; World Development Indicators database; Eurostat; team analysis; European Commission 3 Data point for 2009 McKinsey & Company | 19
  21. 21. SECTOR GROWTH STRATEGY 1 Agriculture Transformation example: “Green Morocco” has achieved a jump of almost 50% in agro GDP and production in under 5 years Agriculture as the main engine for economic growth and social development Pillar II Pillar I Social Agriculture: Commercial Agriculture: Social investment and fight against rural poverty Private sector investment on high productivity/ high value Focus on aggregation and contract farming Reform of key transversal areas Integrated Water management (Supply & Demand) Land reform & industry structure Market access and trade policy (FTAs) Access to inputs & services (incl. distribution networks) Doing business & access to financing (incl. taxation & subsidies) Institutional reform & public services (incl. extension / R&D) Integrated rural development McKinsey & Company Source: Green Morocco Plan | 20
  22. 22. Ideas others have leveraged to achieve a quantum leap growth strategy 1Sectorwe all need to do? What do institutions 2 Policies &could the What actions 3 Deliveryactually get it done? How do we government take? ▪ Set a compelling vision of what Serbia will be the best at … ▪ … that will be achieved by a prioritized sectorspecific growth strategy ... ▪ ▪ ▪ ... supported by a change in mindsets and behaviors ▪ SOURCE: McKinsey Enable local and foreign (incl. FDI) enterprises to deliver the vision through private investment and entrepreneurship... ... by orchestrating policies and institutions to increase sector and economy wide competitiveness … ... and making it easier to do business ▪ Committed and visible high level political leadership... ▪ … focusing on delivering big outcomes in few priority areas fast ... ▪ ... supported by Delivery Labs, a Delivery Unit and transparent performance management McKinsey & Company | 21
  23. 23. POLICIES AND INSTITUTIONS 2 The overall findings of the latest 2013-2014 Global Competitiveness Report mirrors the public perception that change in Serbia is required… Global Competitiveness Index 2013-2014; Ranking of countries in Europe (out of a total of 148 countries worldwide) Top 3 Bottom 3 3rd place: Finland 4th place: Germany 1st place: Switzerland 101st place: Serbia Serbia’s competitiveness has fallen by 14 positions in the past 7 years to the lowest position in Europe 95th: place: Albania 91st place: Greece 1 A measure of the degree of sophistication of business practices and strategies of companies in Serbia SOURCE: World Economic Forum Global Competitiveness Report 2013-2014 McKinsey & Company | 22
  24. 24. POLICIES AND INSTITUTIONS 2 … while suggesting that productively channeling the great talent available in the country is key to Serbia’s path forward Detailed set of indicators (total of 114) that together make up the overall country rank What are Serbia’s … …Greatest competitive strength? ▪ Tertiary education ▪ ▪ ▪ ▪ ▪ enrollment Quality of math and science education Quality of scientific research institutions Number of Serbia is a source international patent of great talent … applications1 Mobile broadband subscriptions Flexibility of wage determination …Greatest competitive weaknesses? …Most significant barriers blocking the further development of the strengths ▪ Ability to attract Professionalize management ▪ Willingness to delegate authority ▪ Reliance on professional management ▪ Nature of competitive advantage2 Extent of staff training ▪ Firm level technology absorption …mainly because managers are ▪ Quality of management schools not inspiring, financing is hard to come by Improve access to financing and the government is not ▪ Easeit feels likehelping of access to loans ▪ Financing through local equity market ▪ Venture capital availability Improving government effectiveness ▪ Burden of government regulation ▪ Efficiency of legal framework ▪ Quality of overall infrastructure ▪ Intensity of local competition (2nd ▪ talent lowest place globally) Ability to retain talent (3rd lowest place .. .however we do globally) not seem to be providing adequate opportunities for our talent to develop… NB: ~Two thirds of Serbia‟s economy is managed by the government 1 PCT patents, applications/million population 2 Busines sophistication/ competitiveness of company strategies/production process sophistication SOURCE: World Economic Forum Global Competitiveness Report 2013-2014 McKinsey & Company | 23
  25. 25. POLICIES AND INSTITUTIONS 2 However, countries should not implement policies blindly – following a reform agenda focusing only on macro enablers is not the whole answer Countries in Latin America implemented "Washington Consensus" economic reforms… Structural Reform Index1 0.58 … but these reforms were not associated with strong economic growth in most countries GDP per capita, constant 2000 USD 1985 +1% p.a. 1999 1.7x 4,019 0.34 Latin America Average 3,533 Latin America Average ▪ Similar evidence in Eastern Europe and Subsaharan Africa ▪ At the same time, evidence that – "Growth champions" (Asian Tigers, India, China) had employed policies that were contrary the Washington consensus ("planned growth 2.0") – Rise of contemporary economic super-powers similarly been associated with heavy interventionism 1 1 = most "reformed"; 0 = least "reformed". Includes measures of trade, financial, tax, privatization, and labor policies. From Lora (2001) SOURCE: Lora (2001); World Bank; Rodrick (2004); EconDev KIP team McKinsey & Company | 24
  26. 26. POLICIES AND INSTITUTIONS 2 The priority and supporting sectors can be grouped by degree of differentiation and tradability of products… Size of circle = relative amount of sector value added in 2005 Differentiation index 0 = average High 1.6 Pharma Differentiation of products R&D Business services 1.2 0.8 Real-estate activities 0.4 Local services Other Wholesale and retail trade Post and telecommunication Radio, TV, and communication equipment Chemicals Computer and related activities Finance and insurance Other Resourceintensive industries Aircraft and spacecraft Medical instruments R&D-intensive manufacturing Pulp, paper, printing, and publishing Fabricated metals Rubber and plastics 0 Electricity Infrastructure -0.4 Construction Hotels and restaurants Land transport Basic metals Agriculture, forestry, an d fishing Low -0.8 1 Low Wood products Motor vehicles Machinery and equipment Manufacturing 10 100 Imports plus exports divided by sector gross output, % Tradability of products High Sectors can be grouped into clusters based on two key sector competitiveness drivers, tradability & differentiation SOURCE: EU KLEMS growth and productivity accounts; OECD input-output tables; McKinsey Global Institute analysis McKinsey & Company | 25
  27. 27. POLICIES AND INSTITUTIONS 2 … which allows governments to tailor policy based on the sector group needs which both targets and simplifies policy formulation Degree of intervention Low High Setting ground rules/direction Building enablers Tilting the playing field R&D-intensive manufacturing Business services Local services Government as principal actor Manufacturing Infrastructure Resource-intensive industries Infrastructure Grouping of sectors into clusters enables a tailoring of government policies by cluster to simplify policy development and increase its effectiveness SOURCE: McKinsey Global Institute/Public Sector Office Competitiveness Project McKinsey & Company | 26
  28. 28. POLICIES AND INSTITUTIONS 2 Example of a best practice proactive investment attraction approach Design Customized pitch books ▪ Prioritising and segmenting investor target list ▪ Tailoring pitch book (and proactive proposals) for priority investors in each segment Investment excellence ▪ Supporting enablers Execute Tailored value proposition to prioritized investors in key sectors Army of investment officers to source and pitch deals ▪ ▪ ▪ Delivering a targeted number of deals each p.a. through 20-401 dedicated officers Conducting fact-based performance dialogues to review progress, resolve issues and problem-solve concrete action Attract enough investors to meet the required level of investment levels p.a. Plug-and-play industry ecosystem ▪ ▪ Providing large scale infrastructure for investors to come in Developing plug-and-play facilities with well connected logistics and supporting infrastructure Business friendly environment and a cosmopolitan society ▪ ▪ Enforce Providing clear and transparent investment rules and governance Ensuring ease of establishing and operating business ▪ ▪ Investment and Enforcement agency to ensure quality of committed and deployed investment ▪ Overseeing commitment of investment ▪ Reviewing on an on-going basis the quality of investment, investments gaps against stated targets, performance management of investment officers Committed investments timely and fully deployed Committed investments reached targeted outcome ▪ Quick ramp-up times and assured supply Proximity to efficient ports and logistic providers ▪ ▪ ▪ Top position in Ease of Doing Business Top position in Most Liveable Countries 1 Number of investment officers varies across countries and investment needs SOURCE: McKinsey McKinsey & Company | 27
