Note: The successor states to Yugoslavia are Bosnia and Hercegovina, Croatia, Macedonia, Serbia and Montenegro, and Slovenia. Bosnia and Hercegovina declared independence in April 1992.
1. General Policy Framework
Since midsummer of 1991, Yugoslavia has been torn by a violent internal conflict. By the end of 1991, four of the six republics which constitute Yugoslavia--Slovenia, Croatia, Bosnia-Hercegovina, and Macedonia--had declared their independence. In December, the European Community announced its intention to recognize any Yugoslav republics which met certain criteria. Only Montenegro and Serbia continue to recognize the authority of central government institutions and regulations. The political and economic situation in Yugoslavia remains highly unstable. This report outlines the situation at the end of 1991. It is difficult to predict what form the policies discussed below will assume when the conflict ends.
As the Yugoslav Federal Government disintegrated in 1991, Yugoslavia's economy descended rapidly towards chaos. The promising economic reform program that Prime Minister Markovic implemented in mid-1989 was stymied in 1990 by the increasingly nationalist political agendas of Yugoslavia's major republics. Critical reforms in the banking system, privatization, and tax regime were derailed. In virtually every area of policy, republic legislation became more sovereign than federal law, culminating in the proclaimed secession of Slovenia and Croatia in late June 1991. Trade and tariff legislation became the de facto domain of the republic governments, whose perspectives were frequently dominated by short-term revenue needs and apparent desire to inflict economic damage on other republics. The virtual collapse of the economy and "rule of law" in Yugoslavia resulted in the suspension of trade credits and investment guarantees by foreign government agencies, as well as the suspension of assistance from the IMF and World Bank. Federal authorities were unable to exercise inspection responsibilities and in late 1991 suspended health and safety certification of Slovenian agricultural and aviation industries. The "reworking" of economic relationships between republics and with the outside world, including the U.S., cannot proceed until Yugoslavia's violent internal conflict is resolved. The European Community and the United Nations continue to undertake efforts to achieve a peaceful, negotiated solution to the crisis.
Centrifugal forces in each of Yugoslavia's six republics have left the Federal government with little influence over economic policy. Laws of one republic are not enforceable in other republics and the republics have ceased funding the federal budget.
The federal budget process has been severely distorted by the demands of the civil war, as the Yugoslav People's Army (JNA) consumes growing portions of the budget. Press reports claim that up to 80 percent of the proposed 1992 federal budget will be devoted to funding the JNA. Disagreement with the new budget priorities led Prime Minister Markovic to resign in December 1991. Since mid-1991, federal expenditures, including the increased demands by the federal military, have largely been met by inflationary money creation and the extension of credits to the federal government by the National Bank of Yugoslavia (NBY). Although inflation had been earlier rekindled by the republics' refusal to observe government spending and wage restraints, the massive federal monetary expansion to meet budget obligations and growing costs of Yugoslavia's civil war seems certain to lead to the re-emergence of hyperinflation.
The strongest federal institution is the National Bank of Yugoslavia (NBY), whose influence is ensured by its control over Yugoslavia's remaining $3.8 billion in foreign exchange reserves. As of late 1991, it was unclear how long the NBY could continue to operate in a relatively neutral manner and carry out its mandate to meet the payments-schedule for federal debts and guarantees. Yugoslavia's external debt continued to decline in 1991, with medium- and long-term debt dropping to $14.5 billion, but foreign exchange reserves will be virtually exhausted by early 1992.
Inflation reached an annualized rate of over 700 percent in October 1991 and continued at this level through the end of the year. Year-on-year industrial production declined by almost 20 percent in 1991, following a 10.5 percent decline in 1990. Unemployment exceeds 20 percent in Yugoslavia, with pockets in the poorer republics and provinces exceeding 40 percent. Yugoslavia's civil war has resulted in a major decline in national income (GDP), with official estimates projecting a 20-30 percent decline for 1991, and an even more massive decline in 1992. Thanks to sizable tourism earnings and overseas workers' remittances, Yugoslavia enjoyed seven straight years of current account surpluses until 1990. The future of these critical sources of foreign exchange is now in doubt. In 1990 Yugoslavia suffered a current account deficit of $2.4 billion, and the 1991 current account deficit is likely to reach three billion dollars or more, leaving foreign exchange reserves at a dangerously low level.
