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South Slavic: October 17, 2002

17 October 2002, Volume 4, Number 35

The next issue of "RFE/RL South Slavic Report" will appear on 7 November 2002.


Part II.

A recent broadcast of RFE/RL's Radio Most (Bridge) with Omer Karabeg; Mladjen Kovacevic, professor at Belgrade's Faculty of Economics; and Stojan Stamenkovic, research fellow at Belgrade's Institute of Economics and editor in chief of its journal, "Monthly Analysis and Prognosis."

RFE/RL: Do you find the present exchange rate of the dinar encouraging for foreign investors?

Stojan Stamenkovic: I do.

Mladjen Kovacevic: I do not. Especially not joint investments. You know, our problem cannot be solved only with the sort of investments with which our best companies are bought for next to nothing. The fact that the cement plant in Beocin, owned by foreigners, will [soon] export huge amounts of cement will not help us at all. That will be like the case of the Czech Skoda [automobile manufacturer].

Stamenkovic: What is wrong with the Czech Republic? They are about to join the European Union.

Kovacevic: Skoda's export is worth 2.5 billion [editor's note: Kovacevic does not specify the currency], and Volkswagen owns all the stock. The Czech share is not more than 15 percent.

Stamenkovic: But how many Czechs are employed there?

Kovacevic: Some 150,000, directly and indirectly. And that is the only benefit.

Stamenkovic: At the same time, we have some 14,000 workers in Zastava [editor's note: Serbia's leading automobile manufacturer] thinking that they are making something, but they are really making nothing, since there is nothing to make there. That is the point.

Kovacevic: OK, but one should not talk about Czech exports then. We are talking about German exports from the Czech Republic, with only 15 percent being the Czech share. Those are the wages of the Czech workers and a few other things.

Stamenkovic: Even if it is only 15 percent as you claim, that is far more than zero. If only we could reach the Czech, Polish, or Hungarian levels of development.

That is the way we are headed right now, but many are trying to get us to go back to the Bulgarian way. Bulgaria has spent 11 years in transition -- and nothing has been achieved because it has all been stop-and-go.

Let me tell you a story about the situation in Bulgaria. A man was building a house here in my neighborhood. He had an illegal worker, a Bulgarian, who came here because he could not find a job in Bulgaria. He has six children, and no job whatsoever. For 10 euros a day he was doing the hardest jobs from 7 a.m. till 7 p.m. And he considered himself lucky to have that job [editor's note: the same story could be told of many Ukrainians in the Czech Republic].

Are we going to follow the Bulgarian way by preserving all the jobs and all the bankrupt companies? No, we have to follow the examples of Estonia, the Czech Republic, Poland, and Hungary. There is no other choice, unless we want to go back to Milosevic's model of primitive accumulation at the expense of agriculture.

Kovacevic: That was not a good way to go, but with the present exchange-rate policy, we are going to discourage domestic production through our huge imports. I am deeply convinced that right now there is no country in Europe that is so open to imports as is Serbia.

Stamenkovic: That is not quite right. We have a problem with the price of edible oil right now. The government is trying to convince the producers what the price should be. Our import duty is 30 percent, plus 5 percent more in customs fees.

Well, no wonder that a cartel sprang up. There are three major and two minor producers who have simply made a deal -- and now they want the price of edible oil to go up.

They do not need to explain anything to me. All we have to do is to reduce the import duty by 10 percent, allow the Slovenian Merkator company to open their hypermarkets here, and the price of the edible oil will fall.

Kovacevic: Yes, but [Yugoslav National Bank Governor Mladjan] Dinkic claims that the price of edible oil is one euro in neighboring countries. If the exchange rate here were 80 instead of 60 dinars [to the euro], prices [here] would be different.

I am telling you, very soon we will have a situation in Serbia in which everything will be more expensive than elsewhere simply because the exchange rate has remained the same while the prices keep rising some 10-15 percent a year.

Stamenkovic: The fact is that in the less than two years since Milosevic's fall, we have made huge progress in this country's transition. All the relevant international actors acknowledge that, including all the financial institutions and the Council of Europe.

Kovacevic: If I were you, I would not stress the fact that we are praised so much from abroad. It is simply a matter of courtesy. Argentina used to be praised, too, and we have seen how it wound up.

Let me tell you one more thing. It seems to me that the present government is spending the money that we are being given from abroad on consumer goods and pensions in order to buy social peace.... The previous government did similar things....

Once I said to Dinkic: "If you want to be a politician," which is what he is obviously trying to be, "you should keep in mind that most of the people simply cannot survive without selling their foreign currency savings." The cost of living has gone up drastically, and people are simply forced to sell their foreign currency savings -- no matter how unrealistic the exchange rate is.

Stamenkovic: The exchange rate is defined by the balance of payments.... Both imports and exports are important parts of the balance of payments, but they are not the only ones. The U.S. wrestled with a huge budget deficit for years, compensating for it with an enormous influx of foreign capital. In other words, they arranged it so that the entire world financed their budget deficit.

RFE/RL: Do you think that Yugoslavia should do the same?

Stamenkovic: As long as we can.

Kovacevic: It is true that the U.S. had an enormous deficit, but, on the other hand, the Americans' transnational companies make huge profits abroad, from Malaysia, to Singapore, to Mexico. Unfortunately, we cannot be compared to them.

Stamenkovic: I know that we cannot. However, this is my argument to show you that the balance of payments has to be viewed as a whole and that we cannot isolate and analyze only one part of it.

Kovacevic: What worries me is that our exports are very limited now. Our exports amount to some $220 per capita -- while, for example, Belgium, with a similar population of 10 million, has some $22,000, without any help from the state.

Nobody here even mentions that issue. I have never heard a single politician or presidential candidate talk about the problem of our exports. There is no company in Serbia whose exports exceed their imports. As soon as a company makes some export profit, it spends it all by importing commodities in order to cover the losses made thanks to the unrealistic exchange rate.

Stamenkovic: But what are we supposed to sell abroad? I recently read a gentleman's proposal that we export the Yugo Florida [car] to the U.S. again [as we did in the 1980s].

Kovacevic: Well, some poor people will buy the Yugo.

Stamenkovic: Come on, who can believe that! It costs more to produce that car than they can get by selling it.

Kovacevic: Well then, what they are doing is transferring their losses to the domestic buyers.

Stamenkovic: There are no more domestic buyers, either. There is nothing left. [All such losses have] been transferred to the [state] budget, which means to the taxpayers.

RFE/RL: Finally, let us draw a conclusion: should the dinar be devalued or not?

Kovacevic: I do not advocate a big, one-time change in the exchange rate. But if we continue with the present policy, we will find ourselves in big trouble in a few years' time.

This is why I find it very important to correct the exchange rate in order to avoid what happened in Argentina, where the exchange rate had not changed for years....

In order to prevent this country from going the way of Argentina, I want to correct the exchange rate to discourage imports and stimulate both exports and the influx of sound foreign investments.

Stamenkovic: The current exchange-rate policy is a good one. If we have the kind of collapse that Mr. Kovacevic is talking about, it will be for completely different reasons, not because of the exchange rate.

The exchange rate is defined by the market. The policy of increasing foreign-currency reserves and ensuring solvency are coordinated with the planned level of the reserves. If the foreign-currency reserves increase beyond that level, then economic activity will slow and inflation will rise.