The Governer of the New Dinar

After the surprisingly good start of the anti-inflationary program, Dragoslav Avramovic, who headed the team of experts responsible for the drawing up the "Program for the reconstruction of the monetary system and economic recovery", was elected to the post of National Bank of Yugoslavia (NBJ) Governor, by the Federal Assembly on March 1-2. VREME talked to Avramovic on this occasion about questions concerning the transitional period of Yugoslavia's economy.

VREME: In spite of the fact that a proper reconstruction of our system is just at the beginning, would you say that it is now obvious that the real transition from a state economy to a market economy can only begin with healthy money? Is the stand that this should be done after the reform has been completed, incorrect?

AVRAMOVIC: Healthy money is an absolutely vital prerequisite before anything else can be done. I don't believe that we could have had a non-market economy during hyperinflation. That would have meant taking food from the farmers by force, which is what happened in Russia during the Twenties. We could not follow such an extreme policy.

But, it is not easy to say how our economy will develop further. If I were the one making the decisions, I would say that the economy must function along very traditional principles, such as: healthy money, fullfilling contractual commitments, free prices (except in the case of monopolies), total equality between the private, state and co-operative sectors, etc. I believe that these categories must be free of political interference.

Only the future can show if private ownership would be the dominant mode in such a system. The Socialist Party of Serbia (SPS) would probably demand greater state involvement, others would demand other things. Perhaps a consensus could be reached over the importance of the state's role in the economy, because it has not been proved that the private sector is superior per se.

However, the state must not be allowed to decide on prices, reimbursement... or interest rates. Or rather, the state can influence them only to the extent to which the National Bank influences the banking system. But, there are limits to this.

This brings us to the reason for our talk. How do you view your election to the post of NBJ Governor? Some regard it as a concentration of responsibility in the event that the new dinar fails, others think it a logical move?

It's a public secret that I was wary of accepting the post. I thought that my main job was to draw up the program. I am not an administrator. I do not like administrative responsibilities. But, I would be sorry to see the whole thing go down the drain.

Others decided that I could see this program through best. The idea that I am being saddled with all the responsibility is not true. I don't think that that is the point. One man cannot bear all the responsibility. Of course, there will be such attempts, if things don't work out. But, I, personally, do not fear such a thing, even though everything is possible. The main reason I wavered, is because I am not the type of person who likes to command, and the matter concerns the NBJ system which employs 10,000 people, and that's the equivalent of two Russian divisions.

The Central Bank cannot solve our tax problem, nor can it change things directly. But a strong dinar can do miracles, in various fields. I've seen that.

There are debates with regard to the strong dinar and the encouraging of production. Is this a contradiction in your program, since the market is usually regulated with "soft money"?

If you have a stable fiscal situation and strong money, then you have great possibilities in the social field. Germany's social system is proof of this. It is a great tragedy that they are dismantling it now. West German Chancellor Helmut Schmidt was a leftist and a very serious person. He is not my ideal, but he probably resolved this contradiction between hard money, good social protection and market conditions.

Unfortunately, our situation is additionally burdened by the fact that it is very easy to pass from stability to a new inflation. Once you have a stable situation, you don't have to be so orthodox. But, in the beginning, you have to be.

You mentioned bringing basic prices into balance. There are views that it is very dangerous when the state interferes with basic prices, especially the price of money, all the more so as Yugoslavia does not have control systems which would oversee economic policy, namely, the money market, capital and other financial markets.

That is a crucial question. We won't resolve the financing of our public services until they become economic units making a 10%-12% profit, which would enable them to appear on the money market.

Which are the basic prerequisite conditions for the establishing of our financial markets? The first is - strong money, and the second the resolving of the problem of old foreign currency accounts. The second problem is important not only from the humanitarian point, but also as proof that the state, in spite of all the mistakes it may have made, does fulfill its commitments. Account holders know how much the state can pay now, and that this is not much. But, some kind of an arrangement must be made, one which will show that the state wishes to put an end to this problem once and for all.

