INSTITUTE FOR

WORLD ECONOMICS

HUNGARIAN ACADEMY OF SCIENCES

W o r k i n g P a p e r s

No. 135 June 2003

Yoji KoyamaTHE TRANSITION TO A MARKET ECONOMY IN THE

SUCCESSOR STATES OF FORMER YUGOSLAVIADIFFERENCES OF NORTH AND SOUTH

1014 Budapest, Orszagház u. 30.Tel.: (36-1) 224-6760 • Fax: (36-1) 224-6761 • E-mail: vki@vki.hu

2

SUMMARY

The paper places in a broad historical per-spective the transition to a market economyin the successor countries of former Yugo-slavia.

Part 1 describes historical factors andthe international environment. Ethnically,the Yugoslav Federation of the socialist pe-riod was a country composed mainly ofSouth Slavs, but from the historical andcultural points of view, it bridged CentralEurope (Slovenia and Croatia) and the Bal-kans (FR Yugoslavia and other republics).The disintegration process was also influ-enced by the international environment, asthe Yalta system and the Cold War ended atthe turn of the 1990s and the EC pursuedfurther integration. The menace of the So-viet Union, a factor serving to unite nationsin the former Yugoslavia into a singlecountry, was lifted. The reason why theYugoslav Federation disintegrated and atro-cious national conflicts broke out can betraced to the collapse of the 1974 Constitu-tion, which had turned Yugoslavia into afederation tinged with confederative ele-ments – a weak federal government sup-ported by a strong centralized party. So longas the League of Yugoslav Communists(LYC) retained its prestige, the regime wassafe, but once this was lost, the regimecould not survive and the inter-republicanthreshold became ever higher. Thus disinte-gration of the economy had already begunin the 1970s. The Yugoslav economy beganto stagnate at the beginning of the 1980sand became mired in the mid-1980s. Theloss of party prestige culminated in January1990 in a split into republican constituents.Between April and December 1990, free,multi-party elections took place in each re-public, where goals had become disparate.Croatia faced a serious ethnicity problem.Bosnia-Herzegovina contained Muslims,Serbs and Croats living in a symbiotic rela-

tionship. It became clear that these coun-tries could not secede from the YugoslavFederation without bloodshed. Slovenia’srush to independence led to a tragic disinte-gration of Yugoslavia. The faint chance andsincere effort to avoid civil war in Bosnia-Herzegovina eventually failed. Nationalconflicts were precipitated by internal col-lapse and worsened by international actionsthat accelerated the process from without.

Part 2 examines the process of transi-tion to a market economy in each successorcountry. Slovenia, the most homogeneous ofany constituent republic or province, suf-fered relatively little damage in the inde-pendence conflict as it undertook its ‘doubletransition, from a socialist to a marketeconomy and from a regional economy to anational economy.’ Nor was its transition-induced recession very deep. More seriouswere the costs incurred through secessionand independence. The main cause of therecession was a drastic reduction in tradewith other former Yugoslav republics,which was offset by increasing exports toWest Europe. Slovenia, in fact, was suc-cessful in entering the EU markets. Withprivatization, there was a heated contro-versy between advocates of gradual, decen-tralized, commercial privatization on theone hand and mass, centralized, distributiveprivatization on the other. The privatizationlegislation of 1992 was a compromise en-compassing features of both, including pri-vatization by free distribution of ownershipcertificates to all citizens. For the time be-ing, this small country’s strategy in findingappropriate areas for specialization hasbeen successful. Furthermore, events in theoutside world – the end of the Cold War,globalization and regionalism – have gonein Slovenia’s favour. Western countries re-sponded warmly to Croatia on its independ-ence, but were gradually repelled by Presi-

dent Franjo Tudjman’s overtly nationalisticcourse. The political dominance of theCroatian Democratic Union (HDZ) wasunshaken until the early 2000, as opposi-tion parties remained weak. Tudjman’s po-litical style was rather authoritarian. In thecourse of privatization, small and medium-sized companies were purchased by em-ployees and management using preferentialcredits, while large companies, which werenationalized first, came under the manage-ment of confidants of the ruling party,which produced a small number of gov-ernment-approved tycoons concentratinghuge wealth in their hands. This approachled to deadlock at the end of the 1990s. In-creasing public dissatisfaction led to an op-position victory in the general elections ofJanuary 2000 and a new coalition govern-ment centred on social democratic parties,embarking on economic restructuring andefforts to join the EU. The Federal Republicof Yugoslavia (Serbia and Montenegro) ex-perienced two wars and two post-war re-coveries within a decade. The civil war inBosnia-Herzegovina from April 1992 toNovember 1995 resulting in UN sanctionsbeing imposed on the Federation. Thencame the Kosovo war. The economy of theFR Yugoslavia was damaged by the wars,sanctions and international isolation, pro-ducing a crisis in which the public had littleoption but to support the undemocraticMilosevic government through thick andthin. Privatization in the first half of the1990s was frustrated by astronomical infla-tion. The Titoite notion of ‘social ownership’meant that officially the state had notowned the means of production in the so-cialist period. Paradoxically, therefore, thechange of system turned the state into thebiggest owner after the system change, withmembers of the ruling party being ap-pointed to managerial positions. The budgetconstraint in state and socially owned firmsremained soft. The main borrowers fromthe banks remained their owners. The col-lapse of the Milosevic regime in October2000 left the economy in a parlous state.New privatization legislation was adoptedin May 2001 and a start was made to pri-vatization, much later than in the other

post-socialist, transition countries of Centraland Eastern Europe. There was a crucialshortage of capital and an urgent need forFDI, especially by strategic investors. Thetransition to a market economy in Bosnia-Herzegovina and in Macedonia is still at aninitial stage. Like Serbia and Montenegro,they need to develop regional cooperationwith other Balkan countries, with the hopeof joining the EU in the distant future.

The international community has ex-tended less assistance to the Balkans than toCentral and Eastern Europe. Attention andaid for economic reconstruction and stabili-zation need to be greatly increased to bringlasting peace to the region.

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INTRODUCTION*

An underlying cause of the national con-flicts that split former Yugoslavia was theeconomic crisis that surfaced in the 1980sand continued for more than ten years.Economic performance differed in northernand southern republics, although they allstill operated under the system of socialistself-management. Thebreak-up of the Federationproduced five independentcountries: Slovenia, Croatia,Bosnia-Herzegovina, a newFederal Republic of Yugosla-via (composed of Serbia andMontenegro) and Macedo-nia.

Transition to a market,or more precisely capitalisteconomy became inevitableafter the collapse of the socialist system.However, the decentralized, self-managedmodel of socialism differed strongly fromthe Soviet type, so that the transition in thecountries of former Yugoslavia could besaid to be from an incomplete to a fully-fledged market economy.

Most people in Western Europe andthe United States show bias when they viewthe problems of former Yugoslavia. EasternEurope is very far from Japan and the cul-tural and economic ties have been weak. Inthis respect, Japanese researchers such asthe author are handicapped, but on theother hand, they find it easier remain ob-jective. This paper takes an approach that

* The author, Yoji Koyama is professor of Russian andEast European Economies, Faculty of Economics, Nii-gata University, Japan. This paper is a revised andenlarged version of my paper (2000b). I would liketo express special thanks to Bruce Brown, associateprofessor at Niigata University from 1997 to 2000,for his kind help in translating the Japanese text. Iwould also like to express gratitude to Eva Ehrlich,Gábor Révész, Tamás Novák, Aleksandar Sevic andVera Vratusa-Zunjic for their valuable comments.

combines economic history with interna-tional relations.

It is important when analysing eco-nomic performances in the North and theSouth to consider three groups of factors: (i)the historical factors, including differencesin initial conditions, i.e. the underlying so-ciety, the maturity of civil society, the de-velopment level of the pre-socialist marketeconomy etc. (ii) the international environ-ment, and iii) the orientation of the politicalelite.

The paper begins with a brief discus-sion of historical factors and the interna-tional environment. Then the reasons forthe disintegration of Yugoslavia and theoutbreak of atrocious ethnic conflicts arediscussed. Comparisons are made betweenthe northern and southern republics, espe-cially Slovenia, Croatia and the new Yugo-slavia, Bosnia-Herzegovina, and Macedoniabeing omitted because the transition to amarket economy has hardly begun there.Finally, the prospects for the region areconsidered.

Table 1The successor states

Area(km2)

Population (million) Currency Per capita

GDP (USD)Slovenia 20,251 2.0 Tolar 10,109Croatia 56,538 4.54 Kuna 4,406Bosnia-Herzegovina 51,129 3.2 Conv. mark 1,027FR Yugoslavia 102,173 9.54 940

Serbia 88,361 8.98 DinarMontenegro 13,812 0.56 DEM (Euro)

Macedonia 25,713 2.03 Denar 1,702Source: WIIW (2001).

6

1) HISTORICAL FACTORS AND THEINTERNATIONAL ENVIRONMENT

1.1. Historical factors

Examining movements in Eastern Europeafter the collapse of the socialist regimesunderscores again the importance of his-tory. The Eastern European countries otherthan the Soviet successor states, which ex-perienced a succession of political changes(‘democratization’) and aimed at a transi-tion to a market economy and capitalism,can be classified broadly into the Centraland Eastern European countries and theSouth-East European countries of the Bal-kans. The former belong to an area cultur-ally influenced by Catholicism and havestrong historical, cultural and economic tieswith Germany and Austria. They returnedto Central Europe, as it were, as soon as theCold War ended. In the Balkans, on theother hand, civil society was underdevel-oped and the area had been culturallydominated by Greek Orthodoxy.1 There wasstill a noticeable legacy from centuries ofrule by the Ottoman Empire.

When the author visited Budapest inMay 1991, László Láng, director of the Re-search Centre of Central Europe, explainedthat Central European countries has a‘common experience’. Central Europe isvery cohesive and coincides with the extentof the former Austro-Hungarian Monarchy.Again, there are historical reasons for this.What today constitute Southern Poland, Bo-hemia, Hungary, Slovenia and Croatia allreached their period of modernization whilethey formed a part of the Austro-Hungarian

1 On civil society, see Bibic and Graziano (1994). InJapan, theoretical research on civil society is repre-sented by Hirata (1968).

dominions. This meant they were affectedby European or international trends intransportation, cultural achievements andlevel of technology. They share a historicalexperience of coexistence within the sameempire. Even today, an industrial map ofEastern Europe shows clear concentrationfrom South Poland through Moravia, Bo-hemia, Western Hungary and down to WestCroatia and Slovenia. The line is still visible85 years after the Austro-Hungarian Mon-archy collapsed (Koyama 1992, p. 85).

Láng added that the difference be-tween the Central Europe and the Balkans ishistorically ascribed to the difference be-tween Catholic and Byzantine influences.Central Europe also differs from other re-gions politically, in that the churches wereless closely connected with state power. Onthe contrary, the church in ByzantineEurope was always entangled with thestates. Although civil society did not developin Central Europe, there was a chance for itto happen. The difference in church-staterelations is the main reason behind the dis-tinction between Central Europe and theBalkans. The political processes of the west-ern and southern parts of Eastern Europeremain different to this day (Ibid., p. 84).

Lang’s view should be consideredwhen studying the processes of the transi-tion to market economies in EasternEurope.2 Teruji Suzuki, a specialist of com-parative law, attaches importance towhether countries inherited the system ofRoman law, through the study of jurispru-dence in medieval universities in CentralEurope.3 Roman law supported right of

2 Rule by the Austro-Hungarian (Habsburg) Monar-chy had positive as well as negative aspects. A seriesof reforms, including the educational system, wascarried out in the reign of Maria Theresa (1741–80).The spirit of reform was continued by her son JosephII, who carried out abolition of serfdom and torture,promulgation of religious toleration, and promotionof industrial development. When Joze Mencinger, aprominent Slovenian economist, was asked by theauthor for the reason for his country’s economicsuccess in an interview (April 1, 1997), he referredunexpectedly to Maria Theresa’s education reforms.3 For detail on Roman law, see Stein (1999). Theauthor is also indebted to Christopher Beermann,associate professor at the Niigata University Faculty

7

ownership, so that it was the foundation forthe subsequent development of marketeconomies. Roman law was not inherited bycountries imbued with Orthodox Christian-ity – Russia and the Balkans, where the con-cept of ownership never became so deep-rooted (Suzuki 1998). Of course, this can-not be determined quantitatively, but itseems to have effected a relative delay in thedevelopment of a market economy in pre-socialist Balkan countries.

Ethnically, the Yugoslav populationconsisted mainly of South Slavs, but histori-cally and culturally, it straddled CentralEurope and the Balkans. The Slovenes andCroats who seceded from the Austro-Hungarian Empire in 1918 formed a jointstate with the Serbs. This became the firstYugoslavia, which later suffered chronicnational conflicts, and became after WorldWar II the second, socialist Yugoslavia un-der Josip Brod Tito.

1.2. Changes in the international en-vironment

The expulsion of Yugoslavia from Comin-form in June 1948 amounted to expulsionfrom the Soviet bloc. The Soviet Union andother Eastern European countries imposedan embargo and even threatened Yugoslaviamilitarily. Communists in Yugoslavia be-came sceptical about the Soviet type of so-cialism and began to grope towards a so-cialist road of their own.

Thereafter, relations with the Westgradually improved, and in 1949, theUnited States began to extend economic andmilitary assistance to Yugoslavia. ‘The con-tinued independence of Yugoslavia,’ Presi-dent Truman argued, was ‘of great impor-tance to the security of the United States’(Hoffman and Neal 1962, p. 148). Such USassistance continued until 1955, when rap-prochement with the Soviet Union ensued. of Law for recommending this book and for his ownexplanations.

In 1958, however, the Soviet Union criti-cized the new programme of the LYC,which included references to the danger ofwar through confrontation between eitherthe American or the Soviet bloc. Althoughthe relationship with the Soviet Union laterimproved, Yugoslavia never returned to theSoviet fold and continued to view the SovietUnion almost as a ‘potential enemy’, citingthe 1948 expulsion, the Hungarian Revolu-tion of 1956, the suppression of reform inCzechoslovakia in 1968, and so on. Diplo-matically, Yugoslavia remained neutralbetween East and West and secured atten-tion as the one socialist country in the non-aligned movement. The West continued tosupport Yugoslavia, because of the delicateposition it occupied in world politics.

Some 45 years after World War II,which had been a unifying experience forthe main national groups of Yugoslavia asthey fought to liberate their country, theinternational environment drasticallychanged. Gorbachev, the promoter of per-estroika in the Soviet Union, practicallyabandoned the principle of limited sover-eignty in 1988. Thereafter, the socialist re-gimes of Eastern Europe collapsed one afterthe other in 1989–90. Since the Yalta sys-tem no longer applied and the Cold Warhad ended, so had the menace of the SovietUnion, a factor that had united the nationsof Yugoslavia into a single country. Also be-hind them was the fear of German andItalian expansionism, which was tradition-ally menaced the Slovene nation. The Euro-pean Community, meanwhile, was pursuingfurther integration. ‘The end of the ColdWar made the previous deep political,ideological and military gap along Slove-nia’s Western and Northern borders withItaly and Austria politically obsolete andeconomically harmful. The Slovenes werethe most exposed and sensitive within theformer Yugoslavia to the demonstration ef-fect of the West’s growing affluence, itseconomic liberalism and political democ-racy’ (Bebler 1997, p. 138).

