Doc. 8503

7 September 1999

Economic reconstruction and renewal in south-eastern Europe following the Kosovo conflict

Report

Committee on Economic Affairs and Development

Rapporteurs: Mr Evgueni Kirilov, Bulgaria, Socialist Group, and

Mr Nikola Obuljen, Croatia, European People's Party

Summary:

In the wake of the Kosovo conflict Europe must engage vigorously together with the rest of the world in the economic reconstruction and revival of both that afflicted province and south-eastern Europe as a whole. The South-Eastern Europe Stability Pact and the July 1999 Brussels Donor Conference are initial signs that this commitment is taken seriously.

The report stresses the need to build the effort around the key concepts of comprehensiveness, in that it must encompass the entire south-eastern Europe; renewal in that it should lead to economic modernisation and reform and open up a new chapter in economic relations both within the region and between it and other parts of Europe, including the European Union; the right phasing of assistance, which must also be lasting in nature; proper co-ordination not only between actors but also between programmes; and an emphasis on democracy, human rights and the rule of law.

Finally, the report underlines the Assembly's determination to promote the rebuilding of the region by fully using its special position as a parliamentary forum for such organisations as the OECD, the EBRD, the World Bank, the IMF, the United Nations Economic Commission for Europe and the World Trade Organisation.

I.       Draft recommendation

1. In the aftermath of the Kosovo conflict it is urgent for all of Europe, to engage, together with the rest of the world, in the economic reconstruction and renewal of south-eastern Europe, a region vital to the continent's overall peace and stability.

2. The Assembly with this in mind welcomes the speedy international response to the need for post-conflict reconstruction, as manifested both in the sizeable assistance pledged to Kosovo by numerous countries at the Brussels' donor conference on 28 July 1999, and at the south-eastern Europe Stability Pact Conference held in Sarajevo on 30 July.

3. The Assembly, referring in particular to Assembly Recommendation 1414 (1999) on the crisis in Kosovo and the situation in the Federal Republic of Yugoslavia and Assembly Resolution 1184 (1999) on the need for intensified economic co-operation in south-eastern Europe, calls on the Committee of Ministers to ensure that the reconstruction effort is built on the following principles:

i. "Comprehensiveness", in that it must encompass the entire region, from conflict-torn Kosovo to a Federal Republic of Yugoslavia under a new democratic regime to all the countries in south-eastern Europe directly or indirectly affected by the Kosovo conflict as well as those preceding it;

ii. "Renewal", in that the countries of south-eastern Europe must seize the opportunity born out of the conflict in order to open a new chapter in their relations, and in that the reconstruction must bring about thoroughgoing structural reform leading to a market-oriented economy and a modernisation of infrastructure and industry;

iii. "Correct Phasing" of assistance, covering successively humanitarian aid, water and energy, infrastructure repair including educational facilities, environmental clean-up, macro-economic stabilisation and regional integration;

iv. The closest possible co-ordination between international institutions and programmes involved;

v. Long term commitment by the international community and by the countries concerned;

vi. Democracy, human rights and the rule of law, all of which must pervade the entire project.

Kosovo

4.        The Assembly welcomes the rapid establishment of the United Nations Interim Administration in Kosovo (UNMIK), the appointment of a UN Special Representative and the creation of a High Level Steering Group for enlisting and channelling emergency assistance. It calls on the Committee of Ministers to ensure full support by all parties concerned for these institutions in their difficult mission.

5.        In order to fulfil the economic aims of UN Security Resolution 1244 on the situation relating to Kosovo, assistance to the province must focus on:

i. emergency assistance to support the return of refugees and displaced persons, including housing reconstruction:

ii. the establishment of a civil administration capable of ensuring the establishment of democracy, the rule of law and the protection of all citizens;

iii. an assessment of the damage incurred from the conflict and the practical organisation of the reconstruction effort, including the necessary institutional basis;

iv. priorities for public spending and the creation of a stable environment for investment, private sector development, banking, external trade, currency and macro-economic measures.

Most affected neighbouring countries and the overall region

6.        The Assembly notes the major economic disruptions caused by the conflict to countries neighbouring the Federal Republic of Yugoslavia and to south-eastern Europe as a whole. Of particular concern is the collapse of transport on and across the Danube due to destroyed bridges - a disruption which has particularly affected Danube basin countries and those linked up with them, such as Ukraine. It is essential that these countries not only be assisted in their efforts to repair the damage still being done to their economies, but that they are also given the firm prospect of timely economic integration with other parts of Europe, notably the European Union.

7.        The Assembly welcomes the Stability Pact for south-eastern Europe as a broad political framework which, if rightly used and supported by the countries in the region, will facilitate regional integration and development. The Assembly calls on the Committee of Ministers:

i.        to assess, within its framework, the long-term external financing needs of the countries concerned, fully involving in particular the European Union and the World Bank as well as other international financial institutions concerned.

ii. to lay particular emphasis on a plan for intensified south-east European economic co-operation, which alone can ensure that assistance leads to sustainable growth. Such a plan should include structural reform; measures to facilitate trade and border crossings; repair and renewal of trans-European transport links and other infrastructure, preferably through projects involving several countries simultaneously and using, wherever possible, companies from the region.

iii. to ensure privileged access to the more economically advanced European countries for exports from the region, such as through preferential unilateral trade agreements, in particular with the European Union and EFTA;

iv. to work in favour of the conclusion of a multilateral free trade agreement involving as many countries in the region as possible, as well as the members of the Central European Free Trade Agreement (CEFTA)

8.        The Assembly resolves fully to use its special position as a parliamentary forum for international organisations such as the OECD, the EBRD, the World Bank, the IMF, the United Nations Economic Commission for Europe and the WTO in order to monitor their efforts on behalf of south-eastern Europe.

