Download FEDERAL REPUBLIC OF YUGOSLAVIA (FRY)

Professor Milica Uvalic
Department of Economics
Faculty of Political Sciences
University of Pergugia
Via Pascoli 20
06123 Perugia Italy
[email protected]
Federal Republic of Yugoslavia (FRY)
M. Uvalic
Working Paper 18/01
2
ACKNOWLEDGEMENTS
This paper was revised in October 30, 2000 for publication in Southeast Europe and
Black Sea Studies, Volume 1, Number 1, Summer 2000.
This paper is associated with a project in the ESRC ‘One Europe or Several?’
Programme. The project is lead by Professor Saul Estrin and is entitled ‘Economic
Impact of Exclusion from EU and EMU: Balkans and Baltics’, Reference Number L213
25 2003. Details can be found on the ‘One Europe or Several?’ website www.oneeurope.ac.uk.
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The Federal Republic of Yugoslavia (FRY) is today the country in Southeastern Europe
(SEE)1 that is undoubtedly in the worst overall situation. Throughout the 1990s, delays in
fundamental economic and political reforms and numerous accompanying problems
have positioned it among the countries that lagged behind most in the transition to a
market economy and multiparty democracy. Moreover, the Kosovo conflict has had
disastrous consequences for FRY’s economy. In addition to the direct, immediate costs
due to loss of human life and physical damage to industrial capacity and the
transportation, energy and communications infrastructure, the conflict will have a number
of indirect longer-term effects, including substantial loss of gross domestic product (GDP)
over the next decade. Although FRY has been the country in the region most heavily
affected by the NATO bombardments, for political reasons it has not been included, for
over a year, in the Stability Pact for Southeastern Europe, adopted 10 June 1999. It is
only recently, after the elections held on September 24, 2000, which brought victory to
the democratic opposition alliance DOS (Democratic Opposition of Serbia) and Mr.
Vojislav Kostunica as new President of FRY, that political circumstances in the country
are radically changing, in this way also determining a turnaround in international
strategies. At the meeting in Bucharest on October 26, 2000, FRY was officially admitted
to the Stability Pact, while initiatives are in course which should allow the re-admission of
FRY into major international organizations (the United Nations, the International
Monetary Fund, the World Bank).
The paper discusses the main characteristics of the Yugoslav economy today,
concentrating primarily on Serbia as the largest part of the Yugoslav economy, and not
considering Kosovo since it has de facto been taken over by UNMIK (UN Interim
Administration Mission in Kosovo). The paper examines the country’s initial conditions in
1989, external shocks during the 1990s, macroeconomic performance over the past
decade and progress made in economic reforms, followed by some concluding remarks.
INITIAL CONDITIONS
FRY consists of two republics, Serbia with its two provinces (Vojvodina and Kosovo)2
and Montenegro, but in 1989, when the transition to a market economy began in Central
1
For the purposes of this paper, Southeastern Europe includes Albania, Bosnia and Herzegovina, Bulgaria, Croatia,
FYR Macedonia, Romania and FRY.
2
According to UN Security Council Resolution 1244, the region of Kosovo is to remain under the sovereignty of the
Yugoslav federation, in spite of some main functions being taken over by UNMIK.
4
and Southeastern Europe, these two republics were still a constituent part of the Socialist
Federal Republic of Yugoslavia (former Yugoslavia). At that time, former Yugoslavia had
a number of advantages with respect to other SEE countries. Although some of these
advantages applied only to the country as a whole,3 others were equally important for its
republics.
Former Yugoslavia held a special position in international economic and political
relations, from which all its republics in one way or another benefited. It was not a
member of CMEA (Council for Mutual Economic Assistance) but had concluded several
trade agreements with the European Economic Community (EEC), and of all SEE
countries, it had the largest share of its trade with the EEC. Its privileged position with
major international financial organizations, its relative openness and the adoption of joint
ventures legislation in 1967 enabled a substantial entry of foreign capital.4 Thanks to an
early start in market-oriented reforms, Yugoslavia was the most reformed socialist
economy. Despite the preservation of some systemic features of socialist economy, such
as the prevalence of nonprivate (social) property and state paternalism, the positive
effects of four decades of economic reforms were experienced throughout the country.
