Mihail Arandarenko Faculty of Economics, Belgrade Stojan Babic Faculty of Economics, Belgrade Zeljko Bogetic International Monetary Fund, Fiscal Policy

    Research Department Bojan Dimitrijevic Faculty of Economics, Belgrade Mladjan Dinkic (coordinator) Faculty of Economics, Belgrade Petar Ivanovic Faculty of Economics, Podgorica Milan Kovacevic Owner of Consulting Firm, Belgrade Ljubomir Madjar Faculty of Economics, Belgrade Jelica Minic Institute of Economics, Belgrade Branko Milanovic World Bank, Transition Economics Policy Research Department Milic Milovanovic Faculty of Economics, Belgrade Mihajlo Nikolic Advisor to the ex-Governor of the National Bank of Yugoslavia Jovan Rankovic Faculty of Economics, Belgrade Dusko Susnjar Karic Bank Dusan Vujovic World Bank, Economic Development Institute Veselin Vukotic (coordinator) Faculty of Economics, Podgorica Bosko Zivkovic Faculty of Management "Braca Karic"


    Page Diagnosis of the present economic situation ............ 3 Political and social bases for the economic revival ............ 6


    1. Normalization of the relations with international financial and trade organizations .......... 8 2. Macroeconomic stabilization .......... 10 3. Solution for the problem of foreign currency debts towards the population .......... 12 4. Solution for the problem of foreign debts .......... 13 5. Internal liberalization and stimulation of competition .......... 16 6. Liberalization of foreign trade .......... 17 7. Establishment of economic ties with former Yugoslav republics .......... 18

    II PRIVATIZATION AND ENTREPRENEURSHIP 1. Privatization and restitution .......... 20 2. Stimulation of entrepreneurship .......... 22


    1. New economic legislation and market institutions .......... 24 2. Reform of the financial system: new role of the Central Bank and the establishment of a new financial system .......... 25 3. Restructuring (rehabilitation) of banks .......... 28 4. Financial consolidation of the economy and restructuring of companies .......... 30 5. Reform of public finances and public debt policy .......... 31 6. Revitalization of the agriculture and solution to the problem of agriculture financing .......... 33


    1. Restructuring of the labor market and solution to the problem of unemployment .......... 36 2. Education and health systems .......... 38 3. Pension system reform .......... 39 4. Fight against poverty and social programs .......... 40

    APPENDIX .......... 42


The economic situation at the beginning of 1997 - the year of a possible democratic revival - is characterized by a number of major degenerative processes or characteristics:

1. For the past seven years this country has suffered a heavy financial credibility crisis, lack of confidence in other important social institutions, including the juridical system and the wide spectrum of public organizations. The population's foreign currency savings were blocked and factually expropriated. Hundreds of thousands of people were deprived of funds which they thought would provide an old age income and source of life security. Two devastating hyperinflation in the interval of five years have wiped out huge amounts of liquid dinar assets. Moreover, mushrooming so- called-private banks have additionally deprived the population of huge funds. As a consequence, the population has lost its confidence in banks, the financial system and the government, which was supposed to back up the banks and other financial institutions. In the whole country, as a fact, there are virtually no savings. The state and "socially" owned companies are operating with huge losses, therefore there is no mention of internal accumulation, nor can these sectors be counted on at the macroeconomic level as factors which can eventually create savings. The conclusion is clear and unambiguous: there are no investments and no possibilities to maintain the existing capacities in an economy with no accumulation. In the long run, a continuing slump can be the only clear future and obvious destiny of such economy.

2. The drastic decline in investments is leading to a systematical and rapid depreciation of the population's assets, furthermore, assets which would otherwise be invested in production as its most important component. In 1995 the gross investments into production were 2.8 times lower than the amortization. The funds available for production are decreasing at a worrying speed, and the country is getting poorer before our very eyes. This long term decline of assets is incomparably more important than the short term production fluctuations. Perceived in a longer term, it will inevitably lead to a continuing decline of all major macroeconomic aggregates.

3. Insufficient investment practically means a halt for the modernization of the economy, an obsolescence of its production facilities and a decline of morals, the devastating effects of which cannot be reflected in macroeconomic balances, but which non the less cause a decline of assets. This invisible thawing of capital is probably stronger than the visible one. With its obsolete technology, an equipment which market economies have by large and long since discarded, the competitiveness of the economy is more than unsatisfactory.

4. The loss of confidence in the creators of the economic policy has caused an obvious hesitation of foreign capital to engage in the Yugoslav economy. Moreover, the domestic capital is fleeing as well. This is a separate and independent basis on which the value of capital and the social assets are decreasing.

5. Parallel to the decline of assets, Yugoslavia's liabilities are growing systematically and rapidly, i.e. those in the economy as much as those borne by the state. Yugoslavia's foreign debt amounts to over 9 billion US$ and during the last six years nothing has been done in the servicing of it. The foreign currency debt towards the population is amounting to 4.2 billion dollar, and should be added on top of that. These liabilities are equal to the more or less realistically calculated annual Yugoslav gross national product. Precise information is not available, but only on the basis of the foreign interest payments the liabilities are annually increasing by estimated 600 million US$ and the liabilities towards the population by an estimated 130 million US$. The dramatical present economic situation can be summarized in two simple statements: the assets are disappearing quickly and the already huge liabilities are constantly and steadily increasing.

6. The periods of rise and short term fluctuations in the production are misinterpreted as long term trends. There is no doubt, that the government is using these ephemeral rises for the purpose of its political promotion, but it is also obvious that it has succeeded in forcing this opinion on one part of the wider public and even on some experts. Serious analysts cannot be misled by these illusions. In 1994 and 1995 a rise of the gross domestic product was registered (6,5%, i.e. 6% respectively) as a result of pure post-hyperinflation recovery, since the breakdown of the monetary system reduced the industrial production to one third of its capacity - which is by far below the level which could have been reached even in the conditions of a transformation recession, disintegration of the country, prolonged war and collectivistic economic system. Once the economy received some money - which was and remained far from having all required attributes, but was nevertheless incomparably better than the old money ruined by hyperinflation - a certain adjustment and return to a certain level had to happen, which was, despite all other unfavorable conditions permanently sustainable in a monetary economy. But, this change happened only once. It cannot represent a continuous source of growth. After the adjustment was finished, all possibilities of obtaining an increase in production on this basis disappeared. In 1996 a modest increase was created, but at the cost of a huge foreign trade deficit (in excess of 2 billion US$), which cannot provide a long-term sustainable basis for an economic growth either.

In identifying the causes of the present economic plunge we should not disregard the heavy external blows, which lie beyond the reach of the economic policy, and politics in the wider sense. The loss of markets of Eastern Europe and Iraq, as well as those in a certain number of non-aligned countries, certainly cannot be blamed on the economic policy. The disintegration of the country and the accompanying colossal loss of markets and suppliers together with the break-up of many technological and management ties, surely cannot be attributed to the strictly interpreted economic policy. The consequences of the war and the exhaustion of the country through the refugee crisis, humanitarian aid and other ways - cannot be attributed to the economic policy either.

Despite the fact that by this the evaluation of the economic policy as being one of the causing factors is to a large extent revised, it by no means shall decrease its responsibility. On the contrary. This responsibility is even greater if the times are more turbulent, uncertainty greater and greater the frequency of external disruptions. It is obvious, that economic policy has sadly failed this historic examination. Our economic policy, the concept of which lacks expertise, the performance of which was poor and less inspired by public interest and more by the wish to enable a narrow circle around the political leadership to gain as much as they could, has even contributed its own internal impulses to the external blows. It went from bad to worse. The mistakes made by the economic policy reduced the gross national product far below the level which could have objectively been realized. The gross national product was independently of the objective external conditions reduced below the level which for the widest population literally meant a pauperization from which it can only hardly recover. Therefore, the present government is obviously and undoubtedly to blame for the humiliatingly bad state of our nation and our economy today.


Serbia and FR Yugoslavia can only with huge and rapid changes of the overall social and economic system come out of the historic retrogression. Precisely that is why the program of economic reform must be of a universal and very radical nature. The main arguments in favor of a radical program are: (1) the production has already dropped to an extremely low level, therefore its further decline should not be worried about; (2) the existing equipment and technology is used beyond repair and new investments are a precondition for economic growth in the future; (3) in reality the wages are already down to extremely low amounts, so there is nothing to protect and nothing to lose; (4) non-economic forms of management have gained grounds to an extent where they can be suppressed only by radical measures; (5) the alliance of politics, public enterprises and Mafia (the new oligarchy) is so strong, that it can be broken only with a frontal set of measures.

The set of reforms to be taken by the new government aimed at the salvation of the economy and society as a whole is by no means a routine, everyday and usual affair. Parallel with the far reaching changes in the overall configuration of the economic flows, the management mechanisms and management forms, together with the accompanying regulation instruments must be changed. The reason for that being, that the present economic structure is a direct consequence of the present institutional order, as well as its earlier, altogether not much different variations. Every fundamental change requires above all an intervention in the causes. A pure dealing with consequences is from the very beginning destined to end in failure.

The institutional transformation, which shall enable a radical economic turn, shall focus on a far reaching social reform based on private ownership, democracy and market economy. From a society led by a political elite with no restrictions and practically undivided power, Yugoslav society should grow into an open society in which the free individual and his individual rights shall represent the foundation of an operational principle for the general organization of the society. The role of the government is not to control people, but to serve as a social service, to act as creator and guarantor of the environment in which individual rights shall be affirmed and protected to the maximum. Patronizing of people is simply the other side of the coin as they are generally deprived of their rights which was and still is the characteristic and almost definition of socialist totalitarian rule. The role of the government is not to directly take care of the well being of the individual and to be responsible for the provision of some predetermined levels of consumption and income, nor it is to worry about his or her personal happiness. On the contrary, it is the right and the life goal of the individual to secure his or her own well being and happiness and the role of the government is to create the conditions in which he can achieve it in a productive, ethical and dignified way. The obvious direction of the strategic changes must show in a crucial widening of personal liberty - followed inevitably and simultaneously by personal responsibility.

For the establishment of such a significantly changed society which is based on a qualitatively different philosophy not only a thorough change of institutions is essential, but also a change of the prevailing system of values, alteration of behavior patterns, transformation of culture and the general social consciousness. By all means, this is a long lasting learning and adjustment process comprising a conglomerate of changes which cannot take place over night. However, the anticipated turn shall certainly initiate this process, the beginning of a long socio-psychological transformation, which would mean an ideological decontamination due to its deeply rooted collectivistic values.

