THE MOST DIFFICULT CASE IN THE REGION
Serbia:By: Drago Brdar (Belgrade)
The era of Milosevic's rule and systematic destruction has ended disastrously for Serbia. At the beginning of transition it enjoyed a high rating as a part of the former SFRY which was the champion of economic changes among the countries of the former Eastern block. However, after Milosevic practically nothing of this has remained.
"Serbia is the most difficult case of transition in the Balkans," said the well-known expert on regional transition, Dr Vladimir Gligorov, a researcher at the Vienna Institute of International Economic Research, at a seminar of the Alternative Information Network (AIM) devoted to transitional prospects in South-East Europe.
The economic losses of Milosevic's Serbia measured by social product are assessed by Gligorov at around 60 percent of the social product realised at the end of the previous decade. Local experts do not agree fully in their assessments, but do not disagree much either. Branko Dragas, advisor to Serbian Prime Minister Zoran Djindjic established that in 1991 Serbia realised the gross social product amounting to USD 11 billion, which according to the calculations of other experts, would correspond to the loss of a half of the GDP. In his opinion, in the past eleven years Serbia lost USD 216 billion.
Strong De-industrialisation
Serbia without Kosovo has the population of 10.683 million inhabitants living on the area of some 91,500 square kilometers. At least 618 thousand refugees from Bosnia and Herzegovina and Croatia and another 230 thousand internally displaced Serbs from Kosovo should be added to this number.
According to independent experts of G-17, in the period from 1990 to 1999 the Yugoslav economy (excluding Kosovo) out of which Serbia accounts for 95 percent, registered an average annual growth rate of around 7 percent. Due to that the gross social product (GSP) by the end of 1999 declined to around 50 percent of the 1990 GDP and in early 2000 the per capita gross domestic production according to the estimates of the Belgrade Consulting Company CES MEKON, fell to slightly above 40 percent of the GDP from the second half of 1980's, i.e. from USD 2,8000 to 1,200 per capita. A half of the social product was produced in the grey economy, which was the only way for the substantial part of the population to survive, but at the same time proved the source of accumulation of enormous wealth by a few privileged members of the former regime.
Economic experts divide this period into three sub-periods characterised by substantially different trends in GSP developments. In the first, from 1989-1993, the GSP persistently fell and in 1993 reached rock bottom of 41 percent of that of 1989. In the period 1994-1998 GSP cumulatively grew by 27 percent or 5 percent annually to increase in real terms in 1998 to 52 percent of the 1989 GSP. As a result of the NATO bombing in 1999, the GSP dropped by 19 percent to 41.5 percent of the level realised in 1989.
During this entire period, the international community applied sanctions against Serbia of different intensity. Due to the lack of fresh capital, working capital and investments, as well as the loss of markets and outdated installations, in such conditions the industrial production faithfully followed the GSP trends. Enormous problems created at the time deepened the recession and led to de-industrialisation. Until 1999, output of many industrial sectors dropped to a mere several percentage points of that registered in 1989 so that the share of industry in the total social product dropped as opposed to agriculture. The power utilities sector and, until 2000, oil production were the only ones that resisted this trend. The rate of industrial capacity utilisation fell from 75 percent in 1989 to 35 percent in 1999. Due to intensive disinvestments, a significant part of capacities are technologically outdated and impossible to be put to a profitable use without additional investments.
No systemic changes have been initiated so that the economy is still based on social and state ownership and problematic motivation mechanism. There was no real privatisation although the regime pretended having such intentions. Due to a slow, but nevertheless reversible privatisation process, the GSP structure changed much less than in other countries in transition. According to G-17, in 1999 the Serbian economy reached only one third of its level of some 10 years ago. During 11 months of 2000, the industrial production in Serbia was 6 percent below that registered in the same period last year.
Although the economy has undergone intensive degradation, the employment rate was not significantly lowered in this period - only 10 percent. FRY has an army of approximately 760 thousand unemployed. That is equal to unemployment rate of 25 percent which is the third highest in Europe after Bosnia and Herzegovina and Macedonia. An additional figure of 30-40 percent surplus labour should be also included. According to the official statistics, the unemployment persistently grew, but not proportionately with other indicators. However, the registered unemployment rate is far from the actual one. The number of people on paid vacations, i.e. fictitiously employed persons is extremely high and amounts to 30-40 percent of the total number of employed. According to the estimates of G-17, the actual unemployment is around 32 percent, which means that every third labour active inhabitant of Serbia is jobless.
Enormous Proportions of Poverty
Due to the liberal regime of retirement, the number of pensioners increased enormously at a rate of 3-4 percent annually so that the workers-pensioners ratio deteriorated. At the end of eighties there was one pensioner per every three employed persons, while in the late 90's that ratio reached the level of 1.7 to 1.
Poverty has assumed unprecedented proportions, both compared to the eighties as well as to circumstances in the region at large. CES MEKON experts assess that some 35 percent of the population lives below the regional poverty line and that the same number is just above that line. Over two thirds of workers receive below the average wages. In December 1990 the average salary amounted to DM 752, while in the 1994-1998 period it fell to DM 170. In 1999, due to enormous depreciation of the dinar exchange rate, it was mere DM 80. The salaries were at their lowest in December 1993 - DM 21.
During this decade of general decline, the population survived thanks to the grey economy. It is estimated that together with the money earned in the grey economy an average household made two and a half average salaries. In November 2000 a consumer basket cost 9,326 dinars (DM 311) which is equal to 2.86 average salaries.
