ECE/GEN/99/5A
ANNEX
THE CRISIS IN
SOUTH-EASTERN EUROPE: PRE-CONFLICT DEVELOPMENTS
AND POST-CONFLICT
RECONSTRUCTION
The conflict in Yugoslavia is
not only dominating international politics and relations at the
moment, but it has - and will have for some time to come - very
serious and wide-ranging economic implications, especially for
the countries in and around the war zone. One broader effect of
the crisis has been to focus for the first time wide public
attention on the economic situation in the whole south-eastern
part of Europe, a region that has long been neglected in the
mainstream discussions on international economic policy. When
considering the effects of the war on south-eastern Europe, it is
essential to stress that they are falling on countries where the
process of economic and political transformation during the past
decade has proved to be much harder than in central Europe and,
as a result, have fallen further behind the rest of Europe rather
than starting a process of "catching up".
Among the immediate costs of the
conflict is the tragic outflow of refugees from Kosovo; the
burden of caring for them is considerable and is already causing
considerable strains on the economies of The former Yugoslav
Republic of Macedonia and Albania. There is clearly an urgent
need for very rapid action to support the costs of caring for the
refugees, and to compensate for the loss of access to the
Yugoslav and European markets. This is essential to preserve
political stability in the receiving countries. But there is also
an urgent need to consider how to approach the issues of
reconstruction, rehabilitation and economic development when the
conflict has come to an end and a settlement has been reached.
The longer that takes, of course, the greater will be the human
and financial costs of the refugee problem. It is vital, however,
to start thinking of how to approach the problems of the
post-conflict period, despite uncertainty as to when it will
start.
The heavy burden of the past
The deep economic problems that
the transition economies in south-eastern Europe have been facing
since the start of economic and political transformation are
complex and interrelated. The increasing number of transformation
failures, in particular in south-eastern Europe, provides
convincing evidence of the prime importance of a number of
factors for the overall success of the transformation process
which B although not entirely neglected B were generally given inadequate attention in much
of the academic and policy debate in the early phases of
transition. Among these factors B which have seriously impaired the process of
economic transformation in south-eastern Europe B are the obvious locational disadvantages of the
region (in terms of their distance from the most important west
European markets), the highly unfavourable starting conditions
(in terms of inherited economic distortions), and the lack of
historic traditions in institutional development (which has
contributed to a persistent institutional hiatus in these
countries).
The regional economy had already
been destabilized before the conflict by the breakup of the
former SFR of Yugoslavia, and the ensuing conflicts in Croatia
and Bosnia and Herzegovina, and more recently by the escalation
of the Kosovo conflict. The negative side effects of UN sanctions
on Yugoslavia were particularly detrimental for some of the
countries in the region (Albania, Bulgaria, Romania, The former
Yugoslav Republic of Macedonia, for example) and in effect
amounted to a strong external shock that added to an already
severe transformational recession. Military conflicts, political
unrest and general instability in the region have been a strong
deterrent to FDI in the region; the countries of south-eastern
Europe never became an attractive destination for FDI, unlike the
not-so-distant central European transition economies. Regional
trading links, never very strong, have been broken during a
decade of military conflicts and economic sanctions, and there
are now many barriers to their restoration, a factor which adds
to the discentives for significant FDI in the region.
The overall deficiency of
resources (in terms of the available physical and human capital,
domestic savings and investment) appears to have been the main
impediment for recovery and economic stabilization in south-east
Europe. Historically, being located in the periphery of the
continent, the south-east European region has remained largely
underdeveloped. The process of industrialization that took place
during over four decades of communist rule was not soundly based;
investment decisions in that period did not reflect comparative
advantage and expected market returns but rather the arbitrary
preferences of central planners. Once these countries were
exposed to open competitive pressures from world markets, a large
share of the existing capital stock was rendered non-viable as it
had little or no value under market conditions.
The actual experience of reforms
and economic transformation in the south-eastern part of Europe
has been highly problematic. Over the past decade none of the
transition economies in this region has been able to embark on a
path of sustained economic growth. Many of them still face
problems of macroeconomic stabilization; financial and currency
crises have been much too common in the region in recent years.
These persistent failures have raised considerable doubts about
the wisdom of the actual transformation paradigm that has been
pursued in these countries during the last decade. The policy
approach heavily influenced by the "Washington Consensus" presumed that sustainable macroeconomic
stabilization could be easily and rapidly achieved through rapid
liberalization and monetary austerity; it was supposed (at least
implicitly) that this would then pave the way for setting the
economy on a path of high and self-sustained growth, supported
strongly by inflows of private capital from abroad. This paradigm
embodied strong reliance on the automatic operation of the market
mechanism in restructuring the economy, an assumption
incorporated B at least implicitly B in the design of the transition programmes.