  29. 29. POLICIES AND INSTITUTIONS 2 A relatively low level of financial depth in Serbia suggest that availability of capital is a key precondition for growth Financial depth, stock of financial assets (debt + equity) as a % of GDP, 2012 GDP growth is strongly correlated to growth in the stock (household and corporate) stock of financial assets with a World correlation of 0.83 and 0.81 for Emerging Markets 417% 217% 127% 93% Serbia 100% Bosnia Croatia Eastern Europe Western Europe 1 Calculated as FDI income/FDI stock based on UNCTAD methodology as presented in the World Investment Report SOURCE: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute analysis McKinsey & Company | 28
  30. 30. POLICIES AND INSTITUTIONS 2 Infrastructure example: benchmarks suggest a major rise in infrastructure spend may be needed to support a Quantum Leap BASED ON BENCHMARKS Serbia; Infrastructure investment gap analysis3 Historical Quantum Leap scenario % of GDP, 5% growth, 2000-2008 % of GDP, assuming 7% growth, 2013-2023 6.7% 5.3% 4.7%1 3.3-4.3% 3.4x 2.0% 1-2% Actual historical spend4 Target spend Gap Recent spend2 Target spend Gap Implies total investment of up to 30-40 billion USD over ten years ▪ Current infrastructure is strained due to decades of underinvestment1, further increasing the importance of adequate infrastructure investment to support sustainable growth in the next decade ▪ However, the situation may not be as critical as suggested by benchmarks due to major economic decline in the 1990s and solid infrastructural base in the 1980s 1 The gap in the 1990's is at least 1%, on top of the gap generated in 2000-2008 2 2007-2010 3 Benchmark is: 1.8% of GDP + 70% of growth 4 Illustrative due to data quality issues SOURCE:ITF, Buildecon Reports and GWI, OECD 1998 report on the perpetual inventory method, Farewell to Cheap Capital (McKinsey report, 779371, p. 65), Various IFIs (e.g. World Bank) and data providers (e.g. Global Insight) McKinsey & Company | 29
  31. 31. Ideas others have leveraged to achieve a quantum leap growth strategy 1Sectorwe all need to do? What do institutions 2 Policies &could the What actions 3 Deliveryactually get it done? How do we government take? ▪ Set a compelling vision of what Serbia will be the best at … ▪ … that will be achieved by a prioritized sectorspecific growth strategy ... ▪ ▪ ▪ ... supported by a change in mindsets and behaviors ▪ SOURCE: McKinsey Enable local and foreign (incl. FDI) enterprises to deliver the vision through private investment and entrepreneurship... ... by orchestrating policies and institutions to increase sector and economy wide competitiveness … ... and making it easier to do business ▪ Committed and visible high level political leadership... ▪ … focusing on delivering big outcomes in few priority areas fast ... ▪ ... supported by Delivery Labs, a Delivery Unit and transparent performance management McKinsey & Company | 30
  32. 32. DELIVERY 3 Achieving a transformation is hard, but it is not harder in the public sector than in the private sector How successful was the transformation in reaching the targets your organization set? Percent (Public=974, Private=4,572) Extremely successful 100 5 Very successful 30 Somewhat successful 51 Not successful at all Don‟t know 5 9 Private 100 9 40 percent of government transformations succeed 30 41 10 10 Public SOURCE: Public Sector Transformational Change (TC) survey 2012 to U.S. Government Leaders GS15-SES (n=974); Private Sector TC survey ‟06, ‟08, ‟10 to a panel of business leaders (n=4,572) McKinsey & Company | 31
  33. 33. DELIVERY 3 Why transformation is hard – a few thoughts from former transformation leaders ―The difficult thing is not to see what to do, the difficult thing is to do it… If I had to do it all again, I would perhaps set up some centralized unit just to monitor progress and to spread ideas and best practices.‖ – Göran Persson, former Prime Minister, Sweden ―How many times in administration we had super perfect strategies that stay on the shelves, were not implemented and thus produced no results.‖ – Ahmed Chami, former Minister for Industry, Morocco ―Don’t think you can simply have a good idea and not manage and build stakeholders who will support it and who will argue for it.‖ – Tony Blair, former Prime Minister, United Kingdom ―I didn’t expect to encounter inertia of such magnitude—inertia that is due to the scope of the program, the number of workers involved, and the strength of habits anchored for decades or more in the public sector.‖ – F.D. Migeon, Head of Department for Modernization, France ―You cannot transform anything until you change what is in the minds of people.‖ – Roel Bekker, former Secretary General for Government Reform, the Netherlands McKinsey & Company | 32
  34. 34. DELIVERY 3 Lessons a government can leverage to increase chances of success (1/3) 10 key learnings from an analysis of 40 government led Transformation Programs across the world 1 Shoot for the sky Around the world, governments have achieved remarkable transformations – resulting in improvements that many believed beforehand to be impossible 2 Set a clear and compelling target Be very clear about what it is that you wish to achieve (growth, efficiency or quality) 3 You have only one shot at the goal Successful transformations build the foundations for impact: the usual focus is the mandate term, but simultaneously they also ensure quick wins and plan for persistent, long-term impact ▪ Past Transformation Programmes (TPs) aimed at boosting growth were able to create additional annual GDP growth of ~1.5% (range from 0 to 4%) ▪ Successful transformations usually focus on two goals ▪ simultaneously (but not three) Smaller countries are more likely to take a hands on approach in growth programmes ▪ The average duration in power of national leaders since ▪ 1945 has been 7 years, which is ~ as long the average TP Not a single TP was implemented in less than 3 years 4 Be persistent and consistent, but flexible Changing targets half way will undermine confidence in the program, but shifts in circumstances demand flexibility ▪ Once you have set a target, stick to it. Clarity in the ▪ ambition is one of your most powerful tools Be open to modifying your approach when and where necessary – as when new opportunities arise McKinsey & Company | 33
  35. 35. DELIVERY 3 Lessons a government can leverage to increase chances of success (2/3) 10 key learnings from an analysis of 40 government led Transformation Programs across the world 5 Capture the right moment Successful leaders require a mandate for change and take full advantage of the opportune moment – the kairos – as well as of an aspiration for change in the public opinion ▪ The two most common reasons for starting a TP are: – The election of new leaders (in 70% of cases) – A crisis (in 50% of cases) ▪ The most powerful mandate for change was based on both a crisis and a change in leadership 6 Agree on what you want to change and the program will follow “What you want to do” (the portfolio of interventions) significantly shapes the options for “how you do it” (the program design) ▪ A hands-on growth TP is most likely to be successful if driven top down by a centralized, highly skilled administrative team through a delivery unit1 7 Do not neglect the basics Ensure you give due regard to the key success factors that apply to all transformation programs ▪ E.g. develop a clear change story linked to a national vision, establish a central team, set targets centrally, link targets to budgets, harness the energy of transparency by communicating targets and results, assign the best public servants to the job2, assign accountabilities and manage performance, leverage change agents, etc 1 Unless existing structures with sufficient experience in terms of transformation already exist 2 Often with an infusion of the private sector, however depending on existing capabilities McKinsey & Company | 34
  36. 36. DELIVERY 3 Lessons a government can leverage to increase chances of success (3/3) 10 key learnings from an analysis of 40 government led Transformation Programs across the world 8 No one expects to travel into space in a propeller plane Transformation in the public sector are ▪ TPs are very complex (average of ~250 interventions extremely complex, and demand grouped in 22 categories), large (Serbia‟s gov‟t manages significant investment and high-quality ~2/3 of the economy and is the biggest employer), require resources over the long term, requira large central team (average of 1,300 FTEs involved over ing a major effort on capability building 7 years) and a scale-up in capabilities (e.g. through academies for civil servants building leadership, functional and operational capabilities) 9 Personal commitment matters 100% Transformations leaders lead from the front, investing significant time and reputational capital ▪ Almost all TPs had at least one person at the helm whom ▪ have given their name, face and reputation (and political career) to achieving the goals of the program These TP leaders invested as much as 10-50% of their time to driving the TP over the whole programme duration1 10 Rewards will follow (through sometimes posthumously) Some criticism is inevitable, but the record shows transformations leave a long-lasting legacy ▪ Successful TP leaders find ways to push beyond the initial criticism to achieve their aims. Looking back, these leaders often point to their leadership of the TP as one of their greatest achievements in office. Once the program has reached many of its goals, their achievements are also frequently acknowledged internationally 1 Including succession planning after they are gone McKinsey & Company | 35
  37. 37. DELIVERY 3 Malaysia case example: The Prime Minister outlined 4 elements to Malaysia’s transformation Programme 1 People First Performance Now 3 2 “Then Government is set to begin the transformation process in strengthening the efficiency of its delivery system” “Our real work will begin as we make the transformation of government services happen” 4 10th & 11th Malaysia Plan McKinsey & Company | 36
