The IMF and the Balkan Crisis Jude Wanniski April 8, 1999

Memo To: Secretary of State Madeleine Albright
From: Jude Wanniski
Re: A Polyconomics Report, Six Years Ago

When the Clinton administration began six years ago, it came onto the scene during the middle of a chess game in the Balkans that had begun several years earlier. Perhaps your predecessor, Warren Christopher, had a grasp of how the game began, but I doubt he took the trouble to understand the forces that wormed their way into the Balkans that led to the rot back then... and today. Polyconomics took the trouble to look back to the origins of the ethnic strife that began in 1987, discovering the destabilizing influence of the International Monetary Fund as the primary culprit. Criton Zoakos, then of my staff, wrote the following letter to our clients on May 5, 1993. It is one of many pieces we've written over the years on the continuing Balkan crisis. On the theory that if you don't know why something broke, it becomes difficult to fix and stay fixed, I send you this copy of our 1993 letter and hope it helps you realize that where swords will not work in that part of the world, ploughshares will.

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In 1987, the old Yugoslavia, with all its tragic failings, was still a functioning state. The International Monetary Fund then took over economic policy, implementing a number of all too familiar shock therapies: devaluation, a wage freeze, and price decontrol -- designed on the Harvard/MIT economic textbook principles meant to drive the wage rate down to a level where it would be internationally competitive. As the economy contracted from this shock, revenues to the central government declined, triggering pressure from the IMF to raise taxes to balance the budget. As always, this led to a further weakening of the once strong Yugoslav new dinar, which in 1986 was still worth $22.

These centrifugal forces began to tear at the federation, with the richer provinces of Croatia and Slovenia objecting to being drained of resources by the poorer provinces. Just as the USSR splintered as the IMF browbeat the Gorbachev government into a ruble devaluation, Yugoslavia broke into pieces as ethnic and religious rivalries were reasserted in an attempt to control the rapidly shrinking pool of resources. As in Russia today, where the IMF textbook shock therapy is again being used, the peoples' money capital had been extinguished and the population left impoverished. On average, the dinar was devalued by one order of magnitude each year. As in Russia, inflation was driven by the price of oil being pushed ever higher in a fruitless attempt to reach world levels. By December 1989, the dinar had fallen in value by 200 times, to 11 cents from $22. Hyperinflation became evident in December 1991 as the dinar fell to one-half cent of value by the following summer, to the present 0.003 cents. Hyper-unemployment accompanied the hyper-inflation. [In Russia, the ruble has now lost 200 times its value of 1987, roughly where the Yugoslav dinar was in December 1989, not quite yet at the point of a hyperinflation that would in all likelihood produce a breakdown of civil authority.]

When the IMF shock therapy hit Yugoslavia, the initial form of social disorder was not ethnic friction but massive and repeated strikes and other labor actions. As late as 1988, an enterprising U.S. journalist deployed in Belgrade had difficulty finding evidence of ethnic passions and reported: " 'I would be a Serb, a Bosnian, anything - an Uzbekistani - I'd make my eyes slanted, if I'd have money,' says a Belgrade taxi driver named Zoran, stretching the skin around his eyes with his fingers to make his point." Ordinary people turned into ethnic monsters only after all their options for a normal economic life were destroyed. "Ethnic cleansing" arrived only after "shock therapy" had done its work. Finally, on December 14, 1992, when dinar devaluation reached the IMF's theoretical ideal of infinite percent with the dissolution of the state that used to issue dinars, civilized life ended and was replaced by a "natural state of war," as political philosopher John Locke predicted would invariably happen when organized government disappears from a people's life.

Now, the same Western intellectuals who cheer IMF shock therapies propose the further extinction of the last remnants of organized government in Serbia under the blows of the proposed allied air strikes. This will produce not less violence but more -- precisely because of the further extinction of organized power. Once this happens, the United Nations and others will discover that instead of trying to stop a war of tanks, artillery batteries, aircraft, and chains of command, they will have to deal with a war in which crazed populations kill each other with knives, clubs or their bare hands.

