bosnia report
New Series No: 21/22 January - May 2001
Economic overview of the Former-Yugoslav successor states
by Igor Mekina, Igor Lasic, Drazen Simic and Branko Peric, Branka Nanevska, Drago Brdar, Zoran Radulovic


Slovenia - Igor Mekina

At the time of independence, basically two models of privatization were proposed: one by Jeffrey Sachs, who had advised Yugoslav Federal prime minister Ante Markovic;, the other by a Slovene team headed by Joze Mencinger. The former, relying on the concept of self-management, advocated a distribution of vouchers to employees, who would thus become transitional owners. The latter advocated a radical break with it. The privatization law eventually adopted offered a three-way approach depending on the size of the firms involved, which were classified as small, medium and large. The value of each firm was assessed by independent bodies and its managers were authorized to decide on the type of privatization. All Slovene adult citizens were then given vouchers, which depending on their age varied in value between DM 2,000 and 4,000. They were free to choose the firm in which they would invest them. The majority of small firms were bought by their employees, while most of the big ones acquired scattered shareholders. The more profitable firms were over-subscribed. Some shareholders proved lucky, others not. By the end of the process it had become clear that too many vouchers had been issued, i.e. that there was not enough property on offer in which they could be invested. Many citizens deposited their vouchers in new state, para-state or private investment funds. At present only half of the firms have been privatized. The state has been left with large and unprofitable firms. Privatization of state banks and insurance firms is scheduled for 2001. Also, about half of the property that was nationalized has been returned to its owners. Socially owned apartments were sold at relatively low prices at the end of 1992.

Slovenia is considered to be one of the least corrupt countries in Europe.


Croatia - Igor Lasic

The growth of unemployment is due mainly to reduction of the productive sector. Some of this was due to loss of markets: in 1991 the domestic market was restricted to two thirds of Croatian territory; the borders with Serbia, Bosnia and Montenegro were closed, at the same time as a black market in oil and arms flourished; and certain valuable industries located in the war zone were destroyed. Defence also consumed a large part of the state income. But the effects of the war were in the long run not so damaging as the HDZ s policies in government. It began by a purge of existing managers: only those who promised to be obedient survived. All social property was declared state property and passed to the control of first the Agency for Privatization, then the Ministry for Privatization and finally the Croatian Fund for Privatization (HFP) - which had full freedom of action. The workers, depending on their length of service, were given the possibility of acquiring shares in their enterprises - up to DM 20,000 - on the basis of state-issued loans repayable within five years. Some firms became the property of the Pension and Invalid Fund (MIO), while others were acquired by state banks. This was the first step towards a general plunder of state assets.

600,000 shareholders eventually emerged, keen to secure their jobs, but with little knowledge of how to run firms on the new basis. Simultaneously a number of shady businessmen appeared, who began to buy the shares held by HFP and MIO and later also those held by the state banks, which proved to be simply agencies for distributing property to individuals close to the regime. The whole process of acquisition of shares has remained shrouded in mystery. In the meantime the managers of former socially owned firms offered for privatization worked hard to make them insolvent, while at the same time re-directing their business to new privately-owned firms. This resulted in their collapse and their workers becoming unemployed.

The last phase of privatization involved the new tycoons buying up the shares held by small shareholders. Their firms were visited by various individuals who offered to buy up the workers shares at a fraction of their nominal values. The shares of the Varazdin textile giant Varteks, for example, were bought at 0.75 of their nominal value. Varteks was acquired by one Josip Gucic, now sought by Interpol: the value of the cloth on its premises alone was greater than what he had paid for the shares to the Varteks employees. The workers were ready to sell, partly because they were frightened by the collapse of their firms, but also because they were told that those not willing to sell would soon be dismissed by the new owners. In this way, within a few years, three quarters of these shares were bought up. The new tycoons had no problems with the financial police or any similar bodies. In many cases, as was later revealed, they did not even have to own majority shares in order to take over firms - it was enough to enjoy the ruling party s support. Once they had squeezed as much as they could from these firms, so that they came close to bankruptcy, the new owners returned them to state care. Some have since been arrested, but the majority are likely to escape punishment.

The state, nevertheless, has retained some 70% of what was previously socially owned in terms of value. Only 30% of the public communications system, for example, has been sold. The banks have been sold mainly to Italian and Austrian firms. Foreign capital has entered Croatia mainly by way of the banks and trade, with a only a few firms risking investment in industry. Private investment funds were established under the pressure of the World Bank, but they have been given only insolvent firms to deal with.



