This article was published with minor edits in the weekly NIN on July 30, 2020.
Author: Kori Udovički, PhD
At a time when hundreds of people are officially dying from COVID in Serbia, it is important to be absolutely clear that this was not inevitable. And it is not true that in this crisis one must choose between the health of citizens and economic activity. On the contrary, health management has become one of the most important economic policies – if the government does not keep the epidemic under control, its explosive spread takes control of everything, no matter how much the government resorts to repression. People in Serbia are dying today because of a cynical electoral calculation, but also because Aleksandar Vučić, despite all the control he has over his party and the state (repressive) apparatus, is unable to manage the fine system of measures and incentives necessary to bring the Serbian economy to safe harbor. Had he been able, he could have won the election with greater political gain, with economic benefit for the economy, and all without unnecessary loss of life.
The first and second waves
According to a conservative rough estimate, every day in the current wave of the epidemic, the Serbian economy is losing over a million and a half euros in earnings compared to what could have been realistically expected after the state of emergency. I start from the fact that for at least another year, the economy's operations will be under the dual impact of direct restrictions on the possibility and manner of doing business, as well as a drop in demand resulting from the restrictions themselves, but even more so from the general crisis in Serbia and beyond. The calculation includes the currently intensified negative impact of both these factors. It does not include the increased treatment costs for the state (which the economy will also pay) and the chain consequences that increased uncertainty and the collapse of the most affected companies will produce in the slightly longer term.
To understand this wave, as well as how the epidemic can be managed differently, it is useful to look at the experience of the state of emergency, although it is certain that such an experience will not be exactly repeated. Nor should it be necessary, given that now everyone – the economy, the state, and citizens – has largely adapted to the inevitable new business conditions.
As then, the new wave directly affects micro, small, and medium-sized enterprises and entrepreneurs (MSMEs) the most, as they form the core of domestic entrepreneurship.
During the state of emergency, the main sequence of effects was caused by the ban on business activities that involve close contact or gatherings of a large number of citizens (hotels, restaurants, personal care, markets, and shopping malls). CEVES research shows that one in five, mostly micro-enterprises, and at least one in three entrepreneurs (with about 230,000 employees in total) could not operate. In addition to activities whose work was banned, entrepreneurs and workers over 65 years of age, who were forbidden to move, were also blocked, as were those who could not solve the problem of employee transportation. For most companies, however, the first impact consisted of the need to operate safely. Establishing physical distance, working in shifts, using protective equipment and disinfectants, switching to digital operations and working from home as much as possible – all this entailed costs that continue to burden operations to some extent even after the state of emergency.
For two-thirds of MSMEs, which could not partially or at all establish remote work, reduced working hours represented a major limitation. Retail outlets were also drastically affected by reduced working hours and a large number of non-working days. To this should be added the problems of difficult procurement and transport of goods – problems that, along with associated increased costs, continued to be felt particularly in exports and imports of goods.
However, after adapting their operations, the main cause of revenue loss for MSMEs was the drop in demand. During the state of emergency, as many as 40 percent of MSMEs experienced revenue losses greater than 50 percent, and only one in four companies and one in five entrepreneurs had revenues in line with pre-epidemic expectations. As soon as the state of emergency was lifted, some activities even had higher demand than usual (e.g., hairdressers), while others faced a more lasting decline. Some sectors, especially everything related to tourism, faced an extremely deep decline – in May, 87.6 percent fewer tourists visited Serbia than in the same month last year. It was realistic to expect that, if the public was constantly reminded of the necessary safety measures, demand for other exposed activities would remain at a reduced level. For some niches (international congress tourism), it was quite clear that they would not find a medium-term solution on their own. Instead, in June and July, the neglect of strict safety measures and the creation of an atmosphere of „victory over COVID“ initially boosted the business of hospitality and similar activities to a surprisingly high level.
Now their decline is much deeper, less due to restrictions, more due to falling demand and citizen caution. MSMEs emerged from the state of emergency with great enthusiasm. COVID caught them in the first surge of economic growth since the previous crisis, and CEVES research shows that in the meantime they have significantly increased exports and their importance for the Serbian economy, and even accumulated reserves – during the state of emergency, only one percent of MSMEs laid off employees.
Enthusiasm and reserves
The first package of economic measures served to supplement some of the reserves that MSMEs had spent during the state of emergency. As such, it was justified, and its delay (contrary to my expectations) proved less important. About two-thirds of companies resorted to deferring tax debts (far fewer used the loan moratorium, as a small portion of MSMEs incur debt at all). Also, two-thirds of companies state that they relied on their own reserves and help from family and friends to resolve financial difficulties during the state of emergency, and over 90 percent took (or received without request) the minimum wage. Nevertheless, in surveys, only 5-10 percent of them said that the government's measures influenced their decision on (not) laying off workers. About a quarter said they did not have difficulties with making payments.
