1. It is almost startling to consider the degree
of change that has transpired in Serbia over the past six months. Before last year’s elections, members of the
Milosevic regime were exploiting Yugoslavia’s international isolation in a
failed attempt to entrench their grip on power while apparently milking the
national treasury for private gain. Those elections and the Serbian people’s
stubborn refusal to allow the regime to get away with a gross fraud brought in
a government which is increasingly cooperating with the very countries
Milosevic had cast as Serbia’s most bitter enemies. A year ago it would have been impossible to imagine the
organisation of a donor’s conference for Serbia with Western government
participation. And who could have
foreseen Serbian-NATO cooperation on matters related to instability in the
Presevo valley or, indeed, the incarceration of Milosevic himself? Serbia now has a President who appears
sincerely dedicated to the rule of law and democratic institutions. He has surrounded himself with economic
reformers who are very frank about Serbia’s serious economic problems and who
recognise the need for profound reform to get the economy on track. Although generally known as harbouring
strong nationalist feelings, Mr Kostunica has made clear his desire to build
strong relations with the West.
2. All
of this is good news; yet a number of outstanding problems continue to cloud
relations between Serbia and the West.
Serbian cooperation with The Hague Tribunal remains a critical concern
as does FRY compliance with the Dayton Agreements. Serbia’s domestic political situation is highly fragile, and
there is a great deal dividing the many parties within the governing
coalition. At the same time,
Milosevic’s Socialist Party constitutes the largest opposition party. Many of the officials appointed by the old
régime remain in place and invariably continue to exercise some influence over
the day-to-day affairs of state.
Corruption poses a serious problem to Serbia’s fledgling democracy and
its battered economy.
3. Serbian
recognition of its serious economic problems is only the first step in their
resolution. National leaders must gird
themselves for the difficult task of asking their people to undertake short‑term
sacrifices in order to increase the prospects for a better economic
future. That is politically a very hard
sell, particularly for a people who have seen their circumstances steadily
worsen over the last decade and who are, as a result, justifiably sceptical of
official calls for sacrifice.
4. At
the same time, Serbian relations with both Montenegro and Kosovo remain highly
uncertain at best, while the exact balances between the institutions of the FRY
and Serbia itself are not fully apparent.
This ambiguous state of affairs within the FRY have important
implications for a region which remains very unstable. Fighting has broken out in Serbia’s Presevo valley and now the Former Yugoslav
Republic of Macedonia, while Bosnia-Herzegovina continues to hang in a kind of
limbo characterised by an absence of war but a failure to achieve
reconciliation.
5. For its part, the West has confronted serious
difficulties in managing policy toward the region. The change of administrations in the US seemed to introduce yet
another element of uncertainty, with many actors anticipating a shift in US
policy. In such an unstable region,
even the intimation of change in the US outlook can be sufficient to alter the
tactics of those local actors who may want to test the limits of Western
policy. According to Richard Holbrook,
"Recent actions by Macedonian Albanians and Bosnian Croats are, in part,
reactions to a new administration perceived as more passive in the
Balkans." In light of recent
reaffirmations of America's commitment to work hand in glove with its allies in
building peace and security in the region, as well as strong and ultimately
successful US pressure for the arrest of Milosevic, that impression has begun
to dissipate. Nevertheless, recent
events only illustrate the importance of continued American engagement and
leadership in this fragile region.
6. Another
serious challenge lies in coordinating aid to Serbia among the many
international organisations and governments that have agreed to play a rôle in
Serbia. This is a problem rendered more
complex by the sheer number of multilateral and bi-lateral initiatives in place
and the conflicting approaches among the donor countries in everything from the
rôle of the private sector to the philosophical basis of the judicial system.
There is clearly no standard approach to building either a democratic or a
market order, but the sheer diversity of views confronting Balkan leaders
regarding which path they should follow must, at times, seem overwhelming. There is also the old problem that some aid
remains in one way or another, “tied” or conditional - something which limits
the flexibility of the recipient to use all the resources ostensibly made available
to it by compelling it, for example, to purchase or accept specific goods from
the donor or to employ specific companies. Oftentimes two donors might offer
essentially the same programme to the recipient and grant the recipient little
leeway to take advantage of both donations.
This tends to inflate the amounts of real resources actually available
to recipient countries.
7. Thus
Serbia embarks upon a democratic and market-oriented transition at an extremely
difficult moment. The challenges it
faces, while not insurmountable, are nonetheless most daunting.
8. The
victory of the Democratic Opposition of Serbia (DOS), a coalition of 18 parties
in the federal parliamentary elections of September 2000 as well as Vojislav
Kostunica’s defeat of Slobodan Milosevic in presidential elections held on
the same date, marked a critical turning point in Serbia's evolution. This would culminate in Milosevic’s finally
ceding power in October after a protracted effort to maintain his grip on power
failed to stem the popular will, which was perfectly expressed in massive
street demonstrations. The victory was
effectively cemented on 23 December 2000 when the DOS coalition won a
majority of seats in Serbian parliamentary elections.
9. These
events triggered a prompt response from the international community which
naturally welcomed the changes. In
October the European Council lifted sanctions initially imposed on the FRY in
1998 while keeping in place those sanctions targeted specifically against
Milosevic and key members of his inner circle.
The EU also invited Belgrade to begin negotiating a Stabilisation and
Association Agreement and made the FRY eligible for an array of economic and
technical assistance programmes.
