Socialism lives in Serbia

Milan Marinković continues his discussion of issues confronting the new Serbian government, which took office late last month:

The heads of two important institutions have been replaced since the new Serbian government was constituted. Dejan Šoškić is no longer the central bank (NBS) governor. He resigned four years before his term was to expire amid pressure from the governing coalition. His successor is Jorgovanka Tabaković, championed by President Tomislav Nikolić.  She is a high-ranking official of Nikolić’s Serbian Progressive party (SNS).

Tabaković has a PhD in economy from the University of Novi Sad. She graduated from the faculty of economics in Priština at the age of 23 as the best student in her class. Such qualifications are respectable; whether they will be sufficient for the challenging central bank role remains to be seen.  Just a couple of days ago Standard and Poor’s downgraded Serbia’s credit rating to BB minus, with a negative outlook.

More important is the new law on NBS, passed as a prelude to the change at the bank’s top. Some articles of the law seem controversial and likely to endanger the central bank’s presupposed independence from the government. The whole thing smacks of Prime minister Ivica Dačić’s determination to pursue his populist economic agenda despite persistent warnings from experts.

During the election campaign, Dačić and his Socialist party (SPS) frequently criticized then-governor Šoškić for his restrictive monetary policy, accusing him of thwarting Serbia’s economic growth. Šoškić explained that more expansive measures would be possible only after the government stabilized the economy through fiscal consolidation and other structural reforms; otherwise, it would result in high inflation and a serious slump in the value of the national currency.

Šoškić was right, but obviously to no avail. Even though Prime Minister Dačić’s party holds no economy-related ministry in the government, its impact on economic policy is already visible. Dačić likes to quote French socialist president Francois Hollande, whom he is apparently trying to emulate. But Dačić neglect two facts:  Serbia and France are in completely different positions;  Hollande’s economic program has yet to yield results.

The Serbian prime minister has also recently labeled the financial sector as “the biggest enemy to the Serbian people.”  He was alluding primarily to the foreign-owned banks in Serbia, which are generally considered the healthiest setment of an otherwise weak economy. Although Dačić later downplayed the statement, saying that he was speaking metaphorically, potential investors have every reason to be nervous about his government’s future steps. It was not the first time that Dačić made such remarks, and it likely won’t be the last time, either.

Dačić and his partners need to begin thinking about what they can do to rein in Serbia’s public debt.  The debt-to-GDP ratio has already exceeded by 10% the ceiling of 45% defined by law. Those opposing austerity measures argue that the ratio is much higher in the most developed countries, such as Germany and the United States.  This may be true, but Serbia’s is by no means comparable with these far stronger economies.

Serbia is at the same time struggling with a large trade deficit, caused largely by poor export performance.  Serbia’s weak industrial base and technological obsolescence mean that currency devaluation can hardly mitigate the problem, let alone solve it.  Foreign investment would help, but Serbia is instead facing capital flight.

Many in Serbia fail to understand that the roots of Serbia’s economic troubles are much deeper than the global crisis. The downturn in the global economy only caused deficiencies long embedded in the country’s economic system to surface and suddenly become painfully evident to everyone. The Serbian economy desperately needs relief from state intervention, as well as thorough rationalization of the public sector.  That would also help reduce corruption, which has reached epic proportions, by cutting out unnecessary bureaucratic procedures.

Dačić and his government are nevertheless planning to impose more burdens on entrepreneurs. Instead of announcing the needed urgent budget cuts, Minister of Economy and Finance Mlađan Dinkić has announced that pensioners who receive less than 15,000 dinars a month (approximately 125 euros/150 dollars) will get an extra (13th) pension of 20,000 dinars by the end of the year through four monthly installments, starting in September. The extra pension was promised in the election campaign by the Party of United Pensioners (PUPS), which is a member of the ruling coalition. Dinkić himself may be reluctant to fulfil this commitment, but  seems to have little choice.

After more than a decade of post-Milošević transition, Serbia still appears locked into a socialist economy and, even more damaging, mentality.