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September 28, 2001
. Vreme News Digest Agency No 510
Late and Way Too Late Reforms

It Could Have Been Both Better and Worse

by imitrije Boarov

Regardless of the fact that some positive trends in economy initially always cause temporary problems, and therefore the "balance of success" in the domain of some economic reforms and long-term economic policy actions generally cannot be calculated exclusively with a black and red pencil - let's first try to remember what could be qualified as a success of the new government in Belgrade in the economic domain.  

RETURN TO THE WORLD: First and foremost, the contributions of Kostunica, Djindjic, Labus, Dinkic, Djelic, Pitic and the other leading figures from DOS and G-17 Plus are immeasurable in the implementation of the decision of the international factors to support the democratic changes in Serbia by accepting FRY into the international financial and economic institutions. The importance of that incredibly swift (albeit, still only partial) return to the international economic and financial institutions and flows, as well as the thus-far direct financial support which could be evaluated at around 300-400 million dollars and the indirect improvement of the financial position which comes close to two billion dollars (by bridging the 138 million dollars debt towards the IMF, conclusion of the stand by arrangement with the IMF and the payment of the first two installments of around 100 million dollars and a regulation of the 1.7 billion dollars debt towards the World Bank, as well as the withdrawal of the first short-term loans), are insufficiently understood here, and even less adequately esteemed. First of all, that enormous success was paid at a fairly cheap price - an used up dictator was extradited to The Hague tribunal and equal secession of SFRY was accepted by all states which emerged on its wreckage. The story by which we have thus entered into the expensive scheme of "international requirements" doesn't seem convincing (actually, it seems frivolous), since practically all countries in the world are under pressure of similar "requirements", even those who are a hundred times larger and more serious than FRY. Of course, the aid package was less than was expected, and what is even more uncomfortable - it was less that what was "desperately needed" and planned. Let's remind ourselves that in CES MEKON's scenario in Belgrade (which was drawn up by Stojan Stamenkovic) it was said that in the year 2001 it was necessary to attract at least 750 million dollars from non-government investors from abroad, beside the foreign donations primarily to the electrical industry and health services of around 900 million dollars and beside the new state loans in the world of around 500 million dollars - so that, with the overall influx of two billion 150 million dollars in total from international sources, two controversial yet necessary goals could be met - both the employees' salaries and investments into the economy could be increased. That is, only with these funds could a parallel increase of investments into the economy of 30 percent be achieved, as well as a personal consumption increase of around 20 percent. Since that influx hasn't been achieved, those goals couldn't be met either.

Still, the political thesis by which in the last year the world had invested into democratic Yugoslavia a lot less than the damage it had caused with the year-long sanctions against Milosevic and NATO bombardment (direct damage of around five billion dollars, indirect around 30 billion dollars) is receptive only to proud domestic ears and cosmic justice criteria, but has nothing to do with international reality. First, in a simplified manner, attention should be drawn towards the fact that in economics it is often more important if someone postpones debt payments of 100 dinars today, then to forgive 80 of the debt and demand that you pay 20 immediately etc. Therefore, the package of international support in the last year which is made up of close to a fourth of non repayable aid and more than three fourths of various loans and credit arrangements - shouldn't be overly scrutinized. What is a lot more important is to attempt to truly bring into the country the larger part of the promised aid and promised investments. And let history deal with justice. A return to the world of international finances, however, isn't completed, because our companies and banks cannot independently appear on the international money market for now, at least until our outside debts of around 12.5 billion dollars are regulated. Those debts will, according to the estimate of Dr. Mladjan Kovacevic, surpass 13 billion dollars by the end of the year, of which over nine billion dollars worth of debt payments, which haven't been paid, are now due - and that circumstance reduces the greatest success of the new government, and especially the federal government's deputy prime minister Dr. Miroljub Labus. Entrance into the World Trade Organization (WTO) couldn't have been expected immediately - and according to the latest news things are moving along at a good pace in that direction.

THE FATE OF THE DINAR: On second place of the positive side of the yearly economic budget, which is logically connected to the first aforementioned success of the new democratic government - one would have to note the increase of the state's foreign currency reserves from the inherited amount of approximately 385 million dollars to today's approximately 1055 million dollars - which has enabled stabilization of the dinar rate towards international currencies. There are a lot of experts who believe that a practical "freeze" of the dinar exchange rate (although it is a model of a managed, oscillating rate) of around 30 dinars for one German mark - in principle isn't good, especially for those who export from Serbia, since it favors those who import and therefore suffocates domestic production and widens the trade deficit - which still can't bypass the crucial significance of the domestic currency's stabilization for any kind of clarification of the economic conditions in the country. In a country with painful hyper inflation experience and a late transition, in which nothing is stable - from a job to a seat in parliament, at least money has to be totally stable for a while - so that anyone can at least evaluate what he has, and what he doesn't have, so that our companies and banks can for once face up to their own expenses and assess which of those expenses they can, and which of them they can't, transfer to the buyers etc. Anyway, the governor of the National Bank of Yugoslavia (NBJ) Mladjan Dinkic, who skillfully proclaimed the dinar's internal convertibility, has gradually managed to double the domestic money mass in the shadows of that stable dinar rate and to therefore reinstate the monetary system which had previously been losing ground under pressure of an archaic exchange of goods (which is impossible to control, tax and channel). Finally, Dinkic cannot be reproached even when he says that the relation of the foreign currencies supply and demand is now such that it can comfortably support a stable dinar, and that it would be mad to carry out some kind of "rate policy" with that relation of supply and demand.

TRANSITION SHOCK: The third great success of the new government, even though a lot of today's criticism of the economic policies advocates are connected to it, is the liberalization of prices and a deregulation of foreign-trade operations which has enabled a somewhat elemental correction of the disparity between the prices of various products, naturally, onto the higher price level. One had to have had "guts" for such a rate in a state in which the philosophy of "protection" of both the consumers and the manufacturers was imposed by the state as the supreme economic arbitrator.

