Op-ed

Glimmerings of hope in the ashes of the Yugoslav economy: Tale of two cities – Bank president sees a pointer to a devastated country's revival

The Guardian, 29 December 2000

by Jean Lemierre

During even the frostiest years of the cold war, Yugoslavia stood out among socialist countries as the most advanced in terms of living standards, and the most liberal in terms of market reforms, freedom of movement and political debate.

All of this changed after its break-up. Legitimate economic activity collapsed in the face of wars, international sanctions and state-sponsored criminality. Foreign tourists and investors began to be treated with suspicion, and stayed away.

The victory of Vojislav Kostunica, Yugoslavia's new president, has initiated a welcome reversal of domestic and foreign policy. The choice made by Serbs at the ballot box this week only confirms that a new era of economic reform and international cooperation is in the offing.

At face value, the state of the economy is gloomy. Yugoslavia has a per capita GDP of around £800, only marginally higher than that of Albania. Many full-time workers receive wages of less than £33 a month. Poverty and unemployment are widespread, and foreign debt stands at 140% of GDP.

Yet to take only the economic figures is to miss a significant part of the story. Forced to struggle from one day to the next, people learned to cope with adversity. Many hold down two, even three, jobs, with those completely disenfranchised from the state system turning to small private initiatives that have helped build an informal economy covering as much as 50% of GDP. While state-owned enterprises continue to run up large losses and debts, these privately owned, small enterprises are creating new jobs and generating profit.

Two towns highlight this point dramatically, bankers from the European Bank for Reconstruction and Development have discovered during recent missions to the country. In Kragujevac, south of Belgrade, life revolves around one large state-owned car factory, Zastava, which produces the Yugo. Seventy thousand people once counted on Zastava for work. But production has slowed almost to a standstill, leaving many jobless and local suppliers with no business. Life in Kragujevac is harder still because a large portion of Serbia's 500,000 refugees, victims of four wars in a decade, are housed in the town.

Yet just an hour's drive away is Cacak, where the local economy is based not on heavy industry but a plethora of small and medium-sized enterprises. The town has traditionally been more politically and economically progressive than elsewhere in Yugoslavia, helped largely by being small enough (population 55,000) to avoid the gaze of Belgrade.

During elections in 1996, only seven of 70 locally elected seats went to Milosevic's party. In 1998 the town established its own independent radio and television. Today there are 3,000 local businesses in Cacak.

For years it has been a tale of two cities and, indeed, two economic philosophies - one based on large-scale state-owned industry, the other more laissez faire. Cacak provides an example to the new Yugoslavia. But making sense of the chaotic state of large state-owned enterprises and banks will require painful and radical reforms, which means living standards could get even worse before they get better.

In nearly a decade of helping the ex-communist countries of central and eastern Europe and the former Soviet Union shift to a market economy, the EBRD has learned a few lessons about why some countries have been successful and others less so.

It is clear that from the outset, some countries, like Hungary - and indeed Yugoslavia itself - were more advanced than others. But what counts more are the varied paths they have followed since. Those that started economic reform early have progressed furthest and fastest, suggesting that success will rest on good leadership, sound decision-making and the will of the people.

The most obvious lesson in this is that a credible stabilisation programme is essential if the conditions for sustained long-term growth are to be created. Private investors cannot operate in a climate of high inflation, exchange-rate instability and fiscal irresponsibility.

Such a programme will involve painful choices, but experience shows that the alternative is far worse in the long-term. Staff from the bank who have been on the ground to determine recent progress in Yugoslavia sense that the right direction is being taken. Ownership issues must be clarified early on. No foreign businessman will dare invest in a company or bank where ownership is unclear.

Long-term growth will never occur in the absence of the rule of law. The legal system has to be adapted to the challenges of transition. Finally, the response of the international community must be closely coordinated. It should also be realistic in terms of both implementation and sustainability. An important factor here is the evident goodwill between the international community and the Yugoslav authorities.

Yugoslavia has joined the United Nations and the stability pact, while the European Union and bilateral donors are extending emergency aid to help the country through the winter. Just last week the shareholders of my institution agreed to extend membership to the country. Membership in the International Monetary Fund and other international bodies is imminent. With hard work by the people of the region, as well as by the international community, this part of Europe could achieve stability and rapid economic growth as well.

Jean Lemierre is president of the European Bank for Reconstruction and Development.