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2) COLLAPSE OF THE REGIME BASEDON THE 1974 CONSTITUTION AND

THE OUTBREAK OF NATIONALCONFLICTS

One of Tito’s achievements had been to in-tegrate the nations of Yugoslavia into a fed-eral state of ‘fraternity and unity’, in a re-gion where they had traditionally battledwith each other. In every national census ofthat period, more than a million citizensdeclared their national affiliation to be‘Yugoslav’. The word ‘Yugoslav’ did notmean citizen of Yugoslavia but defined anational group reflecting ‘a dream of com-munists, who tried to create Yugoslavs whowould rise above the national groups’(Iwata 1983, p. 280). Unfortunately, Titofailed to spread ‘Yugoslav’ consciousnessfurther than that.

Despite aid from the developed to theless developed republics, through a Fund forAccelerated Development at federal level,the economic differences between Northand South widened. For example, the differ-ence between Slovenia and Kosovo in percapita GNP was 3.2:1 in 1947, but 6.9:1 in1978 (Ramet 1984, p. 183).

As for relations between the federa-tion and the constituent republics, one post-war option, supported by the northern tworepublics, was to encourage republic-leveldevelopment, another was to have a pow-erful federal government, which the lessdeveloped southern republics preferred,along with resource redistribution throughthe federal government. With hindsight,there might have been a third option: apowerful federal government in a capitallocated neither in Belgrade nor Zagreb, forinstance in Bosnia-Herzegovina, which hadhitherto managed to transcend the problemsof national coexistence. No such option wasdiscussed. After the centralist Vice PresidentAleksandar Rankovic fell from power in the

mid-1960s, the LYC leadership went fordecentralization and de-etatization.

State control weakened and marketforces increased after the economic reformsof 1965. Graduate professionals and ‘tech-nocrats’ played increasingly importantroles. However, market-economic ills suchas inflation, income differences betweenenterprises and rising unemployment be-came evident. By the late 1960s, a youngergeneration was criticizing the governmentand party leadership for emasculating self-management and for tolerating detrimentaleffects of market economics. The main con-cern in the 1950s had been to struggleagainst state bureaucrats and empower ofself-managed enterprises, but in the late1960s and early 1970s it became a struggleagainst technocracy.

The LYC pushed through amendmentsto the country’s constitution in 1971. De-signed to appease the developed republics,these were systematized as the 1974 con-stitution, which loosened the Yugoslav fed-eration. Republics and autonomous prov-inces gained prime sovereignty and allpowers except those explicitly granted tothe federation, i.e. foreign policy, defence,measures to ensure a unitary Yugoslav mar-ket, common monetary and foreign-tradepolicies, and the principles of the politicalsystem and ethnic and individual rights.There was to be a collective head of statewith nine members – one from each repub-lic and province, plus the party president.Vojvodina and Kosovo, as autonomousprovinces within Serbia, had fewer dele-gates to the Federal Assembly than the re-publics, but they enjoyed the same de factoposition, with a veto over federal decision-making. The Socialist Federal Republic ofYugoslavia had become tinged with confed-eration.4 Meanwhile the regime pursuedeconomic democracy, eliminating technoc-racy and extending self-management toworkplaces smaller than ‘enterprises’. Themarket mechanism was not foresworn, but

4 For the emergence of the regime under the 1974constitution, see Rusinow (1977), pp. 284–5.

9

a ‘contractual’ mechanism became empha-sized instead. In addition, the regime pur-sued democratization and ‘de-professionalizing of politics, extending po-litical participation by drawing large work-ers and other citizens into a delegatesystem. Nonetheless, the communistsof Yugoslavia still sought to realizetheir goals within the framework ofa one-party system.

Although Yugoslavia wasunique in decentralizing and de-etatizing in this way, it still sharedwith the Soviet model a rejection ofthe multi-party system. While theconstitution was being prepared, aCroatian national movement arosein 1971, which Tito eventually sup-pressed, although his desires tocentralize again met with resistance fromlocal leaders reluctant to concede the pow-ers obtained in the 1965 reform and subse-quent constitutional amendments. Althoughhe was not able to reverse the decentraliza-tion of the state, Tito concentrated on re-centralizing the party. One Slovenian politi-cal scientist has called the result a ‘centralistfederation’ (Fink-Hafner 1995), but in thepresent author’s view, Yugoslavia at thattime had a weak federal government sup-ported by a strong centralist party. In short,the regime instituted by the 1974 constitu-tion supposedly aimed at Utopian economicdemocracy, but in fact was sustained by theLYC, whose mobilization of the masses hadbeen the force binding decentralized, self-managed socialism into a country. As longas the party retained its prestige, the regimewas safe, but once it lost it, the regime wasdoomed.

The self-managed enterprises hadconsiderable power, so that an albeit in-complete mechanism of market coordina-tion functioned. Full development of a mar-ket economy, however, would require amulti-party system to reflect the diverse in-terests in society, as Milovan Djilas (laterpurged and imprisoned) had posited back in1954. Again with hindsight, one way inwhich disintegration of the Federationmight have been avoided would have been

to have democratic parties straddling therepublics and provinces, which Tito’ssomewhat Bolshevik view of socialism pre-cluded.

Table 3Proportions of goods and services procured

from and delivered to other Yugoslav republicsor provinces, %

Outside pro-curement

Outsidedelivery

1970 1978 1970 1978Slovenia 23.9 21.3 42.2 35.5Croatia 27.4 20.3 37.2 28.9Bosnia-Herzegovina 36.9 27.1 36.8 30.5Montenegro 61.8 45.3 51.3 32.2Macedonia 36.2 30.2 35.5 35.4Serbia proper 32.6 26.1 40.4 30.8Vojvodina 30.8 27.5 50.6 34.7Kosovo 53.7 47.6 43.4 37.1Yugoslavia(average proportions) 38.0 31.0 40.0 32.0

Source: Ibid., p. 291.

Although the need for a unifiedYugoslav market was always stressed offi-cially, the markets in each territory weretending to close off in the 1970s. In Monte-negro, for example, the proportion of goodsand services sold within the republic rosefrom 48.7 per cent in 1970 to 64.5 per centin 1970 (Table 2), while the proportion ofcommodities procured outside the republicdecreased from 51.3 to 32.2 per cent (Table3). The inter-territorial thresholds were be-coming higher, which ran against the his-torical trend. Some economists went so faras to see in this the emergence of eight na-tional economies within Yugoslavia.

Table 2Proportion of goods made and services performed within the

same republic or province, %

1970 1972 1974 1976 1978Slovenia 57.8 59.2 63.3 64.5 66.3Croatia 62.8 63.7 64.4 68.8 70.4Bosnia-Herzegovina 63.2 65.2 68.9 67.3 69.1Montenegro 48.7 53.2 55.5 62.7 64.5Macedonia 66.5 66.6 68.3 63.4 65.2Serbia proper 60.0 60.7 62.5 65.2 67.0Vojvodina 50.0 53.6 56.2 62.6 64.4Kosovo 56.6 62.2 55.8 62.6 64.4Yugoslavia(average proportions) 59.6 61.3 63.4 65.7 67.5

Source: Pavlovic and Stojanovic (1984), p. 290.

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These fragmenting tendencies werefurther promoted by 1977 legislation onforeign-currency dealings and externalcredits, obliging each republic and provinceto draw up a balance sheet of internationalpayments and to fulfil export and foreign-earnings targets. In a seemingly contradic-tory tendency, the territorial units were be-coming linked directly to the world econ-omy. There were many ‘cases in which thesame or similar goods were being exportedas another republic was importing fromabroad, i.e. inter-republican trade was be-ing conducting through third countries’(Korosic 1989, p. 72). The Yugoslav econ-omy had already begun to fragment in the1970s.

Yugoslavia enjoyed a relatively highrate of economic growth until the late1970s. While this continued, the country’snational groups coexisted happily. Thisrapid economic development in the 1970swas based on loose economic controls in-herent in the system of self-management,which led to a sharp increase in the stock offoreign debt. At the beginning of the 1980s,the Yugoslav economy began to stagnate,and by the mid-1980s, it was mired in acrisis, to which the LYC failed to produceeffective solutions.5 The LCY, as the forcebinding the territories and nations into acountry, gradually lost prestige. Conflicts of

5 To summarize, Yugoslavia had been pursuingheavy and chemicals-led industrialization in the1970s. At enterprise level, empowered workerstended to distribute much of the gross income aspersonal incomes (wages) and communal consump-tion, so that relatively little was accumulated. Nev-ertheless, the investment-hungry enterprises contin-ued to borrow from domestic and foreign banks,exploiting defects in the financial system and loosepractices at financial institutions designed to serveself-managed enterprises, which themselves estab-lished banks. Local politicians exerted strong influ-ence on bank appointments and management. As thebank debts of self-managed enterprises mounted,local politicians had an interest in continued devel-opment of the regional economy. Thus banks effec-tively became managed by their big debtors. Mean-while changes in the credit system in 1972 hadmade it easy for enterprises to borrow abroad.Yugoslavia’s stock of external debt rose from USD4billion in 1970 to USD20 billion in the early 1980s.For more detail, see Koyama (1995 and 1996).

interest between republics began to be re-flected within the LYC itself.

Economic factors were of prime im-port in Yugoslavia, as Ken’ichi Ohno dis-cerningly argued: ‘Where plural ethnicgroups subjectively feel they share positivebenefits or negative damages, the “ethnicboundaries” of their groups gradually fade,fusion proceeds and national conflicts donot occur. This is especially evident wheretwo groups experience disproportionatebenefits from cooperation (synergistic ef-fects). Conversely, where plural ethnicgroups struggle for shares of a finite pie,feelings of hostility are generated and“ethnic boundaries” actualized. Thereuponthey fall into a self-inducing processwhereby own-group consciousness and ex-tra-group hatreds are fortified by tensionthat is heightened in turn by the consciouslyasymmetric perceptions (“we” as good andpeaceful, “they” as evil and militant, etc.).In this case, national conflicts escalate ataccelerating speed’ (Ohno 1996, p. 256).

What triggered the conflicts amongthe republics was the Kosovo problem. Afterthe suppression of revolts in 1981, the dis-content of the Albanian community inYugoslavia turned inwards. There wasmounting violence towards local Slav mi-norities and plundering, and scores ofthousands of members of the Slav minoritiesfled from the province in subsequent years.Many people in Serbia proper became in-censed by the inability of the Serbianauthorities to protect their brethren inKosovo, although the province was part ofthe republic. Slobodan Milosevic came tothe fore in the League of Communists ofSerbia advocating outright Serbian nation-alism, securing the post of party presidentin Serbia in 1987. The next year, on his ini-tiative, Serbia amended its constitution toreduce the powers of the autonomousprovinces. In July 1990, the Republic ofSerbia dissolved the Kosovo Assembly andimposed direct rule. Meanwhile Croatia andSlovenia were becoming increasingly criti-cal of Milosevic’s political style and the in-crease in Serbia’s weight within the federa-tion.

11

According to Table 4, based on a sur-vey in spring of 1989, the most positive at-titude toward political pluralism was shownby Slovene communists. On the subject of‘striving for a multi-party system’, for ex-ample, 36 per cent of Slovene communistsresponded positively, which was far morethan the 19 per cent of Croatian commu-nists. With ‘recognizing the existence andactivity of new alliances’, 44 per cent ofSlovenian communists responded positively,followed by 24 per cent of Kosovo commu-nists, who were embroiled in a very seriousethnic problem. ‘LYC members in Sloveniastrove for the most radical change’ (Fink-Hafner 1991, p. 11), while communists inMontenegro and Serbia were generallyconservative.

Table 4Attitudes to a political pluralism among LYC

members in republics and provinces, % in sup-port

Supp

ort f

or a

mul

ti-pa

rty

syst

em

Reco

gniti

on o

f the

exis

tenc

e an

d ac

tivity

of n

ew a

llian

ces

Supp

ort f

or a

cces

s fo

rne

w a

llian

ces

to th

em

ass

med

ia

Montenegro 6 9 12Serbia 9 8 10Vojvodina 10 12 14Bosnia-Herzegovina 12 14 18Macedonia 14 14 16Kosovo 16 24 24Croatia 19 19 24Slovenia 36 44 46Source: Siber, I. (1989): Komunisti Jugoslavije odrustvenoj reformi. Belgrade: IC Komunist, p. 29.Quoted by Fink-Hafner (1991), p. 11.

The LYC finally split in January 1990and free, multi-party elections ensued ineach republic in April–December that year.Slovenia’s April elections brought in a non-communist government, but the new presi-dent was the ‘Social Democrat-Communist’Milan Kucan. In Croatia, the new presidentwas the avid Croatian nationalist FranjoTudjman, with a non-communist govern-ment. By contrast, the elections in Serbia inDecember 1990 were won by the SocialistParty of Serbia, which had been created by a

merger of the League of Communists of Ser-bia with its popular-front organization. InMontenegro, the League of Communists ofMontenegro won. In both cases, the com-munists took a nationalistic line and gainedsupport from many workers uneasy abouttheir jobs. A non-communist governmentwas formed in Macedonia. In Bosnia-Herzegovina, its symbiotic communities ofMuslims, Serbs and Croats voted in a coali-tion government of dominant parties fromeach, reflecting the delicate national bal-ance.

In this way, the goals of the republicsbecame disparate. Were tragic nationalityconflicts inevitable? In this author’s view, asthe effort to foster ‘Yugoslav’ consciousnessand maintain the federation had turned outto be unsuccessful in 1991, the second bestchoice was to remodel the federation into aconfederation. Otherwise the disintegrationof the federation was inevitable, but therewould still remain a possibility of a peace-ful, longer process of separation based onnegotiations. If the international communityhad been prepared to intervene in the inter-republican disputes, it should have sup-ported the process of remodelling or ofpeaceful negotiated separation. Instead, theinternational community coped with theYugoslav question in a blundering way.

At the time, the international commu-nity did not want the Yugoslav federation tobreak up and the West supported its con-tinuation until the first half of 1991. Theforeign ministers’ meeting of the Commis-sion on Security and Cooperation in Europe(CSCE), held on June 19, 1991, confirmedits support for the unity of the YugoslavFederation. US Secretary of the State JamesBaker visited Belgrade on June 21 and an-nounced that the US would never approveany unilateral secession.

