EUROPEAN AFFAIRS

By Misa Brkic

You have voted now pay for it.

Something like this could be the message to the citizens who, have voted at the recent parliamentary elections in Serbia for parties which are the constituents of the Government and parliamentary majority, but now are "whining" the state is expensive, insatiable, and spendthrift.

The beginning of the article is by no means vicious message to voters whose fear from the easygoing Government has been reinforced especially after the budget amending for this year and announcement of the state expenditures for the next one. On the occasion of 100 days of the Government work, economic experts also stated as one of its key faults its taxpayers` money light spending. Pensions increasing, investment in joint automobile factory with Fiat, Corridor 10... are just some of the big projects that are the budget burden and need more and more money, although we have every day assurances that the Government does all this for the benefit of its citizens.

Even this Government`s good intention could turn out either way. In other words, it can bring small benefits on one hand and, on the other, cause great damage.

Public sector consumption share of more than 40 percent GDP is too high and unsustainable for the country as Serbia is, and rising fiscal policy the budget is being filled in with during the last five years has contributed at an average of 15.3 percent yearly to the rise of salaries of those employed in the state administration (while the yearly GDP rise in the same period was averagely 5.6 percent). Such rise of salaries and consumption considerably has contributed to the high foreign trade deficit that has finally ended in the two-digit inflation rate and threatens to seriously endanger macroeconomic stability of the country.

Inflation, deficit, "inflated" dinar exchange rate and populist promises - ideal and standard picture for the liquidity crisis of a country and at the beginning of autumn Serbia was exactly ahead of such a crisis. It was crucial for foreign investors` decision not to invest their capital in Serbia although it was believed political situation pacification could suit the rise of direct foreign investments. It was good occasion for foreign investors to fill in the budget (instead of citizens - tax-payers) and, by the way, increase employment and decrease payments balance deficit. Government decision to maintain too big budget appeared as very harmful one since it has been driving away private investments and slowing down economic growth.

Taking into consideration that external deficit and potential crisis in Serbia will remain actual in the course of the years to come, it may be worth checking several European Union countries and their way of solving the problem currently molesting Serbia.

In literature and practice very often are mentioned the examples of Ireland and Portugal.

The moment it has started serious reforms, Ireland opted for attracting foreign investments in electronics and medications production that has contributed to considerable increase of productivity and export. Government has decided to raise salaries but always a bit less than the total productivity growth. In order to keep the balance of payments balance under the conditions of foreign investments growth the Irish Government has been decreasing public spending and therefore it had current account - surplus.

What has Portugal done? Great foreign investments influx was not directed into production but the incommutable goods sector, mainly real estate. This way neither export nor was productivity growth enabled. Anyway, the Portugal Government opted for the raise of wages that has been (as in Serbia) bigger than the growth of the total productivity. Therefore export has become unprofitable (profit margin has been constantly decreasing) and export sector has grown even smaller which led to the payments balance deficit growth. At the same time, high fiscal deficit also existed. The moment the payments balance became unbearably high the Government had to start reducing it that prompted - recession.

Which of those two examples are similar to Serbia? The Portugal one since it constantly increases salaries above the productivity of labour, it does not decrease public spending and foreign investments primarily directs into the sector of incommutable goods.

What is the message for Serbia? To apply the experience of Ireland.