February 17, 2002

Milosevic's disastrous economic legacy

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‘Don’t fly to Belgrade in January, you’ll never get out.” As the dense fog enveloped the central Serbian plain I knew what my Yugoslavian colleague had meant. Holed up for days in the Belgrade Hyatt may not give a sense for how the ordinary Serbs lived under Milosevic, but it did throw some light on the society he created.

Every night the hotel’s bar filled up with frightful gangsters and their beautiful, leggy molls ordered pina coladas as the temperature outside fell to minus ten. These people had got very rich under Milosevic and were keen to show it. The carpark was bumper to bumper with gaudy Ferraris and Porsches — most were stolen in Germany or Italy by Serbian gangs and then sold in Belgrade to the new rich.

While the vast majority of the people managed to survive on about $60 a month, these gangsters had money to burn. They were the winners of Sloboeconomics, the weird and highly regressive financial regime that Slobodan Milosevic put in place to guarantee political power. His 12 years in power were a textbook lesson in economic expediency.

The economic aspect of his disastrous rule is often overlooked, particularly when the world is focusing on war crimes. Yet economics played a central role in his ascent and grip on power. From day one he manipulated the economy to keep the opposition divided, desolate and confused. In direct contrast to ‘normal’ politicians who eulogise about the economy in good times and seek to ignore it in bad times, Milosevic was always constant.

From the start, he regarded the economy as a tool that could be used to create whatever environment was necessary to support his political ends. If chaos was needed to deflect attention, then chaos was delivered. If a semblance of normality and tranquillity was required, then that was engineered. Throughout his years in power, Milosevic pushed the Yugoslav economy from one extreme to the other.

Before coming to power, Milosevic was one of the most important bankers in Yugoslavia. As head of Beobanka (the biggest bank in Yugoslavia), he understood the political power of money, savings and affluence. For him, affluence and cash bred dissent and he believed it was “better to have a poor country with no dissent than a rich one with someone else at the helm.” From day one he went about eliminating what he saw as the “enemy within” — the wealthy, moderate, middle classes in Serbia.

Traditionally, Yugoslavs kept all their savings in hard currency. Most of the cash was earned in Germany, Sweden or France by Yugoslav “guest workers” and was sent home. Throughout the 1950s, 1960s and 1970s, Yugoslavia (like Ireland) depended on emigrants sending cash home.

Marshall Tito recognised this and allowed all Yugoslavs to hold two bank accounts: one in dinars for pocket money and one in hard currency for real savings. When Slobo came to power, he realised that to remain on the throne he had to hit the middle classes in their pockets, where it really hurt as, otherwise, they would tire of his crude, opportunistic nationalism and oppose him.

Claiming that the Yugoslav army needed the cash to prosecute the Bosnian War, Milosevic froze the precious hard currency savings. At a stroke, $7 billion was robbed from the citizens (this is a lot of money in a country where GDP per head is now $1,000). He replaced this hard currency with dinars.

Initially, to let tensions cool down, he kept the dinar stable but, when the dust had settled, Milosevic began to print money hand over fist. The ensuing inflation reached 10,000 per cent in 1994, eliminating the wealth of the middle classes entirely.

Faced with poverty, a significant proportion of the only potential opposition left the country. This suited Milosevic down to the ground. It is believed that over two million Serbs now live abroad.

He then set about creating an economy based on a system of licences — all of which were issued by him. By 1996 everything in Serbia required a licence, from leasing a shop and opening a bar to trading securities and financing exports. At every juncture, someone from the Socialist Party got his or her cut. Milosevic’s cronies were lining their pockets and, in the process, bolstering the main man.

Ironically, the imposition of sanctions — by eliminating other sources of cash and trade — bolstered his position. As a result, the economy was controlled totally by Slobo. This was an economy of licence fees, backhanders and extortion. Everybody knew the score. If you wanted to do business, you paid for the pleasure.

Therefore, the Milosevic regime, far from being an economic and political tyranny, can be more aptly described as kleptocracy, where an extortionate, licence-based system thrived. The only thing that kept the lid on everything was not the secret police or army but a system of intricate favours with just enough people lining their pockets and everyone owing the big man.

In 1997, having replaced the old economic system with one stuffed with his cronies, Milosevic changed tack again and replaced inflation and uncertainty with a strong currency and stable prices. Now that the middle classes had been eliminated, he saw it was essential to keep the prices of basics low to buy off pensioners, soldiers and farmers.

By 1998, with street protests mounting again, a stable financial system became more crucial than ever. Milosevic realised that he needed to keep what was left of the opposition peaceful.

Having wiped out their real power by successive bouts of hyperinflation, he now only needed to give them a feeling of modest economic security, without losing his grip on the underhand extortionate economy. To do this he needed to keep the exchange rate stable.

He did this by selling the family silver, netting DM1 billion of hard currency through the sale of Serbian Telecom (in a deal reputedly brokered by former British Foreign Secretary Douglas Hurd who had been pensioned out of politics to a big job at Nat West bank).

He also allowed wage arrears to mount, particularly in the easily controlled countryside. By late 1998, inter-company debts had risen to eight billion dinars — twice the size of the money supply. While the exchange rate was being kept artificially high, any chance of Serbian companies exporting competitively was ruled out.

Ultimately, the only way this Lilliputian economy could grow was via exports. However, Milosevic was prepared to sacrifice even this remote possibility to ensure that the schizophrenic economy endured and that he tightened his grip on the state.

This disastrous combination of the strong exchange rate along with asset stripping and no investment, eroded the economy’s marrow, leaving little more than a brittle shell.

This economic labyrinth was blown apart by the war in Kosova. With no real infrastructure, the economy, such as it was, ceased to function. The regime managed to stay afloat with soft credits from China, free fuel from Russia and anti-Western rhetoric, which rings true if your houses have been bombed and the south of your country is occupied. But ultimately, the Serbs saw sense and rejected him.

Rebuilding the economy after 12 disastrous years will prove almost impossible. But because of the overwhelming need for cash, the new government handed over Milosevic (against the wishes of the new president) on foot of American promises of aid.

What next for Slobodan Milosevic? Well this week’s performance at the War Crimes Tribunal indicates that he still appears to live in a twilight world where he is a wronged man with the world against him and the innocent Serbs.

A lot will be written about him over the coming weeks and history will certainly judge him harshly, but I wonder if any epitaph would fit quite so aptly as, “Here lies Slobodan Milosevic, a man who understood above all that everyone can be bought and everyone has his price.”