Bosnia-Herzegovina - Drazen Simic and Branko Peric

Here we have two practically separate economic systems, as a result of which there are no reliable statistical indicators for assessing the economic performance of the country as a whole or for comparing the performance of the economy in the two entities. We do not even know how many people actually live today in Bosnia-Herzegovina. It is estimated that some 2.5 million live in the Federation and about 1.4 million in Republika Srpska.

It is worth mentioning the fact that in 1991, before the start of the war, B-H was the only Yugoslav republic with a positive trade balance (with $2.1 billion of exports as against $1.6 of imports). In 1999, by contrast, the Federation imported almost five times as much as it exported ($2.4 billion as opposed to $518 million). In 1991 the gross national product per capita in B-H was $1.872; eight years later it was $1.126 in the Federation, where the level of unemployment is currently estimated at 39%. According to the World Bank, direct war damage amounts to $15-20 billion, but there is also indirect damage represented by loss of markets in the former Soviet Union, the Middle East and Asia.

Industrial growth in the Federation is declining: 87.6% in 1996, 35.7% in 1997, 23.8% in 1998 and 10.6% in 1999, with an estimated 10% for 2000. Five years after Dayton industrial production has reached 38.7% of the pre-war level. Current unemployment in the Federation is estimated at 39% or 264,000 people, while 421,000 are officially employed. The average salary is DM 426 and average pension DM 177.

The infrastructure - roads, bridges, electrical transmission, power plants, schools and hospitals - have been largely restored, but B-H still lacks a self-sustaining economy. The time of donations is gone, while direct investment is lacking. During the past five years only $400 million has come in the form of direct investment. The standard explanation is that privatization is late: the process of privatization in both entities began only last October. Half the state-owned firms were earmarked for privatization in the Federation. The value of state-owned capital in the Federation is estimated at DM 17 billion, and the idea is that by the end of 2001 half of them will end up in private hands. Following a start full of irregularities, at the insistence of the international community the 86 most attractive firms have been set aside for sale by international tender, with ready money as the only form of payment. Privatization has been used by the state to redeem its debt to pensioners, war veterans and old savers. These citizens have been allocated around DM 15.6 billion, with which they can directly buy company shares or invest in Private Investment Funds. Given the poor response to the invitation of the PIFs to invest in their certificates, it remains open to question whether ordinary people will participate in the privatization process. The most likely reason for this abstention is the complete lack of trust in the value of  papers distributed by the state , including privatization vouchers.

Only a small part of the enterprises have been sold thus far, so that the state remains the dominant capital owner especially in the case of industry. Sale of flats is faring better. The problem here, however, is that thousands of those who left their homes during the war are now trying to reclaim them. Since the law says that an individual must have lived in his or her apartment for at least two years before acquiring the right to purchase it, privatization of the apartments previously owned by the state will last several more years.

As for the privatization of state banks, this is at the beginning, although the dates set for this passed by long ago. According to law, by 1 June 2001 all state-owned capital deposited in the banks must be sold, but it is doubtful that this date will be met. The state has managed thus far to get rid of only those banks that were majority privately owned. The attractiveness of state banks is expected to increase following the closure of the Fund for Payment Transactions (former Bureau of Social Accountancy) on 1 January 2001, when internal monetary transactions became the domain of commercial banks. At the start of January it is also expected that a Sarajevo stock exchange will begin to operate [since postponed to late 2001], on which the shares of privatized firms could be exchanged. There is at present a semi-legal traffic in privatization vouchers, which can be sold or donated. They are at present sold at 3% of their nominal value, giving plenty of opportunities to various sharks and new tycoons to gain state property for symbolic sums of money.

Foreign investors are prevented from participating in privatization by the problem of so-called restitution [of property nationalized under Communism] - i.e. a potential buyer is faced with the possibility that the firm he has bought belongs in fact to someone else. During the past three years there have been several attempts to bring in a law on restitution of property. The former owners, especially the religious communities, insist that it be returned, while current owners prefer the idea that the former owners be reimbursed by the state. Since the Federation has no money for such payments, it is likely that the law on restitution will not be brought in soon.

The local government has finally admitted, under pressure from the international community, that corruption does indeed exist in B-H and is getting worse. The presence of widespread corruption has been one, albeit not the only, complaint of potential foreign investors. The year 2001 could easily be the year of Bosnia s total economic collapse, or at best stagnation of its economy. Experts are talking of maximum industrial growth of 10% and an almost certain rise in unemployment. The Federation will be spared inflationary pressure, however, above all by the Central Bank s modus operandi as a  currency board ; inflation will thus be only 3-4%. Average wages will perhaps be kept at their present level, but pensions will decline. This is due to the new rule according to which pension funds can distribute only the money that is collected during the relevant month from taxes paid by the legally employed. Due to widespread  grey employment and the small number of new jobs, the income from this source will be too small to maintain pensions at their present level. The only comfort will be the fact that pensions will henceforth be regularly paid.

