Stabilising inflation in Slovenia, Croatia and Macedonia: How independence has affected macroeconomic policy outcomes

Abstract

THE NATIONAL QUESTION, seen most of all in disagreement about the competencies of the federation versus the republics, and compounded by the emergence of the aggressive Milosevic regime in Serbia, brought about the break-up of Yugoslavia. Economic forces certainly played their role; resentments about the Federal Fund for Less Developed Regions, disputes over stabilisation policy, tariffs and wages brought out intense rivalry among Yugoslav republics and their constituent nationalities. And Yugoslavia's macroeconomic instability and falling living standards in the 1980s made it clear that the existing political arrangements were inadequate for the tasks of economic management. Still, it seems fair to say that the ending of Yugoslavia was less a rational economic choice than the triumph of national and political passions. It remains useful to ask about the economic effects of separation. Given the continuation of war and diplomatic turmoil in the region, it may be too early to address this question fully. I limit the task by limiting the sample of countries to Slovenia, Croatia and Macedonia.1 The other two ex-Yugoslav states, Bosnia-Hercegovina and Federal Yugoslavia, are excluded because of the war in the former and the comprehensive economic sanctions on the latter. Rather than attempt to decide whether the new states will be economically better off than ex-Yugoslavia, this article looks only at initial efforts to create a stable macroeconomic environment, in particular to bring inflation under control. The premise is quite rudimentary: inflation of 20% or more a month is incompatible with satisfactory economic performance.2 What are the keys to combating inflation? Monetarist theory would argue that an independent, inflation-fighting central bank is the crucial institution, and that a tight monetary stance is the most crucial policy measure. This article takes a broader view, inspired by post-Keynesian thought, arguing that the creation of economic institutions and economic policies to mediate distributional conflict is central. Stabilisationoriented monetary policy and institutions are only one element of macroeconomic stability in this view; a degree of political consensus over fiscal matters, and