The Impact of Neoliberal Policies in Transitional Economies of the Western Balkans

The Impact of Neoliberal Policies in Transitional Economies of the Western Balkans Aleksandra Piletić Institute of Social Studies Abstract "This paper gives an overview of the regressive neoliberal policies that have been implemented in transitional economies of the Western Balkans prior to the economic crisis, as well as the additional austerity measures that have been enacted since 2008. It will demonstrate how both have worked together to exacerbate overall living conditions, lower the standard of living, and create even greater income inequality. Emphasis will be made on policies implemented in Serbia with a focus on the negative impact of the privatization process, the shortcomings of certain labor policies and the ramifications of the restructuring of the workforce. Moreover, it will look at how austerity measures introduced since 2008 have aggravated the rate of unemployment and had an unfavorable impact on wages, both in the private and public sector. Furthermore, a direct link will be made between the policies that have been implemented as part of an EU accession strategy, and a clear decrease in the living standard. Finally, an outline of a plausible set of new policies will be proposed, focusing on ways of improving working conditions and enacting more comprehensive social programs." I Introduction The current state of the Serbian economy is attributed to a wide range of historical factors and actors. Most often, these narratives are based on a combination of different preconceived notions and biases, normally associated with political currents. For Western-minded individuals, support for EU accession goes hand-in-hand with opposition to nationalist ideas and breaking from the chauvinism that pervaded the 1990s. This is also connected to strong support for EU accession reforms, as well as economic intervention by the IMF and other financial institutions. On the other hand, a break from Washington Consensus ideas is ironically most characteristic of regressive and radical nationalist currents which have a legacy of being staunchly cautious of Western meddling in Serbian affairs. Consequently, little to no space is devoted to the critical examination of neoliberal policies outside of the sphere of nationalist rhetoric. 1

This paper aims to provide an overview of regressive neoliberal policies pertaining within an historical context with the intention of showing that economic stagnation in the Western Balkans in general and Serbia in particular is directly linked to policies implemented as part of the transition from socialism to capitalism. Two separate instances of transition will be addressed occurring respectively before and after the Yugoslav war such that a clear parallel can be drawn between the effects of privatization and market liberalization in both instances. Finally, this will be put in the context of current economic policy, implications for the future and recommendations for an alternative approach. II Transition - Part I The policies oriented towards market liberalization introduced after the democratic reforms of 2000 were not the first of their kind. A well-known feature of the economy of socialist Yugoslavia was its unique polycentric system of administration, which in many respects relied on the same principles as a bona fide market economy. The centrally planned economy was done away with as early as the 1950s, and new fundamental theoretical approaches decentralizing social and economic decision-making were introduced (Hamilton). The first massive privatizations were put forward by the last Yugoslav Prime Minister, Ante Marković in 1989. These initial reforms were hailed as a progressive tool designed to salvage the country from the detriments brought about by an unruly mixed socialist economy. However, due to the unique nature of the Yugoslav economy, the 1989 reforms were seen by the general public as a mere continuation of previous reforms, implemented by Tito in 1965 (Vujačić, Petrović Vujačić). Namely, it was then that market-oriented reforms (such as liberalization of prices and trade, the legalization of limited private entrepreneurship and the allowance of foreign direct investment) were introduced. The 1989 reform package, however, differed from previous initiatives in several respects. The first significant change was the reopening of the Belgrade Stock Exchange which had been dormant since 1941 while the second introduced measures which would for the first time allow private enterprises to employ as many workers as they saw fit. Other important features included the introduction of a new dinar which was pegged to the deutsche mark, the freezing of wages, removal of price controls on 85% of all commodities and the strengthening of existing 2