That liberalization and that deregulation have exposed the picture of the population's poverty - which Milosevic's regime has brought us to. Even though it is impossible to come to a totally authentic synthetic indicator of the population's standard, the story on the social situation in FRY should be kicked off with the so-called "consumer basket price" which includes 65 most essential products for a four-member family's monthly survival . According to the last accessible data of the Federal Institute of Statistics from August 2001, that monthly "consumer basket" cost 11.623 dinars (around 380 German marks), which is totally acceptable by European standards. It is a completely different story that at the same time that meant that for the survival of a family one needed to earn around two average monthly salaries. Simply put, even those four-member families in which two members are employed (and there are less than half of those in Serbia) - they still can't provide enough funds for the most basic survival. On top of that, it is difficult to even imagine how the majority of the families live in which no one has a job or where only one person is employed, or where an entire family lives off a single pension of its most senior member - which is often the case in Serbia.  

It is interesting to note that the consumer basket in foreign currency prices has significantly risen in the last year. While in July of last year the price of that basket was 227.30 DM (and the average salary then was 127.83 DM), in July of this year its price was 370.13 DM (while the average salary is 186.61 DM). Still, because the foreign exchange rate of the dinar at around 30 to one to the German mark practically hasn't budged in the last year, it is possible that the claims of the Serbian government are true that the living standard has risen by about 7 percent - because last year one had to give 2.3 average salaries for the basket, and now two salaries. However, all of this is pure statistics, which don't make the people feel any better.  

The liberalization of prices has also sharpened the picture of the previous "overkill production" of the food industry in Serbia and the harsh exploitation of the villages and the farmers which the citizens of low productivity didn't have much use of. That is now apparent in the increased food costs, and one should note that despite the nominal 83 percent salary increase in the last year (from 3051 dinars in July 2000 to 5581 dinars in July 2001), milk prices have gone up by 248 percent, bread by 352 percent, flour by 134 percent, ham by 132 percent, pork fat by 154 percent, cooking oil by 212 percent, sugar by 380 percent etc. When we add to these drastic price increases the increase of public utility costs (electricity, heating, water, garbage disposal etc.) of about 200 percent, and take into consideration that budget payments (tax and contributions) have gone up over 200 percent - then one can understand the "transition shock" which is now shaking Serbia better than standard calculations of prices and salaries.  

As the fourth success of the new government, one could list the tax reform and the gradual order of the entire circle of public finances for which the greatest credit goes to the republic finance minister Bozidar Djelic and his deputy Dejan Popovic. Apart from the more or less normalization of pension payments and other social contributions by the introduction of the system of gross salary calculation, order has been partially introduced into collecting sums for the social funds and financial discipline has also been partially improved. Maybe the "financial reprisal" towards Milosevic's profiteers, envisioned as being carried out by a one-time only extra profit tax, could have been achieved with less noise and with more effect (for now we only have noise, and practically no effects), but that is a subject for a longer discussion.

True, as the budget reform has been carried out on the basis of the inherited organization of administration and distribution of authority from the beginning of the middle ages (the period of state absolutism and centralism), in the last year the budget revenue of the Republic of Serbia (according to the assessment of the author of this text) has been increased nominally by over 300 percent, and realistically over 100 percent - even though funds from privatization still haven't started flowing into that budget. That has, simultaneously with the concentration of power in the government in Belgrade - drastically increased the responsibility of the new political elite. And Serbia's elite has never been graced by a surplus of responsibility.  

THE NEW OWNERS OF SERBIA: The fifth of the major successes of the new government in the economic sphere can only be generally described and is for now still highly conditional - that being, that the people feel more free to open a business, that it is easier for them to envision financing for their project from sources from abroad (a few banks have been founded with foreign ownership) and that fear of a monopoly of certain para-state companies and their political lobbies is diminishing.

The negative side of the balance of the new government in the economic sphere in the last year is a lot easier to compose than the positive. The main problem on that negative side remains the problem of privatization as the key transitional process. Someone will say - well, the new Serbian law on privatization was passed very quickly (is it "quick" that this state's legislative agony with privatization has been ongoing since 1989), but the lack of a serious shift towards creating a "private economy", which is the main pillar of the entire prosperity of the democratic world - is totally wanting. Even though the Ministry of Economics and Privatization of the government of Serbia has kicked off its promotional campaign two weeks ago under the slogan New Fortunes Are Beckoning, which should improve the image of the new law on privatization and alleviate the fear of an alleged sell off of the Serbian economy to foreigners, since ads for the sale of 20 Serbian companies have already appeared in the international press - the citizens feel like mute spectators in that process since nothing has been provided for them on that privatization table. Allegedly all is for them and because of them - only the government is mediating in it all. The revenue of the company sales will fill up its deficit in the public funds, incite development and restructure the economy, open up new jobs and better perspectives etc. To make the irony complete, this negative item of the new government in the last year is least attacked by the advocates of a liberal economy (even though, as a rule, they are naturally the most suspicious ones here), and most by the old national fundamentalists. That's how, with a lot of reasons, one can suppose that the huge crisis within DOS, i.e. the quarrel between Kostunica's and Djindjic's parties, actually has as its most serious cause the fact that the circle around the president of Yugoslavia is afraid that, in the course of privatization, the rival circle surrounding the Serbian prime minister will earn huge amounts of money and acquire a decisive economic basis - choosing at their own will the "new owners of Serbia". But, that is part of the economic balance of the new government which is hopelessly colored by old Balkan political fights.

All in all, in the course of the last year we didn't live well - it could have been better, but it could also have been worse.

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