9. Finally, the Assembly recalls the important position of the Federal Republic of Yugoslavia in south-eastern Europe and states its belief that complete economic recovery is not possible in the region without reconstruction also in that country under a new democratic regime. It calls on all Council of Europe member states to work in favour of such an outcome and, as soon as it is reached, to provide that country with assistance going beyond the humanitarian assistance immediately required, by involving it fully in the south-east European reconstruction project, in particular as concerns economic reform and infrastructure repair and environmental clean-up following the Kosovo conflict.

II.       Draft order

1. The Assembly, referring to its Recommendation ... (1999) on economic reconstruction and renewal in south-eastern Europe following the Kosovo conflict, considers such reconstruction and renewal vital not only for economic development but also for lasting peace and stability in the region and in Europe as a whole. Considering the urgency, complexity and long-term character of this international effort and the resulting need for parliamentary Europe closely to monitor the progress made and the difficulties encountered, the Assembly instructs its Committee on Economic Affairs and Development, where necessary assisted by other Assembly committees, to report on the subject at regular intervals.

III.        Explanatory Memorandum by Mr Kirilov and Mr Obuljen

Contents

I. INTRODUCTION

II. THE IMPACT OF THE KOSOVO CRISIS ON THE ECONOMIES OF SOUTH-EASTERN EUROPE

III. THE MAIN ISSUES TO ADDRESS

IV. CO-ORDINATING THE INTERNATIONAL RESPONSE: THE BRUSSELS DONOR CONFERENCE AND THE SARAJEVO SUMMIT, JULY 1999

V. CONCLUDING REMARKS

I.       INTRODUCTION

1. The conflict in Kosovo and surrounding areas has caused vast economic damage to the economies of south-eastern Europe. For Kosovo and other parts of the Federal Republic of Yugoslavia, especially Serbia, destruction has wiped out infrastructure and production facilities worth tens of billions of dollars. Domestic and foreign investor confidence has taken a severe blow. Some of the region's economies- where output is still below 1989 levels- were heading for another decline in GDP in 1999 even before the conflict began. The conflict has severely decimated its commerce and transport system, curbed foreign investment and greatly strained already over-burdened national budgets .

2. In this situation, two motions for resolutions, presented in May 1999 (Doc. 8406 by Mrs Vermot-Mangold and Mr Plattner and others; and Doc. 8414 presented by Mr Obuljen and others) recognised “the urgent need to provide substantial assistance on a lasting basis to the region”.

3. The aim of the present report is to follow up on these motions in line with the mandate given by the Bureau of the Assembly, and on Resolution 1184 (1999) on the need for intensified economic co-operation among the countries of south-east Europe. That report, it will be remembered, was drawn up before the Kosovo conflict but presented to the Assembly while it was still going on, obliging the Rapporteurs (Mr Kirilov and Mr Liapis), to issue a hastily drawn up Addendum on the first economic implications of the conflict.

4. The present report, prepared some three months after the end of the conflict, aims to make a first assessment of the losses suffered by some of the countries in the region and the difficulties they are facing as they are trying to rebuild and re-establish their earlier links. It will also make concrete proposals for post-conflict economic reconstruction in south-eastern Europe, as well as suggest ways in which indispensable international assistance may best be co-ordinated. The Rapporteurs are greatly indebted to their colleagues on the Committee on Economic Affairs and Development for their very valuable contributions made in the course of the Committee's consideration of the report in early September 1999. On this occasion the Committee also unanimously adopted the draft Recommendation contained in the report, as well as a draft Order reflecting its commitment to following the matter up in the future. The Committee at that time also engaged in a very full exchange of views with Mr Jean-François Rischard, Vice President of the World Bank for Europe.

5. Three more points need to be made at the outset about the scope of the report. The first is that the Rapporteurs are acutely aware that the Kosovo conflict has had and continues to have a profound impact on the whole of south-eastern Europe. Countries such as Greece, Hungary, Ukraine, Slovakia and Slovenia are indirectly affected in a very profound way, as are even countries further afield. However, and the Rapporteurs plead for the understanding of their Committee colleagues concerned, only the following six countries will in the main be considered in the present report of 'first damage assessment' and 'immediate reconstruction needs', although reference will on occasion be made also to others. These countries are Albania, Bosnia-Herzegovina, Bulgaria, Croatia, "the former Yugoslav Republic of Macedonia", and Romania. Finally, the report will not go into the purely political aspects of the subject - save very briefly on the few occasions where they are particularly linked up with the economic dimension and necessary for the logic of the argument. This stance is in deference to the Committee's mandate and that of the Political Affairs Committee, which is of course mainly responsible for these aspects. But it is also necessary in order to preserve the stringency of the argumentation, the subject of which is certainly wide and complex enough as it is.

II.       THE IMPACT OF THE KOSOVO CONFLICT ON THE ECONOMIES OF SOUTH-EASTERN EUROPE

6. While the suffering of Kosovo's ethnic Albanian refugees and displaced persons has been the most visible tragic consequence of the conflict, it also had a broader regional impact. For one thing, it for the first time brought the world's attention to the economic plight of the whole of the south-eastern part of Europe, a region traditionally as neglected in the international discourse on economic development as it is vital for overall European stability and economic development. When discussing the effects of the conflict on the region, we must remember that countries were affected that had an even harder time carrying out the economic and political transformation over the past decade than has been the case in many parts of central Europe. As a result of the conflict, they have fallen even further behind the rest of Europe, rather than being allowed to “catch up”.