bankruptcy and liquidation laws which were to forbid state subsidy of state enterprises and banks operating at a loss. These novelties were by far the greatest harbingers of the emergence of a new socioeconomic structure in the Yugoslav federation, which was ultimately passed on to its constituent republics after its break-up. However, these reforms went by largely unnoticed in the wake of nationalist demagoguery leading up to the break-up of Yugoslavia. The war introduced a deep recession, and for the next ten years, the economies of most former Yugoslav republics were characterized by sizable grey economic sectors, hyperinflation, UN sanctions, client-patron relationships, considerable refugee populations, infrastructure damage and overall economic stagnation. For this reason, the reforms of Ante Marković are still perceived as the last instance of economic well-being in SR Yugoslavia and are largely interpreted by Western-oriented liberals in Serbia as a much needed turn to capitalism after decades of socialist planning. The great majority holds the view that Marković s economic reforms had they not been interrupted by the Yugoslav civil war would have helped Yugoslavia achieve a European standard in a very short time. For the average citizen, this reasoning is not entirely illogical wages increased twofold and the overvalued exchange rate proved convenient for consumers. In reality, however, these reforms produced only short-term stability. Even though the monthly inflation rate had dropped from 64.3% to zero in less than six months, in the long term, it was difficult to find a means of stabilizing the economy. Eventually, the annual growth rate declined to 7.5%, GDP declined by a further 15% and industrial output decreased by 21%. As previously mentioned, the true aftereffects of Marković s reforms passed largely unobserved due to the precarious sociopolitical situation in Yugoslavia. However, even though the war that followed dealt a harder blow to each former Yugoslav economy than any of Marković s reforms, the latter left a very strong legacy of public admiration for market liberalization. Combined with the strong antisocialist sentiment which dominated the years following the breakup, as well as an increasing awareness of the need to belong to the European Economic Community, this legacy created all the necessary preconditions for future market liberalization. II Post-2000 Transition A return to market liberalization and the introduction of EU accession reforms characterized by all-encompassing privatization and austerity measures was the order of the day for the 3

government led by Prime Minister Zoran Đinđić. However, the chief difference between the reforms of Ante Marković and Zoran Đinđić was Marković s acute awareness of habits inherited by the workforce as part of the 40-year socialist legacy. This is most evident in the differing approaches taken by each on the privatization path: while Marković s Act on Financial Operations and Laws on Social Capital preferred a method of insider privatization aware of the notion that the self-management system empowered workers to feel they owned the enterprises they were employed in the government of Zoran Đinđić prioritized speed at the expense of efficiency, implementing a model of privatization based on sales (Vujačić, Petrović Vujačić). It was clear from the very beginning that the new democratic government, led by Đinđić, intended to make a permanent break from socialist tradition including all privatization attempts made by prior governments up to that point of which the method of insider employee privatization was a logical part. This model was seen as inadequate and inefficient and it was believed that it would perpetuate the dominance of insiders, consequently failing to attract capital of larger foreign investors (Vujačić, Petrović Vujačić). It was believed that employees would, desiring to maintain control over their enterprises, obstruct the access of outside investors and that in such enterprises, just like in the system of self-management, there would be an incentive to pay wages that are too high, as well as maintain an unwarranted level of employment (CLDS). Results from privatization up until that point were seen as modest and believed to have been attained at a significantly slower pace compared to the desired accelerated method of privatization which was to bring about a much-needed overhaul in a short period of time. Ironically enough, while the intention was to attain a stable economy by means of a quick and efficient privatization which would decisively break from all past traditions, the exact opposite took place: an unnecessarily long privatization which did a very poor job of attracting foreign investors. In 2001, the new Privatization Law that was passed shifting focus to the aforementioned model based on sales was seen as a way to recuperate the state budget while building a social safety net which would protect workers from the harsh sides of transition (FEFA). The social safety net was built using a series of new laws which were to protect the most vulnerable parts of the population, and included a program of one-time intervention measures which were 4

