Hot Spots: Yugoslavia.

At a cursory glance, what is left of Yugoslavia--the two Republics of Serbia and Montenegro--may not seem to be an attractive place for potential exporters or investors. The economy is a shambles, political stability has yet to be secured, and the immediate outlook is uncertain. Nonetheless, and at the risk of going way out on a limb, we submit that this is a good time, now that sanctions have ended, to build new business relations with this war-ravaged land.

After President Kostunica's triumph over Milosevic in Yugoslav polls on September 24 and a popular uprising on October 5 that forced the regime to concede defeat, the 18-party Democratic Opposition of Serbia alliance won a landslide victory in Serbia in December that gave it a better than two-thirds majority in the Republic's parliament. Since it is the Serbian rather than the Yugoslav government that holds the real power in the truncated former Federation, this was a crucial turn of events.

It will take time for the country to settle down politically and come to terms with a host of crosscurrents in which lingering nationalism is still in evidence. As for the economy, it, too, will be difficult to get back into gear. Real GDP is said to have grown by about 7 percent in 2000, but following a 17.7 percent plunge in 1999, gross domestic product by the end of last year was still less than half that registered a decade ago, at around 4.87 billion USD. Agriculture was hard hit by floods and drought in 2000, posting a steep decline of 19.7 percent. Much of the infrastructure has been destroyed or damaged by the war.

Inflation wound up at close to 117 percent last year. This is due largely to the fact that prices for widely used goods, commodities and services, which under Milosevic's regime were kept artificially low, are being adjusted upward to world levels. In the months ahead, hefty hikes in the cost to consumers of electricity, telephone service, other utilities and bread will probably drive inflation up to 150 to 200 percent per annum before the adjustment has run its course.

Reflecting the general weakness of the economy, the foreign trade deficit has grown while the volume of both imports and exports has declined. By the time all the figures are in, the shortfall for 2000 will probably be 2 billion USD. Since early October, when Milosevic was overthrown, the people of Serbia have suffered prolonged electricity shortages and power cuts, and the prices of basic foods have soared out of reach for many. UN officials estimate that Yugoslavia will need at least 1.45 billion USD in aid for food, energy, medicine and pension payments just to get through next May.

Amidst all the misery, however, there are signs of hope in many places. The government of Yugoslavia is working on a bill designed to greatly simplify and deregulate foreign trade. The new law will scrap applications for export-import transactions, the registration of foreign trade companies and compulsory deposits, as well as various taxes. Customs tariffs will be gradually lowered, and the complicated system of import-export permits and quotas will be eliminated.

The newly elected Governor of the Central Bank, Mladjan Dinkic, has issued a 10-point plan to stabilize the country's finances. This includes building up official FX reserves (now under 500 million USD) to where they cover three months' worth of imports. In mid-October, the Central Bank began to sell hard currency to individuals in a successful bid to crack down on the black market and support the dinar. In December, the government ...