7. The conflict has been a major external shock for the whole south-east Europe region, the latest of several experienced since the start of the transition in 1989. These included the collapse of the Comecon trading bloc, the international trade embargo against the Federal Republic of Yugoslavia and a series of emerging-market crises. In the view of the Rapporteurs, there is now a risk of internal political destabilisation as the conflict has disrupted the domestic political equilibrium in several countries in the region, bringing with it the risk of social unrest and decreasing popular support for reforms as such.

8. A number of effects of the conflict can already be discerned:

• The large flow of refugees has put an enormous strain on the social and economic fabric of countries such as Albania and "the former Yugoslav Republic of Macedonia", not least in providing immediate assistance from national budgets.

• Disruptions in trade and transport (road and river), not least due to the over sixty bombed bridges in the Serbian part of the Federal Republic of Yugoslavia, are hurting all the surrounding countries for which the Federal Republic of Yugoslavia has traditionally been a major export market, and in particular Bosnia and Herzegovina and "the former Yugoslav Republic of Macedonia". Bulgaria and Romania - but also countries further afield such as Ukraine - are forced to find alternative - and more costly transit routes around the Federal Republic of Yugoslavia in their trade with, say, western Europe. (Just to clear the Danube debris in order to permit transport on it to resume is estimated to cost up to 14 million dollars and take at least six months.)

• The conflict has already adversely affected the confidence of foreign investors, particularly in areas bordering Kosovo. In addition, some countries experience a reduced influx of tourists and have to pay an extra 'country-risk premium' on capital markets for loans.

• Finally, the crisis could result in the postponement of structural reforms, negatively affecting longer-term development. This is both because money is lacking for social accompanying measures during the reform process, and because a population in material hardship is more likely to cling to the existing order than to embrace change

9. The regional economy had already been destabilised before the Kosovo crisis, first by the break up of the former Federal Republic of Yugoslavia, followed by the conflicts in Slovenia, Croatia and Bosnia-Herzegovina and, more recently, the escalation of the Kosovo conflict. The indirect effects on the region from UN sanctions vis-à-vis the Federal Republic of Yugoslavia were particularly detrimental to countries like Albania, Bulgaria, Romania and "the former Yugoslav Republic of Macedonia", in fact amounting to a strong external shock added onto an already severe 'transformational recession'.

10. Military conflicts, political unrest and general instability have been a strong deterrent to foreign direct investment in the region. Regional trade links, never very developed, have been seriously weakened as a result of a decade of military confrontation and economic sanctions - a factor which further weakens foreign investment interest in the region.

11. Indeed, the experience with reforms and economic transformation in south-eastern Europe has been highly mixed. Over the past decade, none of the transition economies there has been able to embark on a path of sustained economic growth. Many of them still face difficulties in reaching macro-economic stabilisation, while financial and currency crises have been a recurrent phenomenon. If in 1990 the average pay per capita in the then four south-east European countries amounted to 80 percent of the central European average, last year it was only 50 percent. Now the Kosovo conflict has compounded the difficulties. The direct economic damage in 1999 alone is estimated at almost USD 8 billion off the region's combined GDP, according to an assessment by the Economist Intelligence Unit /EIU.

12. The worst-hit country is clearly the Federal Republic of Yugoslavia, in particular Serbia, with a real GDP contraction of about 40%. Reviving Kosovo's economy is complicated by the fact that, after years of regional conflict and sanctions imposed against the Federal Republic of Yugoslavia, the province was one of the poorest in south-eastern Europe already before the hostilities. Official statistics indicate that from 1990 to 1995, Kosovo's GDP contracted by an estimated 50 percent, falling to less than $400 per capita (lower than Albania, Europe's poorest country).

13. The economies most directly affected, beside the Federal Republic of Yugoslavia itself, are Albania and "the former Yugoslav Republic of Macedonia". These two countries have borne the brunt of the refugee exodus and are, politically, the most fragile in the region. However, Bosnia- Herzegovina, Bulgaria, Croatia, and Romania are also in various ways feeling the effects of the crisis.

14. The transport links to and from the south-eastern part of Europe have been severely impaired: navigation on the Danube has been made difficult, or in places impossible, due to destroyed bridges and traffic to or through the Federal Republic of Yugoslavia, and in particular Serbia. This includes road, rail, river and to some extent air transport (due to destroyed airports). The effects are especially felt in trade between western Europe, the region's main trading partner, and countries like Bulgaria, Romania, Ukraine, Greece and "the former Yugoslav Republic of Macedonia", as available alternative routes to those destroyed are of limited capacity. As was highlighted by several members of the Economic Committee, the loss of the Danube as a waterway will have negative effects on all of Europe, through disruption of trade in all countries bordering that river as well as on the Rhine, which is connected with the Danube.

15. The closing of the border with the Federal Republic of Yugoslavia is hitting "the former Yugoslav Republic of Macedonia" with particular severity. The direct trade to and transit trade through the Federal Republic of Yugoslavia represented over two-thirds of that country's exports. Bosnia-Herzegovina is also affected owing to the importance of the Yugoslav market for it. Bulgaria and Romania, countries with little direct trade with the Federal Republic of Yugoslavia, are affected through the cessation of transit trade with third countries via that country. The damage to transport and storage infrastructure in the Federal Republic of Yugoslavia, and especially Serbia, now appears to be extensive, requiring transit trade — including road, rail and transport along the Danube — be re-routed for an extended period. This has resulted in congestion, major increases in transportation costs, and some loss in export markets for Bulgaria and Romania.

