Slovenia is in a league of its own, and is clearly one of the transition success stories. It has been rewarded by inclusion in the first batch of Central European countries to negotiate EU membership, although it narrowly missed being in the first group of countries to be admitted to NATO. Any political tremors which are felt in this tiny country from time to time are not unlike that of neighbouring Italy, or Poland. In other words, they are not a consequence of ethnic nationalism or authoritarianism, but of a widely divergent polity, making for weak coalition governments. The standard of living is the highest among all transition economies and social tensions are minimal.

Croatia is adapting itself to peacetime conditions but ethnic nationalism and national statehood still colour political life. Croatia's aspirations and involvement in Bosnia, its lack of co-operation with the International War Crimes Tribunal and the question of the repatriation of Croatian Serbs who fled in 1995, all remain as serious obstacles to its full integration into international political structures.

Recently, the US engineered a delay of a $30m World Bank loan to show its displeasure with Croatia's lack of co-operation in the Dayton Peace Process. Croatia’s president Tudjman is still sufficiently obsessed with the "Greater Croatia" project to be willing to accept, albeit with complaints, an international political isolation.

Slobodan Milosevic, now the President of FR Yugoslavia, has regained quite a bit of the political ground he lost during the three month long civil protest last winter. The opposition parties, now hopelessly split, are spending more time fighting each other than attempting to bring to an end the 10-year era of Milosevic's rule. Milosevic's power is currently more under pressure from breakaway factions in Republika Srpska and in Montenegro, than from his own opposition in Serbia.

Elections that are taking place this fall will make the picture a little clearer. Local elections in all of Bosnia and parliamentary elections in Republika Srpska will show how effective the Dayton Peace Process has been so far. They will also indicate if Bosnia is headed toward reconciliation or partition. No major break-throughs should be expected, but a trend will clearly emerge. These elections will also test the resolve of the US-led international community to stay the course and continue its presence in Bosnia.

Parliamentary and presidential elections in Serbia show what kind of political landscape will emerge there after Milosevic moved to the Presidency of Yugoslavia. Turnout was, as expected, low because of apathy and a boycott by some opposition parties. Milosevic's socialists are now only able to rule in coalition with one of the major opposition parties. A grand coalition is possible, while continuation of political uncertainty is inevitable.

Montenegro, the junior partner in the Yugoslav Federation, is poised to mount a serious challenge to Milosevic's rule. Prime Minister Djukanovic, who is the odds on favourite to win the October presidential election in Montenegro, has publicly stated that Milosevic is a spent political force. He argues for quicker reforms and compliance with the Dayton Agreement. For the next few years the politics of Yugoslavia will be marked in large part by the duel between Milosevic and Djukanovic.

Mostly because of the situation in Bosnia, the region has not yet achieved a self-sustained momentum toward peace and stability. Lasting peace will require roughly the current level of international involvement. Any premature attempt to withdraw foreign military forces such as SFOR from Bosnia or UNPREDEP from Macedonia could, and probably would, push the region into a new round of confrontations.

Will the US-led international community continue with its presence until self-sustained stability prevails? Yes, and for the following reasons:

1. Pulling out now, or next summer, would be a total waste of over $7 bn spent so far. Following a withdrawal, the situation would likely deteriorate rapidly and revert to the conditions which brought about the intervention in the first place.
2. Pulling out would be a major humiliation for NATO, one it could ill afford. The US Secretary of State has stated firmly: "The Dayton Peace Accord is a post-cold-war watershed". She sounds very convincing.
3. Probably the most important reason is in the snowball effect. Pulling out, and allowing Bosnia to break up so as to accommodate a "Greater Serbia" and a "Greater Croatia" would inevitably raise the question of a "Greater Albania". This could lead to a genuine Balkan war involving Greece and Turkey among others.

The economy: a mixed bag

Since gaining independence in 1992 Slovenia has made considerable progress in economic reform. Its per capita income is now equal to what it was before the recession which marked its transition. It also started from a comparatively higher base and a fuller integration into the world economy than any other post-communist country. Today the problems of the Slovenian economy are no longer typical to transition economies.

