A Step Back for the Serbian Economy!

Sin­ce the fall of Serbia's aut­ho­ri­ta­ri­an regi­me in 2000, the coun­try has impro­ved its rela­ti­ons with the inter­na­ti­o­nal com­mu­ni­ty and insta­ted an inde­pen­dent demo­cra­cy. Howe­ver, much work rema­ins to be done on the eco­no­mic front.

In the six years sin­ce the fall of Milosevic’s aut­ho­ri­ta­ri­an regi­me, Ser­bia has chan­ged for the better.

After resto­ring rela­ti­ons with the inter­na­ti­o­nal com­mu­ni­ty, the eco­no­my has begun reco­ve­ring from the big 1990s slump, and demo­cra­cy has been con­so­li­da­ted thro­ugh two elec­to­ral cyc­les sin­ce 2000.

With the seces­si­on of Mon­te­ne­gro, Ser­bia too has gai­ned inde­pen­den­ce, and the final sta­tus of Koso­vo will like­ly be pea­ce­ful­ly resol­ved in the fol­lo­wing months.

Dif­fe­rent path

Whi­le Ser­bia is sho­wing a gra­du­al pro­gress in tran­si­ti­on towards a sta­ble demo­cra­cy and con­sti­tu­ti­o­nal govern­ment, the eco­no­mic poli­ci­es emplo­yed by post-Milo­se­vic govern­ments do not pro­mi­se a sub­stan­ti­al impro­ve­ment in living standards.

Ser­bia could have taken a path that post-com­mu­nist Czech Repu­blic, Esto­nia or Slo­va­kia took — but it cho­se not to.

Good inten­ti­ons

Whi­le Ser­bia is sho­wing a gra­du­al pro­gress towards a sta­ble demo­cra­cy and con­sti­tu­ti­o­nal govern­ment, the eco­no­mic poli­ci­es do not pro­mi­se a sub­stan­ti­al impro­ve­ment in living standards.

Neit­her one of the two post-Milo­se­vic govern­ments sho­wed appre­ci­a­ti­on for com­pre­hen­si­ve free-mar­ket reforms.

Inste­ad, they opted for wide­ly discre­di­ted con­cepts of govern­ment-led development.

It is under­stan­da­ble that poli­ti­ci­ans find it hard to resist inter­est gro­ups or are wary of enra­ging voters by under­ta­king some radi­cal reforms.

But it is very regret­ta­ble when poli­ti­cal eli­tes still tru­ly beli­e­ve in public works, sub­si­di­es and simi­lar sta­tist deve­lop­ment ideas.

In Ser­bia, the lat­ter seems to be the case. Even good inten­ti­ons are tur­ned into rot­ten poli­ci­es by gene­ra­ti­ons of poli­ti­ci­ans rai­sed and edu­ca­ted in Eastern Euro­pe­an socialism.

Govern­ment control

Ser­bia could have taken a path that post-com­mu­nist Czech Repu­blic, Esto­nia or Slo­va­kia took — but it cho­se not to.

The distrust of mar­kets is not limi­ted to one gro­up — but is rat­her a fea­tu­re of the enti­re poli­ti­cal sce­ne, poli­ti­cal­ly libe­ral pro-western wing and hard line nati­o­na­list par­ti­es alike.

No poli­ti­cal par­ty stands for a smal­ler govern­ment role in the economy.

Con­si­der the latest govern­ment ini­ti­a­ti­ve. After sel­ling a sta­ke in one of the two sta­te-owned mobi­le tele­com­mu­ni­ca­ti­ons com­pa­ni­es, the govern­ment has deci­ded to dra­sti­cal­ly incre­a­se govern­ment spen­ding over the next year and a half.

Gre­at expectations

The so-cal­led Nati­o­nal Invest­ment Plan, put forward by Mini­ster of Finan­ce Mla­djan Din­kic, an eco­no­mist by education,proposes spen­ding more than $2.1 bil­li­on in the cour­se of one and a half years on dif­fe­rent invest­ment projects.

For the small Ser­bi­an eco­no­my, that num­ber is huge — amo­un­ting to more than 7% of the country’s GDP.

The govern­ment has adop­ted the plan wit­ho­ut much public cri­ti­cism and is abo­ut to start with implementation.

Pro­jects ran­ge from infra­struc­tu­re and hou­sing, to edu­ca­ti­on, cul­tu­ral mani­fe­sta­ti­ons, sports, export sub­si­di­es and small busi­ness finan­ci­al support.

Power plan

On the indu­stri­al deve­lop­ment side, the plan intro­du­ces a spe­ci­al sche­me of han­do­uts to be gran­ted to new enter­pri­ses that sub­mit invest­ment pro­po­sals to a govern­ment agency.

