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May 4, 1992
. Vreme News Digest Agency No 32
Interview: Mr. Nebojsa Savic, Economist

The Smaller - the More Open

by Zoran Jelicic

Both the experts and the public are familiar with the project. What are the chances of the Serbian government accepting and putting into practice such ideas?

Serbia's economy, i.e. the new Yugoslavia's economy, finds itself in a very specific situation. The per capita national income has fallen from approximately US$ 2,900 to its present-day level of US$ 1,500. The latter figure represents the demarcation line between two groups of countries. Namely, the theory of economic growth often postulates that countries with a per capita income ranging from US$ 500 to US$ 1500 constitute a group with specific problems that must be taken into account when future development strategies are conceived. The former Yugoslavia was in the group of middle-income countries.

I draw your attention to this fact, because the transition process, which is yet to be initiated, demonstrates the critical position we find ourselves in. If the choice and dosage of measures are correctly chosen, Yugoslavia stands a good chance of remaining in the group of middle-income countries and of resuming development and growth, so that we could reach the per capita income level of US$ 3,000 after a few years. I don't believe, though, that it can be accomplished before the end of this century.

If its per capita national income drops below the US$ 1500 level, does Yugoslavia have better chances of getting more substantial foreign financial aid?

It is a fact that the less developed a country is, the greater are its chances of being financed by the World Bank and the International Monetary Fund. However, without a market-oriented program, aimed at greater efficiency and larger exports, we will continue to fall even lower and remain without the adequate foreign financial aid.

You said that we cannot expect to achieve the former level of development before the end of this century. Is that prognosis valid even if a transition program is adopted in the country and if Yugoslavia finally enters the world of market economies?

Unfortunately, the figures are merciless. It would be a great success if we could stop the shrinking of the national product, which has been drastic over the past two years, within the next two or three years. A 17-18% decrease in the national product was registered last year, and that means that almost a fifth was lost. Almost a third of the year has gone by, the decline continues, and there are no means of stopping it before the end of the year.

And this is not a consequence of restructuring and modernization of the economy.

Exactly. This is one of the reasons why a turn of events cannot be expected even during the next year. But even if we manage to achieve this next year, the result would be a US$ 14 billion national product. That level should be maintained through the following year, so that it would only be in 1995 that we could be able to create conditions for a return to the 1992 level. Furthermore, having in mind the fall up to now, the Yugoslav economy growth rates would have to be very high during the last five years of the century in order to reach the previous (almost) US$ 3,000 level. All in all, I believe that it would be a huge success to reach US$ 2,000, or a slightly higher level, before the turn of the century.

What do you see as the main obstacles to this turning point, i.e. the transition of the economy?

The most important move for Yugoslavia's economy is to remove all obstacles to free trade within the former Yugoslav territories. The data unequivocally show that mutual bonds between the Serbian and Montenegrin economy, on the one hand, and other ex-Yugoslav republics, on the other, are very strong. The trade between the two aforementioned groups had by far exceeded that with other foreign countries. Hence a part of the decrease in the national product is a consequence of broken economic ties. Another, but by no means small, problem lies in the fact that market enclosure brings about new monopolies. It is absurd, and this is happening now, that packaging accounts for 60-70% of the production costs of certain goods.

I believe that we will be able to speak about some kind of economic recovery when the following two conditions are met: first, when all barriers are removed, and second, when a mode of payment between the ex-Yugoslav republics is found, for every one of them has its own currency, not a single one is convertible. However, we should not turn back to clearing payment in its classical sense, for we have had enough bad experience with that.

In other words, the characteristics of the Serbian and Montenegrin economies are such that they do not allow expansion to take place before economic ties with other parts of the former Yugoslavia are re-established.

It is absolutely necessary to re-establish these ties, based on new principles, of course, so that everyone interests will be taken into account, and where these interests coincide, some business will be done. Secondly, both the trade with these republics, and exports as a whole, have gained in importance, for the new Yugoslavia is smaller than the previous one, i.e. it is more directed towards foreign trade. I consider that the new Yugoslavia would have to raise its foreign trade from the current 17-18% of the national product to 40-50%. This is the only way to ensure economic recovery.

Can a steady growth of exports and economic expansion be based upon a non-convertible currency?