directed at stabilizing the social system, as well as a plan to pay off all social security arrears (Begović and Mijatović). Social programs were subjected to a thorough overhaul, which completely changed the role of the state in the provision of social security services. This very moment marked the beginning of a program of decentralized provision of social services in Serbia. Rather than strengthening and reforming existing institutions, the government shifted the provision of social care to aid organizations, development funds of foreign countries, as well as newly established NGOs, funded by the European Community and other large donors (Begović and Mijatović). This is not to say that foreign aid was not advantageous on the contrary, without it, the Serbian population would have had great trouble recovering from the damage done in the 1990s. However, in the long-term, the new system was not sustainable. III Privatization The aforementioned historical circumstances, and the subsequent trends in Serbian political economy processes had the greatest impact on present transition dynamics. Overall, unfortunately, the transition is viewed as being a failure, falling short of fulfilling all set goals; so far, it has failed to jump-start production, free the economy from political control and increase efficiency in the public sector. Street protests, massive layoffs, cancellation of privatization agreements, as well as a request on the part of the European Commission for the investigation of over 20 dubious privatization deals, have all lucidly attested to this. Furthermore, circumstances such as these have called into question the general model of privatization which is ardently supported by authorities at the World Bank. In spite of its clear shortcomings, the Serbian Privatization Law of 2001 was lauded by the World Bank and evaluated as the best law on privatization among transition countries (Živković). This legislature arguably points to the World Bank's disregard for the provision of a necessary social net to soften the blow of these sloppy, poorly supervised privatizations. The law facilitates and sometimes even encourages the purchase of enterprises with funds of unknown origin, by individuals of unknown criminal background, all the while discriminating against legal entities by allowing only private investors various forms of concessions. In spite of numerous claims by the government that privatization checks are thorough, there is 5

ample evidence demonstrating that buyers have found ways to circumvent these checks. What's more, in some instances it is even evident that the checks themselves have been designed in conjunction with the government and privatization agency with the very intention of being circumvented. For instance, checks pertaining to the purchase of domestic enterprises by offshore companies are virtually nonexistent. Similarly, the PA has explained that it does not possess the adequate resources to submit criminal record certificates for examination such that essentially there is no way of ascertaining if a buyer's certificate is forged or not. Lastly, it is not uncommon for buyers to make purchases via proxies as the origin of the funds used in the purchase is never investigated (Dojčinović). The conditions surrounding the sale of public enterprises are an ideal breeding ground for buyers whose sole intention is the stripping of assets of newly purchased enterprises seeing as investors buy enterprises in installments, as soon as the first payment is made, they are able to mortgage the property, strip its assets or even use it to purchase additional enterprises subject to additional asset-stripping and further loans before driving it into bankruptcy. Once the buyer defaults on his/her installments, the Privatization Agency terminates the privatization contract. However, by the time the company is back in state hands, all that is left is a shell it no longer possesses any assets and has at this point accumulated even more debt than it had before the sale. The buyer answers to no one, but his company now has to be restructured using public funds and it is the taxpayer who foots the bill at the end of the day (Dojčinović). Since the beginning of the new wave of privatizations, 629 contracts - out of a total of 2281 - have been terminated because the new owners have stopped production, stripped assets and/or failed to pay workers. In spite of the fact that 28% of privatizations have failed, the Privatization Agency still prides itself in the efficiency of privatized enterprises. Seeing as all governments since 2001 and many opposition parties have had a hand in the privatization process, it is understandable that the reigning political elite is always reluctant to probe into suspicious privatization deals. The same goes for the Privatization Agency whose formal duties include simultaneously acting as a mediator and overseer of the privatization process, while there is no external entity which is in charge of monitoring its activities. In June 2011, the European Commission put forward a request for Serbia to investigate two dozen of its dubious privatizations. However, it wasn't until just before the presidential and parliamentary elections in April 2012 that the judiciary issued a statement that it evaluated all 6

