IHT - Try Harder to Throw an Economic Lifeline to the Balkans

Paris, Tuesday, November 23, 1999

By Steven Rattner and Michael B.G. Froman - Washington Post Service

NEW YORK - Stability is unlikely in the Balkans without solving the economic side of the equation. The region as a whole suffers from a minuscule and deteriorated industrial base, inadequate or nonexistent financial institutions, extensive corruption, undisciplined government budgets and a dysfunctional legal system. On average, per capita GDP is only 7 percent of West European levels.

Far more is needed than rebuilding bridges and repairing bomb damage. A recent tour of the region makes clear that the remnants of the former Yugoslavia are now, in some cases, essentially welfare recipients.

In Kosovo, the economy is driven by remittances from the Kosovar diaspora and by aid from more than 200 organizations. Nothing is being produced there. There is no banking system; only cash is accepted, and that cash must be Deutsche marks, flown in from Germany and distributed by military convoy.

The largest country in the region, Romania, which seems near an end to a standoff with the IMF, can borrow in the capital markets only at rates in the range of 17 percent. A weak coalition government has had difficulty controlling spending or reducing rampant corruption, and inflation is running at a 50 percent annual rate.

Amid the gloom, the positive power of globalization also can be discerned. Most striking is the acceptance of the notion that economic prosperity (and in some cases survival) is dependent upon the capitalist model of attracting private investment and becoming competitive, as opposed to taking refuge in socialism, protectionism or some other illusory solution.

On the monetary front, the willingness of countries such as Bulgaria to adopt money tied to the Deutsche mark has brought a measure of macroeconomic stability. But proclaiming allegiance to market-based solutions is hardly enough. A far more substantive commitment to structural reform is essential, and so is a more effective Western effort.

On the U.S. side, we see a surplus of coordinators, a shortage of money and a disconnect between the two. Meanwhile, Europe has been slow to bring euros to bear and has been even slower in articulating a concrete vision for integrating the Balkans into the rest of Europe.

The West needs to focus on long-term solutions. Some have called for a Marshall Plan, but Western Europe had functioning institutions before World War II, and thus the U.S. role was reconstruction. As former Communist countries with little history of market economies, the Balkan states need help in creating institutions and processes as well as re-creating infrastructure.

A good navigational tool for policymakers would be to work toward creating a climate that would attract foreign investment, an essential ingredient for the Balkans to become economically self-sustaining and one that is at present nearly nonexistent. That means, at a minimum, political stability, peace and a functioning legal system, including clear property rights.

In some parts of the Balkans, it is difficult for a private enterprise to fire workers. The privatization process has been managed poorly, with state-owned companies casually turned over to workers or hijacked by political interests. In many places the banks are captives of the governments and state-owned enterprises and provide little capital to the private sector.

No dramatic act, such as instituting a currency board, can solve these problems. And the IMF's approach of tough conditionality, while necessary, is unlikely to be sufficient, because in many cases the Balkan states don't have the political or technical capacity to respond to the pressure.

What is needed is a focused effort by the West that will provide much needed technical assistance while maintaining pressure on Balkan governments to reform, even working around them where appropriate.

As structural reform progresses, we need to strive to open Balkan states to one another and, even more important, to integrate them with Western Europe, which will require economic statesmanship by the European Union, particularly in trade.

Above all, we cannot allow the region to disaggregate economically along ethnic lines. We must try - and try harder than we have thus far.

Mr. Rattner is deputy chairman of Lazard Freres & Co. Mr. Froman is a senior fellow at the Council on Foreign Relations and the German Marshall Fund. They are, respectively, chairman and project director of the Council Task Force on the Balkan Economies. They contributed this comment to The Washington Post.

http://www.iht.com/IHT/TODAY/TUE/ED/edsteven.html

[URL may be different next day if article is archived]