[Congressional Record (Bound Edition), Volume 145 (1999), Part 10]
[Extensions of Remarks]
[Pages 14690-14691]
[From the U.S. Government Publishing Office, www.gpo.gov]



 CRISIS IN KOSOVO (ITEM NO. 13) REMARKS BY BENJAMIN SLAY OF PLANECON, 
                                  INC.

                                 ______
                                 

                        HON. DENNIS J. KUCINICH

                                of ohio

                    in the house of representatives

                         Tuesday, June 29, 1999

  Mr. KUCINICH. Mr. Speaker, on June 24, 1999, I joined with 
Representative Cynthia A. McKinney, Representative Barbara Lee, and 
Representative John Conyers in hosting the sixth in a series of 
Congressional Teach-In sessions on the Crisis in Kosovo. If a lasting 
peace is to be achieved in the region, it is essential that we 
cultivate a consciousness of peace and actively search for creative 
solutions. We must construct a foundation for peace through 
negotiation, mediation, and diplomacy.
  Part of the dynamic of peace is a willingness to engage in meaningful 
dialogue, to listen to one another openly and to share our views in a 
constructive manner. I hope that these Teach-In sessions will 
contribute to this process by providing a forum for Members of Congress 
and the public to explore options for a peaceful resolution. We will 
hear from a variety of speakers on different sides of the Kosovo 
situation. I will be introducing into the Congressional Record 
transcripts of their remarks and essays that shed light on the many 
dimensions of the crisis.
  This presentation is by Benjamin Slay, a senior economist at 
PlanEcon, Inc., a Washington-based economics consulting firm 
specializing in Russia, Eastern Europe and the Balkans. His work on the 
Balkans includes developing PlanEcon's macroeconomics model for the 
economy of Bosnia-Herzogovina, and serving as a consultant to a 1995 
Aspen Institute project on economic development after the Dayton accord 
Dr. Slay received his Ph.D. from Indiana University in 1989. He has 
held faculty positions at Middlebury College, Bates College, George 
Mason University, and the State Department's National Foreign Affairs 
Training Center.

             The Balkan Economies: The Impact on Kosovo \1\
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     \1\ This text is adapted from Chris Kushlis and Ben Slay, 
     ``Overview'', in PlanEcon Review and Outlook for Eastern 
     Europe, June 1999, PlanEcon Inc., Washington D.C.
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                           (Dr. Ben Slay \2\)
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     \2\ Senior Economist, PlanEcon, Inc., 1111 14th Street N.W., 
     Suite 801, Washington, D.C., 20005-5603. Phone: (202) 898-
     0471. Fax: (202) 898-0445. E-mail: [email protected]
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                         How Bad is the Damage?

