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2012, vol. 60, iss. 1-2, pp. 13-32
Isn't output more important than inflation in impotent economy: Serbia's economic policies revision
University of Belgrade, Faculty of Economy, Department of Business Economics and Management
Project:
Strategic and tactical measures to overcome real sector competitiveness crisis in Serbia (MESTD - 179050)

Keywords: Serbia; macroeconomic 'M'; structural instabilities; twin output gaps; twin deficits; system risk; industrial policies; real economy; automatic stabilizers; currency board
Abstract
Current economic crisis in Serbia was triggered primarily by pre-transitional structural instabilities and stressors influenced by uncompleted transition, both geopolitical and economic. The fact that macroeconomic policies (monetary and fiscal, primarily) did not manage to fix these problems forces economic practitioners to question the orthodox framework for conducting economic policies. With structural instabilities and in the absence of automatic stabilizers orthodox macroeconomic policies lose their purpose. The previous point is important for Serbia as an economy in transition in which radical reforms such as privatization and financial deregulation provoked output gap. A shift in perspective is particularly important for Serbia that entered the 2008 global economic crisis with impotent economy, low competitiveness, and high system risk. In macroeconomics the prevailing orthodoxy asserted that there was no incompatibility between keeping inflation low and stable, and seeking for maximum growth (or minimal output gap). From this point, the misconception of macroeconomic orthodoxy becomes obvious to anyone. The majority of previous macroeconomic models broke down because the modelers largely ignored their microeconomic implications, or how firms and banks would react to imposed policies and regulation that attempted to exploit past correlations in the data base in order to eliminate market failures. The modeling that took fixing of the problem for granted resulted in breakdown of fixing. Most importantly, with this kind of modeling, no economy in deep recession has ever made turnaround. Today, besides domestic transitional recession, Serbia's economy is exposed to global double dip crisis. This 'combined crisis' will end upon reaching two conditions. First, when bubbles in all kinds of assets are deflated. In the period before the global economic crisis, debt-fueled bubbles were the trigger for irrational exuberance and, consequently, overestimation of the value of equity based on mark-to-market accounting. The bubbles deflation, or eventually bubbles burst, leads to convergence of the real and market value of different kinds of assets. Second, crisis ends, also, when asset prices, debt levels, and factors' income get back into the balance. When the new balance is met, economic expectations will rise, new investment cycle will start, and economy will leave the crisis. Until then, new economic policies must correct all structural instabilities and create the fundaments for recovery. Policy makers in Serbia must react to the main transitional contradiction that achieved price stability is not followed with sustainable employment. The first step in this reaction is to understand the complexity of the crisis and to identify its seeds. In our latest article [3], we intended to identify the seeds of the Serbia's economic crisis and to figure out the feasible solutions predominantly from microeconomic perspective. In this article we shift the focus to macroeconomic perspective. Again, industrial policies are at the core of feasible solution. This is what this paper attempts to explain. It proceeds in five parts. The first and second part review common macroeconomic 'M' as a bottom line in macroeconomic analysis and economic policy modeling, respectively. The third and fourth part analyze Serbia's macroeconomic 'M' and related economic policies, respectively. The fifth part identifies industrial policies as a main tool for elimination of structural imbalances and competitiveness gap. Also, in this part we propose the roadmap for exit from the crisis.
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article language: English
document type: Scientific Paper
DOI: 10.5937/ekopre1202013D
published in SCIndeks: 08/06/2012