Invincible Price of Money

"In the circumstances of a shortage of money and capital, and in the circumstances of a closed market, it is not realistic to insist on free interest rates," said the Serbian Finance Minister, Dusan Vlatkovic, discussing Avramovic's new program at a recent symposium of economists held in Milocer. Conditions do not exist for convertibility of the Dinar and liberalization of foreign trade, so the issuing of bonds by the National Bank of Yugoslavia will not improve the situation, he added. He stressed that "a free market should exist," and that "the Serbian government has no doubts about it."

When Vlatkovic's speech is translated into the language understandable to everyone, this means that the Serbian government should first "fix" the financial situation and then allow some "real, positive interest rates." It should first "fix" the foreign economy relations and then allow "free, real currency exchange rates." It should first "fix" the interests of the ruling super-structure and its state and then "carry out fair privatization," etc. All books on economy say that interest rates, exchange rates and private ownership are the means and institutions which "fix" the situation on the market and "keep the balance."

What was it that made the Serbian government return to Suvar's stands, whose ideological allergy to capital and interest rates was famous at the time when the Serbian socialists were communists? If we put aside the interests of bureaucrats and directors, some of the rational fear originates from the experiences from the time of Mikulic's Yugoslav government (1986-1988) when Oskar Kovac, then the finance minister, made a "real economy" project. The establishment of the real prices for production factors then resulted in general indexation, because the anchor which was to maintain the level of salaries did not hold out and the one which was to halt the budgets had not even been thrown.

Besides, Branko Mikulic in 1986 first tried with cheap credits and a policy which would not be dictated by the IMF, in the same way as Marjanovic's ministers are trying now when the dictation has been postponed for another six months. Mikulic gave cheap credits in return for the promise that prices would not go up and he called this policy "offering a hand to a drowning man." Since the interest rate policy was ambling after the real rate of the Dinar (even after the operation), a gap opened up between the prices of the foreign and domestic currencies. The result was tremendous deficits in ex-Yugoslavia's banking system. The economy "unburdened" itself and the banks transferred the burden to the National Bank. How much did the "unburdening" cost? Estimates say that losses reached 12 billion US Dollars in 1985 alone. When he realized what he had done and that he had to return to the Washington rules, Mikulic, offended by the economy, said that the "hand had not been accepted" and returned to real interest rates (which the "people" rejected in the autumn of 1988).

All these events caused a public discussion on real interest rates, whether they could be free in the circumstances of a shortage of capital, IMF "blockade" and social crisis. The most vociferous now were those who supported the limiting of "capital expenditures", those who in the name of socialism had failed to read Marx's favorite William Pety who said, as early as the 17th century, that it was useless to limit interest rates by law. Despite all the fuss, Mikulic later had to make a deal with IMF that discount rates be calculated according to the formula - six-monthly growth of industrial prices plus one percent. When interest rates went up, people started practicing interest account, the price of real estate dropped and pressures on foreign currency exchange rates relaxed. However, state expenditures did not drop, so when populists came to power in the former Yugoslav republics and began a salary race between the republics, everything fell to pieces. When he gave his last report to the party leadership before he resigned, Mikulic was asked by Milosevic to let the salaries grow and interests drop. This was how the "real economy" ended. This is why it will not even start this time.