European leaders then invited President Kostunica to attend the EU
Summit in Biarritz in mid-October while granting the FRY/Serbia Euro 200
million in emergency assistance.
President Kostunica also attended the November summit of the Stability
Pact in Zagreb. On 1 November 2000 FRY
was re‑admitted to membership of the United Nations. On 10 November 2000, the country joined
the OSCE and later that month the government signed the Helsinki Final Act and
the Paris Charter for a new Europe.
10. US
policy also shifted dramatically in response to the changes in Belgrade. In December the Clinton Administration
lifted trade and financial sanctions and pledged US$160 million in emergency
assistance. Yet Clinton and the
Congress conditioned the disbursement of future aid on Belgrade’s willingness to
comply with the Dayton Agreement and Security Council Resolution 1244 on Kosovo
which, among other things, calls for FRY/Serbian cooperation with the War
Crimes Tribunal in The Hague. Congress
required the administration to withhold promised aid if Belgrade had not begun
to cooperate by 31 March 2000.
11. These
changes did not simply reflect the views of a few people at the top of the
Yugoslavian government. According to
polls published last November, 76.1% of the population of Serbia would
willingly join the European Union, 42.1% wish to participate in NATO's
Partnership for Peace and only 25.2% believe Serbia needs an independent
defence policy. All of this suggests
that the public is looking westward and might be willing to countenance
policies that will ultimately reconcile Serbia and the countries of NATO.
12. Nevertheless,
the extradition of former President Slobodan Milosevic and several of his
allies remains a critical test for the new Yugoslav leadership. The government faces a very tough set of
decisions here as there is strong public opposition to the tribunal. Mr Milosevic's recent arrest represents an
important first step as it suggests that the new government is willing to
engage in some reckoning with its recent past.
Yet, that arrest is related to domestic financial crimes and not war
crimes. Moreover, the government
presented Milosevic with a written assurance that his arrest was not a
precursor to a transfer to the Hague.
13. While
generally recognised as a democratic figure, President Kostunica could lose
credibility if he fails to cooperate with the UN tribunal. On the one hand, he continues to express
strong legal and political reservations about the court. On the other hand, he has called the
tribunal a political instrument practising selective justice biased against
Serbia. Serbia's new President has also
said that Milosevic and others should be held accountable for war crimes
committed while they were in the direct line of command. Kostunica has also alluded to the need to
extradite to the Hague both Serbian nationals and ethnic Serbs with the
exception of Milosevic. Several
prominent Bosnian Serbs living in Serbia have recently gone to the Hague to
face charges of war crimes. This thus
suggests some degree of Serbian willingness to cooperate with the tribunal,
although the real test will likely lie in how the government deals with Mr Milosevic
himself.
14. It
should be pointed out that the West has shown a degree of patience on this
matter, in recognition of the government’s very difficult political
position. The US Congress, however,
required the administration to certify that the government of Serbia was
cooperating with the Hague Tribunal in order to implement a US$50 million US
aid package. The deadline for certification
roughly coincided with the arrest of Milosevic. That arrest prompted the State Department to make the
certification with some qualifications including concerns that the FRY is not
complying fully with the Dayton Peace Accord. As a result, the US aid programme
will continue. The Bush administration
has agreed to support Yugoslav requests for World Bank and IMF loans and will
also participate in an international donors' conference. President Kostunica has denied that the
arrest of Milosevic was in any way related to the US deadline, but it seems
likely that the threatened aid cut-off reinforced the resolve of the Serbian
leadership to make the arrest.
15. According
to the World Bank, the FRY has undergone a severe decline in income and output
since 1989. As a result of the Kosovo conflict, tightened sanctions and
chronic delays in structural reforms, the FRY’s per capita GDP 1999 stood at
40% of its 1989 level, one of the largest declines in the region. In 2000, output in the FRY as a whole
rebounded modestly, as did foreign trade volumes, but the expected annual GDP
growth of around 5% is more a reflection of the low 1999 base, the onset of
economic contacts with the rest of the world and aid inflows than any inherent
dynamism in the economy.
16. Indeed,
the macro-economic environment remains highly unstable. Price inflation rose from over 50% in
December 1999 to 100% in September 2000.
In February 2001, experts spoke of inflation running at an annual rate
of 115%. The post-election removal of
many price controls were expected to bring even higher price rises. Ending price subsidies usually has immediate
inflationary effects, although ridding an economy of these controls is
essential to restoring a rational pricing system and putting economic development
on a sustainable basis.
17. To
begin to get the economy on track, the World Bank argues that Serbia should
focus on the following priorities:
·
Social protection (humanitarian aid focused on the energy sector);
·
stabilisation measures;
·
re-integration with the international community; and
·
rapid implementation of vital public infrastructure projects, including
re-opening the Danube to river and road traffic.
18. The
medium-term agenda begins this year and should combine continued
infra-structure restoration with difficult transition measures needed to build
a market economy. Among these are
restructuring the accumulated stock of fiscal liabilities (FRY’s debt stands at
about US $12 billion); restoring medium-term fiscal sustainability through
pension and tax reform (with up to 240 different levies, the current system is
excessively complex); anti-corruption efforts; labour market reform;
liberalisation of domestic and foreign trade; banking reconstruction and
privatisation; enterprise restructuring and privatisation; energy sector
reform; putting social protection on a sustainable basis while ensuring an
adequate safety net; and finally, improving the country’s statistical capacity.
