Yugoslavia - The challenge of adjustment (Vol. 2 of 2) : Annexes and statistical appendix

Report No. 6353-YU Yugoslavia The Challenge of Adjustment (In Two Volumes) Volume II: Annexes and Statistical Appendix July 10, 1987 Europe, Middle East and North Africa Regional Office FOR OFFICIAL USE ONLY Docmwent of the Wbrdd Bank This rep'or has a restricted stribution and may be used by recipients 'only in the prforriance oheir official duties. 1ts contents may not otherwise be tsclosed without Wor,d Baq authorization.  CURRENCY EQUIVALENTS Currency Unit - Dinar (Din.) Currency Unit Calendar Year 1986 ' March 1987 US$1 Dinar 379.22 Dinar 532.48 Dinar 1 US$0.0026 US$0.0019 Dinar 1,000,000 US$2,636.99 US$1,878.00 WEIGHTS AND MEASURES Metric System. GLOSSARY OF ABBREVIATIONS AND ACRONYMS A/C Account BOAL Basic Organization of Associated Labor CIFER Communities of Interest for Foreign Economic Relations ELN External Liquidity Normalization FC Federal Council FEC Federal Executive Council F-A Federal Price Agency GDP Gross Domestic Product GSP Gross Social Prouct ICOR Incremental Capital Output Ratio IMF International Monetary Fund JRF Joint Reserve Fund LT Long-Term LTPES Long-Term Program of Economic Stabilization MLT Medium- and Long-Term MT Muddle-Through MYRA Multi-Year Rescheduling Arrangement NBY National Bank of Yugoslavia NC Non-Convertible NDA Net Domestic Assets OAL Organization of Associated Labor PPII Producers' Price Index of Industrial Goods RAP Republic and Autonomous Province SAL Structural Adjustment Loan SC Social Compact SDK Social Accounting Service (Sluzba Drustvenog Kujigovodstva) SMA Self-Management Agreement SPCs Socia-political Communities SVRN Socially Verifiable Reproduction Need YBA Yugoslav Bankers' Association FISCAL YEAR January 1 - December 31 Period average.  FOR OFICAL USE ONLY TABLE OF CONTENTS Pan No. Volume II: Annexes and Statistical A2pendix ANNEX I: A Decomposition Technique to Anslyze Changes in the Current Account Balances... . . . . ANNEX II: Recommended Improvements in the Supplementary Financial Data of the Audited Statements of Yugoslav Banks. . . . 7 AdIEX III: Trade and Foreign Exchange Policy Between 1978 and 1985 . 9 ANNEX IV: TaxReform . . . . . . . . . .............. 45 ANNEXV: StatisticalAppendix ........47......... . 47 Ths documnt has rstfte distibuion sa may be used by ecpits ony in the perfomac of hir ofial dutil Its contnts may not otews be disclo wthout wod Dnk authorzaton.  ANNEX I A Decomposition Technique to Analyze Changes in the Current Account Balance 1. This annex develops a method for decomposing changes in the current account balance. The approach enables one to arrive at quantitative estimates of the effects on the current account of such factors as terms of trade changess, import substitution, export promotion, and so on. The methodology is In many ways sieilar to that developed by Dr. Bela Balassa.X' However, it differs from his in some important respects. In particular, the goals of Balassa's approach and that developed here differ. Balassa was interested in examining the response of developing countries to the external shocks of 1973-74, and later to the similar shocks of 1979-80. Thus he defined adjustment relative to trend levels of the current account. That is, he decomposed changes in the current account relative to an estimate of what the current account would have been in the absence of the external shocks. 2. The purpose here, in contrast, Is to analyse changes in the current account over timg. The decomposition was therefore done relative to some base year. That is, the purpose was to examine the issue of why did the current account improve after 1979? To what extent can it be attributed to import substitution, to a deceleration in growth, to export promotion, and so on. Aside from the different goals, the methodology developed here differs from Dalassa's also in some important details and in some specific assumptions made. Therefore, this annex will derive the relevant equations from scratch, and will discuss the assumptions made as it proceeds. 3. We can start with the current account balance: 1) C* P6i35e pmga,1. where C is the current account balance (a surplus is positive), Gz and GM are exports and imports of goods and non-factor services, P5 and PM are dollar price indices of the exports and imports, W is net worker remittances Balasa's methodology is presented in Bela Balassa, "The Newly- Industrialixing Developing Countries After the Oil Crisis," Weltwirtschaftliches Archiv, Bank 117, 1981, republished as Essay 2 in Bela Balassa, The Newly Industrialzing Countries in the World Economy, Pergamon Press, 1981. Balassa has published a number of articles applying his technique; for a recent example see Bela Balassa, "Adjusting to External Shocks: The Newly-Industrializing Developing Economies in 1974-76 and 1979-81," Weltwirtschaftliches Archiv, Band 121, 1985.  -2- in dollar value, i is average interest rate on Yugoslavia's debt, and D is Yugoalavia's net outstanding total debt (including short-term and the IMF, but net ot reserves). It is assumed that all factor service exports are part of W and all factor service imports part of iD. 4. The purpose is to decompose char'#es in the current account balance over time. Using subscript 0 to denote tt.a base year and subscript 1 to denote some future wear. the change in the current account will be: 2) Ca-Co a (Pn2s1P,Boeai - tP",S"t-P",6"o) + (Us-N,) + (isDs-io,D) The goal will be to arrange each of the terms on the right hand side in a manner such that a meaningful and interesting interpretation can be given to that component of the change in the current account. 