Two American economists resident in Croatia and Macedonia weighed the balance of pluses and minuses in the economies of these two former Yugoslav successor states in a joint presentation at an EES Noon Discussion. Evan Kraft and Michael Wyzan both found inflation well under control and industrial production rising in the respective economies, but they also emphasized a number of daunting structural problems, particularly the slow pace and politically manipulated nature of privatization.

Kraft called Croatia's monetary stabilization the region's most successful. Inflation has remained negligible since its suppression in 1994, while some $2 billion in foreign exchange reserves have been accumulated. Croatia's share of the former Yugoslavia's debt, as negotiated in deals with the London and Paris Clubs of private foreign creditors, is a manageable 25 percent of 1996 Gross Domestic Product (GDP). Nor, if GDP accounting is accurate, does the state's budget deficit amount to more than 2 percent of GDP. In 1996, that leading economic indicator reportedly rose by nearly 4 percent, led by a full 4 percent increase in industrial production.

Several other indicators were not so encouraging, Kraft continued, and Croatia's transition to a predominantly private economy still lies ahead. Unemployment remains high at 13-14 percent of the labor force according to one definition and 18-19 percent according to another. Unpaid bills, some belonging to state ministries, have climbed to 8-10 percent of GDP, as has the foreign deficit on current account. An overvalued exchange rate for the kuna has contributed to the large surplus of imports and the high cost of living. Real investment in the economy has stagnated, and the rate of interest for new credit from the capital market is discouragingly high at 25 percent. Four of Croatia's five largest commercial banks have now failed, although their rehabilitation has at least brought money market rates down from 30 to 20 percent.

The overriding structural problems, Kraft concluded, remain the large size of the state sector and the slow pace of privatization. Large enterprises have either been exempted or put in the hands of politically appointed managers. The excessive size of the state sector may be seen in the fact that government consumption still accounts for half of GDP, including military expenditures that have not been reduced as expected. In privatization and elsewhere, the Croatian economy still needs a more clearly defined legal environment if long-awaited foreign investment is finally to arrive.

Wyzan pointed out that, like Croatia, the former Yugoslav Republic of Macedonia brought down a previously high rate of inflation to virtually nil in 1995 and has recorded a 4 percent increase in industrial production for 1996. The money supply is holding steady because of public reluctance to hold the denar as well as tight monetary policy. The average monthly wage now exceeds $200, as in Croatia. Yet both publics face a high price level, closer to that of the European Union than that of the Czech Republic. Again, an overvalued exchange rate tells part of the Macedonian story. Real unemployment is reckoned to be 25 percent and still rising.

Wyzan nonetheless argued that the Macedonian economy can become viable, despite the small state's lack of access to the sea and the large, unintegrated Albanian minority. He noted that the Albanian "second economy" is now working effectively, particularly in new construction. The Macedonian deficit on current account is low, and despite lack of access to much foreign investment, freer trade with both Serbia and Greece since 1996 hold future promise.

Wyzan added that the insider privileges and leveraged buyouts for managers have marred the privatization process and helped discourage foreign investment, even the inflow from Greece anticipated once the trade embargo was lifted. The banking reform currently under way may set a more encouraging pattern, Wyzan concluded. But the five banks created at the time of the break-up of the huge Stopanska Banka will have to put qualified managers rather than political appointees in top positions.

Pluses and Minuses in the Croatian and Macedonian Economies was presented at the Center on January 8, 1997, by Evan Kraft, Assistant Professor of Economics at Salisbury State University in Maryland and a visiting scholar at the National Bank of Croatia in Zagreb since mid-1995; and Michael Wyzan, Associate Professor at the Stockholm School of Economics and senior economist at Prague's Open Media Research Institute. John R. Lampe is Director of East European Studies at the Center.