A radical reform of the institutions is not possible without a simultaneous and equally radical political reform. One of the most devastating and still present inheritance of the socialist rule is the general political control of all aspects of social life - economy, finance, education, culture, media, sports... Because of the widely based and deeply rooted control, the party which found itself in power and which derives its continuity from the socialist times has a great advantage over all competitive political organizations. Political competition is extremely asymmetrical and unequal. With such numerous and huge advantages, the ruling party becomes irreplaceable. The basic preconditions for the functioning of democratic institutions are missing. The political leadership is firmly installing itself in the position to control the electoral body, instead in being controlled by it in the spirit and principles of democracy. The irreplaceability of the government is a deep cause for the political voluntarism and its overall irresponsibility.

An economic revival demands a general change of the ruling elite in the society and in the economy. New institutions and laws, new rules and behavior patterns can be introduced only with new people. Old personnel has to a great extent and long since lost its credibility at home and abroad. They now represent the trademark for the set of obsolete socialist ideas and institutions: unless they are replaced nobody - neither on the domestic nor on the international stage - shall perceive this turn as a truly serious, permanent and irreversible change. Their leaving will be their greatest, and most probably, the only positive contribution to the overall economic, social and national revival.



FR Yugoslavia is the only country in Europe excluded from all European institutional arrangements and from all international organizations.1)

Our public should not be fooled: a rapid economic revival of Serbia and FR Yugoslavia is impossible without their full reintegration in the main world financial and trade organizations - International Monetary Fund (IMF), The World Bank (WB) and the World Trade Organization (WTO). The amount of the inherited foreign debt and the hard currency debt towards the domestic population, current account deficit, deficits of the public consumption and the quasi-fiscal deficit are of such extent, that without a significant influx of fresh foreign capital it will not be possible to maintain a macroeconomic stability, to conduct a radical economic reform and lead the economy in the direction of a sustainable economic growth.

Without integration in international financial and trade institutions, as well as regional arrangements in Europe, Serbia and FR Yugoslavia have no economic and political future. Such reintegration is quite unlikely until the social ownership is eliminated and the required political support of the presently most powerful countries in the world is obtained. Due to the existing "outer wall of the sanctions", which is blocking the way to the reintegration of FR Yugoslavia in the most important


1) The Balkans and the wider central-European region are integrated in various networks and programs of aid and support through contractual and institutionalized arrangements of regional character. Slovenia is member of the Council of Europe, it has become member of the Central-European Free Trade Association (CEFTA) and associate member of the European Union. Bulgaria and Romania are members of the Council of Europe and associate members of the European Union. Macedonia and Albania are members of the Council of Europe, and Croatia has the same status, with certain conditions. Bosnia and Hercegovina has the status of an international protectorate, it is an internationally recognized country, it is member of the United Nations, Council of Europe and international financial institutions which are relevant for renewal and development.

international institutions, macroeconomic solutions are practically conditioned by the fulfillment of the non-economic demands for the respect of human and minority rights, as determined by international standards, and a wider democratization of the society. It seems that major political changes are the key precondition for a serious reform of the economic system.

The new government shall by its constructive diplomatic actions and accepting the principle of the equal rights to the inheritance of the former SFR Yugoslavia do its utmost to reintegrate FR Yugoslavia in the IMF. With the renewed membership in this organization, automatically all other doors shall be opened to our country for the international capital. Namely, experience has shown that each dollar of IMF-loans draws in the average additional 3-5 US$ of loans from other public and commercial sources in the world. In order for FR Yugoslavia to renew its membership in the IMF and the World Bank , it has, besides the political preconditions, to regulate all due and outstanding liabilities accrued from September 1992 until today. The due debt towards IMF at the beginning of 1997 amounts to over 100 million US$ and the due debt towards the World Bank is in excess of 1.2 billion US$. It is clear that FR Yugoslavia doesn't have so much cash at the moment (at least not on official government accounts) in order to be able to pay for the "membership card" for the reintegration in these organization, but without the membership in them no large scale private foreign investments, no bilateral and commercial loans can be obtained. In order to resolve this huge problem, the new government must above all convince foreign creditors of its readiness and will to enter into radical economic reforms. On the basis of such program, FR Yugoslavia could count on corresponding financial arrangements which would help it to resolve the payment difficulties of the matured liabilities towards the IMF and the World Bank, which automatically would mean the full membership in them. This would then open the door for new foreign loans and the fulfillment of the economic reform would create the condition for their regular servicing in the future. Later the net-influx of international capital in FR Yugoslavia would be possible only:

(1) if foreign investors could be convinced in the consistent policy of institutional and structural adjustment, and above all in the consistent policy of comprehensive and rapid privatization;

(2) if economic system is compatible with the economic system of market economies;

(3) if non-economic investment risk factors are rated acceptable for them.

Parallel to the establishment of relations with IMF and the World Bank, the new government shall take all steps necessary for the membership in the World Trade Organization. Once the treatment of a most favored nation is obtained, the sales of our products on the world market would be much easier and their prices would be much more competitive, because the present extremely high custom duties and numerous extra custom restrictions would be reduced. At the same time, with the integration in the WTO, our country would be protected from the arbitrage in the anti-dumping proceedings and it would adopt the principle of non-discrimination, i.e. equal customs treatment for domestic and foreign goods. This shall in itself additionally initiate the necessary and thorough changes in the domestic economic system and open an opportunity for a substantial increase of exports in the future.

In the perspective, the aim of our foreign economic policy shall be the integration of our country in the regional trade organizations and the European Union (EU). The new government shall formulate a platform for negotiations with the EU in this respect, in order to obtain preferential treatment of our exports. Promptly the adjustment of the domestic regulations with the legislation applied to the EU market on the basis of the Recommendations of the European Commission for Associated Members (White Book II) shall take place. After the normalization of the political relations with the EU, our country can hope to obtain loans from the European Investment Bank and significant technical aid through the program PHARE.


The real economic revival and the beginning of an economic development is possible only under fully stable conditions. The first task of the new government will be to lay down the foundation for a long term stability of the foreign exchange rate and prices. Once the stabilization is achieved, it will be defended by all deplorable economic policy measures.

The dinar shall be convertible. All restrictions for foreign currency buying and selling shall be lifted. Everybody is going to be able to buy and sell foreign currency as much as he wants in banks and exchange offices. Therefore, the black market will be completely eliminated and a unique foreign exchange rate for all transaction parties - banks, companies and private individuals - shall be established. As a guarantee for the stability of the exchange rate and to maintain the convertibility of the dinar, in the first couple of months special funds established on the basis of short term foreign loans shall be used. The National Bank of Yugoslavia will use these funds, amounting to around 500 million US$, with the only aim to maintain the stability of the exchange rate. Once the exchange rate is stabilized, the funds will become redundant and the loan will be repaid promptly.

The establishment of the full convertibility of the dinar and its long term defense will contribute to the confidence in the creators of the new economic policy. Already in the first year of the implementation of the new economic program, only on this basis the foreign currency reserves of the country will be significantly increased. The new government shall promptly take other steps aimed at the as soon as possible increase of the disposable foreign currency reserves. Through constructive discussions and efficient negotiations with representatives of former Yugoslav republics the issue of the inheritance of the former SFR Yugoslavia would be resolved in a very short period of time thus enabling the utilization of its proportion of the frozen gold and foreign currency held with the Bank for International Settlements in Basel. The creation of adequate institutional conditions for stable business operations and corresponding political solutions will contribute to the utilization of one part of the significant amounts of foreign currency which were in the past years transferred out of the country and held on private accounts abroad as official foreign currency reserves. The data on the amounts of foreign currency reserves of the country shall be published monthly and shall be made available to the public. The strengthening of the foreign currency reserves shall enable a long term convertibility and stability of the dinar and create conditions for resolving other accumulated problems, e.g. repayment of the foreign currency savings deposits and the regular servicing of the foreign debt.

One of the most important aims of the economic policy shall be a low inflation. The interest rates on the money and credit market shall be formed freely. This will initiate the confidence in the domestic currency and contribute initially to stimulate the domestic savings. The liberal forming of interest rate shall discourage the establishment of informal money markets and will help the depolitization of the allocation of loans. The liberalization of interest rates shall further advanced by the competition on the financial market together with a rigid treatment of insolvent banks and companies. A rational allocation of credits shall be secured by an auction procedure. Badly performing banks shall be excluded from the loan auctions at the National Bank of Yugoslavia, which will contribute to an establishment of strict financial discipline.

In the first year of the implementation of the program the inflation will go down below 20% p.a. Nevertheless, such an interest rate is relatively low for our standards, it must be further reduced. After a period of two or three years, the inflation rate should not exceed 10% p.a.

Simultaneously with the stabilization of monetary flows, a strong fiscal adjustment will be made. Reduction of public expenditures shall enable a rapid reduction of the tax-burden on the economy and reduce the budget deficit to a bearable level.

For an final success of the macroeconomic stabilization it will be necessary to establish a minimum of social consensus on the foundations of the economic system: privatization, liberalization, social security and ways how to resolve the unemployment problem. Otherwise social tensions would inevitably lead to pressures aimed at redistribution of incomes, which would prevent the realization of a long term macroeconomic balance.


The government must regularly and completely fulfill all liabilities it guarantees. The present government has drastically dishonored this basic principle, which was markedly shown when it has for a number of years frozen the foreign currency savings ("old foreign currency savings deposits"), completely degrading the reputation of the country and its institutions. Furthermore, the present government has participated in the organization and public promotion of the pyramid structures by numerous para-state banks (Dafiment, Jugoskandik, etc.), which resulted in a huge deceit and robbery of the population. Regardless of the fact that this robbery is ascribed to this regime, the new government must take over the resolution of the problem of debt towards these savings depositors. The priority would be given to the repayment of debts to small savings depositors.

In order to regain the required confidence of the population in the state and the banking system, to revive savings and support domestic accumulation of capital, the problem of the existing huge debts towards the savings depositors must be resolved as soon as possible. At the beginning of 1997 the total liabilities of the state for "old foreign currency savings deposits" amounts to 6.4 billion DM (principal amount 6.2 billion DM together with accrued interest for 1996 in excess of 200 million DM). The real debt towards the savings depositors of para-state banks is still not identified, but it is estimated to be over half a billion DM.

