From macroeconomic stability to industrial policies and back: The case of Serbia

Abstract

After the 2008 economic crisis in the whole civilized world the orthodox model of macroeconomic policies has been under revision. Although the last crisis wave in Serbia was not triggered primarily by macroeconomic policies, it forces economists to question the framework for conducting broad policies in conditions of transitional recession. Without automatic stabilizers broad policies lose their purpose, particularly when massive privatization and financial deregulation take place. Hidden fractures of the uncompleted transition and mistakes inherent to the economic policies force us to develop conceptually wider framework applicable during the crisis as well as in the post-crisis period. In the emerging heterodox model industrial policies lead over broad policies (monetary and fiscal, primarily) with extended set of tenets instead of monetary determinism of orthodox model focused exclusively on two tenets, inflation and output gap, both low and stable. In the orthodox model consumer price inflation (CPI) is approximation for inflation and output gap is defined as the distance from the level of output that would prevail in the absence of nominal rigidities of the economic system. Change of the policies framework is an imperative especially for economies that entered the 2008 economic crisis with structural imbalances and low competitiveness. Main manifestations of structural imbalances in Serbia's economy are twin output gaps (transitional gap +gap by definition) and continuous and strong inflation pressures. Unfortunately, structural imbalances could be easily deepened due to financial crisis and the 'run' on the governments and banks in the EU. The shift from the orthodox model to the heterodox one in case of Serbia is not the matter of economic prosperity in terms of output expansion and competitiveness improvement but the matter of survival. Unlike broad macroeconomic policies that affect the whole economy, industrial policies are sector specific. Namely, industrial policies are directed towards output expansion of industries with tradable goods, by promoting certain sectors for import substitution and/or subsidizing certain export oriented sectors. After output increases through industrial policies, broad economic policies come into play. In many ways, in heterodox model the broad policy measures should remain the same. The main promising routes for improvement are new combination of traditional monetary policies and prudential financial regulation and design of better automatic fiscal stabilizers. In monetary policy automatic stabilizers could be developed in many ways. This article suggests currency board as monetary model for Serbia's economy in which stable and competitive exchange rate play the role of automatic stabilizer. This is what this paper tries to do. Consequently, it proceeds in four steps. The first reviews the genesis of the economic crisis in Serbia and identifies the causes of today's vulnerability. The second and most tentative, takes a new heterodox macroeconomic policy framework (industrial policies lead, broad policies follow). The third identifies industrial policies as an important tool for elimination of structural imbalance causes. The fourth identifies the road map for exit from the crisis.