Российская академия наук институт международных экономических и политических исследований модели системной трансформации и социальная цена реформ (опыт России, СНГ и стран цве)

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Šuković D.
Table 1. Unemployment in countries of Central and Southeastern Europe, 2002
Table 2 Employment by sectors of ownership in economy of Serbia in 2002 and 2003
Structure of Capital in the Economy of Serbia in 2003, in
Economic branches where more than 75% is social or state capital
Economic branches where more than 70% of capital is private
3.1 Profitability and solvency of the real sector
Efficiency of resources utilization in the economy of Serbia in 2003
Losses in Serbia’s economy in 2003
Table 8. Monthly consumption per household member in Serbia in 1990, 2000 and 2003 (In euro)
Pattern of consumption in Serbia in 1990, 2000 and 2003
Table 9 Gini coefficient

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**Šuković D.^{^*}**

INFLUENCE OF ECONOMIC REFORMS ON POVERTY AND INEQUALITEIS IN SERBIA

Introduction

As distinct from other post-communist countries where transition was completed or is in its final phase, Serbia is in a delayed transition. That is why both results and consequences of transition cannot be, either at the economic or social level, directly compared with the ones in other countries. In addition, it is necessary to point to two considerations that transition in Serbia make specific.

First, one should take into account that Serbia as well as other states of former Socialist Federal Republic of Yugoslavia had, before entering transition, a system of self-management that was based on specific participation of the employed and where considerable elements of market economy existed, especially as far as goods market was concerned. For that reason, it was realistic to be expected that implementation of a free market economy would be rapid and successful which should have been certainly an advantage of Serbia in transition. Very successful transition in Slovenia is in part result of these advantages.

However, Serbia also had a big handicap in relation to other countries due to deep economic and political crisis in the period 1990-2000 caused by well-known events. The crisis not only checked the advance of reform processes that began with success in late 1989 and early 1990 but also devastated economic resources and destroyed fundamental social values without which development of a democratic and economically successful society cannot take place.

Though self-management legacy was a big advantage, this can be now viewed as a missed opportunity while the handicap, caused by a decade long crisis, is a big obstacle to reforms in Serbia. Poor results of reforms in the past four years, since the inception of democratic changes, are in fact the cost of that handicap. Corruption and crimes that have remained even after four years of reform processes at a high level are the best illustration of that heavy heritage.

It is just for these reasons that Serbia must have chosen a very delicate program of reforms taking as a starting point both its own specific heritage and big experience of other countries in transition. However, this did not happen. Not only that Serbia did not adapt the concept of reforms to its specificities but also it fell into the trap of Washington consensus that is, as is well known, long ago outgrown and refuted. That is why some economists^¹ are of the opinion that Serbia is only now at the beginning of reforms. But, that is certainly a too severe judgement. Reforms in Serbia have yielded, despite numerous difficulties, certain results but these results fall short of expectations, the fact on which there is a general consensus.

In order to evaluate the situation with regard to reforms in Serbia it is important to establish that they have not entered the key stage as regards privatisation, microeconomic restructuring and institutions building while macroeconomic stabilization and liberalization have been carried out relatively rapidly and successfully, though long-term macroeconomic stability has not been secured.

As can be seen, reforms in Serbia are far from their end and for that reason the overall cost of transition is not known yet. Privatisation of the largest part of big social and infrastructural state companies is yet to come. That will certainly result in extensive lay-offs of workers, which the new private sector would not be able to absorb owing to its slow development.

As social consequences of reforms manifest themselves through the labour market, we shall first, therefore, with a view to elucidating effects of economic reforms on poverty and economic inequalities, indicate basic characteristics of the labour market in Serbia. After that, we shall give a brief account of the situation in the real sector of economy and then proportions of poverty and economic inequalities, as logical effects of changes in the labour market and in real economy.

Labour Market in Serbia

Basic features of the labour market in Serbia in the past decade and a half are as follows:

Mass open and disguised unemployment;
Low rate of earnings;
Large wage differentials for the same type of work and small differentials according to complexity of work;
A high level of long-term unemployment,
A big share of grey economy that engages a large proportion of the population.