Also, the Yugoslav federal government in 1988-90 applied some important measures for
transition to a market economy (Uvalic, 1992). Although short-lived, since disintegration
entailed new legislation for successor states, the measures nevertheless had positive
and long-lasting effects.5
Important differences existed among the Yugoslav republics regarding trade orientation,
openness, level of development and relative economic weight within the federation.
There were notable differences also in the levels of development of the two republics that
would later form FRY. In the late 1980s, Serbia and Montenegro had a gross material
product (GMP)6 per capita below the Yugoslav average, but Serbia was still considered
one of the more developed republics, as was its province Vojvodina, while Montenegro
and the province of Kosovo were among the least developed. In 1989 their joint GDP per
head at PPP (purchasing power parity) was $4,731, or around half of that in Slovenia
(Kekic, 1996: 15). In 1989-90 Serbia and Montenegro accounted for the highest share of
3
In the late 1980s, Yugoslavia was the largest, most populous and most developed country in SEE (Uvalic, 1997c).
One of the oldest examples of Yugoslav cooperation with foreign partners dates from 1954, when the first
agreement was concluded between the car manufacturers Zastava (Kragujevac, Serbia) and Fiat (Italy).
5
For example, the 1988 legislative changes liberalizing firm entry enabled the creation of numerous new small firms
in the private sector; similarly, the 1990 privatization law enabled the first ownership changes throughout the country.
4
5
Yugoslav territory (38 per cent), population (44 per cent), GMP (40 per cent), investment
(40 per cent), employment (40.6 per cent) and unemployment (50.6 per cent), and even
of the country’s exports (31.8 per cent) and imports (34.4 per cent), mainly due to
Serbia’s major relative weight in the Yugoslav federation (Uvalic, 1997b). Serbia was the
republic that by 1989 had concluded the most contracts with foreign partners (33 per
cent of the total), though it lagged behind Slovenia in terms of value of foreign direct
investment (21 per cent of the total). Its exports to the CMEA, though low (8 per cent),
were double that of Slovenia.
Laza Kekic has calculated an overall index of initial conditions in the late 1980s in all
socialist economies that considers such indicators as dependence on CMEA trade, per
capita income, share of services in GDP and previous reforms. His findings suggest that
not only Yugoslavia, but all its republics were ahead of other SEE countries. The overall
index for Serbia and Montenegro was 19, compared to 15 for both Albania and Romania
and 13 for Bulgaria; the maximum index was 24 for Slovenia (Kekic, 1996).
On the eve of the country’s breakup, Serbia and Montenegro therefore held a relatively
favorable position in the SEE region. What, if anything, has remained of these
advantages? Several negative developments have fundamentally affected FRY’s
economic situation in the meantime, practically dissolving most — if not all — of the
advantages the country enjoyed ten years ago.
EXTERNAL SHOCKS
Since the early 1990s, the Yugoslav economy has been negatively affected by a number
of external shocks, primarily the disintegration of the Yugoslav federation, several armed
conflicts and various sanctions by the international community. Though these shocks are
by their nature considered “external,” all have been caused, directly or indirectly, by
internal policies of the Serbian/Yugoslav government.7
6
GMP, or “social “product” in Yugoslav terminology, is the value added of “productive” sectors of the economy,
thus excluding “nonproductive” sectors such as education, health, defense, banking and other services.
7
The disintegration of former Yugoslavia could have been prevented by more flexibility on the Serbian side and a
willingness to collaborate more constructively with the other republics in finding a solution for Yugoslavia’s
transformation. Military conflicts in which Serbia has been directly or indirectly involved have been a deliberate
choice of its government, since all four wars could have been prevented, even that in Kosovo. UN sanctions would
never have been imposed had the Yugoslav government used peaceful means for resolving some of the most burning
political issues. To blame “external shocks” for the catastrophic situation in the country today, as is frequently done
by the Yugoslav government, is to ignore its own responsibility for dragging the country into such a deep economic,
political and social crisis.
