From: malenovi@plains.NoDak.edu (Nikola V. Malenovic )
Newsgroups: soc.culture.yugoslavia
Subject: The Regime Vs Economic Stabilization (VREME NDA 6.Apr 1992)
Date: 6 Apr 92 15:03:01 GMT
Article-I.D.: plains.16481
Organization: North Dakota State University, Fargo


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     "Vreme" News Digest Agency                       No. 28, April 6 1992.
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    The Regime Vs. Economic Stabilization
    -------------------------------------


                     DUBROVNIK BURNS IN THE EUROPEAN BANK


           The  Serbo-Montenegrin economy  is too  weak to struggle
           alone  (without fresh  foreign money)  and survive along
           free-market principles. The regime  is too unpopular and
           at such variance with  current tendencies for anybody to
                                want to help it

    With  a monthly  inflation rate  already reaching  50%, the leftovers of
    Yugoslavia   have   technically   speaking    entered   the   realm   of
    hyperinflation. This hyperinflation cannot last  for long. The last time
    it occurred in Yugoslavia it went  on for four months, from September to
    December  of  1989.  Ante  Markovic's  economic  stabilization  plan was
    implemented by  the end of December.  In hyperinflationary conditions, a
    stabilization  plan must  be implemented  very soon  (within 6 months at
    most) for several  simple reasons. Such a high  inflation devastates the
    inner structures of  an economy. The national currency  ceases to be the
    unit of account in economic  transactions and slowly begins to disappear
    as a means of exchange. Firms  and individuals are forced to spend their
    time hopelessly trying to preserve  their property from inflation. Large
    nominal values  can be attained, or,  even more likely, lost,  in a very
    short term, and  that does not foster social stability.  It is enough to
    mention that keeping dinars in cash for a month only, when the inflation
    is on the mark of 50%, means losing one third of their real value.

    Even  if we  suppose that  Milosevic and  Bozovic, by  virtue of  divine
    providence, opt for a rational economic policy, and manage to define the
    national borders, a successful implementation of a stabilization program
    stands no chance within the current political framework.

    This point can be easily proved. The new state (Serbia & Montenegro) has
    a trade deficit if  the calculation is made according  to a real foreign
    exchange rate of  the dinar. A trade deficit can  be financed in several
    ways:  either  with  diverse  revenues  from  abroad,  such  as emigrant
    workers'  money orders,  shipping or  foreign travel  revenues, or  with
    direct foreign investment,  or new foreign loans. (The  deficit can also
    be  financed  with  foreign  trade  reserves,  but  the new Yugoslavia's
    reserves would have to be on a critical level for 2-3 months).

    If we  examine each of the  five possible financing sources,  we can see
    that  it is  very unlikely  that they  will eventually  come to play any
    major role. Emigrant workers, quite understandably, have stopped sending
    their money to a country which has simply nationalized the hard currency
    savings  accounts. Foreign  travel revenues  are close  to zero, for few
    people are willing  to spend their holidays in  a country where military
    vehicles roam the  streets chasing people and war  is going on. Revenues
    from shipping have been drastically  reduced, because everyone is trying
    to by-pass  a territory where  a war is  being waged, and  where diverse
    armed  formations stop  trucks and   buses whenever  they feel  like it.
    Foreign investment can  only be symbolic in a  war-ridden country run by
    communists,  especially because  other Eastern-European  countries offer
    better protection  to private property. And  finally, the possibility of
    getting new  loans, either from  commercial banks or  from international
    institutions, is very slim.

    Jacques Athalie,  the President of  the new European  Reconstruction and
    Development Bank, has a picture of Dubrovnik in flames in his office. It
    is  easy  to  imagine  what  kind  of  reception Milosevic's and Adzic's
    representatives,  who either  ordered the  bombing or  consented to  it,
    would receive at this bank, if they asked for a loan. The world accepted
    the former Yugoslavia  just because it was outside  the Soviet sphere of
    domination and  pretended to be  a liberal communist  country. Milosevic
    and his team,  now that even Albania has  turned to democracy, represent
    the last communist  island in Europe. Such a regime,  with no friends in
    the world, cannot expect to get any money.

    The consequent social unrest would be of a smaller scale if everyone was
    given a  certain quantity of cloth,  meat, sugar, bread, etc.  by ration
    coupons. Moreover, some recent moves  by Bozovic's government and by Mr.
    Milosevic  demonstrate a  tendency towards  a "Cuban"  model: fixing the
    price of bread, introduction of commodity lists in trade with the former
    Yugoslav republics, administrative centralization,  a ban on exports and
    imports of certain goods, Milosevic's refusal to sign a decision on free
    foreign currency  exchange. The decision to  ban exports is particularly
    indicative. A ban  on exports is one of the  key properties of centrally
    planned economies, where there are  shortages of certain goods. There is
    not a single capitalist economy which bans the selling of commodities to
    foreign  countries   (except  where  arms   or  economic  boycotts   are
    concerned). This is understandable, for  if one wants to sell something,
    it is because it is in his interest to do so. Naturally, import bans can
    be  found  in  capitalism  as  well,  for  manufacturers  also  ask  for
    government protection there. But  export bans are typical real-socialist
    measures, which, by the way, have  not been used in Yugoslavia since the
    1965 economic reform.

    My  aim has  been to  show  that  a stabilization  program is  virtually
    impossible  within  the  present  political  framework. Therefore, those
    working on it are simply wasting  their time. Even if the current regime
    were  willing  to  follow  their  advice  (which  is highly unlikely), a
    stabilization program cannot be implemented. Administrative socialism is
    unavoidable, not only for ideological reasons (i.e. the current regime's
    preferences), but also because the  regime wants to survive politically.
    The  crucial reason  for this,  however, is  quite elementary.  The last
    military-communist  regime in  Europe, in  one of  the poorest  European
    countries, cannot count on foreign aid. The Serbo-Montenegrin economy is
    too  weak to  struggle alone  (without fresh  foreign money) and survive
    along free-market  principles. The regime  is too unpopular  and at such
    variance with  current tendencies for  anybody to want  to help it.  And
    without such support, there can be no stabilization program.

                                                            Branko Milanovic
                                      (The author is a World Bank expert who
                                      has been working  on the stabilization
                                      of socialist and kindred economies for
                                      some ten years)


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     "Vreme" News Digest Agency                       No. 28, April 6 1992.
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