Unlike other countries in transition in Central and East Europe where fall in economic activity resulted into reduction in employment, in Serbia in 1990s the social product fell by more than 50% while employment was formally reduced by only 15%. As the level of employment did not follow the declining level of economic activity, the resulting outcome was a large reduction in earnings. The purpose of keeping excessive number in employment was to cushion the fall in the standards of living and to preserve social peace. However, on the other hand, this resulted in big fall in productivity in the formal sector, high rise in disguised unemployment, and expansion of grey economy and informal labour market.

According to some estimates, disguised unemployment in state and social enterprises, defined as surplus employment the marginal product of which equals zero, amounted to about one third of the employed.^²

Low wages along with large open and disguised employment have boosted growth of grey economy. In addition to the unemployed working in grey economy, those having employment in state and social enterprises also work there, supplementing in that way their earnings.

In the whole period from disintegration of Yugoslavia until the end of 2003 employment in Serbia was constantly on the decline. Thus, we have now a high rate of unemployment that is, according to official data on employment and unemployment about 30%, and according to a survey on labour force about 15% which is, considering a high level of grey economy, surely more reliable. Rise in unemployment in transition is unavoidable because large restructuring of the total economy takes place and jobs are lost more rapidly in the state sector than they are created in the private one. The problem of Serbia lies in the fact that restructuring of big state and social enterprises have not taken place yet and their big labour surpluses are only to appear at the labour market where the rate of unemployment is already high. The only way out is expansion of the new private sector that would absorb big surpluses of unemployed. Failing this, Serbia would be threatened with a problem of long-term high unemployment that would, of course, have unfavourable repercussions on long-term development and standards of living of citizens.

Table 1.

Unemployment in countries of Central and Southeastern Europe, 2002

Country	Unemployment Rates
Country	Registered at the end of the period	LFS average
Albania	14.5	-
Bosnia&Herzegovina	40.0	-
Bulgaria	16.3	17.8
Croatia	21.5	14.8
Macedonia	-	31.9
Romania	8.1	8.4
Serbia&Montenegro	31.2	13.8
Czech Republic	9.8	7.3
Hungary	8.0	5.8
Poland	18.1	19.9
Slovakia	17.5	18.5
Slovenia	11.3	6.4

Sources: CANSTAT statistics bulletin 2002/4, IMF, National Labour Force Survey (LFS) Statistics.

Dimensions of unemployment in Serbia are also illustrated by comparable data presented in the above Table 1.

Analysis of the situation in the real sector of economy

In addition to the analysis of labour market through which effects of reform changes on standards of living of the population are reflected, it is necessary to take stock of effects of transition changes on the real sector of economy, on the efficiency of which, after all, social well-being of the nation depends.

After democratic changes of 5 October 2000 conditions were created in Serbia for rapid and successful reforms. Implementation of all-comprehensive and efficient reforms were expected that would result in a quick economic recovery and rise in the standards of living of the population. The international community granted donations by the end of 2003 amounting to about 2 billion euros and soft credits amounting to 1.3 billion euros.^³ The European Union revoked import levies for goods imported from Serbia. However, it showed out soon that reform processes are neither rapid nor all-comprehensive and that foreign donations and credits that are predominantly spent on consumption cannot have any significant effect on economic recovery. Real sector continues to be in deep crisis, illustrated by an analysis of it on the basis of balance sheets in economy for 2003.

Depending on prevailing type of ownership, all enterprises in the economy of Serbia were divided into four groups:

Enterprises with 100% private capital;
Enterprises with majority private capital, over 50% being private capital;
Enterprises with totally social or state capital, i.e. 100% social or state capital;
Enterprises with majority social or state capital, over 50% being social or state capital.

The employment figures in enterprises grouped according to the form of ownership in 2002 and 2003 were the following:

Table 2

Employment by sectors of ownership in economy of Serbia in 2002 and 2003

Enterprise	2002		2003
Enterprise	Number in 000	%	Number in 000	%
Completely private Majority private Completely social or state Majority social or state	499 140 337 206	42.2 11.8 28.5 17.5	533 120 315 185	46.2 10.4 27.3 16.1
Economy-Total	1,182	100	1,153	100

Source: National Bank of Serbia, Service for credit worthiness, balance sheets in economy;

- Own calculations.