The problem of the repayment of old debts towards the savings depositors and a relatively rapid rebuilding of confidence in the banking system can be resolved only under the condition that it is entrusted to completely new people (for psychological reasons, because the present leadership is completely discredited) having full moral and expert credibility. The new government will have the task to enable a quick pay out of the foreign currency savings. The following possibilities would be offered to the savings depositors:

(1) to get paid relatively quick in full and in foreign currency (out of the funds secured on the basis of foreign loans and from the influx on the basis of the increase of domestic foreign currency reserves);

(2) to invest the savings in privatized companies with special discounts;

(3) to convert the savings into attractive and solid public debt securities with the option to use them freely for other payments or to accrue real interest rates;

(4) to purchase apartments;

(5) to buy state-owned business premises or land to build on.

The new government shall organize a secondary foreign currency deposit market in order to provide their maximum liquidity. Such owners who are not interested in the conversion of their saving deposits into alternative forms of property could sell their titles on the secondary market. The foreign currency deposits price in secondary trade would depend on the demand and supply. The state would permanently support the demand for such instruments in order to enable their owners to obtain the full nominal value of their foreign currency deposits on the secondary market.


The initiation of resolving the problem of the external debt, which at the end of 1996 amounted to over 9 billion US$, represents one of the basic conditions for the return of Yugoslavia on the international finance markets. The renewal of the investment process in our economy cannot be expected without the influx of fresh foreign capital, bearing in mind the fact that the domestic savings deposits are missing. But without the repayment of the due debts towards the international financial institutions, above all towards IMF and the World Bank, no new loans can be expected. After the conclusion of the arrangement on the repayment of our liabilities we shall have to achieve a net- influx of capital from abroad, in order to enable our economy to renew its ability to repay debts on a permanent basis.

One of the greatest obstacles to the normalization of our relations with foreign creditors was the wrong policy of the Federal Government (which is controlled by the Serbian regime), especially towards the Group for Succession at the Geneva Conference on ex-Yugoslavia and later in direct contacts with the representatives of international financial institutions. Namely, FR Yugoslavia has insisted on the continuity with the former SFRY, despite the fact that these institutions stated four years ago that this country did not exist anymore. Such a pretentious attitude, inspired by shortsighted speculative motives of its political leadership, not only implied a special treatment of Yugoslavia in the procedure of the membership regulation in these organizations, which is contrary to their statutes, but also meant the repayment of debts for the whole of the former SFRY, despite the fact that it is clear that our economy is at the moment not even in the position to repay its own proportional debt.

Unlike the former government, the new government shall immediately point out that our country is prepared to become part of international financial institutions according to the same procedure which was applied to all other former Yugoslav republics. The issue of the regulation of the status in these institutions will be tackled without delay and formal preconditions (the belated and full rejection of this procedure by the present government in August last year was followed by threats that it would keep insisting on the continuation principle in other domains of the negotiations on the succession as well).

Bearing in mind the key role of the IMF in each and every program of external debt settlement, the debts due to this institution, amounting to 100 million US$, shall be repaid at once. This could be done either by using short term loans from bilateral arrangements with one of the OECD countries (so called bridge loan) or out of the current foreign exchange reserves, if their level allows it. Namely, the foreign currency reserves could in the meantime gain in substance on the basis of the division of the property of former SFRY between all former Yugoslav republics. Postponement in the solution of this problem, which is permanently being done by the present regime with continuous lodging of fruitless complaints with international courts and by refusing to conclude an agreement on the division of separate portions of the collective property, is harming FR Yugoslavia the most, because it has no access to international financial markets. Once this problem is resolved, substantial foreign currency funds from the presently blocked foreign currency reserves of the former SFR Yugoslavia, would immediately be placed at the disposal of our country. From this amount, one part would be utilized for the repayment of liabilities due to the IMF, from which promptly a loan of around 460 million US$ could be drawn on the basis of the newly established quota of around 320 million special drawing rights (SDR). Once the liabilities towards the IMF are repaid, a similar arrangement with the World Bank should be made, first of all an agreement on the repayment of overdue liabilities and after that on the possible utilization of funds on the basis of already authorized loans, as well as on the contracting of new loans (Structural Adjustment Loan, Infrastructure Projects Loan, Loan for the Financing of Social Program). The beginning of the repayment of debts towards the IMF and the World Bank would indicate the fulfillment of one major precondition for the renewal of the membership in these organizations. The act of agreement signing with the IMF and the World Bank would raise the creditworthiness of FR Yugoslavia, which would speed up the process of its reintegration in all other financial institutions.

The debt of FR Yugoslavia towards foreign governmental creditors (Paris Club) makes around 47% of the general external debt. This debt is especially important, since it is almost completely state guaranteed. Negotiations with the governmental creditors on the settlement of the liabilities, as well as on the possibilities and terms and conditions of its rescheduling should start as soon as possible. Possibilities should be examined how to obtain international support for the process of economic reforms in FR Yugoslavia, and thus in the coordination with the World Bank or some leading developed country secure loans for the financing of programs of economic recovery and structural adjustments of the domestic economy, with strict honoring of IMF criteria for the utilization of obtained funds. Hereby both sides should not forget that only a radical economic reform can contribute to the creation of the preconditions and material conditions for an orderly servicing of external debts in the future.

The debt of FR Yugoslavia towards foreign commercial banks (London Club) makes around 47% of the general external debt and could be rescheduled as well. The form of rescheduling of this debt could be probably very similar to the one already applied to other former Yugoslav republics, but the terms and conditions should be more moderate, due to the fact that our country was under an embargo for a period of three years, that it has received the highest number of refugees and that it still one year after the lifting of the sanctions has no access to international financial institutions.

The new government would in cooperation with experts from the corresponding international financial institutions prepare a special debt repayment program aimed at the adequate preparation of the negotiations of rescheduling of debts with individual groups of foreign creditors (multilateral institutions, governments, commercial banks). It would be based on an objective evaluation of the debt repayment capabilities of our economy in the next 5-10 years. On the basis of this evaluation, corresponding mechanisms to alleviate the burden of the debt settlement, as well as the writing off and reduction of debts, various forms of debt swaps, etc. would be proposed.


The full liberalization of the economic life will lead to the release of private initiative, the development of healthy competition and equality of all subjects before the law. The prices shall be formed freely, existing monopoly shall be eliminated, preconditions will be made for companies to freely enter all branches and it will stimulate entrepreneurial initiatives.

The free forming of prices will lead to a system of prices expressing the relative scarcity of goods, services and production factors. Subsidies to most branches will be canceled (with the exception of agriculture), because the market prices shall enable a normal renewal and growth of production. The abolishment of subsidies and the cessation of the endless covering of public companies` losses out of the country's budget and printing of fresh money (primary issue) will reduce the budget and quasi-fiscal deficit, which will in turn influence the curbing of inflation. Of course, in the price liberalization system objective problems will eventually arise in the energy sector, public utilities and traffic services, the prices of which are today below the production costs, and these problems will be treated separately. However, a sudden price liberalization in these sectors would lead to a significant rise of the general price level and would additionally instigate the inflation and would jeopardize the living standard of the population. Therefore, in a strictly limited transitional period until the companies from these sectors are organizationally and economically qualified for an independent operation and until the increase of the general economic activity does not strengthen the population's income, the state would be obliged to provide these public companies with the necessary financial support, but foremost from the income generated through the sales of public debt securities on the capital market.

One of the most urgent tasks of the new government will be to fight monopoly. Monopoly is harmful in a market economy because it reduces the production, increases prices and provides no incentives for the increase of production. In our economy public (state-owned) companies are systematically permeated with the government, which causes abuse of the public interest regulation function. In addition the "socialist giants" which are in the regime of state and social ownership create the major part of the losses in the economy. Certain parts of these companies could become independent (e.g. arms production could be detached from cars production, postal services could be separated from telecommunications). Later on, these smaller companies could be quickly privatized. At the same time, in the branches found to be monopolistic the establishment of new companies should be encouraged by the removal of bureaucratic obstacles, abolishment of monopolistic laws (presently the law stipulates the existence of monopoly in some industries) and motivating credit and tax policy (new companies in sectors found to be monopolistic would have to pay lower taxes and would get better terms of loans). Until the market competition comes into life, a control of the internal rate of return, or a control of the price increase rate in monopolistic sectors will be necessary. A continuous and especially effective means in the fight against monopoly would be the liberalization of foreign trade.

The new government will give its full support to the development of all forms of competition. Competition is the very heart of the market economy. In the end it always results in reduction of prices, increase of production and productivity of work. The strengthening of competition shall be stimulated with the simplification of the procedure for the opening of new companies (documentation required together with the licenses will be kept at a minimum) and with cut down taxes. Even individuals with little capital must be able to easily start their own operations and investments and the state will be obliged to create the conditions for the banks to support new programs. Since the majority of existing domestic banks is not able to provide adequate credit support to the private sector, the country will be opened for foreign reputable banks. In addition, earmarked loans obtained from international financial organizations would be utilized through new domestic banks exclusively for crediting the development of small and medium sized companies.

In order to make the economic activities of private entrepreneurs easier, the taxes must be low and secure. Not one tax can be retroactive. Especially the payroll taxes must be reduced in order to stimulate the new employment. The small entrepreneurial sector will be significantly relieved with taxes in order to discourage moonlighting and encourage legal employment and business for which they would have to pay relatively low taxes. Such a policy shall contribute to the legalization of the existing gray economy simultaneously and with no extra investment creating positive effects for the society and individual. In such a way, the realization of the basic long term goal of the new government - the creation of a rich citizen as the precondition for a rich country - shall be taken.


The internal liberalization must be accompanied by a liberalization of foreign economic relations. All import and export quotas will be abolished. A few relatively low tax rates on corporate profits (up to 25%) shall be applicable to all industries and shall be equal for everybody: state and private sector companies. Only the agricultural sector can count on a higher degree of protection, but not higher than the one established in developed market economy countries. Liberalization of imports will contribute to the reinforcement of the competition and reduction of prices on the domestic market, but the liberalization of exports will give a chance to everyone, and not only to some individuals with political privileges, to seek their competitive capabilities on the foreign markets. Parallel to the policy of liberalization of imports, the new government shall undertake measures to combat dumping and unfair foreign competition, in accordance with international standards and experience.

The environment for foreign investment shall improve. Once a new market environment is created the government will not be forced to bring new measures to stimulate foreign investments. Foreign investors shall have the same privileges and treatments as domestic investors. If the economic policy is good, there are no reasons for providing foreigners with special benefits. Only countries aiming at "punishing" their own populations and which lead a bad economic policy must give special privileges to foreigners in order to attract their capital. The economic and legal regulations must be simple, good, stable and equal for everyone - domestic and foreign investors.

