Capital Does Not Dance To War Drums

"On the firm dance floor of the city of waltz we practice czardas and polka", said recently a representative of one of the seventy Japanese firms in Vienna. The same applies to some 600 international companies, also present there, facing the East which is being reborn. They hardly even mention Yugoslavia, or the Yugoslav territories. VREME has asked two prominent experts, Mr. Radoje Prica, Ph. D., and Mr. Miroljub Labus, Ph. D., to give an explanation for that.

There has been no foreign investment, nor will there be any until a "favorable climate" has been created, which is the other name for economic, political and legal security. So says the Belgrade attorney Mr. Radoje Prica, permanent legal adviser to "Fiat", "Alcatel", "Ikea", "Hyatt", "Mc Donald's"...

The "blue helmets" are coming, but peace, per se, is not enough to attract the foreign capital. Long term manufacturing capital and peace keeping forces do not go along. Cyprus is, somewhat, an exception, but only due to the fact that the maelstrom of war has shifted the center of business transactions with the Middle East from Lebanon to this partitioned island.

Foreign investors (who, it should not be forgotten, have a wide range of choices at their disposal) once used to weigh whether to invest their money in Yugoslavia or in Hungary. That dilemma does not exist any more - Yugoslavia is a high risk country.

Moreover, because of the developments on the economic and political scene, a large number of particularly significant investments has been cancelled.

The international image of Yugoslavia is best described by some cases from the professional experience of Mr. Prica, when the foreigners did not even want to come to Belgrade. Or by the fact the meetings of the boards of joint venture enterprises are held in Szeged, Vienna, Klagenfurt, anywhere but here.

There are, however, some small-scale investments. Exceptionally, there may be some investment in the service sector. But, it is mostly the case of establishing distribution companies, owned by foreign or joint venture enterprises, set up in order to sell the commodities of the parent company and to provide the necessary hard currency for importing the afore mentioned by means of exports. The value of the assets of such firms ranges from 80 to 800 thousand German marks, and that cannot be considered as significant capital investment, says Mr. Prica. Some contracts have been made, like the one concerning the highway between Nis and Dimitrovgrad, but it is uncertain whether the funds for building that road will ever actually be available.

Alcatel's big business venture with "Mihailo Pupin" has been reduced in scale and slowed down, because the precondition for its initiating was the purchasing of telephone exchanges with 200 thousand lines. It was supposed that French banks would be financing Alcatel's exports to Serbia, but they stopped doing that. Not even credits are available any more.

Certain companies have had plans for new investments, but they are now waiting to see the further development of the situation. "Ikea", for example, has plans for building a large shopping mall near Novi Banovci (an investment amounting to some 20 million dollars), but their realization depends upon the overall situation in the country.

According to Mr. Prica's findings, the same situation prevails on all Yugoslav territories. He went recently to Slovenia, in connection with a potential American investment in Koper. The interest of the investor exists, but because of the fact that its market is smaller now, Slovenia seems less attractive for foreign investment. It is difficult to invest in a country where the banks do not honor the already issued letters of credit or guarantees. The foreigners also have trouble transferring their profits. They cannot even get dinars in exchange for their hard currency deposited on non-resident accounts. Some branch offices of foreign firms bring money in their pockets and change it here, because they are not sure whether they will ever get it back if they deposit it in a bank. The exchange rate should not even be mentioned. They also cope with payment troubles, because the payment operations are very difficult.

"In fact, the best thing for foreign investors in the present day Yugoslavia is the applicable legislation, which used to be absolutely the worst part of it all. The foreign investment law is relatively good. The banking and insurance laws are not bad. The Serbian privatization law is worse and less favorable than the corresponding federal law, but on the other hand, the new fiscal system in the Republic could prove to be much more satisfactory to foreign investors than the previous one", says Mr. Prica. As for lawsuits, most of them refer to (non)payment. Yugoslav companies take the goods on consignment, sell them for dinars, and then cannot get the hard currency, consequently becoming increasingly indebted. In spite of guarantees, the banks do not effect payments either. Arbitration awards or court decisions against the banks can be effected by confiscating the hard currency deposited on their accounts in foreign countries, which usually compels them to honor the debt, or to make, at least, a partial payment.

