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August 10, 2001
. Vreme News Digest Agency No 503
How Successful Are Our Reforms?

The Situation is Dramatic

by Stojan Stamenkovic

(The author is an editor of the Monthly Analysis and Prognosis issued by the Institute of Economic Sciences)

Is it possible that our politicians are not aware of the situation we find ourselves in, that the rational management of the economy and social policies has to have priority over all else?  When you follow recent political events, it is not clear whether the majority of our politicians is aware of the bomb they are sitting on

The people of Belgrade were informed recently that the municipal taxes need to be increased in Belgrade if municipal infrastructural systems are going to function at all (even the Serbian Prime Minister appeared very convincing on this point), and the whole action was halted last Friday.  The Serbian Government insisted that it had to be consulted over such measures; after two days we read the following statement by the president of Belgrade's municipal government: "...we were not aware of the fact that procedure demands approval from the Serbian government."  Congratulations!  There is no doubt that the issue of jurisdiction in this matter will be cleared up soon enough.  But it seems that the question of who should be doing what, who has jurisdiction over what and is responsible for what, is being taken up all too frequently in the public for it to be a mere matter of uninformed individuals in the government regarding their responsibilities.

Essentially, two fundamental issues are being raised in this way: first, how far have we come in the process of transition into an open, market economy, how successful are we in this, and second, how synchronized are the efforts of everyone in the government in keeping us on track (keeping in mind their election promises), despite the appalling financial and social situation the country finds itself in?

Answers to this differ and depend on whether they originate from abroad or at home.  In order for the second issue to be addressed, several elementary facts must be dealt with.  Prior to this, this issue could be approached from a different perspective: why have the expectations of influx of foreign donations following the euphoria of last year been disappointed - donations, credits and investments?

OCCASIONAL AUTOGOAL:  Part of the answer lies in the international community.  Every process and decision has been postponed for political reasons (cooperation with the Hague, above all), and money from the Donor's Conference, if it comes at all, will come, not this year, but the next.  Bureaucratic procedures from the countries of origin of the promised aide have also have an effect on the expediency, etc.  But something must also be said about our own contribution to the delays and the problems we are facing as a result.

First of all, we did not think that they were serious about the whole affair with the Hague.  Our newly elected president considered this the least important matter to be dealt with - we had far more urgent things to take care of.  Then the obstruction in the constitution of the Serbian parliament, then the federal government, then the obstruction by the opposition in the Serbian parliament in the adoption of reform laws.  We passed the law on privatization in July instead of in April, and whether it will produce any effect this fiscal year remains to be seen.  The IMF expressed a positive opinion on this law, even though resistance to it at home is growing.  This is not an issue I wish to elaborate on here, but would like to point out one element that it seems the IMF also overlooked.  Privatization through tenders has been formulated in such a way as if state property is at issue.  But public property is something different, with questions being raised already who is the owner of the property that is supposed to be privatized (one man approximately stated: "Beware!  What you are buying from Djindjic today is not his, but mine, and when I come to power, I will not acknowledge your ownership - I will abrogate it!").  It remains to be seen what will happen with this until the end of the year.  Incidently, do we have a suicidal train in our characters (Heavenly People?), so that we always end up doing something that no one else in the world does and that always comes back to haunt us?  In that past it was public property taken from private hands, yesterday it was a leader who decided to wage war against the entire world and without a single ally, and today - the Law on Taxing Extra Income.

In my opinion the deal with the economic system (monetary system, foreign currency system, foreign trade, fiscal policy, etc.) was carried out properly, in my opinion - everything concerning the international community and international monetary institutions was carried out flawlessly.  But several "shots in our own foot" were fired, of which the Law on Taxing Extra Income out does all others.  How much income it will bring into the budget remains to be seen - it is hardly to be expected that it will haul in the expected billion German Marks.  I will leave out criticism on conditions in which "special incentives" are used (the federal minister is correct in this regard).  One effect is already very visible: the European Bank for Renewal and Development is halting credits for our firms which are on the list of "profiteers", because one of its principles of operation is not to subsidize national budgets, and it does not want to risk for its funds to end up precisely there.  There are two unavoidable conditions for foreign investments - legal order according to western standards and stable conditions for industrial development.  And this law goes against both of these.  There is no use in explaining that this law is for one use only.  If there is a tendency here to resolve matters retroactively, some future government, 5 to 10 years hence, can decided, for instance, that the monopoly accorded by the Serbian government to the Gas Industry of Serbia (NIS) and the subsidy of Zastava's production which does not apply to others all represent special advantages.  On this basis they could conclude that "a tom cat should not be fed a cow's head" and that the buyers of such firms could be affected by another law which could haul in a portion of their profits.  It seems that the most elegant way out of this dead end would be for the Constitutional Court to suspend this law and then for everyone to forget all about it.

