"The new, democratically elected government of Yugoslavia is facing one of the most complex and serious set of economic problems to be faced by any transition economy since 1989." stresses Dr. Danuta Hübner, Executive Secretary of the United Nations Economic Commission for Europe (UNECE) commenting the latest issue of the Economic Survey for Europe, just released by the UN/ECE. "The 1980s were already problematic for the former SFR of Yugoslavia, a lost decade in terms of development; but the 1990s were disastrous, a decade of economic regress."
Yugoslavia’s GDP per head was some 46 per cent of the EU average in 1980; in 1990 it had fallen to some 34 per cent, and rough estimates put it at somewhat under 25 per cent in 2000. Devastated by a series of wars culminating in the Kosovo conflict of 1999, by the chronic misallocation of resources under authoritarian rule, by economic sanctions and isolation from the international community, and debilitated by extensive corruption among the ruling elite which appropriated a considerable proportion of the state’s resources to itself, the present government is faced with an economy wracked by macroeconomic imbalances which are far greater than those encountered in any other transition economy, including Russia. Many of these imbalances were hidden by the previous regime in the form of suppressed inflation and hidden subsidies to the enterprise sector.
An enormous quasi-fiscal deficit – swollen by the losses of publicly owned firms, which amounted to 123 per cent of GDP at the end of 1998 – has accumulated as an alternative to confronting the structural causes of the hyperinflation of 1992-1994 and is the largest single imbalance facing the government. The government debt and the country’s foreign debt, which amounts to some $12.2 billion, are both equivalent to well over 100 per cent of GDP. But attempts to correct these imbalances quickly run into a series of connected problems. Dealing with the stock of enterprise debt will require large-scale public funding to restructure their balance sheets, while stopping the further accumulation of debt will require hard budget constraints in a market environment. But hard budget constraints will threaten at least 30 per cent of the total employed labour force, which are estimated to be underemployed in state owned firms, in a country where registered unemployment is already running at some 27 per cent of the labour force. Enterprise restructuring, in turn, will require a reform of the complicated system of social and public ownership, and the highly distorted structure of relative prices will have to be liberalized if there is to be any significant movement to a more efficient allocation of resources.
At the same time the government will have to confront two other major tasks: the reform of the public finances and of the tax system, and the restructuring of the banks. The net worth of the banks is dramatically low and so huge amounts of fresh funds will be needed to recapitalize them.
The government must attempt to introduce this major programme of reform in a country where the population, after more than a decade of drastically falling living standards and the loss of a major part of its savings through hyperinflation and government sequestration, has little or no confidence in the country’s financial institutions, is distrustful of state institutions, and is resentful of what it sees as excessive foreign interference. Whatever reforms are introduced further hardship for many groups in the society seems inevitable. In these circumstances it may be dangerously counter-productive to withhold assistance to the Yugoslav government until international demands are met for the former President to be handed over to the International War Crimes Tribunal in The Hague. As stressed in previous issues of this Survey, the economic recovery of Yugoslavia is essential for the peace, prosperity and stability of south-east Europe as a whole. The stability of the region remains highly fragile as recent events in The former Yugoslav Republic of Macedonia and Bosnia and Herzegovina have underlined. Without in any way compromising Yugoslavia’s legal obligations to the Tribunal in The Hague, the immediate priority is for the Yugoslav government to get a comprehensive programme of reforms underway and to bring about some improvement in the living standards of the population. But it will not be able to do this without massive help from abroad. There are signs that the international financial institutions are now acting more rapidly and effectively in south-east Europe than they did in central Europe in the 1990s, but they are unlikely to be able to provide all that is needed. A large and generous – and prompt – effort will also be required from the EU, which should include a significant proportion of non-debt finance in its assistance, as well as efforts to prepare Yugoslavia for eventual accession to the Union. A rescheduling and reduction of the country’s foreign debt is also urgent. So far the sums being discussed by the international community fall far short of the Yugoslav government’s estimates of its needs. "With speedy and adequate assistance" stresses Dr. Hübner, "there is a chance that the support for the Government’s liberal reforms will not evaporate into outright opposition and that the economy will embark on a steady path of growth and reform."
For further information please contact:
United Nations Economic Commission for Europe
Palais des Nations,
CH-1211 Geneva 10, Switzerland
Tel.: +41 (0) 22 917 44 44
Fax: +41 (0) 22 917 05 05
Reproduction is permitted provided that the source is acknowledged.