In order to create conditions for a general revitalization and modernization of the economy, the government shall offer specific concessions to investors who are interested in financing large infrastructure projects (roads, railways, public utilities, etc.). The tender would be equally open for domestic and foreign companies, but it could be realistically expected that initially such projects would be financed by major participation of foreign capital. Independently of the federal and republic governments, some municipalities would get the chance to solve the problems of financing their local municipal systems in a relatively short period of time. They would issue their own municipal bonds on the international capital market and could, with the assistance of foreign specialized financial companies, secure the required investment funding.


FR Yugoslavia is a small country which needs a high degree of openness and economic exchange with the world. Bearing in mind this fact, the new government shall promptly initiate its integration in regional economic integrations of Southeastern Europe. At the same time, the economic ties with former Yugoslav republics will be renewed.

The European Union has chosen a regional approach in the resolution of the issue of long term economic cooperation and association with Eastern European countries. This means that FR Yugoslavia will have to show its intentions for an integration in the European Union at first through the regional integration with neighboring countries. The experience with the establishment of the Visegrad Group (Hungary, Czech Republic, Slovakia, Poland) and the later development of economic relations of the European Union with this group undoubtedly confirms this. In addition, the harmonization of the views between the European Union and USA at the end of 1996 on the Initiative on Cooperation in Southeastern Europe (besides all former Yugoslav republics, this initiative comprises Hungary, Rumania, Bulgaria, Greece, Albania, Turkey and Moldavia, i.e. a territory of around 140 million inhabitants) speaks in favor of the thesis that such a way to resolve the problem of integration of smaller countries in international economic integrations represents a global and long term position of the world community, which must be respected by all means.

There is an objective interest of the republics of former SFR Yugoslavia for the reestablishment of a great deal of broken economic ties. Prior to the dissolution of SFR Yugoslavia, on the Yugoslav market (outside its own territory) individual republics realized between 40-80% of their gross domestic product, and in the export on world market 12-23% of their gross domestic product. Slovenia and Croatia have already to a large extent renewed the level of their mutual exchange - Slovenia is today the third important foreign trade partner of Croatia according to their trade volume. Serbia and Macedonia have started to renew their trade exchange. Slovenia is selling its products on the market of FR Yugoslavia mainly through Macedonia. However, the volume of exchange of FR Yugoslavia with former Yugoslav republics is by far more modest than the one which is potentially possible and economically viable. Therefore, the new government will do its best to have these broken economic ties mended and formalized through corresponding regional trade arrangements.



A stable democracy must have its base in a healthy economic life. Its best foundation is private ownership. Owners of capital are naturally interested in a stable political and economic situation, because only under such circumstances can they operate successfully. The higher the number of private entrepreneurs, the better the conditions are for the development of democracy. On the other hand, when individuals are in the economic sense independent of the state, they can freely chose the political option they want and contribute financially to those political parties which best represent their interests. That is why from the standpoint of the democratic competition it is important that the ownership is not concentrated in a few hands. Private ownership and a prosperous middle class are the guarantors of the liberty of a society.

Numerous experiences have shown that companies in private hands are economically the most efficient ones. That is the reason why the new government shall initiate the process of comprehensive privatization, which will be limited in time and obligatory for the whole social sector and a great deal of the state-owned sector.

The privatization will be the key lever in the building of the new economic system, which will lead to the increase in production, rise in income and improvement of the quality of life of all citizens. The fear of privatization has been spread deliberately by the present regime. With the constant adoption, abolishment and amendment of bad privatization laws it has aimed at compromising this process and slowing down reform changes. The purpose of retaining the undisputed authoritarian power was to enable the transfer of capital from the social companies into the pockets of privileged individuals of the ruling political oligarchy. In this way, and for the sake of the accumulation of wealth by a minority, the majority of the population is losing the economic foundation of its survival. Consequently, the social gap between the population and those who express their "concern" for its destiny widens on the public stage. That is why privatization should initiate the process of building a system in which nobody will patronize adult and able people, and a social environment in which no discrepancy between the publicly expressed views and actions in real life will be tolerated, but punished in a democratic procedure.

The privatization will represent the crucial step in the liberalization process of the economic life. While carrying it out, the new government will have to take care so as not to allow individuals to become owners of well protected monopolistic companies, since they would try to use their market power to get rich on account of the rest of the economy. Therefore, in addition to being quick and obligatory, the privatization must be socially acceptable as well.

Efforts will be made to enable as many citizens as possible to become owners of shares of privatized companies. By choosing the concrete model of privatization, which will represent a carefully balanced combination of so called "clean" models, the interests of employees, pensioners, domestic and foreign creditors must be taken into account. Experience has shown that a good organization of the privatization process, the resolution for its accomplishment and the general economic environment in which it takes place are probably more important than the choice of the privatization model itself. That is why an expert and faultless management of the privatization process together with the full public insight and a constant parliamentary control of the institutions implementing it must be provided.

The privatization will to a high degree improve the development of our presently modest financial market, which will enable a much easier trade and transfer of property rights (shares). Aimed at an efficient implementation of the privatization process, the government shall initiate the development of new financial institutions, investment companies, stock exchanges and other financial brokers. The privatization will create the environment for foreign investments in our economy, whereby the legislature will provide for the full equality and security of all potential investors - domestic and foreign. Only after the privatization process is finished and the financial markets have improved, our country could expect a significant influx of foreign capital, which would mainly come through various financial market institutions.

The basic privatization principles which the new government shall defend will be:

(1) autonomy - the companies will independently initiate the privatization process in a period proscribed by the law,

(2) transparency - presentation of complete and true information understandable to the normal citizen about the company which is selling its shares 2) and providing the possibility for everybody to initiate a revision process if he or she thinks that the law was infringed;

(3) consistency - strict obedience of the rules adopted in the beginning;

(4) practicality - searching for simple and achievable solutions which the majority of our compatriots can understand, irrespectively of their education level.

The privatization shall be preceded by restitution (denationalization), i.e. compensation for earlier nationalized property. The compensation for the earlier nationalized property shall represent a breaking point towards a future protection of the inviolability of private property and renewed confidence in it. To all former owners nationalized property shall be either returned or damages will be paid for the nationalized property (in money, shares, etc.). The restitution process shall comprise the return of property which was earlier taken away from the church.


The entrepreneurship initiative should be developed in all aspects of life. It is the drive of market economy and represents an important factor in the economic and general social development. Entrepreneurs are people who are not satisfied with the present situation, who want to change it and find solutions for existing problems. Such people make not more than 3-5% of the overall population. That is the reason why entrepreneurship is still a scarce resource.

After the privatization takes place, the environment for the confidence in entrepreneurs will be created. Besides, the privatization of social and state- owned companies will encourage the development of a completely new private sector, i. e. the continuation of the new and market adjusted production structure. At the same time, the development of new private companies will improve the conditions for the privatization of the existing ones. That is why the privatization process and the development of entrepreneurship are interconnected.

However, today in FR Yugoslavia there are no institutions and institutional mechanisms which could help and stimulate the development of new small and medium sized companies, nor the entrepreneurship restructuring of existing companies. There is no institutional network which could boost an efficient entrepreneurship policy. This represents a large restriction for the acceptance of foreign aid and a serious obstacle to an active participation in numerous restructuring programs and mastering the new know-how destined for countries going through a transition (TEMPUS program, PHARE program, EBRD loans, etc.). Without this new know-how from this field, it will be impossible to build a modern society of entrepreneurs.


2) Experiences of some Eastern European countries show that the differences in the information degree, i.e. differences in the capability to access information on companies to be privatized were one of the main causes for social stratification and injustice in the privatization process.

The new government shall initiate a line of educational programs in entrepreneurship. These programs shall contribute to providing new knowledge, information and practical skills and shall train young people to work efficiently in the production sector and in the state administration at all levels. Simultaneously, a corresponding institutional network required for the full enhancing of entrepreneurship shall be developed. Specialized consulting centers, agencies, education centers, vocational re-training centers, etc. shall be established. These institutions will contribute to a quicker development of flexible and market oriented small and medium sized companies, which will have an impact on the revitalization and important change of the present inefficient, rusty and long since obsolete structure of the domestic economy.



The first step towards a reform of the state and the economic system will be to change the present constitution. The constitutional changes must define in a completely new way the basis of the fundamental social consensus. Constitutions must precisely and clearly define the liberal and democratic foundations of the overall social organization. The protection of minorities - from ethnic to those of shareholders in a legally constituted company - shall represent one of the inevitable and truly decisive principles in the institutional shaping of the economy and the society. It is self-evident that in this process the presently existing huge discrepancies between the constitutions of our two republics, as well as between these constitutions and the federal constitution would be abridged. Bearing in mind the exaggerated centralization of the administrative apparatus and the economic powers at the republican level, the legislation should stipulate the principle that local public affairs are performed by those powers which are closest to the citizens - municipal and town assemblies.

As a natural element of the reform of society and of state there will be the irrevocable affirmation of the rule of law. Just and stable legislation, equally binding to everybody, consistent refraining from retroactive application of regulations, will represent basic principles of the reform of legal system. The guarantee of ownership rights and freedom of contract, legislation of liquidation and bankruptcy, regulation of natural and artificial monopoly and laying down of foundation for a modern trade code will be the crucial elements of the economic legislation. With the amendments in the existing legislation the starting of business must be made easier, simpler and cheaper, but at the same time liquidation and bankruptcy proceedings with a higher participation of the creditors must be made possible. In order to create the preconditions for a successful economic recovery and development, proprietors and creditors must regain their confidence in an efficient legal protection.

The economic legislation must be promptly adjusted to the requirements of the reform which will bring about new market institutions. In addition to the adoption of a new Law on the National Bank of Yugoslavia, Law on Privatization and amendments to the Law on Enterprises (especially in the part regulating public enterprises which are today functioning in the interest of the government and not in public interest), greatest efforts must be made towards the aim of legislative regulation of the operation of the financial market. In our country, the capital market is still at the very beginning, but with the changes in the economic system it will multiply its importance and will become a substantial instrument in the economic revival. Therefore, a Law on Investment Companies must be adopted as soon as possible, in order to enable the establishment of such institutions which are necessary for the normal functioning of the securities market, which will have a significant role in the process of mass privatization and in the reform of the pension system. In the existing Law on Enterprises and Law on Stock Exchanges and Stock Brokers more detailed definitions are required for contract honoring, protection of creditors, the technique of acquisition and mergers should be determined, maximum protection to minority shareholders provided, strict rules for the transparency of companies whose securities are offered to investors, and bodies for the registration of securities (registrars) and their deposits (depositaries) must be formalized.