However, Slovenia made a forciblemove towards independence, successfullytargeting its neighbour and former rulerAustria for support. To general surprise,Alois Mock, the Austrian foreign ministerused the technique of including his Slove-

12

nian counterpart, Dimitrij Rupel, in theAustrian CSCE delegation.

Iwata (1999, p. 158) quotes a sen-tence from a book by an American ambas-sador to the Vatican, which had not beenseriously involved in politics since the mid-19th century: ‘By the middle of 1991, theVatican moved into unprecedented action tobecome a leader of the process of diplomaticrecognition.’ According to Gianni de Mike-lis, a former Italian foreign minister, JeffreyD. Sachs, the Harvard economist, went toLjubljana and told the Slovene governmentthat ‘in order to join Europe they wouldneed to liberate themselves from the yoke ofBelgrade’ (Iwata 1994, p. 126). Supportfrom Italy was unclear, but remarks byMikelis suggest that some Italians were in-volved in the preparatory operations. Hesuggested the convening of a brains trust ofspecialists in which ‘some Austrians andsome Italians participated and prepared ascenario on how to contrive a collision, soas to create a climate of world public opin-ion favourable to Slovenia’ (Ibid., p. 129).

Slovenia and Croatia declared inde-pendence on June 25, 1991, with Slovenia,in particular, promptly translating it intoaction and establishing its own border con-trols. In response, Federal Prime MinisterAnte Markovic (incidentally a Croat) issueda statement, in which he ‘rejected Slovenia’sindependence and ordered Defence Minis-ter Kadijevic to send in units of the FederalArmy and defend the checkpoint on theborder with Austria’ (Nakamura 1994, p.32). This put the federal army in a state ofwar with the Slovene defence forces, in anoperation that failed ‘because of skilful Slo-vene tactics towards the media, which madeworld opinion critical of the Federal Army’(Ibid.) After mediation by three EU foreignministers (of Luxembourg, Netherlands andItaly) and repeated cease-fires and renewalsof fighting, Slovenia and Croatia suspendedtheir declarations of independence for threemonths. When the suspension expired inSeptember 1991, the focuses of the fightingto the Slavonia region of north-east Croatiaand Slovenia was tacitly allowed byMilosevic to assert its independence, which

hastened the tragic disintegration of theYugoslav federation (Glenny 1996).6

Croatia, unlike Slovenia in the north-ernmost part of Yugoslavia and was bor-dered by Western European countries, facedserious ethnic problems. The Serbs of Croa-tia counteracted discrimination and har-assment by the new government by declar-ing an ‘Autonomous District of Krajina’,within which the local Croats then becamean intimidated minority. It soon became ob-vious that Croatia could not secede fromYugoslavia without bloodshed.

Ethnic animosities had been exacer-bated fifty years earlier, when Hitler’s Ger-many supported the Croatian fascist Ustasamovement in World War II, so that Ger-many in 1991 should certainly have taken amore prudent position on the Yugoslav cri-sis. Instead, Germany took the initiativewithin the EU in recognizing Slovenia andCroatia and rejecting the caution shown byFrance and other countries. As a Japanesedaily paper commented, ‘Foreign MinisterHans-Dietrich Genscher, who thought thatthe reunification of Germany was a result of“the right of national self-determination”,insisted that Germany’s special task was tosupport such a “right of national self-determination” for other countries too’(Asahi Shimbun, January 11, 1992). Ap-plying this principle to multinational Yugo-slavia was simplistic, but on December 23,1991, Germany had gone ahead and recog-nized not only Slovenia, but also Croatia asindependent states.

The Badinter Arbitration Committee,established alongside the EC peace confer-ence for Yugoslavia and composed of presi-dents of constitutional courts from five ECcountries, received representations from allYugoslav republics except Serbia and Mon-tenegro, calling for recognition of their in-dependence. On January 11, 1992, theBadinter Committee advised that Slovenia

6 Hiroyuki Iwata has also questioned Slovenia’s re-sponsibility: ‘The hostile nationalism of the Croatsand Serbs was rampant… but the fuse would nothave blown unless an electric current had been sentfrom Austria and Germany ’ (Iwata 1994, p. 90).

13

and Macedonia satisfied the requirementsfor immediate recognition. Croatia, how-ever, could not be recognized immediatelybecause the Croatian government needed toshow more consideration for its ethnic mi-norities, for whose protection there shouldbe constitutional safeguards. In the event,the EC Council decided not to recognizeMacedonia, but to recognize both Sloveniaand Croatia, feeling obliged to follow Ger-many’s lead rather than jeopardize ECunity. On January 15, 1992, other ECcountries did likewise.

The largest of the three communitiesin Bosnia-Herzegovina were the Muslims(‘Bosnians’) with 43.7 per cent, followed bythe Serbs (33 per cent) and the Croats (17.3per cent). The three nations lived in mixedcommunities, not segregated ones for themost part. The periods of peaceful coexis-tence had been much longer than those ofdisputes, giving rise to a regional con-sciousness (‘Mi smo bosanci’). The Japaneseobserver Professor Hiroshi Iwata (1999)notes that the Serb and Muslim leaderscame close to an agreement to avoid civilwar in July 19917. Similar views have been

7 The efforts by the Muslim politician Adil Zulfikar-pasic are described in Chapters 5 and 6 of Iwata(1999). Although a traditional Muslim aristocrat, hehad joined the Communist Party of Yugoslavia andfought with Tito’s partisans, but gone into exile inItaly in 1946. He eventually became a millionaireand Bosnian politician based in Zurich, returning toto Bosnia-Herzegovina and establishing a new party,the Muslim Bosnian Organization (MBO), after thecollapse of the communist regime.. This party domi-nated by intellectuals won little support and gainedonly three seats in the general elections of November1990, as opposed to 86 seats for the Muslim nation-alist Party of Democratic Action (SDA) headed byAlija Izetbegovic. The Slovenian conflict of June1991 alarmed many Bosnians, who feared a repeti-tion of the ethnic murders of World War II. TheZulfikarpasic initiative received endorsement fromIzetbegovic on July 12, 1991. (The phrase ‘BelgradeInitiative’ used in the Western media was mistaken.)On July 13, Zulfikarpasic and Filipovic (vice-president of the MBO and a member of Parliament)sat down with Radovan Karazdjic and MomciloKrajsnik (chairman of the Republican Parliament) onthe Serb side. It was agreed that the Muslims wouldaccept coexistence with the Serbs in a confederativeYugoslavia, while the Serbs would postpone estab-lishing a ‘Regija’ (Serb territory). With Izetbegovic’sconsent, Zulfikarpasic met Milosevic on July 14 inBelgrade and obtained his endorsement. The draft

expressed by the journalist Misha Glenny:‘The decision by the European Communityto recognize Slovenia and Croatia pushedBosnia into the abyss. Once this had hap-pened, the Bosnian government had onlythree roads along which it could travel andeach led to war. It could have stayed in therump Yugoslavia and been ruled over byMilosevic and Serbia. It could have acceptedthe territorial division of Bosnia betweenSerbia and Croatia, as suggested by Tud-jman and Milosevic. Or it could have ap-plied for recognition as an independentstate. The Croats and Moslems consideredthe first solution unacceptable; the Moslemsand Yugoslavs, the second; and the Serbs,the third. This enforced choice could nothave been presented at a worst time – Ser-bia and Croatia had been radicalized by thetrauma of a war which neither side had yetwon and neither side lost’ (Glenny 1996,pp. 143–4). Elsewhere he adds, ‘The deathsentence for Bosnia-Herzegovina waspassed in the middle of December 1991when Germany announced that it wouldrecognize Slovenia and Croatia uncondi-tionally on 15 January 1992. So distressedwas Alija Izetbegovic by this news that hetravelled to Bonn in a vain effort to per-suade Kohl and Genscher not to go aheadwith the move. Izetbegovic understood fullwell that recognition would strip Bosnia ofthe constitutional protection it still enjoyedfrom the territorial claims of the two re-gional imperia, Serbia and Croatia’ (Ibid., p.163).8

agreement needed only the signature of Izetbegovic,who was visiting the United States. Wide reports ofthe draft agreement caused immediate relief of thetensions between the two communities. Joint rallieswere held in Trebinje, in southern Herzegovina, andZbornik, in eastern Bosnia. The agreement was thenunexpectedly rejected by the SDA. According toIwata, Milovan Djilas considered that the Izetbegovicfaction, counting on support from the Islamic worldand US favour, thought it could gain hegemony overthe Serbs and Croats of Bosnia-Herzegovina. Zulfi-karpasic, on the other hand, underestimated the po-litical power of those whose priority was dissolutionof Yugoslavia, rather than problems of war or peace(Ibid., p. 230).8 ‘Bosnia could only have been saved if a politicalparty spanning the three communities had emergedas the most powerful after the collapse of communist

14

The government of Bosnia was com-pelled to choose the third course. On De-cember 20, 1991, its foreign minister re-quested recognition from the EC, which inturn requested that Bosnian leadership toconduct a plebiscite as a precondition forrecognition. On February 29, 1992, theBosnian leadership took a plebiscite on in-dependence despite a Serb boycott and thendeclared independence on the grounds that60 per cent of the eligible voters had sup-ported it. The EC, pressed by Germany, rec-ognized Bosnia and Herzegovina as an in-dependent state on April 6.

Contrary to Western expectations,armed groups from each national commu-nity, led by extreme nationalists, began tofight for ground. The biggest victims werethe Muslims and world opinion was rousedby news of Serbian death camps and sys-temic rape of Muslim women. However,similar deeds occurred to some extent inMuslim and Croat-ruled territory as well.Although the conflict between the nationalgroups was an intricate one, Westerncountries set out to examine who was rightand who was wrong. The United States, inparticular, was eager to solve the problemby finding and attacking villains. In theearly stages, Croatia won a propagandavictory over Serbia.9 The United States andWestern Europe tended to judge matters inCentral Europe and the Balkans by WesternEuropean standards. Croatia, with itsCatholic culture, was found more congenialthan Serbia, and the implications of Tud-jman’s extreme nationalism were ignored, power. The poverty of the pluralist system based onthe three national parties was demonstrated by thestructures which it spawned’ (Glenny 1996, p. 148).By the end of 1991, the disintegration of the Yugo-slav Federation had become an undisputed fact, withfierce civil warfare in Croatia. Movements for sepa-ration and independence appeared in both Bosnia-Herzegovina and Macedonia, which broke up thetripartite coalition in the former.9 Serbia’s propaganda defeat is discussed in Yama-saki (1993). The author points out that the one in-ternational TV relay station in Yugoslavia was lo-cated in Zagreb, so that Serbia was cut off fromsending out television news during the first threemonths of the war, by which time internationalopinion was firmly anti-Serb (p. 59).

while Serbia was made the villain. This ap-proach by the Western countries made re-solving the national conflicts more difficult.In short, the conflicts were caused by aninternal collapse, worsened by internationalactions that had the effect of accelerationthe process. The way the internationalcommunity misunderstood the conflicts inYugoslavia is evocatively demonstrated bythe Dutch political scientist Koen Koch. Ac-cording to his report, delivered at a confer-ence on Yugoslavia held in the Hague inNovember 1991, the conflict was not feder-alism versus confederation, democracyversus communism, or pluralism versus na-tionalism. Western Europe saw the conflictas one with Slovenia and Croatia on oneside, aiming at a market economy and de-mocracy, and Serbia on the other, trying tokeep up the old command economy. In fact,the Croatian government was as authori-tarian as the Serbian. It is also misleading todefine the Yugoslav conflict as basically anethnic conflict, a battle between Serbs andCroats imbued with hatred centuries old.What was witnessed in fact was a powerstruggle between old and new politicalelites, using nationalistic rhetoric to boosttheir own positions of power and privilege,regardless of the interests of those theyclaimed to be fighting for. Both in Serbiaand Croatia, government-controlled mediarevived memories of World War II atrocitiesand disseminated ethnic stereotypes andprejudices. This media war and the ensuingconflict curdled populations into their con-stituent ethnic groups. Serbs and Croatsalike were manipulated by their nationalistleaders, who benefited personally from ex-acerbating the conflict, whereas the popu-lation was harmed directly. Nationalism,Koch argued, had to be replaced by a plu-ralism that accepts unique cultures, relig-ions and languages. Only when the nation-alist leadership was replaced by representa-tives of the democratic opposition, wouldthe conflict end (Koch 1992, pp. 191–201).

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3) SLOVENIA’S DEVELOPMENTSTRATEGY AND TRANSITION TO A

MARKET ECONOMY

3.1. Development strategy

Slovenia, a country with an area of 20,251sq. km and with population of less than 2million, is ethnically the most homogenousof the former republics and provinces ofYugoslavia (90.1 per cent Slovene). Damagein the ‘independence war’ of 1991 wasrelatively minor.

In mid-1993, the government com-missioned a long-term economic-development strategy from the Institute forMacroeconomic Analysis and Development,which produced a detailed report in April1995, entitled ‘Strategy for Economic De-velopment: Approaching Europe, Growth,Competitiveness and Integration’. The maingoals were (i) faster economic growth andcatching up, (ii) higher competitiveness,(iii) inclusion in the European integrationframework, and (iv) permanent sustain-ment of economic growth from the ecologi-cal, social and ethnic standpoints.10

An informative account of the basisfor the strategy can be found in Svetlicic(1997). It was noted first that fundamentaltechnological changes – the informationrevolution and related changes – had madesmall countries more viable; the externalenvironment was enhancing the effects ofsmallness. This denied the argument thatglobalization and the economies of scaleand scope mitigated against them. The vi-ability of a small country in the globalized

10 The strategy’ is introduced briefly by Nakamura(1995) and Majcen (1999).

economy depends much on its ability toadapt swiftly to the changing external en-vironment (Ibid., p. 3). On the one hand,the weaknesses of small countries such asSlovenia include a weak position in inter-national relations, due to the scarce powerand natural resources, and inadequate la-bour and local factor conditions. This iscoupled with an inability to realize econo-mies of scale due to a small domestic mar-ket, limited finance and R and D capacities,etc. On the other hand, small countriesachieve social (cultural and religious) co-hesion more easily. They have better im-plemented policies and a more stable sys-tem, escape costly international responsi-bilities, adjust more radically and speedily,and are better placed for specialization;computerization and telecommunicationswhich are relatively more powerful weap-ons for small firms and countries than forlarge ones. He stressed despite their weak-nesses and threats, small countries havestrengths and opportunities that surpassthem. A small domestic market is immate-rial. The key is access to world markets.Small countries like Slovenia need not havea full set of industries. Instead, they shouldfind areas and niches of appropriate spe-cialization and thoroughly internationalizetheir activities.

