The IMF and the Balkans: Throwing good money after bad

By Diane Alden & Steve Farrell
web posted September 27, 1999

The damage inflicted on Kosovo and the entire Balkan rqegion by the war is going to cost the Western alliance big bucks.

According to the European Commission on Economics, the reconstruction of Kosovo alone will cost approximately $18 billion. The cost to the rest of the region will be even higher. The European Union's estimate released in Washington in June was $30 billion, and as steep as $90 billion when the entire former Yugoslavia is factored in.

Whatever the final figures, rebuilding the factories, railroads and infrastructure, which took a pounding from NATO air strikes, will be enormous.

The Clinton administration has stated that it expects the Europeans to bear the lion's share of the cost of Balkan reconstruction. Spokesmen for the administration have indicated that the United States has done its fair share by supplying military hardware and humanitarian aid to the tune of $7
billion to date.

However, Clinton's announcement regarding the anticipated massive U.S. budget surplus had the Europeans at the G8 summit in Cologne, Germany in June talking about where that surplus should go. There was every indication the United States is expected to accept the economic brunt of the war in the Balkans.

Chomping at the bit to spread U.S. tax dollars around, the U.S. Senate passed a bill giving $535 million to the Balkans, excluding Serbia.

Costly Quagmires

Most observers agree that the NATO alliance is going to be bogged down in the Balkans for the foreseeable future. Accordingly, the Royal Institute of International Affairs in London has calculated that the proposed annual price tag for the presence of 50,000 KFOR troops will be as much as $25 billion a year.

The United States participation in Bosnia has cost $9.4 billion with 6,700 troops garrisoned in the area (down from 22,000). The Department of Defense indicates that approximately $3.5 billion per year will be spent in Kosovo, assuming there is no eventual ground war.

Daunting economic challenges are in store for the Balkans. These include such mundane problems as: Which currency to use; where to get specialists with managerial and technical skills; and the wrenching of economic control from government hands into private.

In sorting it all out, the usual suspects are lining up to spend the tax monies of various Western nations as they attempt to fix the Balkans once and for all. The ultimate goal is to hurry the process of integration into the community of European nations. Recently, the Crown Prince of Yugoslavia, Prince Alexander, stated that: "Of course such an economic integration will take years to bear fruit and cost a great deal. But billions of dollars have already been spent in peacekeeping is time to go back to fundamentals no matter how long it takes." In other words, the West is committed to the Balkans; indefinitely.

Nevertheless, some in the international community see only the business opportunities, which death and destruction in the Balkans have created. Sir John Battle of the British Economic Task Force to the Balkans said recently, "I am confident that the British business community has the quality and expertise necessary to help these people rebuild their lives." While this may sound like the silver economic lining to an otherwise bleak Western interventionist cloud, similar plans did not work well in recreating Bosnia.

The expected resurgence of the Bosnian economy never materialized. Kevin Mannion, director of the International Management Group, a UN reconstruction agency, asserted recently: "There is no economy in Bosnia, because there is a general feeling here that broken-down state companies are an asset when in fact they are a liability."

Foreign investment failed to materialize as envisioned in the Dayton accords. Though military conflict ended, the leaders of the various Balkan states have refused to give up control of the economies of their respective states, with unfortunate consequences for the citizens of the Balkans.

Balkan economies have traditionally been fiefdoms built on spoils and patronage. The politicians in these countries obstruct economic change that might lead to free markets, and therefore diffuse rabid ethnic nationalism. Political leaders like Milosovec will not give up control of their economies because to do so would be to give up power. So far the West has been unable to spur needed changes in any of the Balkans. In addition, NATO bombing has driven these fragile economies even further into chaos.

In the next round of rebuilding, this time in Kosovo, the British business community is likely to take the lead. A recent analysis in the Village Voice maintains that due to advance planning the European Union, more specifically the British Department of Trade and Industry, has already sent a task force to the EU to plead its case.

The Germans have done likewise, while the U.S. merely has plans to send a Commerce Department Officer to wade in on the bidding process. Immediate U.S. business prospects for cashing in don't appear very good at the moment. However, it is expected that the U.S. will have its day when the IMF intervenes.

Historical "Root Causes" of Economic Failure

After World War II, industrial development took place in northern Yugoslavia, while the southern half of country merely produced raw materials. As the price of raw materials fell, serious economic inequalities between the various states grew. This in turn led to discontent and a desire for independence in the industrial north.

In the view of Balkan expert Professor Chussodovsky of the University of Ottawa, the International Monetary Fund is partially responsible for the turmoil in the Balkans. In addition, Criton Zoakos of Polyconomics, Inc., and Jude Wanniski, former associate editor of the Wall Street Journal, have stated: "In 1987 the old Yugoslavia, with all its tragic failures, was still a functioning state. The International Monetary Fund then took over economic policy, implementing a number of all too familiar shock therapies; devaluation, a wage freeze, and price decontrol, designed on the Harvard/MIT economic textbook principles meant to drive the wage rate down to a level where it would be internationally economically competitive."