The present financial system must be changed from the beginning. Today it rests on the principles of soft budget constraint and financial repression, i.e. on obligatory and politically based direction of funds and loans to the inefficient social sector, large state companies and privileged private (para- state-owned) companies, with no serious checking of their objective capabilities to ever repay the loans. The rejection or inability of such companies to repay the loans they took, as well as the fact that there are no efficient sanctions for such a behavior in practice, immobilizes the lending potential of the commercial banks and leads to a general illiquidity resulting in enormous pressures on the Central Bank to issue money without coverage. Pressured by social tensions and political demands, the Central Bank is then forced to cover the huge losses in the social and public sector with loans consisting of freshly printed money (primary issues). Such a financial policy inevitably leads to high inflation. The poorest are hit the most by inflation. Only those who know when and how much money is being printed make profit , i.e. those who have the privilege to receive cheap loans from the Central Bank.

The Central Bank will have the most important role in the new financial system. Its basic tasks will be creating healthy money, maintaining the stability of the exchange rate and the convertibility of the dinar, as well as achieving the stability in the general price level. In order to be able to fulfill these tasks efficiently, the present position and role of the National Bank of Yugoslavia must essentially be redefined. The National Bank of Yugoslavia shall become a fully independent monetary institution, out of political reach of the executive authorities. In order to provide for the full and factual independence, the role and the composition of the Board of Governors must be altered altogether, because today its members are representatives of the federal and republic governments, large state-owned banks and the so-called representatives of the economy (political establishment). In its present composition, the Board of Governors has the possibility of outvoting the National Bank of Yugoslavia experts represented by the governor, and making decisions which are contrary to the public interest. Therefore, the Board of Governors shall have only a consultative character and will consist only of financial experts.

The National Bank of Yugoslavia shall receive much wider authorizations and full independence with regards to the choice of tasks and instruments of the monetary policy. The key role in the establishment of the credibility and monetary sovereignty in the National Bank of Yugoslavia shall have its governor. The governor of the National Bank of Yugoslavia must be a respectable expert who is able to gain and keep the full confidence of the majority of the population. The governor will be elected with a mandate of 5 or 7 years, in order to enable him to work completely independently of the current politics (monetary policy must not depend on the requirements of the election campaign of any political party).

In addition to the formal independence from the government, which will result from its new position, the National Bank of Yugoslavia must gain its factual independence as well. The factual independence is secured by the way the total amount of money is created and by the regulation of money circulation. In this respect, it will become necessary to make corresponding statutory changes in the relation between the central bank and commercial banks, in order to impose a strict control on the creation and withdrawal of money. Applicable adjustments to the political system shall eliminate every possibility of illegal issues of money outside of the National Bank of Yugoslavia (gray supply) as it was used by the present regime extensively, which caused devastating monetary impacts. The quantity of money in circulation shall be regulated mainly by the operations of the National Bank of Yugoslavia on the open market, i.e. by buying and selling of securities issued by the National Bank of Yugoslavia.

The present informal governmental control of the commercial banks shall be abolished as soon as possible which will prevent the transfer of fiscal and quasi-fiscal deficits in the balance sheets of the banks. The fiscal repression which the government is making on the banking sector (by limiting interest rates, political allocation of loans etc.) will be removed permanently. Strict rules for the protection of creditors will be set up. The minimal protection of the security of liabilities shall be secured by mechanisms which are already in use in modern market economies. Debtors will have to take the risk of liquidation, regardless of their size, social and political status.

With the establishment of a simple and transparent mechanism for the management of money, conditions will be created for a gradual remonetization. This increase will come as a result of the newly established confidence in the domestic currency.3) Once the normal level of monetization is reached, which can be accomplished relatively quickly with a good management of economic flows, conditions will be created for the development of other basic institutions of the financial system.

The new government shall especially stimulate the financing of the economy via modern institutions of the financial market. This will contribute to the reduction of transaction costs and will enable an easier transfer together with a higher efficiency in the utilization of money. The principles on which the financial markets shall be based will be their transparency and standard protection of investment into securities. All participants on the market shall have the right to be provided with objective and full information (by the national securities commission). The state shall provide the protection of this right in the interest of all participants on the market. A deregulation of this market will enable a quicker establishment of financial brokers and investment companies.

The remaining basic parts of the new financial system (book-keeping system, auditing, issue and secondary trade with securities) will be developed in order to comply with European standards. The modernization of these systems shall be radically expedited, which will contribute to their security, thus facilitating the transfer of foreign savings into the domestic economy.


3) The confidence of companies, households, states and banks towards its domestic currency is measured by the coefficient of monetization with domestic currency. Its size has after 1991 dropped to a level of 5-8% of GDP. All efforts to increase the amount of domestic money have until today ended in causing inflation. The monetization coefficient for Yugoslavia is among the lowest in the world and comparable in size with Turkmenistan, Uganda and Rwanda.


The crisis in the banking sector is very deep. An unavoidable consequence of the present economic system, which is strongly supporting the lack of financial discipline, was the tremendous financial exhaustion (devastation) of the domestic banking sector. It is acutely demonstrated in the form of the so called "zombie banks", which exist with no real credit potential and no real activity. Such banks are gradually dying out, but are causing a strong negative chain reaction on the whole economy. The damages which are suffered by the creditors of such banks in case of their bankruptcy are by far greater than the damages on the owners themselves. That is the reason why bankruptcy of banks en masse is an undesirable phenomenon. The main aim of the activities of the new government in this field shall be the rapid neutralization of the strong negative effects in the devastated banking sector.

The first step in the direction of stopping the expansion of these disruptions will be the isolation of highly contaminated companies from the banking system and the isolation of insolvent banks from the rest of the system. Those banks would be subdued to a special control and management regime aimed at rapidly restoring their minimum operation with restricted funds. Preliminary evaluations show that in this moment these banks cannot go in the liquidation procedure, because this would cause tremendous financial problems for a larger part of the economic sector for a relatively long period.

The government and the National Bank of Yugoslavia will initiate the proceedings for the redefinition of the present institutional solutions and mechanisms for the reconstruction (rehabilitation) of banks. This task must be tackled at once, since the doctrine "let's do nothing until better times come", which is the current philosophy actually led to such a deep crisis. In the shortest possible period of time a model for the rehabilitation of banks comprising the following three preconditions must be defined: (a) to cost as little as possible; (b) to enable the utilization of market solutions in the rehabilitation procedure; (c) to enable an efficient privatization of banks.

The countries in transition are using two basic classes of rehabilitation models for banks. The first class of models is oriented towards the market and tries to minimize the funds (domestic and foreign) required for intervention. The revitalization of the banking sector is accomplished by a strong reform of regulation which enables the establishment and the quick growth of new banks. The competition on the financial market provides the new banks with advantages in comparison to the old banks. New banks are growing quicker than the old ones whereby they gradually take over their markets and clients. The second class of models comprises standard rehabilitation models in which the state, the central bank, state agencies and bank owners introduce fresh funds in the existing banking system, thus performing its rehabilitation. The first model can be conditionally described as autonomous, and the second as state rehabilitation. The Yugoslav model would represent a combination of the first and the second experience. The autonomous rehabilitation could begin right away, independent of the disposable funding for an external intervention. This process would be enabled and assisted by a serious regulatory reform which very often accompany such a reconstruction of the banking sector. New prudential norms and auditing standards will be activated which should remove the so-called "banker's shortsightedness" and provide the owners of money with a secure choice of bank according to the degree of risk of investment in it.

In order to spur the autonomous rehabilitation of the banks it will be necessary to protect the deposit owners from high risks. The task of the design and an application of a deposit protection system will be initiated at once. In the first stage of the development of this system, the state will have to be its main creator and the first big finance provider. With the increase of savings deposits and the overall financial potential of the banking sector, this system will be left to an autonomous regulation by the commercial banks themselves.

The restructuring process of banks will especially benefit by the competition imposed by new banks and new institutions (investment companies) on the domestic financial market. The country will be opened for highly reputable foreign banks. All banks, domestic and foreign likewise, shall operate under equal conditions. Once an efficient banking system is established, the state will try to prevent with measures of the economic policy the appearance of hazardous banking transactions which could bear a great risk of bankruptcy. In order to maintain the stability of the newly established financial system and to prevent the so-called "domino effect", the bankruptcy of banks and other financial institutions should be kept at a minimum. The National Bank of Yugoslavia will have an active role in the realization of this aim and in the prevention of unwanted financial processes by intervening adequately and timely in all risky situations. Thus, once the confidence of the population in the banking system is finally regained, under no circumstances should it be allowed to have it ruined again. That is the reason why the new monetary authority will treat the possible creation of financial institutions of high risks with extreme rigidity. Due to the still not faded memory of our citizens of the bad experiences with quasi-private banks of the Dafiment banka or Jugoskandik kind, the operation of such institutions would be open to sharp public criticism and in obvious and drastic cases even to their prompt closure.


The present situation of the Yugoslav economy is characterized by a disturbed financial structure resulting in a shortage of its own capital (6.7 billion DM) and a shortage of long term working capital (5.7 billion DM to get 35% of the facility working and around 15 billion DM for a full employment of all available facilities). This financial imbalance is the main cause of the heavy insolvency in the economy and represents an unavoidable obstacle to the urgently required increase of the employment rate.

The prolonged accumulation of losses is caused, among other things, by the low utilization rate of the existing capacities. This causes a rapid spending of capital, which additionally intensifies the illiquidity problem, which will, sooner or later, bring to a financial ruin of the whole economy. In order to make a financial consolidation of our economy we need: (a) to increase the volume of business operations and to remove the negative effects of the progression of fixed expenditures, which will at the same time represent a precondition for the departure from losses; (b) to improve the financial structure and to introduce a financial balance which reflects the utilization rate of capacities.

The realization of the above mentioned requirements implies the fulfillment of a number of measures. A quick privatization of companies would be carried out thus enabling them to get leased or acquired by foreign or domestic investors. The internal and external debts, which in mid 1996 amounted to 10.3 billion DM, should be prolonged or swapped. Heavily contaminated companies would have to go bankrupt and proceedings for the settlement of their liabilities would have to be initiated. Capital in companies would be stepped up and the level of employment would be adjusted to the capital available. Strict control of the creditworthiness of the debtor by the creditor (banks) would be introduced. Concessions to domestic and foreign investors would be given.