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Disintegration
The breakup of the Yugoslav economic union in 1991 had a number of very negative
consequences for FRY. The immediate effects included a strong inflationary impact on
Serbia because of the monetary independence of the other republics, which unloaded
their dinar holdings in the Serbian market; the segmentation of monetary channels and
serious payment problems following the breakup; a reduced currency area; and lower
revenues for the federal government due to the breakup of the customs union. Other
consequences with even more long-lasting effects included the loss of supplies of goods
and inputs at low prices from the other republics and the loss of a large protected market
in other parts of the country; disruptions caused by the termination of traditional links
between partners or by the introduction of trade barriers by the newly created states;
diminished interest by foreign investors due to the market’s small size; and very high
political risk. All these effects of disintegration had a disastrous impact on FRY’s
macroeconomic indicators (see below).
Wars
Over the last eight years, FRY has been directly or indirectly involved in four wars in
Slovenia (1991), Croatia (1991-92), Bosnia and Herzegovina (1992-95) and Kosovo
(1998-99). Already the wars in Croatia and Bosnia and Herzegovina have meant
enormous direct costs for FRY in terms of loss of human lives, the expense of
maintaining refugees and substantial military expenditure, while the conflict in Kosovo
has physically damaged much of the county’s transportation and energy infrastructure
and its productive capacity. These wars have had also several indirect consequences
that negatively affect macroeconomic stabilization, economic recovery and systemic
reforms, effectively postponing the transition to a market economy.
The consequences of the most recent war in Kosovo have been particularly devastating.
Estimates of the conflict’s overall costs for FRY vary widely, ranging from $30 billion to
$100 billion (the latter is the Yugoslav government’s official estimate). According to the
G17, a group of independent experts from Belgrade, total costs amount to $30 billion.
The direct costs include around $4 billion in physical damage (the destruction of
industrial capacity accounts for about 70 per cent of the physical damage); $2.3 billion in
lost human capital; and the remaining $23 billion in the loss of potential GDP due to
physical damage, expected to be felt over the next ten years (Group 17, 1999). Though
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some of these estimates have been revised, since the initial scenarios were
overpessimistic, undoubtedly long-term costs will still be substantial. Serbia’s road and
railway connections have been seriously disrupted, while trade on the Danube has come
to a standstill (though there is an inland channel used by ships, and a few bridges have
been repaired). Severe heating problems were expected due to electricity and heating
fuel shortages, although some energy provisions have been provided by Russia, and the
overall situation has been less dramatic than initially thought.
Sanctions
Because of its involvement in several armed conflicts, during the past eight years FRY
has been subject continuously to numerous and varied sanctions by the international
community (Babic, 1999). The UN imposed its first embargo in late 1991 because of the
Serb-Croat conflict in Croatia. After the war moved to Bosnia and Herzegovina, sanctions
were reinforced in May 1992, to be partially removed only in November 1995 thanks to
the Dayton Peace Accords. What remains in force is the “outer wall” of sanctions, which
essentially blocks FRY’s reentry into international organizations, such as the UN, the
Organization for Security and Cooperation in Europe (OSCE), the World Bank, the
International Monetary Fund (IMF) and the European Bank for Reconstruction and
Development (EBRD). It also prevents FRY’s participation in all EU programs of
assistance for countries in transition (Uvalic, 1997a). It is to be lifted only once certain
political conditions are fulfilled.8 The most recent package of sanctions was imposed
because of violence in Kosovo, initially in a limited form in May 1998, but reinforced on
30 March 1999 to include an air traffic ban and an oil and trade embargo.
MACROECONOMIC PERFORMANCE
Yugoslav macroeconomic performance has been extremely variable the past decade,
although the long-term trend points to a general deterioration of most macroeconomic
indicators, especially after the Kosovo conflict.
After the breakup of the Yugoslav economic union, the economy virtually collapsed within
a few years. By the end of 1993, GMP had fallen to 43 per cent of its 1989 level,
whereas expansionary monetary and fiscal policies necessary to finance the war
8
The main conditions include cooperation with the Hague Tribunal for war criminals in former Yugoslavia,
democratization, respect for human rights and the resolution of succession issues of former Yugoslavia.
8
triggered one of the highest hyperinflations ever recorded in world history.9 The monetary
reconstruction program implemented in early 1994 by the governor of the central bank,
Dragoslav Avramovic, initially succeeded in halting hyperinflation, introducing a
convertible dinar and reversing the trend of declining output. These positive results,
however, were soon undermined by problems essentially caused by the absence of
systemic change, which put strain on stability (Avramovic, 1995). Inflation remained high
the next few years, since further progress in monetary stabilization was achieved only in
1997 and 1998, when average retail price inflation dropped to 18.5 per cent and 29.8 per
cent, respectively (see Appendix Table 1). Growth rates from 1994 to 1997 were higher
than in several other SEE countries, but in 1998, GMP increased by only 2.6 per cent.