WHO IS FEEDING WHOM:  Is it possible that our politicians are not aware of the situation we find ourselves in, that the rational management of the economy and social policies has to have priority over all else.  The president of the Serbian Parliament states that reforms have not begun yet, except for the fiscal system, that other issues are more vital, while the spokesman of his party is threatening reconstruction of the government, so that I ask myself whether it is better for us to have a government with 40 to 50 members with a salary of 10 to 12 thousand dinars, or to have ten competent members with a salary of fifty thousand dinars.  In fact all this hubbub around the distribution of power reminds me of the golden rule following the Second World War:  all communists get top positions!  Another spokesman (spokesmen are real gems on our political scene) stated that the Law on Taxing Extra Profit needs to be "applied rationally."  That is precisely what he stated on TV, and I don't know why exactly this reminded me of a sentence uttered by Our Greatest Son (Tito): "For God's sake, don't follow the law like blind men!"  The leader of that whichamacallit-party which would not have even gotten into parliament had it run independently is now trying to internationalize the issue of Vojvodina's autonomy, just as all the excitement around Montenegro is beginning to die down (does this connected in any way with Montenegro's budget problems?).  He should reconsider whether he is not basing his approach on what was the case yesterday, but is hardly the case today where price parity is in effect, namely the issue that Vojvodina was/is feeding Serbia - simply put, if we did not buy wheat from Vojvodina at 25 pfenings a kilogram, we would be buying it at 20 or 22 elsewhere.  The man in the Hague only just took steps toward disbanding his party, and many other leaders are already bracing for a new elections.  It is as if they want to convince the rest of the world that this country will continue to be in turmoil for sometime to come, and a place where their investments could easily go up in smoke.  Instead of worrying how to create and stabilize conditions for economic development and a way out of the appalling social conditions here, they are deluding the people by creating new committees of MP's, by squabbling whether the health minister should be forced to submit his resignations, or whether the director of the Institute for Healthcare should also resign (in the meantime someone made sure that some medication has become more expensive than in highly developed countries) - or they are debating immediate institution of religious education in public schools.  The answer to the first issue addressed above is based on several hard facts.

After a regular review of our program of transition, held in the July Stand-By arrangement, IMF experts gave an overall positive assessment (exceptions are budget difficulties facing Montenegro as a result of its inability to adapt its expenditures to the reduced influx of donations, by comparison with last year).  We managed to meet all criteria set for us, which is a condition for approving the second installment of IMF credits; we also managed to meet so-called indicative criteria.  The IMF assesses that we will manage to adapt our budget expenditures to the evidently reduced influx of funds from outside for financing our budget deficit, and that we will not resort to credits through the National Bank of Yugoslavia beyond the expected levels...

WISE MOVE:  This is where the fox is to be found!  Now it is expected that 130 million German marks will come into the budget from privatization alone, instead of as many dollars - that is to say twice as little in a critical third quarter for the fiscal budget.  The Serbian Prime Minister recently addressed a dramatic letter to the German Chancellor, warning him that a collapse of the Serbian Government can only be avoided if the promised loan of a 100 million German marks comes through before the end of August.  I think that he is right in this, despite calming statements made by other government officials.  Given that the IMF would not take a positive view of renewed delays in paying out salaries and pensions, a tightening of the budget belt in the third quarter would have to affect social expenditures and subsidies of the economy.

This is the light in which we should view the halt in price hikes in municipal taxes.  With the added comment: realistic prices, prices which cover the cost of heating and water, for instance, cannot be established until individual measuring of use is not implemented (the circle is once again closed, these are not small investments).  We will have to accept subsidies in this area for a little while longer.