But the interference of the IMF caused revenues to the central government to shrink and that in turn forced the IMF to insist on raising taxes in Yugoslavia in order to balance the budget.

As the Cold War was ending in the late 80s, the Federal Republic began to splinter. At the same time, servicing the national debt became hopeless. As a result, the attempt to comply with IMF demands made a shaky economic situation even worse.

Between 1979 and 1985 a quarter of the national income was taken up with debt service. As a result, the economy began to implode and ethnic conflicts erupted. Thus, the current conflict in the Balkans may be partly explained by economic factors as much as by ethnic hatreds and rivalries.

Therefore, while not entirely to blame for the strife in the Balkans, the IMF and WTO did play a part. Critics of both institutions assert that as in the case of aid to Mexico several years ago, the major recipients of economic goodies were the big Western financial institutions rather than the man on the streets of Pristina or Guadalajara.

Since 1996 the IMF magic bullet for curing structural economic problems has been the development of something called the Heavily Indebted Poor Country Initiative (HIPC). According to economists from the Heritage Foundation, this particular magic bullet, as put forth by the Group of Seven in Cologne, Germany (including the Clinton Administration), will only make the problems facing Balkan economies worse.

They maintain, "The debt cycle can be stopped only through debt forgiveness along with reductions and eventual elimination of bilateral and multilateral development assistance." In other words, these countries have to be cut off from the international checkbook and credit cards held by the Western industrialized nations. The HIPC initiative basically increases the dependence on foreign loans and guarantees that these loans will continue indefinitely.

The Heritage analysis concludes, "Congress should take steps to implement the policies that are necessary to solve poor-country debt problems and encourage the economic policies that attract private-sector credit and investment and have proven the best means of achieving long-term, sustainable economic growth."

However, the fly in the economic ointment is that the basic conditions for economic freedom and viability in the Balkans - and the Soviet Union as well - don't exist. There is no free market experience, unless you want to call the underground economy "free market."

Eastern Europe and Russia are coming from a centralized statist model based on Marxism or rather the Slavic interpretation of Marxism. There is no contract law or business ethic. The banking systems and economic structures are nothing more than the fiefdoms of modern day warlords in three-piece suits.

The IMF throws money at these economies, wherein no one has a clue about how financial institutions or basic free market structures work, and expects good results. The West and the United States turn a blind eye and make foolish assumptions that "good intentions" will solve all ingrained problems.

However, the Clinton Administration and current Western governments alone cannot be blamed for the economic debacle in these emerging nations. The machinations of the IMF have been going on for a long time, through Republican as well as Democratic administrations.

The large financial houses which back the IMF have always had a major stake in "lending" money to these emerging nations, and one way or the other, good times or bad, it means more money for them. There is a pervasive ignorance about who pays the bill for these loans. Bankers don't pay for the IMF, the taxpayers do. Neat deal if you can get away with it; these "investors of other people's money always do.

Additionally, modern Western governments have foolishly assumed that emerging countries will automatically do correct and prudent economic things if enough strings are pulled and enough interest is exacted, or the rules of capitalism are applied. It hasn't worked that way.

The economies of the Balkans, if experience is any guide, are at the mercy of economic dictums, which don't work for them. But the economic gurus of the IMF continue to develop costly new plans and put old snake oil in fancy new bottles.

In the end, the Balkan experience will show that some multinational corporations and individuals will profit from rebuilding. But don't look for economic prosperity or stability for the average Yugoslav, or for other countries in the area any time soon.

The West will be propping up creaky and moribund economies until a way is found to: 1) Create an ethical business climate. 2) Make sure monies given to these countries don't get "invested in off shore bank accounts, or houses and yachts on the Riviera for the Slavic oligarchy. 3) Cut off funds until such time as a massive effort to restructure is made. 4) Build an infrastructure in all segments of the economy but particularly in banking and investment and back it up with a demanding judicial process. 5) Avoid being blackmailed by incompetent or unyielding governments threatening retaliation if loans are not forthcoming.

Aside from refereeing the ethnic conflicts, Western involvement with capital and manpower will be far more costly than policy makers care to admit. The benefit to the Balkans may be illusive and short lived once the West leaves the area. The bill for our involvement in the Balkan quarrel will be paid by the American and Western alliance public. Unfortunately, it will be throwing good money after bad.

Newsmax writers Diane Alden of Holly Springs, Mississippi, and Steve Farrell of Henderson, Nevada, are widely published research writers and former co-workers at Right Magazine, where Steve served as managing editor. Joint projects include their upcoming book Democrats In Drag: A Second Look at the Republican Party. Please email any comments to Steve and Diane at

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