THE UNITED KINGDOM Source: U.S. Department of Commerce, Survey of Current Business August 1990, Vol. 70, No. 8, Table 13 * Section 8 is an abridged version of Section 6 of the United Kingdom country report included in the Department of State's Country Reports on Human Rights Practices for 1990, submitted to the Congress January 31, 1991. For a comprehensive discussion of worker rights, please refer to that report. YUGOSLAVIA Key Economic Indicators (Millions of U.S. Dollars unless Yugoslavian Dinars 1/ Gross Social Product (GSP) or material product is the total output of goods plus services regarded as productive. This approximates but is 10-15 percent less than Gross National Product. Socialized sector, excluding police and armed forces, plus employed in non-agricultural private sector, excluding self-employed. 2/ 1. General Policy Framework After the first six months of Yugoslavia's shock therapy program, directed by the government of Prime Minister Ante Markovic, Yugoslavia looked to be on the track to a comprehensive economic reform program and a major reduction in inflation. However, events of the last four months have put into question the ultimate success of the government's efforts. YUGOSLAVIA In analyzing the reform process in Yugoslavia, it is essential to realize that in Yugoslavia's highly decentralized self-management economy the constituent Republics of Yugoslavia, rather than the federal government, exert much of the authority in economic policy. Macroeconomic policy coordination is weak and the federal government has few of the fiscal and monetary levers present in most modern states at its disposal. The federal government continues to seek additional legislative and constitutional changes to obtain the authority it needs in these areas, but these efforts have been blunted by larger ideological and ethnic differences among the constituent Republics. Despite these obstacles, the initial achievements of the federal government's program were remarkable when viewed against the dismal economic conditions of the country in 1989. Prime Minister Markovic and his team presided over a reform program which brought monthly inflation down from 64.4 percent in December to negative 0.2 percent in April. The centerpiece of the anti-inflation strategy was to peg the dinar to the Deutsche mark at a 7 to 1 rate and to pursue a restrictive monetary policy. In the first quarter of 1990, the new measures led to an extraordinary hard currency inflow which increased foreign exchange reserves dramatically. Foreign exchange reserves rose from $5.5 billion in December 1989 to $8.5 billion in May 1990 and peaked at just under $10 billion by September. Meanwhile, despite increasing concern that the 7 to 1 peg was unrealistic in view of Yugoslavia's inflation record in comparison to that of the Federal Republic of Germany, Yugoslav exports to the West increased 11.5 percent in the first nine months of 1990. The combination of the convertible dinar, the increase in foreign currency reserves and the dramatic decrease in inflation served to restore public confidence, which had been battered by two years of hyperinflation and continued interrepublic squabbling over the country's constitutional future. Two indicators provide evidence that the main lines of Federal economic policy were leading to increased confidence in the economy. With the liberalization of laws concerning private business, Yugoslavia saw an explosion of newly established private firms in 1990. The Yugoslav government estimates that nearly 40,000 of these firms, primarily in the service sector, have been formed since January 1990. Foreign investment also increased markedly. Through the first 10 months of 1990, 2,300 foreign investment contracts were signed, although most of these ventures are small scale with the foreign investment ranging from a few thousand dollars to a peak of $35 million. Economic reform began to stall as Yugoslavia entered into multiparty elections in the republics of Montenegro, Macedonia, Serbia and Bosnia-Hercegovina in November and December 1990. Further progress on structural reforms will be hampered until a new consensus emerges on Yugoslavia's political and economic future. The crucial constitutional issues turn on how much authority the constituent republics should cede to the federal government and how decision making can adequately reflect the divergent views of the republic leaderships without becoming excessively bogged down by consensus procedures. Whether genuine multiparty elections will produce an electoral mandate which will translate into an effective constitutional structure remains to be seen. YUGOSLAVIA Industrial restructuring, banking reform and privatization are critical factors in Yugoslavia's economic future and are central to reducing inflationary pressures in the economy. Fallout from serious restructuring would include a major increase in unemployment in a country already burdened with a 16 percent unemployment rate. Estimates of worker redundancy countrywide range from 30 to 50 percent. The lack of a sufficient formal safety net or available resources to support the displacement of such a large proportion of the work force is of concern to those governing at both the federal and republican level. - In general, at all levels in the Yugoslav government system federal, republic and municipal budgets are balanced during the fiscal year which runs from January 1 to December 31. Due to high levels of inflation, ex ante budget forecasts have