Late last year, as US and World Bank officials were negotiating the details of a $17 million aid programme for Bosnian Serbs, they were given an unnegotiable demand, the officials say. Bosnian Serb authorities linked to former leader Radovan Karadzic, who has been charged with war crimes, insisted that unless areas they controlled received 15 percent of the money, they would block the whole deal. With the Bosnian Serb member of the three-person Bosnian presidency threatening to veto the aid plan, they got what they wanted and the deal went through. It became another chunk of the increasing flow of loans and grants to the part of Bosnia where the authorities are seen as implacable opponents of Western policy.

As the American government throws its weight behind a new group of Bosnian Serb politicians it says are more cooperative, Western governments are preparing to spend some $130 million on new aid projects in Bosnian Serb areas. Diplomats in Bosnia and human-rights monitors in Washington say they fear that some of the aid will strengthen leaders who oppose Western efforts to promote peace and ethnic tolerance or, through lax auditing, make those leaders richer.

The situation sharpens a dilemma long present in Western policy in Bosnia: the conflict between principle and practicality þ whether aid should go to hard-core nationalists, even criminals, in the hope of enticing them to become more moderate, or merely as the unfortunate price of carrying out broader goals. Following the US lead, the West leapt to give financial support to Kradzic's successor, Biljana PlavÐic, after she split with other nationalist politicians. American diplomats call the new Bosnian Serb president a moderate, though they acknowledge that her actions fall short of her promises to back Western efforts to carry out the peace accord that ended the Bosnian war two years ago.

That a lot of the aid goes to authorities who routinely renege on commitments is acceptable for now, in the view of the administrator of the United States Agency for International Development, Brian Atwood. Money is a tool for gaining influence and encouraging political change, he said. 'If we're too rigid on the terms, we'd never move any money,' he said. 'You do the best you can, but it does no good to be so rigid you basically don't engage.' 'Moral absolutism will not get us very far in Bosnia policy,' said a senior American official who is helping shape that policy. He said that in the last few months some Bosnian Serb leaders had become less difficult to deal with because thÌÌÌÌÌÌÌÌÌÌÌÌÔ ey want Western aid.

In this small town, Sokolac, an agricultural centre in mountains dabbed with sheep herds and rustic cottages that Bosnians consider the heartland of Serbian nationalism, local leaders are pleased to have been selected for a $750,000 World Bank loan to remake the water system. They cannot explain, though, how they met the criteria for the loan. They say the water system is not below the level needed to satisfy basic human needs or protect the health of its 12,000 customers. Nor is it insufficient to supply water for initial economic recovery. Only a leap in the town's growth would substantially tax the system. 'We're hoping to have 30,000 people living here in a few years,' said Mitar Odvic, the water-system manager. 'Considering that, what we have now is not adequate.'

In Sokolac, the small group of Bosnian Serb men who control almost all government, business and daily life have defied pressure to share power or allow thousands of refugees from other ethnic groups to return home. In the benefits they will get from the World Bank loan, and in their opposition to the peace accord, they are typical of many authorities to whom financial aid is being directed.

Officials of Western assistance programmes say money is always precisely targeted and scrupulously monitored: it is supposed to be for urgent needs, and only for areas where local authorities can be trusted to unify and stabilize the country by doing what was promised in the peace accord. That accord recognized a Bosnian Serb Republic and a Bosnian-Croat Federation in Bosnia; two important elements of it that are nearly universally ignored in the Serb Republic are the arrest of war-crimes suspects and the return of refugees.

But many experts say that without aid the Serb-controlled region of Bosnia will remain an economic wilderness, dragging down the rest of Bosnia. 'Their part of the country cannot make it back with the previous level of assistance,' said Rory O'Sullivan, head of the World Bank mission in Bosnia. 'If half of the country is dead economically, the whole country cannot survive.'

Criticism of the aid programmes comes from the belief that much of the money is going to the worst Bosnian Serb leaders, either through oversight, or so that they will not obstruct the aid that might help moderate leaders. 'There is always the temptation to push out money to get economic results,' said Nina Bang-Jensen of the Coalition for International Justice, a non-profit organization based in Washington. 'But economic results on a corrupt foundation will fail,' she said. 'You have to support the right people.'