  38. 38. DELIVERY 3 Malaysia case study – cross functional full time delivery labs were used to detail out the concrete reform plan for each priority initiative What is the purpose of a lab? Who participates in a lab? ▪ An intense 6-8 week, “locked in together in a room until the work is finished” approach in taking a high level reform programme and translating into an actionable (who does what when) initiative by initiative implementation plan ▪ The lab includes key stakeholders (20-30 ▪ What happens in a lab? How is commitment secured? ▪ people) relevant to solve the defined problem, and are selected from the government, state owned enterprises, private and social sectors The invited cross-organizational team works fulltime in one location The lab involves an intense closely facilitated/managed problem solving process ▪ The key political leaders are engaged early ▪ and continuously (~every 1-2 weeks) Initiative level owners sign off on programmes and are accountable for implementation ▪ A “3-feet“ level implementation What are the end products? programme, including agreed solutions, detailed execution plans with responsible owners (across organizations), timelines and targets McKinsey & Company | 37
  39. 39. DELIVERY 3 Malaysia case example: 500 people, primarily from the private sector, worked across 12 labs for 8 weeks to develop a program with ambitious targets through the Delivery Labs ENTRY POINT PROJECTS Gross National Income (GNI) USD PER CAPITA GNI IN 2020 Transformational Actions Jobs USD ADDITIONAL JOBS Investment INVESTMENT McKinsey & Company | 38
  40. 40. DELIVERY 3 Malaysia case example: 12 National Key Economic Areas (NKEAs) were selected Financial Services Oil, Gas & Energy Education Greater KL Business Svcs Tourism NKEA Labs: 11 Economic Sectors + Greater KL Agriculture W’sale & Retail E&E Within the first 8 months, the ETP was able to a major jump in FDI to reach 55 billiion USD (for a country of 27 million people) within 8 months, which compares to Serbia‟s total FDI stock to date of 26 billion USD Health Services Telco Palm Oil McKinsey & Company | 39
  41. 41. HIGHLY ILLUSTRATIVE EXAMPLES DELIVERY 3 Some transformations specifically drive concrete changes in behaviors by tackling change in the most obstructive mindsets Detailed further To … From ... • Hard work does not pay off… no one can pay me as little as I can work… employment through connections • It will not get better for me until it gets worse for someone else • Hard work pays off and the more I work the work the better off I will be • We can achieve more working together (moving from a win/lose to a win/win mindset) • I can only change and effect my own • It is always someone else‟s fault (government, system, corruption, external powers, etc) • With the people and institutions that we behavior to make things better- I am responsible for what happens to me • Things were once better, and they will be better in the future have here, things will never get better • I know what I don‟t know • I know the best SOURCE: Team analysis McKinsey & Company | 40
  42. 42. DELIVERY 3 “I know the best” mindset example: moving from unconsciously unskilled to consciously unskilled is the necessary first step for further growth Personal realization Requires no conscious thought Personal experiences ▪ Owned as ▪ Pleasure ▪ Ease ▪ Satisfaction normal, natural and effortless Unconsciously skilled ▪ I can do it but I need Requires practice to think about it Consciously skilled Requires a point of choice Requires incident leading to insight ▪ Aware of what I have to learn, but don‟t know how to do it Consciously unskilled ▪ Don‟t know what I don‟t know/have to learn SOURCE: © Gita Bellin and Associates, 1999 ▪ Choose to change ▪ Skill building ▪ Nurturing by others ▪ Courage and humility ▪ Persistence ▪ Confusion ▪ Go in „learning‟ ▪ „Aha!‟ moment ▪ Realization ▪ Upsetting situation or Unconsciously unskilled relationship McKinsey & Company | 41
  43. 43. DELIVERY 3 While growth is a critical outcome, over time the Transformation Program could also address other drivers of happiness United Nations World Happiness Report 2013; Score out of 10 xx Difference: Happiest to Serbia Explained by Perceptions of corruption Generosity +0.3 +0.4 +0.4 7,50 Freedom to make life choices Healthy life expectancy Social support 4,81 GDP per capita Base country + residual 2,93 +0.4 Average of top 10 happiest countries1 Serbia (106/156) Least happy country2 1 Denmark, Norway, Switzerland, Netherlands, Sweden, Canada, Finland, Austria, Iceland, Australia SOURCE: UN According to the UN World Happiness Report, an increase in income to highly developed country levels1 would increase Serbia‟s happiness by +0.4, the same as an increase in generosity and slightly more than a decrease in perceptions of corruption (+0.3) 2 Togo McKinsey & Company | 42
  44. 44. THANK YOU McKinsey & Company | 43
  45. 45. BACKUP McKinsey & Company | 44
  46. 46. Looking forward, time is of the essence A karios may be approaching – Serbia can capture the opportunity Achieving a Quantum Leap is possible… with the right prioritization, including many already existing ideas The implementation of the Transformation/ Reform agenda is likely to be a key challenge… and it can be done McKinsey & Company | 45
  47. 47. Day zero hypothesis growth strategy 1Sectorwe all need to do? What do PRELIMINARY DRAFT institutions 2 Policies &could the What actions 3 Deliveryactually get it done? How do we government take? ▪ A vision does not exist today and one is desperately needed. Potential messages include: ▪ – Best human capital in the region – Primary sectors: agriculture, food ▪ As talent is infused, a result processing, automotive cluster, It sector, mining (tbc), outsourcing & offshoring (tbc), semiconductors (tbc) oriented government effectiveness transformation should be pushed within the government to fix the basics (e.g. tax collection) ▪ ▪ SOURCE: McKinsey ▪ The next 6-12 months will be a highly opportune moment for the government to launch a Transformation ▪ The Transformation should follow the hand-on growth model with a strong central Delivery Unit Sector based policy enablers should be defined in implemented across time horizons (incl. policy guillotine) Global Competitiveness “quick fixes” (including perception drivers) should be launched – Secondary sectors: education, infrastructure, retail, e nergy A culture of meritocracy should continue to be transitioned to in 2-3 years (in both SOE and the gov‟t) McKinsey & Company | 46
  48. 48. Ideas others have leveraged to achieve a quantum leap growth strategy 1Sectorwe all need to do? What do institutions 2 Policies &could the What actions BACKUP 3 Deliveryactually get it done? How do we government take? ▪ Set a compelling vision of what Serbia will be the best at … ▪ … that will be achieved by a prioritized sectorspecific growth strategy ... ▪ ▪ ▪ ... supported by a change in mindsets and behaviors ▪ SOURCE: McKinsey Enable local and foreign (incl. FDI) enterprises to deliver the vision through private investment and entrepreneurship... ... by orchestrating policies and institutions to increase sector and economy wide competitiveness … ... and making it easier to do business ▪ Committed and visible high level political leadership... ▪ … focusing on delivering big outcomes in few priority areas fast ... ▪ ... supported by Delivery Labs, a Delivery Unit and transparent performance management McKinsey & Company | 47
  49. 49. SECTOR GROWTH STRATEGY 1 100 largest companies in Serbia (1/2) Source: APR McKinsey & Company | 48
  50. 50. SECTOR GROWTH STRATEGY 1 100 largest companies in Serbia (2/2) Source: APR McKinsey & Company | 49
  51. 51. SECTOR GROWTH STRATEGY 1 Manufacturing, professional services and mining sectors pay the highest salary in Serbia Top 10 industries by highest income, RSD, 2011 Industry Sub-industry Mining and quarrying Extraction of crude petroleum and natural gas 89,167 Activities of head offices; management consultancy activities 86,682 Professional, scientific and technical activities Average net salary Manufacturing Manufacture of tobacco products Manufacturing Manufacture of coke and refined petroleum products 79,349 Financial service activities, except insurance and pension funding 77,611 Transportation and storage Air transport 75,616 Other service activities Activities of membership organizations 74,136 Manufacturing Mining support service activities Financial and insurance activities Warehousing and support activities for transportation 64,969 n/a 64,837 Professional, scientific and technical activities Electricity, gas, steam and air conditioning supply SOURCE: RZS 84,239 71,367 McKinsey & Company | 50
  52. 52. SECTOR GROWTH STRATEGY 1 Number of people employed in Serbia by Sector (1/2) Top 10 industries by growth in employment, 2011 Industry Sub-industry Arts, entertainment and recreation Gambling and betting activities Real estate activities Real estate services Financial and insurance activities Insurance, reinsurance and pension funding, except compulsory social security Administrative and support service activities Services to buildings and landscape activities Information and communication Information service activities Administrative and support service activities Office administrative, office support and other business support activities Professional, scientific and technical activities Activities of head offices; management consultancy activities Professional, scientific and technical activities Legal and accounting activities Administrative and support service activities Employment activities Arts, entertainment and recreation Sports activities and amusement and recreation activities Number of employees, 2011 SOURCE: RZS 4,688 Growth, 2008-2011, % 14.89 3,125 11.41 7,843 11.08 10,205 10.42 1,532 7.04 3,024 6.99 15,821 5,766 6.18 5.68 4.73 1,991 6,421 4.12 McKinsey & Company | 51