19. This
is a daunting list indeed and does not even include other imperatives like
attracting foreign investment - something that is not likely until after many
of these reforms are firmly entrenched, political stability more apparent, and
reconciliation with Western institutions more deeply rooted. One of the real tragedies for the FRY is
that it has missed a vital ten years of economic, political and social
transition and, as a consequence, must now brace itself for an extended period
of economically and politically difficult reform after a decade of painful war
and horrible governance. This is thin
gruel indeed for a public that has weathered more than a decade of utterly
misguided rule and withering economic decline.
Serbia’s leaders will face the political temptation to slow down reform,
but further delay will only complicate an already daunting transition and set
the country even further back from other transition countries in Central and
Eastern Europe.
20. The
government acknowledges the depth of the problem and has begun to outline the
very difficult agenda it must follow.
Miroljub Labus, Federal Deputy Prime Minister of the FRY, argues that
his government wants to create an efficient open market economy, eradicate
corruption and protect the neediest.
The goals, he says, are to ensure that the FRY catches up rapidly with
other Central European economies, is part of the international economy, and is
ultimately positioned to join the European Union as a full member within five
to seven years.
21. Labus
and others continue to draw hope from the fact that a decade ago, Yugoslavia
enjoyed fairly developed economic links with Western and other markets as well
as a tradition of autonomous enterprise management that set it apart from other
centrally planned economies. The problem
with this argument is that in economic terms, a decade is a very long period
indeed, and most of those old links have simply vanished into the ether,
particularly as western companies and governments have intensively cultivated
economic ties with the countries of Central and Eastern Europe. Moreover, Yugoslavia's worker management
system never worked well in practice.
The country thus no longer holds the privileged position it did in Cold
War times and, its record over the last decade has endowed it with a reputation
as a highly risky place to do business.
Restoring international confidence is going to be a long and painful
process. For that reason, international
economic support will be critical to helping the country develop the
institutions and practices that, over the long term, provide the kind of
reassurance foreign investors will need to enter that market.
22. Serbia’s
Finance Minister, Bozidar Djelic, recognises the problems created by a legacy
of poor administration and corruption.
He has laid down several critical priorities for the Serbian government:
clean up corruption, create a transparent budget, simplify the tax system,
concentrate government efforts to overcome smuggling; establish an ombudsman to
overcome the central rôle corruption and criminality played in the previous
government and to entrench a new culture of transparency; encourage industrial
restructuring, overhaul the banking system, and set up a legal and industrial
framework needed to attract investment.
Again, this is a tall order, and the devil will lie in the myriad of
policy choices achieving these goals will involve.
23. Interestingly,
Djelic has also promised to review earlier privatisations that allowed
management to purchase companies at knockdown prices and very likely permitted
régime cronies to funnel resources into private accounts. The Serbian Finance Minister has indicated
that the government could reverse a recent wave of management buy-outs and
plans on passing new privatisation legislation this spring. The government also plans to levy
retroactive taxes on businessmen and former politicians who siphoned off state
funds to form their own companies. The
experience elsewhere, however, suggests that it can be particularly difficult
to reverse privatisations because the practices of asset stripping and money
laundering make it impossible to recoup the value of formerly state-owned
firms. The remnants of worker management
in Yugoslavia adds yet another level of complexity to the problem of
privatisation, and shareholder structures in the FRY are Byzantine to say the
least.
24. At
the same time, Djelic claims that the government needs to go cautiously on
privatising those commercial assets still in state hands. That is certainly appropriate because the
government must first ensure that the institutions and rules guiding
privatisation, as well as those exercising economic and commercial oversight,
are functioning. A strong body of
market rules and a capacity to enforce them are essential preconditions for reassuring
foreign and domestic investors and preventing corruption and gross
mismanagement. Thus the immediate goal should not be privatisation itself, but
rather a comprehensive programme to lay out the institutional and legal
framework that will make eventual privatisation a success.
25. Representatives
of international financial institutions maintain that a real test of the
government’s commitment to economic reform will lie in restructuring the country’s
still vast industrial complexes.
Many towns such as the copper and gold-producing town of Bar, and
Kragujevac, where the Zatava car factory is located, are still supported by
only one industry. War, outdated
technology, bad management and loss of markets have sparked an output collapse,
and such towns are now mired in a virtual economic shut-down; developing
strategies to cope with these problems will be extremely difficult politically
as well as economically.
26. What
to do with the banking sector is also the subject of some debate. Boris Begovic, of the Centre for
Liberal-Democratic Studies in Belgrade maintains that the banking system is
simply beyond rehabilitation and should simply be scrapped and rebuilt from
scratch. On the other hand,
Vladimir Gligorov, a Vienna-based analyst has advanced a "Slovene
solution" using fresh capital injections to revivify the current banking
structure.
27. The
problem with the latter approach is that the previous régime utterly corrupted
and plundered state-owned banks, most of which are now little more than empty shells. Financial transfers in Serbia are completed
with extreme difficulty, and confidence in the financial system as a whole has
simply collapsed. The legal structure
governing finance is ill-defined and generally ignored, and conducting simple
financial transactions requires even the most honest businessman to break
laws. This suggests that current
banking structures are probably beyond salvaging, and any effort to simply pump more liquidity into the current
system would likely involve throwing good money after bad. A more fundamental restructuring is in
order. As Aleksandar Denda, vice‑president
of the Serbian Association of Tradesmen and SME Owners has pointed out: "…
if anyone were to donate US $100 million for business development tomorrow, we
would not have the banks, the consultants or the regional development centres
to be able to make good use of the money". Thus engaging the EBRD and international banks in a combination
of banking restructuring and recapitalisation may prove the only means to
revivify a totally moribund financial system.
