Yugoslavia: an Economy on the Brink : Unrest: Ethnic warfare has been a nightmare for business. Tourism and banking have been especially hard hit.

The banking system has broken down. Unemployment and inflation are soaring. The passing of summer mutes the pathos of missing tourists and shuttered hotels but not their impact.

Ethnic violence is ravaging the economic heart of Yugoslavia, long the most dynamic nation in Eastern Europe.

In cold economic terms, the accelerating national tragedy has one simple cause: Yugoslavs, consumed by regional xenophobia, would rather fight each other than grow together in one country.

“In contrast to the other East European states, there is no objective or fundamental reason for such economic dislocation. It’s really a man-made crisis,” Patrick J. Nichols, the economic counselor at the U.S. Embassy here, told Yugoslav managers in a speech last May.

Since then, the republics of Slovenia and Croatia have declared their independence from what they say is a Serbian-dominated federation. Violence in the aftermath, now centered in Croatia, has eroded the economic authority of a weak federal government and broken the web of economic ties among Yugoslavia’s six republics.

The impact is already unpleasant for Yugoslavs to behold, with the prospect of worse to come in a long, lean winter ahead.

“People are poorer than ever. People are hungry,” said Manojlo Vukotic, editor of the newspaper Borba, one of Yugoslavia’s few federalist voices. “This year, we will have a world record economic decline of around 25%. One million workers are not getting paid, or receiving only a part of their wages. Pensioners are not being paid. Privatizations have slowed to a halt. Development has not only been stopped, it is marching backward--decades backward.”

With the collapse of communism and its stern central authority, the moderate government of Prime Minister Ante Markovic sought to hold Yugoslavia together with free-market economic reforms.

It won the promise of $5 billion in loans--since suspended--from international lending agencies. And it attracted foreigner investors--about 3,000 of them last year by Nichols’ estimate.

But even in the best of times, the federal government lacked enforcement powers. Markovic’s goal of a six-republic Yugoslav common market drowned amid the rise of runaway nationalism in Serbia, Croatia and Slovenia.

Serbian leader Slobodan Milosevic and Croatian leader Franco Tudjman, who both say they are former Communists, have seized private companies and turned them into state corporations, economists note.

Yugoslavia’s first post-Communist multi-party elections last year were fought “much more on unresolved issues of the past rather than on programs on which to build the country’s future,” the U.S. Embassy observes in a report to American businessmen.

One Western diplomat observed: “Sadly, the leaders of Serbia and Croatia care nothing for economics. Their underpinning is resurgent nationalism, and they believe that victory is worth whatever the cost. The bill for that will be steep.”

One early cost has been the death of tourism. Worth about $5 billion to the economy last year by one estimate, it will probably generate only about $200 million in 1991, about the same as in 1965.

So, too, has there been a cataclysmic slump in remittances sent back to Yugoslavia by the estimated 1 million Yugoslav workers who live in Western Europe, most in Germany. An inflow that reached $5 billion to $6 billion in a good year will likely fall below $1.5 billion in 1991. One economist estimates that a combined loss of $10 billion from tourism and remittances would amount to about a third of national disposable income.

If expatriate workers prefer German banks to Yugoslav banks, there is good cause. Slovenian businessmen prefer banks in neighboring Austria over their neighborhood branches in Ljubljana.

The $7.7 billion in foreign currency deposits in Yugoslav banks are blocked. Banks here in Belgrade, the Serbian and Yugoslav capital, do not honor checks drawn on Croatian or Slovenian banks. And vice versa.

Barter trade is springing up. More goods would change hands for hard currency, but there is a great shortage of it.

Visa cards work fine in Belgrade, where their clearing company in based. But in Croatia, use American Express, based in Zagreb.

It is possible to eat in McDonald’s in Belgrade, but never, Croatian patriots vow, in Zagreb, while the national franchise remains in the hands of a Belgrade company.