  53. 53. SECTOR GROWTH STRATEGY 1 Number of people employed in Serbia by Sector (2/2) Top 10 activities by decrease in employment, 2011 Industry Sub-industry Number of employees, 2011 Manufacturing Manufacture of other transport equipment Manufacturing Manufacture of basic metals Manufacturing Manufacture of computer, electronic and optical products 8,835 -8.67 Manufacturing Manufacture of beverages 9,537 -8.54 Mining and quarrying Extraction of crude petroleum and natural gas Manufacturing Manufacture of machinery and equipment n.e.c. Manufacturing Manufacture of other non-metallic mineral products Accommodation and food service activities Food and beverage service activities Agriculture, forestry and fishing Crop and animal production, hunting and related service activities Transportation and storage Air transport SOURCE: RZS 3,777 Growth, 2008-2011, % -12.19 14,425 -9.11 1,415 -8.38 15,518 -8.18 13,505 -8.06 10,740 -8.00 29,142 1,499 -7.96 -7.63 McKinsey & Company | 52
  54. 54. SECTOR GROWTH STRATEGY 1 National vision example: Singapore 21 vision- key messages Our vision for Singapore is not houses of brick and mortar, but homes with hearts and dreams. People who feel confident and secure. People who believe in Singapore and its future. Let‟s work together to make Ours the Best Home, for ourselves and our children. In a global, knowledge-based economy, countries which attract and mobilise human talent will thrive. We have to continue to draw in talent but we must also continue to invest heavily in education and training of our own people. In future, the competitive advantage of nations will lie in their people - how a society is organised to maximise and mobilise the potential of its people. We need to go beyond economic and material needs, and reorient society to meet the intellectual, emotional, spiritual, cultural and social needs of our people. In Sony Corporation, they call this "heartware" NB: The Economic Development Board, established in 1961 and active since, has been a key factor in driving Singapore‟s growth by formulating and implementing national economic strategies, at first focusing on promoting Singapore's manufacturing and logistics sectors Source: Excerpt from a speech delivered in Singapore‟s Parliament, June 5th, 1997 McKinsey & Company | 53
  55. 55. SECTOR GROWTH STRATEGY 1 National vision example: Malaysia’s Wawasan 2020 vision established and maintained since 1991- key messages Hopefully the Malaysian who is born today and in the years to come will be the last generation of our citizens who will be living in a country that is called 'developing'. The ultimate objective that we should aim for is a Malaysia that is a fully developed country by the year 2020. Each [developed country], out of a world community of more than 160 states, has its strengths. But each also has its fair share of weaknesses. Without being a duplicate of any of them we can still be developed. We should be a developed country in our own mould. Malaysia should not be developed only in the economic sense. It must be a nation that is fully developed along all the dimensions: economically, politically, socially, spiritually, psychologically & culturally. The vision includes 9 key challenges, including developing a society that is: united, psychologically liberated and secure, democratic, moral, liberal and tolerant, scientific and progressive, caring, economically just, prosperous and competitive A number of creative approaches were used to bring the vision to life, including the Wawasan 2020 patriotic song in Malay and English Source: www.wawasan2020.com McKinsey & Company | 54
  56. 56. SECTOR GROWTH STRATEGY 1 National vision example: Malaysia’s Wawasan 2020 vision established and maintained since 1991- recent update Source: Malaysia Investment Development Authority McKinsey & Company | 55
  57. 57. SECTOR GROWTH STRATEGY 1 On a total economy level, productivity and employment drive growth Economy level Myth 1 Productivity growth doesn‟t matter Productivity growth GDP growth Employment growth Source: MGI Reality Productivity growth is closely correlated with competitiveness, and it is the key driver of rising living standards 2 Productivity is a Productivity growth and job killer employment growth are often positively related 3 Productivity is only about cutting costs and labor Productivity growth in many sectors comes from increased top-line revenue and higher value goods McKinsey & Company | 56
  58. 58. SECTOR GROWTH STRATEGY PRELIMINARY 1 Serbia should target sectors according to four criteria Description ▪ A “Countercyclical sectors” (traditional and high-tech/ high-productivity) Priority sectors Sectors not effected (or slightly effected) by crises Biggest potential in the next couple of years in terms of investing (FDI potential for Serbia) Larger growth and GDP enhancement potential in the current crises ▪ Chocolate production ▪ Water and soft drink production ▪ Generic pharma ▪ Bio-molecule pharma ▪ Specialty chemicals ▪ Household chemicals Good base for further growth, especially for exports Existing infrastructure and labor supply Shorten time needed until beginning of production and achievement desired quality levels ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ B ▪ ▪ Development of clusters centered around existing "champions" or revamp of past clusters C ▪ ▪ ▪ Infrastructure developments ▪ ▪ D Targeted ad hoc efforts with relevant multinationals, Serbia-friendly companies and efficiencyseeking FDI SOURCE: McKinsey; team analysis ▪ ▪ ▪ Office machinery Electronic photo cells, transistors Wire, Cable, Patterns Lighting Medical equipment (basic) Automobile parts Software research and maint. (focus on mobile and gaming) Wood processing Serbia‟s substantial infrastructure lag (especially in transport) compared to developed countries Growth opportunity in telecom services (especially mobile) Growth opportunity in energy production ▪ ▪ ▪ ▪ ▪ ▪ Power generation Mobile/diversified operators Shipping Road construction Railway construction Air carrier Large FDI inflow by multinationals Utilizing Serbian Diaspora to attract FDI Efficiency-seeking FDI amidst costcutting crisis initiatives ▪ Food Pharma Chemicals n/a Electronics Automotive Software Wood Infrastructure McKinsey & Company | 57
  59. 59. SECTOR GROWTH STRATEGY 1 Most growth is likely to come from productivity improvements, rather than increased employment GDP per capita, 2011, PPP, $ thousand CEE1 19.0 Productivity contribution Labor utilization contribution EU15 20.4 4.5 34.9 1 CEE excluding Croatia SOURCE: The Conference Board; Eurostat; Global Insight; International Monetary Fund; team analysis McKinsey & Company | 58
  60. 60. SECTOR GROWTH STRATEGY 1 Given Serbia’s middle income status, more than half of Serbia’s future growth can be expected to be in service related sectors Services1 % of GDP, 1970–2001 Industry2 Agriculture Low-income countries Middle-income countries (incl. Serbia) High-income countries 80 80 80 70 70 70 60 60 60 50 50 50 40 40 40 30 30 30 20 20 20 10 10 10 0 1970 1980 1990 2000 0 1970 1980 1990 2000 0 1970 1980 1990 2000 1 Industry: manufacturing, mining, and construction; services: personal, professional, and public-sector services and utilities. 2 The World Bank defines middle-income economies as those with per capita GNI in 2003 between $766 and $9,385 measured with average exchange rate over past two years. SOURCE: World Development Indicators, World Bank; McKinsey Global Institute analysis McKinsey & Company | 59
  61. 61. SECTOR GROWTH STRATEGY 1 GDP per capita has been increasing with time, mostly driven by productivity increase, with simultaneous growth in employment Productivity Hours per capita GDP per capita Employment per capita EU-15 economic growth Indexed numbers1, 1970 = 100 U.S. economic growth Indexed numbers1, 1970 = 100 250 250 200 200 150 150 100 100 50 1970 1980 1990 50 1970 2000 Year 1980 1990 2000 Year 1 The trends are based on real growth Sources: The Conference Board; MGI McKinsey & Company | 60
  62. 62. SECTOR GROWTH STRATEGY 1 Both higher efficiency and higher output value lead to productivity growth Reduce input for a given output Consolidate to better leverage scale Improve operational performance Drivers for productivity performance Find innovative processes to improve operations Create innovative high value added products and services Sell highervalue goods Increase output with a given input Source: MGI analysis Close gap to bestpractice operations Sell more goods to increase capacity utilization Shift to higher-value goods within existing product portfolio ▪ Productivity driven by: – Efficiency, which can lead to (temporary) job losses on firm and sector level – Increases in value/volume, often enabled by higher efficiency and lower prices, potentially leading to job creation ▪ Productivity crucial for economic development and without negative implications on employment McKinsey & Company | 61