Economic growth over the last five years has been moderate but healthy. It involved a significant restructuring of the economy and a further expansion of exports, which were a high percentage of GDP to begin with. GDP growth is expected to stay in the 3-4% range for the next year or two. Inflation dropped from 200% in 1992 to less than 10% last year. Structural unemployment has hovered around 14% for years, but with sticky wages it is unlikely to drop much in the immediate future.

Since 1992, Slovenia has generated a trade deficit as import growth outstripped exports. However, the current account was in surplus throughout the period, except for 1995 when a small deficit was registered. Foreign currency reserves have tripled in size, reaching $2.2 bn, which is $200m more than the total public external debt in 1996.

Slovenia has maintained a relatively orthodox fiscal policy, and its budget deficit has never exceeded 3% of GDP. This year it will be about 1%, next year 0.5% and a balanced budget is expected by 1999. However, government spending remains at a relatively high level of 45% of GDP because of residual social programs and incomplete restructuring of social services.

Four years ago, Slovenia chose a much slower road to privatization than did other Central European reformers, such as the Czech Republic. Part of this reflected the constraints of the old Yugoslav system of enterprise self-management, which meant that the government could not privatize by decree. Only this year was the final batch of 1,365 socially owned enterprises granted approval to change their ownership structure.

However, unlike most other transition economies, Slovenia has completed its bank rehabilitation program and so the socially-owned banks are now ready for privatization. The present market value of the banks is believed to be higher than the value of bonds issued for their rehabilitation, promising an interesting competition for the proceeds of the sales. The New Ljubljanska Bank — which has one quarter of total bank equity in the country — recently received an A- rating, the highest in Central and Eastern Europe, from Thompson Bankwatch. It is scheduled to be privatized in the medium term, not before the end of 1998.

The main policy challenges are:

• an over-valued currency (tolar) and rapid real wage growth, both of which are undermining Slovenian competitiveness;
• high interest rates which attract speculative capital inflow, thus increasing monetary aggregates and cause inflationary pressures;
• an inflation rate which is high compared to its main trading partners, despite the appreciating tolar;
• xenophobic concerns by Slovenian companies of being taken over by foreigners. No were in Eastern europe is this feeling of concern as strong as it is in Slovenia. The real challenge remains in balancing an inflow of direct foreign investment with possible domestic political repercussions.

The Ljubljana Stock Exchange was founded in 1989, using the EFA Software Services and the Alberta Stock Exchange as its model. Until last year, activity on the exchange was lethargic, dealing mostly in short term government paper. In November of last year foreigners "discovered" Slovenian stocks and the index shot up by 80% in three months.

Since July, turnover on the Ljubljana stock Exchange has increased sharply after the relaxation of limitations on foreign portfolio investors. Previous custodial accounts (foreign currency reserves to the amount of funds on the account, imposed by the Bank of Slovenia) were dropped in June. However, foreigners are not permitted to sell securities to Slovene investors for seven years.

Croatia: partial transition

The economic recovery of Croatia started in 1993 with a stabilization package similar to the one applied in Poland. Since then, measured GNP growth has been accelerating and is currently in the 4-5% range. Most independent analysts suggest that the actual growth rate is even higher, thanks to a booming grey economy. The main obstacles to faster growth are high taxes and contributions to social funds, driving a significant part of economic activity underground. Tourism, which grew by close to 40% so far this year is the main contributing factor.

Croatia has achieved spectacular results with its anti-inflation policy. From over 1500% in 1993 it was brought down to 2% in 1995. Currently the rate hovers between 3-4%, by far the lowest in transition economies. Export growth over this period has been sluggish and was far outpaced by the growth of imports, creating large trade deficits in 1995 and 1996.

However, the disinflation policy came at the cost of an over-valued currency, which is itself at the root of the external deficit. Observers estimate that the kruna is overvalued by roughly a third. ‘Currency stability’ is a high political priority of the government and it will resist a devaluation as long as possible. Foreign reserves have grown dramatically over the last three years, reaching $2.6 bn registered at the National Bank in mid-1997, with at least as much in commercial bank's holdings abroad.

Financing the war effort has been expensive. High expenditures were covered with high taxes, generating relatively small budget deficits under the circumstances, ranging between 1 and 2.6%. Taxes and social contributions are still above 50% of GDP though they are beginning to decline slowly. Structural unemployment remains high, at 17%, although it has recently been dropping gradually. Wages are growing strongly and faster than productivity growth. Consumer spending, after the lean war years, is booming.