16. All the countries in the vicinity of Kosovo will suffer the effects of a decline in confidence on the part of traders, consumers and investors. The impact of the conflict is forecast to reduce projected foreign direct investment inflows into the area by about USD 1.4 billion, to USD 4 billion. In 1998 it stood at USD 5.6 billion. In particular, a serious loss of foreign direct investment is projected for Albania, "the former Yugoslav Republic of Macedonia", Bulgaria, and Croatia. Croatia and Bulgaria are likely to suffer a significant loss in tourist receipts. Most countries are projected to face higher borrowing costs in international capital markets. In some cases access to private financing may dry up entirely.

17. An international donors' meeting in May 1999 provided Bosnia-Herzegovina with aid pledges amounting to $1.05bn this year, a development which may prove more important in determining the rate of economic growth in 1999 than the effects of the conflict on the country's limited exports. The real costs of the conflict will take the form of heightened risk perceptions on the part of investors, a possible aggravation of inter-ethnic political divides, and the risk of diversion of funds to other economies in the region.

18. The conflict in the Federal Republic of Yugoslavia will considerably hurt Croatia's tourism industry, dampen exports, heighten perceptions of regional risk and impede access to international capital markets. Croatia's economy is now forecast to contract by 2% this year and remain at zero growth next year.

19. The disruption to trade and investment caused by the conflict, combined with the cost of supporting the influx of Kosovar Albanians, has taken a heavy toll on the economy of "the former Yugoslav Republic of Macedonia", whose economy is expected to suffer a decline of 15% in 1999 compared to the year before. The country's current account balance will worsen dramatically this year, raising the spectre of a forced devaluation of the currency and even a default on debts. Romania's loss of trade and transit routes as a result of the conflict in the Federal Republic of Yugoslavia is expected to lead to a contraction of the economy by 4% this year.

20. The impact of the conflict on the economies of south-eastern Europe economies is therefore considerable. Growth forecasts have been reduced across the region, and most budget and current-account deficits look set to widen. On the other hand, a large proportion of Kosovo's ethnic Albanian refugees have been able to return to their homes under international protection, thus easing the burden on Albania and "the former Yugoslav Republic of Macedonia". However, any calling into question of existing national borders may hurt economic prospects. The damage to intra-regional relations could also be profound and protracted. Should the Yugoslav President, Slobodan Milosevic, manage to remain in power, then this raises the fearful prospect of a recalcitrant, isolated and impoverished country in the midst of south-eastern Europe, further compromising its recovery chances. (However, certain members of the Economic Committee in this context pointed to the encouraging signs of efforts in the direction of greater democracy and economic reform now discernible in Montenegro.)

III.       THE MAIN ISSUES TO ADDRESS

21. The Kosovo crisis is primarily a human tragedy. It necessitates a co-ordinated economic and financial response from the international community on two fronts:

(i) providing immediate aid to relieve the suffering and facilitating the return of the largest number of refugees possible; and (ii) ensuring that neighbouring countries of the Federal Republic of Yugoslavia have access to adequate external financing to help them deal with the adverse economic consequences of the crisis.

22. The most recent IMF assessment forecasts that growth will slow on average by 3-4 percentage points in 1999 in the six most-affected countries of the region (excluding the Federal Republic of Yugoslavia itself). The total increase in the 1999 balance of payments gap for these countries is estimated at USD 1 billion. A lack of adequate and timely balance of payments financing would result in further severe damage to these economies.

23. The international response to the post-conflict plight of the region has to be both comprehensive and co-ordinated. It must address the problems of countries directly and indirectly affected by the military actions, and contribute to regional development and integration into the global economy. In the economic and social fields, there are at least three broad goals: to formulate a comprehensive recovery programme which takes into account the real situation in the whole region aimed at restoring growth and the confidence of investors; to rebuild the infrastructures and speed up institutional and structural reforms; and to re-establish good neighbourly relations in south-eastern Europe.

24. In the Rapporteurs' view, a new approach is needed to address these problems. A key task must be to find ways to revitalise and rebuild a large European region in its entirety. A comprehensive programme of economic measures must be shaped that will allow these countries to embark on a path of macro-economic stability and sustained economic growth, and to ensure their integration into the wider European economy.

25. In this context, the idea of a "Marshall plan" for south-eastern Europe has also been raised. In this regard, the Rapporteurs wish to emphasise a number of features in the original Marshall plan that might make a similar approach appropriate for the countries of south-eastern Europe. These are as follows:

(i) the programme must be set a realistic time-frame, and assistance must be maintained long enough to provide a reasonable chance of success;

(ii) assistance should be provided within the framework of national programmes for recovery and reconstruction, containing targets for the main economic variables and for institutional reforms, together with an account of how each government proposes to achieve the various objectives;

(iii) the various national programmes should be peer-reviewed within a regional framework to encourage co-operation among the participating countries and to provide a regional perspective;

(iv) the continued release of funds should be made conditional on intermediate targets being met (conditionality);

(v) assistance needs to be delivered promptly at the start of the programme in order to create a momentum for change and the prospect of recovery.

26. Another conclusion that should also be drawn, however, both from the experience of the Marshall Plan and from the transition process in south-eastern Europe since 1989 is that there are no easy answers and no short-cuts. The experience of Bosnia and Herzegovina since the Dayton Agreement is also a reminder that the military parts of settlement can be agreed fairly quickly, whereas economic reconstruction, even when the funds are there, can be an extremely slow process if the various parties are unwilling to co-operate.

27. The Federal Republic of Yugoslavia will be of crucial importance to regional recovery. The size of its economy alone and the fact that many principal transport routes of the region pass through that country, mean that most of the region's problems are unlikely to be solved unless it is involved.