  63. 63. SECTOR GROWTH STRATEGY 1 Driving service sector growth is critical, particularly in terms of jobs growth Sector contribution to a country's net growth of employment, 1985–2005 %, million employees Low-income countries 100% = 324 Medium-income countries 100% = 50 High-income countries 100% = 74 29 100% Goods 9 32 129 91 Services 68 SOURCE: International Labor Organization; National Statistics; McKinsey Global Institute analysis McKinsey & Company | 62
  64. 64. SECTOR GROWTH STRATEGY 1 Within a 3000km radius, Serbia has access to ~900 million people, >650 airports and ~100 cities with >1M population Population by distance band Distance in KM; Millions 900 710 280 67 500 1000 2000 3000 500 2000 3000 # airports 42 170 513 671 # of cities with > 100k ppl 65 202 618 819 # of cities with >1M ppl SOURCE: ESRI World data 1000 5 21 72 94 McKinsey & Company | 63
  65. 65. SECTOR GROWTH STRATEGY 1 Serbia’s sector growth strategy should be squarely positioned to take advantage of the major global trends (1/2) Global trends that influence country growth programs through 2050 Trends Economic center of gravity 1 shifts to developing world Urbanization rates increase 2 rapidly – mostly in the developing world Global consumer class expands 3 rapidly in emerging economies Labor force growth decreases 4 globally, but mostly developed countries Race to increase productivity 5 through technology and the knowledge economy Description ▪ Most growth through 2050 will be in emerging markets across Asia, Africa, Middle East, and Latin America, which will drive 80% of GDP growth through 2050 ▪ By 2050, urban areas will add about 2.6 billion people – absorbing almost all population growth globally Over 80% of the developed world population will be urban and over 60% of the developing world population will be urban ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ 6 Trade increases and new flows emerge SOURCE: Working group ▪ An extra 3 billion people will join the middle class by 2050 – mostly from emerging markets By this time, the share of global consumers in emerging markets will be 2/3, up from 1/3 today Many developed economies will see almost no labor force growth due to aging populations and decreasing labor force participation in some population segments Over 70% of global labor force growth through 2030 will come from China, India and Young Developing economies Largely driven by decreasing labour force, most GDP growth will need to come from productivity advances as discussed in trend 4 This will depend on new and disruptive technologies like mobile internet, 3D printing, robotics, etc. The rise of knowledge economy and innovation – particularly in the developing world – will also play a major role Global trade volume will be about 8 times larger by 2050, as trade within emerging markets increases from ~10% of global share to ~40%. Worldwide demand for transport infrastructure will grow rapidly, as supply struggles to keep pace McKinsey & Company | 64
  66. 66. SECTOR GROWTH STRATEGY 1 Serbia’s sector growth strategy should be squarely positioned to take advantage of the major global trends (2/2) Global trends that influence country growth programs through 2050 Trends Global energy demands rise, but 7 the source of supply remains uncertain Transition toward sustainable 8 practices Description ▪ ▪ ▪ ▪ 9 Increasing demand for food 10 Change in social values SOURCE: Working group Detailed on next slide ▪ ▪ ▪ ▪ Exploding demand from emerging markets will lead to ~1% p.a. rise in final energy demand – an over 50% increase in total energy demand by 2050 However, future sources of energy are uncertain, since the rise of new technologies could enable major improvements for natural gas or renewables - and the various scenarios would have differing impacts on oil prices Largely due to resource and cost constraints, governments will need to improve resource productivity and implement more sustainable practices in waste management, recycling, manufacturing and water conservation Global demand for food is projected to double in the next 2-3 decades as world population increases and agricultural land becomes more scarce and less arable Much of this demand will be in emerging markets like China, which will begin eating higher calorie diets rich in meat – as developed countries currently do Increasing demand for political and economic freedom Declining focus on family unit and values Less focus on religion globally McKinsey & Company | 65
  67. 67. Ideas others have leveraged to achieve a quantum leap growth strategy 1Sectorwe all need to do? What do institutions 2 Policies &could the What actions BACKUP 3 Deliveryactually get it done? How do we government take? ▪ Set a compelling vision of what Serbia will be the best at … ▪ … that will be achieved by a prioritized sectorspecific growth strategy ... ▪ ▪ ▪ ... supported by a change in mindsets and behaviors ▪ SOURCE: McKinsey Enable local and foreign (incl. FDI) enterprises to deliver the vision through private investment and entrepreneurship... ... by orchestrating policies and institutions to increase sector and economy wide competitiveness … ... and making it easier to do business ▪ Committed and visible high level political leadership... ▪ … focusing on delivering big outcomes in few priority areas fast ... ▪ ... supported by Delivery Labs, a Delivery Unit and transparent performance management McKinsey & Company | 66
  68. 68. POLICIES AND INSTITUTIONS 2 The overarching goal of policy is to increase country competitiveness by making it easier for businesses to do business… 2013 global rank (148 countries) Top 50% Global Competitiveness IndexEconomy wide score for Serbia Rank out of 148 countries Innovation and sophistication factors Fall of 14 positions in 7 years to the lowest position in Europe Business sophistication 137 Innovation 112 Higher education and training 83 101 87 93 95 Bottom 20% Top 5 most problematic factors for doing business Goods market efficiency Efficiency enhancers 132 1 Corruption ▪ Labor market efficiency 119 Financial market development 115 2 Inefficient ▪ government bureaucracy Technologies readiness 60 Market size 69 3 Access to ▪ financing 4 Government ▪ instability Institutions 2006 2009 2012 2013 Basic requirements Infrastructure 126 90 Macroeconomic environment 136 Health and primary education 5 Inadequate ▪ infrastructure 69 SOURCE: World Economic Forum Global Competitiveness Index McKinsey & Company | 67
  69. 69. POLICIES AND INSTITUTIONS 2 GCI detail: Serbia (1/2) McKinsey & Company | 68
  70. 70. POLICIES AND INSTITUTIONS 2 GCI detail: Serbia (2/2) McKinsey & Company | 69
  71. 71. POLICIES AND INSTITUTIONS 2 FDI attraction activities should be aligned with the sector strategy ILLUSTRATIVE Criteria I Define pool of investors in priority investors Shortlist players who optimally match local value chain ▪ ▪ II SOURCE: McKinsey analysis ▪ ▪ III Select the best investors to pursue ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ Fit with priority sectors Value added to the GDP (e.g. through DIA) Environmental/social image Fit with other development goals (e.g. job creation) Value chain fit where investors optimally positioned to compete Synergies with current local industry ecosystem Management team Breadth, depth and quality of product offering Financial standing Strength of supporting network Branding Appetite for investment McKinsey & Company | 70
  72. 72. POLICIES AND INSTITUTIONS 2 Governments should differentiate their interventions and sectorlevel policies by the degree and target of intervention Degree of intervention Low Setting ground rules/direction Governments can limit sector policies to ▪ Setting the regulation covering labor, capital and land markets; ▪ Establishing the general business environment, ▪ Setting broad national priorities and road maps High Building enablers Without interfering with market mechanisms, governm ents can support private-sector activities by ▪ Expanding hard and soft infrastructure; ▪ Helping to ensure adequate skills through education and training, ▪ Supporting R&D activities SOURCE: MGI/PSO Sector Competitiveness Project Tilting the playing field Government as principal actor Governments can Governments can play choose to create a direct role by favorable conditions for ▪ Establishing statelocal production owned or subsidized through companies; ▪ Trade protection ▪ Funding existing from global businesses to competition ensure their survival ▪ Providing financial ▪ Imposing incentives for local restructuring on operations certain industries ▪ Shaping local demand growth through public purchasing or regulation McKinsey & Company | 71