This transformation paradigm,
however, has not proved to be very successful in the transition
economies of south-eastern Europe. The reasons are much too
complex to be spelled out in a short note, but basically they are
related to the factors outlined above: the locational
disadvantage of the region, their highly unfavourable starting
conditions, and the lack of strong traditions in institutional
development. In some cases, the fast liberalization and opening
of the economies turned out to be premature and detrimental as
these economies were totally unprepared to cope with the external
shocks. The scale and speed of the external shocks greatly
exceeded the possible rate at which internal economic
restructuring and re-allocation of capital and labour could be
achieved in these economies, and this resulted in an unwelcome
rate of destruction of productive assets and much higher levels
of unemployment than were necessary. Over the years, the UN/ECE
secretariat has been advocating the adoption of alternative
approaches and strategies of reform, especially as regards the
region of south-eastern Europe, with much greater emphasis on the
building and the development of institutions and market
infrastructures, and it has persistently advocated a much higher
level of external support for these economies.
The shock waves of the
conflict in Yugoslavia on neighbouring countries
The outbreak of the conflict in
Yugoslavia has added a new dimension to the already unfavourable
external environment for many transition economies, worsening
further their short-term economic outlook. The conflict-related
economic damage already incurred is quite substantial.
Neighbouring countries (Albania, Bosnia and Herzegovina,
Bulgaria, Croatia, Hungary, Romania, The former Yugoslav Republic
of Macedonia) have lost important markets as well as traditional
suppliers in Yugoslavia. The transport links to and from the
south-eastern part of Europe have been severely impaired:
navigation along the Danube has been paralyzed by the destroyed
bridges and all traffic through Yugoslavia (ground, rail and air)
has been brought to a halt. The negative effects are especially
strong for international trade between western Europe, the main
trading partner, and the countries locked in the Balkan region
(in particular Bulgaria, Romania and The former Yugoslav Republic
of Macedonia): as the available alternative routes are of limited
capacity, this has resulted in the direct destruction of
important trade flows. In addition, the loss of the Danube as a
waterway will have a pan-European negative impact as it is
causing costly interruptions in shipments for all the riparian
countries. The conflict has undoubtedly increased investors'
perception of risk in the whole area surrounding the zone of the
conflict and this will restrain access to international financial
markets and raise borrowing costs for the affected countries,
which in general are badly in need of fresh finance. The inflow
of FDI to this region B an important force for economic restructuring as
well as balance of payments support B is also likely to be curbed. The fact is that the
conflict will have a significant negative economic impact on all
the countries in south-east Europe, most of which were already in
a precarious economic state.
Quantitative estimates of the "costs" or of the "incurred damage" for any individual affected country must
necessarily be largely guesswork due to the lack of precise
information as well as unresolved methodological difficulties.
However, it is useful to mention some of the transmission
channels through which the conflict affects the neighbouring
countries. The principal ones are: the cost of supporting
refugees in the host countries, direct loss of exports and
imports as a result of the disruption of transport routes;
increased costs/prices of exports and imports (and, indirectly,
further losses due to the deterioration in competitiveness) as a
result of re-routing through alternative and more costly
transport routes; lower fiscal revenue due to foregone export
revenue and lower imports (hence lower duty and other customs
receipts); reduced income from tourism (both foreign exchange
earnings and fiscal revenue); smaller inflow of FDI due to
perceptions of increased risk by foreign investors; and higher
borrowing costs on international financial markets. The combined
effect of all these negative factors has already had a serious
macroeconomic impact comprising a severe balance of payments
shock, a loss of aggregate output, increased unemployment, and a
deterioration in the fiscal balance and without assistance this
will be more severe the longer the conflict lasts.
The countries which have
received most of the refugees, The former Yugoslav Republic of
Macedonia and Albania, two of the poorest countries in Europe,
are bearing a considerable cost in supporting them, perhaps of
the order of $0.5-$1.5 million a day. In addition their trade
with Europe, most of the total, is disrupted. Their need for
speedy assistance is considerable.
Although the precise measurement
of the conflict-related economic damage is necessarily uncertain
at this stage, it is still useful to quote some of the estimates
prepared by official government agencies in some of the other
affected countries. Bulgaria estimates its direct export losses
due to the conflict at $1.0-1.5 million a day; thus two months of
conflict would result in the loss of some 2.5 per cent of its
annual exports and if the conflict continues until the end of the
year the loss would be some 7 per cent of total exports. In
addition Bulgaria expects that it will attract no more than one
half of the $1 billion of FDI that was expected in 1998, which
will create additional serious problems for financing the
country's balance of payments. Romania estimates that it might
lose some 15 per cent of its exports to Hungary, Austria and
Germany (that is, more than 3 per cent of its total exports) as a
result of the conflict. According to high level Romanian
government officials, the first month alone of the Kosovo
conflict has resulted in total economic damage to Romania
amounting to $730 million. Ukraine claims that its direct
daily losses due to the conflict amount to $300 thousand.
