Pedestrians in the underground walkway beneath Terazija, one of downtown Belgrade’s busiest avenues, stroll past one of Serbia’s most unusual retail ventures. Hangup, a minuscule but stylishly-appointed shop, is just big enough to accommodate a shop assistant, perhaps two customers and Hangup’s merchandise. It specialises one thing only: wooden coat hangers.

“I buy my coat hangers there. I think everyone does now,” says Danica Popovic, a liberal economist at the University of Belgrade.

As elementary as Hangup’s business is, Mrs Popovic says that the peculiarities of Serbia’s post-socialist economy play a role in ensuring its survival. Where else in Europe can a hyper-specialised retailer of a low-priced item hope to survive in a busy town centre location? One factor is Serbia’s uneven application of bankruptcy law to larger companies, says Mrs Popovic. Robna Kuca, the Yugoslav “socially-owned” retail chain where Belgraders typically bought coat hangers during the communist era, has slumped to a state of near-collapse.

Because it declared bankruptcy in advance of European-standard legislation introduced last year, and because Robna Kuca’s creditors also declared bankruptcy, the process has been muddled. The chain’s privatisation was expected to be this year, but political obstacles got in the way.

Another factor is lingering market isolation. While a few big Europeans retailers have entered the market, operators such as Tesco, Carrefour and Ikea have so far stayed away.

Regional companies loom larger. Global sellers of fast moving consumer goods have yet to open full-scale operations in Serbia. Local businesses and consumers thus remain insulated, in part, from the full impact of globalisation, including the super-abundance of inexpensive products undercutting local specialist suppliers.

“The coat hanger salesman is one of the winners in this situation, but Serbia as a whole is a loser,” Mrs Popovic says.

When economists say Serbia’s economy continues to operate far below capacity, this is often what they mean. The economy is growing impressively, but there remains vast room for improvement.

Gross domestic product (GDP) grew about 6 per cent last year, a steady repeat of 2005. Inflation, which dogged Serbia two years ago, has been tamed with the help of a determined central bank, shrinking last month to an annual rate of 3.3 per cent.

A robust banking sector, now 80 per cent owned by European Union-based banks after a series of big privatisations, is spurring rapid rises in commercial investment and consumer spending.

Despite recent political uncertainties that have stalled some market reforms, successful privatisation deals demonstrate Serbia’s renewed magnetism as the largest market in the former Yugoslavia, with strong interest expressed from both western and eastern European investors.

Serbia’s effort since 2000 to transfer ownership and economic initiative to the private sector has clearly worked, Mrs Popovic says.

Trade statistics offer vital evidence. Total exports are up by 370 per cent since 2001, growing faster than imports, although import volume is still double the level of exports.

The coat hanger shop’s owner and supplier typifies the trend. Weber International, a private Serbian company, manufactures 3m locally-made coat hangers a year, exporting to Germany and Italy on top of sales in Serbia.

Radovan Jelasic, the central bank governor, says he is “very, very confident about where Serbia is heading”. Yet he adds that more can be done to liberalise the economy, which he describes as “captive” to large, inefficient public enterprises.

“We have already broken some of the big taboos. Serbs now know it does not matter if the company that owns your bank is not Serbian, but they still think that the question of who owns the power lines running down your street is a patriotic issue,” Mr Jelasic says.

Restructuring and privatisation of large public enterprises – such as the power utility, oil company and the state-owned companies that still dominate the insurance sector – is essential, the governor says.

But he adds that sales this year would be premature: “This year would be better spent preparing strategies for privatisation rather than taking concrete steps.”

The primary risk is that political will may falter in the near term, as Serbia’s discordant pro-democratic bloc sets to work in the new government installed earlier this month, says Vuk Djokovic, director of CEVES, the Centre for Advanced Economic Studies.

“The mid-term prognosis for Serbia’s economy is good, but the capacity of this administration to go on with reforms is limited. Political will is lacking throughout the whole civil service,” Mr Djokovic says.

Only when reformers succeed in opening the market further will the post-socialist hangups that have become fixtures of Serbia’s economic landscape eventually disappear.

Additional reporting by Vesna Hadzivukovic