  73. 73. POLICIES AND INSTITUTIONS 2 Governments have a broad array of options available to them across this spectrum of interventions Degree of intervention Low High A Setting ground rules/direction B Building enablers C Tilting the playing field D Government as principal actor Set regulatory environment Develop infrastructure Establish companies 1 Define labor and unionization laws, rights, and taxes 2 Streamline bureaucracy to reduce transaction costs and time frames of doing business 3 Manage exchange rates 1 Expand and develop the national road network 2 Allocate specialized infrastructure (e.g., lanes for efficient vehicles) Define market environment 4 Negotiate free-trade agreements with foreign governments on sector exports 5 Enact vehicle operating restrictions (e.g., speed limits, driver qualification, and vehicle inspections) 6 Regulate vehicle safety, environmental, and other performance standards 7 Control fuel prices (via tax and subsidy levels) 8 Set vehicle acquisition costs (e.g., VAT, registration fees) 9 Define vehicle approval process before market entry Build skilled labor pool Incentivize domestic production 1 Impose import restrictions ▪ Tariffs ▪ Quotas ▪ Domestic content requirements 2 Subsidize investments (e.g., financial incentives such as tax breaks for Greenfield projects) 3 Regulate capital flows (e.g., limits on FDI and profit repatriation) 4 Incentivize exports Set sector direction 10 Create a vision and define a strategy for the development of the domestic sector 6 Subsidize sector research and development 7 Support technology transfer (JVs with global leaders) 3 Fund sector-specific education programs (e.g., automotive engineering degrees) Facilitate sector processes 4 Facilitate discussion among domestic sector stakeholders 5 Simplify interaction with authorities (e.g., one-stopshop regulation interaction partner) Support innovation SOURCE: MGI/PSO sector competitiveness project Stimulate demand 5 Create vehicle purchase incentives (e.g., scrap schemes, technology rebates) 6 Provide liquidity support along the automotive value chain (e.g., credit for auto loans) 7 Leverage government as an automotive consumer to guarantee minimum demand 1 Establish state-owned enterprises (SOE) to build up sector from scratch Support ongoing operations 2 Infuse cash into automotive producers ▪ Governmental loans during crises (with/without expected repayment) ▪ By acquiring an equity stake Restructure industry 3 Control number of producers and level of competition (e.g., via monopoly restrictions or antitrust legislation) to moderate overcapacity and competitive levels McKinsey & Company | 72
  74. 74. POLICIES AND INSTITUTIONS 2 1980-1990s: Washington consensus (1/2) ▪ "Unified" position of required reform measures to stimulate and sustain economic growth in developing countries of World Bank, IMF, US Treasury, several academics (espc. Chicago) ▪ Focus on fixing (macro) enablers, e.g., – Fiscal discipline – Tax reform – Financial/interest rate liberalization – Unified/competitive exchange rates – Fostering trade and FDI – Privatization – De-regulation – Secure property rights ▪ Later complemented by strong push for good governance and strong institutions ▪ Otherwise "hands-off" government role SOURCE: Literature review, McKinsey McKinsey & Company | 73
  75. 75. POLICIES AND INSTITUTIONS 2 Best-practice example of "go to market" country strategy: Singapore 1 Targeting and proactive approach to preferred investors ▪ All industries are open to foreign investment in Singapore‟s free-enterprise economy ▪ 2 World-class country sales approach Why Singapore? 3 Streamlined governance and fast implementation ▪ ▪ Ranks no.1 on World Bank‟s Doing Business Ranking; – just takes 4 days and 4 procedures to start a business – 3 days to register property ▪ The Economic Development Board and the EnterpriseOne Portal serve as one-stop shops for those looking to invest in Singapore – Cater to all needs right from registering a business, obtaining licesnes and permits, finding business premises – Complete information on govt. laws, regulations, funding options, etc all available through them – All services are available online 24*7 The top three core sectors that attract maximum investment are: chemicals, electronics and biomedicals (including pharmaceuticals) ▪ The Economic Development Board (EDB) has unveiled a new International Headquarters Award programme in 2003 to attract more company operations to Singapore. The award is open to all organizations incorporated in Singapore, and it offers customized incentive packages with lower concessionary taxes ▪ Incentives are also given if companies chose Singapore as their regional or global headquarters ▪ Other secotrs it is now promoting for investment: Logistics and supply-chain management, healthcare, education and IT ▪ Promotes itself as a „dynamic global city‟ and cites its competitive factors as follows: – Trust : integrity, quality, reliability, product ivity, a strong legal system – Knowledge: knowledge-based manufacturing and services, a thought and information hub, commitment to education and skills – Connected: physical connectivity as well as people and business networks – Life: an excellent place to live, work, learn and play Financial and Other incentives – Schemes range from assistance in manpower development, technological/equip ment upgrading, to R&D, intellectual property and industry development – Offers a competitive tax regime: no capital gains tax, corporate tax rate of only 17%) SOURCE: Economic Development Board, Singapore; Country Commerce Report (Economist), WB McKinsey & Company | 74
  76. 76. POLICIES AND INSTITUTIONS 2 Best-practice example of "go to market" country strategy: France 1 Targeting and proactive approach to preferred investors ▪ ▪ ▪ France targets innovative companies and adopts a targeting and proactive approach offering, for example, the best research tax credit in Europe In France, the research tax credit (Crédit Impôt Recherche – CIR) represents a reliable element of an innovative company‟s financial plan, and is particularly well adapted to the needs of SMEs. This tax incentive enables companies to increase their competitiveness by supporting their Research & Development efforts The French Government has undertaken a major reform of the research tax credit by means of the Financial Law of 2008, which is in line with the "Lisbon strategy" (knowledgebased economy) and the "Barcelona objective" (3% of total GDP dedicated to R&D) 2 World-class country sales approach ▪ Launching the project – Presentation of the advantages offered by – – ▪ – – SOURCE: Invest in France Agency ▪ France Support and assistance in defining business project, and link to a network of regional partners in order to determine the best site proposals to satisfy business requirements and constraints. Assistance with the project: presentation of the legal framework best adapted to the project, interface with local authorities and presentation of public funding available for the business. Services to assist the expatriate personnel – Long-term support (after-care service) – Businesses receive two visits per year: one – 3 Streamlined governance and fast implementation visit to their development site in France and the second in their home country. Maintaining collective links with foreign business networks set up in France: collaboration with international chambers of commerce and foreign business clubs set up in France, such as the IFA “Japan Club” Intervening rapidly at the request of businesses to assist them in the event of a specific challenge, particularly concerning contact with French administration Facilitating the integration of foreign businesses into the fabric of the local economy, particularly through the mobilization of potential partners, subcontractors and suppliers. ▪ Invest in France Agency was established under the New Economic Measures Law of 15 May 2001. IFA is a public industrial and commercial body (EPIC), placed under the responsibility of the Minister for Economy, Finance and Industry, and the Minister for Regional Development. The Agency is responsible for promoting, prospecting and facilitating international investment in France. IFA works closely with local authorities to achieve this objective. Invest in France Agency has 154 members of staff in 2007, 72 of which are based in 21 offices around the world McKinsey & Company | 75
  77. 77. POLICIES AND INSTITUTIONS 2 Best-practice example of "go to market" country strategy: France 1 Targeting and proactive approach to preferred investors ▪ ▪ ▪ 2 World-class country sales approach Foreign investment permitted in most industries, especially when it creates jobs, contributes new technology or increases exports; but sensitive to takeovers in defence or public services ▪ EU Member states have a lot of incentives available to them as part of the EU framework such as: – Assistance for R&D activities – Assistance for professional training of employees – Environmental subsidies for SMEs – Employment subsidies etc ▪ At an overall level other benefits available are: – financial grants upto 15% of the total investment for large companies and a quarter of the total investment for midsized companies – Subsidies for business premises – Tax incentives – Employment and research activities grants etc 1 Competitive Alternatives: SOURCE: IFA Website, WB France promotes itself as “a land of innovation and creativity centrally located in the heart of Europe that offers a skilled workforce, a high quality of living and competitive business advantages” Major attractions include: – World‟s 5th largest economy; has 20,000 subsidiaries of international companies – According to KPMG1, France has the lowest cost structure among the European countries. Business set-up costs: including payroll, location, transport, utilities and tax – Offers 71 competitive clusters that offer partnership environment, research labs, universities etc at one place – High quality transport and ICT sector – Highly developed financial services sector – Productive workforce – Spends ~2.2% of GDP on R&D 3 Streamlined governance and fast implementation ▪ Invest in France Agency (IFA) has been set up that provides assistance at every stage of the investment process. It provides: – – – – ▪ Provides complete information to enhance decision making for foreign investors Information on the economic and regulatory environment Act as an intermediary for contact with French administration Provides after-care services as well such as visas for family members, work permits, information on education for children, health insurance etc Ranks 31/181 economies on World Bank‟s Doing Business Rankings 2009; – Takes just 7days and 5 procedures to start a business – 113 days to register property KPMG‟s Guide to International Business Location, 2008 McKinsey & Company | 76