The losses of the Slovenian tourism industry might be as high as
30 per cent of the total tourism-related revenue (that is,
more than $300 million), tourism in Croatia, and, indeed,
throughout the region is likely to be badly affected this summer.
The spillover costs of the
conflict are equivalent to another external shock for the
affected countries which will be the stronger, the nearer they
are to the conflict zone and the longer the conflict lasts. As
all the south-east European transition economies were already in
a very precarious state before the conflict, due to their grave
domestic problems, they are extremely vulnerable to any
additional external disturbances. There is therefore a
considerable risk that unless timely and comprehensive measures
(supported by adequate resources) are taken by the international
community to offset the negative impact of the Kosovo conflict,
some of these economies will soon be facing a new round of severe
economic crises.
Recovery in south-east Europe
(i) The place of
Yugoslavia
The rapid growth of economic
damage and the grave economic implications of the Kosovo conflict
for the whole of south-eastern Europe demand an urgent response
by the international community. It is becoming increasingly
evident (and this opinion seems to be shared by a growing number
of experts) that a new approach, different from those applied in
the past, is needed to address these problems. And it is
important to emphasize that we are not speaking of simply
providing assistance or rebuilding the assets and infrastructure
destroyed in the course of the conflict or of trying to re-start
economic transformation using the old paradigms. A key element of
such a new approach must be to find ways and means to revitalize
and rehabilitate a large European region, encompassing several
sovereign states; it must include a comprehensive programme of
economic measures that would allow these countries to embark on a
path of macroeconomic stability and sustained economic growth and
to ensure its eventual re-integration into the wider European
economy.
Yugoslavia occupies a special
position in the context of the south-eastern region of Europe.
Being one of the relatively large economies and strategically
located on the main routes to western Europe, it was both an
important market for neighbouring countries and an important
transit country. As such it will be central to plans for reviving
economies in the region when the conflict is over and a
settlement reached.
Until the conflict is brought to
an end we shall not be able to assess with any accuracy its
consequences for the economy of Yugoslavia, but it seems
quite safe to say that it will be in a disastrous state. The
final extent of the damage will depend on the length of the
conflict and the prospects for repairing it will depend on how
long it will take for a peace settlement to be reached. The task
of rebuilding the economic infrastructure will be considerable
and will run into tens of billions of dollars. And it will also
require considerable amounts of official assistance to get
the process started - until a settlement is reached over Kosovo
and security restored to the region as a whole there is unlikely
to be any significant inflow of private capital from abroad.
It is important to stress that
the Yugoslav economy has been in a parlous state for a long time.
Following the second oil shock in 1979 the economy was virtually
stagnant for most of the 1980s; it then suffered from the
break-up of the former SFR of Yugoslavia, leading to the loss of
markets, economies of scale, etc., and then from four years of
conflict and international sanctions. After the Dayton Accord of
November 1995, little progress was made in restructuring the
economy and pushing forward the process of transition to a market
economy. The process of economic and political transformation (as
was under way, at varying rates, in most of the other transition
economies) never got started in Yugoslavia. The persistence of
military conflict and external economic sanctions were used by
the authorities as a pretext to maintain a strong administrative
grip over the economy which became even stronger during periods
of open conflict. Over the past decade, this has perpetuated a
very specific economic regime in Yugoslavia, predominantly based
on the unreformed, "self-governed" firms (which, however, remained closely
controlled by the authorities through political nomination of the
management) and unreformed state institutions which functioned in
a manner that was somewhat similar to a conflict economy. Thus,
despite mimicking some reforms (such as partial privatization),
Yugoslavia has basically remained a non-starter in economic and
political transformation.
The Yugoslav economy will
therefore be facing several sets of complex problems when a
settlement is finally reached. First, will be the
reconstruction of the physical capital stock and infrastructure.
This will be a major task and will have to be sequenced over an
appropriate time period, starting with emergency measures to
restore basic services and then perhaps giving priority to the
repair of the transport system, including clearance of the
obstacles to traffic on the Danube. Secondly, economic
activity has to be switched from conflict time to peacetime
objectives; and thirdly, in parallel, the transition
process will have to get under way, almost certainly with the
transformation of the old self-management system into a
private-property based market economy if foreign capital is to be
attracted into the country. Fourthly, progress with
reconstruction and reform will also depend on a reasonable degree
of macroeconomic stability being maintained and, especially, on
avoiding the risk of a severe inflation arising from the
bottlenecks that will be inevitable in the short run. It is
difficult to see how these problems can be tackled effectively,
and within a reasonable time so as to preserve social stability,
without a major programme of assistance from abroad, namely, from
the European Union and other members of the NATO alliance.
