The successor states to the former Yugoslavia may be unanimous in their opposition to any political project even hinting at its recreation, but they still face a set of surprisingly common economic problems. (On the emergence of the successor states from the collapse of Yugoslavia, see Yugoslavia and After: A Study in Fragmentation, Despair, and Rebirth, edited by David A. Dyker and Ivan Vojvoda [New York: Longman, 1996].) For one, there is the obvious absence of the economic boom that a postwar recovery period often generates. As a partial solution, business enterprises are turning back toward their nearest neighbors, their former compatriots. Even this movement faces two further problems. First, their transitions to a market economy based on private enterprise are in the best case half-finished and have in the worst cases created new vested interests grounded in political power and corruption. Second, while private entrepreneurship has indeed grown apace, its enterprises are typically too small or too closely linked to political or outright criminal networks to press effectively, from below, for a legal market framework.

Below, beginning with Slovenia, which is without doubt in the best shape, are short updates on the state of the economic transitions of the successor states of the former Yugoslavia. Bosnia's transition is most troubled as it struggles with two, and informally three, political entities. Yet for Southeastern Europe and for U.S. policy, Bosnia remains the crucial arena for constructive change.

The Slovenian economy comes closest, as is widely acknowledged, to matching the track record of its northern neighbors the Czech Republic, Hungary, Slovakia. Indeed, Slovenia's level of per capita income, domestic bank structure, and international financial rating was no small factor in its selection by the European Union as one of six candidates for membership.

Its transition appears, nonetheless, to be losing momentum. Progress on already slow plans for privatization of industrial enterprises ("gradual" is the favored local phrase) is slowing further. Much of the pre-1989 business elite, subject to a less political process of selection than counterparts from the Soviet bloc, is still in place and preparing to bid for the management buyouts at the center of the privatization process. In the meantime, the growth of Gross Domestic Product (GDP) has slipped to a modest 1 percent for 1996. Partly responsible are a combination of high monthly wages, averaging $650 for industry, and a high exchange rate for the tolar. Labor strikes pressing for still higher wages reflect the sort of unrealistic expectations in an increasingly competitive world market that German trade unions have finally begun to abandon.

Slovenian export value to Italy and Germany has slipped accordingly. One consequence has been the rediscovery of markets in the former Yugoslavia. The freest trade is with Croatia next door. The prospect of similar access across all of Southeastern Europe may have encouraged the recent Slovenian decision to join formally the U.S.-backed Southeast European Cooperative Initiative (SECI). Of the eleven countries invited to join (Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Greece, Hungary, the Former Yugoslav Republic of Macedonia, Moldova, Romania, Slovenia, and Turkey), only Croatia has declined to participate.

The Croatian economy has recorded the highest rates of GDP growth (5-6 percent for 1995-96) among the successor states, and financial stability continues to keep inflation minimal. At the same time, Croatia's transition to a free market framework led by legal private enterprise still lags behind the Central European standards to which its government proclaims adherence. Like Slovenia, putting its finances in international order prompted an overvalued exchange rate for the Croatian kuna that inhibits exports. It is also a burden on the most promising tourist areas the Istrian and Dalmatian coasts. A recently successful issue of state bonds on the European market has locked in the present exchange rate.

The state continues to dominate the economy. Privatization of large industrial firms, tourist enterprises, and banks remains undone, and they are still in state hands managed by appointees of the ruling political party, HDZ. The restructuring of the large Privedna Banka of Zagreb, one of two banks that together account for 75 percent of Croatian bank assets, has finally begun, but the state will still hold a sizeable fraction of the shares.

Illegal business also continues to pose particular problems of the Croatian economy. A recent, rather careful survey revealed that only 25-35 percent of Croatia's GDP derived from illegal activity. That relatively low figure for the Yugoslav successor states, while not enough to determine the economy's direction, obscures the larger share of total assets so encumbered. A significant share of this "dirty entrepreneurship" derives from the porous borders with Slovenia and especially the Croatian parts of the Bosnian Federation. Still using Croatian currency and tied to Croatia in ways not authorized by the Dayton agreement, these regions move smuggled goods into Croatia, in particular to its Dalmatian coast, at prices that undercut legal sales.

Illegal business, sanctioned by state authorities, is estimated as high as 80 percent of Serbia's badly shrunken GDP. Privatization under the present regime would only consolidate the illegal trade. Export value is barely half of imports, and international debts are four times the amount of hard currency reserves. No lifting of the outer wall of financial sanctions against the regime of Slobodan Milosevic is in sight. In the absence of a flexible exchange rate, continuing inflation is making local currency, the Serbian dinar, scarce. In short, a transition crisis impends without a transition.