3.2. Economic performance: costsand benefits of secession and inde-

pendence

Slovenia experienced a ‘double transition,from a socialist to a market economy andfrom a regional economy to a nationaleconomy’ (Mencinger 1996, p. 417). It hadthe advantages of an early start in makingits market-oriented reforms within Yugo-slavia (the first in the mid-1960s), main-tained some advantages of its own, andgained a better position than other formersocialist countries in implementing eco-nomic reforms, adapting to ‘European val-ues’ and adhering to sound economic poli-cies. However, the early 1990s saw a

16

recession in Slovenia, as elsewhere in thepost-socialist region. This ‘transformationalrecession’ has been explained by the Hun-garian economist János Kornai as concomi-tant on the transition from a supply-constrained to a demand-constrained econ-omy (Kornai 1995, p. 175). In the case ofSlovenia, the recession was comparativelyless serious, because the coordination of theeconomy had for many years been decen-tralized, and the impacts of insufficient de-mand had already prevailed over those ofsupply shortages in the 1980s, while mostexports were directed towards WesternEurope.

More serious were the costs caused bysecession and independence (Mencinger1996, pp. 416–17). The Slovene economywas badly hit by the secession itself, andeven more so, by the subsequent politicaland economic developments in the rem-nants of the Yugoslav Federation. The ‘sup-ply shock’ added considerably to inflation-ary pressures in the first months after inde-pendence. Slovenia also suffered damagebecause of hostile action against businessunits in other republics, as the cross-ownership pattern was asymmetric. In

1990, there were 2710 Slovene-ownedbusiness units and 62 companies in otherrepublics, but only 690 units and 9 compa-nies in Slovenia owned by interests in otherrepublics. Links with the rest of the worldwere also hindered by unresolved responsi-bilities for Yugoslav foreign debt and for-eign-currency reserves, non-financial as-sets, 2500 bilateral and multi-lateralagreements on export quotas, transport li-censes, etc. (Mencinger 1997, p. 209).What struck hardest was near complete lossof the Yugoslav market of 23 million peo-ple. According to Mencinger’s estimates(Ibid., p. 210), Slovenia lost 74.1 per cent ofits ‘normal’ exports to Yugoslavia, 18.8 percent of its ‘normal’ exports proper, and 45.2per cent of its ‘normal’ total exports. As aresult, GDP declined in 1991 and 1992 by8.9 and 5.5 per cent respectively. The un-employment rate rose from 2.6 per cent in1989 to 7.3 per cent in 1991 and 9.1 percent in 1993. The worst affected groupswere young job-seekers and the unskilled –the 1993 unemployment rate for the 15–24age group was 24.2 per cent (Svetlik 1997,p. 218).

Table 5Slovenia’s macroeconomic indicators

(1990–2000)

1990 1992 1993 1994 1995 1996 1997 1998 1999 2000Real economy (% changes)GDP -4.7 -5.5 2.8 5.3 4.1 3.5 4.6 3.8 4.9 5.1Industry -10.5 -13.2 -2.8 6.4 2.0 1.0 1.0 3.7 -0.5 n.a.Agriculture 1.6 -6.7 -4.2 4.2 1.6 1.1 -2.9 3.1 2.3 n.a.GDP p. c. (USD mn) 8706 6280 6370 7231 9418 9439 9103 9793 10020 n.a.Unemployment (an-nual average %) 4.7 8.3 9.1 9.1 7.4 7.3 7.1 7.6 7.4 n.a.

Consumer prices (%over previous year) 550 207.3 32.9 21.0 13.5 9.9 8.4 8.0 6.1 8.6

Government bal-ance/GDP (%) -0.3 0.3 0.6 -0.2 -0.3 -0.2 -1.7 -1.4 -0.9 -1.0

Interest rates (%)Deposit rate n.a. 48.3 30.2 27.9 20.8 11.2 13.9 7.0 9.6 n.a.Lending rate n.a. 72.2 42.6 38.5 28.0 18.3 20.3 12.3 15.2 n.a.External performance (USD mn)Goods exports 4120 6683 6083 6832 8350 8353 8408 9091 8623 9054Goods imports 4730 5892 6237 7168 9303 9178 9184 9880 9868 10016Trade balance -610 791 -154 -336 -953 -825 -766 -789 -1245 -962Current account 530 926 192 574 -100 31 12 -147 -783 -491Current account/GDP (%) n.a. 7.4 1.5 4.0 -0.5 0.2 0.1 -0.8 -3.9 -2.6

FDI net USD mn 0 113 111 131 183 188 340 250 144 50Debt servic-ing/exports of goods& services (%)

n.a. 4.9 5.0 4.9 6.8 8.8 8.8 13.5 8.0 n.a.

Source: EBRD (2000), p. 213; data for 1990: EBRD (1997), p. 235.

17

Slovene companies strove to diverttheir exports to Western Europe. In 1992,total exports increased by 33 per cent andtotal imports by 28 per cent, but results in1993 were far less impressive: exportsdown 9 per cent and imports up 5.9 percent. The drastic decline in total exports wascaused mainly by the collapse of trade withformer Yugoslavia, which plunged by 37per cent (from USD1508 million to USD963million). Particularly important in this diffi-cult period was the relative openness of theGerman market (Mencinger 1997, pp.211–14). The EU share of Slovenia’s totalexports rose from 60.9 per cent in 1992 to67.2 per cent in 1995, while its importshare rose from 59.6 per cent to 68.9 percent in the same period. The driving forcebehind Slovenian exports to the EU weremanufactures redirected from formerYugoslav markets: footwear, chemicals,textile, metalworking and paper. In the sec-ond quarter of 1993, the economy bottomedout, so that GDP increased by 2.5 per centover the year and has been growing since(World Bank 1999b, p. 49).

Despite the pessimistic forecasts, theSlovene economy seems to be competitive.When the present author visited the countryin 1997, economists gave several explana-tions. (i) Slovenian companies were strivingto modernize under the pressure from mar-ket. (ii), Slovenia had inherited the entire ECexport quotas for former Yugoslavia. (iii) Adivision of labour similar to the one be-tween South-East Asia and Japan was devel-oping with Germany and Austria. For ex-ample, Slovene companies produced com-ponents (such as car seats for BMW), andother companies were making and export-ing textiles under foreign brand names.

Four years after secession and inde-pendence, ‘The benefits of secession appearto prevail over its costs. Namely, while thecosts of re-orientating trade from protectedto competitive markets were significant, thesecession intensified economic restructur-ing, produced sound economic policy, andpermitted the construction of a “normal”economic system’ (Mencinger 1997, p.213).

3.3. Restructuring and privatization

Preparations for privatization had begun atthe end of the Yugoslav period. Theamendment to the 1974 Constitution in No-vember 1988 and related laws allowedgradual transformation of socially ownedcompanies into mixed ones. Discount-price‘internal shares’ enabled employee buy-outs. In 1990, responsibility for privatiza-tion was shifted to the republics. The firstdraft programme for privatization in Slova-kia was announced in November 1990.

There was heated controversy be-tween advocates of two approaches. Onewas styled gradual, decentralized, commer-cial privatization, by which firms them-selves initiated the process and the govern-ment role was confined to regulation andmonitoring. ‘Gradual’ meant that the initialprivatization (by selling or issuing shares)might be full or partial. ‘Commercial’ ruledout any free distribution of shares by right,although citizens of Slovenia would be enti-tled to discounts on share purchases up to aceiling and there would be additional dis-counts for employees of the unit being pri-vatized. This approach was championed byJoze Mencinger, in whose view there weremerits and lessons for future managementin the experience of self-management undersocialism.

The second group proposed mass,centralized, distributive privatization. Thisapproach was represented by Jeffrey Sachs,an economist noted for his eradication ofvicious inflation in South America and plansfor shock therapy drawn up for the gov-ernments of Poland and Russia. In his view,the political, social, and economic legacyhad to be eradicated. ‘Centralized’ meantthere was a big role for government in pri-vatization, and ‘mass’ that enterprises wereto be immediately converted into joint-stockcompanies by free distribution of shares tothe public.

The second privatization bill of No-vember 1991 was voted down, but the Acton the Transformation of Social Ownership

18

was finally passed in November 1992. Thiswas a compromise between the strategies:the decentralized, gradual approach of thefirst and the predominantly distributive,voucher privatization of the second(Mencinger 1996, pp. 418–19).

Stiblar (1993, p. 185) summarizes theprivatization legislation as follows. (i) Itregulates the conversion of enterprises insocial ownership into firms with known,private owners, while delineating the rolesof the Privatization Agency, the Reimburse-ment Fund and the Pension Fund. (ii) Cer-tain entities are excluded: public enter-prises, banks, insurance companies, coop-eratives, enterprises in bankruptcy proce-dure. (iii) Social capital is defined in the lawas the difference between the assets and li-abilities of social enterprises, plus perma-nent investments and stocks in their posses-sion. The value of social capital is estab-lished by drawing up an ‘opening balance’,by methods prescribed by the PrivatizationAgency and Social Accounting Service. It isnot a book value, because it is usually farfrom the real value. (iv) The rights of previ-ous private (individual and corporate) own-ers and their heirs are also prescribed. Thedenationalization act called for restitutionof private property rights in kind (if possi-ble) or value (shares) to those stripped ofownership by the nationalization proceed-ings of the post-war socialist regime. (v) Allagricultural land and forest in social own-ership are transferred to the Fund for Agri-cultural Land from the day of enactment.Companies using and managing land maycontinue to do so until an authorized bodydecides on denationalization (restitution) orconcession.

In 1993, vouchers known as owner-ship certificates were distributed free to allSlovenian citizens. Unlike the vouchers inRussia, these had different face values (be-tween SIT 200,000 – DEM 2500 – and SIT400,000) depending on the citizen’s age.The total face value of the certificates dis-tributed came to 40 per cent of the bookvalue of social capital on December 31,1992. The certificates were not transferable,but could be used to purchase shares in pri-

vatized companies (internal distributions,buyouts and public issues) or investmentfunds (World Bank 1999b, p. 88). The con-version process affected almost 1500 so-cially owned firms between 1993 and1997. By November 1998, 1369 privatejoint-stock companies were registered asoperating. The report by the World Banksaw the strong self-management tradition inSlovenia as an obstacle to privatization.Most companies were controlled by insid-ers. More than 90 per cent of firms chose totransfer ownership through internal distri-bution/buyout. In terms of capital value,however, 26 per cent of the total was heldby insiders, 29 per cent by the state and 31by institutions. Most insider buyouts tookplace in labour-intensive small and me-dium-sized firms. In 67 per cent of the ap-proved programmes, employees acquiredmore than half the company, but thesecompanies accounted for only 16 per centof national capital value. The shares in morecapital-intensive firms were offered to thepublic for cash or certificates, subject to ap-proval of the floatation by the Slovenian Se-curity and Exchange Commission. Only 12per cent of companies used public sale astheir preferred privatization method, butthese accounted for almost 30 per cent ofthe total social capital. Slovenian citizenswere given pre-emptive rights in these is-sues, so that sales to foreign investors werelimited (Ibid., p. 89). A noteworthy role wasstill being played by the state. For example,agricultural lands and forest previouslyused by socially-owned firms were nation-alized, as were public utilities and threelarge banks and steelworks, which had beenbailed out. The public services in which thestate retained its participation includedpower generation and distribution, trans-portation, telecommunications and postalservices, water distribution and other mu-nicipal services, and urban and environ-mental infrastructure (Ibid., p. 90). By1996, the private sector accounted forabout 40 per cent of GDP, which was wellbelow the proportions of over 60 per centfound in other Central European transitioncountries. Even in 1999, the private sectorwas thought to be generating only 50–55

19

per cent of GDP and employing about 50per cent of the labour force.

3.4. Restructuring the financial sys-tem

Slovenia had inherited a defective bankingsystem from former Yugoslavia, where es-pecially under the 1974 Constitution, banksgained a character of subordination to theself-managed enterprises, which hadfounded them in many cases.11 After theindependence of Slovenia, the financialsystem including banks was essentially re-structured. According to the report of theWorld Bank (1999b), Slovenia’s bankingsector faced four major problems at the timeof independence. (i) Some 30–40 per centof bank loans were non-performing. (ii)There was practically no competition in thesector. (iii) The regulatory and supervisoryregime was lagging behind internationalstandards. (iv) Banks had lost assets in otherparts of former Yugoslavia (see Section 3.2).Nevertheless, Slovene banks retained liabili-ties, especially towards the London Clubcreditors.

The authorities headed off the mostpressing bad-debt problem by nationalizingthree major banks and establishing a BankRehabilitation Agency. The process began bywriting off current bank losses againstcapital and replacing non-performing assetswith BRA-issued bonds to a total of DM 1.9billion, which was equivalent to just under10 per cent ofSlovenia’s 1993GDP. The swapremoved two-thirds of the badassets held bybanks. TheWorld Bank re-port found itparadoxical that public ownership in thebanking sector had significantly increased

11 See note 6.

during Slovenia’s transition to a marketeconomy and pointed to other problemssuch as weak competition and high operat-ing costs. The rehabilitation as such hadbeen successful and improved the sector’sfinancial position significantly, but it wasexpected that the restructuring would haveto continue (Ibid., pp. 65–68).

3.5. Recent tendencies

Having grown continually since 1993, theSlovenian economy exceeded its 1990 out-put level in 1996. In 1999, per capita GDPequalled an exchange-rate USD10,109equivalent to USD15,550 at purchasing-power parity (WIIW 2001, p. 56). Equiva-lent figures for the Czech Republic wereUSD5305 and USD13,080 respectively(Ibid., p. 42), so that Slovenia was by thenthe richest of the transition countries.

Furthermore, it has been an economywith both inward and outward flows of FDI.According to Jaklic (2001), the first Slove-nian OFDI occurred in 1951. Parallel withthe disintegration of former Yugoslavia,many Slovenian companies became foreigndirect investors overnight. Exports werecomplemented by more rapid expansion ofoutward FDI, especially in the second half ofthe 1990s. The stock of outward FDIreached USD621 million at the end of1999, which was equivalent to 23 per centof the inward FDI increment in that year.

Slovenia was already highly depend-ent on foreign trade, but secession and in-dependence increased this. Exports and im-ports of goods and non-factor services ac-count jointly for over 100 per cent of GDP.

Table 6Slovenia’s outward stock and flows of FDI

(USD million)

1993 1994 1995 1996 1997 1998 1999Outward FDI stock 280.6 354.0 489.9 478.4 452.4 599.6 621Net outward FDI flows 1.3 - 2.9 5.1 6.3 35.6 1.7 37.5Outward FDI stock/GDP (%) 1.5 2 2.5 2.7 2.5 2.3 3.2Source: Jaklic (2001), p. 387.

20

For example, the share of exports of goodsand services in GDP in 1997 was 57.1 percent, and that of imports 58.3 per cent. Slo-venia’s small open economy is thereforevulnerable to external economic fluctua-tions (World Bank 1999b, p. 5). Slovenia,like other Central East European (CEE)countries, is due to join the EU in 2004. Slo-venia has still many problems in the field ofagriculture, social welfare, etc., associatedwith the structural adjustment required bythe process of EU harmonization.