28. However, how is the democratisation of the Federal Republic of Yugoslavia to be achieved? The Yugoslav President is a 'political survivor' par excellence. However unpalatable the prospect, it is possible that Mr Milosevic will be in power for some time still. It is therefore difficult to make emergency aid to Yugoslavia contingent on his leaving power and even completely to deny the country more long-term reconstruction assistance should he refuse to go. Carefully channelled humanitarian, financial and economic aid, and a constructive dialogue trying to by-pass Mr Milosevic (it will be difficult), is a better policy than sanctions and threats, and has a better guarantee of ensuring his eventual departure. On the other hand, the 'stick' of withholding aid as long as Mr Milosevic stays and the 'carrot' to the Serbian people of more substantial assistance once he is gone cannot be easily abandoned by the international community.

IV.       CO-ORDINATING THE INTERNATIONAL RESPONSE: THE BRUSSELS DONOR CONFERENCE AND THE SARAJEVO SUMMIT, JULY 1999

29. Building on the existing collaborative work on a country-by-country basis in the region, the European Commission and the World Bank have been given a special mandate for co-ordinating economic assistance in south-eastern Europe (endorsed in an international meeting held in April 1999). Under this mandate, the two institutions are responsible for "co-ordination of matters related to the economic recovery, reform and reconstruction of the Southeast European Region," including for mobilising donor support, providing economic analysis, developing conditions appropriate for the receipt of assistance and implementing projects. Agreement has also been reached on a co-ordination structure which includes a "High Level Steering Group" overseeing economic recovery and the reconstruction mandate.

30. The World Bank's involvement in the region is considerable. 800 million dollars had been committed to the six most affected countries (Albania, Bosnia-Herzegovina, Bulgaria, Croatia, the "former Yugoslav Republic of Macedonia" and Romania) even before the conflict. Over one billion dollars of additional funds have been pledged to them following the conflict. And between 2.5 and 3 billion dollars are foreseen over the next two to three years.

31. The vehicles for World Bank action are three in number. Firstly, there is the High-Level Steering Group at G-7 level just mentioned. A second instrument will be so-called 'individual consultative groups' that will start their work in late 1999, concentrating on the needs of individual recipient countries. The final and third means is the Stability Pact for South-Eastern Europe, in which the World Bank is a major actor.

32. Furthermore, responding to the urgent need for special measures to tackle the huge job of post-conflict reconstruction in Kosovo, the European Commission has adopted a draft regulation establishing the European Agency for Reconstruction (EAfR) and laying down its operating mandate and procedures. (The EU Council of Ministers is likely to adopt the Commission proposal in early September following approval by the European Parliament.)

33. An initial estimate of the cost of reconstruction studied by the Commission in the light of experience gained with similar programs in Bosnia-Herzegovina suggests that appropriations of the order of 500-700 million euros a year will be required from the EU budget for the next three years over and above humanitarian aid and macroeconomic assistance.

34. The Agency is intended to enhance the effectiveness, speed and visibility of European operations, allowing them to be at the same time decentralised and closely co-ordinated with the United Nations Interim Administration in Kosovo (UNMIK). It has laid the foundation for European Union involvement in the reconstruction of Kosovo and beyond.

35. Three different types of assistance will be involved in the reconstruction of Kosovo:

(i)       humanitarian aid to help returning refugees resettle in their homes. (182 million euros have been allocated to date via the European Community Humanitarian Office (ECHO), working closely with the UNHCR). Here, the UN is also involved, especially the UN High Commissioner for Refugees.

(ii)       Reconstruction aid based on the existing OBNOVA (Fund for the Reconstruction of the Federal Republic of Yugoslavia. Kosovo is eligible for grant aid under OBNOVA. Invitations to tender will follow OBNOVA rules and be open to local procurement as far as possible;

(iii) Macroeconomic assistance, essentially in the form of loans (notably for balance of payments support), with the aim of building a viable economy and enhancing the prospect for regional integration.

36. It is essential that especially assistance under i) and ii) above arrive speedily, also to relieve NATO forces of many civilian tasks for which they are not equipped. The UN High Commissioner for Refugees, for example in July 1999 complained that it had only received USD 140 million of the USD 400 million it needs to help repatriating refugees rebuild their homes.

37. The European Agency for Reconstruction will be modelled after programs used in Bosnia-Herzegovina. The Agency will first carry out a number of small projects and bring numerous specialists to Kosovo, including engineers, experts in mine clearance, architects, agricultural advisors, health and welfare workers and advisors on small business and micro-enterprises. As the technical management body responsible for implementing the OBNOVA program in Kosovo, it will also draw up reconstruction projects and be responsible for carrying them out once the Commission has approved them. Subsequently, depending on political decisions taken within the framework of the Stability Pact, it may be mandated to carry out similar activities in other parts of the Federal Republic of Yugoslavia. It will also be able to implement programmes on behalf of other donors.

38. On 28 July, 1999, a donor conference was organised in Brussels by the World Bank and the European Union to gather and co-ordinate pledges for the reconstruction effort in Kosovo. Pledges of 2.1 billion dollars (2 billion euro) were made by the around fifty countries attending. Thanks to these commitments, it will be possible to tackle not only the most urgent humanitarian needs and reconstruction efforts, but also to start more long-term investments. The material repair costs owing to the damage suffered during the conflict, was estimated at about 1.1 billion dollars (1.03 billion euro). This figure includes the repair of destroyed dwellings and infrastructure. The conference pledged to not only repair the damage but also seize this opportunity to achieve a modernisation of Kosovo's infrastructure and economic basis.