Due to the country’s unregulated status in international financial institutions and its high
political risk, there has been a very limited inflow of foreign finance. From 1990 to 1998,
foreign direct investment (FDI) amounted to a bit over $1 billion, almost entirely due to
the 1997 privatization of Serbian Telecom, of which 49 per cent was sold to Italian and
Greek partners. Sluggish export performance after the lifting of the sanctions in 1996-97
determined a large current account deficit, which has been somewhat reduced but
remains far above the danger level — $1.2 billion in 1999, corresponding to 9.4 per cent
of GMP (EIU, 2000: 9). Foreign exchange reserves are only around $300 million, while
the country’s gross external debt in 1999 was $14.1 billion (EIU, 2000).
After the Kosovo conflict, all economic indicators worsened notably in 1999. Real GMP
declined by 19.3 per cent, as did GMP per capita by 20 per cent and industrial production
by 21.5 per cent. Exports decreased by as much as 50 per cent and imports by around
30 per cent (see Appendix Table 1). The country’s GMP in 1999 dropped to around 40
per cent of its 1989 level. Inflation has been increasing — in September 1999, a 12.4 per
cent monthly rate was recorded — though the annual inflation rate in 1999 has not
exceeded 50 per cent. The government has decreed a price freeze, forcing enterprises
to lower prices to their mid-October 1999 level, which seems to have only provoked
shortages, thus repressing inflationary pressures instead of reducing them. The black
market exchange rate in mid-January 2000 was more than three-and-a-half times the
official rate (approaching 22 dinars to the Deutschmark, in comparison to the official rate
of 6 dinars to the Deutschmark), rising further to 32-35 dinars to the Deutschmark in late
9
The average annual retail price inflation in 1993 amounted to 116.5 trillion, which corresponds to a 15-digit
inflation rate (EIU, 1995: 28).
9
September 2000.10 Because of very low reserves, if radical economic reforms are not
implemented, a serious international liquidity crisis is expected by 2001 (Pitic et al.,
1999).
FRY has become one of Europe’s poorest countries. In 1999, with an estimated GDP per
capita at the PPP rate of around $2,580, it was only marginally better off than Albania
($2,420) and behind all other countries in the SEE region (EIU, 2000: 30). By December
1999, the average net Yugoslav salary had declined to DM 95, down from DM 167 a year
earlier, and was not even sufficient to buy half of the average basket of goods. For years,
pensions and salaries have been paid after several months’ delay, frequently in kind,
while the last few months they have been paid with coupons for electricity (which,
ironically, at present is being rationed). The official unemployment rate is close to 30 per
cent, but this figure neglects another 20 per cent in surplus labor, those who are officially
employed but effectively without work. Around 90,000 workers alone have lost their jobs
due to the destruction of industrial facilities during the recent war.
ECONOMIC REFORMS
Progress in institutional reforms has been extremely slow and disappointing, since strong
anti-reform forces are still influential, and vested interests impede radical change. This
refers primarily to Serbia, since Montenegro has tried to implement more radical
measures in several areas which are under its own competence (and not those of the
federation). According to the author’s own rough estimates of EBRD’s three groups of
transition indicators — markets and trade, enterprise privatization, financial institutions —
in 1997 FRY lagged behind the other SEE countries in most fields (Uvalic, 1997c). Very
little progress has been made since then, while in some areas there has been a reversal
in policies, deteriorating the situation further. As recently stated by Vladimir Gligorov, the
economic policy and institutional development pursued by the Yugoslav government can
be viewed as moving in a retrograde fashion, with centralization, nationalization, antiliberalization, anti-stabilization and corruption as its main features (Gligorov, 1999).
Regarding EBRD indicators on markets and trade, the Yugoslav government has
continuously implemented measures of strong administrative control rather than
10
Not surprisingly, at the beginning of November 1999, Montenegro decided to introduce a parallel currency, the
Deutschmark, on its way (possibly) towards full independence.
