Saturday, March 17, 2012

Research Paper on Yugoslavia

Research Paper on Yugoslavia

Hyperinflation in Yugoslavia
Economists distinguish several kinds of inflation: floating, galloping and hyperinflation. The last one represents a real threat to state economy, and it is the kind of inflation that affected Yugoslavia in 1992-1994. First of all, hyperinflation is characterized by high rates of price increase. The difference between prices and salary is so drastic, that it destroys the welfare of even the most well-to-do social classes. At the beginning of the 1990s the Union Republic of Yugoslavia experienced deep economic crisis, mainly due to its decay in 1991 and the creation of new states. It brought about the destruction of economy. Moreover, at the beginning of Yugoslavian war, the government had to expend great efforts to prevent the country from its direct participation in military affairs. Apparently, the government did not pay enough attention to the problems of economic policy. Inflation was considered a phenomenon of capitalist economy. As a result, an enormous economic crisis spread all over the country. In 1993 the gross domestic product reached only 49%, while the industrial output decreased to 41% (Watkins).

According to its rates of growth, Yugoslavian inflation of 1992-1994 occupies the second place in economic history. The peak of Yugoslavian inflation fell on January of 1994, when the use value increased 310 million %. The monthly level of inflation reached 1660%. Yugoslavian hyperinflation lasted for 22 months, which is the third record among other countries: in Nicaragua it lasted for 48 months, while China suffered from it for 26 months.

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Furthermore, one of the destructive consequences of inflation was money devaluation. The real quantity of dinar (Yugoslavian money) was brought down to a minimum (Lahiri, 1991). Thus, in January of 1994 the supply of money figured up to 0,3 % of gross domestic product, while in normal conditions it wobbled between 25-30%. Apart from this, consumer prices of 1993 increased 116,5 billion %, in comparison with the preceding year. The government tried to take measures, such as denomination of dinar, but there was no use. By the end of 1993 dinar still remained unstable. Its largest denomination was 500 milliard dinars, which cost less than a dollar. The statistics is striking. In such a way, average salary was expressed in billions of dinars, while in reality its value came to 15 dollars. The most unfortunate year of 1994 has been marked by everyday inflation of 62%.

The sources of Yugoslavian hyperinflation were the following:
1) The first one lies in sudden decrease of money supply, caused by rapid changes in tax base.
2) The second one deals with the percentage of average taxes. By the end of hyperinflation period, the value of Yugoslavian money was less then 4$ per caput. It means that the whole sum of national money could circuit 2 times a day. Despite the decay of money circulation, the profit from emissions remained stable: it equaled nearly 140 million dollars per month. Nevertheless, it was not enough to maintain gross domestic product at a proper level.

Generally speaking, if a country suffers economic inflation, losses are inevitable. Its first victims become consumers. All kinds of inflation negatively affect the welfare of the population. That’s why we may say that social and economic consequences of inflation are related to income changes in the first place.

What measures did the government take in this situation? In order to improve the circumstances, Yugoslavian authorities tried to compensate the expenses by reducing the period of tax collection. As a result, the consequences of inflation gradually became less destructive. The country had to sacrifice 50% of real taxes each quarter. By the end of the year the statistics reached 95% (Financial Market, 2006).

However, Yugoslavian government also made an attempt to use the increase of taxes as a way to overcome the problem of inflation. The taxation of wages reached 222%, and the authorities introduced a two-percent tax for all check payments. As a result, by the end of inflation crisis the tax rates were so high, that it was impossible to accommodate them to normal conditions, and they had to be reduced rapidly. That’s why it was hard to predict the budget income for 1994. Some modern economists consider that state expenses, based on tax increase do not influence the rate of inflation and demand. But there are completely opposite opinions as well, and this question is still argued about. In case of Yugoslavia neither increase, nor decrease of taxes brought about significant changes in the economy of the country.

