Traps of Bad Money

"The Letter to the Public About the Measures for Overcoming the Economic Crisis" is being widely read and attacked these days. The authors are eminent Yugoslav economists which the Vreme weekly named the Group 17 in its last issue. The series of talks about our present and future economy was initiated by Vreme weekly after the government had promised that 1997 would be the year of serious reforms. Our contribution this time an interview with Ph.D. Bosko Zivkovic, professor at the School of Management "Braca Karic" and the member of the Group 17. He says: "When estimating the quality of a system, especially when evaluating the needs and possibilities to change the system, the starting point and the basic component is money. The Yugoslav economy belongs to the class of the least monetarized economies of the world. Namely, the degree of monetarization, which is defined as the ratio of the total amount of money in dinars against the aggregate national product, varies from 5 to 6 percent. The efforts of the controlling sphere to enlarge the quantity and enhance the quality of the money have failed. The period when professor Avramovic, in the first half of 1994, succeeded to bring the monetarization coefficient to 10 percent may well be considered the "heroic era". Unfortunately, it is well known what happened already at the end of 1994 and during 1995. The level of monetarization decreased to that which we have now.

What is the impact of such a situation on the economic development of the country?

The absence of the elementary financing institutions, regular banking, fiscal system and normal payment transfers slow down development. Developmental potentials, even when they exist in the material sector, can not be used, because with 6 percent of monetarization there is no financing of the floating capital in the companies nor the financing of the social funds. Wherever you turn, you hit the barrier called the low quantity of domestic money.

What is your estimate of the relation between the transactions in dinars and the transactions in the "reserve" currency, the German mark?

Dinars are used only for daily purchased items. The stronger currency, in this case the German mark, supports transactions of greater individual value (apartments, houses, equipment, cars, livestock...) but also of greater risk.

Is this caused by unsatisfactory credibility?

Credibility is the key issue of monetary and financial systems. We have had awful experience with two bouts of hyper-inflation, we have had the so-called "break-ins" into the monetary system, expropriation of private currency deposits and depreciation of the dinar deposits occurred massively. Even the most primitive shepherd from the remotest mountain learned that dinar should not be hung on to for long. Or, in academic terms, we are dealing with the so called "rational expectations". You can yourself compare the experience with inflation from 1989. The prices had slowly accommodated the inflatory process, but at the end of 1993 we already developed the system of rational expectations. Current financial values are becoming customized to the future changes. We have all mastered that in practice. People learned intuitively through mistakes.