Dubrovnik Burns in the European Bank

With a monthly inflation rate already reaching 50%, the leftovers of Yugoslavia have technically speaking entered the realm of hyperinflation. This hyperinflation cannot last for long. The last time it occurred in Yugoslavia it went on for four months, from September to December of 1989. Ante Markovic's economic stabilization plan was implemented by the end of December. In hyperinflationary conditions, a stabilization plan must be implemented very soon (within 6 months at most) for several simple reasons. Such a high inflation devastates the inner structures of an economy. The national currency ceases to be the unit of account in economic transactions and slowly begins to disappear as a means of exchange. Firms and individuals are forced to spend their time hopelessly trying to preserve their property from inflation. Large nominal values can be attained, or, even more likely, lost, in a very short term, and that does not foster social stability. It is enough to mention that keeping dinars in cash for a month only, when the inflation is on the mark of 50%, means losing one third of their real value.

Even if we suppose that Milosevic and Bozovic, by virtue of divine providence, opt for a rational economic policy, and manage to define the national borders, a successful implementation of a stabilization program stands no chance within the current political framework.

This point can be easily proved. The new state (Serbia & Montenegro) has a trade deficit if the calculation is made according to a real foreign exchange rate of the dinar. A trade deficit can be financed in several ways: either with diverse revenues from abroad, such as emigrant workers' money orders, shipping or foreign travel revenues, or with direct foreign investment, or new foreign loans. (The deficit can also be financed with foreign trade reserves, but the new Yugoslavia's reserves would have to be on a critical level for 2-3 months).

If we examine each of the five possible financing sources, we can see that it is very unlikely that they will eventually come to play any major role. Emigrant workers, quite understandably, have stopped sending their money to a country which has simply nationalized the hard currency savings accounts. Foreign travel revenues are close to zero, for few people are willing to spend their holidays in a country where military vehicles roam the streets chasing people and war is going on. Revenues from shipping have been drastically reduced, because everyone is trying to by-pass a territory where a war is being waged, and where diverse armed formations stop trucks and buses whenever they feel like it. Foreign investment can only be symbolic in a war-ridden country run by communists, especially because other Eastern-European countries offer better protection to private property. And finally, the possibility of getting new loans, either from commercial banks or from international institutions, is very slim.

Jacques Athalie, the President of the new European Reconstruction and Development Bank, has a picture of Dubrovnik in flames in his office. It is easy to imagine what kind of reception Milosevic's and Adzic's representatives, who either ordered the bombing or consented to it, would receive at this bank, if they asked for a loan. The world accepted the former Yugoslavia just because it was outside the Soviet sphere of domination and pretended to be a liberal communist country. Milosevic and his team, now that even Albania has turned to democracy, represent the last communist island in Europe. Such a regime, with no friends in the world, cannot expect to get any money.

The consequent social unrest would be of a smaller scale if everyone was given a certain quantity of cloth, meat, sugar, bread, etc. by ration coupons. Moreover, some recent moves by Bozovic's government and by Mr. Milosevic demonstrate a tendency towards a "Cuban" model: fixing the price of bread, introduction of commodity lists in trade with the former Yugoslav republics, administrative centralization, a ban on exports and imports of certain goods, Milosevic's refusal to sign a decision on free foreign currency exchange. The decision to ban exports is particularly indicative. A ban on exports is one of the key properties of centrally planned economies, where there are shortages of certain goods. There is not a single capitalist economy which bans the selling of commodities to foreign countries (except where arms or economic boycotts are concerned). This is understandable, for if one wants to sell something, it is because it is in his interest to do so. Naturally, import bans can be found in capitalism as well, for manufacturers also ask for government protection there. But export bans are typical real-socialist measures, which, by the way, have not been used in Yugoslavia since the 1965 economic reform.

My aim has been to show that a stabilization program is virtually impossible within the present political framework. Therefore, those working on it are simply wasting their time. Even if the current regime were willing to follow their advice (which is highly unlikely), a stabilization program cannot be implemented. Administrative socialism is unavoidable, not only for ideological reasons (i.e. the current regime's preferences), but also because the regime wants to survive politically. The crucial reason for this, however, is quite elementary. The last military-communist regime in Europe, in one of the poorest European countries, cannot count on foreign aid. The Serbo-Montenegrin economy is too weak to struggle alone (without fresh foreign money) and survive along free-market principles. The regime is too unpopular and at such variance with current tendencies for anybody to want to help it. And without such support, there can be no stabilization program.

(The author is a World Bank expert who has been working on the stabilization of socialist and kindred economies for some ten years)