Undoubtedly, foreign capital and expertise will be essential simply
because Yugoslavian banks have literally exhausted their own capital stocks and
lack the kind of managers needed to turn around the system. At the same time, innovative financial
solutions to redeveloping the Serbian economy from the ground up are essential.
The EBRD has been looking at micro-finance as one approach that has worked well
elsewhere and this is certainly the right way to give a positive impetus to the
small-business sector.
28. Obviously,
economic reform will prove totally elusive if Yugoslavian society is not
actively engaged in the process and ultimately supportive of it. But the FRY’s
social fabric is in tatters as a result of abhorrent leadership and policies,
war, and even the legacy of the Titoist system, which tended to repress and
paper over real social tensions rather than address their root causes. It is now time to confront these root
causes, and this will prove another of the great challenges President Kostunica
and the government face.
29. The
UN Secretary General's Special Envoy to the Balkans, Carl Bildt, recently
argued that the situation in Serbia is even worse than in Bosnia. Serbia’s state institutions have been shaped
by a dangerous combination "of mafia and nomenclature. The sanctions imposed by the international
community produced misery for the once honest middle classes and illicit opportunities
for the paramilitaries that thrived under the protection of Milosevic’s
regime". A decade of war in the
region has brought roughly 800,000 refugees, mostly Serbs, into the
country. If abandoned and ignored
these, essentially disenfranchised refugees, could easily turn "into a
reservoir of revanchism". Bildt
has urged the international community not only to focus its assistance on
underwriting fundamental structural and economic reforms, but to also support
refugee return, citizenship, and property rights.
30. Rising
unemployment has also exacted a high toll on social stability. The pervasive lack of jobs, even before the
transition process begins, is particularly worrisome and perhaps the single
most daunting barrier to reform.
Official unemployment (which excludes workers on unpaid leave) is expected
to rise from 26.5% in 1999 to 30% in 2000.
Unofficial estimates put the current rate at closer to 50%. About three-quarters of the jobless have
been unemployed for over one year.
Moreover, it is likely that as the FRY liberalises, much of its
antiquated industrial infrastructure will close down, and many of those now
clinging to already tenuous jobs will find themselves out of work. Undoubtedly, many will blame any government
that has adopted policies designed to shake out failed firms and will find it
difficult to accept the economic logic of the decision. Inevitable reductions
in the armed forces will add even more names to the unemployed rôles, and for
this reason, the World Bank and NATO have launched a joint programme to
facilitate the integration of retired military personnel into the civilian
labour market.
31. Average
net wages in the Republic of Serbia are US $40-45 a month, while average
pensions stand at roughly US $30 a month.
Currently about 46% of the population is living on less than US $1 a
day, and about two-thirds are getting by on US $2 a day. Obviously these figures do not reflect
relative purchasing parities, but they nonetheless point to pervasive
destitution. Poverty is most concentrated
in urban areas, which were hardest hit by sanctions, conflict-related damage
and delayed reforms. This, too, makes
the FRY something of an exception in Central and Eastern Europe where, generally,
rural areas are poorer than the metropolitan regions.
32. All
of this suggests that the international community should focus immediate
attention on helping to build a cost-effective social safety net in the
FRY. Without this support, it is
probable that government reform efforts will simply collapse. Still powerful anti-democratic elements
stand to regain a political foothold by capitalising on public despair, and
avoiding such an outcome must be a priority for Western donors.
33. Infrastructure
needs are also evident. The problem is
that the FRY is in no position to underwrite the costs of any major
infrastructure investment, and even rebuilding some of the bridges destroyed
during the war is beyond its capacity.
Wolfgang Hager, of the Centre for European Policy Studies (CEPS),
recently suggested that internationally funded infrastructure investment could
help put people back to work. Hager
correctly notes that private investment is not likely to be forthcoming over
the short- to medium term. Yet the FRY
requires investment levels equivalent of roughly 25% of GNP to kick start
economic growth and to begin to catch up with other transition economies. In practical terms this would require some € 635 million of investment over the next two years - most of which by
default will have to be donor-funded.
Perhaps the best approach is to ensure a degree of harmony between
Serbia’s infrastructure and its social welfare needs. In short this means using
public and donor funding to put Serbia’s people to work revamping the country's
infrastructure, cleaning up its damaged environment, and providing critically
needed economic and social services. Putting people to work in an effort to
rebuild the country and its institutions would provide a framework for granting
many of the unemployed a living wage but without necessarily creating a culture
of dependency. At the same time, Serbian officials should develop a sense of
priority so as to focus development projects on areas where Serbia enjoys at
least a potential comparative advantage internationally. The public is
relatively well-educated and skilled and there are certain sectors where this
could provide a foundation for the country’s reintegration into European
markets. Given the likely absence of private capital over the short term,
international aid capital will have to be injected into the Serbian economy to
steady the nerve of a government dedicated to reforms and to ease social
pressures on it.
34. Corruption
remains another critical concern. Once
entrenched, corrupt practices are terribly difficult to expunge, particularly
in a society that is as economically and politically traumatised as
Yugoslavia’s. The Milosevic régime was
thoroughly venal, and pervasive cronyism has left a social and economic legacy
that will greatly complicate the FRY’s economic development. The German Federal Intelligence Service
(BND) recently estimated that the Milosevic clan alone has deposits totalling
US $100 million around the world and an Interpol warrant has just been issued
for Milosevic's son, believed to be hiding in Russia.