As for Republika Srpska, it was established at the donors conference held in December 1995 that out of $5.1 allocated for the reconstruction of B-H, $1.4 million would be invested in RS. Five conferences have been held thus far to collected this amount, but since RS did not take part in the first three only small amounts were received during this period. More significant sums - though only a small part of the sum promised - started to arrive in 1998, most of which were spent on infrastructure. According to official figures, 240,000 have jobs while 145,000 are unemployed. The average salary is DM 290 and the average pension DM 90. Corruption and business fraud are very widespread, given the absence of laws that would prevent them.

The privatization of state property is now entering its last stage. According to the director of the Office for Privatization, the ten existing PIFs have received 36% of 53 million printed vouchers, and by the end of the prescribed period this will reach 40%. Parallel to this a sale of state capital in 52 strategic enterprises is also proceeding. Up to now 67 firms owning capital of value up to DM 300,000 and 15 firms above that value have been privatized. Many of the state banks derive from the former Economic Bank of Sarajevo, while Kristal Bank, the largest bank in RS, was previously part of Belgrade s Jugobanka. According to figures issued by the Ministry of Finance, the RS government has approved a programme for the privatization of banks that are solvent and dispose of DM 5 million. It is expected that economic growth in RS will decline in 2001.


Macedonia - Branka Nanevska

Macedonia has conducted privatization on an ad hoc basis. Vouchers were distributed for little or no money; capital soon found its way into private pockets, while the state was left penniless. 95% of industrial, commercial and mining firms were privatized by the middle of 1998 and the last stage is now nearing an end. The state earned DM 54 million in 1993-8 in this way and another DM 34 million in the last six months of 2000. According to the opposition, a good number of these enterprises were acquired by members or supporters of the ruling coalition. Corruption in Macedonia is extensive.

Serbia - Drago Brdar

According to the experts, Serbia s social product has been more than halved since 1990. In addition to its 10,683 million inhabitants (without Kosovo), Serbia according to official figures is currently home to some 600,000 refugees from Croatia and Bosnia and another 230,000 from Kosovo. In the course of the 1990s production in some industrial branches has fallen to a few per cent of the value achieved in 1989, and to one third in the industrial sector of the economy taken as a whole, so that one can talk of a de-industrialization. There has been no real privatization.

Unemployment is 25% or 760,000 people, placing Serbia immediately after Bosnia and Macedonia. The unemployment is in fact greater, since many people registered as employed are in fact on permanent paid leave. The true unemployment rate is, therefore, estimated at 30-40%. The average monthly wage in 2000 was DM 108. Due to widespread  grey employment, however, a family s monthly income is estimated at 2.5 times greater than the average wage.

Privatization has gone through various phases, ending up as a non-obligatory process. At present 400 out of approximately 7,000 firms have been sold off. Some local economists have argued that the sale of all these enterprises could not bring more than $6 billion - at a time when Serbia s foreign debt is estimated at $13.3 billion. The banking sector is organized on the basis of shareholding, but the shareholders are the old socially owned firms which remain to be privatized. According to recent analysis by foreign experts, only 8 out of 80 banks currently operating in Serbia fulfill the necessary legal conditions. There is no market in capital or money, trade on the Belgrade stock exchange being conducted mainly in promissory notes. Serbia is at present judged the most corrupt country in Europe.


Montenegro - Zoran Radulovic

De-nationalization in Montenegro has thus far been limited to non-cultivated village land. The necessary law remains to be approved by the national assembly. At the start of the 1990s the former social property was proclaimed state property. The government and three state bodies - the Development Fund, the Employment Fund and the Pension Fund - acquired responsibility for running the economy. The workers and pensioners acquired the right to buy minority shares in the firms in which they worked or had worked, but the necessary vouchers were never distributed. In 1996 a law was brought in that permitted the sale of majority shares in small and medium-size enterprises, but this occurred in only a few cases. A new law was introduced in 1999, which established privatization on the base of mass distribution of vouchers and sale of larger firms by international tender. The distribution of vouchers, however, has been postponed. A few more important firms have been sold, causing much controversy. As a result, only up to 5% of state assets have been sold thus far. The private sector that has emerged is made up of new firms. Thousands of them, mainly engaged in trade, have been created and closed on an almost daily basis. Some of them have managed to survive and do well, however.

According to official figures, 114,749 people have jobs and 85,657 are unemployed. The average monthly wage is DM 205 and pension DM 110. The Montenegrin government has not produced its economic plan for 2001, but it is expected that salaries will remain at their present level.

These (abridged) texts have been translated from a special supplement to Monitor (Podgorica), 5 January 2001


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