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Global
Research, October 28, 2009
Devastating "Free Market" Reforms
Imposed on Serbia
by Gregory Elich
http://globalresearch.ca/index.php?context=va&aid=15849
©
Copyright Gregory Elich, Global Research, 2009
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A dozen years ago, neoliberal political forces
took power in Serbia, promising a radical
transformation of the economy. Today, deep into
that transformation, Serbia is foundering from
its effects exacerbated by the worldwide
economic downturn. Industrial production has
fallen 15 percent compared to the average of
last year, (1) while unemployment remains high.
A delegation from the IMF is in Belgrade,
negotiating over Serbia's 2010 national budget
and how best to deal with the economic crisis.
The two sides are not far apart, in that both
parties envision more of the usual neoliberal
prescriptions as the way out of an economic
crisis brought about in large part by those very
same measures.
The probable outcome of the talks is the further
enthrallment of Serbia to Western dictate.
Already the economy has been essentially placed
at the service of U.S. and Western European
corporate interests, and the centerpiece of that
transformation is the privatization drive. The
economy of Serbia was at one time predominantly
based on two forms of public enterprises:
socially-owned firms that were worker managed,
and larger state-owned companies. The last
remaining firms in the former category are
scheduled to be completely eliminated by the end
of this year, while the latter category will
take longer to tackle.
The outcome for those who work at enterprises
that undergo privatization has been all too
predictable. Companies privatized in accordance
with the 2001 privatization law have shown a
decrease of 45 percent in employment over the
first two years of private ownership. Those
companies that are privatized based on the 2003
law dropped just 15 percent by the end of the
first year, but this apparent difference was
only because of the extensive downsizing that
these firms must undergo prior to sale, in order
to make them more attractive to investors. The
textile industry has been particularly hard hit,
with steep job losses and falling performance.
As the Privatization Agency reveals, "the
performance of privatized companies is worse
than the performance of the sector as a whole,"
an interesting admission. (2)
Inevitably, it is working people who bear the
brunt of privatization. Unemployment in Serbia
steadily grew since 2000, when neoliberal
political forces came to power, quickly reaching
32 percent within four years. (3) After that
there was a modest economic recovery, due in
part to the short-term influx of cash from the
sale of enterprises through privatization.
Unemployment dropped to 16 percent by April
2009, but this apparent improvement is illusory,
having to do mainly with the recent adoption of
the current American model for calculating
unemployment. Under this method, workers who are
not regularly and actively seeking jobs are
counted as "discouraged," and "out of the job
market," and therefore not belonging to the
ranks of the unemployed. If one adds back in the
number of workers who are classified as
"inactive" but who profess both the ability and
the desire to work, then the unemployment rate
increases to 25 percent. In real terms, then,
there has been no meaningful improvement in the
unemployment rate. (4) To put this in
perspective, at its peak in 1933, unemployment
during the Great Depression in the U.S. reached
25 percent, a figure that was then not
calculated to exclude a significant portion of
workers. Today Serbian workers are enduring
their own Great Depression, but one that has
been imposed through adoption of the neoliberal
economic model. For those who lose their
livelihoods, there is little hope. Nearly two
thirds of the non-discouraged unemployed have
been without work for a year or longer,
sometimes much longer. (5) They are society's
discards.
"Pay is often barely enough for basic needs
including food and bills," points out Dejan
Bizinger on his blog. "There is absolutely no
way for them to get a mortgage from a bank to
buy a car, let alone affording a flat." At an
unemployment center, a woman remarks, "Of course
I could not get employment." Seeing little hope,
she was applying for a reduced early pension. "I
am a 50-year -old engineer holding a university
degree and the only place I can find a job is at
a fast-food restaurant. Think how humiliated I
would feel after 30 years of work at the office
to start flipping burgers at some local shop." A
British resident of Belgrade relates that the
"Serbian people are crying out to be able to get
mortgages and loans that will allow them to move
out of their parents’ houses before they turn
40, and by that same token they are crying out
for the kind of financial responsibility that
will see them become voluntary slaves to their
companies; living in fear of losing their jobs."
