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Yugoslavia: Now For The Hard Part


International Business

Yugoslavia: Now for the Hard Part

Can Kostunica revive the economy?

For 13 years, the people of Serbia watched President Slobodan Milosevic divide the once-prosperous Yugoslavia, start four wars that cost more than 200,000 lives, and incite the wrath of NATO, which bombed them for three terrifying months last year.

In the end, however, it was a combination of economic meltdown and humiliating international isolation that drove hundreds of thousands of Serbs onto the streets to topple the "Butcher of the Balkans." From students to coal miners, the Serbs made it clear they wanted to improve their economic lot--and to live in "a normal country."

Now they have that chance. Western leaders have rushed to embrace the new President, Vojislav Kostunica, lifting sanctions and promising aid. But as the euphoria of the peaceful revolution subsides, Yugoslavs may discover that toppling a dictator was the easy part. Building a democracy and restoring a shattered economy could take years, and never succeed completely.

The economic obstacles may prove insurmountable--at least for a generation. Ten years of war and sanctions have decimated an economy that was once the envy of the East Bloc. Gross domestic product of Serbia and Montenegro--the two republics remaining in the Yugoslav federation--has plunged from $31 billion in 1987 to $10 billion in 1999, according to G17 Plus, a Belgrade think tank that now advises Kostunica on economic policy. Per capita GDP in Serbia fell from $3,200 to $1,700 in the last 13 years, while industrial output fell 65%. Total external debt, the vast majority held by the state, is close to $15 billion. Unemployment has risen from 17% to 27%, while analysts estimate that almost half of those employed are actually redundant.

What is left of the old economy, most of which is still state-owned, limps along with the aid of government subsidies. But a lack of materials, plus dwindling demand for anything but essential goods, has taken its toll. The Zastava car factory in Kragujevac, south of Belgrade, is a prime example. It once pumped out 200,000 cars a year. Now, heavily damaged by NATO bombs, the factory will produce fewer than 20,000 cars this year.

No surprise, then, that the Kostunica government is appealing for foreign aid--$500 million of it, for starters. "We need this cash just to cover holes in the budget and to stabilize the currency," says Srboljub Antic, a member of G17 Plus who is advising Kostunica. Already, Brussels and Washington seem to be obliging. The European Commission has lifted its embargo on oil shipments to Yugoslavia and a ban on commercial flights. And EU member states will soon consider a commission proposal to channel $2 billion in aid to Yugoslavia over the next seven years. The U.S. has also promised to lift sanctions soon.

Lifting sanctions and channeling aid money may stabilize things, but Kostunica needs to get some economic activity going fast. How will he even begin to cope with such a disastrous situation? Over the past several months, as Kostunica gradually mounted his challenge to Milosevic, he has also been receiving economic advice from the G17 Plus consultancy and other advisers. They have devised a post-Milosevic economic plan that Kostunica has embraced. Its chief architect, 36-year-old economist Mladjan Dinkic, is favored to become president of the Yugoslav National Bank.WESTERN FLIGHT. The sweeping plan calls for a total overhaul of state finances and the budget. The system of personal taxation, which now has individuals paying a lump sum at the end of the year, would be modernized. Tax exemptions for favored stated companies would also be eliminated. And the Yugoslav dinar might be replaced by the German mark or eventually the euro as the official currency. Longer term, Kostunica may try to attract foreign investment to the auto factories, chemical makers, and cement plants that survived last year's NATO bombing.

But even before attempting any of these reforms, Kostunica and his team want to take stock, so they plan to bring in at least one Big Five auditing firm to go through the government's books. That will allow Kostunica's team not only to measure the depth of the economic crisis but also to gather evidence against Milosevic and his cadre of corrupt loyalists. Although Kostunica has said he will not extradite Milosevic to the Hague, where the former President has been charged with war crimes, several sources indicate he will not shy away from prosecuting him for fraud at home.

At least there's a plan. But some of the economic damage may be too deep to reverse. Driven away by war, tens of thousands of young, educated Serbs have abandoned their country for a better future in the West. On top of all this, gangsters have flourished in Yugoslavia. A vast web of Milosevic cronies and criminals has grown rich from running factories and smuggling gasoline, guns, cigarettes, and booze. A huge black market has contributed to the breakdown in the rule of law. Tax evasion is endemic. The murder rate has risen more than 150% since 1989. "There are not many signs that this is part of Europe," says Anna Husarska, senior political analyst with the Brussels-based International Crisis Group.

Brussels and Washington may not cooperate to fix this mess as much as the Yugoslavs would like. The EU and the U.S. have delayed lifting sanctions that froze Yugoslavia's close to $1 billion in foreign assets and blocked Belgrade from access to international financial institutions. That's to prevent Milosevic from tapping foreign bank accounts.KOSOVO TROUBLE. There could also be disagreements over Kosovo, where 40,000 NATO troops still patrol. Albanians in Kosovo are demanding independence, but Kostunica--an ardent nationalist--is sure to resist. The U.S. is expected to demand that Kostunica grant Kosovo broad autonomy and allow NATO troops to remain. U.S. aid may not materialize if Kosovo proves a sticking point.

Some Serbs are optimistic that Kostunica can revive his country. "There won't be progress overnight. We need a few years," says Jovan Mileusnic, 68, manager of Jugohemija Belgrade, an import-export company whose revenues have plunged from $430 million in 1990 to an expected $26 million this year. "But once we get a chance to enter European markets again, we've got the basis for development."

Yet others are are not even cheered by the dramatic revolution. One couple, Alexandra and Goran Maric, 30 and 32 respectively, haven't changed their plans to emigrate to Canada. "We lost the best days of our lives," says Goran, an engineer. "We want a decent living now, and it's sure that we won't get it here." Some Yugoslavs, it seems, are giving up on their country, even after winning it back. Fighting such attitudes may prove just as difficult for Kostunica as was fighting Milosevic.By Christopher Condon in Budapest and Tanja Jakobi in Belgrade, with Stan Crock in WashingtonReturn to top


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