Madzar, Lj. (2008) Mechanisms of Mobilization and Alternative Allocation of Public Funds, Study No. 1, Belgrade

Madzar, Lj. (2008) Mechanisms of Mobilization and Alternative Allocation of Public Funds, Study No. 1, Belgrade

Madzar Ljubomir

Mechanisms of Mobilization and Alternative Allocation of Public Funds

Abstract

This paper discusses some institutional defects and potential for improvement. One of almost insuperable legacies of the previous socialist order includes excessive public expenditure, which is widely accepted to be unsustainable in the long run. The exorbitant burden of public expenditure is largely interpreted as a solid financial basis for equally hypertrophied and overpowering state that may become a threat for the process of democratization and strengthening of human rights and freedoms. The government's disproportionate drawing on domestic income and wealth turns not only into a (macro)economic problem, but also into a political and the widest social risk. The high share of various forms of collective consumption in GDP, beside being inherited from the past, demonstrates a clear tendency to continue over time. It therefore comes to be increasingly considered as a great challenge with which the economy and the society as a whole need to face. The determinants of undesirably high fiscal burden are discussed in detail, as well as a number of widely accepted factors that act as hindrance in curbing public expenditure and stall improved allocation of funds. The paper analyzes the problem of a common reservoir and a number of problems concerning the type of principal-agent relations, and systematically discusses their specific manifestations and particular features in specific circumstances in Serbia.
Serbia has been branded as an unwieldy object that is not easy to steer, both in design and in implementation of economic and, particularly, fiscal policies. The difficulties in and for Serbia stem from its substantial, if not excessive ethnic – and by consequence cultural, religious, historical and other – heterogeneousness that results in widely diversified and politically divided electorate. The biggest impact of political differentiation is reflected in the sprawling, unstable, multiply frustrated and ineffective coalition government. Fragile governments are unable to implement economic and fiscal reforms with required comprehensiveness and speed. The many instances of unsatisfying changes that still require deep reforms appear in the end to be objectively conditioned, i.e. caused by the heterogeneousness of the society that makes it a conflict-prone and unstable entity. Simultaneously, a complex constellation of institutions for budget audit and financial control is far from being developed in a satisfying manner. To create an extensive and refined network of control bodies and audit institutions, any country would need a sizeable amount of knowledge, information, high expertise embodied in easily available personnel and time – the factors that are notoriously scarce in Serbia.
Due to weak and incompletely institutionalized control mechanisms, politicians and other holders of power in Serbia have a lot of room for discretionary and evidently willful decision-making. As political competition is at the same time burdened with many weaknesses, politicians demonstrate the tendency to accumulate inordinately large quantities of political power. While in power, they utilize state resources and taxpayers' money to build their client networks and expand their political support. They thus become not easily replaceable, holding to their offices for too long, and the political system becomes inflexible and unable to tackle the challenges of the time. Furthermore, due to deep structural failures, particular interests of political agents and their organizations largely depart from the general interest, however defined. It can be concluded that members of the political management and their demonstrated proneness to use taxpayers' money to solidify their private, carefully nurtured, political positions pose a considerable threat for a lasting sustainability of the fiscal system and overall economy.
With slight political competition and instable and multiply frustrated coalition governments, Serbia has meager chances to become particularly successful in implementation of reforms and establishment of efficient institutional structure, including the one concerning the fiscal system. The state itself will probably remain hampered and ineffective, and in turn poorly equipped to create and execute relevant interventions in different policy areas. The gist of the argument is that the country should opt for a narrow, limited state, but a state that will act strongly and energetically on the strictly delineated area where it is evidently irreplaceable.

Key words: fiscal system, public expenditure, structural failures of political system, the problem of common reservoir, principal-agent relations, political competition, political willfulness, ethnic and cultural heterogeneousness, coalition governments, obstacles to reforms, minimum state.

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Madzar, Lj. (2008) Mechanisms of Mobilization and Alternative Allocation of Public Funds, Study No. 1, Belgrade - Serbian version only