Introduction

The Union of Serbia and Montenegro was formed in February 2003 following the signing of the Belgrade agreement in March 2002, out of the remaining parts of the former Socialist Federal Republic of Yugoslavia. The union of these two republics helped conclude a difficult period of wars, international sanctions and international military intervention which led to destroyed infrastructure and social and economic decline. There was a dramatic reduction of GDP by more than 50%, massive increase in unemployment, a drastic fall in salaries, pensions and other personal income caused by the politics of the previous authoritarian regime. Hundred of thousands of people came as refugees and IDPs, fleeing their traditional homes in search of a place to live without fear of ethnic reprisals. There was a general increase in crime and corruption, and a rapid growth of the “grey” or informal economy. All this led to the rapid impoverishment of the majority of the citizens.

Against this background, the Governments of the Union and both republics, during the last years have made major economic and political reforms, and have begun to address the problems of poverty and social exclusion. We have made major efforts to move from the socialist to a market-based economy, while moving at the same time to a democratic political structure. Economic reforms have included major privatisations of productive and financial assets, liberalization of the trade regime, reform of the social security system, judicial reform, and liberalization of labour laws. In general, steps have been taken to improve the environment for business by reducing unnecessary bureaucratic regulations and taxes. Discussions have begun that will eventually lead to the membership of Serbia and Montenegro in the WTO and the EU. These reform efforts began in Serbia only in 2001, with the emergence of a democratically elected republican government, but started somewhat earlier in Montenegro.

An Interim PRSP was discussed by the Boards of the IMF and World Bank in July 2002, and was prepared over the period during the negotiation process of the creation of the new union of the two republics. Thus, the I-PRSP gave only a vague sketch of our emerging poverty strategy. The current document. represents the overall final poverty strategy for the union of the two member states, being composed of separate PRSPs each for Serbia and Montenegro.¹ Both papers analyse the latest available data on poverty, reflect challenges facing the governments in addressing the acute poverty situation and lay out policies and mechanisms for the sustainable reduction of the poverty over the medium term. The strategies adopted by the individual republics are consistent and form an overall strategy for the State Union.

The Poverty Situation

The Governments recognises that poverty is a multidimensional economic, social and phenomenon, which crucially depends on incomes and employment opportunities as well as, social inclusion, access to education, health, quality of housing and other public services. Participation in social and political processes, protection of human rights, gender and ethnic equality are essential dimensions of a wider poverty definition. With such broad definition and limited resources the choice of priorities and the design of effective and targeted public actions gain critical importance in reaching the necessary balance between longer and shorter term needs and challenges.

Poverty analyses show that poverty in the Union. at about 11%², approximately 800.000 in Serbia and 87.600 in Montenegro lives below the national poverty lines with consumption (per equivalent adult)³ of less than 71 € per month in Serbia and 116.2 € in Montenegro, i.e. 2.4 € and 3.9 € per day.⁴ Poverty is higher among vulnerable groups and in rural regions. Additionally in both Republics, many people are at risk of falling below the poverty line. Small changes in average income and external shocks would produce large changes in the poverty rate. For instance, in Serbia, a 22% fall in real income would double the poverty rate. In Montenegro raising the poverty line with 20 percent will double the number of poor.

In the rural regions of both Serbia and Montenegro, poverty is much higher than average. In northern Montenegro, poverty rates average 19%, while in southeastern Serbia poverty is estimated at 23%. Poverty is generally clearly correlated with a number of factors:

• unemployment,

• low levels of education,

• large family size,

• single-member and elderly households, and

• vulnerability.

The highest rates of poverty, however, are found among certain vulnerable and socially excluded groups, including displaced persons, refugees, the disabled, and the Roma population. Within the Roma⁵ population, a recent survey in Montenegro found that 52% lived in poverty, they have an unemployment rate of 43%, and 70% have not attended secondary school. It is estimated that there is 32% illiteracy. According to official statistics there are around 120,000 Roma living in the Union territory but domestic and international estimates indicates that the actual number is around 370.000. In addition, according to the most recent estimates, there are over 600,000 refugees and IDPs⁶ living in Serbia and Montenegro, who have severe deficiencies in housing, employment, health and education. According to assessments, around 22% percent of this category lives in poverty.⁷ Another vulnerable group is the disabled. Although there are no precise figure, some estimates indicates that there are approximately 360,000 disabled in the Union. Only 13% of the disabled have the opportunity to work, and only one-third have a job adjusted to their needs.