2. Exchange Rate Policies
The foreign exchange rate for the Yugoslav dinar is set by the Federal Government (FEC) and has been pegged to the Deutsche mark (DM) since January 1990. Exchange rates for other currencies are determined by their cross rates against the DM. The current official rate of 13 dinars per DM has been in effect since April 1991, but the importance of the official rate has been eroded by the emergence of parallel "black market" exchange rates. Yugoslavia's high domestic inflation relative to Germany, and a general loss of confidence in the economy, has made the official rate increasingly unrealistic, and commercial banks are now commonly paying bonuses of 150 percent, approved by the individual republican authorities, to compete with black market rates and provide incentives for exporters. Some republican authorities are also cracking down on previously tolerated black market dealers. The rapid real depreciation of the dinar and lack of hard currency is clearly depressing Yugoslav imports, which are down 28 percent from 1990. The contracting Yugoslav domestic market and large-scale non-payment of internal obligations have encouraged Yugoslav enterprises to look abroad for sales. Encouraged by substantial foreign exchange profits, Yugoslav exports have only declined by 8 percent from the 1990 level, narrowing the visible trade deficit to a projected $700 million.
On October 7, 1991 Slovenia announced its own transitional currency, called the tolar, and initially fixed its value at 32 tolars per DM (Croatia announced a similar move "in the near future"). All dinars held by Slovenian citizens were to be exchanged at par with the tolar over a three-day period.
Subsequently, the Slovene government allowed some dinar exchanges, but at discounts of 15 to 40 percent against the tolar. Croatia and Slovenia signed an agreement in late October to allow their businesses to make payments in each other's currencies. Although the Slovenian currency is not recognized by foreign governments, and trade with other Yugoslav republics and the world is largely carried out in hard currencies and barter, Austrian and Italian banks bordering Slovenia are accepting the tolar in limited quantities to satisfy cross-border trade needs.
3. Structural Policies
The key structural issues facing Yugoslavia and its constituent republics are radical reform of the bankrupt banking system and large scale industry, privatization of the economy, and comprehensive tax reform. Without these reforms, Yugoslavia and the republics face continuing economic decline. The tragic civil conflict has deepened the economic crisis, however, and shattered interrepublic economic linkages. Many would argue that the war was, in part, triggered by the unwillingness of short-sighted republic leadership to address, in a comprehensive fashion, Yugoslavia's structural economic problems.
Within the limits imposed by the economic collapse, foreign exchange constraints and lack of trade financing, Yugoslav firms were largely free to trade internationally. As a result of the Markovic government's reforms, almost 90 percent of items Yugoslavia imports were theoretically free of quota restrictions. These are federal regulations, however, which have become subject to unpredictable modification by the individual republics. Many Yugoslav industries, such as agriculture and steel, have historically received heavy subsidies in the form of credits and price supports. The chaotic and conflicting legal environment, coupled with a disintegrating Yugoslav market, has penalized foreign investors and damaged productive domestic industries as well.
4. Debt Management Policies
Yugoslavia's medium- and long-term foreign debt obligations at the end of 1991 were estimated to have been $14.5 billion, down from a 1983 peak of $23.5 billion. Yugoslavia has a sizable credit exposure in Africa and the Middle East ($3 billion), and the USSR (bilateral clearing debt of $1.4 billion). Efforts to accelerate payment of the Soviet debt through increased barter trade (especially in petroleum) have been only partly successful. Iraq owes Yugoslavia approximately $2 billion, and repayment prospects in the wake of the Gulf War appear bleak.
Although Yugoslavia underwent a series of debt reschedulings beginning in 1983, debt servicing has not been a problem for Yugoslavia over the past two years, with the ratio of debt service payments to export earnings declining to about 20 percent. The NBY has consistently sought to meet obligations to official creditors stemming from Paris Club reschedulings, and federal guarantees of republican debts. However, with foreign exchange reserves dropping below $4 billion and the strong likelihood of a major deterioration in the 1992 balance of payments, Yugoslavia will be forced to approach official and private creditors for debt relief. The excessive growth of public spending and higher than expected inflation in the third quarter of 1990 caused the IMF to suspend drawings under a March 1990 standby agreement, and there is no prospect that a new standby agreement can be contemplated while Yugoslavia's civil war continues. The issue of allocating responsibility for existing debt is likely to be a major difficulty in establishing new government structures and "reworking" the economic relationships between the Yugoslav republics.
