Former Republic of Yugoslavia:
Economic Effects of the 1999 United Nations Sanctions
Presented to
Doctor Anne Alexander, Ph.D.
College of Business
Department of Economics & Finance
In satisfaction of requirements of
MBAM 5330-01
Advanced Managerial Economics:
Global Business Environment
University of Wyoming
Former Republic of Yugoslavia:
Economic Effects of the 1999 United Nations Sanctions
BACKGROUND
Over the last fifteen years the Former Republic of Yugoslavia has endured significant
national traumas:
1.
2.
3.
4.
5.
6.
Secession by major provinces,
A brutal tripartite civil war with religious underpinnings.
Emergence from a half century under a command economy,
Economic siege by the United Nations,
Bombing of key military, transportation, and economic targets, and
Occupation by a foreign army in its former provinces and on its borders.
Balkan travails commenced in 495 AD with the separation of the Roman empire into
eastern and western empires, the former Roman Catholic and the latter Orthodox, with
the boundary running through the Sarajevo Valley. Slavic raiding parties formed the
advance elements for entry of tribes of Slavic descent. This ethnic and religious mix
was later seasoned by the invasion of the Turks and their imposition of Islamic religion
and tradition during the thirteenth and fourteenth centuries.
The Balkans, in general, endured centuries of ongoing strife among the three main
religious groups, Roman Catholic Croats, Orthodox Serbs, and Muslim Bosniaks.
Serbo-Croatian is the single language in Bosnia it is written in both Latin and Cyrillic
scripts and spoken by all three ethnic groups.
Events in Sarajevo, in particular, triggered the initiation of interlocking treaty
responsibilities with the assassination of Archduke Ferdinand and his wife in 1914, thus
commencing World War I. During World War II Croats and Bosniaks generally
collaborated with the Germans, while Serbs supported the Allies. After World War II the
Republic of Yugoslavia held a quasi-independent status as a Soviet Union ally and
formed a centrally planned, command economy based on the Soviet model.
Stability in the Balkans has usually resulted from one of the three main ethnicities
ascending to power and keeping the others in check, with some political trade-offs to
buyoff and fractionalize the opposition. To some degree, Tito was able to utilize and
formalize this concept in implementing his socialist system. Tito, a Croat, exercised
power from the capital of Beograd in Serbia and his Residency in Sarajevo, a Bosinak
stronghold, while his deputy, Kardelj, was a Slovene. The only group left outside was
the Roma – gypsies – who have traditionally been akin to the “untouchables” caste
across Europe.
The 1974 constitution left Yugoslavia politically moribund and without a viable decision
making process. The Serbs were relegated to economic and political underclass status
in comparison to other Yugoslav provinces.
Tito’s death opened the way for a Serb nationalist, Slobodan Milosevic, to assume
power in the rapidly disintegrating Yugoslavia. An attorney, Alija Izetbegović, ascended
to Bosniak leadership and militated for an autonomous Muslim Bosnia. A Croat hardliner, Tudjman, gained control of the breakaway Croatian state and Croats were
cleansing the Krijina region of Serbs. The stage was set.
In the early to mid-1990s Bosnian Bosniak, Croat, and Serb forces battled each other
for control of Bosnia, supported by Croatian, Serbian, and mid-Eastern fighters. At the
behest of the United Nations, the North Atlantic Council placed North Atlantic Treaty
Organization (NATO) aircraft in support of UN forces on the ground and enforced the
first round of sanctions, intended to force an end to the fighting and bring the warring
parties to negotiate. The sanctions had the effect of further damaging the economies of
Bosnia, Croatia, and Serbia. Critical military supplies including ammunition, petroleum
products, and weapons were smuggled into Bosnia and defeating the sanctions
engendered corruption and the formation of new alliances.
The mid-1995 Srebenica and Sarajevo marketplace massacres goaded the European
Union into action and the world reaction forced Croat, Muslim, and Serb leaders to
agree to the Dayton Accords in November 1995. This cleared the way for NATO and its
coalition partners to occupy Bosnia and areas of Croatia. The Former Republic of
Yugoslavia continued to resist secession by Kosovo leading to NATO air strikes and the
second round of NATO-enforced United Nations sanctions in the spring of 1999.
