Yugoslavia: An Economy Back from the Dead

Yugoslavia's reform drive produces a tentative recovery

The anniversary received short shrift in the wake of the September 11 attack on the World Trade Center. But it's an important moment nonetheless--the passage of a full year since Slobodan Milosevic was ousted from power in Yugoslavia. Now, instead of plotting another savage little war, Slobo sits behind bars in the Netherlands awaiting trial before an international war crimes tribunal. The threat of civil conflict between Serbia and Montenegro--what's left of the Yugoslav Federation--has evaporated. A democratically elected government in Belgrade is mending ties with the West, pushing through painful free-market reforms, and wooing foreign investors.

Twelve months after mass protests catapulted Vojislav Kostunica to the presidency of the Yugoslav Federation, the war-torn economy is starting to function again. Price controls on everything from bread to electricity have been scrapped. The tax code has been streamlined and rates cut in a bid to improve collection. And a new foreign investment law is in the works. "When you watch from afar, the news still looks bad. But once you're here, you can see how incredibly fast they're moving," says Peter Their, a spokesman for Bank of Austria, which expects to open a new subsidiary in Belgrade this month.

PAIN AND GAIN. Much of the credit goes to the team of young technocrats fielded by Zoran Djindjic, the 49-year-old Prime Minister of Serbia. Under their tutelage, Yugoslavia's $8.2 billion economy is expected to post growth of at least 5% this year. That's only half last year's rate but a considerable improvement on the 19% contraction the country endured in 1999. Manufacturing is still in the doldrums, but agriculture, construction, and transportation are showing signs of life. Pessimism still dominates on the streets, where higher prices are the main sign of reforms. But a few are hopeful. "In a couple of years, I think there will be more jobs, especially for young people," says Zoran Krstic, 30, an economist who runs a shoe shop in Belgrade.

Privatization is a key ingredient in the new administration's recipe for recovery. Starting this month, as many as 70 state-owned companies, in sectors ranging from chemicals to automotive to food processing, will go up for sale. Privatization revenues won't be huge: Foreign investment is expected to reach only $600 million in 2002. The real goal is to attract buyers who will invest further in modernizing industry. That's crucial if the country is to wean itself off nearly $1 billion a year in aid.

Several multinationals already are scouting for opportunities. Goodyear is kicking the tires at a factory northwest of Belgrade. French construction giant LaFarge will likely bid for the biggest cement plant, and Belgium's Interbrew is sizing up large brewers. In time, Yugoslavia should also attract the same type of high-tech and electronics manufacturing that has sought out cheap but well-educated labor in Hungary and Poland.

The welcome mat is definitely out. But newcomers should tread carefully, since this is still only half a success story. It will take more than a year to erase the scars left by a decade of war, sanctions, and corruption. Industrial output fell by nearly 3% in the first seven months of the year, a casualty of aging plants and too little investment. Another big problem is Yugoslavia's $12.2 billion foreign debt, equal to 450% of annual exports. The government is now trying to persuade its largest creditors to knock some $4 billion off that figure.

The political scene is just as fragile as the economy. Kostunica's cautious governing style clashes with Djindjic's drive for bold, even rash, action. Their rivalry has begun to slow key legislation. "We're trying to stress the point that this reform process has to go ahead. They can't squander time," says U.S. Ambassador William Montgomery. But with their respective parties set to clash in federal and Serbian parliamentary elections likely to take place next year, it's hard to see relations between the two men warming up any time soon.

As the world economy slows and Western efforts are focused on stamping out terrorism, Yugoslavs also worry that their country will draw less attention and aid. "We are just not as high on the agenda of Western countries anymore," laments one Yugoslav official. Without enough assistance from U.S. and European governments, the recovery could well founder. The worst thing that could happen now is for this nation-under-repair to be forgotten.

By Christopher Condon in Belgrade

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