If we consider totally private enterprises and the ones with majority private capital as a private sector as a whole, we can see that the number of employments in those enterprises increased in 2003 by 2.2%. In the same period, the number of employed in the social sector, i.e. in the remaining two groups in 2003 was reduced by about 8%. More rapid fall in employment in the social sector than rise in the private one points to known problems of reforms in Serbia, being not only slow privatisation but also poor development of autochthonous private sector.

The fact stands that the private sector exceeded in terms of the number of employments social and state enterprises but in order to have the picture of the scope of ownership changes in economy more complete, it is necessary to have also a look at other indicators. Thus, the structure of capital completely differs from the structure of employment.

Structure of Capital in the Economy of Serbia in 2003, in %

To the extent to which the private sector is superior as regards the number of employed to the same extent the social and state sector is superior as regards capital. It is evident that the private sector prevails in the tertiary sector while the social and state one holds its ground in the primary and secondary ones, i.e. in capital-intensive activities. This also means that the so-called »small privatisation« was carried out to a large extent in Serbia while »big privatisation«, i.e. privatisation of large, capital intensive and from business point of view controversial enterprises is yet to come, which is certainly the most difficult and crucial part of reform.

Insight into results of privatisation will be more complete if we see in which branches social or state capital prevails and in which the private one.

Table 3

Economic branches where more than 75% is social or state capital

Branch	Share of social or state capital in the total one,%	Number of employed
Electric power industry	100	23,813
Railroad transportation	100	29,007
Air transportation	100	5,492
Forestry	99	7,144
Water resources management	99	3,785
Public utilities	96	43,088
Urban planning	96	7,546
Oil and gas production	92	17,472
City transportation	75	24,508
Non-metal working	75	16,765

Source: National Bank of Serbia, Service for credit worthiness, balance sheet for 2003.

The situation with economic branches where the majority capital is private is presented in Table 4 below.

Table 4

Economic branches where more than 70% of capital is private

Branch	% Share of private capital	Number of employed
Production and processing of tobacco	100	3,806
Tourist agencies	100	3,035
Production of building material	80	17,637
Production of beverages	80	19,053
Processing of chemical products	80	27,975
Foodstuff production	70	77,183
Manufacture of wood finished products	70	24,003
Catering	70	27,971
Retail trade	70	59,178

Source: National Bank of Serbia, Service for credit worthiness, balance sheet for 2003; author’s calculations

We presented here branches where social and state capital prevails and where the private one prevails. In other branches the share of private and social ownership is more even. However, in order to have a more complete picture of the structure of ownership in our economy one has to have in mind that more than 30% of our economy is in the grey zone, which is outside legal developments and which is naturally in private ownership.

A large share of grey economy is also being indicated as one of the causes of slow development of new private companies, i.e. of new autochthonous private sector that would have to absorb the surplus of labour employed in the social sector. Entrepreneurs are simply in grey economy. That is why suppression of grey economy and its shifting into legal streams is of great significance for starting or accelerating reforms.

3.1 Profitability and solvency of the real sector

If we take as an indicator of profitability turnover^⁴ per employed and the ratio of EBIT^⁵ to turnover, then, according to forms of ownership, it looks like in Table 6

Table 6.

Employee turnover and EBIT ratio in 2003

	Turnover per employed (in 000 din.)	Level Economy = 100	Ratio of EBIT to turnover in %
Totally private Majority private Totally social or state Majority social or state	2,457 1,543 1,059 1,407	135.7 82.5 58.5 77.7	5.0 -7.0 -13.7 -10.5
Economy – total	1,811	100	-3.8

Source: National Bank of Serbia, Service for credit worthiness, balance sheet for 2003; author’s calculations

Extremely low level of turnover per employed and a negative rate of EBIT to turnover in the economy as a whole, excluding totally private sector, speaks of business inefficiency resulting into very unfavourable competitiveness of economy of Serbia. Position of the private sector is considerably favourable in relation to the social and state one but its efficiency is also by far below the level needed to be able to fight with success strong competition at the world market.

To evaluate efficiency of resources utilization in the economy of Serbia we shall take two well-known indicators: profit rate and turnover coefficient of working capital.