ECONOMIC EFFECTS OF SANCTIONS
United Nations sanctions consisted of an outer ring of financial sanctions that prevented
the Former Republic of Yugoslavia from joining international banking and financial
institutions and an inner ring of petroleum sanctions physically enforced by NATO that
prevented petroleum-based goods with military significance or dual use, from entering
the country. From 1998 to the height of United Nations sanctions enforcement in 1999 2000 imports declined by 31.3 percent and exports declined by 46.9 percent 1,
indicating that the United Nations sanctions and NATO actions were affecting the
economy of the Former Republic of Yugoslavia.
The following chart reflects the reduction of real wages and retail sales during the period
1997 through 2003 indexed to 2003 at 100. While it is difficult to separate the effect of
the sanctions from the general impact of the ongoing state of hostilities it is obvious that
wages and sales declined from 1998 through 2000 then commenced a significant
rebound as Milosevic was replaced by Kostunica through the election process, United
Nations sanctions were lifted, hostilities eased, and damaged economic infrastructure
was replaced.
Real Wages and Retail Sales 1997 – 2003 2
Real Wages
Retail Sales
1997
55
54
1998
64
64
1999
60
61
2000
40
60
2001
60
65
2002
70
77
2003
80
82
NOTE: Indexed to 2003 = 100
The Former Republic of Yugoslavia was agrarian by Western European and North
American standards. The following census of livestock from 1997 through 2003
indicates a significant impact on livestock numbers. It is unclear whether cattle
producers were butchering their brood stock due to shortages of imported grain and
support commodities or if the sanctions had reduced the ability to import customary
levels of livestock and meat, thus creating a market for more meat than could be
produced domestically. It is interesting to note that the number of horses, traditionally
not used for meat in Yugoslavia, had not recovered by the end of the reporting period.
This may reflect reduction in equine stocks not absolutely necessary for farm production
and transportation in order to conserve feed for other livestock. The lag in the rebound
of cattle and sheep numbers indicates the slow turn around production requires.
Livestock Census 1997 – 2003 3
(in thousands)
Cattle
Horses
Sheep
1997
1,899
90
2,566
1998
1,894
86
2,402
1999
1,831
76
2,195
2000
1,452
49
1,917
2001
1,306
49
1,783
2002
1,355
49
1,691
2003
1,344
49
1,756
Actual unemployment in the Former Republic of Yugoslavia is difficult to determine. In
agrarian and other less developed and regulated societies undeclared income may be
produced in what is termed the gray economy. This may take the form of bartering,
trades in kind, unreported employment or sales in cash, and similar exchanges.
Undeclared income may serve as a supplement to declared income or benefits received
from other sources such a pensions, unemployment benefits, grants from
nongovernmental organizations, and grants in kind including food, clothing, and medical
services. Rates may also reflect the political objectives of the organization providing the
information. Having said that, the real unemployment rate is high and the economic
legacy of the Milosevic regime continues to haunt Serbia.
Unemployment Rate 1997 – 2003 4 5 6
1997
24.0%
1998
25.0%
1999
32.5%
2000
26.0%
2001
27.0%
2002
29.0%
2003
32.0%
The retail inflation rate provides a clear insight into changes in prices on the street. The
following chart graphically depicts the shortage of goods with attendant increase in
prices. It also testifies to the value of the inflated dinar, the currency of the Former
Republic of Yugoslavia. Increased demand for goods having reduced availability,
coupled with inflated currency breeds corruption, inflation and hyperinflation.
The lag time in market correction is also evident. The sanctions were lifted in October
2000 but retail inflation kept climbing through 2001, falling back to a 19.0 percent
increase in 2002 and 11.0 percent in 2003.
Retail Inflation Rate 1997 – 2003 7
1997
18.5%
1998
29.5%
1999
42.4%
2000
76.0%
2001
89.0%
2002
19.0%
2003
11.0%
Export and import rates of change (current year compared to the previous year) are
very telling in terms of the impact of hostilities and the sanctions. In reviewing the
following chart, exports declined nearly forty-seven percent in and imports declined over
thirty percent in 1999. Although Kostunica replaced Milosevic and the petroleum and
other sanctions were immediately lifted in October 2000, trade did not see any real
improvement until 2002, gaining rapidly in 2003.