Since increases in the price of electricity cannot be avoided (even the upcoming ones in November), because they are written into the Stand-By arrangement as a criterion to be met, a halt to municipal tax hikes was a wise move because it threatened to result in renewed, serious social tensions.  It is quite a different issue whether the increase in the price of electricity is real or not, given the new system of tariffs which not only did not calm existing social tensions, but merely resulted in new ones.  It cannot take into account new, unknown levels of usage determined by new prices, nor can it take into account unpaid for electricity.  The issue of retroactive fines for high usage during last winter is quite another matter.  The rationale behind this system is "to charge as much as possible from as many people as possible" and in this sense it boils down to social demagogy.

Are our social conditions really appalling and what are our perspectives?

The beginning of the plummeting of production in today's FRY coincided with the sanctions Serbia imposed on Slovenia in 1989 through the famous boycott of Slovenian goods.  The sum total of the political project which counted this among its first steps is horrific.  The overall domestic product expected this year, expressed in German marks (which have become the only measure of value in our economy), will only amount to some 19 billion German marks according to the present rate of exchange - that is close to a third of what it was in 1989.  For the entire decade - if statisticians are to be believed - our economy only invested back, on the average, 43 percent into the economy in terms of depreciation: therefore less than half of the value of essential equipment was invested back.  Industrial equipment was depreciated, but in competing investments, barely tenth of its value can be accounted!  The value of our industrial equipment is fit for a market some two to three decades ago.  Jumpstarting economic growth requires new, considerable investments.  If I criticized Mirko Marjanovic's government several years ago for subsidizing every Zastava vehicle by some 2000 German marks, I don't see why I should not do the same today.  In this way social peace is being bought temporarily, while scant equipment is irretrievably lost, with the problem merely growing further.

ON THE EDGE OF HUNGER:  The worst result of such a development of things is that for the 1.9 million registered employed workers, there are 840 thousand registered unemployed workers, with another 500 thousand "employed" who are not actually working because there is no work for them, nor will there ever be for them, without a jumpstart to the economy through extensive investments.  One employed worker in the economy needs to provide for himself and three unemployed, a pensioner, or for those who provide medical care for him or his kids...  With privatization this fact will become all the more evident.  Furthermore, if our economic growth were to remain at 5 percent in the next decade - which is within the domain of what is projected for our capacities by international financial institutions - somewhere at the end of that period, space would be created for activating the hidden unemployed, although the level of unemployment would remain at today's levels.  We need faster development, and this means foreign investment in the amount of two to three billion dollars per year.  The average salary was 2.3 percent higher this year than at the same time last year.  But averages can be misleading.  Behind this average there are six branches with around 250 thousand workers, where the average salary was 60 percent of the overall average, and this time amounts to only 50 percent of the overall average.  If it is supposed (perhaps I could be making a mistake?) that these salaries are being spent on food, and here and there on transportation, perhaps a little on electricity under threats of being cut off, and if it is known that the buying power of the average salary, where bread, milk and sugar are concerned - has been reduced by 30 to 50 percent - it only means that the buying power of these people has dropped by at least a third.  Our problem is no longer how to face the biggest segment of our population (60 percent?) which is leaving beneath the poverty line, but how to keep them from mere hunger.

I was recently in a position to present the situation in our economy to a delegation from the European Community; their reaction to this fact about employment and the prospects until the end of the decade was: "That's terrible!"  The readiness to write off our debts according to Neapolitan conditions indicates that we number among extremely poor countries.  Taking this as a starting point, which is simple enough to understand, the answer to the second issue addressed at the beginning should be sought.  When you follow recent political events, it is not clear whether the majority of our politicians is aware of how terrible this is and what kind of bomb they are sitting on.

Leading politicians in the Democratic Opposition of Serbia should take a good look around themselves.  They will see that popularity of leaders is an ephemeral thing; examples of the Socialist Party of Serbia and the Serbian Renewal Movement are very instructive in this regard, and avoiding crucial problems in order to get a bigger peace of the pie can wipe them off the political scene.  Only someone naïve could believe that such a high number of political parties with different political agendas, gathered around a program with only two issues - changing Milosevic and reentering the international community - could stay in a coalition permanently.  But also naïve are those who think that now is the perfect moment for this coalition to fall apart, in order for the smallest bits of power to be grabbed.

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