When these prerequisite conditions are met, then the Finance Minister will have an ideal situation. A coupon can be released for a period of two or three years with a 10% interest rate. When the price of this coupon jumps to 110% and 120%, then all doors are open to you, and it is possible to follow a low interest rate policy, without pushing things.

If we play our cards right over the next three-four months, we could create a good base, in spite of the economic blockade. But, money doesn't "stink", and if you have a reliable reputation, and if the dinar is standing strong with an interest rate 2-3 points higher than in neighboring countries, since our income is at African level, then capital will come.

You speak of reliability. This brings up the question of the first "corrections" of the projected monetary policy, and under which one billion dinars will be released in the first quarter of the year. This is twice, even three times more than was planned. Were you consulted on this matter?

No, I wasn't informed of that correction. But, I'll put it plainly, I don't believe in monetary projections. I think it is a catastrophe to project a monetary policy in advance, and this catastrophe is being spread by the International Monetary Fund (IMF). All such projections are based on assumptions on the speed of the capital turnover. From Friedman's day and up to the present, there hasn't been an expert who hasn't come up with a method for calculating the turnover of capital.

There are a fantastic number of variants. We operated with Yugoslavia's social product when it was 60 million German marks. We did the same thing two years ago when it stood at 2.2 billion DM. It must be added that the economy nearly collapsed from the speed of the turnover.

Before these monetary models were invented, the Central Bank's policy (e.g. the Bank of England) was to operate with small foreign currency reserves. The Bank of England board meets every day at noon and decides on the price of gold and goods, and what will be done in the next three days. This is not a matter of the budget, which requires annual planning. It is a catastrophe to equalize the budget and its fixed commitments, with the policy of issuing money, which is not a fixed thing. Here, with the same level of money, and depending on the conditions, you can do twice as much on one occasion than you can on another.

We cannot compare with the US or Germany, but if the world starts believing that this country's leadership will not play games with money, i.e., with the value of the currency, then that will be enough. We are not in a situation when we can afford to be too orthodox, because of the situation with our labor force. It is a good thing for us that it is so cheap. If we don't stabilize the budget and achieve a high interest rate, in spite of sanctions, we will have to hand the country over to the Germans and Koreans. They will make it stable.

After your program had been launched there were cynical comments that everything had become cheaper except the state. Are the planned 52% for public expenditure too much for our economy?

You know, I don't like percentages and never use them. Nobody knows what Yugoslavia's social product is right now. There are no figures on this in the first eight pages of the program. We don't know anything for sure. All we know is that those paltry five billion dollars (2.6 billion for the first six months) were the absolute minimum we could earmark for public expenditure. You can't have lower salaries, lower pensions, you can't pay the army less than we are doing right now. I don't know how the army manages with 600-700 million dollars. Even if there are more policemen, it is all being paid for cheaply. Our solution lies in a reconstruction of the tax system.

Our current fiscal system is an obstacle which I haven't solved yet, because it's so illogical. Firms are not taxed according to income, but expenditure. Mostly according to labor expenditure, which is a very common factor here. And, since labor is the cheapest factor, instead of maximizing it, you multiply the price of labor with two because of taxes. And then of course, you have a problem, because what the worker considers to be income, the firm regards as expenditure. This has to change. Tax cannot be collected on produced goods, but sold goods. Firms do not pay tax from profit, but are taking credit in order to do so.

To go back to the question on how to increase this murky social product?

I'm going back to a balance of basic prices. If we find a balance between the price of labor, credit, the costs of the state, public services and if we resolve the problem of old foreign currency savings, and production still doesn't take off, then I don't know when it will. Even with the blockade. Our domestic needs are great.

Just one example - we have 1.5 million cars in the country. Half of this number are no good. There is a market here that "Zastava" (automobile plant) could cover for several years, and so on. Automobile production is a very important thing. Germany has a highly developed car industry - they have highly skilled workers, 1,500 engineers, and they're not getting rid of them. People who talk about returning to a rural economy don't know what they're talking about.