LESKOVAC, Serbia (Reuters) - The Zele Velkovic factory in Leskovac, once famous for its thriving textile industry, was one of the city's biggest when Yugoslavia started to implode in 1991.
The next two decades brought a slow decline fueled by chronic mismanagement and a dramatic loss of competitiveness. Where more than 600 worked, now just 70 walk the factory's cavernous halls, the deafening hammering of its old industrial looms barely disguising the emptiness.
Across the street, however, a factory hums and buzzes with the sound of modern machinery, looking like a sleek and shiny spaceship parked in a scrapyard.
Germany's Falke clothing producer is one of a handful of new arrivals to Leskovac, local proof of the recent textile revival around parts of Europe as some manufacturing is relocated from increasingly costly Asia.
"We're hoping for 4,000 jobs by the end of the year," said the city's energetic mayor Slobodan Kocic.
With its dramatic de-industrialization, shrinking population and rising unemployment, Leskovac is a study in the many things that have gone wrong for Serbia as well as the many that could yet go right.
Kocic's Democratic Party and its head Boris Tadic bid for re-election on Sunday in presidential and parliamentary polls, touting success in dragging Serbia to within a whisker of talks with the European Union on future membership.
The country's dominant party, it faces its strongest challenge yet from the Serbian Progressive Party, right-wing populists led by presidential challenger Tomislav Nikolic.
Nikolic was once a hardcore nationalist who shunned the West, but after years of falling short at the ballot box, now he too embraces the goal of EU accession.
He is playing to widespread dissatisfaction over the state of the economy, choked by the crisis in Europe and facing stagnation in 2012.
Almost a quarter of the country's workforce is now unemployed, its population both aging and shrinking.
Just 880 textile jobs remain in Leskovac, the city's industry run down the collapse of markets in ex-Yugoslavia, broken by cheap competition from Asia and plundered in murky privatization deals.
"Perfectly good machines were decommissioned, broken up and sold for scrap," said 60-year-old Bogoljub Petrovic, a former employee at the now-bankrupt Vucje Textile Factory.
"The new owners destroyed the factories, fired the workers, took the money and fled," he said. The population of the city has dropped by almost 14 percent over the past two decades.
Reforms since the ouster of former leader Slobodan Milosevic in 2000 have focused on cutting red tape and improving the business climate, but the emerging entrepreneurial private sector has been unable to absorb the tens of thousands of workers shed by Serbia's declining industry.
Country-wide, employment in the Serbian textile and clothing sector has collapsed from 160,000 in 1990 to around 40,000 in 2010, the European Stability Initiative (ESI), a respected think-tank, said in a report in April.
This despite the creation in recent years of hundreds of thousands of low-skilled jobs in eastern Europe by the shift in employment in the globalised textile industry.
Very few of these jobs are in the western Balkans, fueling criticism of the government.
Critics say privatization in particular has been poorly handled, lacking transparency and coordination, and serving party interests and tycoons more than workers and the public.
The government defends itself by blaming its predecessor. All the frontrunners in Sunday's elections have pledged to act on a recommendation by the European Commission to investigate the process.
"How can I forget that in the last decade, despite cashing in on 2.6 billion euros from the sale of more than 3,000 state companies, 65 percent of them have either stopped working or are on the verge of closure?" columnist Bosko Jaksic wrote on Sunday in the Serbian daily Politika.
"How can I avoid the impression that the political class has only an unclear idea of how the economy actually functions?"
The seeds of growth are there.
Besides Falke, the Serbian government last year signed a 13-million-euro investment deal with South Korea's Jura to open a production line in Leskovac for vehicle electrical components, and a Turkish jeans company is in the process of securing land in the city for its own factory.
But officials lament the absence of a concrete strategy for the revival of the city.
In 2011, the Serbian textile sector exported goods worth $921 million, mainly to EU markets, 24 percent up on the year before, said Vesna Vasiljevic of the Serbian's Chamber of Commerce's Textile Association.
January and February 2012 saw exports up by 20.3 and 2.1 percent respectively.
Investors are seeking new opportunities in the western Balkans, Vasiljevic said, "but there have been no major efforts aimed at reforming the economy and creating a system compatible with our trade partners."
The ESI cited an inherent, post-Communist fear of being seen to meddle too much in big industry. It co-authored an appeal in April for a change to the growth model in the western Balkans to tackle alarming levels of unemployment.
"Driven by distrust of the legacy of socialist planning, as well as by fear of state capture by corrupt businesses and corruption in the administration, the preferred economic policies have been hands-off, focusing not on specific sectors of the economy but on the general business environment," it wrote.
The policy has ignored the region's wealth of experience and labor in manufacturing, for example in textiles in Leskovac or armaments in neighboring Bosnia.
"Comparative advantages are likely to be still hiding in the remnants of the past," ESI wrote.
Kori Udovicki, a senior official with the United Nations Development Fund (UNDP) who co-authored the appeal, told Reuters: "There's hope. Though a good number of companies did not survive, there's still knowledge and tradition."
At the Zele Veljkovic factory, 47-year-old Goran Nikolic sipped on strong black coffee and recalled returning from Germany in 1988 to work in the then-thriving textile industry in Leskovac, three years before Yugoslavia collapsed.
Now he is one of 15 working for the Best Man DOO clothing producer, and counts himself lucky to have a salary of 160 euros per month, less than half the Serbian average.
"After the collapse of Yugoslav markets in 1990s, quality production was gone, factories collapsed, workers could not earn their pay," Nikolic said.
"I'm satisfied now. I have my salary and benefits."
Editing by Matt Robinson and Sonya Hepinstall