35. In
recent years, development agencies and international lending institutions like
the World Bank and the EBRD have come to a far better understanding of the
great difficulties corruption poses to development and have endeavoured to design
programmes to root it out or at least limit its penetration into the social
fabric. This will not be easy in the
case of the FRY, although the government has announced its dedication to doing
so. Here again, the West can be very
helpful, particularly in tracing stolen money.
Some Western middlemen have been complicit in money‑laundering
operations on behalf of the régime, and Western governments have an obligation
to work with Yugoslav authorities to track down funds plundered from
Yugoslavia’s coffers.
36. Demanding
an accounting for the criminal actions of those in, and close to, the government
over the last decade is therefore essential.
The Yugoslavian government is now seeking to trace money stolen from Yugoslavian
banks by régime insiders as well as gold smuggled out of the large Bar mine to
a Swiss-registered firm. Most of the
money stolen by high officials likely passed through Cyprus, Greece, Israel and
Switzerland, and Swiss authorities recently froze about
US $26 million in suspect accounts.
The Yugoslav government believes some money was also diverted into
British banks after the privatisation of Serbia’s state telecommunications
monopoly in 1997, and in late-March the British Financial Services Authority
agreed to work with the government to try to trace the missing funds. Greek officials have also promised to work
with the Yugoslav government to trace laundered money.
37. Serbia
itself cannot hope to normalise its economy without resolving the panoply of
problems it confronts with its neighbours, including Montenegro and
Kosovo. Obviously coming to some modus vivendi with Kosovo will be
critical, but given recent events in the Presevo valley and now the former Yugoslav
Republic of Macedonia, a regional agreement at this juncture hardly seems
imminent. Indeed, if the problem in
Macedonia is not properly dealt with, yet another round of Balkan wars is well
within the realm of possibility.
38. The
future status of Montenegro also involves important economic
considerations. Montenegro’s parliament
has been preparing a referendum on independence, but the final form of that
referendum and even whether or not it will be held will be decided only after
the new Parliament elected in April is seated. Although election results are
not confirmed at this writing, it seems that out of 77 parliamentary seats,
strongly pro-independence parties won an estimated 41, short of the two‑thirds
mandate sought by the Montenegrin president, Milo Djukanovic. That total is nevertheless
sufficient for his party to push through a public referendum on withdrawal from
Montenegro's union with the republic of Serbia. Official figures based on more
than 99% of the vote suggest that 50.25% of the population supported avowedly
pro-independence parties. Votes that went to three ethnic Albanian parties
expected to support independence amounted to another 2.6%. These figures suggest that Montenegro’s
public remains sharply divided over the question of its place in the FRY. It is likely that any move to break away
fully from Montenegro could result in tremendous domestic upheaval. Milo Djukanovic has recently claimed that he
wants international recognition of the independence of both republics. He has suggested that the two could subsequently
form an "alliance" or "union" to co-ordinate foreign and
defence policy and create a common market and a single currency. Serbian Prime Minister Djindjic and most of
Serbia’s ministers would rather recast the federation by granting Montenegro
greater autonomy within the current structure.
Serbian President Kostunica argues that the matter must be worked out
"in the context of Europe’s larger political evolution", but as the
President of the FRY, he clearly opposes the idea of a separation.
39. While
Western leaders embraced Mr Djukanovic’s effort to stand up to Milosevic, the
election of a new democratically oriented government in Belgrade has ushered in
a more reserved view of Montenegrin national ambitions. There is serious concern that Montenegrin
independence will only inspire other ethnic groups – for example in Bosnia - to
push for their own states and make all the more elusive the effort to build
ethnic tolerance within Balkan societies.
Western leaders warn that an independent Kosovo or Montenegro could
foment permanent instability and lead to the creation of ultimately non-viable
states. According to Carl Bildt, in
order to build real stability in the Balkans, "regional leaders must
abandon their preoccupations with nineteenth-century concepts of nation-states
and borders and embrace the concept of trans-national integration that will
shape Europe in the twenty-first century".
40. In
terms of regional integration, there have been several positive developments in
recent months. In January 2001, the
Ministers of Trade and Economy and their representatives from Albania, Bosnia
and Herzegovina, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia,
the FRY and Romania at their meeting in Geneva agreed on a joint statement of
intent regarding trade liberalisation in South-East Europe. The goal is to develop a memorandum of
understanding with concrete measures by June 2001.
41. Western
policy toward Serbia must help foster regional integration. It sometimes seems that the quest among
transition countries to join the EU has become a kind of regatta in which each
country must look out for itself and not worry too much about the progress of
neighbouring states. And it is also
true that because the EU is such an economic dynamo, the countries of Central
and Eastern Europe tend to develop trade ties with it that are far stronger
than those with their neighbours. Some
of this cannot be avoided, but more efforts are needed to ensure that the
process of regional integration and European integration work hand-in-hand are
not mutually exclusive. This is all the
more true because no country in the region outside of Slovenia and Hungary are
likely to gain admittance to the EU in the near future, and much of the Balkans
was once part of single integrated national economy. The European Commission has made great efforts to foster regional
integration and has made certain kinds of assistance contingent upon this
cooperation. The Stability Pact has
also placed a premium on regional integration by supporting projects, which
engage several countries in the region.