39. International organisations active in Kosovo estimate that up to 120,000 dwellings are no longer habitable. A major task of the conference was therefore to take the first steps toward co-ordinating the immediate assistance measures, for which pledges of 300 million dollars (283 million euro) were given. The priority will be to permit the population to survive the winter under acceptable conditions. The housing priority also includes such things as electricity and water supply. The building material needed as well as the labour force will as far as possible be drawn from the areas concerned. The conference agreed that enough labour is available in Kosovo in order to carry out most of the repair work.

40. The choice of Sarajevo for a Summit for south-east European reconstruction and stability, held on 30 July, 1999, was laden with symbolism, as it was held only a short distance away from the street where an assassin's bullets started the First World War. Around 40 heads of state and government from Europe launched a Stability Pact for south-eastern Europe coupled with a solemn appeal to promote, peace, security and prosperity in the region.1

41. "From Sarajevo", the declaration stated, "we affirm our determination to work together towards the full achievement of the objectives of democracy, respect for human rights, economic and social development and enhance security to which we have subscribed by adopting the Stability Pact". It went on to urge the people of Yugoslavia "to embrace democratic change and to work actively for regional reconciliation". (The Federal Republic of Yugoslavia was not invited to the Summit.)

42. Few specific financial commitments were made at the conference, as these will have to await a meeting toward the end of 1999. However, there were exceptions. Thus, the United States pledged 10 million dollars to promote democratic change in the Federal Republic of Yugoslavia, 50 million dollars to help finance small companies and a trade preference programme to allow duty free imports into the US of a number of products from the region. It also unveiled a 50 million plan to support the EBRD in south-eastern Europe, mostly to help finance the launching of small companies and to increase government-funded political risk insurance. Furthermore, a 200 million equity fund operating under the EBRD would apply to the region outside the Federal Republic of Yugoslavia. The United Kingdom for its part proposed that the EU devote 3 million dollars toward helping Serbia's independent media. The major industrial powers also made a general promise to grant unilateral trade preferences to countries in the region, as well as a general pledge of financial assistance.

43. South-east European countries also presented projects. Thus, Bulgaria suggested the construction of an east-west road, an east-west rail line and a new road from Greece to central Europe - a request also made by the Parliamentary Assembly in several reports on European transport policies (see e.g. Resolution 1023 (1994). The road would circumvent the Federal Republic of Yugoslavia and go via Bulgaria and Romania (including a new bridge across the Danube). Another road could pass through "the former Yugoslav Republic of Macedonia", Kosovo, Albania, Montenegro, Croatia and Slovenia towards western Europe. They, in this context recall the Assembly's recent Resolution 1186 (1999) on European transport policies in which it noted "with concern the major disruption of transport links in south-eastern Europe caused by the armed conflict in Kosovo and surrounding areas" and called it "essential for south-eastern Europe that ... the rebuilding of transport links be accompanied by generous international assistance".

44. The Stability Pact can be said to revolve around the principles of reduction in tensions, democracy and a market-oriented economy. As permanent organs of the Pact, there is to be a Regional Table and three Working Tables for security issues, economic reconstruction, and democratisation and human rights. It offers a framework waiting to be filled with content.

45. All in all, then, the Sarajevo Summit, was longer on symbolism than on concrete commitments. However, it could signify a starting point, both as far as the commitment of the international community to paying greater attention henceforth to south-eastern Europe and its role in the overall European context, and for the countries in the region to start working more constructively with each other.

46. The Rapporteurs fully support the framework proposed by the World Bank and the European Commission for liaising with donors and for finding the best methods of channelling and administering assistance. They wish to stress, however, the long-haul nature of the commitment. Reconstructing south-eastern Europe calls for lasting international involvement, going far beyond short-term responses of a humanitarian, balance of payments or budgetary support nature.

47. The international community should also draw the necessary lessons from the post-conflict reconstruction programme in Bosnia-Herzegovina - where the socialist-era economy still remains largely unchallenged. Therefore the emphasis should be placed on economic reform. Due to various governmental activities, from federal to local, that insist on influencing and controlling economic activities, the post-conflict reconstruction in Bosnia-Herzegovina is not as efficient as it could have been. This time the international engagement must extend to the entire region and foster private enterprise and structural reforms more vigorously.

48. Economic stability and recovery will also require a "third pillar" of support, namely the financing of investment projects that represent a direct or indirect response to the repercussions of the Kosovo crisis. The members of the High Level Steering Group (the World Bank, the IMF and the European Commission and other institutions) should therefore also review the impact of the crisis on the banking sector, on critical infrastructure bottlenecks, on particularly affected regions within countries (such as border regions) and on individual large employers.

49. On the other hand, the Rapporteurs believe that the EBRD’s experience with micro and small enterprise lending in Bosnia and Herzegovina and in Russia is a good basis for efforts to increase the flexibility of economies and spur employment growth. In both countries the Bank has developed financing instruments that enable the blending of grant funds from bilateral donors with the EBRD’s own financing. We think that such instruments can also be suited for the present context, in particular in the three countries most directly affected by the Kosovo crisis.

50. The following forms of international assistance should be given particular attention:

(i) rapid assistance for infrastructure reconstruction and refugee resettlement: the private capital flows that the region desperately needs are unlikely to appear until a basic infrastructure is put in place and refugee issues have been dealt with successfully;

(ii) improved market access for exports, especially those of Yugoslavia's successor states. Generously asymmetrical association agreements (in which obstacles to their exports to the industrialised countries are removed faster than those applied by these countries vis-à-vis imports) should be tried. This would also mean accommodating the desire of these countries for EU association, once they have fulfilled the necessary conditions.