  78. 78. POLICIES AND INSTITUTIONS 2 Best-practice example of "go to market" country strategy: Ireland 1 Targeting and proactive approach to preferred investors ▪ 2 World-class country sales approach ▪ Almost 1,000 overseas companies have chosen to invest in Ireland as their European base and are involved in a wide range of activities in sectors as diverse as engineering, information communications technologies, pharmaceuticals, medical technologies, financial and international services. ▪ Financial Incentives – The main criteria applied to determine the availability of incentives include the quality of employment created and location chosen within Ireland – Grants that are available include: Employment Grants, R&D Grants, Training Grants, Capital Grants ▪ ▪ IDA Ireland Services – Provides information on key business sectors and locations within Ireland – Assist in setting up a business in Ireland – Introduce potential investors to local industry, government, service providers and research institutions. – Offer advice on property solutions Ireland has one of the most advanced and competitive telecommunications infrastructures in Europe. The telecommunications sector has state-ofthe-art optical networks with world class national and international connectivity 3 Streamlined governance and fast implementation SOURCE: IDA Ireland Website, WB Ireland Offers: – The lowest corporation tax rate in Europe at 12.5% – A young skilled well educated English-speaking workforce – A competitive economy – Strong legal framework and Intellectual Property (IP) protection – R&D Environment ▪ IDA Ireland (Industrial Development Agency) is responsible for the attraction and development of foreign investment in Ireland ▪ The IDA meets its objective by: – focusing on business sectors that are closely matched with the emerging needs of the economy and that can operate competitively in global markets from an Irish base – Building links between international businesses and third level education and research centres to ensure the necessary skills and research and capabilities are in place – Building world-leading clusters of knowledge-based activities – Strongly active in the development of infrastructure and business support services, telecoms, education, regulat ory issues especially in relation to EU policy. ▪ Ranks 7/181 economies on World Bank‟s Doing Business Rankings 2009; – Takes just 13 days and 4 procedures to start a business – 38 days to register property McKinsey & Company | 77
  79. 79. POLICIES AND INSTITUTIONS 2 Best-practice example of "go to market" country strategy: United Kingdom 1 Targeting and proactive approach to preferred investors ▪ No limits as such on any sectors ▪ Limits exist in some privatized companies on the amount of voting shares an individual or group may own. The government has in the past imposed limits on foreign holdings in a few strategically important, privatized companies, like Rolls Royce (aircraft engines) and BAE Systems (aircraft and defence), through clauses in their articles of association. 2 World-class country sales approach Why UK? An internationally competitive tax environment for foreign investors ▪ Flexible labour market ▪ Least barriers to entrepreneurship in the world ▪ World leader in innovation: The UK ranks ▪ second only to the USA for the quality of its research base ▪ Stable political and regulatory environment ▪ Progressive transport and communications network ▪ Home to Europe‟s number one city for business: London is the world's leading financial services centre ▪ SOURCE: UK Trade and Investment, WB ▪ 3 Streamlined governance and fast implementation ▪ Other Opportunities: London will host the Olympic Games in 2012. Procurement started in 2007. Contracts will be available for firms of all sizes and the total budget will run into billions ▪ ▪ UK Trade & Investment‟sis the government agency that help overseas companies/investors in growing their UKbased operations UK Trade & Investment helps with: – New UK business opportunities – Choosing a new UK location – Growing your industry networks – Having your say in Government – Trading overseas – Setting up a European headquarters etc – Other services and information is available at http://www.ukinvest.gov.uk/How-WeHelp/en-GB-list.html?nav Ranks 6/181 economies on World Bank‟s Doing Business Rankings 2009; – Takes just 13 days and 6 procedures to start a business – 21 days to register property McKinsey & Company | 78
  80. 80. POLICIES AND INSTITUTIONS 2 Best-practice example of "go to market" country strategy: Georgia 1 Targeting and proactive approach to preferred investors ▪ There are no restrictions on the foreign ownership of companies in Georgia. ▪ As a result of changes to the Tax Code and Law on Entrepreneurs in 2005 and 2006, business registration is simple, cheap and efficient, taking only three days for legal entities and one day for individuals 2 World-class country sales approach Why Georgia? – World‟s Leading Reformer: On World Bank‟s Doing Business Rankings, it has moved from rank 112 in 2005 to rank 15 in 2009; just four years – Strategic geographic location; at crossroads of Europe and Central Asia with excellent infrastructure – Low corporate (15%) and personal income tax (12-25%) levels – Dynamic banking sector; share of banking assets expected to reach 60% of GDP by end-2009 High degree of labor freedom and labor force literacy Simplified licensing and permitting procedures Aggressive privatization policy – ▪ Liberal trade regimes with low tariffs, preferential agreements and streamlined border clearance procedures – ▪ – ▪ Stable macroeconomic environment – ▪ Georgia has dramatically simplified licensing and permitting requirements to ease constraints on business. Only 86 licenses and 50 permits now exist. - Reduced statutory time limits for government action: 30 days for issuing licenses and 20 days for issuing permits. "Silence is consent" - a permit or license is automatically granted if no government action is taken within statutory time limits – – ▪ 3 Streamlined governance and fast implementation Georgian National Investment Agency (GNIA) under the Ministry of Economic Development of Georgia is designed to act as a "one-stop-shop" for comprehensive information about investment opportunities in Georgia Primary functions of GNIA include: Providing up-to-date information about setting-up business operations in Georgia – Researching investment opportunities and informing potential investors about investment advantages in Georgia – Arranging site visits for potential investors leading to the increase of investment opportunities – Facilitation of communication with government agencies – Besides these, also performs export promotion functions and helps local businesses find foreign partners – Diverse investment sectors: Economy has been highly resilient to oil and commodity price shocks, Russian embargo and the sub-prime meltdown SOURCE: Invest in Georgia, website-National Investment Agency, WB ▪ Ranks 7/181 economies on World Bank‟s Doing Business Rankings 2009; – Takes just 3 days and 3 procedures to start a business – 3 days to register property McKinsey & Company | 79
  81. 81. Ideas others have leveraged to achieve a quantum leap growth strategy 1Sectorwe all need to do? What do institutions 2 Policies &could the What actions BACKUP 3 Deliveryactually get it done? How do we government take? ▪ Set a compelling vision of what Serbia will be the best at … ▪ … that will be achieved by a prioritized sectorspecific growth strategy ... ▪ ▪ ▪ ... supported by a change in mindsets and behaviors ▪ SOURCE: McKinsey Enable local and foreign (incl. FDI) enterprises to deliver the vision through private investment and entrepreneurship... ... by orchestrating policies and institutions to increase sector and economy wide competitiveness … ... and making it easier to do business ▪ Committed and visible high level political leadership... ▪ … focusing on delivering big outcomes in few priority areas fast ... ▪ ... supported by Delivery Labs, a Delivery Unit and transparent performance management McKinsey & Company | 80
  82. 82. DELIVERY McKinsey & Company | 81
  83. 83. DELIVERY 3 A multi-year culture change journey can be tailored based on the transformational change toolkit Performance 1 2 3 4 5 Aspire Where do we want to go? Assess How ready are we to go there? Architect What do we need to do to get there? Vision Capability platform Portfolio of initiatives Act How do we manage the journey? Delivery model Advance How do we keep moving forward? Continuous Improvement Health Health essentials Develop a vision around performance and health; understand the current performance and health of the country and develop first hypothesis of the target sectors that will then iteratively be updated later in the journey Discovery process Take the time to deepen your understanding of the journey the country has been on to where it is today; discover the changes in mindsets required to achieve the desired shift in working practices and behaviours. Generate alignment, momentum and ownership among leaders Influence model Identify a set of initiatives – existing and new – that will deliver the specified changes in mindsets and behaviours, along with an understanding of how to organize (people, structure, processes) to deliver on them Change engine Group, prioritize and sequence change initiatives; create a change architecture that is capable of delivering the programme while sustaining energy; start the learning process by piloting and experimenting Capability building Ensure continuous learning and improvement of all leaders along existing and new initiatives ▪ Such a journey would typically be agreed in a facilitated workshop with the top leaders in the country, taking a “we don‟t leave until it‟s finished” approach ▪ Managing the communication and the expectations of the citizens would be a critical part of the process SOURCE: Scott Keller and Colin Price, 'Performance and Health: An evidence-based approach to transforming your organisation', 2010. McKinsey & Company | 82