The PRSP process in both republics included extensive consultations with all relevant stakeholders through established advisory committees (Civil Society, Parliamentary, Local Government, Media, Labour Unions, Experts, International Development Partners and Business sector). In these consultations, the problems faced by the poor were revealed. While each group often had different priorities, these discussions placed heavy emphasis on a few key factors; employment, rule of law, public services including infrastructure, health and education, housing and social services.

Poverty Strategy

Integration into the EU is the strategic objective of the Union of Serbia and Montenegro. Consequently, the development of the society and the economy including the fight against poverty in Serbia and Montenegro is pursued with European values, EU norms and standards, as well as EU policies in mind.

Through the process of developing the Poverty Reduction Strategy, national indicators in line with the UN Millennium Development Goals (MDGs) have been identified. Hence, we have taken an important step forward in the process of reaching these goals by 2015.

Our overall poverty reduction strategy for the Union consists of three main pillars:

• establishing the conditions for dynamic and equitable economic growth, through the creation of a stable macro-economic environment and favourable investment climate, that will create employment and reduce economic vulnerability, as well as the establishment of key programs to directly promote employment among the poor;

• prevention of new poverty resulting from the modernisation and restructuring of the economy through targeted training and social measures enhancing this group’s ability to take advantage of new opportunities created in the reformed market economy.

• improved access to social services by the poor, such as health, education, water and other key infrastructure needs, through improved targeting of existing programs, and actions that improve the efficiency and quality of services delivered, particularly to the most vulnerable groups in society. The goal of these activities is to initiate a long-term process of empowering vulnerable groups to move out of poverty, through the development of new market-oriented skills, and the provision of minimum standards of living.;

Additionally the Strategy call for the establishment of better systems for implementation of activities and for monitoring of key poverty indicators in close co operation and with active participation of all relevant governmental and non-governmental stakeholders.

Key Implementation Measures

The Governments are fully committed to the implementation of this Poverty Reduction Strategy. It will require significant efforts on many fronts, both to extend and deepen the reform efforts recently begun, and to undertake additional efforts in other areas. The principle directions of our efforts will be as follows:

Integration. During the recent period, Serbia and Montenegro has joined international economic and financial organisations including IMF, WB, UN, Council of Europe, negotiation regarding Partnership for Peace membership has started and we have taken some initial steps towards EU and WTO accession. Additionally we have been an active player in the development of the South East Europe Free Trade Area. This has created the basis for further integration of the Union into the Region, Europe and the wider world, with the aim of enabling faster economic and overall development. In August 2003. an Action Plan for the harmonisation of economic systems in Serbia and Montenegro was adopted. The plan aims at the creation of a common market and the removal of obstacles to the free flow of people, commodities, services and capital. Through the Stabilization and Association process (SAp) the EU has encouraged Serbia and Montenegro to prepare for full EU membership by working to achieve very high standards relating to the economy, the functioning of the rule of law, democratisation, and human rights. The Government will continue its efforts to speed up the above-mentioned integration processes that are so crucial to enhance the stability of both Serbia and Montenegro and the region.

Macroeconomic stability. The policies will be geared to support growth while narrowing the external current account deficit. Against the backdrop of relatively modest output and export growth, and a large current account deficit reflecting in part strong consumer demand, policies in 2004 will aim to strengthen external competitiveness while containing the growth in domestic demand and costs. The external current account deficit (before grants) is projected to narrow by ½ percentage point to 10.3 percent of GDP in 2004, and to decline steadily thereafter, as exports recover toward historical levels—reflecting improving domestic supply conditions and an upturn in foreign demand—and imports continue to be contained by the implementation of prudent policies. During 2004, the overall fiscal deficit including foreign financed projects will be targeted to decline to 3.8 percent of GDP. Growth in wage bills in state enterprises will continue to be limited to the projected rate of inflation. The Government recognises that stability is a critical condition for both economic growth and poverty reduction and is therefore fully committed to continue it efforts to achieve this.

