Select Committee on Foreign Affairs Minutes of Evidence

Memorandum by the Foreign and Commonwealth Office on Federal Republic of Yugoslavia: Economy


  1.  The economy of the Federal Republic of Yugoslavia has shrunk dramatically as a result of ten years of economic mismanagement and international isolation (see Annex B). According to official statistics, the economy is now less than half the size it was in 1990. On some estimates almost half the work force are unemployed. Capital and infrastructure are in very poor condition after a decade of underinvestment. Inflation is running at close to 100 per cent: the hyperinflation of 1993 wiped out the savings of most ordinary citizens.

  2.  The burden of poor economic performance has fallen heavily on the Yugoslav people. Income per person in the FRY is now ten times lower than in neighbouring Slovenia in dollar terms, and poorer than in Romania (estimates from the Economist Intelligence Unit suggest GDP per head may have fallen as low as $650 per head in 2000, compared to $9000 in Slovenia and $1600 in Romania). Even adjusting for cheaper local prices and taking account of the very large black economy, this implies a substantial fall in living standards in what was once one of the Eastern Europe's richest economies. Real wages in Serbia fell to only $55 per month by November 2000, and average wages buy fewer staple goods than in 1999.

  3.  At the same time, the FRY has not been in a position to follow the path of reform taken by other transition economies in Central and Eastern Europe, taking advantage of enhanced trade and investment links with the EU. Its neighbour, Slovenia, has grown from being an economy half the size of the FRY economy in 1990, to twice its size today, with income per head close to EU levels.


  4.  The Government believes that the recent political changes in the FRY can pave the way for a successful transition to a prosperous market economy. Experience in other transition economies shows that transformation can be rapid if governments adopt appropriate policies, in particular building basic market institutions, creating sound legal and business structures, and attracting foreign investment. 5. But transition is still only beginning. Price controls remain on most basic foodstuffs (bread, milk, oil, and sugar), housing, public transport, energy and petroleum products. The financial sector remains weak and plagued by bad loans. Administrative systems are poor, which will hamper the implementation of new laws. The social safety-net is poorly financed, making the necessary effort to reform unprofitable industry more difficult. The FRY government estimates that external debt stands at over $12bn, more than 140% of GDP; other estimates put it even higher. 6. However, the FRY does have strengths on which to draw. The old Yugoslavia was a relative sophisticated economy, with a tradition of small business entrepreneurship. The population is well-educated: the diaspora extensive: The FRY also remains at the centre of trade and transport links in South East Europe. Peace, and the end of sanctions, should bring new opportunities quickly.

  5.  The international community also stands ready to help the people of the FRY build a prosperous, peaceful and democratic market economy. The Government welcomes the purposeful approach to economic reform of the new Federal and state governments. The Federal Government's outline economic policy for 2001 (copy attached) sets out sound and credible parameters for monetary and fiscal policy. They have moved rapidly to rejoin the International Financial Institutions, securing membership of the IMF and the EBRD in December. Negotiations are currently underway on an IMF stabilisation programme (see IMF paper, FRY-membership & request for emergency post conflict assistance, The authorities are also making strenuous efforts to create the right legislative frameworks allow new business to prosper, including bringing forward legislation on privatisation, regulation of utilities, and bankruptcy.

Foreign and Commonwealth Office

20 February 2001

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