42. Serbia’s
transition will thus partly hinge both on its capacity to forge a closer
relationship with its neighbours and the EU and the broader international
community. The EU has been quick o
recognise both Serbia’s important advances in building a democratic society and
its very serious short- and long-term needs.
The FRY is now participating in the EU Stabilisation and Association
Process and took part in the Zagreb Summit this past November. The Stabilization and Association process
holds out to the countries of the region the long-term prospect of EU
integration as an incentive to encourage reforms. Those reforms, in turn, will constitute the institutional and
market foundations these countries would need if they ever were to join the
Union. The Stabilisation and Association
process thus includes: Stabilisation
and Association Agreements (SAAs), which constitute a new kind of contractual
relationship linking reform to EU concessions and assistance; a greater level
of trade concessions granted by the EU to countries in the region, budgetary,
financial and balance or payments support; assistance for democratisation and
civil society; humanitarian aid for refugees and returnees; co-operation in
justice and home affairs; and the development of a political dialogue.
43. By
1 December 2000, the FRY was already participating in the special market access
the EU has granted to the region.
Unlike the former Yugoslav Republic of Macedonia, however, it has yet to
sign a Stabilisation and Association Agreement, and an EU/ FRY Consultative
Task Force must be formed to even begin the dialogue. At the Biarritz European Council (13-14 October 2000), European
Commission President Prodi announced EU support of € 200 million for Serbia to
help meet fundamental needs for this past winter. That aid included: an Emergency
Assistance Programme of €180 million focused on energy support, medicines,
and food supplies, the expansion of the European Commission Schools for
Democracy programme (SfD) to the whole of Serbia and the launch of a new
programme called Towns for Democracy (TfD), as well as support for the independent
media. An additional € 20 million in humanitarian
assistance has primarily covered ongoing humanitarian aid for refugees, displaced
people and vulnerable persons in Serbia.
The main priorities and principles for EU assistance from 2001 onwards
will be those of the Stabilization and Association process (e.g.
institution-building, assisting the FRY in adapting its laws and structures to
European norms and supporting the transition to a market economy). The European Commission plans an assistance
programme for the FRY for 2001 of some € 240 million. Over the longer
term, the European Union’s General Affairs Council has earmarked € 2.3 billion
for aid to the FRY until 2006.
44. In
light of criticism regarding the speed of EU aid disbursement, the European
Commission now wants a single, legal framework for financial assistance over
the period 2000-2006. Until now, EU
assistance to the Balkan countries has come under the auspices of various
programmes, and administrative red tape has slowed up the process of getting
resources to where they are most needed.
The aim of the proposal is to improve radically the speed, quality and
visibility of external aid to the region.
But there remain so many entrenched barriers that even the goodwill of
the European Commission has not been sufficient to ensure a satisfactory
aid-granting and disbursement process.
45. A
special donors' conference under the auspices of the Stability Pact was to take
place once the needs of the FRY had been fully assessed, when the new
government had adopted its economic programme, and when sufficient progress on
FRY’s eligibility for funding from the international financial institutions had
been achieved. The United States was
withholding support for this conference conditional upon FRY cooperation with
the War Crimes Tribunal. But
Milosevic’s arrest for the time being has set this particular barrier
aside. The FRY’s government is now
preparing a detailed economic programme and the donors' conference is scheduled
for this spring.
46. According
to a recent report by the United Nations Office for the Coordination of Humanitarian
Affairs (Belgrade 5 December 2000), the FRY’s needs for this past winter and
spring stood at US $1.4 billion. This
included revenues to cover basic energy, food, agriculture, health, education,
social welfare and refugee needs. Yet
donor contributions as reported at the Donor Co‑ordination meeting in
Brussels on 12 December 2000, amounted to US $412,424 million in
total. Thus there has been a
significant gap between committed resources and estimated needs. Critics like
Wolfgang Hager also note that funding numbers can be deceiving because aid is
frequently "tied". Again,
tied aid can dramatically reduce the recipient’s capacity to follow superior
development strategies, for example, by
limiting the choice of which companies are hired to carry out particular
projects. Tied aid also distorts the official assistance figures because aid
conditionality results in some donations effectively cancelling out
others. The result is that official
figures describing the amount of aid money that can actually be put to use are
oftentimes inflated. This is a terribly
inefficient practice. Donors need to be
as flexible as possible in their aid grants so as not to handcuff the
recipients with specific purchasing and/or hiring obligations.
47. As
last year’s sub-committee report noted, within the Stability Pact framework,
the World Bank and European Commission are jointly responsible for coordination
of matters related to the economic recovery, reform and reconstruction of
south-east Europe. The EBRD has taken
on a mandate to coordinate the international community’s efforts to promote
economic development and regional integration in the region through regional
private sector initiatives that encourage cross-border trade and
investment. The EBRD was to set up an
office in Belgrade in early spring and has sent missions to Serbia to identify
and prepare possible projects for the EBRD support. An overall strategy will be agreed with the government this
year. The Bank will work in coordination
with other IFI’s, such as the World Bank and European Investment Bank, and main
bilateral donors, such as the European Commission.
