To the Editor:
Nora Beloff’s article, “The Truth about Titoism” [October 1986], does not tell the truth about Yugoslavia’s debt crisis. Miss Beloff claims that “the Yugoslavs have repeatedly defaulted on the conditions laid down by the IMF for their loans.” Just the opposite is so. Not only have the Yugoslavs never defaulted on payments either to commercial banks or government creditors, they have abided by International Monetary Fund (IMF) conditions (such as drastic currency devaluation and the imposition of real interest rates) even at the cost of considerable domestic hardship, and at the risk of domestic unrest. This would be admirable in a country with a basically capitalist outlook. But for Yugoslavia, where Marxist rhetoric is always available to exonerate default and justify noncompliance, the record is truly commendable.
Above and beyond what is required by the IMF, the Yugoslav authorities have undertaken reforms to make the economy more competitive and more market-oriented. In 1984, the foreign-investment rules were liberalized, allowing Western partners a major say in the management of their joint ventures, as well as the right to hold a practically unlimited share in them. Last year, the banking laws were overhauled to require that banks grant loans on the basis of risk analysis, and to insulate financial institutions from party and other political pressures. Finally, the authorities have begun to ease the tax burdens and bureaucratic constraints on small private businesses. The result is that already the number and scope of entrepreneurial undertakings have increased significantly.
Miss Beloff implies that the Yugoslavs are asking for and getting new credits (“it would be highly sensible to be more selective in providing fresh capital”). Here as well, the opposite is true. The Yugoslavs have recently been so cautious that they are not using to the full existing credit facilities (a substantial line of credit made available by my own country’s Export Development Corporation went essentially untapped, for example). This is in sharp contrast to some other debtor nations, which are actually demanding new loans as a condition for repaying debts that have already been rescheduled.
According to Miss Beloff, “officials go on hoping that, with a little encouragement and a few extra hundred millions of dollars, a collectivist regime will become capable of operating a competitive market economy.” Who are these officials? In my year and a half in Belgrade (I was an economics officer at the Canadian embassy), I encountered scores of government officials and bankers from Yugoslavia’s creditor countries; none ever suggested that the debt-rescheduling program was linked to such a hope. What the creditors want is to get all their money back, in an orderly fashion and at an acceptable rate of interest. They are not seeking a radical transformation of the Yugoslav economy. As for the IMF, it is well known that the Fund’s mandate is to facilitate short-term adjustment and stabilization; it does not seek to effect permanent structural change in debtor economies.
From the bulk of Miss Beloff’s article, it is clear that her motives for disparaging Yugoslavia’s debt-repayment performance are linked more with her distaste for Yugoslavia’s system and leaders than with any serious economic or financial analysis. But those whose money is actually on the line (the IMF, the commercial banks, and the government creditors) are quite satisfied. The commercial banks have already granted Yugoslavia a multiyear rescheduling agreement, indicating a high level of confidence in the country’s willingness and ability to repay its debts. In addition, the IMF has determined that its stand-by credit and conditions need no longer be the basis for the rescheduling of Yugoslavia’s debt to governments.
One would hope that Miss Beloff is enough of a market capitalist not to let her personal likes and dislikes determine her judgment of what are properly considered matters of international finance. In seeing matters such as debt rescheduling through the prism of ideological struggle, she is in a way more Communist (or at least more Soviet) than the Yugoslavs she disparages.
Nora Beloff writes:
Contrary to Robert Howse’s belief, I am not a capitalist. But I am a trained and experienced reporter and would not allow my views on the Yugoslav debt crisis to be distorted by the fact that, as he correctly surmises, I dislike the Yugoslav—and indeed other—Communist regimes which imprison people for their opinions, place party potentates above the law, and drive out people like myself (expelled both from the USSR and Yugoslavia) for exposing what is really happening inside their countries.
It is, however, my view, and one which I share with the wisest and most articulate of the new generation of educated Yugoslavs, that political renewal is now an essential prerequisite of economic reform.
Mr. Howse is wrong to say that the Yugoslavs have never defaulted on the conditions laid down by the IMF. Anyone who has read Yugoslav “letters of intent” knows they have consistently promised more than they were able to deliver. He himself recalls their commitment to impose “real rates of interest.” Today, even accepting the official figures, interest rates are currently less than one-half the rate of inflation.
It is unquestionably true that the rulers have imposed “considerable domestic hardship” on their people in order to meet Yugoslavia’s international obligations; had they not done so, imports would have had to be suspended and Yugoslav industry would have collapsed. What Mr. Howse should have added is that whereas ordinary people have tightened their belts, the priviligentsia, political leaders and those who enjoy their protection, have been loosening theirs: the runaway inflation has made the rich richer and the poor poorer.
It is also true that the Yugoslavs have not so far defaulted on loans, but this is only because Western creditors agreed to postpone repayments. The process of rescheduling, far from being a token of confidence in the system, has been the only way of avoiding the politically unpalatable alternative of declaring Yugoslavia bankrupt and seizing its assets.
Mr. Howse affirms that the Yugoslav authorities “have undertaken reforms to make the economy more competitive and more market-oriented” (indeed, I cannot see why he takes exception to my own statement that officials like himself go on hoping that the regime “will become capable of operating a competitive market economy”). The trouble is that the reforms are never put into practice. Indeed, as long as there is no effective rule of law to make sure that the edicts are obeyed, it is absurd to welcome new rules liberalizing commerce or to suppose, as Mr. Howse does, that financial institutions can really “be insulated from party and other political pressures.”
A public petition (October 1986) by a group of leading Belgrade notables demanded changes in the political and legal system of Yugoslavia which would restrict the arbitrary powers of the country’s political chiefs. The authorities denounced the petition as a “bourgeois” heresy and threatened stiffer repression. Yet until these principles are adopted, we “bourgeois” should learn to be a little more skeptical about Communist good intentions.
As Mr. Howse says, “a substantial line of credit” has been granted by the Canadians, as indeed it has by the other main free-enterprise countries, who call themselves “friends of Yugoslavia”—meaning friends of the regime. These were the credits to which I was referring and the existence of which Mr. Howse denies. When that money runs out, the Yugoslavs will probably ask for more; meanwhile they are negotiating fresh credits with the World Bank and with EEC institutions.
As a former economic adviser, Mr. Howse should know that the IMF, besides fulfilling its mandate “to facilitate short-term adjustment and stabilization,” also acts as referee on the creditworthiness of international borrowers. Once the Yugoslav loans were rescheduled, Yugoslavia did not need IMF financing and consequently suspended the accompanying “conditionality,” which, as I have shown, the Yugoslavs frequently breached. But Western public and private institutions have insisted that the IMF nonetheless continue a form of “intensive monitoring” to provide guidelines for new loans or still further postponements of old ones.
It has long been my view that the IMF, presumably under political pressure, has been as complacent as the American and Canadian embassies in Belgrade in failing to understand the nature of the Yugoslav crisis. In the summer of 1983 I wrote challenging IMF optimism. The head of the IMF’s Central European Division, Duncan Ripley, replied: “Measures to enhance efficiency will continue to constitute essential elements in future IMF programs with Yugoslavia, and in this connection, we are looking carefully at the recommendations of the Krajger Stabilization Commission.”
Since then, the inflation rate has reached three digits and the dinar has lost two-thirds of its value. Mr. Krajger, the chairman of the Stabilization Commission, himself has admitted that the program never really got going as the political leaders from the eight federated republics and provinces could not bring themselves “to cross the Rubicon,” by which he meant that they refused to abandon their grip on the economy and to allow market criteria to replace arbitrary administrative decisions on the allocation of investments and jobs.