(6) The free market has come to Serbia, with all
that it entails.
But things are not universally dire. For those
who are well-positioned, there is money to be
made, and it is that class that the Serbian
government is keen to serve. In particular, it
is Western corporate interests that are being
wooed. As the Serbian Chamber of Commerce
reports, "the key objective" of the
privatization process "is to attract foreign
investment." (7)
To further that objective, the Law on Foreign
Investments offers a broad host of incentives.
The corporate tax rate is quite low, just 10
percent. But companies are totally exempt from
any taxes whatsoever for a period of ten years
from the first year in which they make a profit,
as long as they invest a minimum of $11 million
and employ at least 100 people. This is an easy
hurdle to clear for any investor purchasing a
medium-to-large sized firm. Yet even companies
unable to meet those conditions are offered a
variety of other tax incentives, so that in real
terms the corporate tax rate tends to be well
below 10 percent. The Law on Foreign Investments
also offers guarantees against nationalization,
removes restrictions on foreign investment and
provides custom duty waivers. (8) In addition, a
company that hires a new employee is permitted
to take a tax reduction of 100 percent of that
person's salary for a period of two years.
To meet the demands of Western corporate
investors, Serbia has also launched a program
entitled the "guillotine of regulations," which
aims to quickly eliminate one third of Serbia's
regulations governing business operations. (9)
It is probable that many of the regulations that
will be axed serve some protective function for
the populace. At the inception of the
"guillotine" project, the Ministry of Economy
invited foreign investors to offer their
recommendations on what they wanted to see it
accomplish. (10) No clearer signal could have
been given as to the project's objectives.
U.S. corporate circles are not shy about
ensuring that their needs get met. Their
presence is woven throughout the Serbian
economic and political system, running much
deeper than such visible manifestations as the
spread of Western companies and chain stores and
the blight of billboards.
Representing the views of the U.S. corporate
world, the U.S. Agency for International
Development (USAID) has implemented a number of
programs in Serbia designed to promote those
interests. Among other things, USAID says, its
efforts are intended to "help deepen structural
reforms." One of its programs that is designed
to advance that objective is the Bankruptcy and
Enforcement Strengthening (BES), which helps the
Serbian Privatization Agency Bankruptcy Unit
"privatize state and socially-owned enterprises
through bankruptcy, reorganization and/or
liquidation in a more efficient and effective
manner." (11) Not to mention making those
enterprises cheaper to purchase for the Western
investor. The BES program is managed by a
private contractor, Booz Allen and Hamilton,
which reports that it is also "attracting global
IT companies to outsource in Serbia." (12)
One of the pillars of USAID's efforts is the
Serbia Economic Growth Activity (SEGA), in which
the agency "advises" the government of Serbia
"on the formulation and implementation of laws,
policies and procedures relating to financial,
fiscal and macroeconomic development." (13) It
is SEGA that played a major role in the
establishment in Serbia of the Value Added Tax,
the most regressive form of taxation there is.
(14) The Value Added Tax currently stands at a
whopping 18 percent, but the IMF is pushing for
it to be raised still higher. Among SEGA's "key
results" achieved so far has been its
involvement in the introduction of private
pension funds, which are envisioned as an
eventual replacement for Serbia's public pension
program. (15) The organization is currently
actively "facilitating the next stages of
pension reform." Having helped establish
voluntary private pension funds, SEGA is
currently "analyzing the feasibility of
introducing mandatory private pension funds."
(16) The outcome of that analysis is entirely
predictable: the abolishment of the public
pension fund and the abandonment of retirees to
the tender mercies of the market.
Another component of the agency's efforts in
Serbia is the Municipal Economic Growth Activity
(MEGA), which sees its role as "facilitating
private sector growth" through a variety of
means, including advocating policies and
supporting legislative action. (17) That
"support" goes so far as to include direct
participation in the drafting of Serbian
legislation.(18)
MEGA's most important accomplishment has been
the establishment of the National Alliance for
Local Economic Development (NALED), "through
which leaders from both business and local
governments gather together around issues of
common interest." (19) Interests, it probably
goes without saying, that are inimical to those
of the working population. NALED has initiated
what it terms the Business Friendly
Certification, which is awarded to those local
governments which prove themselves sufficiently
subservient to USAID's demands.
