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