The sanctions also imposed an opportunity cost on nations imposing the embargo and
those nations participating. For example, by some estimates the sanctions cost the
United States nearly one billion dollars in lost exports to the Former Republic of
Yugoslavia in 1999, alone.
Export and Import Rates of Change 1997 – 2003 8
Exports
Imports
1997
26.0%
17.2%
1998
5.7%
-1.9%
1999
-46.9%
-30.3%
2000
4.0%
1.0%
2001
10.5%
28.0%
2002
20.6%
31.8%
2003
32.8%
33.1%
NOTE: Reflects the year to year change in dollar (US) volume of trade
The statistics in the following chart are presented in order to graphically relate the scale
of movement in the economy of the Former Republic of Yugoslavia and not because
they reflect data of particularly the same magnitude or necessarily correlate closely.
Collection of Comparative Economic Statistics on
the Former Republic of Yugoslavia 1997 - 2003
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%1997
1998
1999
2000
2001
2002
2003
-40.0%
-60.0%
Unemployment
Exports
Imports
Retail Inflation
CONCLUSIONS
There are a variety of views regarding the efficacy of sanctions, whether imposed
against Serbia or against Cuba, Iran, Iraq, or other nations. Some views align with
political interests; others reflect interest in trading with denied areas. Economists may
debate the success of sanctions in securing the changes intended while other groups
militate against sanctions on humanitarian or moral grounds. Many argue that nations
usually respond to sanction by focusing resources on military requirements and
gradually replace the denied products and materials with local substitutes.
Regardless of the perspective, sanctions are usually intended to elicit political change
through use of economic means. Sun T’su might have termed it “war by other means”.
The bottom line is that sanctions against Serbia worked, elicited the political change
intended, and did so with comparatively little in terms of direct combat operations.
From a personal perspective, having spent a significant amount of time in the Balkans
during this period in a senior level position with daily contact with both ranking and rank
and file Croats, Muslims, and Serbs and having the responsibility to reduce smuggling
of petroleum products into Serbia from Bosnia, I view the sanctions as successful as
they resulted in the regime change intended.
The foregoing economic statistics stand in testimony to the level of economic pain
inflicted on the Serbia. This did not change the Serbian population’s view of other
ethnicities nor did it evoke a fundamental change in their view of themselves. The
sanctions did make it crystal clear to the Serbs that the world community would not
tolerate the behavior of the Milosevic regime and unbridled Serb radical nationalism.
Serbs understood that they could reduce their level of pain by removing Milosevic. In
October 2000, in an internationally supervised free and fair election, the Serbian
constituency voted Milosevic out and put Kostunica into power.
1
Export and import percentages derived and calculated from data originating from and Serbia and
Montenegro Statistical Office and from M. M. Habib, The FRY Economy One Year After the Kosovo War
with data from the Federal Statistical Office of the FRY (FSO), Federal Ministry for Foreign Affairs of the
FRY, Vienna Institute for International Economic Studies (WIIW) Database, Economist Intelligence Unit.
2 Interpolated from Serbian Statistical Office and Staff Estimates.
3 Food and Agriculture Organization of the United Nations Statistics Unit (FAOSTAT), 2005
4 Economic Consequences of NATO Bombing: Estimates of Damage and Finances Required for the
Economic Reconstruction of Yugoslavia, Belgrade, June 1999, page 14.
5 Poverty Reduction Strategy in Serbia, Challenges and Possibilities at the Local Level, Standing
Conference of Cities and Municipalities, Belgrade, 2004.
6 During hostilities, unemployment is customarily low reflecting the demand for both soldiers and workers
to produce military goods. The United States has endured economic downturns after its military
engagements. The rising unemployment rate reflects this phenomenon in Serbia.
7 Ibid, endnote 1.
8 Export and import rates of change assimilated and calculated from data originating from the Serbia and
Montenegro Statistical Office.