NALED organizes "business encounters" once a
month to promote "open dialogue between
businesses and government," thereby furthering
the influence of the business world on
government policy. (20)
In July, 2009, NALED signed a memorandum of
understanding certifying Belgrade as a "business
friendly environment." In line with that
agreement, USAID's MEGA program will train all
of the employees in the city and municipal
governments "on how to provide relevant
information on development opportunities to
prospective investors." MEGA will also work with
the city on drafting an action plan and defining
priorities and projects. It is MEGA that will
play the primary role in those endeavors.
Belgrade is to be oriented firmly towards the
business investor. (21)
Igor Pavlichich, mayor of Novi Sad, Serbia's
second largest city, observes, "Since we joined
USAID's Municipal Economic Growth Activity
program, many expert analyses have been
developed on how to rationalize the city's
budget expenditures. Program experts have
advised us on how to use the budget funds for
the capital investments in infrastructure. From
now on, public utilities will have to take care
of their budgets and to move on to a more market
oriented approach."(22) Such statements make one
wonder: who is running the affairs of this city,
the mayor or USAID? Looking to the future, the
city has also developed a strategy of economic
development, with the heavy involvement of
USAID.(23)
In Nish, the city assembly passed a decision to
offer land for industrial construction.
Employees of MEGA actually wrote the draft
legislation, which the city dutifully passed
with the backing of the mayor, who reported that
the city would be "offering a number of
incentives to new investors." (24) The project
is being run by MEGA, and the project leader is
an employee of that organization. "The city
leadership showed great flexibility in
negotiations with potential investors," comments
the project leader. (25)
Earlier this year, representatives from the
towns of Loznica, Zrenjanin and Kragujevac set
up presentations at the Hanover Industry and
Technology Fair. "Our appearance at this fair
was actually a prize won at the Invest in Serbia
competition," pointed out a member of the
Loznica group. "All costs of the travel were
covered by USAID through its MEGA program." The
group's display was also supported by USAID
consultants who gave the town's delegation
"directions on how to promote themselves," which
smacks of treating the town's municipal
employees as children in need of guidance. But
they learned their lessons well. As one member
of the delegation remarked, "Our competitors are
India, China and Pakistan, for the cheap labor
and wider market potentials." (26)
Since USAID's goals run directly counter to
those of any rational working person, propaganda
is an essential component of its efforts. The
agency can help there too, providing "funding
and technical assistance to NGOs across Serbia
so that they can mobilize citizens to understand
and support necessary reforms." (27) These
reforms are considered "necessary," but for
whom? Only for the class that stands to gain
from them.
Another organization actively involved in the
affairs of state in Serbia is the American
Chamber of Commerce, as it seeks to promote U.S.
business interests. Its "support" of the reform
process goes so far as to actually help write
Serbian legislation and to have legislation
submitted to it for its approval. In a recent
example, representatives of the American Chamber
of Commerce met with Natasha Kovachevich,
Assistant Minister of the Fiscal System
Department in the Ministry of Finance. The
meeting took place in response to a list of
recommendations for so-called "improvements" to
the Corporate Tax Law that the American Chamber
of Commerce had submitted to the agency.
Kovachevich informed the visiting committee that
"most of the AmCham recommendations would be
incorporated in the New Draft Law," planned to
be adopted in tandem with the 2010 budget.
Kovachevich then "invited AmCham representatives
to a follow-up meeting as soon as the new Draft
Law is completed, but before it is sent to
Government," so that the American Chamber of
Commerce "can talk over any further amendments."
(28)
The Foreign Investors Council (FIC) represents
the interests of Western corporations in Serbia.
Its purpose "is to assist Serbia in fully
accepting and nurturing market economy and
introducing a system of European values and
standards." In order to "improve the investment
and business development climate in Serbia," the
Foreign Investors Council makes "concrete reform
proposals." (29) In other words, it meddles in
the Serbian regulatory and legislative process
just as the American Chamber of Commerce does.