The greatest cost of the new wave lies in the collapse of that optimism and the aimless depletion of those reserves. Sustainable economic growth, the development of an economy that can secure our future, comes through the courage or ambition of a multitude of entrepreneurs who must believe that it makes sense to risk their assets and savings. This crisis is not an opportunity for us, but within and beyond it, the prospects and the ability of every entrepreneur to find a solution, to invest their reserves in the small opportunities they discover – must be protected. This is only possible with consistent and predictable, preferably agreed-upon, economic policies. In their absence, despondency and costly wandering arise. Although the delay of the first package of measures did not in itself cause a problem, it reflects a deep problem that will still cost the Serbian economy. Let's first clear up the myth that the first package of measures had to be so broadly targeted and expensive due to the speed and limited administrative capacity of the Serbian state. All countries with which Serbia is usually compared introduced their first package of measures in the third or fourth week of March. Serbia actually announced the package on March 31st, and the actual package on April 10th. In addition, all countries in the region and many outside it had more narrowly targeted packages of measures.
One instead of all
The question, therefore, is: why was the package of measures delayed? I have no doubt that they waited for the „de facto“ Minister of Finance to first pause in performing the duties of the „de facto“ Minister of Health. The public is well aware of the extent of Aleksandar Vučić's personal involvement in controlling the health aspects of the epidemic in the first month of the crisis. From choosing which expert assistance to rely on, to procuring respirators while conducting geostrategic policy, to playing the role of spokesperson for the Crisis Staff. In the meantime, the economy and the state's economic verticals were preparing proposals and packages that were awaiting a response. The first economic messages that reached the public from him were related to maintaining salaries in the public sector, pension supplements, and raises for healthcare workers. It is likely that he was able to pay attention to the economy only after new health policies were adopted in dialogue with Chinese doctors (at the beginning of the last week of March). In the meantime, it seems that only the National Bank acted autonomously.
The biggest problem in this story is not that important decisions are delayed, like the formation of the Government now. Nor is it an insurmountable problem that the heads of state verticals have been disempowered – Vučić can replace more than half of the ministers (the mass testing policy adopted at the end of March was actually correct). The problem is that the occasional benefit from such engagement cannot nearly compensate for the damage caused by the unpredictability and capriciousness of decision-making at the highest level. It disempowers and paralyzes entire state verticals, from top to bottom. The problem is significantly worsened by the fact that it is accompanied by a subtle but effective message that nothing is expected from the individual initiative of the small individual, inside and outside the state. There are no indications of messages that joint action, mutual help, but also free (and fair) competition among a multitude of small and large players in society can create something valuable for everyone.
When we look at how other countries are introducing measures, it is clear that they are working on parallel tracks. Measures emerge in waves: now one minister, now another announces a step, public dialogue is conducted – something at the national level, something at the ministry level with their constituencies. Businessmen invest resources in adapting to the new situation, connecting their interests and the health of citizens in ways only they could have thought of – digitalization, better ventilation, new procedures that protect both employees and clients. States, with detailed sanitary analyses and instructions, support and monitor initiatives.
Lest readers misunderstand me: businessmen in Serbia are fighting like lions, and individuals and institutions everywhere, including in the state, are doing as much as they can to adapt their activities and make them as useful as possible at this moment—especially in projects financed by the international community. During the crisis, the Chamber of Commerce distinguished itself with its engagement and agility. But this is not the same as mobilizing state verticals into action from base to top, and from top to top. The first package of measures had to be understood as buying time – for the economy and the state to prepare for the „new normal“.
Like two peas in a pod
And it did buy time, but there was no clarification – for what? Immediately after emerging from the state of emergency, many businessmen probably had unrealistic expectations. Less than five percent of them thought they would need any debt forgiveness to survive! Awareness that Serbia faces medium-term problems began to mature sporadically during June. Productive and mutually beneficial political leadership at that moment would have been for the „de facto“ prime minister to initiate and support national, or at least state, reflection on what that „new normal“ would look like, how much it would cost, and which expectations could no longer be realistic. It is hard to believe that anyone reading the international press could doubt that the hospitality sector, and especially hotels focused on international tourism, would remain under unbearable pressure. What is the state's policy for them, five months after the outbreak of the crisis?
In this unprecedented crisis, no one has a crystal ball (or the time) to develop ambitious policies and strategies. But it is possible and necessary to clearly weigh which part of state resources will go to civic solidarity, and which part to investments that we believe can move us forward? What positions do we stand for as a nation? A choice must be made, for example, between the following two: „unless something much worse than expected happens, we will not allow the country to be left without these, or such, hotels“ or „we do not believe that even in such a crisis, some hotels should be helped to fail, someone who still has money will buy them.“ With or without national dialogue – which of the two is Vučić's position? Instead of answers to these questions, more than two months after the adoption of the first package of economic measures, the announcement of a second one begins, which resembles the first one like an (enlarged) egg to an egg.