Table 7

Efficiency of resources utilization in the economy of Serbia in 2003

	Profit rate	Turnover coefficient of working capital
Totally private	2.3	2.26
Majority private Totally social or state Majority social or state	-5.3 -3.7 -6.2	1.91 1.87 1.23
Economy - total	-2.5	1.96

Source: National Bank of Serbia, Service for credit worthiness, balance sheet for 2003; author’s calculations

A very low coefficient of turnover of already lacking working capital indicates irrational utilization of resources that, naturally, had as an effect bad business results. Profit rate is globally negative (-2.5%), which means that not only there is no return on invested capital but also the negative rate warns about the process of disinvestments.

The private sector has a higher turnover coefficient and a positive profit rate of 2.3%, and it is certainly the most successful, but the degree of its efficiency is still far below the optimum and one might rather say that it operates on the verge of profitability.

Unsuccessful conduct of business in economy had to result in big business losses. Thus, at the end of 2003, accumulated losses of Serbia’s economy amounted to 739.4 billion dinars that, calculated at the exchange rate on 31 December 2003, amounted to EUR 10. 8 billion. Out of these losses, totally private enterprises account for 21.5%, majority private 6.2 %, totally social or state ones 51.7% and majority social or state ones 20.5%. Viewed as a total, social and state enterprises account for 72.3% of losses and the private ones 27.7%.

Losses in Serbia’s economy in 2003

In order to have a full picture of the situation in the real sector of economy we shall add to this host of indicators another one. It relates to the degree of depreciation of equipment. In the economy as a whole in 2003, depreciation of equipment was 83%. Even according to this criterion the social sector is in a more unfavourable position since the degree of equipment depreciation in it is about 90% while the private sector is in a better position with the rate of about 75%.

This short analysis of situation in the real sector of economy indicates that, in addition to the fact that the private sector is more efficient by a wide margin, reforms in Serbia are still skin-deep and that the crucial stage of transition is yet to come.

Poverty and economic inequalities

Deep economic crisis since the beginning of 1990s has inevitably had grave repercussions on the standards of living of the population. Data that we present below show that the standards of living of the population in 2000 were more than three times lower than in 1990.

Table 8.

Monthly consumption per household member in Serbia in 1990, 2000 and 2003

(In euro)

Category	Year
Category	1990	2000	2003
Food	58.2	20.7	39.0
Drinks and tobacco	10.1	3.3	5.4
Clothing and footwear	14.1	3.0	7.0
Housing, fuel and light	15.4	5.2	14.9
Household furniture	6.8	0.7	5.0
Health care	5.4	2.5	3.6
Education, culture and leisure	7.7	0.9	5.8
Transport and PTT services	13.5	2.8	11.9
Savings	19.1	2.6	-
Other	18.0	2.9	6.9
TOTAL	168.3	44.6	99.5

Source: Federal Statistical Office and Republic Statistical Office, Surveys on consumption of population; author’s calculations

Accordingly, average monthly consumption per household member in 1990 amounted to EUR 168.3 while in 2000 it was only EUR 44.6.

Since democratic changes in October 2000 consumption has risen from EUR 44.6 in 2000 to EUR 99.5 in 2003. One might conclude at first sight that a sudden and big rise in the standards of living occurred. However, one should not lose sight of the fact that in late 2000 prices were liberalized causing their considerable rise while the exchange rate of dinar in relation to euro was relatively stable meaning that the purchasing power of euro in Serbia was rapidly falling. This is best illustrated by comparable data on development of domestic inflation and the exchange rate of dinar for euro. While prices in the period 2000 – 2003 rose by 146.3, the exchange rate of dinar for euro at the same time rose only 30.6%. This disproportion indicates that the rise in prices was faster by 115.7% while consumption in euros was increased by 123% so that a conclusion may be drawn that the standards of living in Serbia rose on an average in the first three years of reforms (2000 – 2003) by about 7.3%. This calculation is based on mentioned survey researches and relationship of changes in retail prices and the exchange rates of dinar and euro. In fact, what is about is that there was a mild rise in the standards of living that is completely in accord with everyday idea of changes in the standards of living of population.

Changes in the standards of living are well illustrated, in addition to absolute indicators, by data on the pattern of consumption.