Each year the Foreign Investors Council produces
a White Book, which includes "proposals for
improvement of the business environment in
Serbia." The aim of the White Book is to "point
out the desired changes so as to improve
conditions for doing business, and to provide
concrete suggestions [to the Serbian government]
on how to improve them." As the FIC notes, the
organization "has always worked in close
partnership with the relevant government
authorities."
None of the FIC's "helpful" suggestions are
surprising. It calls for more privatization and
more "market competition," that is, additional
advantages for Western investors. The FIC
suggests that "additional decreases in labor
expenses are necessary." Apparently, Serbia's
already low salaries are considered still too
high to suit all investors. There should be
"further reductions of the income tax rate and
the income amount exempt from taxation, or by a
reduction in social security contributions." At
over 70 pages, the recommendations are far too
numerous to enumerate here, but suffice to say
that no stone is left unturned in this wish
list. (30)
Not to be left out, the World Bank has its own
set of prescriptions it is furnishing to the
Serbian government in addressing its fiscal
crisis. The Ministry of Finance asked the World
Bank to provide advice on constraining expenses,
a request the bank was all too happy to comply
with, stating that the Serbian "public sector is
already oversized."
The World Bank, while acknowledging the cuts
that Serbia has already made in public services,
feels that more can be done. Current pension
benefits are frozen for a period of two years,
an action that the bank deems "highly
desirable," yet the government of Serbia "should
also consider other methods for reducing
benefits on a permanent basis." Pension benefits
are "too high," the bank complains, explaining
that "the pension due to a new retiree in Serbia
is equal to nearly 60 percent of the net average
wage." Something has to be done about such a
state of affairs. After all, a person might
survive on such a sum. The solution? "Freeze
pensions, then index to inflation." But one has
to be careful not to overdo it, lest it cause a
popular backlash. "Over the longer term,
however, indexation based solely on inflation
will reduce pension levels to socially
unacceptable levels. Employees would be asked to
contribute 22 percent of wage over a lifetime of
employment to support a pension equal to 9
percent." What to do, then? Serbia should move
to a mixed inflation and wage based system in
which benefits would drop substantially but not
catastrophically. Another desirable reform would
be to reduce pension benefits for early retirees
"even if they meet the years of contribution
criteria." Raising the retirement age for women
would be another improvement, from the bank's
standpoint. The goal of pension reform, the
World Bank states, is to turn the pension system
"into a surplus-generating system which pays
very low benefits." What is the point of such a
pension system? Simply, to vanish. And in its
place? "The Government will also need to further
develop the private pension sector." (31)
The health system is another arena ripe for
reform. The World Bank suggests that "efforts to
right-size [translation: down-size] facilities
and staffing at hospitals and [community health
centers] should continue."The number of beds at
facilities can be reduced. The Health Insurance
Fund "now has a considerable number of
occupational therapists on its payroll." This
sector should be "assumed by the private
sector." Community health centers "could reduce
staffing levels without reducing the number of
consultations they provide." That is, existing
staff should be made to work harder and longer
hours and reduce the amount of time spent with
each patient. (32)
Education, the World Bank suggests, would
benefit from the "rationalization of the school
network, particularly at the primary level." The
problem, according to the bank, is that "Serbia
has too many teachers... As a result, many
classes are inefficiently small." The average
class size in primary school is 19 students, and
in secondary school it is 26. The recommendation
for rationalization of the educational system
would result in the widespread closing of
schools, bussing over long distances of students
who reside in sparsely populated areas, and a
"considerable reduction in staff." Those
teachers who survive mass layoffs would be made
to face the prospect of a lowered standard of
living. "In principle," the World Bank helpfully
suggests, "wage restraint could be a source of
future savings," and there is "no evidence"
contrary to the proposal that wages could be
lowered without generating recruitment and
retention problems." With a newly formed large
pool of laid off educational staff, there would
be an inevitable reluctance among employees who
might otherwise clamor over the reduction in
their wages. Current regulations in Serbia set
the maximum class size at 30. The World Bank
proposes changing the regulations so that this
number would instead become the minimum class
size. To counter claims that smaller class sizes
are more conducive to learning, the World Bank
points out that Serbian students score lower on
achievement tests than their counterparts in
some of the other nations of the region. The
implication is that packing more students into a
classroom will not matter, yet it is difficult
to imagine room for improvement under such a
scenario. Regardless, that program is underway.