Serbia has closed the Belgrade branches of several hundred Slovenian and Croatian companies without compensation. It seized $7 million in property from one Croatian company alone, economic sources say.

One day last week, Serbia, which generates about 60% of Yugoslavia’s electricity, shut off power to the national railways, stranding 77 trains for three hours.

Croatia has imposed a $10-a-ton tax on foreign oil flowing from Croatian ports to Serbia and has announced the expropriation of vacation homes belonging to Serbs in its territory.

The Croatian oil company, Yugoslavia’s largest, stopped shipping products to Serbia after all 185 of its gas stations in Serbia were seized.

Now, long lines of motorists waiting for gas in Serbia are among the early evidence of a crisis that has not yet reached deeply into the retail level. There are sporadic shortages, but shops in both Serbia and Croatia are, at least momentarily, well-stocked and busy.

Goods made in one republic are not always welcome next door, however, and sometimes they don’t get there anyway because of transport disruptions, road, rail and air, caused by fighting or politics.

Behind the statistics, people suffer. Sometimes aided by the Serbian-dominated Yugoslav army, irregulars who claim to represent the 600,000 Serbian minority in Croatia have seized nearly a quarter of the republic’s territory. Amid fighting that continues unabated by a European Community peace initiative, it is easy in Croatia to imagine Serbian snipers lurking in the ripe fields this harvest season.

“No one has any money. We can’t even go out and pick the corn. We’re afraid. We’re all crying,” a tearful Croatian peasant woman, Marina Skotica, said in an interview at the central market in Zagreb on Wednesday.

In Zagreb, Croatian government economic forecaster Marijan Zivkovic termed the republic’s economy “catastrophic,” reporting a 50% decline in the gross domestic product. Tourism was off 87%, and the forestry products industry had collapsed. “Everything is getting worse and worse,” he said.

Serbian farmers in Croatia gather wheat with AK-47s on their tractors. Their bumper harvest of ’91 is often loaded on army trucks for processing in Serbia, not Croatia.

With republics increasingly refusing to pay their share for national services, federal income this year is only about 20% of what was budgeted.

There is nothing to stop the republics, or anyone else, from ignoring federal edicts: A federal survey in August of 500 Yugoslav companies showed that every one was cheating on its federal taxes.

Among the federal institutions hurt by the squeeze are the armed forces, while all of the republics are also strapped for cash.

A sympathetic Germany is providing some export credit guarantees to Slovenia and Croatia. By contrast, Serbia, labeled by the European Community as the aggressor in the Croatia fighting, risks becoming an international pariah at a time when it needs money most.

Fighting in Croatia has not been costly to Serbia, one economist noted. Large sums, however, are needed not only to keep Serbia going but also to maintain control of the southern province of Kosovo, where rigorously ruling Serbs are outnumbered 9 to 1 by 2 million restive ethnic Albanians.

In the flux, Yugoslav industrial production is off 30% by one estimate and still falling, while unemployment is already at least 20%. Inflation, brought under control by Markovic’s reforms last year, is now at least 8% per month and rising.

Individual republics, each with its own central bank, have begun setting their own exchange rates for the buffeted Yugoslav dinar. At a moment of quickening national crisis, the federal central bank did not intervene during a long and bloody August because its governors, representing rival republics, could not agree to meet. Slovenia and Croatia are denied use of the bank, in any case.

Yugoslav businessmen, individually and collectively, tend to be less xenophobic than the politicians who control their republics. But in the current climate, there is nothing they, or foreign investors, or Yugoslavs themselves, can do but hunker down and hope to ride out the storm.

Calm water may be a long time coming.

“Any economic system runs on confidence. There is none here now,” lamented one nearly broke Yugoslav businessman. “Neither has anybody any idea when, or how, it might begin to be restored.”

Special correspondents Danica Kirka in Zagreb and Michael Montgomery in Belgrade contributed to this report.