One more reason for Yugoslavian inflation was deficit of state budget. It implied unbalance of state expenses and income. Such deficit is often covered by additional money printing, which causes the increase of money supply and eventually results in inflation (Watkins). Hyperinflation is characterized by disastrous increase of money quantity and product prices. The role of money itself becomes insignificant, and people, as well as enterprises turn to some more effective forms of payment, such as checks or barter trade.

As for microeconomic consequences of hyperinflation, it is important to notify that at that period Yugoslavian economy consisted of two sectors: “green market” and official economy. The green market included provisions and alcohol trade. During the years of 1992-1993 prices here were determined by German mark and Yugoslavian dinar according to unofficial rate of exchange. Official economy included larger stores and firms of financial and non-financial sector (state, cooperative and private), which used check payments.

Political crisis of the 90s led to lack of control over money supply in economy, while falling-off of production reduced the amount of product offering. It became a threatening factor for economic instability and resulted in shortage of goods. Deficit of products became a serious consequence of Yugoslavian hyperinflation. At first, it was caused by price freezing in 1993, which turned out to be unsuccessful. However, even in later years it was almost impossible to overcome deficit. Prices of vitally-important goods were doubled and tripled. Thus, a hand knit sweater, which in normal conditions would cost no more than 80$, was sold for 200$ during the period of hyperinflation (Gruber, 1991). The matter is that retailing business did not go well, and tradesmen failed to buy new goods in time at the expense of their earnings. The prices were determined for a short period of time. However, large stores could not change prices more often than once a day. That’s why they began to decrease the variety of goods. Perishable goods were not sold at all. Other kinds of products were kept in warehouses. Shortage of goods was accompanied by the reduction of working hours from 12 to 7. It gave an opportunity to revalue the prices. In the official sector of economy, the situation was aggravated by the necessity to accept checks, as this process took several days. All the above stated circumstances suggest that high level of inflation leads not only to irrational use of resources, but also destruction of market functioning. Only at the end of 1994, the shortage of goods in Yugoslavia began to disappear, due to the stabilization program, launched by the government.

Despite all aspects of the inflation catastrophe, economic situation in Yugoslavia began to gradually improve. The turning point was “The Financial Reconstruction and Economic Improvement Program”, adopted on August 24, 1994. This date marked the transition to economic stabilization. The program consisted of several stages. The first one implied the monetary system reconstruction and a number of new measures against inflation. It aimed at reduction of inflation level, economic stabilization and improvement of market functioning. In the sphere of monetary policy, the program provided for a liberal formation of exchange rate. The program disapproved such measures as price and salary freezing. But it also gave an opportunity to reduce the budget deficit in a relatively short period of time. The increase of budget income created a basis for budget balance.

With the help of this program, Yugoslavian government managed to reconstruct economy and create favorable conditions for further economic growth. This program helped achieve impressive results. It not only stopped hyperinflation, but also ceased the process of price growth and eliminated financial shortage. However, it was not enough for the prosperity of the country. Despite visible improvements, Yugoslavia suffered enormous losses, because of the economic disintegration.

Summarizing our research on Yugoslavian inflation, we should say that its economy has never been stable enough to overcome domestic and foreign trends. The main reason for its hyperinflation was ignorance of the government. If Yugoslavian authorities paid more attention to the state economy, damages could have been less disastrous. Yugoslavian authorities, however, hesitated about the necessity of taking measures immediately. And their hesitation aggravated already serious circumstances and made things even worse. Besides, we consider that another significant reason for inflation was disintegration of Yugoslavia. The matter is that Yugoslavia could not cope with all the requirements of disintegration process, and it failed to create a stable economy at once. As for measures, taken by the government, they appeared to be highly efficient only on their first stage. Although the financial reconstruction program achieved positive results, it could not continue to realize further stages of the program without new finances. In our research we tried to investigate the causes and consequences of inflation, as well as anti-inflationary policy of the state.
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