From: malenovi@plains.NoDak.edu (Malenovic Nikola V.)
Newsgroups: soc.culture.yugoslavia
Subject: Economy ( VREME NDA 5 Sep 1992 )
Date: 5 Sep 92 18:12:28 GMT
Article-I.D.: plains.20175
Organization: North Dakota Higher Education Computing Network


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     "Vreme" News Digest No. 49                             August 31, 1992
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    Economy
    -------


                         LEGALIZATION OF BLACK MARKET


    When  two-thirds of  all workers   are on  their forced  vacations, when
    hospitals  lack  food  and  medicine,  when  fuel  is short and gasoline
    coupons remain unused, when the GNP fell to less than 15 billion dollars
    from near  under 30 billion dollars  three years earlier, when  the full
    economic  blockade has  been imposed,  when prices  soar daily, when all
    this is  happening to us  there is just  a black market  and "a parallel
    economy" that are helping us to survive.

    The first step  on the way out of an  all-encompassing economic chaos is
    seen  in the  inauguration of  a legal  order and  legal security. Hence
    legalizing  the black  market is   far more  efficient and  cheaper than
    employing more auditors  and building up police control  over the market
    because such moves  have so many times practically  proved that they are
    ineffective and that they additionally  burden the finances of the state
    that already does not kow how to cover its existing liabilities.

    The legalization of  a parallel economy means the  respect of realities.
    It also  means we admit that  our existent economic system  is worthless
    because it does not enable people  to work and earn in legally permitted
    ways. The recognition of the realities is the first step in bringing the
    current complete  insanity back to  order. The next  step calls for  new
    institutions to be formed to act and restore order in economic relations
    and channel people's legitimate material interests to the achievement of
    full welfare of all and one.

    The current  debate on the position  of the National Bank  of Yugoslavia
    (NBJ) represents  a good example of  how it is possible  -- amid general
    financial indiscipline and uncontrollable money  printing -- to set up a
    central bank as  an autonomous and supreme monetary  authority that will
    be empowered to heal the financial system of its insanity.

    The  government and  the National  Bank, however,  are at  war over  the
    latter's status  and competences to pursue  and independent money policy
    and to autonomously set the foreign  rate of exchange of the dinar which
    is exceptionally important for the legal  and black markets, so that the
    government will  easily win general support  for a decision not  to cede
    the determination of  this rate to someone else.  This is facilitated by
    the  established policy  of the  National Bank  which believes  that the
    black market of foreign exchange can be regulated by a tightened control
    of street  foreign currency dealers. It  is absolutely safe to  say that
    the NBJ's new governor has not yet  seen for himself the usual scenes of
    even  policemen buying  foreign currency  in the  street. This  is to be
    understood an not to be condemned.  To want people to behave contrary to
    their own interests would be unreasonable.

    A more rational system  could be introduced with an  auxiliary move that
    would  legalize  the  black  market  of  foreign  exchange  and set up a
    controllable  system of  a dual  foreign exchange  rate. Such  a foreign
    exchange system operates abroad in at  least one-fifth of the members of
    the  International Monetary  Fund (IMF).  This system  is not  efficient
    enough  as  the  system  of  single  real  rate  of convertible currency
    exchange, but  it may well serve  a brief and rational  transition stage
    towards the  introduction of the "internal  convertibility of the dinar"
    (once the  external conditions allow it,  that is, once the  blockade is
    lifted and a new agreement with the IMF signed).

    In  its  essence,  a  dual  rate  of  exchange  keeps the dinar rate for
    commercial  (export-import)  transactions  apart  from  that for capital
    investment activity. More often than not,  the former rate is held fixed
    at a level lower than the balanced  rate. It is used to service external
    debts, to import the basic production  materials and energy, to build up
    the competitiveness  of the state-subsidized exports,  and the like. The
    latter rate is formed freely upon the law of foreign currency supply and
    demand.

    The introduction of a floating rate  of exchange is aimed at averting an
    outflow of capital  and domestic currency from the  country because such
    outflows unnecessarily depress the value of the dinar.

    Under conditions of a high  inflation and legal insecurity, the families
    have a narrow  choice in trying to preserve the  real vaue of the dinar.
    One  thing they  can do  is buy  foodstuffs and  form reserves  of food.
    Another  possibility is  to turn   dinars into  a foreign  currency. Low
    interest rates on  the dinar deposits do not  encourage the formation of
    savings  in dinars  and of   domestic capital.  People prefer  to change
    dinars into  some foreign currency  and the consequences  are adverse in
    macroeconomic  terms.  In  real  terms,  the  dinar becomes devalued and
    produces a feed-back  effect on that segment of  imports which is formed
    out  of the  foreign currency   influx from  the black  foreign exchange
    market. Inflation  thus rises and  pressure intensifies on  turning more
    and more dinars into foreign currencies.

    Business operations  on the black  foreign currency market  are risky as
    the street  rate of exchange increases  by the amount of  risk premiums.
    Since banks do  not go out directly to the  black market, a large number
    of intermediaries further increases the amount of commission.

    If the black foreign exchange market is legalized, the prices of foreign
    currencies will fall off and  their demand will certainly increase. Both
    trends  would generate  favourable macroeconomic  effects. The  National
    Bank  would  not  have  to  intervene  on  this  market when setting the
    balanced rate  of exchange and would  not have to use  the scant foreign
    currency reserves  for this purpose.  Corruption would diminish  and the
    government costs  of the implementation of  foreign exchange legislation
    would be cut. The amount of foreign currencies flowing through the usual
    financial  channels would  increase. People  would freely  buy and  sell
    foreign currency at bank counters.

    It is worthwhile, however, to be  cautious as to this solution and again
    reassure  the  state  that  a  regime  of  administrative control of the
    foreign exchange market  can exist without having its  black market. The
    dual rate  of exchange accounts  for a short-term  remedy; it is  just a
    rational break before the market is regulated reasonably. Unless this is
    done, a black  market would reappear as a  third foreign exchange market
    out of control of the government and the National Bank.

    This means  that foreign currencies  wuld further remain  abroad because
    the  importers would  continue falsifying  their import  bills and go on
    raising purchase  prices. The exporters  would do the  same, but in  the
    opposite  direction,   with  the  falsely  lowered   prices,  while  the
    authorized  buyers of  foreign currency  would buy  them at the official
    rate of exchange only to resell them  at a higher black market rate. The
    ordinary men  would continue overdrawing  their checking acounts  to buy
    foreign  currency for  ready money.  A legalization  of the black market
    aims to find a system in  this insanity. Should this insanity last, this
    move will not have any effect.
                                                              Miroljub Labus


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     "Vreme" News Digest No. 49                             August 31, 1992
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