Legalization Of Black Market

The first step on the way out of an all-encompassing economic chaos is seen in the inauguration of a legal order and legal security. Hence legalizing the black market is far more efficient and cheaper than employing more auditors and building up police control over the market because such moves have so many times practically proved that they are ineffective and that they additionally burden the finances of the state that already does not kow how to cover its existing liabilities.

The legalization of a parallel economy means the respect of realities. It also means we admit that our existent economic system is worthless because it does not enable people to work and earn in legally permitted ways. The recognition of the realities is the first step in bringing the current complete insanity back to order. The next step calls for new institutions to be formed to act and restore order in economic relations and channel people's legitimate material interests to the achievement of full welfare of all and one.

The current debate on the position of the National Bank of Yugoslavia (NBJ) represents a good example of how it is possible -- amid general financial indiscipline and uncontrollable money printing -- to set up a central bank as an autonomous and supreme monetary authority that will be empowered to heal the financial system of its insanity.

The government and the National Bank, however, are at war over the latter's status and competences to pursue and independent money policy and to autonomously set the foreign rate of exchange of the dinar which is exceptionally important for the legal and black markets, so that the government will easily win general support for a decision not to cede the determination of this rate to someone else. This is facilitated by the established policy of the National Bank which believes that the black market of foreign exchange can be regulated by a tightened control of street foreign currency dealers. It is absolutely safe to say that the NBJ's new governor has not yet seen for himself the usual scenes of even policemen buying foreign currency in the street. This is to be understood an not to be condemned. To want people to behave contrary to their own interests would be unreasonable.

A more rational system could be introduced with an auxiliary move that would legalize the black market of foreign exchange and set up a controllable system of a dual foreign exchange rate. Such a foreign exchange system operates abroad in at least one-fifth of the members of the International Monetary Fund (IMF). This system is not efficient enough as the system of single real rate of convertible currency exchange, but it may well serve a brief and rational transition stage towards the introduction of the "internal convertibility of the dinar" (once the external conditions allow it, that is, once the blockade is lifted and a new agreement with the IMF signed).

In its essence, a dual rate of exchange keeps the dinar rate for commercial (export-import) transactions apart from that for capital investment activity. More often than not, the former rate is held fixed at a level lower than the balanced rate. It is used to service external debts, to import the basic production materials and energy, to build up the competitiveness of the state-subsidized exports, and the like. The latter rate is formed freely upon the law of foreign currency supply and demand.

The introduction of a floating rate of exchange is aimed at averting an outflow of capital and domestic currency from the country because such outflows unnecessarily depress the value of the dinar.

Under conditions of a high inflation and legal insecurity, the families have a narrow choice in trying to preserve the real vaue of the dinar. One thing they can do is buy foodstuffs and form reserves of food. Another possibility is to turn dinars into a foreign currency. Low interest rates on the dinar deposits do not encourage the formation of savings in dinars and of domestic capital. People prefer to change dinars into some foreign currency and the consequences are adverse in macroeconomic terms. In real terms, the dinar becomes devalued and produces a feed-back effect on that segment of imports which is formed out of the foreign currency influx from the black foreign exchange market. Inflation thus rises and pressure intensifies on turning more and more dinars into foreign currencies.

Business operations on the black foreign currency market are risky as the street rate of exchange increases by the amount of risk premiums. Since banks do not go out directly to the black market, a large number of intermediaries further increases the amount of commission.

If the black foreign exchange market is legalized, the prices of foreign currencies will fall off and their demand will certainly increase. Both trends would generate favourable macroeconomic effects. The National Bank

would not have to intervene on this market when setting the balanced rate of exchange and would not have to use the scant foreign currency reserves for this purpose. Corruption would diminish and the government costs of the implementation of foreign exchange legislation would be cut. The amount of foreign currencies flowing through the usual financial channels would increase. People would freely buy and sell foreign currency at bank counters.

It is worthwhile, however, to be cautious as to this solution and again reassure the state that a regime of administrative control of the foreign exchange market can exist without having its black market. The dual rate of exchange accounts for a short-term remedy; it is just a rational break before the market is regulated reasonably. Unless this is done, a black market would reappear as a third foreign exchange market out of control of the government and the National Bank.

This means that foreign currencies would further remain abroad because the importers would continue falsifying their import bills and go on raising purchase prices. The exporters would do the same, but in the opposite direction, with the falsely lowered prices, while the authorized buyers of foreign currency would buy them at the official rate of exchange only to resell them at a higher black market rate. The ordinary men would continue overdrawing their checking accounts to buy foreign currency for ready money. A legalization of the black market aims to find a system in this insanity. Should this insanity last, this move will not have any effect.