4) TRANSITION IN CROATIA

The transition in Croatia coincided with ahard-fought independence war. The ini-tially warm Western welcome for Croatia’sindependence rapidly cooled politically inresponse to President Franko Tudjman’sovertly nationalistic course. In 1991–5, fi-nancial assistance from the EU was limitedto aid for humanitarian purposes.12 To-wards the end of the 1990s, the Tudjmanregime encountered increasing public dis-satisfaction and lost the general elections inJanuary 2000. A new Social Democrat-ledcoalition embarked on economic restruc-turing and efforts to promote EU member-ship.

12 Continual discrimination and harassment of Croa-tian Serbs culminated in a clearance of the Krajinadistrict by the Croatian army in August 1995 andresettlement there of Bosnian Croats, in contraven-tion of the Dayton Agreement of November 1995.Under US pressure, the World Bank cancelled aUSD30 million loan for bolstering Croatia’s bankingsystem and the IMF also postponed a loan. Negotia-tions for the country to join the World Trade Or-ganization were suspended, under pressure from theUnited States and the EU, and its negotiations to-wards a cooperation agreement with the latter,which began in June 1995, were suspended inAugust. Although Croatia had been officially in-cluded in June 1995 among the recipients under thePHARE programme, that too was suspended inAugust.

4.1. The Croatian economy after in-dependence

Independence was obtained at no small cost.War between the Croatian and YugoslavFederal armies began, but the conflictmoved mainly to Bosnia-Herzegovina andCroatia became calm again. However, athird of its territory came under Serbianmilitary rule and remained so until July1995. Manufacturing was severely hit bythe war, with about a third of capacitydamaged (Fujimura, 1996, p. 77). GDP was39 per cent lower in 1993 than in 1990.The annual rate of inflation exceeded 1100per cent in 1993 (Table 7).

The first stage of a two-stage stabili-zation programme was introduced in Octo-ber 1993, when the central bank tightenedmonetary policy and liberalized the foreign-exchange market, while the governmentupped utility prices to eliminate subsidiesand placed controls on public-sector wages.Within a year, inflation had calmed andcentral-bank started to increase. The dinarwas replaced by a new currency, the kuna,in May 1994. The second-stage structuralreforms were intended to produce long-term economic stability, through fiscal re-form, acceleration of privatization, re-structuring of loss-making public-sectorenterprises, restructuring of the bankingsystem, and development of the financialsystem (Jovancevic, 1999, pp. 240–41).

Croatia’s foreign-trade volume beforeindependence had amounted to 100 percent of its GDP (Samardzija 1997, p. 107).Exports in 1990, including trade with otherYugoslav republics and trade in materialservices, was put at USD13.7 billion orabout two-thirds of GDP. This was morethan halved to USD5.7 billion in 1993, fol-lowing the downturn in the economy, asharp fall in revenue from services, and theloss of two neighbouring markets (Ibid., p.35). Thereafter came rapid recovery, begin-ning in 1994. However, wages began tosoar, increasing by almost 40 per cent in

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1995, presumably due to earlier adminis-trative suppression. A consequent surge indomestic demand brought a 44 per cent in-crease in imports without real progress interms of GDP (Ibid., p. 104). Exports in1995 covered only 62 per cent of imports,as opposed to 93.7 per cent in 1973 and86.3 per cent in 1988 (Statisticki GodisnjakJugoslavije 1989, pp. 325 and 418).

The partner structure of foreign tradeshifted steadily towards Western Europe(Samardzija 1997, pp. 106–9). In 1992, theEU took 52.45 per cent of Croatia’s exports,former Yugoslavia 31.97 per cent, and CEEand ex-Soviet countries 5.79 per cent. By1995, the EU share had increased to 58 percent, while former Yugoslavia’s was 23 percent and the CEE and ex-Soviet group 9 percent. With imports, the EU supplied 46.79per cent in 1992, former Yugoslavia 23.24per cent, and the CEE and ex-Soviet coun-tries 13.58 per cent, as opposed to 62.16,11.31 and 9.31 respectively in 1995. Abreakdown by countries shows that first

place for exports in 1985 went to Italy(23.7 per cent), followed by Germany (21.5per cent), Slovenia (13.1 per cent), Bosnia-Herzegovina (8.3 per cent), Austria (4.3 percent), Russia (3.3 per cent), France (2.4 percent), Liberia (2.3), the United States (1.8per cent) and the Netherlands (1.7 percent). In the same year, the first place inCroatia’s imports went to Germany (20.1

per cent), followed by Italy (18.2 per cent),Slovenia (10.7 per cent), Austria (7.7 percent), the UK (6.1 per cent), the UnitedStates (2.7 per cent), Libya (2.5 per cent),France (2.5 per cent), the Netherlands (2.3per cent) and Switzerland (2.2 per cent).

Nowadays, implementation of the sec-ond stage is criticized (Croatian Chamber ofEconomy 2000, p. 2). The violent inflationwas rapidly controlled in 1993–4 and inthis regard, the stabilization programmewas a success, as Ivan Teodorovic (2001,pp. 276–7) concedes. However, he criticizesthe second stage because an ‘economic pol-icy that allowed for increasing domestic

Table 7Croatia’s macroeconomic indicators

(1992–2000)

1990 1992 1993 1994 1995 1996 1997 1998 1999 2000Real economy (% changes)GDP -6.7 -11.7 -8.0 5.9 6.8 6.0 6.5 2.5 -0.9 3.7Industry -11.7 -14.6 -6.0 -2.6 0.3 3.1 6.8 3.7 -1.4 n.a.Agriculture -2.9 -13.5 4.5 -0.3 0.7 1.3 4.0 10.2 n.a n.a.GDP p. c. (USD mn) 5106 2291 2349 3137 4029 4422 4396 4806 4456 4227Unemployment (annualaverage, %) 9.3 13.2 14.8 14.5 14.5 10.0* 9.9 11.4 13.6 n.a.

Consumer prices (% overprevious year) 610 666 1518 97.6 2.0 3.5 3.6 5.7 4.2 6.5

Government bal-ance/GDP (%) n.a. -3.9 -0.8 1.2 -1.4 -1.0 -1.4 -0.4 -6.2 -6.7

Interest rates (%)Deposit rate n.a. 435 27.4 5.0 6.1 4.2 4.4 4.1 4.3 n.a.Lending rate n.a. 2333 59.0 15.4 22.3 18.5 14.1 16.1 16.1 n.a.External performance (USD mn)Goods exports 4020 3127 3904 4260 4633 4546 4210 4605 4372 4590Goods imports 5190 3430 4646 5432 7900 8236 9435 8773 7674 7904Trade balance -1170 -303 -742 -1172 -3267 -3690 -5224 -4169 -3302 -3313Current account 1050 326 606 826 -1451 -1148 -2343 -1550 -1537 -798Current account /GDP(%) n.a. 3.2 5.6 5.7 -7.7 -5.8 -11.6 -7.1 -7.6 -4.1

FDI, net (USD mn) n.a. n.a. 120.3 117.3 120.8 515.9 550.7 1013 1635 1125.8Debt servicing/exports ofgoods & services (%) n.a. 8.8 9.7 8.9 9.6 8.9 10.0 13.1 14.4 n.a.

Source: EBRD (2000), p. 153; Data for 1990: EBRD (1997), p. 220. Note: *This sharp fall in unemploy-ment, strange at a time when demobilized soldiers were appearing on the labour market, points to achange in methodology. Jovancevic (1999, p. 246) puts the jobless rate at 16.4 per cent in 1996, 17.5per cent in 1997, 17.6 per cent in 1998 and 19.0 per cent in 1999.

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consumption and rising foreign debt inhand with a softening of the budget con-straint had to end up with a softening of theentire fiscal system. Thus, a slowing downand in some aspects the reversal of the re-form process had threefold effects: stagnantgrowth rates, increasing unemployment andsocial differentiation.’

4.2. Economic restructuring and‘state-dominated’ privatization

The privatization legislation of April 1991defined permissible procedures and a gen-eral framework. Two supplementary piecesof legislation permitted direct state in-volvement in any sector. The main charac-teristics of privatization strategy in Croatiawere (i) nationalization of social capital, ofwhich the state became owner of 80 percent. (ii) The government had a prominentrole and extensive discretionary powers inthe privatization of re-nationalized firms.(iii) Instead of an Eastern European-stylevoucher scheme, there was a system of dis-counts on share purchases, with priority foremployees. (iv) The privation was ‘revenue-oriented’ (Bicanic 1993, p. 426). A plainerexplanation was given by Kalogjera (1993,p. 63), who described it as one of basic pri-vatization objectives to obtain funds neces-sary to repay public debt and assist financ-ing recovery.

Criticism of the power privatizationgave to the state came from two seniorCroatian economists. Noting that formerYugoslavia’s shift from a command econ-omy towards a market economy had begunin Croatia in 1950–52, where 60 per centof prices had been liberalized over eightyears, Branko Horvat (1999) called the1990s privatization a backward transition.Similarly, Dragomir Vojnic (1999, p. 17), ina keynote speech at an international confer-ence in 1999, said his country had ‘onlyexploited market tradition to a certain de-gree’ and ‘the process of circulation andconcentration of capital did not develop onthe basis of entrepreneurship and entrepre-

neurial capability, but on the basis of politi-cal fitness’.

On the political side, the Tudjman re-gime and the Croatian Democratic Union(HDZ) held power from 1990 to 2000,thanks to a constituency system that hadgiven the HDZ 65 per cent of the parlia-mentary seats with 48 per cent of the poll.The main opposition party was different ineach election (communists in 1990, liberalsin 1992, and yet another party in 1996).This, ironically, gave the political system akind of stability.13 According to Puhovski(1999, p. 20), ‘All the really important de-cisions are made in some kind of courtaround President Tudjman, officially calledthe National Defence and Security Council.’

4.3. The privatization process

The Privatization Agency and the Develop-ment Fund set up in 1991 inherited the le-gal framework of the Yugoslav Federation.The role of the Privatization Agency was tocheck the submitted plans and superviseand monitor the privatization process. Theproceeds went to the Development Fund.The Privatization Agency had the power toinstall managers in loss-making enterprises.The Development Fund was free of directaccountability and its portfolio of shares inalmost all companies made it the biggestowner of assets and a market maker on thenascent stock exchange. For firms it owned,it appointed managers and could initiateprivatization when and how it saw fit. Thetwo organizations merged as the CroatianFund for Privatization in January 1993 (Bi-canic 1993, pp. 422–8).

Privatization itself involved threerounds of share sales and allocations to de-velopment and pension funds. The firstround was a discount sale of shares to em-ployees, the second a full-price sale, againto employees, and the third a non-

13 Author’s interview with Ivan Grdesic, Faculty ofPolitical Science, Zagreb, July 9, 1997.

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discounted sale to the public. Shares in thefirst two rounds could be purchased in in-stalments over periods of up to five years.The biggest discounts went to employeesbuying into firms that employed them,awarded on transactions up to a ceiling ofDEM 20,000 per individual, contingent onmode of payment and years of service.Shares sold in the first round could not ex-ceed 50 per cent of the total estimated assetsof the company (Ibid., p. 433).

Managerial buyouts were apparentlypreferred in the actual privatization, butBicanic has pointed to problems in this re-gard, referring to ‘the frequency and formof bending the rules and breaking the law’.The most frequent dodges were ‘managerloans’, ‘manager’s insurance schemes’, and‘ghost buyers on one side and undervaluedassets on the other’ (Ibid., p. 435). The pref-erential loans to managers received frombanks (whose managers were establishedbusiness partners or even friends) were forup to DEM 10,000. Banks might accept ascollateral the shares themselves, overvaluedreal estate, or frozen ‘foreign-currencysavings deposits’ (Ibid., p. 435; Kalogjera1993, p. 81). Sometimes the company in-volved would pay high insurance premiumson its managers’ behalf, which they thencashed in at a discount to finance theirshare purchases. In other cases, workerswould be paid to act as ghost buyers ofshares at large discounts and sell on tomanagers. Managerial buyouts were com-mon. However, legislation facilitated under-valuing and incorrectly valuing assets – forexample, location was not considered orbook value used in spite of inflation. Man-agers were not the only ones breaking andbending the rules. The Privatization Agencywas often accused of using privatizationlegislation for non-economic (mostly politi-cal) goals. Noted examples mentioned byBicanic (1993, p. 436) were replacement ofmanagers with party faithful in Istria, at-tempts to influence the media by puttingindependent dailies and weeklies into re-ceivership, and preventing employee buy-outs to ensure that the state retained major-ity control.

4.4. Privatization stalemate

Privatization in Croatia came to a standstillin 1997. According to research by a Hun-garian research organization Kopint-Datorg(ET 6: 3, pp. 176–7), the deficiency was thatprivatization had not been extended to thebanking sector, energy industry, publicutilities or arms industry. The most wide-spread method was sale of half the sharecapital to employees at a discounted price.Most unprivatized equity was handled bythe Privatization Fund. Other holdings werecontrolled by the pension funds, while 5 percent was being used for compensation.Small and medium-sized companies werepurchased by employees and managementusing preferential credits. The large compa-nies, which were nationalized first, cameunder the management of cronies of theruling party. According to Kalogjera, ‘Everyprivatization sale is carried out [in a way]favourable to a ruling party.’14 In Croatia’scase, where Tudjman and the HDZ werefirmly in power from April 1990 to January2000, the evil is evident.

It was officially declared in 1997 that50 per cent of all firms had been privatized,but Kalogjera was sceptical. In fact, he ar-gued, 80 per cent were in the hands of thestate or under state control. Zakosek (1996,p. 93) reported that about 560,000 share-holders (12 per cent of Croatia’s popula-tion) in various companies, including em-ployees and managers, had emerged out ofthe privatization process. The limiting fea-tures were (a) ineffective capital markets,(b) negligible foreign investments, (c) lackof domestic capital, and (d) the fact that themain privatization transactions were stillhandled by the state, not the stock market.Vojnic (1999, pp. 17–20) saw hundreds ofthousands of small shareholders plundered,despite the formal rights given by the law,because of their restricted ability to pay for

14 Author’s interview with Drazen Kalogjera, Zagreb,July 10, 1997.

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their shares. Wealth was being concen-trated into the hands of a small number oftycoons supported by the ruling structures.The deviancy involved a broad range frommass small crime, bribery and corruption,up to organized crime permeating variouslevels of the economy and society. Vojnicused expressions like ‘maffiocracy’, ‘savagecapitalism’ and ‘primitive accumulation’ inhis criticism of privatization practice inCroatia, adding that a previously relativelydeveloped middle class, the foundation ofcivil society, had almost disappeared. Hedrew parallels with the situation in Russia,and blamed the deviancy on World Bankand IMF advisers and their concept of‘Washington Consensus’.