Companies would be stimulated to get rid of those parts which are in no direct connection with their main activities ("restructuring of assets"), and the funds obtained in such a manner could be invested in new projects in the reorganized company. Furthermore, a special industrial sector restructuring program would be developed with the help of international financial institutions. The program would, at first, experimentally encompass a few larger companies in order to choose on this basis the best applicable method for the restructuring of the whole industry. Programs for the restructuring of the utilities with the aim of their financial and technological improvement and increase of efficiency would be carried out.


Yugoslav public finances suffer today from enormous, inefficient and unnecessary expenditures, high and arbitrary taxes which suffocate production and employment, and from deficits which permanently nourish the high inflation. Without a significant reduction and reform of state expenditure there can be no permanent macroeconomic stability.

Already in the transition period public spending will be notably reduced, to a level of 40% of the gross national product. The long term aim will be its further reduction, to a level of 30%. In order to reduce public spending, the government shall introduce new priorities for the spending of state money. Today huge funds are being spent on the police, an improper bureaucratic apparatus and on the insolvent and obsolete pension system. This causes the shortage of money for the poor, children's hospitals, for the old and handicapped, student grants, for additional education and vocational training of workers, for the scientific institutions... Only after the priorities of the country are shifted from the repressive regime to the humane functions of the state - programs for the poor, long forgotten primary schools and health systems, maintenance and reconstruction of infrastructure - a radical economic turn will happen.

The huge funds for the financing of the police are not a problem as such (in the budget for 1997, Serbia has designated three times more funds for the police than for the agriculture), but the problem is for what aims they are designated. The state, instead of securing a better life for the police force, mercilessly spends money on expensive equipment and weaponry (armored vehicles, chemical warfare agents, etc.), whose only aim is to repress the population. In a democratic country, the function of the police is to serve the citizens, and not to repress them. Instead of spending the money on eavesdropping on the citizens and equipment for dispersing demonstrators, the new government will increase the standard of living of the police force and enable it to fight the crime much better. Important reserves will be realized on the basis of reduction and rationalization of expenditures for the army, in accordance with the already accepted international obligations.

The foundation of the public income of the new state will consist of low but extensive taxes. Taxes will be reduced in accordance with the reduction of expenditures. A wide taxation base will enable the application of relatively low tax rates, which will in turn reduce the tax evasion. The presently high taxes force people either not to work, or to cheat, or to flee to the informal sector and seek illegal work. The socially owned sector itself has plunged deeply into the gray economy, especially in trade transactions and wage payments. It is our belief, that every normal person would prefer to legalize his business, if he is convinced that the taxes will be low, stable and that there will be no retroactive taxes. Bearing this in mind, a lot of people will be ready to register their present economic activity. The total sum of the taxes for the state will rise, although the individual will have to pay less. Low taxes will stimulate the growth of employment and production, and the agility of the economy activity will contribute to a further increase in the state income. Stable taxation will enable a long term business planning and long term investments. Predictable taxes will attract domestic and foreign capital. The new government will reduce to a large extent the present "tax benefits". These benefits are utilized only by corrupt civil servants, whereas poor families almost never get to use them. The reform and improvement of the internal revenue office will be carried out in order to enable an efficient collection of taxes.

The new government will reduce taxes on wages (payroll taxes) simultaneously with the rapid reform, including privatization, of the pension and social security systems. These taxes can be reduced to 20% of the net wages. The reduction of the taxes and contributions on wages will influence an increase in legal employment rate and will widen the taxation base. The tax for travel abroad must be immediately abolished. Taxes on property and capital shall be adjusted according to the practice in the European Union. The tax on corporate profit should not exceed 25%, with the option of its further reduction in sectors in which new producers are stimulated. Significant state revenues will be collected through the taxation of expenditure, in the form of value added tax (VAT), which will not exceed the European level. The budget will be filled with taxation of those products which are today, with the assent of the government, pushed in the gray economy zone (e.g. cigarettes,4) coffee) and which are potentially the most lucrative source of fiscal income.

With a radical fiscal reform, conditions will be created for a long term sustainable increase in production, investment and employment. However, the reduction of the public expenditures to a level which is in line with our national income will not be easy, especially bearing in mind the requirements for capital expenditures in the utilities sector, after the postponement for a number of years. That is why it could be anticipated that in the first couple of steps of the reform a fiscal deficit is suddenly generated. Should this occur, it must be financed exclusively from real sources, whereby the state would incur debts either on the domestic market or abroad.


4) Out of the total annual consumption of cigarettes in FR Yugoslavia of 20,000 tons, around 13,000 tons is realized through gray (illegal) channels.

In order to provide a stable and non-inflationary financing of the deficit of public finances, the new government will establish and pursue a policy of public debt. In all developed countries, long term state bonds represent the central security. Such securities are traded the most and at the same time they represent the most secure investment, since their collection is guaranteed by the country. There is no such security in our country, since the present regime itself does not believe in its persistent proclamations to the people - stability of prices and the domestic currency. The new, competent and responsible government will in practice prove that this stability is possible and achievable, thus gaining the necessary confidence of the population.

The issue of public bonds will take place after serious and extensive preparations. The success in practical application of this standard mechanism for the financing of the country's deficit will be very important for the economic recovery of the country and its future economic development. In order to gain confidence of the population as the base for the issue of the public debt bonds, special foreign currency funds will be utilized. In addition to the funds mentioned, the state will guarantee the security of the bonds with its complete movable and real estate, since it will include facilities which are now socially owned (e.g. the building of the former Central Committee of the League of Communists). The issue of public debt bonds will be backed by a reputable person, who will get the full moral and expert confidence of the domestic public. Public debt bonds will bear attractive interests for their buyers. In determination of the interest rates levels, consideration must be given not to cause unwanted disturbances on the global capital market. The public debt bonds will be easily transferable and collectable at any time. They can be cashed in even before the collection date imprinted on them, because it will be possible to trade them freely on the secondary market.


Serbia has an extremely fertile soil, a good climate and industrious and able farmers. However, due to the disastrous agricultural policy these natural potentials are by far underutilized. The present government is treating agriculture extremely irresponsibly: breach of obligations taken and non- performance of debts from earlier purchased agricultural products have influenced the farmers to lose their respect for the country and have caused an economic insecurity and lack of motivation for production. Drastic consequences of such an agricultural policy are a reduction of livestock over a period of many years, a discomforting growth of not cultivated agricultural land and unnecessary shortage of some agricultural products (e.g. shortage of this year`s wheat).

Serbia naturally depends on its agriculture. With this in mind, the new government shall make a radical turn in this sector and within the period of the next 2-3 years it will shape the economic status of the agricultural sector which, once established, will apply for the next several decades and which will significantly influence the future development of the whole agriculture. Concentrating its efforts in this direction, the new government will propose a rapid privatization and organizational transformation of state-owned and socially-owned estates; it will determine a stable system of guaranteed prices and will implement completely new mechanisms for the financing of the agricultural production.

Since agricultural production depends to a large extent on nature and circumstances, the state is obliged to protect the farmers from uncertainty and risk with economic policy measures, to stimulate their production and to prevent undesirable large oscillations in the production of certain products. The new government shall introduce a system of guaranteed prices, which will be valid for a number of years, without any fundamental correction, bearing in mind the fact that the inflation will be reduced to a very low rate. The guaranteed price will be the minimal real price, which the state will be obliged to pay to the producer, regardless of the prevailing market price. Should it happen that the real market price is lower than the guaranteed price (in a good crop year and excessive supply), the state will be obliged to compensate to the producers the full difference between the market and guaranteed price by means of subventions from the agricultural budget. On the other hand, should it occur that the crop is a failure and that the market price is higher than the guaranteed one, than the farmer will be in position to collect the proceeds from his work by selling his products on the free market for higher prices than the guaranteed ones. However, should the prices increase significantly, the country will intervene from its commodities reserves, thus increasing the supply and balancing the prices, whereby it must bear in mind the protection of the living standard of the population and keep the earlier established price relations between various agricultural products. Each producer will know in advance the guaranteed price for each product, which will enable him to adequately plan the structure of production.

Due to the extremely bad shape of the obsolete agricultural equipment presently used, it will be of utmost importance to find adequate mechanisms for extending loans to farmers. For the financing of the agriculture, only real sources will be used. The agricultural sector can not count on selective loans from the National Bank of Yugoslavia out of prime issues of money. Commercial banks shall be the major providers of loans and they will take pledged collateral (agricultural products, land or real estate) as security for the risk of their exposure. The credit risk will be reduced by the utilization of hedging, with the improvement of the commodities futures market and the development of a program for the insurance of crops, property and agricultural products.

The development of financial markets shall enable the initiation of new institutions and agricultural crediting mechanisms. A long term system for farm credits on the basis of pledged collateral, similar to the American Farm Credit System, shall be implemented. A special institution, a Center for Farm Credits, must be established, in which the farmers can lodge their applications for specific project financing (purchase of modern computerized agricultural machinery, silo, milking equipment, etc.). This center shall, on the basis of the its estimated creditworthiness and applicable mortgages, issue special bonds. They will contain basic information on the project and its bearer. The bonds will yield an interest rate and they shall be traded on the stock exchange (secondary market). At the moment of sale of these bonds, the producer shall receive the funding he needs and the buyer will practically become his creditor, whereby the possibility will exist that the bonds are further traded on the secondary market. After a predetermined period expires, the producer will return the credit by repurchasing his bonds from the stock exchange.

Insurance companies and end buyers of agricultural products (foodstuffs factories) will credit farmers as well. Young and able farmer will enjoy the most favorable credit treatment, and the government shall stimulate them especially for work in agriculture. The government shall establish a special institution for extending credits to beginners aimed at training them to be able to communicate with bankers within a period of five years.

The state will stimulate the consolidation of agricultural estates and the specialization of farmers for the production of 2 or 3 products at the most, which will enable a more productive utilization of modern agricultural machinery and agrotechnical agents. Special attention shall be dedicated to the improvement of the information system and education of farmers, including information on new technologies, novelties in management and will provide help in risk management and marketing for their agricultural products. After the agricultural sector is thus reorganized, it will become attractive for foreign investment, which will improve its further development.



