WIIW - the costs of the Kosovo crisis (sender: A. Tausch); other website

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The Vienna Institute for International Economic Studies - WIIW



     22 April 1999

                      The Costs of the Kosovo Crisis


 A new WIIW study analyses the current economic situation in the
countries affected by the Kosovo crisis
 and assesses immediate costs and longer-term prospects. A rudimentary
set of vulnerability rankings is
 presented, and market reactions as well as the immediate reactions of
the international financial community
 are analysed.

 The Kosovo crisis brings in huge costs for the countries directly
involved in the conflict, especially for
 Yugoslavia, but it also burdens the whole region with significant
spillover costs. These are high by
 themselves, but their marginal impact may in fact be much larger
because they come as an unexpected
 external shock to economies that are already having grave and in some
cases unmanageable
 macroeconomic problems. Also, the immediate costs may be only a small
part of the eventual longer-term
 costs, depending on how the current crisis is indeed resolved.

 The crisis can be seen as an external shock that shifts the demand
curve for the GDP of a particular country
 either through adverse developments in foreign trade or through lower
investments or through higher public
 expenditures. The transmission mechanisms of these shocks are adverse
changes in the terms of trade, in
 investment risks and in budget deficits. Those may be enough in some
cases to initiate a 'regime' change,
 i.e., bring in a recession or a full-blown crisis. Finally, if the
crisis lasts for any period of time or there is a
 'bad' outcome, the immediate costs may translate into longer-term lack
of growth and development. It may
 even further delay regional and European integration.

 The home-grown macroeconomic problems are important for the way the
burden of the costs of the
 Kosovo crisis will be dealt with and adjusted to in the various
countries in the region affected by the crisis.
 A number of countries have serious problems in coping with the
immediate problems that the Kosovo crisis
 brings and also with those that will come about if the crisis is
prolonged.

 As for the transmission mechanisms of the costs from the Kosovo crisis,
they come down to a worsening in
 the terms of trade for the countries that use Yugoslavia as a transit
country, to an increase in investment
 risks and thus costs, and to a squeeze on private consumption because
of the increase in public
 consumption.

 The immediate costs of the Kosovo crisis may turn into more permanent
ones depending on the way the
 Kosovo crisis is resolved. If there is some kind of political solution
and a joint protectorate over Kosovo is
 installed, there will be long-term costs for everybody involved in one
way or another due to persistent
 tensions. Other solutions do not necessarily lead to better prospects.

 Concerning the initial reaction of the international financial
organizations, one effect is that the substitution
 between regular types of foreign finances for the soft loans of the IMF
and the World Bank tend to alleviate
 the financial problems the countries in the area find themselves in,
but do not change the fundamentals and
 thus do not contribute to sustained and sustainable growth.








 For a copy of the complete study, ask for WIIW Current Analyses and
Country Profiles, No. 12
 ("The Costs of the Kosovo Crisis", by V. Gligorov and N. Sundström,
April 1999, 33 pp. including
 12 Tables and 8 Figures, ATS 600.-/US$ 48.-), available from WIIW,
A-1010 Vienna,
 Oppolzergasse 6, Tel. (+43 1) 533 66 10-11, Fax (+43 1) 533 66 10-50,
e-mail:

straka@wsr.ac.at