5. Significant Barriers to U.S. Exports
Yugoslavia's federal import surcharge was lowered from 21 percent to 16 percent in 1990. However, this figure is still relatively high, as the import surcharge is added to the nominal duty rate to calculate the total tariff rate. Agricultural commodities imported under foreign commodity credits (i.e. most U.S. agricultural goods) face only a one percent levy. Agricultural products are subject to variable surcharges which are triggered if the import price, inclusive of customs duty and 16 percent import surcharge, is still lower than the domestic producer's price. The surcharge is then levied to equalize the two. Quantitative estimates of the levies' impact on U.S. producers are unreliable. Particularly for agricultural goods, U.S. exports are affected more by price and bilateral arrangements, i.e. countertrade, than by levies. Because of the current crisis, Yugoslav importers were unable to take advantage of U.S. agricultural credits in 1991.
Import quotas apply to certain agricultural products. Quota levels are established in consultation with end-users. As a result of the 1988-89 liberalizations, quota restrictions are now negligible on the major traditional U.S. exports to Yugoslavia: soybeans, soybean meal and oil, cotton, hides, skins, and some grains. Items still on the quota list comprise "big-ticket" items such as aircraft, heavy construction machinery and equipment, and computer system elements. U.S. officials continue to urge a reduction of levies in GATT Balance of Payments consultations and bilateral discussions.
In general, Yugoslavia accords "national treatment" to foreign investors. The 1988 Foreign Investment Law opened all sectors of the Yugoslav economy to foreign investors except for rail and air transport, communications, and media and publishing. Although foreigners may now purchase buildings and have use of adjoining land, they are not permitted to purchase direct title to land. Rules governing the repatriation of capital and profits have been aligned to match OECD norms, but in practice companies have found conversion of local currency to hard currency in 1991 to be increasingly problematic.
In addition, Yugoslav republics have been instituting regional regulations which inhibit or effectively preclude trade with firms in other regions of Yugoslavia. Tax schemes have also been implemented that create a disadvantage for goods produced in other republics (some by U.S. owned firms). This market parcelization tends to constrain direct U.S. exports, and has negative impact on earnings of U.S. investors. Policies on investment incentives and performance requirements are not uniform at federal, republican, provincial, and municipal levels. During 1991 U.S. firms reported that pressures to accept offset sales were intensifying.
Yugoslavia is a signatory to the Antidumping, Customs Valuation, Import Licensing, Technical Barriers, and Subsidies Codes of the GATT. It has not accepted, but observes the Bovine Meat and Civil Aircraft Codes. Yugoslavia has not signed the GATT Government Procurement Code. U.S. companies have not raised concerns that Yugoslav health, testing, or other regulatory standards pose significant trade barriers.
6. Export Subsidies Policies
A ten percent federal subsidy payment for exports of goods was removed in December 1990, but a three percent subsidy on net exports of services remains. Significant increases in subsidies for agricultural exports, particularly wheat, were announced in 1991. Restricted access to foreign currency and the resulting high demand has artificially boosted pressures to export. The opportunity to profit from foreign exchange earnings has resulted in sales of goods in hard currency countries at prices 35 percent below domestic levels. The decline in foreign exchange reserves and a growing tendency to reduce market access of importers through "administrative" measures in certain republics has depressed imports in some sectors where U.S. firms are highly competitive.
While enforcement of intellectual property rights (IPR) is weak, and there remain shortcomings in Yugoslavia's IPR legislation, the federal government has been increasingly attentive to U.S. IPR concerns. Yugoslavia is a signatory to the Bern Copyright, Paris Industrial Property, and Universal Copyright Conventions, and is a member of the World Intellectual Property Organization. While Yugoslavia made substantial progress in 1990 in strengthening protection of intellectual property rights (IPR), U.S. firms cite shortcomings in IPR legislation and enforcement as an important disincentive to introducing U.S. products or new investment in Yugoslavia. Despite repeated U.S. interventions, the 1990 legislation for patent provisions failed to establish "product" protection for animals, plants, and biotechnological items. The U.S. also identified problems in Yugoslavia's legislation in the use of overly broad criteria in granting compulsory licenses and licensing arrangements under the Foreign Trade Law. The U.S. continues to have problems with Yugoslav practices regarding protection for phonograms, trade secrets, and lay-out designs for integrated circuits. The U.S. has been addressing IPR problems in Yugoslavia in the context of the "Special 301" watch list, and in the context of negotiations of a Bilateral Investment Treaty.