The Ministry of Education has already initiated
a three-year plan to carry out some of these
measures, including the closing of schools and
mass layoffs. (33)
To appeal to the IMF and in order to meet loan
conditions, Serbia sent a letter of intent to
that organization in April 2009, in which a
number of promises were made. Serbia committed
to freezing pension and public employee salaries
for a period of two years and cutting
discretionary budgets in all ministries by 26
percent. More importantly from the IMF's
standpoint, Serbia indicated that state
ownership in banks "will be phased out as soon
as market conditions permit," and that it would
"continue to restructure state-owned
enterprises, increase private sector
participation, and improve the investment
climate." (34)
The IMF Mission that visited Belgrade in
September 2009 noted with approval that the
government of Serbia, "in consultation with the
World Bank, will proceed with health, education
and non-pension social benefit reforms." But the
IMF wanted to see a speed up in reforms. "It is
now time to shift from immediate crisis-fighting
mode to putting in place more medium-term
oriented policies," including yet more
privatization. (35) As an earlier IMF Mission to
Belgrade reported, "We welcome the renewed
efforts to accelerate privatization or
bankruptcy of socially owned enterprises," but
"we urge completion of the process as soon as
possible." Many of the previously privatized
firms have been sold for peanuts, closed down
and then stripped of their assets, leaving the
former workers without any livelihood. More of
this would be a desirable thing, as the IMF
suggests the nuclear option: privatize as fast
as possible, and where a firm cannot be sold in
a timely manner, close it down and sell off its
assets. "The bankruptcy process should be
strengthened, and government and public
authorities should initiate bankruptcies without
delay. Unviable companies that cannot be sold
rapidly should be liquidated to free up
productive assets." (36) This is a recipe for
sparking a huge leap in unemployment and mass
immiseration.
For the IMF, the economic crisis is seen as
fortuitous. "The current difficulties present an
opportunity to tackle long-delayed structural
reforms. While the global financial crisis may
not be particularly conducive to pushing ahead
with the still extensive privatization agenda,
this should not deter the authorities from bold
structural reforms. With vested interests likely
off balance, this may indeed be an opportune
time to tackle long-standing - politically
difficult - issues." (37)
That the Serbian government not only listens to
such proposals, but enacts them is an
embarrassment. The government of Serbia flaunts
its disregard for its own citizens. The
bourgeois parties in power represent only the
narrow interests of their own class and the
system's Western beneficiaries.
With mounting radicalization, workers are
increasingly responding to the abuses of the
system with strikes and protests. Despite strong
motivation among the workers, these actions tend
to lack much in the way of success, given spotty
support from the unions. Indeed, the unions
recently signed an agreement with the government
on mass layoffs of government employees. (38)
Unfortunately no measure is likely to dislodge
the grasp of Western power in Serbia in the
foreseeable future. The powers arrayed against
workers are at the present time too powerful,
and Serbia occupies too important a geographical
position in the Balkans, one that Western
corporations are not likely to readily
relinquish. Centrally located, and along the
Danube, the country has the region's major road,
rail and river navigation routes. The nation's
location is crucial for integrating the entire
Balkans under the neoliberal model and the
shipment of goods from this low-wage region to
the West. It is also an important trading
linkage between Europe and the Middle East. The
Corridor X project is planned to expand Serbia's
transportation capabilities, which as the World
Bank reports, " will enable Serbia to capitalize
on its geographical position as a key transit
country in the Pan-European network." (39) It
will be a long and daunting task for the Serbian
working class to reverse its losses.
Gregory Elich
is on the Board of Directors of the Jasenovac
Research Institute and on the Advisory Board
of the Korea Truth Commission. He is the
author of the book Strange
Liberators: Militarism, Mayhem, and the
Pursuit of Profit.
Notes
(1) "Industrial Production in August 2009,"
Statistical Office of the Republic of Serbia,
September 30, 2009.