Over one million recipients of humanitarian aid (12 percent of the FRY population, excluding Kosovo) which is distributed through Red Cross, are in the most difficult position. This number includes 618 thousand refugees and internally displaced persons from Kosovo, 312 thousand vulnerable citizens and 100 thousand users of soup kitchens.
With some interruptions, this entire decade was marked by high price fluctuations. In the 1989 to 1994 period there were two hyperinflations. During the second one, which lasted over twenty months, the monthly rate of inflation exceeded 50 percent as many as 20 times. During its metastasis, in January 1994, the monthly rate of price rise reached 3.13 x 108.60 percent daily or 2 percent per hour so that monthly salaries were not enough for one day. Measured by the aggregate growth of prices Serbia, together with Montenegro, ranked second in the world and third regarding the duration of inflation. Hyperinflation destroyed the wealth which took generations to accumulate. It was only partly the consequence of the disintegration of the state, war, transition of the economic system, foreign-trade shocks, but mostly provoked by manipulations of the regime aimed at making it possible to carry out the redistribution of wealth.
Hyperinflation was halted by the application of an orthodox programme which was relatively successful in the first stage of its implementation - until October 1994. Negative trends resurfaced immediately after this first stage as a result of intentional encouragement of and tolerance exhibited towards financial indiscipline, avoidance of structural changes and privatisation. In the last six years the annual inflation rate was around 50 percent. Due to its unforgettable experience with inflation and marked inflationary expectations, the economy established an extremely short time lag between money flow, the prices and production. The former regime doctored the statistical data which is why the officially registered inflation for 2000 was 113.7 percent although experts suspected it to be much higher.
According to economists, hyperinflation and inflatory trends that characterised this entire decade could be attributed to the monetisation of large internal deficits. Data on fiscal deficit were not published and according to expert assessments they were between 4 and 4.5 percent of the GSP. According to CES MEKON's estimates the public debt reached USD 6.618 billion (65 percent of the GSP), out of which the state's external debt accounted for USD 2.2 billion, and internal for USD 4.4 billion. Public outstanding liabilities are estimated to have been USD 164 million; liabilities to state agencies, to the National Bank of Yugoslavia, to local self-government units and business banks USD 417 million; liabilities of the non-economic sector USD 47 million. The foreign-exchange liabilities (saving deposits and state debts to foreign creditors) accounted for the largest share of the public debt at end 1990. In the last years of this period this debt mostly increased on account of accrued interest. At the end of 1999 the foreign exchange saving deposits reached USD 3.8 billion and the public external debt (calculated on the basis of IMF quota) USD 2.2 billion.
The public sector was basically totally devastated. The share of public revenues, expenditures and deficit in the social product was totally untransparent, the structure of revenues and expenditures deformed, while public debts to pensioners, social benefits recipients and public servants kept accumulating over the entire period. This period was also characterised by the constant increase of the indebtedness of large enterprises to the state, as well as tax evasion. The tax system was over-centralised, unfair, untransparent and unstable.
The Most Corrupted in the World
According to estimates of CES MEKON the losses of domestic enterprises amounted to USD 2.4 billion in 1998 or 15 percent of GDP, while cumulative uncovered losses were around USD 9.6 billion or 28 percent of the assessed value of capital. Short-term debts of the economy amounted to 229 billion dinars, which is 23 percent above GDP. Most debts had fallen due but were not being serviced so that the accounts of over 27 thousand firms were permanently frozen. Their liabilities amounted to USD 2 billion. Through the network of debtor-creditor relations, the illiquidity was spreading from the nucleus of insolvent enterprises and affecting the greater part of the overall economy.
There are no official data on the actual value of foreign debt. Estimates range from USD 11.5 to 18 billion, which in any case exceeds the assessed GDP.
The problem of chronic trade deficit characterised this entire period, and was to a great extent reflected on the balance of payments deficit. It was cumulatively assessed at USD 15 billion. The problem with the more precise determination of the amount of this deficit is that a part of trade transactions were not realistically registered - figures on both imports and exports were reduced. Foreign trade during the entire decade was conducted under a very complicated system of import licences. The trade in "strategic" products was reserved for the privileged few.
Privatisation was also went through different stages, and ever since 1988 a model of insider and optional privatisation has been in force. Until now, based on this model some 500 enterprises have been involved in this process and another 7 thousand are envisaged for privatisation.
At the beginning of this period, commercial banks were transformed into shareholding companies. However, there are no real shareholders in banks. Shareholders are old, socially owned enterprises which have not yet undergone ownership transformation. At the same time, these are the greatest bank debtors so that the banking sector is still functioning as the debtors' service. Banks are operating with extremely problematic balances which are the reflection of the lack of confidence of depositors resulting from the freezing of the foreign currency savings deposits (which in 1999 amounted to DM 6.7 billion), as well as citizens' negative experiences with the pyramid savings schemes. Out of some 90 banks in Serbia only a few are truly relevant, and according to the latest findings of foreign experts only eight meet legal requirements for business operation.
Capital, foreign exchange and money markets do not exist or have moved completely to the black market. At the Belgrade Stock Exchange, which was re-constituted in November 1989, only short-term securities are traded, and shares only on rare occasions and then in primary trade. Until now only shares from the privatisation of one firm were sold in secondary trade.
According to the Transparency International's survey, in the past year Yugoslavia was the most corrupted European country. Such a rating is attributable to the extremely high share of the grey economy in the national economy which paved the way for tax evasion and corruption, but also to broad discretionary rights of certain officials who charged the so-called "office fee".