In the US Congress there is also concern that foreign-aid money in Bosnia may not be achieving American goals as well as it should. Thirteen law-makers wrote Secretary of State Madeleine Albright asking her not to approve the World Bank loans. One of them, Sen. Frank Lautenberg, Dem., NJ, said in a telephone interview that Congress sees little payoff for the money being spent. 'They'd better start showing results soon,' he said. 'There's not a lot of patience around here.'

In the last two years, even as foreign diplomats condemned Bosnian Serb authorities for their refusal to carry out essential tenets of the 1995 peace agreement, the World Bank lent about $15 million and the European Union donated about $80 million for projects in the area those authorities controlled. The US Agency for International Development provided $19 million in loans and grants, most of it for economic development, to the same area.

With the formation recently of a new Serb Republic government that foreign diplomats say will be more amenable to the peace agreement, Western officials want to distribute much more money. The United States alone expects to contribute about $5 million dollars a month. (There are no exact figures, but estimates are that about 900,000 people live in the Serb Republic.) New World Bank loans were approved by the United States in December. Congressional criticÌÌÌÌÌÌÌÌÌÌÌÌÔ s objected, but Albright issued a waiver to legislative restrictions on giving aid where authorities have not done enough to arrest suspected war criminals. Most of the more than 50 people under indictment on charges of war crimes are thought to be living in the Serb Republic.

World Bank officials, like officials of other Western aid programmes, said their projects were approved after careful research, and with the towns ranked according to need. Even so, 15 percent of the World Bank money went to towns like Sokolac, in the eastern part of the Serb Republic, where many officials are under the sway of Karadzic, who is considered a principal barrier to peaceful reunification of the country. The loans had to be endorsed by the three-person Bosnian presidency, where the Bosnian Serb representative threatened to block all loans unless communities in the eastern part of the Serb Republic got a share, according to Western officials. 'It is necessary to include a portion of the aid to the eastern Serb Republic because of the veto Karadzic has over the entire process,' said a senior American official. 'That's the way business gets done,' said a State Department spokesman, speaking on condition of anonymity.

Foreign consultants to the World Bank who oversaw the research into which towns qualified for assistance say most of the data were collected by local officials who work for the same hard-line politicians the West is trying to marginalize. All the towns receiving American, World Bank or European Union money were reviewed by the office of the chief Western monitor in Bosnia, to ensure the aid would help only communities where there is a reasonable hope that officials may become cooperative. But in Sokolac, international refugee officials said not a single Muslim or Croat refugee has returned, nor did they expect local political leaders would allow any to return soon.

In the town of Bijeljina, also to benefit from the new batch of World Bank loans, American soldiers recently detained a well-known war-crimes suspect who had been living there openly þ his friends say under the protection of local officials. Another Bosnian Serb-controlled town, FoÑa, cleared to get World Bank money, was dropped in late December after human-rights groups in Washington pointed out to the State Department that officials in FoÑa are thought to be harbouring several men indicted on charges of war crimes.

For US assistance in the Serb Republic in the last two years, nearly every project required a memorandum of understanding in which local authorities agreed to follow the peace accords by allowing refugees to return and arresting war-crimes suspects. But Bosnian Serb authorities have arrested no war-crimes suspects. Of the 560,000 Muslims and Croats expelled by Bosnian Serbs during the war, only about 3,000 have been allowed to return, according to the United Nations.

Senior American diplomats, including Albright, insist they will support only Bosnian Serb political leaders who support the peace accords. But American aid officials say they don't have the staff to monitor compliance when it comes to loans and grants. A senior US aid official conceded American funds in Bosnia could easily go to companies controlled by opponents of American policy. Often, said the official, the money is disbursed without a close check on the company. 'It's a concern,' the official said. 'We don't have resources to look at the bona fides of every company.'

This article was first published in The New York Times, 17 February 1998