Southeastern Europe After the Kosovo Crisis

• Author: Dimitri G. Demekas, Johannes Herderschee, James McHugh, and Saumya Mitra
• Position: Advisor/Senior Economist, in the IMF's European I Department/Economist/Lead Economist in the World Bank's Europe and Central Asia Region

In the wake of the Kosovo crisis, the countries of Southeastern Europe have made great strides, although they still have to catch up with their neighbors in Central and Eastern Europe. What form should their reform agenda take, and what lessons can the international community draw for helping other postconflict regions?

The Kosovo conflict of 1999 was short, but it was painful and costly. Besides the many lives that were lost, nearly one million Kosovars (about 45 percent of the prewar population of the province) were displaced either inside Kosovo or in neighboring countries. There was extensive damage to property, especially the housing stock and public infrastructure, primarily in Kosovo but also in the rest of the Federal Republic of Yugoslavia. The conflict and attendant international sanctions on the Federal Republic of Yugoslavia also disrupted transportation and normal economic links among the countries of Southeastern Europe: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Federal Republic of Yugoslavia, the former Yugoslav Republic of Macedonia, and Romania (see map).

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

For the international community, the immediate priority was to avert a humanitarian crisis, and it successfully did so. But by stepping back and taking a long-term regional approach, it also sought to develop solutions that could help achieve lasting peace and strengthen all of Southeastern Europe's economies. This approach went well beyond the reconstruction and upgrading of shared infrastructure, such as bridges and road networks. It also aimed at fostering "peace, democracy, respect for human rights and economic prosperity," in the words of the Cologne document of June 10, 1999, that created the Stability Pact for South Eastern Europe.

Although it is early days, the region is showing encouraging signs of economic recovery-in the form of higher growth, lower inflation, and reduced current account deficits. The priority now for policymakers is tackling major economic challenges if the region is to catch up with its European neighbors, and it is well positioned to do so. In retrospect, therefore, the Kosovo crisis and its aftermath were a defining time for Southeastern Europe. Can the international community draw lessons from it that will help it deal with regional conflicts elsewhere? The answer appears to be yes.

What happened

In purely economic terms, the conflict was not the catastrophic external shock that many had feared at the outset. Economic sanctions closed the borders of the Federal Republic of Yugoslavia and disrupted regional trade routes, with export receipts for the region as a whole declining by about 7 percent during 1999. But the slowdown in economic growth was short lived, although recovery was uneven (see chart). The Federal Republic of Yugoslavia was hardest hit, with real GDP declining by about 15 percent in 1999. Postconflict growth was also negative in Croatia and Romania, and it slowed considerably in Bulgaria, but the causes of these developments were principally domestic. The fiscal impact of the crisis was limited by the rapid return of refugees and the international community's considerable financial contribution toward meeting the humanitarian costs of refugee flows.

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

This generally benign picture of events, however...