The cost of rebuilding Yugoslavia

BBC News Online, Friday, 6 October 2000, 12:48 GMT 13:48 UK

President Slobodan Milosevic leaves behind him an economy in tatters.

Years of war and sanctions have crippled Yugoslavia's economy.

The US and Western Europe now pledge to lift sanctions, and promises of aid are starting to pour in.

But experts are sceptical whether the unwieldy opposition coalition can administer the economic medicine the country needs, and whether its nationalist leader, Vojislav Kostunica, will accept the conditions that come with Western cash.

End to sanctions

The US and the European Union are to lift sanctions against Yugoslavia shortly, setting the country on its path towards economic normalcy.

It would mean an end to bans on trade with Yugoslavia and investments in the country.

Part of the reason for Western willingness to offer an economic olive branch to Yugoslavia is the hope that this will encourage democracy to take root.

Stability pact

One of the biggest and most immediate sources of aid for the new government is likely to come through the Balkans Stability Pact.

Set up after the Kosovo war in 1999, it co-ordinates aid from the European Union and the G8 group of the world's top industrialised nations plus Russia to the countries in the region.

Serbia had been excluded while President Milosevic was in power.

There are fears that Serbia's participation in the pact could deprive other countries in the region from funds.

However, the co-ordinator of the aid programme, Bodo Hombach, has made it clear that more funds will be available. Already, the US is said to have pledged an extra $500m for Yugoslavia.

True reform

But for Yugoslavia to enjoy a true economic recovery, it needs to look beyond Western aid.

Analysts say that the country must now consider structural reforms, as the seeds of economic chaos in Yugoslavia were planted long before sanctions were put in place.

It is difficult to gauge the impact the sanctions alone have had on the Yugoslav economy.

Charles Robertson, an emerging Europe economist at ING Barings, attributes the state of the Yugoslav economy less to sanctions but to the “lack of structural reform [and] a lack of privatisation to good investors”.

“I would imagine that the Yugoslav economic policy has been tailored more to keeping Milosevic in power than insuring long term stability,” he adds.

The break-up of Yugoslavia cut off Serbia's large manufacturing sectors—which include autos and chemicals—from outlets and suppliers.

Once trade with other European countries resumes, economic growth should start to pick up.

Private help

Yugoslavia is also now likely to join other central and Eastern European countries in looking to Western investors for cash.

But what are Yugoslavia's chances of attracting private investments?

“This isn’t a huge economy. It is hard enough for major, quickly reforming economies of central and Eastern Europe to attract funds, it is going to be that much harder for a place like Yugoslavia,” says Juliet Sampson, emerging market economist at Bank of America in London.

And she adds: “The competition is fairly stiff.”

Private investors, who had their fingers burnt in the Russian crisis of 1998, will need evidence of a genuine commitment to reform and even more importantly, economic data they can trust.

“A lot of the real trade flows are not going to be recorded, either because they are not legal, or because there hasn’t been a real interest in giving an accurate portrait of what is going on in the economy. Any data should probably be taken with a grain of salt,” Ms Sampson added.

Multilateral medicine

If Yugoslavia chooses to follow the well-trodden route to reform, it could also approach the World Bank and IMF for funds.

While the World Bank has programmes for structural aid that Yugoslavia may wish to apply for, getting IMF funding may be more problematic.

“In economic terms is he [President Kostunica] the kind of leader who would be willing to sign up to an IMF programme which in practice means relinquishing some economic control and agreeing to targets set by multilateral or external power?” Bank of America's Ms Sampson asks.

A strong nationalist like President Kostunica might find the economic medicine prescribed by the West hard to take.

“It might be in the interests of Yugoslavia to sell its banking system to foreigners,” says ING Barings' Charles Robertson.

But he doubts that this is a policy Mr Kostunica would favour: “This is an opposition movement, united only in its attempt to get rid of Milosevic. When it come to making very hard economic decisions, they will have real difficulties.”