The other casualty in Macedonia

Dimo Bosevski is the picture of a stubborn Macedonian entrepreneur. It took him 25 years to collect the items in his gallery: African prints, American modern art, antique European furniture, and Macedonian artifacts dating back 2,000 years.

In that time, he has weathered a half-dozen major economic crises and still managed to come out on top. Last year, it finally looked like business was picking up, but then disaster struck.

"Business dried up as soon as the war started," he says. "I used to have 20 to 30 people come in here every day. Now there are days when no one comes in at all and weeks when no one buys anything. People are afraid, so they don't spend money."

This spring, just when it appeared that the worst was over for this tiny, landlocked country of 2 million, an insurgency by ethnic-Albanian rebels stopped the Macedonian economy in its tracks. The resulting social unrest, some analysts say, could be a potentially volatile element in the ongoing conflict.

Yesterday, the two sides resumed peace talks aimed at reconciling the majority Macedonians with the ethnic Albanians, who bitterly complain of being treated as second-class citizens.

"Even if the conflict were to stop today, the [economic] damage that has been inflicted would be huge," says Vladimir Gligorov, a leading Macedonian economic analyst based in Vienna, Austria.

The conflict is centered around Macedonia's three major industrial cities, located in the northwest: Skopje, Kumanovo, and Tetovo. Several major foreign investments have already been withdrawn, including the construction of a large shopping mall. Imports and exports are estimated to be down by 20 percent, as is consumer spending.

"The war has destroyed our most important asset - credibility," says Slobodan Casula, an analyst for the main Macedonian newspaper Dnievnik. "Who in his right mind would invest in a country which is at war with terrorists only a few kilometers from the center of its capital city?"

But this country has seen hard times before. Macedonia became independent in 1991, and began the transition from a command economy to a free-market system. The transition resulted in several years of hyper-inflation, massive unemployment, and dropping GDP.

In 1992, Greece, the country's primary link to ports and foreign markets, slapped an embargo on Macedonia over the country's name, which Athens claims belongs to a Greek province. Shortly thereafter, the UN imposed sanctions on Yugoslavia, Macedonia's other major trading partner.

Macedonia managed to avoid the economic collapse that engulfed its neighbors Albania, Bulgaria, and Romania. In 1999, the war in Kosovo sent some 300,000 refugees fleeing into Macedonia, further burdening the economy.

Under the energetic stewardship of 30-year-old Finance Minister Nikola Gruevski, the Macedonian economy still grew by 6 percent in 2000, inflation was brought under control, and unemployment began to decline.

Several major foreign investments came in, shoring up the national budget. Preliminary negotiations for European Union membership were initiated. And Macedonia became known as a minor economic miracle in a bleak region.

"It's the little country that could," says Jason Miko, executive director of the American Chamber of Commerce in Macedonia. "The Macedonians somehow pull through crises every time. That's the amazing thing about this country. I still think they will come through this one as well."

However, the current conflict in Macedonia has already erased the economic gains of 2000. Untold military expenditures and the $200,000 per day the government is laying out to support displaced persons have spirited away last year's budget surplus - the first in Macedonian history.

The government anticipates a deficit of more than $100 million this year, and many military bills won't come due until 2002. Meanwhile, tax revenues are down, due to the drop in imports and sales. Mr. Gruevski imposed a 0.5 percent war tax on all financial transactions to try to plug gaping holes in the budget, but even that will raise only $30 million.

"It's a real shame," Mr. Miko says. "Goods are not coming into Macedonia. The local economy is stalled. Foreign contracts are being canceled or put on hold. Foreign capital is fleeing."

Despite the facts that IMF staff left in mid-June for safety reasons and the European Union has threatened Macedonia with aid sanctions, Gruevski has continued with his Western-oriented reforms, passing 30 new laws through parliament in the past month alone.

The currency has so far remained relatively stable, thanks to a cushion of foreign exchange reserves provided by the sale of Macedonian Telecom to German and Hungarian buyers last year. But these funds are expected to last only a matter of months.

Gruevski has called Macedonia's allies to a donor conference later this month, where the country will call in some moral debts. "Macedonia never really recovered from the Kosovo crisis," Miko explains, "and there are still international obligations to this country for its role in supporting the West."

Western leaders promised Macedonia hundreds of millions of dollars in aid in return for its cooperation during the Kosovo crisis. Only about 20 percent of those promises have been fulfilled. For example, NATO has yet to pay Macedonia for heavy road usage by its Kosovo troops, which are supplied and deployed out of Skopje. However, the US has increased its annual aid allowance to Macedonia from $30 million to $50 million this year, not counting generous amounts of military aid.

Last week, international mediators jump-started negotiations for a political agreement between ethnic-Macedonian and ethnic-Albanian political parities. Economic aid is likely to be an important factor in the resolution of the conflict, as economic distress is already generating social aggravation that could endanger the peace process.

"Major layoffs are imminent," Casula says. "That will add to the social tension of the 30 percent already unemployed. That is an explosive mixture. If the economy is not rescued, all the political deals in the world will be meaningless."

(c) Copyright 2001. The Christian Science Monitor