Court decisions in Yugoslavia, however, can hardly be implemented. It is almost impossible, for example, to give effect to a verdict in Montenegro favoring a company from Serbia. Foreigners, claims Mr. Prica, fare much worse, because the courts always tend to protect local companies. at least by dragging out the lawsuit.

Carrying out a court decision is even harder than it was in the (former) legal system which was explicitly based on the principle of opportunity, instead of legality, says Mr. Miroljub Labus, Ph. D., professor of economics at the Law School in Belgrade, who has always stressed, even at the time of high hopes in dollars and marks inundating the country (in 1990), the outstanding importance of legal security for that desired inflow.

Today, Mr. Labus says: "If radical measures are not adopted promptly, the inflow of foreign capital cannot be expected".

The regulations are, indeed, much better now, but the legal instability is greater, not only because of the war, but also because there are no government agencies capable of providing basic security - from illegal carrying of weapons, hand grenade explosions, violence, and robbery to non-existence of an independent judiciary. According to Mr. Labus, a reconstruction of the legal system and establishing of an independent judiciary must go along with abrogation of the state of war. Truly, the state of war was never officially declared, which furthermore complicates the things, because a number of decrees has been issued that are understandable only if a state of war is declared. In all countries in which a state of war is declared, the restriction of a free flow of commodities and price control are considered as normal, even in cases where integral private ownership is present. But the restrictions of the free market last only as long as the state of war is in force. Considering the fact that this has not been formalized in Serbia, one cannot be sure whether the restrictions imposed will eventually be lifted.

There is, however, a serious suspicion that a number of laws and decrees have not been passed because of the war, but because of the intention to completely restrict the market economy. These regulations, remarks Mr. Labus, seem to have been conceived for a specific type of market on which government ownership will be dominant, with government regulations prevailing over the free market forces, because the fields that were liberalized during the 1990 reform (wages, prices, foreign trade, foreign currency) have been subjected again to government regulations, without a clear idea whether this will be temporary or permanent.

Mr. Labus is, for instance, categorical when saying that the republic law on the transformation of social ownership must be changed, because "its only effect was the abrupt halting of privatization of the economy and the fostering of government ownership, i.e. nationalization, while the performance of companies is getting worse".

Where do we find ourselves now? On the eve of a new anti-inflation program, Mr. Labus believes, and says: "If the inflation rate, during the past two months, has been on the level of thirty percent or more, that can only last for several more months. Eventually we will come up against the wall of hyperinflation and we will have to adopt an anti-inflation program. It will demand great sacrifices, which will be unbearable without the inflow of foreign capital. If that capital is not provided, the program will fall short, the hyperinflation will soar again and we will find ourselves in a very difficult economic situation."

In spite of everything, Mr. Labus believes that there are still certain chances of diminishing the losses. The immediate tasks would be to stop the war right now, to pacify the political situation, to reach an agreement concerning the refinancing of the debt, to establish a state (or states) capable of providing legal security, to reintegrate, as much as possible, the Yugoslav market, to open up towards Europe and to attract new investments. The change would have to be radical and fast, says Mr. Labus, concluding with the following: "If we miss the opportunity, we will become the same to Europe as Latin America is to the USA. We can still avoid that, but I am afraid of the alarming level of state intervention that could push our country to the gutter of Europe and ultimately waste something that has been invested in for 20 years."

"It is crystal-clear now that no one was wise enough to realize that the costs of disintegrating the country are very high and that they materialized at a time when cards are being dealt again in Europe and when the queue for economic development, from which we have fallen out, is being joined. Everyone wanted to enter Europe, but no one realized that the way they wanted to achieve that was taking them further and further away from it."