4.5. Reorganizing the banking system

According to Jovancevic (1999, p. 241), thebreak-up of the Yugoslav monetary systemtechnically made the Croatian banks insol-vent. Large amount of banks claims on theNational Bank of Yugoslavia became im-possible to collect and private foreign-currency deposits have been frozen since1991. Numerous companies found them-selves in serious difficulties, unable to repaytheir debts to banks. The governmenttherefore recapitalized a number of majorcompanies by issuing treasury ‘big bonds’ asa debt-repaying instrument.

The real increase in fixed assets fromdomestic sources was very small in the1990s, for several reasons. (i) Except in1995–7, the deposit rate has been lowerthan the inflation rate (Table 7), so that themarginal propensity to save has been small.(ii) High exchange rates have not encour-aged industry to export, so that the volumeof production has remained low relative tothe size of domestic market, with high fixedcosts per unit of production. The profits ondomestic manufacturing and services havebeen low, so that corporate savings havealso remained low. (iii) The limited domes-tic funds have made capital (i.e. interestrates) expensive. For instance, the lending

rate in 1995 was 22.3 per cent against anannual inflation rate of only 6.1 per cent.This may also have pointed to inefficiencyin the banking system. (iv) Capital marketshave functioned sluggishly, making it hardfor firms to finance investment through eq-uity and impeding modernization of pro-duction (Ibid., pp. 255–6).

This meant that the Croatian economybadly needed foreign direct investment, butthe inflow was small until the mid-1990s(Table 7), due to Croatian distaste for it andthe government’s poor foreign relations(Croatian Chamber of Economy 2000, p. 2).Croatia and the FR Yugoslavia eventuallyaccorded each other diplomatic recognitionin April 1996, which was much welcomedinternationally (Samardzija 1997, p. 24). Inearly 1997, Croatia received its first creditrating from three major agencies, indicatingthe arrival of peace and reconstruction andthe end of a period of extreme political risk(Jovancevic 1999, p. 242).

Table 8Banks according to type of ownership

Banks 1990 1994 1995 1996 1997 1998State-owned 21 19 15 15 9 9Private 5 32 39 43 51 51Total banks 26 51 54 58 60 60Source: Jovancevic (1999), p. 242.

Rehabilitation of Croatia’s banks wasfacilitated by participation from foreignbanks. The process started in 1996 withfour large banks (Slavonska, Splitska, Ri-jecka and Privredna banka). Hitherto, thebanking system had remained concentrated,with a small number controlling a relativelylarge proportion of total assets and reve-nues. The existing banks were privatizedand new private banks were established(Table 8). Whereas only one bank had en-tered the Croatian market before 1996, sixforeign banks opened branches or subsidi-aries between late 1996 and 1997, whichhelped to intensify competition. By 1998,the majority of the banks (85 per cent, with70.2 per cent of the total banking assets)were predominantly privately owned. Theother nine banks (with 29.8 per cent of the

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total assets) were wholly or state owned(Ibid., pp. 241–3). The intensified competi-tion sent some banks out of business, in-cluding four in 1998 (Dubrovacka, Zu-panska, Glumina and Gradska), which heldhuge amounts of bad debt (Ibid., p. 257).

4.6. The Croatian economy in thesecond half of the 1990s

The economy started to recover in 1994,recording growth rates of about 6 per centin 1995–7. The best performance wasshown by construction, which was closelyrelated to reconstruction of war damage.However, the Croatian economy had notrecovered its 1990 level even by 1998,when it recorded negative growth in thesecond half of the year.

The shortage of domestic funds andthe difficulties for companies in obtainingbank loans have been mentioned already. Sohas the very small amount of FDI up to1995 – a per capita figure much smallerthan the ones for other CEE countries.Capital investment in manufacturing andservices has also been low in the final yearsof the federation, so that technologies inCroatia had become obsolete. Having beenthe world’s third biggest ship-builder, pro-ducing mainly for the world market, thestate-owned shipyards were allowed tostagnate and lose their international com-petitiveness after independence. Croatia isnow only the thirteenth largest shipbuilderin the world (Horvat 1999, p. 55; BCE, May2000, p. 30).

On January 1, 1998, sales tax was re-placed by a value-added tax. The annualreport of the Ministry of Finance denied thishad any negative impact on economicgrowth, since it had reduced the tax ratefrom 26.5 to 22 per cent while successfullydrawing much of the informal economyinto the tax net and so increasing overalltax revenue. Instead, the annual reportmentioned the financial crisis in East Asia,saying that negative perceptions of investors

and increased sensibility to risk in the sec-ond half of 1997 had curbed FDI in transi-tion countries (Republic of Croatia, Ministryof Finance 1999, pp. 9–14). GDP fell by 0.8per cent in the fourth quarter of 1998, ac-cording to the report because of worseningcredit availability on domestic and foreignmarkets, high costs of capital, difficulties incollecting outstanding debts, decreasedgrowth rates in domestic demand, and alevelling of tourist consumption (Ibid., p.11). This explanation may cover the short-term changes, but the underlying cause wasloss of development impetus, due to struc-tural problems such as decreased competi-tiveness, delay in restructuring enterprisesand the banking sector, and swelling publicexpenditure. Employment fell by 3.2 percent in the first quarter of 1999 and the un-employment rate jumped from 18.6 percent in December 1998 to 19.6 per cent inMarch 1999. The recession also worsenedthe position of the central budget. Havingregistered a surplus in the previous year,the budget showed a deficit to 1837 millionkuna in the first quarter of 1999. To pre-vent further deterioration, the governmentapproved a restrictive package in May1999, clipping 3.5 billion kuna off publicspending. Meanwhile a spate of bankingfailures meant that large sums had to bespent on topping up the deposit insurancefund and reducing the deficit of the welfarefunds. Monetary policy also had to be tight-ened (ET Vol. 8, No. 2, pp. 129–30).

Both exports and imports declined in1999. Exports were down to USD4.27 bil-lion (5.8 per cent less than in 1998). Im-ports amounted to USD7.77 billion (i.e. 7.2per cent less than in 1998). Although thetrade deficit decreased slightly (USD345million), it was still USD3.49 billion. Theweak trade performance was ascribed to theabsence of a preferential trading agreementwith the EU, the customs border that cameinto effect with Bosnia-Herzegovina, andthe slow start to the structural moderniza-tion of industry (ET Vol. 9, No.1, p. 39).

For a long time, Croatia’s large deficitsin goods trading had been offset by the sur-plus in services and remittances from work-

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ers abroad. These were both affected badlyby the events in the Balkans. By the autumnof 1998, tensions between Yugoslavia andNato were rising over Kosovo, and betweenMarch and June the following year, Natomade air attacks on Yugoslavia. AlthoughCroatia was not in the war zone, the attacksinvolved overflying by Nato planes frombases in Italy and the Adriatic, which dis-couraged tourists from visiting the Adriaticcoast and halved revenue from tourism.This and a fall in transportation led to adrastic worsening of the services balance.Accumulated external debt doubled in fouryears from USD3699 million in 1994 toUSD8489 million in 1999 (Republic ofCroatia, Ministry of Finance 1999, p. 97).By September 1999, debt had reachedUSD9.3 billion, of which USD1.7 billionwas due for repayment by 2000 (Hrvatski1999, p. 5).

There was also a mounting problemwith debts between firms. According to datafrom the Institution for Payment Transac-tions, this amounted to 23.3 billion kuna inJune 1999, which was 7.3 per cent higherthan in the previous month. The total inAugust 1999 was almost 62 per cent or 8.9billion kuna more than in late 1998 (Ibid.,p. 7).

Consolidated state spending rose from40.5 per cent of GDP in 1994, to 47.9 percent in 1998, when it was expected to riseto 49.1 per cent. Adding in local authoritiesto government spending and non-budgetfunds, total public spending came to 70 percent of GDP (Croatian Chamber of Economy2000, p. 9). The biggest share of central-government budgetary expenditure in 1997went to defence (20.32 per cent), followedby social security and welfare affairs andservices (18.76 per cent), public-order andsafety affairs (12.12 per cent), education(11.78 per cent), and transport and com-munications (9.98 per cent). The biggestitem in the 1999 budget was social securityand welfare affairs and services (23.07 percent), followed by defence (12.88 per cent),education (12.56 per cent), transport andcommunications (11.65 per cent), andpublic-order and safety affairs (9.73 per

cent). Spending on defence and public orderdecreased, but their shares in the statebudget remained high. Of the non-budgetfunds, the most important were pensionsand health. Deficits in the non-budget fundswere covered by transfers from the centralbudget, of which 50.8 per cent went to thepension fund in 1998 and 13.9 per cent tothe health fund (Republic of Croatia, Min-istry of Finance 1999, pp. 47–8). By March1999, the number of retired was nearly onemillion out of a population of 4.6 million, sothat the ration of active to retired was 1.6:1in 1999, as opposed to 3.2: 1 in 1990 (Ibid.,p. 19). In this respect, the working pro-gramme of the new government criticizedproblems such as a lack of discipline inpayment of pension and health contribu-tions, recognition of claims regardless offinancial conditions, and very uneven rights(Government of the Republic of Croatia2000, p. 4). Budget expenditure had to betrimmed before a stand-by credit agreementcould be reached with the IMF. Reforms ofthe pension and health systems became in-evitable as transfers from the central budgetcould not be maintained. Similarly, anagreement had to be reached with socialpartners on limiting wage and price in-creases. As a result of all this, Croatianeconomy came to a standstill towards theend of the 1990s (ET Vol. 9, No.1, pp. 39–40).

4.7. Political changes

The economic difficulties showed thatTudjman’s methods had failed. The publichad become dissatisfied with the way Tud-jman’s adherents had amassed wealth whilemany people became impoverished. As aregional journal reported early in 1999,‘Opinion polls credit [Tudjman’s] rulingparty––the badly divided Croatian Demo-cratic Union (HDZ) – with a dismal 20 percent level of support. Worse, the man him-self has dropped from the second most re-spected person in the country in Januarylast year, to a pathetic 35th place now’

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(BCE, February 1999). Few foreign states-men chose to attend Tudjman’s funeral inDecember 1999. The HDZ won only 40 ofthe 151 seats in Parliament (24.38 per centof the vote) in the general elections of Janu-ary 3, 2000. A centre-left union of the So-cial Democratic Party and the Social LiberalParty won 71 seats (40.84 per cent of thevote), and a centre-right union 24 seats,which decided to support a coalition gov-ernment from outside. The three main can-didates in the presidential election on Janu-ary 24, 2000 were former Foreign MinisterMate Granic (HDZ), Drazen Budisa of thecentre–left union and Stjepan Mesic of thecentre-right union, a one-time president offormer Yugoslavia, who won with 56.21per cent of the vote in a run-off poll onFebruary 7.15

The new prime minister was Ivica Ra-can, last leader of League of Communists ofCroatia and leader of the Social DemocraticParty. His programme, based on the publiccommitments of the coalition groups, wasone of change aimed at building a civil soci-ety and a democratic, market-oriented stateintegrated into the EU. One of the maintasks was to change the political system byreducing the powers of the president andstrengthening the role of Parliament and thegovernment. Other tasks were the promo-tion of dialogue and tolerance, establishingan independent judiciary and the rule oflaw; turning Croatian Television into apublic, independent, responsible medium,etc. The new government set out to takeCroatia into the WTO and CEFTA and gainassociate membership of the EU (Govern-ment of the Republic of Croatia 2000).

Prime Minister Racan called on theleaders of state enterprises and institutionsto resign, so as to wind up Tudjman’s eco-nomic estate (ET Vol. 9, No.1, p. 38). Thenew government broke with the nationalis-tic course of its predecessor. This was ex-emplified by a cooperative position towardsthe International Tribunal in the Hague on

15 To’o Fairu No.521–2, pp. 4–5, Niigata NippohFebruary 9, 2000, and other Japanese newspaperreports.

war criminals in the former Yugoslavia.Leaders of the West welcomed the new gov-ernment and tried to put a rapid end to thecountry’s international isolation.16 In June2000, Nato invited Croatia to participate inits Partnership for Peace. Meanwhile therewere negotiations with the IMF about a newloan. In July 2000, Croatia was admitted tothe WTO. Relations with the EU improvedand an Agreement on Stabilization and As-sociation was reached in October 2001.

4.8. Challenges for Croatia

Economic restructuring had been inconsis-tent under the Tudjman regime. The gov-ernment that took office in 2000 faced tasksthat included first of all painful public-spending cuts (e.g. reductions in govern-ment employees and their remuneration,cuts in subsidies, and reform of the pensionand health systems, etc.) Also urgent werepromoting exports, attracting FDI, restruc-turing business and banks, improving thecapital market, accelerating privatizationand opening it to foreign investors, sup-porting agriculture, cutting unemployment,introducing minimum social protection, andso on. Moreover, there were 46,000 dis-placed persons and 140,000 refugees fromSerbia, Montenegro and Bosnia-Herzegovina to take care of (Government ofthe Republic of Croatia 2000; CroatianChamber of Economy 2000).

According to Borozan and Barkovic(2002), 2650 companies had been involvedin privatization in the first decade (1991–9). In 1991, the Privatization Fundmanaged a state-owned portfolio worth 86billion kuna, of which assets worth 3.8billion kuna remained unprivatized in1999. Many privatized businesses were

16 BCE (June 2000, p. 43) reported, ‘Mr Racan hashanded over sensitive documents to the InternationalCriminal Tribunal on war crimes in former Yugosla-via, despite threats from war veterans to disrupt theall-important tourist season. He has also invited toUN officials to Croatia to investigate mass graves,prompting criticism from war veterans.’

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privatized businesses were ruined under themanagement of Croatian ‘tycoons’, whoreturned the shares to the PrivatizationFund in that year, dramatically increasingits portfolio again. By September 2001, itheld stock in 1203 firms with a combinedshare capital of 63.6 billion kuna, in whichthe state holding was 25.5 billion kuna.Most of the portfolio was unattractive toinvestors due to high indebtedness of com-panies, insolvency, technical obsolescence,and inappropriate manpower structures.Only about 100 companies in industry, in-surance and tourism proved attractiveenough to obtain FDI.

FDI, having remained low in the firsthalf of 1990s, began to increase in 1996,reaching USD1.6 billion in 1999 (Table 7),when 35 per cent of Croatian Telecom wassold to Deutsche Telekom for USD850 mil-lion (followed in 2001 by another 16 percent for USD422 million). Also in 1999, 66per cent of Privredna Banka Zagreb wassold to Banca Comerciale Italiana. The cu-mulative FDI over the 1993–2001 periodwas USD66.4 billion, with Austria as thebiggest investor (27.23 per cent), followedby Germany (25.81 per cent), the UnitedStates (18.17 per cent), Luxembourg (5.59per cent) and the Netherlands (3.63 percent). As for the sectoral structure, the big-gest draws were telecommunications (29.37per cent), banking (17.26), pharmaceuti-cals (15.41), cement (5.05), petroleum andgas (3.11), hotels and catering (2.66),commerce (1.67), bricks, roof tiles, etc.(1.53) and brewing (1.35). FDI in manu-facturing (except pharmaceuticals) hasbeen small and in tourism unexpectedly so.These will have to attract more foreigncapital. Borozan and Barkovic (2002) notethat ‘blue-field’ (sea-related) investment isthe most profitable, but has been officiallyneglected and ignored so far.