The statistically registered unemployment exceeds 850,000, which makes an unemployment rate of around 26%, the highest in Europe. More cautious estimates of the hidden unemployment are about 700,000, which makes a total of over 1,500,000 really unemployed people. When the figure of the hidden unemployed in the social sector is deducted from the officially registered employment the real employment amounts to 1,400,000. This calculation shows that a little over two million people (counting around 700,000 farmers) are working for the remaining four fifths of the population, simultaneously carrying the whole burden of the enormous public spending.

Obviously, this state of the labor market is economically and socially unsustainable. However, a further rise in the unemployment rate, as well as a further erosion of the already poor living standard of the great majority of workers would be socially unjust, politically dangerous and economically harmful as well. The burden of the reforms shall not be placed on those who can carry it the least. Therefore, we are of the opinion that a wide ranging social consensus must be reached on the scope, speed and division of labor market reform costs, thus securing the support of the most important industrial relations actors: all relevant unions, associations of employers and representatives of the government and the authorities of the country. A special three-party body consisting of their representatives will be formed - Labor Market Council. It would have a consulting role, but its recommendations, reached by consensus, would be binding for the state bodies.

In addition, a special Labor Market Restructuring Fund shall be established, in order to secure permanent and stable financing sources and to improve the efficiency and control over the spending of funds. This Fund will collect funds from the unemployment insurance, general budget revenues and possibly from a special tax for this purpose. The rate of the obligatory unemployment insurance, instead of its recent demagogic reduction from 1.2.% to 0.8%, should be increased to 1.5%, bearing in mind the increased unemployment risk. The support from international financial and development institutions in the form of special help or credits for such purposes could be expected.

Within the framework of the Labor Market Council, active and passive programs for the labor market policy shall be adopted. Active programs are education programs, vocational training programs, public works programs, self- employment, etc., and passive programs depict the current financial aid to the unemployed. Those programs will be implemented by the Employment Bureau, which will be reorganized before that. Its staff should be additionally trained and motivated, since a firm control over the realization of active programs is making multiple returns. A computer information system will be implemented, which will be available to everyone who seeks work. Local employment bureaus shall get a greater independence in order to create their own programs, which are adjusted to the specific regional requirements. These programs should be as specific as possible with clearly defined groups of recipients - long term unemployed, young people with no work experience, those who lost their jobs and had no qualifications, those who lost their jobs and had qualifications for which there was no demand, the age group above 50, etc. Everybody who finds himself on the list of the Employment Bureau will be completely and as often as possible informed on the available opportunities,ranging from new job offers, education, retraining and vocational training, to the help to find employment with private employers or the setting up of his own small business. Nobody who receives unemployment benefit will be left without it after the maximum period expires, if in the meantime he was not offered any of the active programs.

The Labor Market Council shall permanently evaluate the social durability of the restructuring costs and their just distribution, monitor the operations of the Employment Bureau and control the utilization of funds obtained from the Labor Market Restructuring Fund and present the public with regular reports on this. The Labor Market Council shall determine the amounts of the minimum (guaranteed) wage and the wage policy basis.

By the year 2000, the most serious anomalies with employment and wages could be rectified. With the legalization of the gray economy and the expansion of the private entrepreneurship, the registered employment will increase. By implementing the privatization process false employment will be reduced to a minimum, and through the wide spread application of active labor market programs will keep the open unemployment rate at the present level. More importantly, its structure will be much improved, with a smaller participation of long-term unemployed in the overall unemployment. The environment of a healthy and stable growth will enable a significant reduction of the unemployment rate in the first years of the next decade. By eliminating false employment, the wage will cease being a social category. The sectoral restructuring and the introduction of competition on the labor market will lead to a reduction of inter-industry wage differences, aided by the Labor Market Council, in which the guidelines of the national wage policy will be adopted through mechanisms of collective bargaining.


Education and health systems have practically been ruined during the nineties. The social situation of the education and health systems employees has been degraded to the very bottom and their remuneration, compared to their qualifications, is the lowest in comparison to other professions. At the same time, the recipients of their services are hard hit as well. The continuation of this trend would be devastating, not only from the social and human standpoint but also in the economic aspect. Education and health are the main components of the human capital, on which to the greatest extent depends the future and the economic prosperity of every country. Therefore, the earmarked resources for these purposes must have the priority in relation to other public expenditures. The salaries of professors, doctors, school and hospital staff must be increased, the schools and hospitals must be equipped with modern technology and materials, after that the quality of their services will significantly improve.

The education system must be reformed in three basic domains: finances, content and organization. The financial reform will contribute to a more efficient management in the educational facilities (internal efficiency) and will provide to the recipients of educational services the education they want (external efficiency), which can be achieved by financing based on enrollment proportions. For the reform of contents most important are new curricula, especially in the humanities, in order to inspire the critical spirit and creativity required in the new civil society and market economy. This requires a free market of textbooks, an increased responsibility and advanced training of the education staff and stronger stimulation mechanisms for them, as well as a new approach to grading and examinations, with the emphasis not only on reviewing the knowledge received, but also on the facility to creatively utilize newly acquired knowledge. Finally, the organization reform will consist of decentralization, with which the education will better be adjusted to local requirements, and the diversification of offers through the motivation of development of a network of private educational institutions and institutions which are not funded by governmental money, which will contribute to competition and efficiency.

One of the development elements of the educational system will be its adjustment to the requirements of ethnic minorities. One part of the expenditures, which comprises this adjustment, shall be financed from the budget, but a great deal of it could be covered with funds collected from the minorities themselves. This approach is based on the principle that each and every group in the society can initiate and finance any activity, provided that it doesn't inflict harm to the rest of the society.

The health policy shall have the task, within the boundaries of the available budget, to fulfill following aims: equal access to health protection for everybody; the quality, volume and proportion of services, including health prevention and education, which would lead to the maximum improvement of the health of the citizens (external efficiency); prudent management of medical institutions (internal efficiency); and just and efficient health service financing, which means that up to a certain level the health services would be provided for everyone, but the services exceeding this level would, in principle, be financed by the funds of citizens. The focus will be shifted from the present exclusive emphasis on health care to a wider concept of health policy, which will primarily concentrate on the prevention and propaganda of a healthier lifestyle (combined with economic incentives, such as high taxes on tobacco and alcohol, etc.), protection at work and an adequate ecological policy.

In the last couple of years private practices started to develop in our health system. However, the state-owned and private sectors are not integrated properly. The issue of the compensation of expenses for health services received by the population in the private sector has not been resolved. Thus, the expenditure of recipients of health services for health protection and treatments have increased significantly, and at the same time the high health insurance contributions rate is still applicable. The solution can be found in the stimulation of the development of the private sector through incentives in the tax policy and inexpensive credits, which would eventually reduce the average price of services in them, as well as their inclusion in the health insurance system.


The existing pension system is based on the principle of current payments (pay-as-you-go), which means that present employees are financing present pensioners. In an environment marked by the crisis, reduction of the number of employees, irregular and belated payments into the pension fund and a permanent increase of the number of pensioners (today we have around 1,500,000 pensioners, i.e. more than really employed in the social sector), the government has been covering the chronic deficit in the pension fund by printing fresh money (primary issue), and recently by increasing the "pension tax", which employees must pay as an obligatory contribution. The government has (with the first method) excited the (hyper)inflation, whose main victims were the pensioners themselves, and with the additional burdening of the already bent economy and the impoverished employees it is only contributing to their ruin, forcing them into making losses and into the gray economy, with the perspective to get even emptier pension funds and thinner and increasingly irregular pension checks.

The new government shall take urgent short term measures for the replenishment of pension funds and will simultaneously initiate an extensive reform of the pension system, in order to find a permanent solution for the social security of present and future pensioners. In the short run, the reform of the tax system and the reduction of the pension insurance contribution rate will incite the economic activity and return a great deal of employees from gray to legal economy, which by itself shall replenish the pension funds. The long term solution will be based on a clearer connection of the contribution paid in by the individual during his work life and the pension he will eventually receive. This rule will be corrected in that the state will guarantee minimum pensions to those pensioners whose incomes imply a pension below the minimum pension. To those who wish to contribute to their pensions more than proscribed by law (i.e. old age savings), it will be allowed to make voluntary contribution in the existing pension funds or private ones to be formed. The pension funds will gradually become institutional investors, whose funds are capitalized in order to maintain their real value. This will eventually lead to the creation of a combined system of public and private pension insurance.

Without a healthy and growing economy an efficient pension system is impossible. The issue of the relations between the employees and the pensioners is not only an issue of distribution; it is chiefly an issue of the magnitude of the funds available for distribution. Should the disintegration of the economy continue, even the best formula for the solution won't guarantee a decent life to pensioners. Only in a successful economy can the pensioners look forward to a secure and peaceful future.


In Yugoslavia today more than a third of its population is poverty- stricken, which is fivefold in comparison to 1990. The structure of poverty has changed - today it is more spread in urban than in rural areas. An even larger part of the population lives just on the poverty line, with the constant danger to step across. Therefore, it is an unrealistic expectation that a social safety net, regardless of its good concept and management, can look after more than one half of the overall population of a country.

However, the new government will have to provide funds to the poorest. Such funds are evidently insufficient in an exhausted and devastated economy. An additional and main source of funds can be found in specialized credits with international financial institutions, which could be utilized for the activation of the social insurance system and the protection of the most needy. The present autocratic regime cannot count on such funds; they could be secured only by a reform oriented and truly democratic government, bearing in mind the precondition for their provision which is the strict implementation of the structural adjustment program.

The present situation in the domain of social benefits is characterized by a huge gap between the declarative guaranteed benefit rights and their realization. It is quite common that payments of child care benefits, disability allowances and social benefits are delayed for months, thus becoming devalued by inflation. The irregularity and insecurity of payments contribute to the already difficult situation of the most needy and impaired. The priority of the new government will be a regular and timely payment of social benefits.

Special attention will be given to the improvement of the organization and internal efficiency of specialized social services. Social workers will be additionally motivated and trained to work with aid recipients. Under the conditions of shortage of funds it will be very important that the aid should be properly targeted, i.e. to those who need it the most. Of course, the best and most efficient way to help people is to help them to help themselves. In this respect, programs will be made, wherever possible, to open possibilities to the poor to earn money themselves. Additionally, the country will with tax benefits and co-financing encourage and support humanitarian programs and activities of domestic and foreign non-governmental organizations.