Yugoslav shortcomings in the IPR field include the failure to enforce copyright laws to curtail book, video, and audio piracy. However, pirated videos and records have limited sales on the domestic market due to poor quality. Moreover, financial problems of Yugoslav film companies and distributors, in part due to declining cinema attendance and revenues, have led to a decline in imports of foreign films. At present, there is no defensible estimate of the value of forgone U.S. earnings attributable to video piracy.
Yugoslav involvement in computer software development has not evolved to the point where officials have a strong inducement to create standards adequately protecting software under copyright law. At present, Patent Bureau officials "interpret" the Patent Law as conditionally protecting software, but enforcement is weak. Computer software is not addressed explicitly in either the amended Patent or Copyright Law and is, therefore, subject to replication without compensation in the Yugoslav market.
8. Worker Rights
a. The Right of Association
All workers, except military personnel, are entitled to form or join unions of their own choosing without previous authorization. Workers are no longer formally obligated to register with and pay dues to the official unions. However, pressure toward conformity, and the advantages of some material benefits, still operate to encourage official union membership in many enterprises. In 1991, there was a blossoming of new trade unions throughout Yugoslavia as the centralized national federation structure eroded. Workers, in both blue and white collar work places, left the old pro-government federation and formed independent local and republic-level groups of their own, particularly in Slovenia, Croatia, and Serbia. Individual managers and enterprises, including government media organs, often used explicit and implicit pressures including coercion and firing threats to discourage workers from attempting to participate in such organizing activities. Despite the fact that the Yugoslav federal government formally recognized the Independent Trade Unions of Kosovo (ITUK) in May 1991, the new organization continued to face major barriers at the local level in representing a work force which has suffered from official repression and repeated mass firings on ethnic grounds. Throughout 1991, especially in Croatia and Serbia, union organizations were concerned that labor agitation during a time of inter-republic war would expose them to charges of disloyalty and treason. In Montenegro, such accusations were made against several pro-labor political groups. The right to strike is recognized and was widely exercised throughout Yugoslavia.
b. The Right to Organize and Bargain Collectively
Yugoslavia is in the early stages of a process of moving from a system of socially-owned property to one in which economic privatization may become a reality. Under the former system of social ownership, wages were essentially set by the workers themselves, although political pressure from the Communist Party was frequently a factor. Under new labor legislation, unions face a difficult task in pinpointing management responsibility and ensuring accountability of authorities in the negotiation and execution of labor agreements. These problems will worsen as Yugoslavia's economy deteriorates in the face of civil strife and political disintegration. Protection for unions and union members is provided by both federal and republic law, but laws have not caught up with the recent changes.
c. Prohibition of Forced or Compulsory Labor
The Federal Constitution prohibits forced labor, and this prohibition appears to be respected.
d. Minimum Age of Employment of Children
The minimum age for child labor is 16, although in village and farm communities, younger children often assist with family agricultural obligations. Enforcement is the responsibility of the Federal and Republican Secretariats for Labor, Health, and Social Policy.
e. Acceptable Conditions of Work
The official work week in Yugoslavia is 42 hours and there are generous sick leave and vacation benefits. However, a number of enterprises have actually operated far fewer hours during 1991's deepening economic crisis, and widespread enterprise insolvency has resulted in nearly half of the labor force receiving salaries at varied intervals, or in amounts well below those stipulated in wage agreements. Minimum wage rates are guaranteed by federal law, but growing inflation is likely to erode the viability of the wage minimums.
Yugoslavia is now facing a serious problem of displaced persons fleeing from areas of conflict. By the end of 1991 over 500,000 displaced persons had registered with the Red Cross as having fled their homes.
Yugoslavia has extensive federal and republic laws and regulations governing worker safety. Enforcement of work safety rules, however, is lax.
f. Rights in Sectors with U.S. Investment
Rights in sectors with U.S. investment do not differ in any material way from those in other sectors of the economy.
Source: National Trade Data Bank, Agency: U.S. Department of State