Economic Environment. The Government will continue to maintain a stable macro economic environment, and take steps to increase the attractiveness of the economy for private investors, including improvements in the legal and judicial structures and assistance to small and medium scale entrepreneurs. The privatisation process will accelerate, particularly based on the limited restructuring of state/socially owned enterprises capable of being competitive in the market. The implementation of new Bankruptcy Laws will enable us to close down those enterprises that cannot be profitably restructured. A major tax reform has already reduced corporate taxation and implemented or will soon be implementing, a VAT. Further tax reforms will aim at simplifying and improving the system. Reform in the financial sector have already improved financial sector regulation and increased the role of the private sector. The privatisation of the remaining publicly owned banks are envisaged over the next three years.

Public Sector. The public sector will be strengthened through measures to improve budgetary, procurement and treasury functions. A major program of judicial reform is already underway, with the intention of bringing the judiciary up to EU standards Public administration reform is one of the priority tasks for the future, both to increase efficiency and to reduce the opportunities for corruption. Corruption in the public sector both discourages private investors, and denies the poor access to essential services. The key will be the establishment of a professional civil service, free from political interference, with clear guidelines on ethical issues. In Serbia, an Anti-Corruption Council has been formed, and a group of anti-corruption laws are expected to be passed by in early 2004. The Government of Montenegro will soon adopt the programme for combating corruption and organised crime as well as the strategy for combating illicit people trafficking. Another key part of public sector reform is to strengthen local government structures, and decentralize the delivery of services to local municipalities, working with local NGOs. The Government recognises that well-functioning legal institutions, and a government bound by the rule of law, are important to economic and political development, and represent an important precondition for private capital investments and economic growth. The importance of the rule of law is enshrined in the principles of the EU.

Social Sectors. In general, the PRS envisions a continued improvement in all social services, including pensions and social protection programs, building on recent reforms. While programs of social protection have recently been improved in terms of targeting efficiency and program operation, a major issue remains the clearance of arrears accumulated from the past, particularly in Montenegro. A major effort will be made to improve the targeting of these programs to all eligible groups, particularly the most vulnerable and excluded, who often fail to participate. Special programs will be set up to provide social protection for the elderly. in the area of pension reform, the Governments will consider to move toward the establishment of the remaining two pillars of the reform: private mandatory and especially private voluntary systems. In the health sec/or, one of the main issues to be addressed includes the financing of the health system. At present. the benefits provided far exceed revenues from wage taxes. This requires redefinition of what services will be provided, and how they will be financed. The system itself needs to improve its overall efficiency in the use of resources, and shift its emphasis more toward preventative and primary care. A major focus of PRS reforms will be to include vulnerable groups, particularly the Roma, IDPs and refugees within the system. Support of the International Community is needed to achieve this. Greater efforts will be made to promote better public health through health promotion. in education, the major challenge is to improve the quality of education, to increase attendance in pre-primary programs, and to include vulnerable and excluded groups. A major problem is that existing vocational secondary schools are not aligned with contemporary market demands. A major reform of the curricula, and better coordination with the private sector, is required. Special programs will be designed to make schools more accessible to the Roma population, and to children with special needs, particularly the disabled.

Rural Development. The high rate of poverty in rural areas necessitates special attention to the needs of these areas. These include steps to improve productivity in both farm and non farm employment, as well as improvements in social services and rural infrastructure. To do this requires efforts to help support development of SMIEs, improve marketing and processing facilities for agricultural goods, and better development of forest resources, especially wood processing. Special emphasis has to be given to rural infrastructure needs, including reliable water supply at EU standards, better sewer and sanitation services, and improvements in rural roads that allow access to markets. During the coming period the responsibility and the capacity of the local self-governments needs to be strengthened to achieve this.