A significant part of the social programs funds must be directed into construction of housing, in order to provide apartments for thousands of army officers who fled from various parts of the former SFR Yugoslavia, and for other refugees and exiled persons as well. This constructing of housing segment cannot be left to the market alone. In rural regions the state will purchase deserted houses and apartments, refurbish and hand them over to interested refugees, who could reside in and possibly repurchase them on favorable terms. For the fled army officers and other exiled persons, with the aid of international funds, special settlements in towns would be built, with secured favorable long term mortgage loans (over 30 years).

Evidently, the only long term efficient remedy against poverty is an efficient and advanced economy. If the gross national product continues to fall, the most part of the population will cross the poverty line. Once everybody is poor, nobody can provide funds to help the poverty-stricken. Therefore, their destiny and future is inseparably connected with the destiny of the reform and the democratization of the country.


Dear citizens, *)

In order to pull out the country from a long drawn economic crisis, moral collapse and the extremely unenviable present situation, Serbia and FR Yugoslavia must undergo an urgent and thorough economic reform. The basic and only precondition for its initiation are fundamental political changes. After it has inflicted invaluable material and mental damages on its own people, the ruling political leadership of Serbia has neither moral nor expert credibility which would enable it to successfully carry out a general economic reform.

The present regime in Serbia and FR Yugoslavia has for a number of years been pursuing leading a devastating economic policy. Ignorance, incompetence, irresponsibility and lack of scruples of the people in charge of our economy are the basic cause for the economic devastation which we are witnessing and an almost hopeless situation in which we have found ourselves. The gross national product of the country is more than halved, the real personal income of the population is four times lower in comparison to its level in 1990, and the unemployment rate is by far the highest in Europe. Whole generations of our citizens have lost a number of years of their lives in general hopelessness and tens of thousands of highly educated experts have reluctantly left their fatherland, hoping to find mere existence and human hope in foreign countries.

The unlimited abuse of authority in Serbia in the past eight years has discredited all key categories and mechanisms of market economy. The trust in the domestic banking system is lost completely and every aspect of savings has disappeared. The institute of loans is fully ridiculed: the Loan for the Economic Revival of Serbia from the year 1989 was used only to take money from the population, whereas the obligation of its adequate and regular repayment is discarded.


*) This document, originally titled "Letter to the Public on the Measures How to Overcome the Economic Crisis", was published on January 24, 1997 in almost all daily newspapers in FR Yugoslavia and distributed to all parliamentary political parties in FR Yugoslavia (with the exception of the ruling parties in Serbia), trade unions, trade organizations and non- governmental organizations.

At the beginning of 1991, the state has frozen 8.7 billion DM of foreign currency savings deposits of the citizens; the persistent rejection of the regime to begin with the fundamental solution of this problem, departing from the principles of honoring contracts and sacred private property, has lead to a general lack of confidence in the banking sector and to a permanent rejection of the population towards all aspects of institutionalized savings. The present regime in Serbia has, through criminal intrusion into the monetary system of FR Yugoslavia in 1992-1993, initiated and nourished one of the highest hyperinflation in the history of mankind; primarily owing to the Serbian authorities, which have for a period of two years illegally issued money outside of the National Bank of Yugoslavia; the annual inflation in 1993 reached a frightening level of 553 pentillion percent (5.5 x 1020%). In this period, the present government has participated in the organization and public promotion of the speculative operations of numerous semi-state banks (Dafiment, Jugoskandik, etc.) and savings-banks, formally introduced as private institutions; their malign financial operations have caused a savings hysteria of unprecedented proportions and have inflicted damage to hundreds of thousands of citizens. This was later used as an argument to discredit private banking sector and the institute of private property as such.

After several years of hardship, suffering and great deprivation of our population, it was shown that the war and the international embargo have served the regime as an alibi to cause monetary chaos, while the real motives of those who initiated it were more rational and down to earth than those officially proclaimed ideas of national-patriotism, in the name of which the people were called to war; during these difficult war years several billion of DM were permanently pulled out of the mattresses of the populations and transferred to foreign private accounts of the political elite. After the economic embargo was finally lifted, the Serbian government again stamped on the national interest and arrogantly blocked the urgently needed integration of FR Yugoslavia in international financial and trade institutions. The country was deliberately led into self-isolation, which enables chosen members of the political establishment their monopolistic dealings and further accumulation of wealth on the account of the vast majority of impoverished population, dying social companies and robbery-like duties on the stressed private entrepreneurs.

The intensive destruction of the economy carried out by the political leadership in Serbia has completely ruined our society. The population has been robbed, both materially and spiritually, and deprived of the right to a normal life. The healthy economic motivation has been destroyed and the general criminalization of the society generated. The regime has made the people used to gray economy and black markets. Financial speculations and malversation are made more attractive than honest work in an environment in which the legal system and the market is not functioning, in which bribe and collection of various "commissions" have become part of normal life. After curbing hyperinflation and a temporary stabilization, the ruling elite in Serbia has continued with its criminal intrusion into the monetary system of FR Yugoslavia by using gray (illegal) issues of money as mechanisms to cause monetary impacts and as a means of forced pulling out of foreign currency from the population of Serbia and Montenegro. The last monetary intrusion which took place at the beginning of this year has seriously endangered the further functioning of the state consisting of Serbia and Montenegro, since Montenegro has announced to introduce its own currency, as a protective measure against possible future monetary attacks from the Serbian government which would practically cause the dissolution of FR Yugoslavia.

The responsibility of the ruling political establishment in Serbia for the degrading bad shape of our people and economy of today is evident and indisputable. Among other things, the current regime has drastically eroded the imperatively required credibility towards the foreign public and the international financial institutions, and without the influx of foreign capital no rapid economic revival is possible nor the process of economic development can be initiated. The governing personnel of the Socialist Party of Serbia was managing all destructive processes which devastated the domestic economy and resulted in a great robbery of the population for which they bore no consequences. It is a disaster and shame for the country that the very same discredited people still hold the highest positions. A serious reform can neither be carried out by the leadership of the Yugoslav Left, a political party which is practically fighting privatization and foreign investments and which in its ranks has super-rich private so-called-businessmen, who can easily obtain import quotas and who enjoy other monopolistic privileges and make huge profits like parasites in a closed economy. Attracting its membership by promises of possible social advancement over night on the basis of political connections and resolving the problems of their material existence without work, Yugoslav Left has become the nesting place for corruption and political immoral. With its authoritarian and profiteering politics, which were economically devastating for the widest social strata, the leadership of the Socialist Party of Serbia and the Yugoslav Left have discredited the leftist ideas as a legitimate form of political organization aimed at fighting for social justice and social equality. Finally, we are of the opinion that the leadership of the political party New Democracy has permanently lost the chance to become part of the reform movement since it has subdued the general state interest to its own private interests. This leadership has hypocritically publicly defended open market economy, but in reality it was substantially helping the Socialist Party of Serbia and the Yugoslav Left in the devastation of the economy, destabilization of the dinar and delay of the integration of Serbia and FR Yugoslavia in the international community.

The program of the rapid economic recovery of Serbia and FR Yugoslavia has been created as a result of our deep certainty that the salvation from the present economic problems is realistically possible. At the same time we are of the opinion that the carrying out of this program represents the basic precondition for the survival of the political association between Serbia and Montenegro, bearing in mind that the gap between the economic systems and the development aims of the two republics is disquietingly far apart. We have approached the preparation of this document inspired by our sincere belief that its application will bring about a radical economic turn and improvement to our society. We are offering and presenting this economic program to those political authorities in FR Yugoslavia who are prepared to promptly and with no compromises enter the process of fundamental economic and social reform. It is obvious, that we exclude from those authorities the leadership of the governing political party and its political satellites in Serbia.

Serbia and FR Yugoslavia can break away from this historical retrogression only through extensive and rapid changes in the general social and economic systems. In order to expedite the economic recovery fundamental changes are essential in the economic system, private ownership must be strengthened, the efficient functioning of the market must be secured and the integration of the national economy in the world must be provided for. These changes are impossible without a general democratization of the society, without guaranteed civil rights, good money and objective information, against which the present government is fighting. Therefore, the change of the present regime is a precondition for the recovery of Serbia and FR Yugoslavia.

The program of radical economic turn to be carried out by a new and reputable government comprises following essential elements. In a relatively short period of time the relations with the International Monetary Fund will be resolved together with the issue of succession with the former Yugoslav republics. This would enable the influx of foreign capital and strengthen the foreign currency reforms of the country. The dinar will become convertible. Everybody will be in the position to buy and sell foreign currency in banks and exchange offices by unlimited amounts. The stabilization of the foreign exchange rate of the dinar will be followed by an internal and foreign economic liberalization reflected in the elimination of monopoly, lifting of all import and export quotas, development of healthy competition and free entrepreneurship initiatives. Economic regulations and legislation will be simple, good, stable and equal for all - domestic and foreign investors. Such an economic environment will result in the creation of confidence in the government and shall enable the repayment of debts to the foreign currency savings depositors. The process of privatization will be entered, which will be rapid, obligatory, comprehensive and socially acceptable.

A fundamental reform of the banking system will be carried out, while strict financial discipline will be introduced and all possibilities for a forced and politically motivated direction of loans removed. The National Bank of Yugoslavia will become a fully independent monetary institution, out of reach of the executive authorities and everyday politics. The commercial banks will become consolidated, which will lead to a minimum fiscal burden of the state and will enable the development of new banks. The development of financial markets will be promoted. The rehabilitation of the banking sector will enable an efficient restructuring of present and the development of new companies.

The structure of public expenditures must be drastically recomposed and their part in the gross national product must be reduced. This will enable the reduction of taxes. Low taxes will stimulate the growth of employment and production. Stable taxes will enable long term business planning and long term investments. Predictable taxes will attract domestic and foreign capital. Non- inflationary financing of the public finances deficit could be realized through the establishment and realization of the public debt policy.

The reform must create expenses and denials. However, the burden of its realization shall not be placed on the shoulders of those who can carry the least. The new government will give its special consideration to the resolution of the unemployment problems, improvement of the education and health systems, as well as the fight against poverty. The presently insolvent pension plan must be reformed. The final aim of the application of the new economic program will be the creation of an efficient economy, capable of increasing the living standard of the population and the social welfare in the long run.

The realization of this new economic program, the details of which we will present to the public at the beginning of next week, will demand hard work, tremendous energy and the engagement of the most creative experts in our country. Hoping that this program will serve as a basis for reaching a wide professional, political and social consensus on the need of a radical economic reform in Serbia and FR Yugoslavia, we are presenting it to the public for elaboration and adoption.


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