Gui­de­li­nes for pro­ject pro­po­sals expla­in that invest­ments in labor-inten­si­ve and export-ori­en­ted indu­stri­es have more of a chan­ce to be fun­ded, as the reduc­ti­on of unem­plo­yment and stock­pi­ling hard cur­ren­cy reser­ves are cited stra­te­gic aims of eco­no­mic policy.

Wise spen­ding?

With the inflow of pri­va­ti­za­ti­on money, Ser­bia could afford tax cuts to sti­mu­la­te pri­va­te ini­ti­a­ti­ve and attract dome­stic and fore­ign investments.

Accor­ding to the plan, the govern­ment will build 4,000 apart­ments to be offe­red to the mem­bers of sta­te admi­ni­stra­ti­on for purc­ha­se at sub­si­di­zed prices.

It will invest in adap­ta­ti­on of ski cen­ters, swim­ming pools and other tou­rist faci­li­ti­es that could easi­ly be pri­va­ti­zed, but are still run by the local govern­ment branches.

And a gre­at deal of money will be devo­ted to reno­va­ti­on of cul­tu­ral cen­ters, the­a­ters and churc­hes, as well as sub­si­di­es to the­a­ter gro­ups and musi­cal ensembles.

Part­ne­red with Paris

Thanks to the agre­e­ment with the Paris Club of inter­na­ti­o­nal cre­di­tors to wri­te-off $700 mil­li­on of Serbia’s debt pen­ding the suc­cess of the arran­ge­ment that Ser­bia had with the Inter­na­ti­o­nal Mone­ta­ry Fund (IMF), the IMF was able to play an impor­tant role in fiscal and mone­ta­ry poli­cy until this year.

It suc­ce­e­ded in restra­i­ning govern­ment spen­ding and effec­ti­ve­ly made the govern­ment revi­se and down­si­ze the nati­o­nal bud­get a few times, even­tu­al­ly to aro­und 43% of the GDP.

Spen­ding spree

The distrust of mar­kets is not limi­ted to one gro­up — but is rat­her a fea­tu­re of the enti­re poli­ti­cal sce­ne, poli­ti­cal­ly libe­ral pro-western wing and hard line nati­o­na­list par­ti­es alike.

Now that the Exten­ded Arran­ge­ment has ended and the IMF does not have a car­rot in hand anymo­re, the Ser­bi­an govern­ment is going on a spen­ding spree to car­ry out its erro­ne­o­us deve­lop­ment ideas.

But taking on the role of entre­pre­ne­ur and hel­ping to petri­fy the rent-see­king cul­tu­re of cro­ny capi­ta­lism insti­tu­ted in the 1990s is not the right path to secu­re Serbia’s future.

With the inflow of pri­va­ti­za­ti­on money, Ser­bia could afford tax cuts to sti­mu­la­te pri­va­te ini­ti­a­ti­ve and attract dome­stic and fore­ign investments.

Uti­li­ti­es and some major sta­te mono­po­li­es are yet to be privatized.

Mar­ket monopoly

After all, the lan­dli­ne tele­com­mu­ni­ca­ti­ons com­pa­ny that also pro­vi­des inter­net ser­vi­ces is a govern­ment mono­po­ly, as is the oil indu­stry — and elec­tri­ci­ty pro­duc­ti­on and trans­mis­si­on companies.

The govern­ment could also start the badly nee­ded pen­si­on system reform.

Over-inve­sting

Neit­her one of the two post-Milo­se­vic govern­ments sho­wed appre­ci­a­ti­on for com­pre­hen­si­ve free-mar­ket reforms.

With payroll con­tri­bu­ti­ons making up for bare­ly a half of its expen­di­tu­res, the pen­si­on system is essen­ti­al­ly ban­krupt and sur­vi­ves only by rece­i­ving fun­ding for anot­her half of its expen­di­tu­res from the nati­o­nal budget.

Inste­ad of cho­o­sing from the long menu of pos­si­ble reforms that could have final­ly moved Ser­bia furt­her towards a mar­ket eco­no­my, the govern­ment — under the gui­dan­ce of alle­ge­dly reform-ori­en­ted eco­no­mists in its ranks — has unfor­tu­na­te­ly deci­ded to invest an addi­ti­o­nal 7% of GDP by itself.

All that it accom­plis­hes is to delay the out­set of real struc­tu­ral impro­ve­ments in Serbia’s eco­no­my — and hen­ce pre­pa­re the coun­try for a sta­ble eco­no­mic future.

 

Sla­vi­sa Tasic & Ivan Jankovic