reports pertaining to the privatizations in question and that several pre-trial and criminal proceedings had been initiated. Among these are several large enterprises including the Serbian telecommunications operators "Mobtel," the supermarket chain "C-market," several pharmaceutical companies, as well as one of the oldest railroad car manufacturing and maintenance companies in Serbia. However, it is important to keep in mind that most of the failed privatizations occurred outside of the public eye i.e. small, local enterprises in remote municipalities - and that the cumulative effect of those privatizations remains yet to be seen. Widespread layoffs have become commonplace in the Serbian transition economy. The Privatization Agency reports that "the effect [of privatization] on employment is particularly negative" seeing as, in 2010, privatized enterprises employed 60% workers less than in 2002. However, the Agency also explains that this is not intrinsic to the process of privatization, but rather a product of external forces which happen to also cause non-privatized enterprises to experience a 54% decrease in workforce. In other words, a monstrous rise in unemployment cannot be attributed to privatization, but rather to "a loss of market, aging of technical and technological equipment, modernization and an inadequate structure of the workforce in terms of qualifications and age." The complete deindustrialization of Serbia's previously prosperous industrial centers Zrenjanin being the most obvious example with a current unemployment rate of 35% - is hardly attributable to the sudden aging of the workforce and technological equipment. This type of damage could be done only through the institutionalization of detrimental economic policies. The Serbian Labor Law closely regulates the problem of redundancy. Namely, the employer is obliged to draft a detailed program outlining the reasons for the termination of the relevant employees' contracts, their work histories, as well as a proposal for resolving the socioeconomic position of these employees. The labor union, as well as the national employment agency, is prescribed a very important role in the process of creating a support structure which would enable the employee to later find new employment. However, the 30 strike actions that occurred just in 2009 involving factory occupations, railway blockades, city-hall and police station takeovers, sleep-ins, boss-nappings, hunger strikes and even a case of self-mutilation speak best to the extent to which workers are de facto protected from the negative effects of privatization (Srećković). Investors in newly privatized firms have 7

found many ways of circumventing the law, in particular with respect to the distribution of severance payments. They have done so in a number of ways by sending workers on paid leave, by making them sign consensual terminations of employment and even by blatantly refusing to fulfill their obligations stipulated by the law. In 2009, paid leave was even encouraged as a solution for dealing with the "effects of the global economic crisis." Faced with 2500 job losses per month, the Serbian Parliament passed legislature which enabled employers to extend paid leave during which wages are 60% of original amount to over 45 days. This was done under the guise of saving jobs and taking a burden off of employers struck by the global recession. However, all it did was create additional insecurity for workers, giving their employers the power to indefinitely prolong their state of employment limbo. In effect, a report by the International Labor Organization (ILO) points to the fact that, since the democratic government came to power in 2001, efforts were made to remove unnecessary overprotection of employees in the job market such that it would be more efficient and attractive for foreign investors. Previous labor laws were deemed inefficient as they provided such strong employment protection that it was nearly impossible to lay off workers. The new Labor Law, however, increased the scope for employers to dismiss their employees, introduced rules for a redundancy program and legalized a wide variety of employment contracts, creating a space for a wide range of "partial employment" contracts which ultimately served to the detriment of the worker. These three changes in the legislation only exacerbated the highly segmented nature of the Serbian workforce characterized by a large group of highly protected employees in the public sector and a significant portion of completely unprotected workers in the private sector that had been encountered in 2000. That is, in the years since 2000, while those working in the public sector lost a great deal of rights, those in the private sector gained little to none at all. In public debate over the causes for unemployment, government representatives usually state the global economic crisis as one of the main factors for causing such a great rise in unemployment. However, in reality, unemployment has been a problem since the beginning of the transition even when growth was the strongest. Employment dropped from 53.4% in 2004 to 49.9% in 2006, which was not only significantly below employment rates of EU countries, but also those in the region, such as Croatia, Romania and Bulgaria. In other words, even in 2006 at 21.6%, Serbia had the highest unemployment rate in the region (except for Kosovo). 8