To attract more FDI and activate busi-ness, it is indispensable to improve the in-vestment climate. The communicationstechnology and transport infrastructureneed improving. There are still administra-tive barriers to flows of FDI. Foreign busi-ness people often encounter lengthy proce-

dures, such as application for entry visasand work permits of foreign managers andworkers, company registration and otherprocedures for founding a business, busi-ness-location problems such as land acqui-sition, construction permits, usage permitfor utility services, etc. These are often per-ceived as ‘administrative harassment’ (Ibid.2002). Here the more active attitude ofHungary towards FDI could be instructive.

Croatia aspires to join the EU by 2007,but progress seems uneven. Like other can-didates, Croatia will have to introduce theacquis communautaire, revise its domesticlegal system and harmonize its economy,which is a time and energy-consuming pro-cess. Bartlett (2002) points out that late en-trants may be at a disadvantage comparedwith CEE and Baltic countries due to accedein 2004. Latecomers may face higher non-tariff barriers, restricted access to Europeanlabour markets, and fiercer competitionfrom new members. EU supports are valu-able to Croatia, but the amounts receivedhave been modest. In connection with theStability Pact of South Eastern Europe, theEU offers the CARDS programme to replacePHARE for the Western Balkans, includingCroatia, with political rather than economicaims. It complements EBRD and World Banksupport, and is geared towards fields suchas democratization, return of refugees,fights against organized crime, and securityof borders (Ibid., p. 11). Although Croatiahas the Adriatic coast, as a superlative tour-ist attraction, it would find it very difficultto adopt Norway’s approach to the EU.17 Itwill therefore continue for many years withits efforts to satisfy the conditions for the EUmembership.

17 Intent on keeping its earnings from North Sea oilto itself, Norway has found non-member associationwith the EU a satisfactory arrangement. Iceland takesthe same position for fear of adverse effects on itsfishing revenues from the EU Common Fishery Policy(Bartlett 2002, p. 14).

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5) COLLAPSE AND A DIFFICULTREBIRTH IN THE NEW YUGOSLAV

ECONOMY

The Federal Republic of Yugoslavia has ex-perienced two wars and two post-war re-coveries in a decade. The civil war in Bos-nia-Herzegovina, which broke out in April1992 and ended with the Dayton Accord inNovember 1995, led to economic sanctionsbeing imposed on Yugoslavia from May1992 till November 1995. The two eventscaused losses of USD50–60 billion and re-pairing this vast economic damage – or justreturning to 1990 levels – is expected totake at least 10 to 15 years’ (BusinessEurope September/October 1996, pp. 7–8).

Inflation on the astronomical scale ofthe late 1980s recurred. The monthly ratepeaked in January 1994 at 310 million percent. This was triggered by excessive publicconsumption due (i) to 700,000 refugees inSerbia and Montenegro and aid given toSerbs in Croatia and Bosnia (ii) a bloated,bureaucratic Federal administration inher-ited from former Yugoslavia, (iii) militaryexpenditure equalling 10 per cent of socialproduct (iv) high pension costs, and v)budgetary support to loss-making sectors(Mitrovic-Israel, 1997, pp. 470–71).

Economic activity sharply declined.The year-on growth rate of social product(a category similar to GDP) was –8.4 percent in 1990, –11.2 per cent in 1991, –26.1per cent in 1992 and –30.3 per cent in1993. A drastic fall in the supply of goodsled to widespread shortages, which contrib-uted further to price increases. Hyperinfla-tion was also stoked by mechanisms of thegrey money supply peculiar to Yugoslavia.As the new Yugoslav Federation inherited adecentralized central-banking system, therewas more than one decision-making entity.Monetary policy became unclear and itsimplementation ill-coordinated, which ledto excessive money-supply levels (Ibid., p.

472). The fall in output was mainly due tothe UN sanctions, but also to the hyperin-flation – industrial output stabilized after itended, which was well before sanctionswere lifted. The decline in output was ac-companied by a decline in living standards.Per capita GDP in 1993 was half what ithad been in 1991.

The hyperinflation was curbed by theimplementation of the Avramovic Pro-gramme (Programme of Reconstruction ofthe Monetary System and the Strategy ofEconomic Recovery of Yugoslavia), whichamounted to two-phase shock therapy. Thefirst phase was similar to the shock therapyimplemented by Ante Markovic governmenton January 1, 1990, which the secondphase included elements of drastic reform.

Phase 1, which started on January 24,1994, was intended mainly to halt inflationand stimulate output. It included introduceda new dinar pegged at parity with the Ger-man mark (DEM), convertible for firms andindividuals, and with the money supplybacked by foreign-exchange reserves. Thismonetary system was based on the so-calledcurrency-board system. Implementationapparently halted the hyperinflationstopped almost overnight (Mitrovic-Israel1997, pp. 477–8).

The currency-board system could bemaintained for only six months. Beforelong, financial discipline loosened and theemission of currency based on borrowingfrom the central bank was resumed. Pricesbegan to rise again (the inflation rate in1995 was 120 per cent), and the gap be-tween official and black-market exchangerates on official market and black markethas expanded. The dinar was devalued inNovember 1995 to an official exchange rateof YUD 3.3 to DEM 1.

Phase 2 included correlating primarycurrency emission with foreign exchangereserves. Interest rates were to reflect mar-ket demand and the limited supply of cur-rency. State monopolies in foreign trade andindustry were ended and privatization be-gun. With few exceptions; quotas on ex-ports and imports were removed and tariffs

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reduced. These radical reforms proposed byDragoslav Abramovic, then governor of theNational Bank of Yugoslavia, met with con-siderable resistance from much of the ex-isting industrial and political power struc-ture (Ibid., p. 479). He had already clashedwith the government over his unwillingnessto ease monetary policy, his advocacy ofspeedy, unconditional Yugoslav member-ship of the IMF and the World Bank, and hissupport for privatization. Eventually, he wasdismissed from his post by the Federal Par-liament on May 15, 1996 and implementa-tion of Phase 2 was neglected.

5.1. Frustrated privatization

The process of privatization has been veryslow, with the equity, in most cases, beingsold at preferential prices to employees andmanagers of the company concerned. About2034 registered socially owned firms (45per cent of the total) were sold off in 1990–94. More than half a million employees –75 per cent of those employed in such en-terprises – subscribed and were allocatedshares. The privatization affected. 44 percent of the total socially owned capital.Thereafter, an additional 42 per cent of so-cially owned capital was privatized, in-cluding mainly public infrastructure and

Table 9Macroeconomic indicators for FR Yugoslavia

(1990–2000)

1990 1994 1995 1996 1997 1998 1999 2000Real economy (% changes)GDP -7.9 4.3 6.1 5.8 7.4 2.5 -21.9 7.0Industry -12.3 2.1 3.8 8.0 9.5 3.6 -23.1 11.2Utilization of industrial ca-pacity (%)* n.a. 36.2 37.6 40.3 44.2 n.a. n.a. n.a.

Agriculture -7.0 n.a. 4.1 n.a. 7.3 -3.2 -0.9 -19.7GDP p. c. (USD at exchangerate) 2696 n.a. 1449 n.a. 1712 1742 1424 940

Personal consumption/GDP(%)* n.a. 64 67 73 n.a. n.a. n.a. n.a.

Govt consumption/GDP (%)* n.a. 21 21 22 n.a. n.a. n.a. n.aFixed investment/GDP (%) n.a. 13 12 12 n.a. n.a. n.a. n.a.Unemployment (%) 20.3 23.1 24.7 25.8 25.5 25.4 25.5 26.8Consumer prices (% of previ-ous year) 579.7 n.a. 57.7 n.a. 21.6 29.9 44.9 85.6

Government balance/GDP(%) n.a. n.a. n.a. n.a. -7.0 -6.1 n.a. n.a.

Money and credit (% change)M2* n.a.. n.a. 42.6 75.3 61.6 n.a. n.a. n.a.Dinar credits of banking sys-tem* n.a. n.a. 68.4 100.6 44.8 n.a. n.a. n.a.

Discount rate (% p. a.) n.a. n.a. 90.2 n.a. 33.7 33.7 26.3 26.3External performance (USD mn)Goods exports* n.a. 1481.8 1531.1 1842.0 2368.0 n.a. n.a. n.a.Goods imports* n.a. 1898.1 2666.3 4102.0 4799.0 n.a. n.a. n.a.Trade balance* n.a. -416.3 -1135.2 -2261.0 -2431.0 n.a. n.a. n.a.Current-account balance -512 -288.3 -968.2 -1318.4 -1800.0 -1180 -1341 -1298Current balance/GDP (%) 1.8 2.4 7.6 8.8 12.1 6.4 8.9 n.a.FDI net (USD mn) n.a. n.a. n.a. n.a. 740 113 112 25Gross external debt (USD mn) n.a. n.a. 9000 n.a. 10500 11500 12500 11500Sources: Data marked * from CESMECON (1997), p. 8; others from WIIW (2001), pp. .60–61 and 448.Note: As WIIW (2001) shows data only for 1990, 1995, 1997, 1998, 1999 and 2000, correspondingcolumns for 1994 and 1996 contain data from CESMECON (1997). With foreign trade, where data fromCESMECON (1997) and data from WIIW (2001) disagree, data from CESMECON (1997) are adopted,but supplemented with data from WIIW (2001).

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utilities (energy, communications, trans-port, etc.)

Although this may give the impressionthat privatization was rapid in Serbia, therewas a strange occurrence connected withthe hyperinflation. In 1994, new, retro-spective legislation stipulated that theamounts paid for privatized assets had to bereassessed. This has meant that only 3 percent of all capital was recognized as privat-ized. A higher percentage could be retainedonly after paying substantial additionalsums of money. The result was an almostcomplete suspension of privatization. Thestructure of capital ownership then becamestate 42 per cent, social 45 per cent andprivate 3 per cent in Serbia, while in Mon-tenegro it was 86, social 0 and private 14per cent respectively (Kovacevic 1997, p.246). While the idea of ‘social ownership’had been that the state was no longer theofficial owner of the means of production inYugoslavia in the socialist period, the stateparadoxically became the biggest ownerafter the change of system. The budget con-straint remained ‘soft’ in state and sociallyowned enterprises alike.

5.2. Inconsistent reform of the bank-ing system

Although the banks were converted intojoint-stock companies under the bankingreform of 1989, they were not privatized.

The 44 banks in the new Yugoslaviafounded before 1989 are known as the ‘old’banks and the 67 founded since 1989 arecalled the ‘new’ banks. The ownershipstructure of the latter varies. Some are en-tirely private while others employ both so-cially owned and private capital, both do-mestic and foreign. Although ‘new’ banksaccount for less than 20 per cent of thesector’s assets, they make 80 per cent of theprofits. ‘Old’ banks account for over 80 percent of the total balance of the bankingsector, especially the ‘big six’, with a totalshare of about 60 per cent (Pitic 1999, pp.

341–2). A situation in which ‘debtors of abank are actually its owners’ persists in the‘old ‘ banks, whose owners are not moti-vated to maximize profits. Instead, enter-prises buy shares in a bank to ensure thatthe bank offers it credit. Instead of initiatinginsolvency proceedings against enterprisesknown to have no prospects, banks wereforced to keep them artificially alive for so-cial and political reasons (Ibid., pp. 343–4).It is said that bad loans constituted about 60per cent of the social product in 1997 (La-bus 1997, p. 38).

At the beginning of 1991, the gov-ernment froze the population’s foreign-currency deposits (‘old foreign-currencysavings deposits’) and failed to settle forthem. At the beginning of 1997, the totalliabilities of the state to the public wereDEM 6.4 billion (Vukotic 1997, p. 8). Thisexacerbated the credibility crisis in thebanking system.

5.3. A delay in reforms

UN sanctions were lifted immediately afterthe Dayton Accord in November 1995 andforeign trade officially resumed. GDP in-creased by 5.8 per cent in 1996 and 7.4 percent in 1997. Although the performancewas apparently not so bad, the Yugoslaveconomy had serious structural problems.Through the national conflicts and UN em-bargo, the new Yugoslav economy main-tained several features and defects of Titoiteself-managed socialism.

The Yugoslav economy had low inter-national competitiveness. Its exports in1997 were less than a half its imports andthe trade deficit of USD2.4 billion corre-sponded to 16 per cent of GDP. The pricefor covering such a huge deficit was exces-sively high interest rates, which in turnhiked up the exchange rate, stimulatingfurther imports and restraining exports.High interest rates made it difficult for do-mestic companies to obtain credit. The shareof investment was only 11 per cent of GDP.

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As a continual increase in profits was not tobe expected, companies laid off workers in-stead of increasing employment. During theperiod 1989–97, the number of employeddecreased from 2.9 million to 2.33 million.(In the social sector it fell from 2.73 millionto 2 million, while in the private sector, itrose from 58,000 to 320,000.) The numberof unemployed in 1997 was 816,000 andthe unemployment rate 26 per cent, with anadditional 800,000 or so hidden unem-ployed. Unlike the number of employed, thenumber of dependants increased (1.24 mil-lion pensioners and 700,000 refugees). Theabsence of a serious banking reform can beexplained by the lack of will to carry it out(Sevic and Zamberlin 1999, p. 366).

In 1997, the share of the state budgetand its deficit accounted for 47.7 per centand 5.6 per cent of GDP respectively. Thestate budget was suffering from a chronicdeficit due to the numerous loss-makingenterprises and a decrease in the number ofemployed. The government decided not topay the wages of certain members of thepublic sector and to delay paying pensions(MacWilliams 1997, p. 382). To cope withthe budget deficit, the government was al-ways tempted to print money and sell offstate property by the piece. A typical exam-ple was Serbia Telecom, partially privatizedat the end of June 1997 to an Italian com-pany (29 per cent) and a Greek company(20 per cent). Most of the proceeds wereutilized to pay back wages and pensions. Anew law on ownership transformation wasadopted in Serbia in July 1997 and cameinto effect in November.

5.4. Difficult rebirth

Reconstruction of the Yugoslav economycalls for radical economic reform, accord-ing to foreign observers and many peopleinside the country. The biggest problem lieswith domestic politics. Slobodan Milosevicmanaged to remain leader so long, despiterepeated failures and heavy criticism, be-cause (i) the opposition was fragmented, (ii)

the government and ruling parties con-trolled the mass media, (iii) Milosevic’s na-tionalistic line had popular appeal, espe-cially in the countryside. Milosevic’s coali-tion of post-communists and extreme right-wingers was also kept in place by the distri-bution of managerial appointments. Theostensible ‘privatization’ left the state as thebiggest owner of the means of production,which was the source of the ruling parties’power.

