New Serbia's Old Economy
Also published by United Press International (UPI)
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Looking forward to a $260 million IMF loan, Serbia's current rulers can sigh in relief. A donor conference is scheduled for June 29th in Brussels. Serbia endured a decade of war, sanctions, civil wars, international pariah status, bombing, and refugees. Its infrastructure is decrepit, its industry obsolete, its agriculture shattered to inefficient smithereens, its international trade criminalized. It is destitute. The average monthly salary is 50-70 US dollars. The foreign exchange reserves are depleted by years of collapsing exports, customs evasion, and theft.
The last seven months witnessed a concerted and much applauded effort at reforming the economy. It is a sad testimony to the state of Serbia's finances that a projected rate of inflation of 35% for 2001 is considered to be a major achievement. Growth (from a basis equal to 40% of Serbia's 1989 GNP) is predicted to be c. 5% this year and even higher in 2002. But such a rebound is technical. The fundamental issues of a crime-laden and dysfunctional financial sector, sagging privatization, and a private sector crowded out and bullied by the state and its reams of venal red tape - are far from being tackled. An entrenched old boys nertwork of managers, secret service operators, politicians, and downright criminals sees to that. At the other extreme, revanchism against the Milosevic era cadre is rife and creates instability and uncertainty.
No amount of international aid - multilateral and bilateral pledges now amount to more than $1 billion - will suffice if these social ailments are not tackled. Serbia's physical infrastructure alone sustained damage estimated at $4 billion. And although puny in relation to the Serb economy, Montenegro's looming secession and its autonomous currency pose almost insurmountable legalistic problems as to who gets the funds alotted, how, and how much. Still, compared to the expenditures of waging war and maintainig peace, the aid pledged is small money. The USA alone has spent in excess of $21 billion in the Balkan in the 1990's. This is more than Yugoslavia's whole GDP.
Some elementary reforms have surprisingly been neglected hitherto:
As a result of a multi-annual spiral of mega devaluations followed by hyperinflation, Serbia's currency, the dinar, is distrusted by everyone. The DEM and Euro are widely used. Influential economic think tanks suggest to implement a currency board (as in Bulgaria) or to fully replace the dinar with the DEM or the Euro. The antiquated, centralized, and corrupt payment system needs to be wiped out. The insurance and banking markets should be thrown wide open to foreign ownership. The national accounts need to be made transparent - everything, from money supply aggreggates to levels of foreign exchange reserves, should be published regularly.
The Serbs do not trust their "banks", these instruments of official corruption, cronyism, and outright theft. Introducing foreign owners and foreign management is only half the equation. The other half is injecting competition to this staid marketplace by allowing credit co-operatives and other forms of non-bank lending to operate freely.
The second phase must involve a simplification of the tax code, strict enforcement and a shift from income and profit taxes to simple and easily collected consumption taxes. Whether monetary and fiscal policies should be lax to encourage growth - or strict to reduce the twin (budget and current account) deficits is now hotly debated in Serbia. Other raging debates are: which sector of the economy should most benefit from credit available to SMEs - agriculture or industry? And should state owned firms be privatized or shut down?
Economic co-operation with neighbouring countries (such as Greece) and historical strategic partners (such as Russia and even Italy) is the key to the resuscitation of Serbia'a flagging economic fortunes. West - from Australia, through Israel and Sweden to the USA - and East - China, Japan - are already expressing interest and signing deals. Serbia is strategically located, a large market, with a history of capitalism, an educated workforce, and a rich export culture and history. Inevitably, Serbia's immediate neighbours (Croatia, Macedonia, Bosnia, even Slovenia) regard these developments with cautious pessimism. International aid is considered to be a zero sum game - if Serbia gains, someone must lose.
Still, in the long run, the solution to Serbia's economic quagmire is in the hands of the European Union. Serbia needs unilateral transfers by Serbian workers in the European Union, open markets to its goods and services, and an actual and effective integration of Serbia into the continent's free trade zone. What Serbia has instead is a protectionist European Union which adamantly refuses to open its borders to labor and goods from the Balkans. This is not a good omen.
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