5. Starting with the interest component of eqn. (2), note that: 3) 1,0, 1,0, a 1.0, - 1o0 + toot - ,0Ds where one has simply added a subtracted ioDson the right hand side. Re-arranging one has: 4) i,s - ioD a (jis - io)Dg + O (0Ds - Do) The first terms on the right hand side can be interpreted as the effect on the current account of an increase in the rate of interest between period 1 and period 0, while the second term can be interpreted as the effect of a larger outstanding debt. Equation (4) can therefore be inserted into equation (2) for the interest rate effects. 6. The export and import terms of equation (2) can be written as: 5)(Polles-P80660 - P"se"t-p"oe"o) *PS, sgs,.PSgoS,o-Po. pSBS,,U,S, 4N,SW,,pN,B5+PN,BN, ~P"o, s PsPIISI-aoo) BsoPe gi+s @s - P"s-P"+o) *Be OpHo ("s -p"66"s * (P5,..P5,)BSU,.(PN,4PNo)BMs #+ Wt ,P"N)Oe1 - (p"s-PHO)GS13 * pSo (65,.S, IR)..PM,(6M,s BN,) h) * tC(Ps-Po) - (P",-P".) JGs - tI"-"){"-g * P5,(95,"S,@) ~PoBs@  -3- The four terms in expression (6) can be interpreted as, respectively, the pure terms of trade effect, the unbalanced terms of trade effect, the export volume effect, and the import volume effect. Note that the unbalanced terms of trade effect arises from the interaction of inflation (a rise in P") and unbalanced trade. If either one of these factors is not present, the effect will be zero. 7. The export and import volume effects can be usefully broken down further. One can decompose the growth in export volume between the effects of growth in the world market (with Yugoslavia maintaining a constant market share) and growth in Yugoslavia's share of the world market. This raises, of course, the empirical question of whether one can in fact define the concept of a "world market" for Yugoslavia's exports. There is, of course, not a single market to which Yugoslavia sells, but rather a multiplicity distinguished by product, region, and so on. One could, if it were thought desireable, decompose the export volume effect further, distinguishing the export volume effects in each of several different markets. That is, one could break-up exports and the corresponding markets based on region (say Europe vs. rest of the world) or product (say manufactured exports vs. noi-manufactured exports), and so on. However, it was decided this would not be fruitful for Yugoslavia. Most of its exports (roughly 80t) are manufactured goods, and although the regional dimension !s important, it was felt that the differences in the growth rates of the markets by region were not sufficiently great as to warrant such a complication. However, if one were to apply the technique to other countries, one might want to take this further step in the decomposition. In particular, one might want to distinguish certain primary goods exports (such as copper for Chile, petroleum for Mexico) from non-traditional exports. In Yugoslavia, however, it was decided to keep to a single "world" market and this market was defined as total world imports of manufactured goods.' One should also note that to the extent the single "world market" is defined inappropriately, one will only be misallocating the export volume growth effect between the effect of market growth and the effect of a change in market share. No other element in the decomposition will be affected. However, the drawbacks in the approach must be recognized. 2/ Total world imports of manufactured goods (SITC 5-9) as reported in the OECD Foreign Trade Annual, was in fact used directly only through 1981, the last year available. For 1982-85 the growth of such imports in the 16 major OECD nations was used, with these growth rates appiied to the 1981 world figures. For 1981, where overlapping data was available, the imports of manufactured goods in the 16 major OECD countries accounted "or 932 of the world total.  -4- 8. Defining 2 as the size (in current dollars) of the world market and e as the Yugoslav share in the market, one hast 7) P.eSS * e. 3) *% *9 C/P.. 9) P*j"S* * lala * (,a4me1,)Z * eel set * (6e,4)(lI/POS) * *tl,/lP,) 11) Pi,-P. * (,@.'Oe(l,/P%,) **.{tZ,/",) (ZeIP',)) The first term on the right hand side can be interpreted as the effect of a change in the export market shbre, while the second term can be interpreted as the effect of real growth in the world market, with an unchanged share. 9. The import volume effect can be usefully decomposed into the effect of growth in total output with a constant import share and the effect of a change in the import share (i.e., import substitution). It is also of interest to distinguish between growth in output at some trend (or other exogenously set) rate, and the growth actually observed. Defining Y with no superscript as the actual level of output (in real terms) in some period, Yt as the trend level of output, and a as the import share, one has: 12) 6". ' ioy 13) 6"s * ftY& a *ay& _ soy& + a,y? - SOY,$ + seyv' a (84-eYa + *(Ya YT ) + **VTa 14) 9"s-9"o * a(B-M,)Y, *+ s(Y,-Y's) * *+ 1YT.-Yo) The first term on the right hand side can be interVreted as the effect of a change in the import share, the second term as the effect of the deviation in growth from trend, and the third term as the effect on import demands of growth at the trend rate.  -5 10. taserting equatiotl (11) an (14) Into (6), and equations (6) and (4) into (2), one hUs as ouw final equation: Pure terms *o trado * Unbalanced terso ot trade 1X) C. - C, s C(PZz-lP%)l(,. -P%)X035a P^"}(|||, + Change in espert share o4 mar