A programme of radical economicreforms was announced in February 1997by a group of 17 economists (G17) whosought a new, democratic government inSerbia and the Federation, describing theMilosevic regime as ‘socialist totalitarian-ism’ supported by an alliance of politics,public enterprises and organized crime(Vukotic 1998). At an international sympo-sium entitled ‘Roles of Trade Unions in thePrivatization Process’, held in Belgrade inJune 1998, a trade-union leader explained,‘It is paradoxical that an international sym-posium with such a subject is being organ-ized by trade unions. Usually trade unionsare the biggest victims in privatization.Trade unions in Yugoslavia do not shrinkfrom privatization as a means of resolvingthe present situation.’ With the bankingsystem, G17 advocated overcoming thecredibility crisis the G17 advocated solvingthe problem of government’s foreign-currency debts to the public, establishingindependence of the central bank, returningto international financial markets, and in-troducing foreign capital. However, FRYugoslavia did not succeed in getting fullfinancial assistance during the Milosevicperiod, because membership of the IMF wasnot obtained. In mid-1998 the United Statesand the EU decided to ban investment in FRYugoslavia, a freeze on the bank accounts ofYugoslavs abroad, and a ban on landings byYugoslav civil aircraft while the country’sapproach to the Kosovo problem remainedunsatisfactory.

Devaluation from YUD 3.3 to YUD6.0 to the German mark in April 1998 didnot increase Yugoslav exports or improvethe trade balance due to the high depend-

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ence of Yugoslav producers on importedraw materials and capital goods. Thegrowth rate of social product in 1998 was2.6 per cent. Recession ensued in the latterhalf of 1998 and industrial production inJanuary 1999 was down by 9.6 per centfrom the same period of the previous year.According to a questionnaire survey offirms (Economska Politika, Broj 2441, Feb-ruary 1, 1999, p. 8), the main constraintson production were shortages of credit(41.8 per cent), imported materials (20 percent) and demand (17.1 per cent), coupledwith low prices (13.9 per cent). By thespring of 1999, the Yugoslav economy wasat a standstill.

5.5. Kosovo and the Nato bombard-ment

The groups aiming for democratic rebirth inthe Yugoslav Federation were preventedfrom ousting the Milosevic administrationby divisions among themselves. Milosevic,meanwhile, failed to find a peaceful solu-tion in Kosovo, where armed clashes be-tween the local Albanian ‘Kosovo LiberationArmy’ and Serbian security corps weretaking place and many Albanians becomingrefugees. Mediation by the United Statesand others went badly.

The Yugoslav rejection of a final pro-posal for peace provided the occasion forNato to begin aerial bombardment of thecountry on March 24, 1999.18 The US andWest European forces intervened militarilyin Kosovo to stop ethnic cleansing by Serbia,but it is difficult to say that their purposewas achieved. In fact, military interventionbrought a surge of Albanian refugees, whilethe bombardment caused heavy civilian

18 Just before the deadline at Rambouillet, the USmade an additional proposal – Appendix B (1999) ofthe Final Draft of the Peace Agreement – requestingthat Nato armed forces be given strong extra-territorial rights and freedom to deploy not only inKosovo, but throughout the Federation. This was un-acceptable to Yugoslavia at all.

casualties elsewhere in the FR Yugoslavia.For the time being, the perceived interna-tional aggression tended to reinforceMilosevic’s political power. Damage on theYugoslav side was estimated at aboutUSD30 billion, with more than 600,000 lostjobs and 2.5 million citizens losing sourcesof earnings. Unemployment is said to havereached 50 per cent. Thousands industrial,commercial and public facilities were de-stroyed or damaged. The 23 oil refinerieshit caused serious pollution. Transportationand communication facilities destroyed orseverely damaged included 61 bridges,railways, roads and airports. GDP decreasedby 22 per cent in 1999.

The first conference of donor coun-tries on the reconstruction of Kosovo washeld on July 28, 1999 in Brussels and ameeting on cooperation for stabilization inSouth-Eastern Europe on July 29–30 inSarajevo. The Milosevic administration wasnot admitted, although delegations fromsurrounding countries were. No assistanceother than humanitarian aid was permittedfor the FR Yugoslavia, which had sufferedthe worst damage.

5.6. Collapse of the Milosevic Regime

Milosevic was defeated by Vojslav Kostu-nica, a candidate of the Democratic Unionof opposition groups at a presidential elec-tion in late September 2000. Milosevic triedto retain power, but was dislodged early inOctober by a surge of public protests. Kos-tunica’s provisional government rapidly re-stored membership of the United Nations(November 2000), IMF (December 2000),the EBRD (December 2000) and the WorldBank (May 2001). In December 2000 thegovernment began to negotiate three suc-cessive financial agreements with the IMF tosupport its stabilization and market policies.The international community took a chari-table view and a donor conference in De-cember 2000 decided on emergency aid toprevent a humanitarian disaster over thewinter.

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The new government that took officein January inherited an inflation rate of 120per cent; a non-existent foreign-exchangemarket, a sick banking sector, a huge gov-ernment budget deficit, sizeable arrears ofdebt and a wide trade gap. The foreign debtsince 1992 had reached USD12.2 billion(equivalent to 145 per cent of GDP). Unem-ployment was running at 27.3 per cent. In-dustry was using obsolete equipment.Shortages included electric power, pharma-ceuticals, oil and gas, fertilizers, and foods(sugar, cooking oil, wheat, etc.) (Yugoslavia2002). It was impossible for FR Yugoslaviato reconstruct its economy without interna-tional support. A donor conference spon-sored by the World Bank and the EuropeanCommission was held in Brussels on June29, 2001, to which the government of Ser-bia submitted a detailed ‘Reform Agenda’.This contained 36 priority programmes andprojects, focusing on three main areas: (i)establishing the rule of law, (ii) renewingthe economy, and (iii) combating povertyand offering social protection to vulnerablegroups.

5.7. Privatization by trial and error

The privatization begun in the first half of1990 had failed to bring positive change inthe economy. A further round after theDayton Agreement, under the 1997 Act onOwnership Transformation, strongly fa-voured granting shares to employees, withup to 60 per cent of the equity being re-served for them free of charge. Almost 1000companies adopted this form of privatiza-tion, and most were quickly privatized be-tween October 2000 to February 2001,following unification of the official and un-official exchange rates. However, the gov-ernment gained very little revenue from thesales and there was negligible inflow ofbadly needed capital from abroad. The newgovernment suspended the legislation tolimit further losses and review the process(Ministry for International Economic Rela-tions of Serbia 2001).

The corporate sector was in a parlousstate, affected also by a decade of economicsanctions and by the Nato bombardment.There had been a 60 per cent fall in outputbetween 1990 to 2000 and a dramatic in-crease in the debts of state-owned enter-prises to domestic and international credi-tors. Much of this related to 28 large in-dustrial concerns (Ibid.). A new law on pri-vatization adopted in May 2001 was fol-lowed by the establishment of an Agency forPrivatization in June. Although the FRYugoslavia made a very late start with pri-vatization, compared with other transitioncountries, it was ‘better late than never’.19

All state-owned enterprises are to beprivatized by 2005. In 2001, three cementworks were sold, and in the first half of2002, an additional 15 big factories wereprivatized. By the end of 2002, 44 largecompanies, including the Zastava car fac-tory, were being privatized. There are twoprocedures: tender privatization and auc-tion privatization. All large enterprises, thenumber of which does not exceed 150, willbe subject to tender privatization by the Pri-vatization Agency. The more than 7000small and medium-sized firms will be pri-vatized by auction carried out by the enter-prise itself with state assistance (Yugoslavia2002).

5.8. Grounds for anxiety

Outside observers still see grounds for anxi-ety in the countries that make up formerYugoslavia. The Republic of Montenegro,headed by President Djukanovic, intensifiedits moves toward independence in the clos-ing years of the Milosevic period, includinguse of the DEM as legal tender. This re-ceived Western encouragement designed tohasten the overthrow of Milosevic. Now

19 This remark was made by Branislav Soskic, presi-dent of the Association of Economics in Serbia, in thekeynote speech at an academic conference on priva-tization at the Faculty of Economics, University ofBelgrade in early April 1997.

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that the Milosevic regime has collapsed, theWest no longer hopes for the emergence ofa further small, independent country, butthe momentum has continued. In March2002, Serbia and Montenegro agreed todissolve the Yugoslav Federation in favourof a ‘state union’ of Serbia and Montenegro,which came into effect on February 2003.Full independence for Montenegro may stillbe imminent.

Meanwhile the conflict deepenedbetween Federal President Vojslav Kostu-nica, a moderate nationalist, and the lateprime minister of Serbia, Zoran Djindjic,who was oriented toward the West, withKostunica’s party withdrawing from theDemocratic Union. The election for presi-dent of Serbia took place in October 2002,with Kostunica as a candidate, since theSerbian president became more powerfulafter the formation of the state union. Hegained more votes than his main opponent,Deputy Federal Prime Minister Miroljub La-bus, but the poll of less than 50 per centmeant the election was invalid. Labus didnot stand in the repeat election in Decem-ber, when Kostunica won 58 per cent of thevote against an extreme-right nationalist,but the election was again invalid due to a45 per cent poll. The voter apathy reflecteddissatisfaction at the miserable economicconditions and disgust at the struggle forpower between the two big-name politi-cians who led the political change in 2000.It is noteworthy that an ultra-nationalistlike We should pay attention to the fact thatan ultra nationalist (Vojislav Seselj) won 36per cent of the votes. In Montenegro, apresidential election in December 2002 waslikewise invalid because of a low poll.

The assassination of Serbian PrimeMinister Zoran Djindjic on March 12, 2003was followed immediately by a state ofemergency. It is reported that the perpetra-tors were members of the security policeunder the Milosevic regime, discontentedwith Djindjic’s policies in general, particu-larly the crackdown on black-marketeering.Djindjic was succeeded by his deputy primeminister (and deputy leader of the Demo-cratic Party), Zoran Zivkovic, who declared

that his government would pursue Djind-jic’s policies. To improve the investmentclimate and reconstruct the economy, therehas been an appeal to the Yugoslav peopleto restrain themselves from parochial na-tionalism and secure political stability.

6) PROSPECTS

Although for Slovenia, ‘the cost of re-orientating trade from protected to com-petitive markets were significant’ (Menc-inger 1997, p. 213), it has so far succeededin entering EU markets. For the time being,the small country’s strategy for finding ap-propriate specialization areas has been suc-cessful and world events such as the end ofthe Cold War, globalization and regionalismare running in its favour. Slovenia had ad-vantages compared with other transitioncountries. As part of former Yugoslavia, itdeveloped an albeit imperfect decentralizedmarket economy during the socialist period.The decentralized coordination mechanismSlovenia inherited seems to have facilitatedthe transition to a successful market econ-omy. Slovenia also experienced a long pe-riod of self-management. The World Bank(1996a and 1996b) points to this as anegative tradition, but the author agreeswith Mencinger that there must be advan-tages in such experience helpful for Slove-nia’s future economic development. Sloveneworkers have the kind of strong sense ofenterprise allegiance found in Japan, as domanagers. Managers in the highly central-ized planned economies were simply ad-ministrators, but in Slovenia, they acted ex-ecutives, gaining experience and know-howabout the market economy. Slovenia has tosolve many problems to do with the struc-tural adjustment and harmonization to theEU, but it is to be hoped that its strengths asa small country will mean that social cohe-sion and adaptability come more easily.

Despite initial Western countriesgoodwill at the time of independence, Croa-tia’s economic performance has not been

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good. It suffered severe damage in its inde-pendence war. More seriously still, the poli-cies of the Tudjman government failed. Achange of government eventually came inJanuary 2000, followed by the election of anew president to replace the deceasedTudjman. The new government came outagainst the extreme nationalism of itspredecessor and announced democratic re-forms. This will improve relations withWestern countries and generate active as-sistance that will help Croatia to make useof its geopolitical advantage. Its economyshould soon develop and the transition to amarket economy proceed smoothly. If itfinds its niche in world markets, it will alsobe able to make use of the ‘strengths ofsmall country’ to attain rapid economic de-velopment.

FR Yugoslavia does not have suchstrengths. Its economy was damaged suc-cessively by the break-up of former Yugo-slavia, the national conflicts, the UN sanc-tions, and the Nato bombardment. It wasunable to utilize its experiences of a decen-tralized market economy under self-managed socialism. This has been a ‘lostdecade’ for FR Yugoslavia. However, theessential cause of the economic crisis wasthe delay in reforms. Serbia and Montene-gro now have to take drastic action to accel-erate privatization, deregulate small andmedium-sized enterprises, reform the fi-nancial system, encourage FDI, etc. Thesuccess of these reforms will require activesupport from the international communitythat was withheld from the Milosevic ad-ministration. At last, Serbia and Montenegromay succeed in overcoming their interna-tional isolation, since the collapse of theMilosevic regime in October 2000. The newleadership inherited economic misery andcountless intractable problems. To improvethe investment climate, Serbia and Monte-negro will indeed have to refrain from pa-rochial nationalism and secure political sta-bility.

Bosnia-Herzegovina has yet to recoverfrom its civil war. Hostile feelings betweencommunities remain. It is indispensable forthe Office of the High Commissioner (OHR)

and the Stabilization Force in Bosnia andHerzegovina (SFOR) to stay for the timebeing. Promoting reconciliation and nation-building is a matter of the highest priority.International assistance is indispensable atthis stage in economic recovery. Thereafterthe emphasis will have to shift from hu-manitarian to commercial assistance and amarket-oriented economy, including theprivatization process.

After independence, Macedonia wasnegatively affected by the civil war in theformer Yugoslav Federation, UN sanctions,its conflict with Greece, the Nato bombard-ment of Serbia, and so on. When the Kosovowar ended in June 1999, Macedonia at lasthad the peaceful environment needed foreconomic development. For the time being,international assistance is necessary for re-covery and reconstruction of its economy. Itis also necessary to educate young people toadapt to a market economy. The ‘strengthsof a small country’ can be expected to out-weigh its weaknesses soon. Macedonia,along with Serbia and Montenegro, needs todevelop regional cooperation in the Balkans,in the hope of joining the EU eventually.

Until recently, the international com-munity has extended less assistance to theBalkans than to the CEE countries. A greatdeal more assistance for economic recon-struction and stabilization in the former willbe needed to ensure lasting peace.20

20 Tsuneo Morita, previously of Nomura ResearchInstitute Budapest and now president of TateyamaMagyar Laboratorium Ltd, is quoted by Morita(2000, pp. 196–7) as saying, ‘The gap betweencountries… with [market-economy] experience andthose without such experience is bigger than esti-mated. If the process of systemic transformation inCentral Europe takes 20–30 years, it would be rea-sonable to view it as a historical project taking 40,50 or more years in the Balkans, and over a centuryin former Soviet countries… It will be a sustainedhistorical process.’

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