(Crnobrnja and Savić) A culmination of discontent occurred in 2009 with the spread of numerous strikes and protests throughout the entire country. However, these protests occurred in the shadow of other events (independence of Kosovo, global economic crisis, etc.) which ultimately received a larger amount of media coverage. Unfortunately, the outcome of the protests was insubstantial compared to the energy and devotion invested by the protestors. One company however succeeded in completely overturning the new owner, who employers accused of leading into bankruptcy Jugoremedija, a pharmaceuticals manufacturer. After a long struggle which would later serve as a paragon for further action, Jugoremedija succeeded in establishing its own management, overturning the general and financial directors and restarting production. (Srećković) The majority of other cases, however, were not as successful. At least a quarter of all privatizations to date have been cancelled, and as many as half of all privatized enterprises have been shut down. The gravity of the failure of privatization stems from the fact that privatization is the principal ingredient of a country's transition, and as such to a large extent determines both the success of that very transition, but also the relevant economy's ability of subsequently participate in market processes. The lack of efficient participation indirectly leads to a number of adverse consequences, especially in terms of the social agenda. Poorly conducted privatization is directly linked to infringement of the rights of laborers, a decrease in wages and consequent shortfalls in the implementation of necessary social programs. V Proposal for Alternate Policies In terms of legislature, indications point to the need for a wholly revised privatization law, with a more efficiently incorporated set of guidelines for the implementation of socially conscious policies, i.e. policies with an awareness of the potential social detriments that can be caused by privatization of enterprises. However, having in mind that the implementation of legislature depends not only on the legislature itself, but also on a wide range of other factors (e.g. the efficiency of the judiciary), it would be best to do an overall analysis of the feasibility of privatization with institutions that are in place and then execute privatization that is based on relevant local conditions and trends. An 9

awareness of the chronic possibility of the appearance of corruption is necessary such that new mechanisms can be devised for its prevention. The biggest question, however, is what industries and enterprises should be subjected to privatization in the first place. For an fair and efficient privatization process, a clear delineation should be made as to what industries would perform better if operated by private owners and which ones must remain in public hands. 10

Works Cited "Analiza Efekata Privatizacije u Srbiji.". Agencija za Privatizaciju, n.d. Web. 25 Sep 2012. <http://www.priv.rs/upload/analiza/full/>. Begović, Boris, and Boško Mijatović. "Četiri godine tranzicije u Srbiji.". Center for Liberal Democratic Studies, n.d. Web. 25 Sep 2012. <http://www.clds.rs/pdfs/4_godine_tranzicije.pdf>. Commission of the European Communities. Stabilization and Association Process for South East Europe - Second Annual Report. 2003. Web. <http://www.becei.org/dokumenti/com03_139_en.pdf>. Crnobrnja, Mihajlo, and Nebojša Savić. "Economic Developments During Transition.". Faculty of Economics, Finance and Administration, 2006. Web. 1 Sep 2012. Đelić, Božidar. "Rezultati Rada." N.p., n. d. Web. Web. 25 Aug 2012. <http://www.djelic.net/rr_minfin.html>. Dojčinović, Stevan. "Serbian Privatization: Criminals Still Cashing In." BalkanInsight. 04 Nov 2011: n. page. Web. 25 Sep. 2012. <http://www.balkaninsight.com/en/page/all-balkans-home>. Hamilton, F. E. Ian. Yugoslavia: Patterns of Economic Activity. London: Bell, 1968. Print. Harasty, Claire. International Labor Organization and the Council of Europe. Employment Policy Review: Serbia. 2007. Web. <http://www.coe.int/t/dg3/socialpolicies/socialrights/source/employmentpolicyreviews erbia.pdf>. "The New Model of Privatization in Serbia." Center for Liberal Democratic Studies, Dec 2000. Web. 20 Aug 2012. <http://www.clds.rs/pdf-e/e-privatisation.pdf>. Milovanović, Milić. "Property Rights, Liberty, and Corruption in Serbia." Independent Review. XII.2 (2007): 213-234. Print. "Proverene privatizacije na zahtev EU." RTS Vesti. 16 Apr 2012: n. page. Web. 25 Sep. 2012. <http://www.rts.rs/page/stories/sr/story/125/društvo/1084004/proverene privatizacije na zahtev EU.html>. Srećković, Milenko. Protests against the Privatization Process in Serbia; Global Balkans Interviews Milenko Sreckovic (Pokret za Slobodu) 09 10 2009. Print. http://www.globalbalkans.org/node/15. Vujačić, Ivan, and Jelica Petrović Vujačić. "Privatization in Serbia: Results and Institutional Failures." Economic Annals. LVI.191 (2011): n. page. Web. 25 Sep. 2012. <http://www.doiserbia.nb.rs/img/doi/0013-3264/2011/0013-32641191089v.pdf>. Živković, Zoran. "Transition in Serbia - Achievements and Challenges." London School of Economics. 23 Jan 2004. Lecture. 11