It is without doubt that Yugoslavia and its monetary authorities should be pursuing a policy of a sound dinar. It should be emphasized as one of the key objectives, for without a sound national currency it is impossible to attract foreign capital, provide for stable economic conditions, or make serious foreign trade arrangements.

Such policy has been neglected over the past few months in the new Yugoslav territory. This has resulted in high inflation. I am sure that the recovery of the present meager hard currency reserves could be possible if the government quickly opted for a sale of state-owned apartments and if a part of the hard currency owned by the population could be attracted by advantageous arrangements into financial and production spheres; in other words, if the system of hard currency handling is liberalized.

As of last week, individuals are allowed to take up to 5,000 German marks out of the country, but only if they have a bank certificate.

Yes, but nobody keeps their money in banks. Naturally, that is not the way to do it. Only a true liberalization of currency exchange and clearly defined exchange posts can stabilize the foreign exchange rate and restore confidence in the system, and in this way strengthen the hard currency reserves.

Confidence in the national currency represents nothing else but people's confidence in their government. Do you think that it can be achieved through free currency exchange at bank counters?

The key issue concerning people's confidence is the credibility of monetary authorities. Without it, it is obvious that there will be no confidence in national currency. Restoring the monetary authorities' credibility and the national currency's reliability are the first and the key moves towards restoring people's confidence in overall government policy.

So it should be done at the very beginning, and not when conditions are favorable, which is the excuse the government has always used to explain the postponing of the national currency's convertibility.

It is absolutely true that the transition process in an economy can be initiated only if the government makes it clear that it is resolute in its pursuit of a policy of sound currency straight away. This means imposing strict budget constraints upon socially and government owned firms, following a balanced budget policy and pursuing an adequate foreign exchange rate policy.

Let us assume that all of this becomes actual. What would happen in the economy then?

A genuine transition process would be set in motion. It has several components. Up to now we have talked about macroeconomic equilibrium. Once this is achieved, we come to possibly the most delicate part of the program, related to the restructuring of firms.

The questions are how to make socially-owned enterprises behave as rational economic entities and how to (at least partially) privatize or commercialize the government-owned sector. This was the point at which the 1990 reform failed, for it did not provide for a transition from a macroeconomic to microeconomic level. That is also the point where the anti-inflation program turns into a stabilization program. The finding of that mechanism is essential for overall success.

We find ourselves in a much more difficult situation than in 1990, because I believe that we will have to sell most of our assets in order to obtain fresh capital. This practically means selling parts of enterprises well below the value we presume they have.

Until recently the explanation was that a solution could not be found until the new state borders were defined. And now they are. What do you expect from the promised anti-inflation program?

The necessity of restraining hyper inflation is very plain. The strategic question is: when is the appropriate moment for the implementation of an anti-inflation program. I hold that this ought to be done right away, in spite of the fact that a new Yugoslavia has just been created. If the new government starts off with the idea that hyper inflation cannot be contained, it would be a grave mistake.

I repeat, we are in a much more difficult situation than in 1990. The economy is in deep recession, there is a huge balance of payment deficit, we have a very large fiscal deficit and the hard currency reserves are very low.

There is yet another difficulty, and that is that wages are already extremely low, and this poses a serious question - to what extent the transition can really go (the real average salary is below 100 German marks)?

At the beginning of last year we had a relatively low monthly inflation rate of 10%. In the middle of the year the money supply was increased in order to cover the inflated federal government expenditures, i.e. to cover the federal fiscal deficit. Two months later, the black market foreign currency exchange rate reacted. Then the l992 budget was announced, and it was said that 93% of government expenditure would be financed by money issuance. This of course, caused the imminent increase in the aggregate demand.

Was the government really saying that we will be spending more than we earn and that anyone who bets on the card that the value of the dinar will fall would win?

Exactly. And anyone who played on that card did win, but at the same time contributed to the rise of the foreign currency exchange rate. Since December 1991, the inflationary expectations began to increase and this attributed to 50% of the present-day inflation rate. Another 25% can be explained by the adopted monetary policy measures, while the remaining quarter can be attributed to other causes.

In other words, it is necessary to restore the people's confidence in the government's policy, because this is the only way to curb the expectations of a much higher inflation.

Can all of this be achieved without the help of the IMF and the World Bank?

I believe that it is not necessary to explain why foreign capital is necessary. I hold that the adoption of a sound, market-oriented program would represent sufficient conditions for swift talks with the Fund concerning its aid and suggestions.

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