       Economic developments in the Balkans since late March have 
     been dominated by the Kosovo conflict. Yugoslavia's already 
     fragile economy has been devasted by the NATO bombing. The 
     exodus from Kosovo has burdened neighboring economies with 
     hundreds of thousands of refugees. Transit routes have been 
     closed, tourism and trade have fallen off, and investment 
     projects have been put on hold or cancelled.
     Footnotes appear at end of article
       Estimates of the Kosovo war's economic costs vary widely, 
     with figures ranging from $20 billion to $100 billion. The 
     latter figure is nonsensical as aggregate GDP in region does 
     not come close to this sum. Moreover, the region's economic 
     problems can not be blamed solely, or even largely on the 
     war. The fighting has instead provided a convenient excuse 
     for politicians and seeking to divert attention from the 
     deeper structural and policy problems that have constrained 
     growth throughout the region. Only Hungary, Albania, and 
     Bosnia continue to grow strongly: the other Balkan economies 
     are either in or headed toward sharp slowdowns caused by weak 
     export demand or the failure to pursue ambitious domestic 
     reforms. For this latter group, the war only added to pre-
     existing difficulties.
       In assessing the damage directly attributable to the war, 
     the region's economies can be placed into five categories:
       The direct hit: Yugoslavia. The Yugoslav economy is in 
     catastrophic shape. Infrastructure, particularly bridges, 
     railroads, and the telecommunications network were all 
     damaged or destroyed by the bombing. NATO also inflicted 
     serious damage on the decrepit, albeit functioning, Serb 
     industrial base, with oil refineries, heavy machinery plants, 
     and tobacco factories especially hard hit. Kosovo is 
     completely devastated: a major reconstruction effort will be 
     necessary just to house returning refugees. This is the 
     second economic disaster to hit Yugoslavia in this decade: 
     the economic sanctions and hyperinflation of the early 1990s 
     had already practically halved economic output.
       The Milosevic regime has done almost nothing to help. The 
     economy is a largely unrestuctured kleptocracy, where leading 
     economic actors engage in rent-seeking activities made 
     possible by regulations drawn up for their benefit by the 
     Milosevic regime. After a recovery phase lasting until 1997, 
     economic growth had already tapered off substantially in 1998 
     before the outbreak of the Kosovo conflict. By early 1999 the 
     economy was clearly headed for a sharp correction. With 
     large-scale Western aid tied to Milosevic's fate, 
     Yugoslavia's second crack at recovery looks just as 
     unpromising as the first. Serbs will be digging themselves 
     out from under the ruble of the Milosevic ear for years, if 
     not decades, to come.
       The front-line states: Albania and Macedonia. These two 
     states absorbed the full shock of the refugee influx. While 
     Albania took in almost twice as many refugees as Macedonia 
     (450,000 compared to 250,000), Macedonia suffered greater 
     economic dislocation. Whereas Albania exported almost nothing 
     to Yugoslavia, half of Macedonia's exports went to or through 
     Belgrade. Macedonia is also more concerned over lost tourism 
     and foreign investment this year. By contrast, since over 60 
     percent of its GDP originates in the agricultural sector 
     (which has a large subsistence component), Albania tends to 
     be more insulated against external shocks than the rest of 
     the region. We therefore estimate that the conflict will only 
     reduce Albania's GDP growth by 2-3 percent this year. It 
     will, however, knock 7-8 percentage points off Macedonia's 
     GDP growth, thereby pushing Macedonia into recession.
       Collateral damage: Bosnia-Herzegovina. Bosnia's Serb half 
     is closely integrated with the Yugoslav economy and as a 
     result suffered heavily from the war: exports from the 
     Republika Srpska went almost entirely to Yugoslavia and have 
     since March dropped to almost nothing. Bosnia also accepted 
     70,000 refugees (both Albanian and Serb), further swelling 
     the numbers of refugees in the country. While we see Bosnian 
     growth slowing this year from 21 percent, this must be viewed 
     in the context of Bosnia's post-war recovery process. Annual 
     growth rates above 20 percent are unsustainable as Bosnia's 
     recovery matures; and problems like falling Croat demand for 
     Bosnian exports are also driving growth down. A new tariff 
     regime with Yugoslavia, and Yugoslav payment difficulties, 
     were already cutting into first-quarter Bosnian exports and 
     growth. For these reasons only half of the 7-percentage point 
     slowdown can be directly attributable to the war. The main 
     engine for Bosnia's growth continues to be the massive 
     international assistance program.
       Shell-shocked: Bulgaria and Croatia. Bulgaria and Croatia 
     bore almost none of the refugee burden (each took in about 
     5,000 refugees), and both countries conduct only a small 
     share of their trade with Yugoslavia (about 2 percent of 
     total exports for Bulgaria, 0.4 percent for Croatia). 
     Bulgaria and Croatia nonetheless find themselves in a 
     precarious position in the aftermath of the crisis. The war 
     cut into exports from both; for Bulgaria this involved the 
     extra costs of rerouting transit trade; for Croatia it 
     affected trade with Bosnia and destinations further south. 
     Reductions in tourist revenues and foreign investment are a 
     greater concern, as these inflows reduce current account 
     deficits and boost tax revenues. Still, both economies were 
     already suffering from their own difficulties before the 
     bombing began: Bulgaria's exports and growth were down 
     sharply due to slow industrial restructuring; while Croatia's 
     economy slowed in the last quarter of 1998 and remained weak 
     up to the outbreak of the war. In both countries the war

[[Page 14691]]

     will cost about 1-2 percent of GDP growth this year, as the 
     growth slowdown is attributable primarily to domestic 
     factors.
       The near misses: Hungary, Romania, and Slovenia. Of the 
     Balkan countries crying wolf, Romania is crying the loudest. 
     Romania suffered only marginally from the Kosovo war; and 
     even these losses may have been more than covered by IMF 
     assistance. Romanian losses were largely confined to the 1.3 
     percent of exports heading to Yugoslavia, and to Danube 
     shipping. Most of Romania's economic problems are domestic in 
     nature. Slovenia is not even trying use the Kosovo crisis as 
     cover for its slowdown in growth. With two-thirds of its 
     exports heading to the EU, Slovenia is less vulnerable than 
     most to trouble in the Balkans; however, it is vulnerable to 
     weak European demand. Likewise, Slovenia's exports to Croatia 
     began to fall before the bombing started, due to Croatia's 
     internal economic weakness. The war has apparently cut into 
     spring tourism, but this should have only a marginal effect 
     on Slovenia's tiny and very manageable current account 
     deficit. The Hungarian economy continues to grow despite the 
     problems on its southern border. In addition to a possible 
     loss of tourism revenues, the main concern for Hungary is the 
     possible effect on its burgeoning current account deficit of 
     lower exports to the Balkans and reductions in its transit 
     surplus as water, trucking, and rail traffic through Serbia 
     has halted. Although these effects pose an element of 
     downside risk to the economy, we expect their impact to be 
     marginal.


                       A New Era for the Balkans?

