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Vol 3, No 21
11 June 2001
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New Serbia's Old Economy
Sam Vaknin

With the prospect of a USD 260 million International Monetary Fund (IMF) loan and a donor conference scheduled for 29 June in Brussels, Serbia's current rulers can sigh in relief.

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 USD 50-70. 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 per cent for 2001 is considered to be a major achievement. Growth (from a basis equal to 40 percent of Serbia's 1989 gross national product) is predicted to be about five percent this year and even higher in 2002. But such a rebound is technical.

How much can aid alone do?

The fundamental issues of a crime-laden and dysfunctional financial sector, sagging privatisation, 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 network of managers, secret service operators, politicians and downright criminals sees to that. At the other extreme, revanchism against the Milošević-era cadre is rife and creates instability and uncertainty.

No amount of international aid-multilateral and bilateral pledges—which now amount to more than USD 1 billion—will suffice if these social ailments are not tackled. Serbia's physical infrastructure alone sustained damage estimated at USD 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 allotted, how and how much.

Still, compared to the expenditures of waging war and maintaining peace, the aid pledged is small money. The USA alone has spent in excess of USD 21 billion in the Balkans during the 1990s. This is more than Yugoslavia's whole gross national product.

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 Deutschmark and the euro are widely used. Influential economic think tanks suggest implementing a currency board (as in Bulgaria) or to fully replace the dinar with the Deutschemark 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 aggregates 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.

Policy reform

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 small and medium enterprises (SMEs)—agriculture or industry? And should state-owned firms be privatised 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's flagging economic fortunes. West (from Australia, through Israel and Sweden to the USA) and East (China and Japan) are already expressing interest and signing deals.

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Serbia is strategically located. It has a large market, 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 that adamantly refuses to open its borders to labor and goods from the Balkans. This is not a good omen.

Sam Vaknin, 11 June 2001

The author:

The author is General Manager of Capital Markets Institute Ltd, a consultancy firm with operations in Macedonia and Russia. He is an Economic Advisor to the Government of Macedonia.

DISCLAIMER: The views presented by the author in this article represent only the personal opinions and judgments of the author.

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Sam Vaknin's book on sale from CER as a print book and as an ebook

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