Infrastructure and Environment. A major effort will be made in the PRS to improve basic infrastructure throughout the country. Much of the present stock of infrastructure has deteriorated during the last decade due to a lack of investment and adequate maintenance. There is a major need to rehabilitate the existing stock of infrastructure, and make limited extensions. This is particularly true in transport, where efforts need to be made to improve the operations of the railways, ports and marine transport. A major effort needs to be made to improve the safety of road transport, as well as to improve roads in rural areas. In energy, major efforts have been made to improve reliability of power supplies, restore and rehabilitate key assets, and improve cost recovery. For the future, greater efforts will be made to improve efficiency and collections of bills, and to work more closely with private investors in rebuilding capacities. In water supply, the major goals will be to improve the efficiency, management and financial operations of service providers, to enhance the accessibility and quality of water services, and to protect human health and the environment. The PRS is based on the concept of sustainable development and rational management of natural resources. In terms of environmental management, we will focus on establishing the appropriate legislative and institutional frameworks, improve the environmental management system efficiency, and implement priority projects to reduce pollution and environmental degradation. Furthermore, it is critical to continue the strengthening of the capacity of involved institutions and companies, with the objective to improve planning and implementation of externally financed projects. In this context, it is important to shift away from a mainly technical-focused approach to one emphasising cost-benefit and economic analysis. It is also important to speed up the restructuring process within these sectors, in order to prepare the companies for privatisation and external competition.

The Cost of the PRSP

Both republics have undertaken detailed costing exercises to approximate the additional cost, beyond their present resources, needed to implement this Strategy. These costs are summarized in the table below, by sector. The overall cost for. the period 2004–06 has an indicative total of€ 1.5 billion (Serbia € 1.1 billion, Montenegro€. 4 billion). However, not all of these costs are additional, but would be partly met from reallocations within sectors and between sectors using currently available resources. In addition, some of these costs could be met from additional domestic resource mobilization. The balance would have to come from external assistance. In Montenegro, it is estimated that foreign financing would amount to about 60% of the total.

Table I.

Serbia and Montenegro: Breakdown of PRS Costs by Sector.

(millions €)

Table I.

Serbia and Montenegro: Breakdown of PRS Costs by Sector.

(millions €)

Sector	Serbia	Montenegro	total	%
Social Protection	157.2	54.7	211.9	13.9%
Education	333.2	96.7	429.9	28.2%
Health	170.2	47.4	217.6	14.3%
Employment	238.5	49.9	288.4	18.9%
Rural, Regional & Agriculture Dev.	64.3	64.9	129.2	8.5%
Environment	5.8	26.4	32.2	2.1%
Infrastructure/Urban	70.3	67.2	137.5	9.0%
Others	47.8	32.6	80.4	5.2%
total	1087.3	439.8	1527.1	100.0

View Table

Table I.

Serbia and Montenegro: Breakdown of PRS Costs by Sector.

(millions €)

Sector	Serbia	Montenegro	total	%
Social Protection	157.2	54.7	211.9	13.9%
Education	333.2	96.7	429.9	28.2%
Health	170.2	47.4	217.6	14.3%
Employment	238.5	49.9	288.4	18.9%
Rural, Regional & Agriculture Dev.	64.3	64.9	129.2	8.5%
Environment	5.8	26.4	32.2	2.1%
Infrastructure/Urban	70.3	67.2	137.5	9.0%
Others	47.8	32.6	80.4	5.2%
total	1087.3	439.8	1527.1	100.0

While the PRS includes some spending for almost every sector, the priorities overall emerge from the greater weight given to certain sectors. The priorities clearly are education, employment, health and social protection, in that order. These four alone amount to 75% of the total. Priorities do differ slightly between the two republics, however, with Montenegro giving more weight to rural development and infrastructure, compared to Serbia.

Implementation. Monitoring and Evaluation

The fight against poverty is a long struggle that will be facilitated by the implementation of the PRS. To maximise the future impact of the strategy, it is important to ensure an effective integration with and linkages to the overall reform process and the overarching European Integration agenda. It is also of central importance to align and link the implementation of the PRS with the yearly Budget process and the framework external resources.

With the adoption of the Strategy, the focus shifts from planning to action - a critical and challenging phase for most strategy processes. It is now necessary to develop effective implementation mechanism taking into account available resources and constraints. The Government of Serbia and Montenegro is committed to doing so.

Each republic has established a set of goals for monitoring purposes. These targets are closely aligned with the Millennium Development Goals, and include both ultimate objectives and process indicators. The next important steps that are required will be to improve statistical capacities to report on these indicators, and to establish working groups in the relevant ministries to be in charge of monitoring not only the indicators, but also the actual implementation of the strategy itself. We intend to carry out the monitoring of the PRSP in a participatory fashion, actively involving all relevant stakeholders, including the civil society, and the Parliament.