       With an end to the conflict at hand, the international 
     community appears to be focused on stabilizing the Balkans 
     for the foreseeable future. Ideally, this commitment includes 
     a strong military presence, substantial reconstruction aid, 
     and firmer promises for integration into the EU. It should be 
     matched by a rededication on the part of regional governments 
     to the policy reforms needed for sustainable medium-term 
     economic growth.
       The first order of business will be post-conflict 
     assistance for Kosovo. As Kosovars leave refugee camps in 
     Albania and Macedonia to return to Kosovo, Western 
     governments and international agencies are facing the 
     immediate problems of providing humanitarian assistance to 
     these returning refugees. To some extent, programs for 
     refugees should not be much more expensive than the 
     assistance delivered to the Albanian and Macedonian refugee 
     camps, since, food, shelter, clothing, medical care, and 
     security should be provided for the refugees irrespective of 
     location. However, NATO will have to create the logistical 
     systems needed to move these supplies from current refugee 
     camps to Kosovo proper, probably without assistance from the 
     Yugoslav authorities or Yugoslav transport systems. This will 
     mean a road construction program connecting Albania to Kosovo 
     and rebuilding bridges and roads in Kosovo. Interim refugee 
     camps may also have to be created in Kosovo until housing is 
     rebuilt. However, as long as Kosovars feel physically secure, 
     these camps could be kept small and in close proximity to the 
     former villages.
       The second stage involves the reconstruction of Kosovo. As 
     refugees return to Kosovo, assistance programs will need to 
     concentrate on moving them to permanent shelters as soon as 
     possible. International aid agencies have had substantial 
     experience in resettling refugee populations. The accepted 
     wisdom appears to be that building materials, seeds, tools 
     and implements, and other such items should be provided 
     gratis, while refugees themselves can be relied upon to 
     rebuild their homes and begin farming or businesses again.
       In the third stage, assistance will be channeled to 
     economic development. If all goes smoothly, after several 
     months, the Kosovo economy will begin to normalize, and 
     policymakers will have to think about helping this economy 
     develop for the long term. This development can be partly 
     financed by remittances. Indeed, the Kosovo economy during 
     the past two decades has been a rentier economy, as Kosovars 
     working abroad have repatriated funds. Still, most of the 
     funds for economic development will have to come from 
     governments and international agencies; the initial emphasis 
     is likely to be on creating an infrastructure to foster local 
     businesses.
       The first priority should be to establish decent transport 
     links through countries other than Serbia. This will involve 
     creating all-weather road links to Albania as well as 
     upgrading road crossings into Macedonia. Policy makers may 
     also wish to set up credit programs for small businesses. 
     Because Kosovo remains heavily agricultural, aid can be 
     useful targeted at improving agricultural techniques and 
     supplying better quality agricultural inputs such as seeds 
     and plant protection agents. Subsidies to restart larger 
     Kosovar enterprises will probably be wasted, unless advance 
     work has determined which companies are likely to be 
     economically viable. Kosovo is unlikely to be a center of 
     large-scale industrial activity under any scenario. It is 
     likely to remain dependent on agriculture, worker 
     remittances, and a few larger plants and mines, such as the 
     lignite mines near Pristina. Aid programs will need to be 
     carefully monitored so that they do not attempt to support 
     activities that in the long run are not financially viable. 
     In any case, external assistance for Kosovo is likely to be a 
     poor substitute for economic reform and international 
     economic integration, both within the Balkans and with the 
     EU.
       Prospects for sustained growth in the Balkans will continue 
     to hinge on security issues. Serbia, with its key location 
     and recent history at the heart of the Yugoslav wars of 
     succession, is still central to this equation. As long as 
     President Slobodan Milosevic remains in power, Yugoslavia 
     will remain an isolated economic backwater, cut off from 
     international assistance and a potential source of renewed 
     regional crises. If Milosevic stays in power, the West will 
     wish to maintain a strong security presence in the Balkans 
     for many years, particularly in Bosnia and Kosovo. If 
     Milosevic goes, Yugoslavia could play a constructive role in 
     regional reconstruction and stability. The Western security 
     presence could be reduced, while trade and other linkages 
     would revive more rapidly.
       The post-1995 Bosnian experience highlights the 
     possibilities and limits of major internationally financed 
     reconstruction efforts for Kosovo. Infrastructure repair, 
     although expensive, has proceeded at a fair pace in Bosnia, 
     as roads, bridges, and telecom networks are now almost 
     completely rebuilt. However, the goals of reconstruction and 
     reconciliation have been partly frustrated by the creation of 
     a culture of dependency upon international donors. Local 
     politicians have stalled structural reforms, and 
     privatization is only now getting underway. Progress in 
     reintegrating Bosnian Serbs, Croats, and Muslims, as well as 
     in attracting private capital flows and investment, has been 
     minimal. The ultimate success of international assistance is 
     determined by whether private flows and domestic investment 
     are able to take up the slack after the assistance comes to 
     an end. The Bosnian experience does not suggest optimism on 
     this count.

     

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