The logic of the proposed air strikes falsely presumes that the crippled Serbian government in Belgrade has the power to impose its will on such Bosnian Serb leaders-of-the-moment as Radovan Karadzik and that, in turn, quixotic figures like Karadzik have the power to impose their will on the rank-and-file of armed Bosnian Serbs. In fact, Belgrade and Karadzik command attention from the armed Serbian rank-and-file only when they serve the logic of the post-civilization "state of war."

Karadzik, as the Bosnian Serbs' putative leader, signed the May 2 Athens accord accepting the Vance-Owens Plan only 48 hours after he had called it "suicidal for the Serbian nation" during an interview with the Deutsche Presse Agentur. For most of April, Karadzik had tried to convince the Bosnian Serb parliament to accept the plan, although suicidal, by arguing that the alternative, i.e., systematic allied bombing of neighboring Serbia, would destroy the only still existing organized state of the Serbian nation.

Following the Athens agreement, battlefield reports from throughout Bosnia-Herzegovina indicate that Serbian field commanders do not consider themselves bound by Karadzik's signature. The fighting will continue not until all sides complete their "ethnic cleansing," but until organized government is restored. In the meantime, the other shoe will fall during May 15 and 16, when the Serbian population in Bosnia holds its referendum on the Vance-Owens Plan -- which is widely expected to be soundly rejected.

On what grounds should the United Nations ignore the Bosnian Serbs' referendum? When the Croatian people held their referendum for independence on May 19, 1991, the world community bowed to their will and recognized Croatia; when the Slovenians did the same, the U.N. again complied. Why is the Clinton Administration on the Serbs' case, pretending that Croats and Bosnians are innocent victims? While media headlines throughout April were filled with preparations for military action against Serbs, the greatest atrocities -- according to reports from the International Red Cross -- were perpetrated by Bosnian Muslims against Croats.

If the Clinton Administration bombs Serbs and arms Bosnian Muslims as it proposes, the levels of violence will only escalate. U.N. ground troops will be confronted with 10 million Serbs settling down to long-term partisan warfare, Bosnian Muslims reinforced by battalions of Iranian-armed and financed mujaheddin, and vengeful Catholic Croats. The entire Balkan peninsula will be one monstrously large Beirut at the mercy of anarchistic ethnic and religious militias. The Serbs will hate the U.N.-U.S. peacekeeping force because of the bombings; the Croats will hate it because it armed the Bosnian Muslims; the Bosnian Muslims will also hate it because they will be under the sway of Muslim fundamentalist mujaheddin armed and financed by Iran. Our presence there will be similar to the U.S. Marines' presence in Beirut in 1982. Our moral outrage at the atrocities Beirutis were perpetrating against each other was no less than our outrage at the present Balkan atrocities. Yet, Ronald Reagan, a proud President under whose watch Soviet Communism was defeated, saw no choice but to leave when we brought home more than 200 Marines in body bags.

Sen. Dennis DeConcini [D-NM], chairman of the Senate Intelligence Committee and an advocate of the use of force in Bosnia, appeared Monday on CNN's "Crossfire," rejecting the argument of Rep. Robert Torricelli [D-NJ] that we should not use force unless we know where that will lead. In a letter to DeConcini yesterday, Jude Wanniski noted: "Bob Torricelli seems closer to reality in arguing it is a slippery slope. The last thing we should do is put troops on the ground. Leave it to some madman to get his hands on a tactical nuclear weapon and we'd lose as many troops in an afternoon as we did over several years in Vietnam."

Rather than playing futile military games, we believe the only constructive route is to undo the destruction wrought by the IMF's shock therapy. The starting point, we have suggested, is to reverse the IMF policies that have pointed Russia and the rest of the ruble area toward economic and political disintegration. With the collapse of communism in Moscow two years ago, The Wall Street Journal asserted editorially that the IMF was now the single most destructive force on earth. The Fund, for the most part controlled by the international banks through their influence at the U.S. Treasury, is truly the satanic force that precipitated the crisis in the Balkans. Until it is somehow neutralized, ethnic cleansing, atrocities and civil war around the world will continue to lay claim to America's blood and treasure.

Criton Zoakos

[Clients: You have our permission to circulate this report beyond your institution if you wish. We are having an extremely difficult time getting our perspective on Bosnia and Russia broadcast through established media. JW]