(ii) A programme for all the neighbouring countries
It is at this point where
suggestions of a Marshall Plan are usually made. Unfortunately,
such suggestions are often made as though the Marshall Plan was
simply a synonym for providing large amounts of financial
assistance to solve large problems, preferably on the generous
terms provided to Western Europe by the United States in
1948. Financial assistance is important - and the
reconstruction of Yugoslavia and the rehabilitation of south east
Europe in general will require large amounts of it; but the ECE
secretariat has long emphasized a number of features of the
Marshall Plan which make a similar approach appropriate for the
transition economies, and especially those of south east Europe:
First: the
programme must be set in a realistic time frame, i.e.
assistance must be maintained long enough to provide a
high probability of success - "Le succès de la plupart des choses
dépend de l'appréciation exacte du temps qu'il faudra
pour les réussir" (Montesquieu);
Two: assistance
should be provided in the framework of national
programmes for recovery and reconstruction, containing
targets for the main economic variables and for
institutional changes, together with an account of how
each government proposes to achieve its objectives;
Three: These
programmes should be drawn up by the relevant national
policy makers and should take into account national
sensibilities, values, and history rather than be driven
by a standard international model, "one policy fitting all";
Four: The various
national programmes should be peer reviewed in a regional
organization, to avoid inconsistencies, to encourage
cooperation among the participating countries, and to
provide a regional perspective to the provision of
assistance;
Five: The
continued release of funds should be conditional on
intermediate targets being met - the removal of such
programmes from the traditional Bretton Woods framework
does not imply a release from conditionality;
Six: Assistance
needs to be delivered promptly at the start of the
programme in order to create a momentum for change and
create positive expectations for the recovery of output
and fixed investment.
The stress on the Marshall Plan
model as a regional and cooperative programme is highly relevant
to the condition of south eastern Europe today. Regional
cooperation is generally very weak in the Balkan and Danubian
countries. This is not just a result of the violent break-up of
the SFR Yugoslavia: it is of long-standing and reflects the
region's relative economic backwardness, the weak trade and other
economic links among the countries of the region, and their
political marginalization from the main currents of post-conflict
integration in western Europe, a marginalization which if
anything has increased in the 1990s. Although most countries in
the region are seeking to strengthen their ties with the EU and
NATO, increased regional cooperation could nevertheless prove
essential for helping to boost the economic recovery of the
countries in the region and to improve their general security not
only from armed conflict but also from the risks of crime
(especially drugs and arms trafficking), illegal immigration,
transboundary environmental threats and so on. Cross-border
cooperation in opening borders and improving regional transport
infrastructures can, in a context of increasing confidence about
economic recovery, help to significantly lower tension in the
region.
In this framework it is
important to stress that Yugoslavia will be of central importance
for any improvement in the regional economy. The size of its
economy alone and the fact that most of the principal transport
routes of the region pass through Yugoslavia mean that most of
the region's problems are unlikely to be solved without its
cooperation.
The South East European
Cooperation Initiative (SECI) is a step forward in the process of
building a framework for regional cooperation. It has already
shown tangible results in harmonizing and simplifying procedures
related to border crossing and demonstrated the capacity and the
will of the participating states to address collectively problems
of common interest. Launched by the United States, it has now
received the support of the EU and the Russian Federation, which
makes it a potentially useful tool for developing a much bigger
programme for the post-conflict task of political and economic
reconstruction and development in the region: this will require,
as suggested above, large amounts of financial assistance, but
also a major and long-term political commitment by the major
donors to the region over many years.
One conclusion that should also
be drawn, however, both from the experience of the Marshall Plan
and from the transition process in south east Europe since 1989,
is that there are no easy answers and no short cuts. The
experience of Bosnia and Herzegovina since the Dayton agreement
is also a reminder that although the military parts of a
settlement can be agreed fairly quickly, economic reconstruction,
even when funds are provided, can be an extremely slow process if
the various parties are unwilling to cooperate. Nevertheless, in
other circumstances, generous assistance can improve the chances
of greater cooperation simply by increasing the opportunity cost
of non-cooperation.
A final lesson I would draw here
from the Marshall Plan is for the potential donor countries of
western Europe: essentially it represented an intelligent and
far-sighted appraisal of what was required to ensure long-term
economic and political stability in western Europe - and, as it
turned out, the intelligent pursuit of self-interest proved to be
compatible with generosity towards the less fortunate and more
vulnerable. West European leaders will need to demonstrate a
similar degree of farsightedness and commitment when eventually
the bombs stop falling and the guns fall silent in Yugoslavia. If
they do not, economic backwardness and stagnation in south
eastern Europe will simply preserve an environment in which
threats to the security of Europe as a whole will continue to
arise.