(iii) traditional IMF balance-of-payments assistance as well as World Bank and EBRD development assistance for stabilisation, market reform and structural adjustment efforts.

51. The Rapporteurs’ recommendation in this respect is to build on existing instruments and experiences and to make every effort to organise the support with a minimum of bureaucracy and a maximum of economic efficiency.

52. Complicating the assistance effort on behalf of south-eastern Europe is the fact that the Federal Republic of Yugoslavia is not a member either of the IMF or the World Bank. The reason is that the statutes of these Bretton Woods institutions stipulate that participating countries must not be in arrears in their obligations to these bodies. The Federal Republic of Yugoslavia is, however, in arrears in the order of 1.5 billion dollars. As Mr Rischard of the World Bank explained to the Committee, this is more than a bureaucratic detail, since a modification of the statutes would require the agreement of all Bretton Woods member states. And yet he, like the Committee, realises the importance of somehow also including the Federal Republic of Yugoslavia in the region's rebuilding effort as very soon as this is politically possible.

53. A related problem is, of course, that Kosovo forms part of the Federal Republic of Yugoslavia and thus cannot qualify either for the reason mentioned. The World Bank is trying to get around this problem by establishing a trust fund for the province of, it is hoped, up to 60 million dollars.

V.        CONCLUDING REMARKS

54. The reconstruction of south-eastern Europe must be based on a number of fundamental principles. Firstly, it needs to be comprehensive, departing from an overall view of the entire region, including and going beyond all those countries affected in the conflict to any degree. Only through this can the tensions in the region be eased and the foundations be laid for a new south-eastern Europe capable of assuming its rightful place as an important political and trading partner for the rest of Europe and other parts of the world. In the Federal Republic of Yugoslavia, economic reconstruction should be closely tied to political reconstruction.

55. Secondly, reconstruction must signify a renewal of the region's infrastructure and industry capable of bringing it closer the level of the most developed parts of Europe, along the lines of what happened to western Europe under the Marshall Plan. Here, there is a certain 'critical limit' to be observed. If the resources brought to bear are too modest, then only the most urgent tasks will be addressed, while many of the most productive investment opportunities will be missed.

56. Thirdly, phasing is important. The Rapporteurs agree with the Group of Seven recommendations of June 1999 for the following sequencing of the assistance:

57. Fourthly, reconstruction has to be linked to economic transition, where many countries still have a long way to go. In the Federal Republic of Yugoslavia this means that reconstruction and market reform, including privatisation, will have to advance jointly - a difficult task by any standard. The past economic structure in that country should not be reinstalled as it will mean continued stagnation for the Yugoslav people and the resulting risk of a similar fate for the whole region.

58. Fifthly, multilateral co-operation needs fully to involve bodies such as the EU, the UN, the IMF, the EBRD, the World Bank, the OECD, the World Trade Organisation, and, of course, the Council of Europe including our Parliamentary Assembly. The Rapporteurs are heartened by the enthusiasm and good will manifested by all these actors, especially since the Parliamentary Assembly and our own Economic Committee maintains special relations with several among them. There is also, of course, the important - and, it must be hoped, increasingly co-ordinated - role of the multinational military presence in Kosovo and Bosnia. Furthermore, countries like Greece and Hungary can serve as useful 'proximate bases' for the reconstruction projects, supplying their experience from the region and their institutional, logistic and financial resources. Several members of the Economic Committee in this context highlighted the need not only for co-ordination among international actors, whether it be in Kosovo or in the wider region, but also between the different programmes in which these actors participate.

59. Finally, the populations of the region must be made to understand the fundamental reasons for the ills that have befallen it, and that the Kosovo conflict, for all its tragedy, must be allowed to open up a new and positive chapter in their relations with one another.

60. The choice of Sarajevo for the July 1999 Summit was also, indirectly, an appeal to the three parts of Bosnia-Herzegovina truly to come together in the interest of the reconstruction of their country. Unfortunately, such goodwill is not yet everywhere in evidence in that country since the international aid effort began. Three years after Dayton, not everything seems to be working in the country. Nationalists often seem to have the upper hand and do not always use fully democratic methods. Corruption and arbitrary rule are sometimes present and serve negatively to affect the general climate.

61. Similar difficulties are appearing in Kosovo, where at least two different Kosovo Albanian factions seem to be at loggerheads with each other. The UNMIK temporary administration has considerable difficulties in establishing a semblance of order under these circumstances, let alone enrolling the Serbian minority in the process. It therefore behoves everybody in the region to start working seriously together.

62. As these lines are being written (August 1999) there is also rising concern in the international community over a rapid rise in organised crime in Kosovo. Kosovo, it must be remembered, does not yet have a police force of its own (of 3,000 thousand policemen promised from abroad, less than 400 have arrived). Nor does it have a functioning civil administration, while political parties are emerging only slowly. There is a risk that groups such as the Kosovo Liberation Army will try to fill this void. At least parts of the KLA are already reported to be involved in organised crime, such as in the blackmail of hotels and restaurants. Even efforts to infiltrate the civil administration have been reported.

63. There is an urgent need for an interim international police force in Kosovo - assisted by an efficient judiciary - to establish and maintain the law-abiding climate that is required for economic reconstruction and renewal to stand a chance of succeeding, until such time as an effective domestic policy force can be established.

64. The Kosovo crisis is affecting the economies of individual countries through a variety of channels. Although the six most affected member countries - Albania, Bosnia-Herzegovina, Bulgaria, Croatia, "the former Yugoslav Republic of Macedonia" and Romania - share a basic fragility in their economic structure, they are exposed to the crisis to different degrees and in different ways. The main 'channels' of exposure are: the refugee problem; the disruption of international trade in goods and services; the closing of transportation routes through the Federal Republic of Yugoslavia; flagging consumer and investor confidence; reduced access to international capital markets; and setbacks to the process of structural reform and development, including weakened governance with all that it entails in the form of vulnerability to economic crime and corruption.

