FOUR YEARS OF TRANSITION IN SERBIA Center for Liberal Democratic Studies Boris Begović and Boško Mijatović (editors) FOUR YEARS OF TRANSITION IN SERBIA Published by Center for Liberal Democratic Studies For editor Zoran Vacić Design Zoran M. Blagojević 2005. FOUR YEARS OF TRANSITION IN SERBIA Boris Begović Milica Bisić Milica Djilas Boško Zivković Gordana Matković Boško Mijatović Marko Paunović Danica Popović Slobodan Samardžić Snežana Simić Dragor Hiber This project is supported by the Earhart Foundation and Atlas Economic Research Foundation Contents Introduction ........................................................................................................7 1. General Overview of Transition in Serbia .....................................................9 2. Economic Activity and Macroeconomic Policies in Transition .....................................................................................................33 3. Public Finance Policies .................................................................................117 4. Privatization of the Real Sector ...................................................................187 5. Real Sector Restructuring ............................................................................209 6. Banking Sector Restructuring .....................................................................227 7. New Economic Legislation ..........................................................................243 8. The Reform of the Judiciary and Judicial Legislation ...............................263 9. Financial Market Reform .............................................................................283 10. Reform of the Labor Market and Labor Relations ....................................295 11. Reform of Pension and Disability System ..................................................337 12. The Social Infrastructure Reform ...............................................................347 13. International Relations .................................................................................365 14. Basic Issues of the State ................................................................................411 15. Four Years of Transition in Serbia: The Resume and a Look Ahead ...................................................................437 Authors ............................................................................................................467 Introduction Transition in Serbia has entered its fifth year and it is time to review the progress made so far, to evaluate the ground covered and identify obstacles to be expected on the road to a liberal-democratic system, a market economy and the rule of law. In addition, this book aims to explain the decision- making mechanisms that have formed this transition and the factors that have influenced the decisions made. Politicians act rationally and react to incentives from their surroundings. This is why it is important not only to determine how far transition has progressed, but also to explain why the transition has taken the form it has. In some respects this book is a logical sequel to the overall activity of the CLDS on the monitoring and the analysis of the transition. The first step in that direction was the collection of papers entitled The Strategy of Reforms (2003) comprising works written at the beginning and in the first phases of this wave of transition including texts by Vojislav Koštunica, Zoran Djindjić, Miroljub Labus and others. While those texts mostly dealt with the ideas and plans of reformists and high state officials, the texts in this collection offer an overview and analysis of the situation over the last four years. In this respect these two books are complementary. 1st September 2005. Boris Begović Boško Mijatović Boško Mijatović General Overview of Transition in Serbia INTRODUCTION In the developed part of the world, institutions evolved gradually during tens and hundreds of years, in order to get to the present rational and efficient forms. In 2000 Serbia attempted to compensate for at least part of the historic delay and, by using good political and economic concepts and accumulated experiences, conduct the reforms swiftly and build new, democratic and capitalist institutions. Today, four years since the beginning of transition, Serbia is in the middle of deep changes of the government, political, economic and social system. Changes are probably happening more slowly than they should, but also faster than is sometimes thought. Transition is usually defined as a change of the institutional system of a country, i.e. the group of domestic institutions and related mechanisms providing a framework for the behavior of individuals and their interaction, such as the market or elections. The institutional system covers, inter alia, the political and economic system, so it is possible to differentiate between the political and economic transition. Political transition essentially encompasses: democratization, i.e. multiparty system and fair elections; change in the character of the state, i.e. parliamentary liberal democracy instead of the party state; and the new role of the state, i.e. the state with the role limited to the protection of the rules of the game and moderate intervention, instead of the all-powerful paternalistic state. Economic transition encompasses the abandonment of the socialist model of economic activity, either centrally- planned, or self-management-market model, and the construction of the standard market model with the domination of private ownership.2 V. Gligorov (Serbia and Montenegro: Situation and Proposed Reforms, 2004) claims that transition in Serbia so far has been quite unsuccessful and is consequently still at the beginning. 2 More details, L.Balcerowicz – Socialism, Capitalism, Transformation, Central European University Press, Budapest, 995 0 Boško Mijatović For most East European countries in transition, the classification into political and economic transition meets the cognitive needs. It is different with the countries created by the breakup of the USSR and SFR Yugoslavia, which, apart from the narrow political and economic changes common to all countries in transition, also entered two additional transition processes: building of a (new) state and search for (new or innovated) national identity, which makes their transition much more complicated. This is particularly true for Serbia, which came out of the 990s as a defeated side in the war for Yugoslav heritage and, thus, faced the problems of the determination of the new state (the issues of Montenegro and Kosovo and Metohia) and the formulation of a new national strategy. Most of the literature on transition is dominated by its economic aspect. This is probably caused by the fact that economic transition is perceived as a more complex and less certain process than political transition, while the social aspect is, generally speaking, quite disregarded. This book is not an exception from the rule either: economic transition has been given most room, whereas much less space has been dedicated to political transition (only the most important issues will be dealt with) and even less to social transition. Nevertheless, when analyzing transition in a country, it should always be borne in mind that transition is a multidimensional phenomenon and that the economic component is only one of many. PRIOR TO OCTOBER CHANGES Political developments during the 1990s The first wave of political and economic transition in Serbia was initiated already towards the end of the existence of the former SFR Yugoslavia, at the same time as in other republics, present independent states. During the federal government of Ante Marković, at the very beginning of the 990s, deep economic reforms of the old self-management economic system were initiated, It is interesting that perhaps the first state reform paper in Eastern Europe with a developed concept of promarket reforms was prepared by a Milošević’s committee and published in 988. It called for shareholding as a way to solve the negative effects of Yugoslav social ownership. Still, in view of the subsequent developments, it is more likely that this was just a tactical move in bargaining with other republic authorities rather than honest pleading for procapitalist reforms. General Overview of Transition in Serbia whereas the party reform was initiated with the breakup of the Communist Union of Yugoslavia (SKJ) along republic lines. Around 990 an impetus to the reforms in Yugoslavia was certainly given by the collapse of socialism in Eastern Europe, as well as the inefficiency of the system of socialist self-management, so clearly demonstrated during the 980s and before. Simply put, the then party and political elite realized that the old path, including cosmetic changes, was no longer viable. The only issue was how far to go with reforms. It was clear to some that that the goal had to be capitalism, while the others, together with Gorbachov,4 naively believed that the third path was possible – the path that would combine the best of socialism and capitalism. The former would give wide state interventionism and state ownership over large and important companies, while the latter would give the market, to the necessary extent. In the political sphere, democracy would be limited, i.e. there were dreams of the so-called non-party pluralism (Mihajlo Marković). The beginning of reforms, stable exchange rate and opening of the country to the world brought the feeling of prosperity