48. The
EBRD expects to support Yugoslavia in at least five ways: identify and support
creditworthy banks with an emphasis on strengthening their institutional
capabilities and providing funding to small-, medium- and micro-sized
enterprises; fund export-oriented medium-sized and large companies undergoing
privatisation; make infrastructure investments in the public sector, with an
early emphasis on airport navigation and refurbishment, and power and railway
rehabilitation; extend loans to local municipalities for water supply, district
heating or environmental services; and mobilise bilateral technical assistance
funding to support enterprise and financial sector reforms, which are
prerequisites for increased foreign investments and efficient local financial
intermediation. Jean Lemierre, the
EBRD’s President, has stressed that the level of EBRD’s engagement will largely
hinge on the depth and pace of the new government’s reform programme.
49. The
EBRD has established a dedicated funding facility, the Balkan Region Special
Fund (BRSF), through which both grants and highly concessionary funds can be
channelled. As the FRY become a member
of the EBRD in January 2001, BRSF is now available to it. The EBRD is also working to reinforce the
region’s very weak banking sector. It
has helped local banks manage relations with their large European counterparts
on trade finance matters and assisted in laying the foundations for banking
privatisation; this has been crucial to banking revival in countries like the
former Yugoslav Republic of Macedonia.
Again, the challenge will be great, as Yugoslavia’s banks are empty
shells. One means of kick-starting
development finance, according to EBRD officials who recently met with this
sub-committee, might be to begin with micro-financing projects which, as
suggested above, can be enormously helpful in supporting small business and
ensuring that development begins from
the ground up. It is essential as well
that lending is also extended to support women’s entrepreneurial initiatives.
Women’s rôle in economic development is critical and should not be neglected.
50. The
EBRD is also financing Quick Start projects in the housing and railway sectors
as well as municipal environmental programs covering areas like water
treatment. According to EBRD officials,
the Stability Pact’s timetable for infrastructure projects has been very
aggressive and has already attracted significant funding.
51. For
its part, the European Investment Bank (EIB) has so far made available €
154 million to the Balkans. The EIB is
participating in the Quick-Start and Near-Term programmes, in which the
European Commission, World Bank and EBRD are also involved. But this programme has not been without some
administrative and financial problems that have blunted its effectiveness as an
instrument for rapid assistance. An EIB lending mandate to the FRY is currently
under consideration by the European Council.
52. On
the environmental front, the EU is providing up to roughly € 22 million or 85%
of the estimated cost of the Danube Commission’s project for the
restoration of navigation on the Danube.
The Danube Commission intends to launch several tenders in the near
future for riverbed surveys, feasibility studies, design, preparation of tender
documents, work supervision, unexploded ordnance clearance works, and debris
clearance works.
53. The
Stability Pact’s Working Table II established a Task Force for the
implementation of the Regional Environmental Reconstruction Programme for
South-East Europe (RERP).
Priorities include institution building, regional co-operation, civil
society development and support for national and local environmental
projects. The programme will also
address war damages in and around the FRY.
The Task Force held its first meeting in Croatia in July 2000 and secured
over €8 million for the initial financing of
environmental projects within the Quick-Start programme. The second Task Force meeting was held in
Brussels in November 2000, this time with the participation of Yugoslav
representatives.
54. The
United States pledged US $158 million in a new "rapid disbursing assistance"
to the FRY, most of which was to cover immediate needs over the winter of
2000-2001. These funds were targeted
for emergency food and energy assistance, humanitarian needs, technical
assistance to the banking sector and economic reform, private sector development
and strengthening civil society.
55. The
United States also pledged US $23.5 million in food aid through the World Food
Programme (WFP) while promising to purchase US $10 million in electricity to
help overcome energy shortages in Serbia.
It is providing US $5 million for urgently needed spare parts for power
production and improved energy efficiency.
Finally, the Americans have offered US $8 million for technical and
material assistance to municipalities, and US $6.1 million in NGO grants both
to meet basic human needs in communities throughout Serbia and to facilitate
efforts to account for missing persons from the conflicts in the Balkan region.
56. The
Serbian Government has tasked its Ministry of International Economic Relations
(MIER) to coordinate aid policy, and
MIER has accordingly established a Serbian Aid Coordination Unit
(ACU). The ACU covers the coordination
of assistance in those sectors which are managed at "Republican"
level, including energy, welfare, health and education. The ACU co-operates
with the federal MIER to ensure that sectoral analysis is consistent with the
macro-economic policy developed at the federal level. Here again, the uncertain institutional future of the FRY adds a
layer of complexity to managing Serbia’s own economic transition because, at
present, federal authorities are de facto
speaking only for Serbia and not Montenegro and Kosovo.
57. While the Serbian authorities' recent arrest
of Slobodan Milosevic is commendable, it should be seen as only the first step
toward his trial in the Hague for war crimes committed in Kosovo, Croatia and
Bosnia. A trial in that court would
mark a significant advance in the international community's struggle against
war crimes and would lay down an important and cautionary legal precedent. The Serbian Government's charges of domestic
corruption, which prompted Milosevic's arrest, simply do not fit the horrendous
nature that the crimes tribunal prosecutors allege he has perpetrated. Moreover, Yugoslavian courts are still
controlled by Milosevic appointees, and many believe those judges would be
under tremendous pressure not to convict their old patrons. Ultimately, full reconciliation between the
west and Serbia will hinge on the government's willingness both to place Mr
Milosevic before the tribunal and comply with both the Dayton Agreement and UN
Resolution 1244. Still some patience on
the part of the west would be advisable.
Serbia's democracy is still highly fragile and a trial of Milosevic in
Belgrade could help the Serbian public achieve some degree of historical
reckoning with what has transpired in their name. It might even be worthwhile
exploring the possibility for an agreement in which Milosevic would be tried in
the Hague, and if convicted, would serve his sentence in a Serbian prison.