10
liberalization. Price liberalization has been partial, even reversed on several occasions
by general or selective price freezes. The foreign exchange system, even after the lifting
of sanctions in late 1995, remained subject to restrictions such as widespread import and
export
licenses,
import
quotas,
high
import
duties
and
associated
charges,
nonconvertibility of the dinar and rationing of foreign exchange. The government recently
adopted a competition law, but since the economy remains highly monopolized, it seems
clear the law is not being implemented. As for the second group of EBRD indicators, only
small-scale privatization has been partially implemented, resulting mainly in widespread
ownership by insiders, who, given the enormous losses in much of the economy, today
own worthless shares in highly undercapitalized enterprises. Large enterprises have still
not been privatized or restructured (Serbian Telecom is the major exception), though
current financial constraints may compel the government to start selling shares in the
most profitable enterprises, such as the Serbian oil industry company, NIS. Finally, little
progress has been made in reforming banks and other financial institutions. A serious
liquidity crisis continues throughout the banking sector. Banks are heavily burdened by
enormous amounts of bad loans, and the unresolved problem of citizens’ “frozen” foreign
currency savings, because of lost confidence, prevents the inflow of new deposits (which
are kept instead under mattresses or abroad). The fall 1999 measures towards major
centralization, imposing the merger of some 22 Serbian banks within Beobanka, a major
bank, run counter to the liberalization of banking operations applied elsewhere. Although
there is a market for government securities, due to delays in privatization, a stock
exchange for enterprise shares is not yet operational.
Undoubtedly, the main problem with the Yugoslav economy is the lack of fundamental
systemic change. Yet, it is too simplistic to say, as is sometimes done, that economic
transformation never got started in FRY. Many important laws, which seem fully in line
with requirements for transition to a market economy, have formally been adopted. Some
were taken over from the legislation of former Yugoslavia, while others were elaborated
after 1991. These include a company law, several privatization laws, a bankruptcy and
liquidation law, a competition law, a new law on foreign direct investment providing major
incentives to investors, a value-added tax law and even an investment funds law
currently in draft form (Federal Ministry, 1999). However, some of these laws contain
provisions that clearly point to an unwillingness to abandon pre-1989 institutions. Others
simply are not put into practice, or are implemented in a highly selective way — primarily
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in favor of state-owned enterprises and a dozen others that are private but protected by
the state.
To illustrate the point, we can take the example of privatization as a pillar of the present
transition. So far, FRY has had at least half a dozen privatization laws.11 Nevertheless,
the reluctance to abandon the old concept of “social property” has led to solutions that do
not ensure the implementation of quick, comprehensive and compulsory privatization, as
proposed in 1996 by governor Avramovic (Avramovic and Uvalic, 1996). Some of the
most profitable Serbian enterprises have been excluded for now from privatization, or
were privatized ten years ago, often using opaque methods that enabled asset stripping
and the transfer of substantial amounts of money to private bank accounts abroad.
Under the most recent Serbian legislation, some 75 state-owned enterprises, which are
among the largest and most profitable firms and represent 35 per cent of the Yugoslav
economy’s total capital, are for the moment excluded from privatization, to be privatized
according to a “special government program.” Thus, little has been privatized: at the end
of 1998, only around 37 per cent of Yugoslav GMP was produced in the private sector,12
while only 31 per cent of the active population was employed in the private, cooperative
and mixed sector (including those who are self-employed in agriculture). By the end of
1998, only 20 per cent of the social sector enterprises, to be privatized according to the
1997 law, have completed the capital evaluation procedure.
Other objectives of transition have been pursued just as inefficiently. Most laws are
implemented in a highly arbitrary way, with different criteria applied to different segments
of the economy, implying the absence of rule of law. This has had very negative and farreaching consequences, since it has contributed to the concentration of power in a
handful of state-protected firms. For these enterprises, soft budget constraints have been
maintained through direct and indirect privileges — selective bank credits, subsidized
interest rates, exclusivity in acquiring import permits or access to foreign currency at the
official exchange rate and a relaxation or canceling of tax obligations. A close
relationship has been established between the political and economic elite, providing for
the overlap of economic and political competencies. Until the October 2000 political
11
These include the 1990 federal privatization law adopted by the former Yugoslav government, the 1992 Serbian
privatization law, the 1994 Serbian revaluation law, which practically negated previous privatization, and the new
Serbian privatization law adopted in 1997. In the meantime, Montenegro has also introduced its own privatization
laws in 1992 and 1996 (a third is now being prepared), while a new federal privatization law was adopted in 1996.
