More Than Just Overhauling the Works

VREME: Mr. Radmilovic, current economic policies are presented as a continuation of last year's program of monetary reconstruction and recovery. Is it really the same policy?

Radmilovic: Today's policy is the result of mistakes made last year.

I am not one of those who challenge the positive achievements of Yugoslav National Bank (NBJ) Governor Dragoslav Avramovic's program. There is no controversy over the fact that compared to late 1993, this program has shown very good results in stopping hyperinflation, stabilizing the currency rate (at the beginning), reviving production to some extent, partly putting some order in the domain of public finances (the state doesn't dip its hands into the NBJ's pocket and the primary issue every day), etc. This is not controversial. It is not however, enough to look at things in comparison with the financial rock bottom we had reached.

VREME: What are the mistakes and how can they be put right?

Radmilovic: I will mention only three mistakes which directly destabilized the economy during the last quarter of 1994.

First, the authorities went too far with remonetization, a procedure during which the quantity of new money is increased in order to amortize the slowness of its turnover which comes with stabilization. They should have stopped printing fresh money two or three months before October, and not have waited till the dinar's stability was shaken. The monetary Rubicon was passed, and the expected inflationary trends were launched, and the result was a jump in prices. The explanation given at the time - that this was done because of agriculture, does not hold, because agriculture was responsible for only 18% borrowing from the primary issue, while it owed 35% between 1985-1989. Obviously, agriculture cannot be blamed for the surplus of fresh money, but some other reasons. That summer the state took too much from the primary issue, salaries in firms which were not working were financed. Simply put, monetary expansion overstepped the limits needed for remonetization.

The second big mistake was that there was a lot of talk in various places that salaries were low and that they should be hiked up. That which economic policy had battled unsuccessfully for 50 years was encouraged - the practice of favoring salaries at the expense of accumulation. Now that there is not enough production these salaries were paid out of the primary issue or the amortization. There was no justification for increasing salaries, because when public and personal expenditures are added (and there are no investments), this surpasses the social product. This tension, whether we like it or not, produces inflation and instability. When production is low, then salaries must be low, otherwise there is no stability.

In my opinion, the third mistake lies in the fact that during the so-called second phase there were no attempts at building up market institutions (which is laid down in the program) and a real transition. I don't exclude the need for certain corrections in privatization, because some things have developed rather haphazardly, but these corrections shouldn't have been such as to stop privatization completely, and to a great extent revert the situation back to old ownership relations.

VREME: There is an impression that futile attempts are now being made at defending this 'first line' at all costs.

Radmilovic: Regarding those enforced moves I'd mention three things. The stopping of personal consumption came rather late, and is now being carried out through the unfortunate and inefficient system of freezing prices. The inefficiency of this measure is easily proved by the fact that salaries in December continued to grow enormously, even though they had been "frozen" at November's level. Basically, because the majority of firms here are not motivated to defend profit, to defend accumulation, all income policies remain inefficient.

Then, there are two sides to this state campaign, this political campaign against inflation. The positive side, in spite of the basic unsuitability of the method, is to be found in the fact that the campaign did assuage inflationary expectations, because it demonstrated some determination on the part of the state and monetary authorities in curbing inflation. Secondly, the unfavorable side of the action is that, as with all classical administrative measures, the price structure continues to be greatly disturbed, and we will be faced with well known consequences on the market (shortages, speculation, etc). This is inevitable, because the inflationary tension is real (students here are still taught that latent inflation is inflation), because the goods being produced now contain the high salaries, high taxes, expensive imports at black market prices, and it is very difficult to prevent all this from being built into the price of goods in the future.