65. The unexpectedly rapid return of Kosovo refugees of Albanian ethnicity (by July, 1999, some 650,000 have returned) means an equally rapid easing of the refugee burden for the 'temporary host' countries (mainly Albania and the "former Yugoslav Republic of Macedonia". Other disruptions, notably in trade, transit and tourism, are, however, likely to remain significant for a longer period of time. In order to support economic stability and reforms, it is necessary to fill the remaining financing gaps. By the same token, the Rapporteurs call on the International Financial Institutions (IFIs) and the European Commission to develop, as soon as possible, a comprehensive assessment of the longer-term external financing needs facing the most affected neighbouring countries.

66. South-eastern Europe needs further sustained economic growth, as this region is Europe's poorest corner outside of the former Soviet Union. The conflict has caused a further precipitate decline in living standards. Recovery crucially depends on a speedy and adequate international response. In this regard, it is not very reassuring that none of the south-east European states has yet been compensated for the enormous losses sustained in 1992-95 during the period of UN trade sanctions on the Federal Republic of Yugoslavia. The Assembly at that time adopted its Resolution 1020 (1994) asking, among other things, the United Nations Security Council "to ensure effective implementation of Article 50 of the Charter of the United Nations regarding the compensation of third countries for losses they have incurred through the sanctions". (See also Doc; 6979; Rapporteur: Mr Pirinski).

67. On the other hand, there is at present no discussion, as there was after the Bosnian cease-fire agreement in 1995, of any "exit strategy". Instead, policymakers are concentrating on long-term international efforts to integrate the countries of the region into the European Union. The Rapporteurs are convinced that, in south-east Europe, the only workable “exit strategy” is the “integration strategy". They hope that aid-financed integration with the rest of Europe will create new networks of inter-dependence in the region that will make future conflict more difficult, and eventually obsolete.

68. The region's reconstruction will also require specific regional approaches. The stress on the Marshall Plan model as a programme for regional co-operation is highly relevant to the conditions of south-eastern Europe today. Regional co-operation has been generally very weak in the countries concerned. Increased regional co-operation could therefore prove essential for helping to boost economic recovery of the individual countries and to improve their general security not only against armed conflict but also from the contagion of crime (especially drugs and arms trafficking), illegal immigration, trans-boundary environmental threats and so on.

69. In this context, the Stability Pact for south-eastern Europe is an initiative of paramount importance. Its success will hinge not least on its "human dimension", that is, the building of the rule of law and civil society, the respect for minority rights and free media, tolerance and pluralism in countries and communities.

70. There are many more destroyed bridges to rebuild in Kosovo, Serbia and throughout the region than those hit by bombs. The linking of people and whole nations - today divided by grievances, distrust if not outright hatred and desire to wreak revenge - will be the most difficult task. Still, the building of these bridges must start now, aided by the economic reconstruction we have tried to outline in this report.

*

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Reporting committee: Committee on Economic Affairs and Development.

Budgetary implications for the Assembly: none.

References to committee: Doc. 8406 and Reference No. 2389 and Doc. 8414 and Reference No. 2396 of 26 May 1999.

Draft recommendation and draft order unanimously adopted by the committee on 2 September 1999.

Members of the committee: Degn (Chairperson), Valleix, Bloetzer, Elo (Vice-Chairmen), Akgonenc (Alternate: Gürkan), Aliko, Andreoli, Attard Montalto (Alternate: Agius), Billing, Blattmann, Bojars, Bonet Casas, Brunhart, Calner, Cunliffe (Alternate: Davis), Cusimano (Alternate: Turini), Durrieu, Eyskens, Frey, Freyberg, Galvao Lucas, Gonzalez Laxe, Lord Grenfell, Gül, Gusenbauer, Gylys, Hempelmann, Hoffmann, Kacin, Kirilov, Kittis, Kuznetsov, Lazarenko (Alternate: Kosakivsky),  Leers, Liapis, Linzer, Lotz (Alternate: Barsony), Mateju, Mitterrand, Nagy, Niculescu, Nothomb, Obuljen, Pereira Coelho, Popescu, Popovski, Prokes,  Puche, Regenwetter, Rigo, Rutskoy, Sarishvili-Chanturia, Schmitz, Shuba, (Alternate: Averchev), Sorocean, Squarcialupi, Stepova, Stoyanova, Tallo, Townend (Alternate: Colvin), Vasile, Verbeek, Verivakis, Wielowieyski, N… (Alternate: Connor)

N.B. The names of those members present at the meeting are printed in italics.

Secretaries of the committee: MM. Torbiörn, Mezei and Ms Ramanauskaite.


1 Participants in the Stability Pact for South Eastern Europe (as indicated in Assembly Doc. 8449) are: the Member States of the European Union, the European Commission, the Foreign Ministers of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Romania, the Russian Federation, Slovenia, the "former Yugoslav Republic of Macedonia", Turkey, the United States of America, the OSCE Chairman in Office and the Representative of the Council of Europe representing the participants in the 10 June 1999 Cologne Ministerial Conference on South Eastern Europe; and the Foreign Ministers of Canada and Japan, Representatives of the United Nations, UNHCR, NATO, OECD, WEU, IMF, the World Bank, acting within their competences, representing the facilitating States, Organisations and Institutions of the Conference, as well as the Representatives of the Royaumont Process, BSEC, CEI, SECI and SEECP.