Pattern of consumption in Serbia in 1990, 2000 and 2003

In %

Category	Year
Category	1990	2000	2003
Food	34.6	46.4	39.2
Drinks and tobacco	6.0	7.4	5.4
Clothing and footwear	8.4	6.7	7.0
Housing, fuel and light	9.1	11.7	15.1
Household furniture	4.0	1.6	5.0
Health care	3.2	5.6	3.6
Education, culture and leisure	4.6	2.0	5.8
Transport and PTT services	8.0	6.3	12.0
Savings	11.4	5.8	-
Other	10.7	6.5	6.9
TOTAL

Source: Surveys on consumption in households, Federal Statistical Office; own calculations.

A big fall in the standards of living in the period 1990-2000 had as its aftermath increase in the share of expenditures for food by about 12 structural points while purchases of durable consumer goods and expenses for education and culture were almost ignored. That is, in fact, the gravest result of a decade long crisis. It is a known fact that neglecting of education, culture and health has very negative repercussions on long-term development.

Analysis of the above absolute and relative data on the standards of living can serve to evaluate the scale of poverty.

An official line of poverty is not established in Serbia but there are other criteria that can be used in an analysis of poverty. That is the consumer basket defined as a minimum consumer basket of food and drinks for a four-member household necessary to satisfy minimum needs for food in accordance with nutritional requirements. Based on an official survey on household consumption conducted by official statistical services, and taking the consumer basket as a poverty line, it is estimated that in Serbia in 2000 about 35% of the population was poor. Since in the period 2000-2003, as we have shown, a mild rise in the standards of living came about, a conclusion can be drawn that the level of poverty was lower in 2003 by 5 – 7 per cent.

Economic inequalities in Serbia until early 1990s, when the crisis ensued, were minor. In the period 1970-1990, the Gini coefficient, as the most reliable measure of inequality, amounted to about 0.28. A low level of economic inequality in that period reflected the system of distribution of income that had been based on small personal incomes differentials, i.e. on a high degree of egalitarianism. As early as 1990 not only poverty increased suddenly but economic inequalities expanded. The system of closed economy, high inflation and escalation of crimes and corruption have had as an aftermath large stratification of the population. Thus, according to my own calculation on the basis of the mentioned survey on consumption of households, the Gini coefficient had the following values:

Table 9

Gini coefficient

Year	Gini coefficient
1988	0.28
1992	0.39
1993	0.45
1994	0.35
1998	0.31
2000	0.37

The lower the degree of development of a country, the smaller tolerance of the size of economic inequalities is and, therefore, values of the Gini coefficient over 0.30 in case of Serbia are undoubtedly excessive and point to a big stratification harmful to permanent stability of the society.

Accordingly, first, long-standing crisis and then slow and insufficiently efficient reforms have resulted into a large number of poor citizens, accompanied with social stratification. How Serbia will cope with these setbacks depends in the first place on efficiency of next reform steps.

References:

Ronald G. Ehrenberg and Robert S. Smith: "Modern Labour Economics – Theory and Public Policy", eighth edition, 2003
Gordan Krstić and Božo Stojanović: "Fundamentals of Reforms of the Labour Market in Serbia", EI and CLSD, Belgrade 2001
"Social Picture and Reforms in Serbia", research, Friedrich Ebert Stiftung, Belgrade 2002
Biljana Bogićević, Gordana Krstić, Boško Mijatović: "Poverty in Serbia and Reform of Government Assistance to the Poor", CLSD, Belgrade, 2002
Surveys on consumption of households, Federal Statistical Office, Belgrade, several issues
Survey, Serbia & Montenegro, Belgrade, 2004
"Changes in Values and Transition in Serbia", collection of papers, Institute of Social Sciences, Belgrade, 2003
Šuković Danilo: "Transition of the Real Sector of Economy in Serbia" in the collection: "Economic Liberties and Business Environment", Association of Economists of Serbia and Association of Economists of Montenegro, Miločer, 2004.
Šuković Danilo: Globalisation and Poverty« in the collection "Globalisation and Transition", Institute of Social Sciences – Centre for Economic Research, Belgrade, 2002.
Maksimović Slobodan and Danilo Šuković: "Basic Limiting Factors of the Transition Process in our country", in the collection "Transition Processes – scope, limitations and prospects (with special reference to Montenegro)", Montenegrin Academy of Science and Arts, Podgorica, 2004.

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