New Economic Policy

Four years ago, when the war began, only the final victory was spoken of. Now sense of defeat prevails in the minds of the people who are not interested in politics, of refugees who do not know what to expect, in the mind of the authorities concerned with passing the buck to others, and the opposition which organized a protest meeting which resembled a commemoration service for an idea and an enthusiasm which is now dead.

Without going too much into the political side of the current situation, I would like to sketch out the principles of an economic policy which could get this country out of the crisis. I think that now, when no one expects it, the time is right for radical changes. The surprise could have a beneficial effect both on the economy and the expectation of people.

Since I want to present my ideas as realistic, I will also consider the political dilemmas currently faced by the government, leaving some more far-reaching and necessary changes such as privatization aside. However it is true that no economic policy will have long term success until private ownership becomes the foundation of our economy.

Question No. 1: Should we devalue the Dinar? This is not a real dilemma. The Dinar has already been devalued. The question is whether to make it convertible and if so at what rate? Convertibility means that anyone can buy and sell as much foreign currency as he likes at the same price. The price is determined by the supply and demand of both the Dinar and foreign currency on the money markets. Since the main problem lies in the fact that there must not be any uncontrolled printing of notes, it would be best to set the rate at a level at which the supply and demand could be balanced, and under the assumption that this price will never be changed unexpectedly. At the moment, it would mean the following: the exchange rate should be set at for example four Dinars to a German Mark (DEM), and then print Dinar notes only up to the value that could be exchanged for foreign currency at that rate. Every price, including the one of the Dinar must be determined by the market. Fixing the Dinar to the DEM means that the value of the Dinar fluctuates together with that of the DEM. The main purpose for attaching the Dinar to the DEM is to stabilize economic expectations. When the banking system wins over the confidence of the industry, business and the population, then the fixed course can be abandoned.

Question No. 2: Should prices be liberalized? All prices, save for a few rare exceptions, should be set free of any state control. Salaries and interest rates in particular. Just as there is no reason for the value of the Dinar to depend on its users, there is no justification for selective interest rates. Today, on the black market monthly rates are twice as high as state controlled annual interest rates. Such a system enhances the feeling of discrimination and refusal to undertake financial obligations. Discussions about financial discipline would be completely redundant if interest rates were determined by market forces. The real interest rates (what is left over when the rate of inflation is deducted from the official interest rate) would be positive, there would be no shortage of so-called working assets, just as there would be no shortage of credits, saving would become profitable, while the failure to undertake financial obligation would lead to bankruptcy or liquidation.

As far as salaries are concerned, there is no need to place them under control either. State control over salaries and other earnings was introduced in many post-socialist countries. This was done because the setback in production is usually far greater than the rise in unemployment. A similar thing is happening in the Yugoslav economy. This however is untenable. Unemployment will grow anyway, so it would be much better for the state to adopt a program of technical and social help for the unemployed and training programs and leave the decision about the number of employees and the level of their earnings to companies themselves. In that case it would be unnecessary to control the earnings, since when the unemployment rate is around 30 or 40 percent salaries do not pose a serious problem.

Question No. 3: Should export be encouraged or not? In many post-socialist countries export is encouraged on the assumption that it is of key importance for economic growth and structural changes in the economy. Export can be encouraged in two ways: by liberalization or by subventions.

Liberalization brings quick and long lasting results. If we compare Yugoslavia with other former Yugoslav republics as well as central and eastern European countries, the advantages of liberalization of foreign trade become obvious and it becomes evident how far behind all of them Yugoslavia is. The main reason for this can be found in the attitude towards trade, an attitude institutionalized in our economic system. Trade is looked upon as something that belongs to the grey, even black economy. Also trade is looked upon as a source of state income, as well as the largest source of bribes and corruption. In other words everyone is after his share which naturally pushes traders into grey economy. That is why import taxes and sales taxes are so high and why corruption is so widespread. All of these problems could be removed by liberalization.

It is not my intention to deny the importance of making sure that sanctions are lifted soon. However unilateral liberalization of foreign trade gives good results even under sanctions (it could be argued that it is even more necessary in such conditions, which the efficiency and importance of black-marketeering in the last couple of years clearly illustrates). If the country under sanctions has no intention of pursuing a trade war with the rest of the world, the liberalization of foreign trade is by far the best way of responding to sanctions. And most importantly it ensures that the country will greet the lifting of sanctions ready to do business. Yugoslavia could benefit from a liberalization of trade in the Balkans, especially between former Yugoslav states. However, because of the war, unsettled accounts, disputes over succession and politics in general this can not be achieved easily. However without such a step we can hardly expect to ensure a liberalization of trade with the EU. Many think that these problems will be solved easily as soon as the sanctions are lifted. However, the two things are uncorrelated. The most important question is whether Yugoslavia is willing and able to take on the obligations which will emerge as soon as its relations with the world become normal? A return to the international community implies taking on economic and political obligation. Debts, compensations, distribution of common property, human and collective rights, recognition of the judgment by the international community and many other things are all on the agenda.

Question No 4: Should investments be encouraged or not? Current calculations estimate that Yugoslavia needs between 1.5 and 2 billion US Dollars worth of investment each year for the country to recover. This seems and probably is unattainable, although really it is quite modest. It is unattainable mainly because it would require important political and institutional changes.

The first change would be to stop investing in war. The recent change in the government policy towards the conflict in Bosnia was a question of survival. However the absence of readiness to put peace before war turned out to be very expensive. The policy of war led to serious structural changes in production and even more importantly in the characteristics of the countries human resources. If we consider the demographic changes, changes in culture and education, the burden of refugees which is still growing, it becomes clear how serious the problems facing investment really are.

Foreign investment, like the domestic one, is not guided by patriotism and philanthropy but profit. Therefore a country eager to attract investment must first create conditions necessary for making profit. This is a broad and complex subject and I can only identify problems that need to be solved.

First of all banks must be rehabilitated: some will have to be closed, others privatized, and at the same time foreign banks ought to be allowed access. None of this can be done over night, so foreign investment can not be expected to fall "like rain" the minute the sanctions are lifted. However the reform could with time bring investments far greater than those anticipated in current plans. Yugoslavia has a similar population as Hungary or the Czech Republic, though their expected investment is far beyond that of Yugoslavia. The conditions are different, which only highlights the need for reform. However, the investment in other countries still has not reached the level required for economic growth. So what is needed is a good economic policy and time. In the case of Yugoslavia, more than that is needed. Since Yugoslavia will continue to be a country from which people will emigrate and to which refugees will immigrate, investments in human resources must receive special attention. The worst thing that could happen would be for experts to continue leaving the country and for refugees to live from welfare rather than find work. It is important to invest in education and knowledge, rather than an army of immigrants, unemployed, armed, criminalized and dissatisfied people. Pursuit of such policy will lead to a catastrophe which will make the current one seem a minor one.

Question No. 5? Should we abandon nationalism and socialism or not? This is no longer a serious dilemma. Nationalist slogans sound grotesque before convoys of homeless refugees. Similarly grotesque is the claim that Yugoslavia is the only post-socialist country which retained the social-democratic idea and finalized the process of transformation. My opinion is that what happened in Yugoslavia was a retrograde revolution. On the other hand, evaluating the current state is not that relevant. What is relevant is whether or not the ruin of this most recent revolution will be met with new policies. I think that new economic policy is necessary. It must be based on freedom (as opposed to socialists) and truth (as opposed to nationalists) and must thus be liberal and democratic. Without freedom and truth, the situation will only deteriorate.