  84. 84. DELIVERY 3 Depending on complexity, a typical transformation program can take up to a year to become established Frame Month Aspire – Where do you want to go? 1 2 3 4 5 7 8 9 10 11 EXAMPLE 12 Define clear organizational aspirations tied to the mission; understand public sector factors at play Assess capabilities, mindset s, and implications of the public Assess – How ready are we to go there? sector factors Architect – What do we need to get there? Develop initiatives to transform organization, and properly address the public sector factors Design and execute approach to rolling out initiatives across the organization; build broad ownership and adjust and refine the program based on on-going monitoring and review. In particular draw upon the Act – How do we manage the journey? Advance – How do we keep moving forward? 6 Objective five critical public sector change actions, while avoiding the major pitfall Begin to develop change leaders Top team Begin to develop change leaders Top 100 Begin to develop change leaders Top 500 Leadership alignment workshop SOURCE: McKinsey Organization Practice Set up mechanisms for continuous improvement, knowledge and best practices sharing and governance. Develop leaders. Monitor factors and leverage change actions Leadership alignment workshop Leadership alignment workshop McKinsey & Company | 83
  85. 85. DELIVERY 3 There are a number of ways to bring the vision of having the top talent to life Transition to a culture where the best for the job are chosen with few upfront defined exceptions. This is likely to be the hardest and the most impactful change, and should therefore be planned and implemented gradually over the next decade (starting with quick wins, strong signals of intent and building on the strengths over time) Diaspora Set the education of the next generation as the national priority which we can all work towards. Build on the strengths of the current education system in a targeted way (e.g. math and science) and linking to the sector specific talent needs Meritocracy Education Develop a world class knowledge collaboration platform between professionals in Serbia and their expert counterparts around the world, including a knowledge repository (documents, access to experts, etc),, online real time presentations (e.g. Webex), structured mentorship scheme, etc, all supported by a world class IT backbone and signature processes (e.g. diaspora expert certification) McKinsey & Company | 84
  86. 86. DELIVERY 3 How to get it Done – Setting in Motion the Virtuous Cycle: the Six Elements of Agriculture Transformation ▪ ▪ ▪ Developed as part of the World Economic Forum’s New Vision for Agriculture initiative in collaboration with McKinsey & Company Based on an examination of large-scale agriculture transformations around the world The most successful agricultural transformations are founded on multistakeholder partnerships and have six elements in common McKinsey & Company | 85
  87. 87. DELIVERY 3 The sector growth strategy should be framed as part of a change story that will rally the nation behind a single vision over the next 10 years… 1. Develop the story structure 2. Write the story 3. Deliver the story ▪ Set the stage – where we are ▪ Start with the political leader‟s ▪ To be consistently delivered by today and why do we need to change ▪ ▪ ▪ Introduce the dramatic conflict “burning platform” or “shining beacon” personal vision Crystallize the key messages (e.g. changes in mindsets such as ) Back them up by facts/proof points ▪ the political leadership and cascaded throughout the government institutions as well as society at large Multiple creative formats can be used, e.g. Videos, Webcasts, Cartoons, et c. ▪ Reach resolution – description of our plan and why we can achieve it McKinsey & Company | 86
  88. 88. DELIVERY 3 There are many examples of effective delivery units set up by governments to implement their growth agendas across the world US (Los Angeles’ Performance Management Unit) ▪ ▪ ▪ Set up: 2006 Focus areas: 7 focus areas including public safety and homeland security, fiscal responsibility and management, education and housing Example of impact: 500+ new police officers, cut more than $200 million without raising taxes UK Prime Minister’s Delivery Unit ▪ ▪ ▪ Set-up: 2001, closed in 2010 Focus areas: 10-20 national priorities across 4 ministries: Health; Education and skills; Home office; Transport Example of impact: 50% reduction in education gap between targeted boroughs and national average France’s President and Ministry of Budget’s RGPP1 ▪ Set up: 2008 ▪ Focus areas: State and central administration‟s operating expenditures; improving quality of public service ▪ Example of impact: ~EUR15 billion savings between 2009-2013, 28% reduction in average waiting time in emergency room Government of Chile’s Delivery Unit ▪ Set up: 2010 ▪ Focus areas: Economic growth; Employment; Urban safety; Education; Healthcare; Poverty, Quality of democracy ▪ Example of impact: 563k+ new jobs created, 50% increase in number of top students choosing teaching as a profession Thailand Delivery Unit ▪ ▪ ▪ Set up: 2010 Focus areas: social security, fuel prices, crime and affordable access to electricity Example of impact: 24 million workers eligible for affordable social security; up to THB 7.3 billion savings from reduction in LPG subsidies Bhutan’s Performance Facilitation Unit ▪ ▪ ▪ Set up: 2010 Focus areas: Job creation in 5 economic sectors (e.g. agriculture and tourism); improvements across 5 key public sector services (e.g. healthcare and education) Example of impact: 13,000 new jobs created, 120+ government services streamlined Malaysia’s PEMANDU ▪ ▪ ▪ Set up: 2009 Focus areas: 7 National Key Results Areas (Education, Corruption, Crime, Rural basic infrastructure, Low income households, Public transport and Cost of living) and 12 National Key Economic Areas Example of impact: 35% reduction in street crime; 60,000 additional pre-school seats l 1 RGPP stands for Révision générale des politiques publiques or General Review of Public Policies SOURCE: McKinsey McKinsey & Company | 87
  89. 89. DELIVERY 3 An effective delivery unit needs to establish routines, solve problems early and build momentum and sustain progress Cycle of effective delivery A Routines are the formal mechanisms to identify and solve problems … C SOURCE: McKinsey Use routines to monitor performance B Identify, classify, a nd solve … and the delivery unit problems constantly monitors and confronts problems Build momentum and sustain progress Routines and problem-solving are the mechanisms to drive delivery, but they must be supported by delivery mindsets and behaviors. The delivery unit must model and cultivate the right mindsets At the same time, the delivery unit must always respond to cultural or behavioral challenges that may hinder the progress of delivery McKinsey & Company | 88
  90. 90. DELIVERY 3 Three main roles must be clearly defined when setting up a delivery unit Description of roles and responsibilities System leader Text Delivery unit Department leaders and staff members ▪ Head of a specific ▪ Composed of senior Delivery ▪ Provide data and other key organization within the state system (e.g. Head of secondary education) ▪ Owns and is ultimately accountable for the delivery agenda in his/her area ▪ Steers the delivery unit towards priorities ▪ Takes action when delivery plan is off track Leader and talented and motivated Delivery Staff ▪ Relentlessly orchestrates the day to day delivery process by establishing the routines and master calendar ▪ Tracks progress and information required by the Delivery Unit to track progress ▪ Participate in routines (e.g., meetings) at the request of delivery unit leader conducts root cause analysis ▪ Detect “red flags” and report ▪ Proactively communicates to issues to department leader and the delivery unit all relevant parties (plays the “spider in the web” role) ▪ Proactively identifies ▪ Work with delivery unit to analyze leading indicators and performance data potential bottlenecks, escalates and suggests solutions SOURCE: McKinsey McKinsey & Company | 89
  91. 91. DELIVERY 3 Once the routines are planned, create and publish a master calendar that should be followed in a draconian fashion Meeting or report Routine Delivery reports Stock-takes with system leader Monthly notes submitted Month 1 2 3 4 5 6 7 8 9 10 11 12 Semiannual delivery reports submitted to system leader Quarterly progress review ▪ Data trends ▪ Issues ▪ Recommendations Quarterly progress review Quarterly progress review Quarterly progress review Monthly updates sent to system leader System actors System actors submit performance data to delivery unit for monthly notes and quarterly progress reviews SOURCE: McKinsey McKinsey & Company | 90
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