proven to be far off actual expenditure levels. Public sector indebtedness is minimal in Yugoslavia, but the quasi-public sector (enterprises and financing authorities for health, education and pensions) are chronically in deficit which puts considerable pressure on monetary policy and strongly contributes to inflationary pressure in the Yugoslav economy. Federal budget revenues are derived mainly from customs duties and sales taxes, and from tax contributions of the republics. While federal expenditures constitute a small share of gross social product (GSP), expenditures at republic, provincial and municipal levels puts overall publicsector consumption well above the Organization for Economic Cooperation and Development (OECD) average. The In view of the limited fiscal tools at the disposal of the federal government, monetary restraint is the most important policy instrument of the central government. National Bank of Yugoslavia (NBY) employs discount rates, reserve requirements and credit ceilings on commercial banks to regulate the money supply. Historically, effective control over the monetary stock has proven elusive in Yugoslavia, but in 1990, the NBY proved much more effective in controlling the money supply and restricting access of unprofitable enterprises to credit. Over the past fifteen months, the NBY has gained considerably augmented authority and is slowly implementing a complicated rechartering and restructuring exercise which will eventually lead to a major streamlining of the Yugoslav banking structure. To halt Yugoslavia's hyperinflationary surge which peaked at an annual rate of nearly 25,000 percent in December 1989, the Federal Executive Council (FEC - Yugoslavia's cabinet) opted for a strategy of pegging the Yugoslav dinar to the Deutsche mark at a fixed exchange rate of 7 to 1. To support this step, monetary policy was tightened significantly. The move to internal convertibility allows Yugoslav citizens to exchange dinars for foreign exchange in Yugoslavia. Some neighboring countries also recognize the de-facto convertibility of the dinar vis-a-vis their currencies. sharp buildup of foreign exchange reserves enabled the Markovic government to establish the dinar's internal convertibility, but relatively high Yugoslav inflation (now projected to be at least 140 percent in 1990) suggests that The YUGOSLAVIA either a major devaluation or a move to a broader float against major OECD currencies is now warranted. The move to peg the dinar against the Deutsche mark has made U.S. goods more price competitive versus those of Japan and Western Europe. At this point, there is little evidence that U.S. firms have exploited the commercial opportunities that the FEC's import liberalization provides. While some OECD countries such as Germany, Austria and Italy have experienced a major growth in exports, U.S. sales to Yugoslavia have remained static. Despite a widespread perception that the dinar is overvalued, exports to the convertible currency area increased by 11.5 percent through September 1990. By the end of 1990, exporters were complaining that the fixed dinar peg had made exports unprofitable and the key tourist sector began to view itself as increasingly uncompetitive. The dinar/D-Mark peg is also contributing to a major increase in imports from convertible currency countries and a widening trade deficit. It appears that the federal government will be forced to make major policy adjustments prior to the onset of the peak tourist season in 1991 or Yugoslavia could again experience balance of payments difficulties. The key structural issue for the future is privatization of the socialized industrial sector. Future lines of policy are unclear at this point. While some policy interests favor rapid and far-reaching privatization, others are strongly opposed to the dilution of social property ownership. Internal inefficiencies in the socialized sector continue to undercut economic performance and contribute to inflationary pressures in the economy. Falling industrial output (an 11 percent drop in 1990 compared with 1989) has still not been translated into comprehensive industrial restructuring. Yugoslavia still suffers from relatively low labor productivity and the fixed dinar/D-Mark peg has resulted in a major increase in domestic labor costs relative to Western Europe. Moreover, wages continue to be disbursed without regard to productivity or business performance. Through July 1990, wages increased 57 percent despite the Markovic government's restrictive credit policies. Unemployment averages 16 percent but varies regionally from about 5 percent in the Republic of Slovenia to nearly 40 percent in the Serbian province of Kosovo. While Yugoslavia's agricultural sector is strong relative to other East European states, the 1990 summer drought throughout the Balkans led to an unanticipated 4 to 5 percent decline in agricultural output. Yugoslavia's past import substitution development strategy led to pervasive protection for domestic industry and agriculture. Already in the mid-1960s, the economy manifested problems of cumbersome overregulation and politically directed resource allocation. Since early 1989, the Markovic government has pursued an aggressive policy of liberalizing prices and opening the economy to foreign competition. Successive trade liberalizations (quotas have been eliminated to the extent that 90 percent of all imports are unrestricted) carried out in 1989 and 1990 served to dampen inflationary pressures, |