The post-communist transition looks better on paper than in practice. The basic laws for a liberal, market economy are almost all in place but the actual economic decision making is still under the influence of powerful vested interests and influential individuals from the ruling party.

Privatization is proceeding rather slowly, for the same reason as in Slovenia. Only 7% of previously socially owned assets have been fully privatized. Another 58% of assets are partially privatized. The final privatization push will occur this and next year.

Though the Zagreb Stock Exchange was established in 1991, the capital market came to life only in April of 1996. As a result of mass privatization, there are 550,000 small retail investors, representing 11.5% of the population. Leading market players are banks and brokerage houses and there are as yet no local institutional investors. The worst part of the system concerns settlements, which are slow.

There are currently 34 shares traded, with 4 listed as Quotation I and 30 as Quotation TN (the main difference being that disclosure requirements for TN companies are less onerous). In the first group the pharmaceutical company "Pliva" has been a great hit, a "deal of the year", with demand exceeding supply by 26 times. It is simultaneously listed on the London Stock Exchange. Zagrebacka banka, another well appreciated stock, is quoted on SEAQ International.

The stock exchange is poised for a major expansion. A host of new companies are about to float stocks while a number of TN are expected to move to Quotation I. "Podravka", a food processing company and "Victor Lenec", a medium sized shipyard, are expected to be the most attractive.

Government bonds are in great demand because of their attractive yields: the JDA series of last year offered a 12% interest in DM, while the JDB series of April of this year offered 8% in DM. These bonds are closely held and turnover is therefore very low.

FR Yugoslavia: Resisting change

After three years of economic sanctions and a costly involvement in the wars in Croatia and Bosnia, the economy in FR Yugoslavia is in desperate need of change. The level of GDP has declined by a half, reaching its 1965 levels in real terms. Registered unemployment is over 25% while hidden unemployment adds at least another 10-15%. Trade with the rest of the world is only gradually recovering but also creating large problems. Import growth is rebounding while exporters struggle to recapture previous markets. In each of the last three years there has been a big trade deficit, as large as 10% of GDP. FR Yugoslavia still has no access to international credit institutions, so balance of payment deficits need to be mainly covered by drawing down reserves.

Inflation, which in December of 1993 reached the second highest level in world monetary history, has been brought down by an orthodox stabilization package. Currently the rate is less than 1% a month. However, FR Yugoslavia’s fiscal policy deficit-ridden. Beside the trade and balance of payments deficits, it also runs a budget deficit, a deficit on the pension and other social funds, with people receiving their pensions and salaries with 2-3 month arrears.

And yet, there is no explicit plan for economic reforms. The government takes a reactive attitude to the management of change, and it will be difficult to carry through complex economic reforms without external financial assistance. So far, the Milosevic administration has been reluctant to yield political concessions in order to gain international financial acceptance.

As an alternative to official international institutional flows, FR Yugoslavia is now opening up to foreign direct investments as a source for desperately needed finance. Recently, Serbian Telecom was sold for DM 1.5 bn to the Italian and Greek state telecommunications companies. Other "crown jewels" are being prepared for sale, most notably the oil and the electricity monopolies.

All members of the "big six" accounting firms have offices in Belgrade. They report increasing interest by foreign investors for Yugoslav enterprises, in particular cement factories, breweries, textile companies and utilities. A new privatization law is due to come into effect in October.

Cynics have said that FR Yugoslavia is the last chance to enter a country at the beginning of post-communist transition, like Poland or Czechoslovakia in 1991. Contrary to popular belief, Serbia does have potentially interesting assets for those who can stomach the political and macro-economic uncertainties.

However, given the massive over-valuation of the currency, a devaluation of at least 50% is possible, even likely by the end of the year. Equities have the potential to rise in price by more than the devaluation, but bonds do not, and are therefore not attractive.

Debt rescheduling negotiations with the London Club have intensified, and are converging on a compromise write-off on the $2.8 bn foreign commercial debt. Serbia asked for an 80% write-off, the creditors offered 30% and a compromise 50% seems very likely.