Manufactured goods are produced at only a small fraction of their 1990 value and with less than one-third of the labor force. Agricultural production has been less affected, but its concentration in the Vojvodina adds momentum to that region's growing demands for some political autonomy. Serb refugees from Croatia and Bosnia have crowded into the Vojvodina, adding to the region's rationale for retaining more income. Serbian industry still retains considerable capacity for textile, timber, and other light manufacturing. Working capital from Croatia and Slovenia reportedly is seeking to find ways into such credit-starved facilities.

Although its growth rate of 6 percent for GDP in 1996 matched Croatia's, the Macedonian economy falls far short of finding itself in a postwar boom. West European economies grew at 20 percent per year during the heyday of the Marshall Plan. Non-agricultural unemployment surely exceeds 20 percent, although the registered figure in 17 percent. The denar has been overvalued, as with Slovenia and Croatia. Financial stability is the gain and a handicapped trade balance (exports overpriced and imports underpriced) the loss.

Illegal business remains a problem here as well, although less so since Greece lifted its embargo and Bulgaria's new government is determined to squeeze its own smugglers hard. The flow of legal foreign investment that was supposed to be the reward for financial stability and a high exchange rate has not yet materialized, as it also failed to do in the 1920s. Macedonia's best bets for foreign investment seem to be the new interest from Greece in the short-run and Western investment of the sort that SECI-encouraged regional integration promises in the long run.

Bosnia's recovery from the worst war damage suffered by any of the warring successor states appears impressive, at least in the Croat-Bosniak Federation. Industrial production rose by 87 percent in 1996 barely 10 percent of the 1990 level but still enough to cut non-agricultural unemployment by one-third to 44 percent.

The Republika Srpska (RS) did not do nearly as well, with industrial production rising 58 percent from a still lower base to reach 8 percent of the prewar level. Net wages averaging 61 Deutsche marks per month were only one-third of the level of the Federation. Unemployment remained at over 60 percent officially and higher unofficially. The growing gap between the RS and the Federation entities makes an impression on the growing number of Serbs who now venture into Sarajevo, Tuzla, and other towns on the Bosniak side. So too does the gap between the great bulk of the population and the small cadre of police and other officials around the Centrex and Selekt-Impex enterprises in the RS. Selekt-Impex receives DM 400-500 per month from the network maintained by Radovan Karadzic and a dozen associates to make themselves millionaires.

Sarajevo's Bosnian government must be credited with at least trying to stop those on its side of the border from participating in the notorious traffic in alcohol, cigarettes, and gasoline that enriched the Karadzic network. At the same time, the Bosnian government cannot sustain the present level of expenditure, twice that of the RS, unless foreign assistance continues at the level of the past two years. That will certainly not be so, which makes the transition to private industry and banking and especially development of an independent but inter-entity financial structure crucially important to the Federation as well as to the RS. The more difficult task of privatization, for which at least an agency law has now been fully agreed upon, can hardly proceed in a positive way unless that structure is put in place.

The Quick-Start agreement signed this June for a central bank, a common currency, and common customs procedures is an overdue movement in that direction. The initial readiness of the RS to implement its part of the agreements was withdrawn in July, following the SFOR apprehension of two accused war criminals. Representatives of the RS, however, faced united pressure from the subsequent conference of international donors to rejoin the process. Speaking at the Woodrow Wilson Center in May, the co-chair of the Federation Council of Ministers, Haris Silajdzic, was optimistic about these economic agreements, especially when coupled with the potential of SECI to reconnect the Bosnian economy with all of Southeastern Europe.

The special Bosnian responsibility among the six specific SECI projects for environmental and economic cooperation is appropriately developing a network of natural gas pipelines to improve regional distribution, with connections linking the RS and the Federation to common external sources. The incentive for the two entities to cooperate on this limited enterprise would seem to be irresistible.

One area where more immediate cooperation is needed but which faces strong resistance, particularly from the RS leadership still loyal to Karadzic, is the return of refugees. Some 250,000 have returned in the past eighteen months, but precious few to any part of the Federation under another ethnic group's jurisdiction. The trumpeted Serb resistance to the return of Bosniaks is well known, as is the absence of any significant return of Serbs to the Bosniak side or Serbs and Bosniaks to Croat areas. The Bosnian regime's failure in 1996 to create conditions that would have persuaded some Serbs to stay in the suburbs above Sarajevo was a lost opportunity. But it is less well known that in 1997 it offered to open some twenty-five towns, including Sarajevo, to the resettlement of 50,000 Serb refugees in return for resettling a comparable number of Bosniaks in the RS. So far, this offer has gone unanswered, and instead, the head of the RS' Pale leadership, Momcilo Krajisnik, has informed all mayors that they will be dismissed if they agree to any such exchange with a Federation town.

Three recent Woodrow Wilson Center events contributed to the report: the State Department Policy Forum by Ivo Bicanic, Professor of Macroeconomics (2 May 1997), University of Zagreb, Croatia; the seminar by Haris Silajdzic, Co-Chair of the Council of Ministers, Bosnia-Herzegovina (15 May 1997); and John Lampe's trip to Sarajevo in July 1997.