12
Although another 27 per cent is produced in the mixed sector, which is being privatized, it is not clear what
percentage of capital in these firms is actually private.
12
changes, the directors of the 30 most important enterprises were at the same time key
politicians, parliament members, ministers in the Yugoslav government and President
Milosevic’s closest political collaborators.
Corruption has become the key feature of economic, political and social relations.
Numerous sanctions have provided authorities with an alibi for the miserable situation in
society and created strong incentives for the emergence of organized crime and war
profiteering. Recruited in part from criminals, a new “elite” has emerged, in which the
state apparatus and organized crime have grown together (Babic, 1999). According to a
1999 report by Transparency International, FRY is among the top ten most corrupted
countries in the world and the most corrupted country in SEE, with a Corruption
Perceptions Index of 2 (the index ranges from 1 to 10, with the highest score indicating
no corruption; Transition, 1999). Much of Serbia’s economy is conducted as part of a
black or gray economy. According to different estimates, the informal economy accounts
for 30 per cent-50 per cent of GDP.
By mid-2000, the Milosevic government had lost all credibility, among other reasons
because it has directly or indirectly been responsible for the loss of some $6.5 to $7
billion of the population’s foreign exchange savings. The sum has been confiscated from
Yugoslav citizens over the last decade using various methods — foreign exchange
savings “frozen” in banks of former Yugoslavia; government bonds issued for Serbia’s
reconstruction but with a value eaten up by inflation; pyramid schemes offered by two
major private, or rather, para-state, banks, since they were set up in collaboration with
the authorities; and the 1992-93 hyperinflation, which forced citizens to sell all their
foreign currency savings to survive (Dinkic, 1995). These are among the reasons why
the 2000 elections ensured full victory to the DOS Presidential candidate Mr. Kostunica.
The ultimate and most negative consequence of the present political and economic
system in FRY, shaped throughout these years by policies strictly in the function of selfinterest of the ruling political and economic elite, is extreme social stratification —
massive pauperization of large segments of the population and rapid enrichment of those
individuals who until recently represented the elite in power controlling the whole country
(termed “warlike entrepreneurs”; Babic, 1999). Unfortunately, this aspect of the present
crisis in FRY — the extreme polarization of society — is likely to leave long-lasting
negative consequences.
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CONCLUSIONS
The election of a democratic government finally opens a new era for FRY after ten years
of wars, sanctions, isolation, and mismanagement. Accumulated problems in all fields
are numerous, but President Kostunica has been addressing them wisely and with
determination. Among the top priorities of the new government is the return of FRY into
international organizations, intensifying its relations with the European Union, and finding
a mutually acceptable solution for the future of the Yugoslav federation. Strong
international financial support is urgently needed through all possible multilateral and
bilateral channels, as otherwise the new government will not be able to carry forward the
complex and numerous tasks which it must address immediately — not least, the
problem of energy shortages. The new government is relying on the expertise of the nongovernmental organization G17 Plus, an expert network which has prepared, well before
the September 2000 elections, a “Program of the Democratic Opposition of Serbia” (G17
Plus, 2000), officially accepted by the democratic opposition alliance DOS. This
document also contains a detailed program of economic reforms, which hopefully will
soon start being implemented. Although radical economic reforms are likely to be costly
in the short term, they are unavoidable and must be seen in the light of substantial
benefits expected in the medium and longer-term.
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APPENDIX
Table 1. FR Yugoslavia – Main macroeconomic indicators
1995
1996
1997
Real GMP growth
6.1
3.5
7.4
(%)
Average retail
74.1
93.1
18.5
price inflation (%)
Exports fob
1.4
1.8
2.7
($ bn)
Imports fob
2.4
4.1
4.8
($ bn)
Gross external
13.8
13.4
12.9
debt ($ bn)
Source: EIU (2000). Some figures for 1999 are EIU estimates.
1998
2.6
1999
-19.3
29.8
42.0
2.9
1.5
4.8
3.3
14.0
14.1
15
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