(2) "Impact Assessment of Privatisation in
Serbia," Privatization Agency, Republic of
Serbia, October 27, 2005.
(3) "Unemployment in Serbia and Montenegro,"
www.worldwide-tax.com.
(4) "Labor Force Survey," Statistical Office,
Republic of Serbia, April 2009.
(5) "Labor Force Survey," Statistical Office,
Republic of Serbia, April 2009.
(6) Ljubisa Bojic, "Serbia: Unemployment and Low
Salaries," Global Voices, August 30, 2009.
(7) "Business in Serbia: Privatization," Serbian
Chamber of Commerce, October 11, 2009.
(8) "Serbia Investment Climate," U.S. Commercial
Service Serbia.
(9) "2009 Investment Climate Statement -
Serbia," U.S. Bureau of Economic, Energy and
Business Affairs, February 2009.
(10) "Willing to Help," Foreign Investors
Council.
"AmCham Business Advocacy Activities," AmCham in
Serbia.
(11) "Building a Strong Investment Climate,"
USAID Serbia.
(12) "Emerging Economies," Booz Allen and
Hamilton.
(13) "Building a Strong Investment Climate,"
USAID Serbia.
(14) "Serbia Economic Growth Activity (SEGA),"
US AID Serbia.
(15) "Serbia Economic Growth Activity (SEGA),"
US AID Serbia.
(16) "Serbia Economic Growth Activity: About
Us," USAID Serbia.
(17) "Municipal Economic Growth Activity
(MEGA)," USAID Serbia.
(18) "Municipal Economic Growth Activity:
Program Components," US AID Serbia.
(19) "Municipal Economic Growth Activity
(MEGA)," USAID Serbia.
(20) "NALED Portfolio," NALED.
(21) "Belgrade Signs MoU with USAID and NALED,"
Radio Television Serbia, Belgrade, July 8, 2009.
"Creation of the Investor Friendly Climate,"
Danas, Belgrade, July 9, 2009.
(22) "Interview with the Mayor of Novi Sad Igor
Pavlicic," Radio Television Vojvodina 1, June 2,
2009.
(23) "Novi Sad Develops Strategic Plan,"
Vecernje Novosti, Belgrade, June 16, 2009.
(24) "Nis Offers 10 Hectares of Land for
Industrial Construction," NTV, Nis, April 28,
2009.
(25) "Modernization of the Urban Land
Management," Narodne Novine, Nis, February 25,
2009.
(26) "Hanover Fair: Let the World Know That We
Exist," LoznickeNovine, Loznica, May 2009.
(27) "Strengthening Democracy and Governance,"
USAID Serbia.
(28) "Meeting at the Ministry of Finance,"
AmCham Serbia, Belgrade, September 3, 2009.
(29) "About Us," Foreign Investors Council in
Serbia.
(30) "White Book 2008," Foreign Investors
Council, Belgrade, 2008.
(31) "Serbia: Doing More with Less," The World
Bank, June 16, 2009.
(32) "Serbia: Doing More with Less," The World
Bank, June 16, 2009.
(33) "Serbia: Doing More with Less," The World
Bank, June 16, 2009.
(34) "Letter of Intent, Memorandum of Economic
and Financial Policies, and Technical Memorandum
of Understanding," Republic of Serbia, April 30,
2009.
(35) "Republic of Serbia : Stand-by Arrangement
- Second Review Mission, Aide Memoire," IMF,
September 1, 2009.
(36) "Serbia - 2007 Article IV Consultation
Concluding Statement of the Mission," IMF,
November 6, 2007.
(37) "Republic of Serbia: First Review Under the
Stand-by Arrangement and Requests for
Augmentation, Extension of the Arrangement,
Rephasing of Purchases, Waiver of Applicability
of End-March Performance Criterion and
Modification of End-June Performance Criteria,
and Financing Assurance Review," IMF, April 30,
2009.
(38) "Govt., Unions in Job Cuts Compromise,"
B92, Belgrade, October 9, 2009.
(39) "Serbia: Doing More with Less," The World
Bank, June 16, 2009.
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