Ultimately, however, it is the Registrar of the Tribunal who, with the final
approval of the Tribunal President, decides where convicted war criminals serve
their sentences. In the end though, the international community will insist on
Serbian cooperation with the Tribunal just as it has insisted on Croatian and
Bosnian cooperation.
58. Indeed, the West must be mindful of the
great political delicacy of the issue in Serbia, and recognise that the Serbian
democracy is highly vulnerable both to the type of political demagoguery that
has poisoned Balkan politics over the last decade and to economic crises that
breed the very despair that provides xenophobes fertile ground for sowing
hatred. Thus the West must navigate a
rather fine line, helping Serbia dig itself out of an economic and political
nightmare while nonetheless insisting that a full reconciliation will eventually
require Serbia to turn over those indicted for war crimes to the Hague
Tribunal. The Bush administration
certification with reservation of Serbian cooperation with the Tribunal
therefore seems eminently sensible. A
trustful relationship between the West and Serbia is emerging, but it will not
take full flight until Milosevic and his henchmen are given the opportunity to
defend themselves in The Hague.
59. The arrest of Milosevic nevertheless makes
it possible to advance plans for economic aid to Yugoslavia, which is an
essential precondition to economic development of the region. As previous reports to this Committee have
stressed, aid must be structured both to advance regional economic integration
and to link more tightly the countries of the region, including Serbia, to the
EU, and by extension, to the global economic system. Further efforts are needed to limit the practice of extending
"tied aid" in order to give maximum flexibility to those laying out
long-term development strategies. The first economic priority of the government
and donors has been to inject stability through emergency assistance
measures. The winter is now over, and
it is time to begin the arduous task of preparing the ground for reform. Efforts must therefore focus on currency
stabilisation and further price liberalisation, fiscal consolidation, trade
liberalisation, the construction of an effective but affordable social safety
net, banking reform, environmental clean up and environmentally sustainable
development and a thriving private sector.
The banking sector must be rebuilt and, in the interim, innovative
solutions to financing development including the use of micro-credit should be
pursued. At the same time, the key rôle of women in building a modern economy
should not be neglected. But even before these measures are begun, a more solid
legal structure must be in place to ensure that laws are actually implemented
and respected. That will be
particularly trying given that precisely what form FRY will ultimately assume
remains in some doubt and in light of Serbia's shattered legal system.
60. Serbian reconstruction and development will
also very much depend on its capacity to strike up healthy relations with its
neighbours, including Montenegro and Kosovo. The latter, in particular, poses a
special challenge to leaders both in Kosovo and Serbia. Even Kosovo’s final status remains a highly
contentious issue between Kosovo and Serbia. Both sides must accept that
regional peace and economic development cannot be advanced if some
accommodation is not achieved.
61. The new government has announced ambitious
plans on all of these fronts, and it will require a great deal of support to
carry these out effectively. The
government is checking that the critical elements of its reform agenda conform
to the EU’s acquis. Here, member
governments can provide crucial expert support to Serbian/ FRY officials and in
fact, have already begun to do so.
62. The West must improve its own capacity to
coordinate and administer aid.
Hopefully, some of the lessons learned in Bosnia and Kosovo can be
applied in the Serbian case. A higher
ratio of "untied" aid would be enormously helpful, and donors must
show great flexibility in structuring aid in order to avoid imposing unworkable
models. Donors on both sides of the
Atlantic, nevertheless, should recognise the importance of the EU framework for
reform and integration, and structure aid to advance this process. This clearly gives the EU the leading rôle
in terms of reconstruction and development assistance, but the US presence can
be particularly helpful in areas like private sector and small-business
development. At the same time, the
Stability Pact’s emphasis on advancing regional cooperation should remain a
fundamental priority, particularly as EU membership is far down the road for
most of the countries of the region; undoubtedly tighter regional economic ties
will help foster reconciliation and peace.
Finally, over the medium term, donor funds will be needed to keep
Serbia's people at work. Putting people to work building infrastructure and
providing basic services is a far superior option to keeping people on the
dole. Doing so will help ensure that Serbia's human capital is not degraded by
the emergence of a culture of dependency.
63. Western governments need to work very closely
with FRY authorities seeking to track down funds looted from Yugoslavian
coffers by the previous régime. A
world-wide hunt is underway for millions of dollars smuggled out of the
country, and it is clear that some western institutions were complicit in
laundering this money. The trail has
led investigators to Cyprus, Switzerland, Greece, France, Germany, Italy,
Russia, Great Britain and Liechtenstein among others, and all these countries
should make every effort to locate Yugoslavian money.
64. The
American rôle in returning stability to the Balkans cannot be stressed
enough. Even the intimation of US
disengagement is sufficient to tempt those who would use violence and
intimidation to redraw regional borders.
The American presence has been critical to stemming the tide of violence
in the region and most recently was a factor in the decision to arrest
Milosevic. Continued US engagement will
be a crucial component of Serbia’s full re-integration into the international
community, and the Europeans and Americans must work harder to coordinate their
aid efforts as well as their security strategies for the region as a
whole. The Americans have recently
emphasised assistance in energy matters as a key priority. This seems like a
worthwhile endeavour and the Americans should be encouraged to help Serbia
rebuild its energy infrastructure which has been seriously degraded as a result
of low investment and war.
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